[Federal Register Volume 79, Number 39 (Thursday, February 27, 2014)]
[Proposed Rules]
[Pages 11184-11226]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-01702]



[[Page 11183]]

Vol. 79

Thursday,

No. 39

February 27, 2014

Part II





National Credit Union Administration





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12 CFR Parts 700, 701, 702 et al.





 Prompt Corrective Action--Risk-Based Capital; Proposed Rule

  Federal Register / Vol. 79, No. 39 / Thursday, February 27, 2014 / 
Proposed Rules  

[[Page 11184]]


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NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Parts 700, 701, 702, 703, 713, 723, and 747

RIN 3133-AD77


Prompt Corrective Action--Risk-Based Capital

AGENCY: National Credit Union Administration (NCUA).

ACTION: Proposed rule.

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SUMMARY: The NCUA Board (Board) is proposing to amend NCUA's 
regulations regarding prompt corrective action (PCA) to restructure the 
part, and make various revisions, including replacing the agency's 
current risk-based net worth requirements with new risk-based capital 
requirements for federally insured ``natural person'' credit unions. 
The proposed risk-based capital requirements would be more consistent 
with NCUA's risk-based capital measure for corporate credit unions and 
the regulatory risk-based capital measures used by the Federal Deposit 
Insurance Corporation, Board of Governors of the Federal Reserve, and 
Office of the Comptroller of Currency (Other Federal Banking Regulatory 
Agencies). In addition, the proposed revisions would revise the risk-
weights for many of NCUA's current asset classifications; require 
higher minimum levels of capital for federally insured natural person 
credit unions with concentrations of assets in real estate loans, 
member business loans (MBLs) or higher levels of delinquent loans; and 
set forth the process for NCUA to require an individual federally 
insured natural person credit union to hold higher levels of risk-based 
capital to address unique supervisory concerns raised by NCUA. The 
proposed revisions would also eliminate several of NCUA's provisions, 
including provisions relating to regular reserve accounts, risk-
mitigation credits, and alternative risk-weights.

DATES: Comments must be received on or before May 28, 2014.

ADDRESSES: You may submit comments, identified by RIN 3133-AD77, 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 Proposed Rule: PCA--Risk-Based Capital'' in the 
email subject line.
     Fax: (703) 518-6319. Use the subject line described above 
for email.
     Mail: Address to Gerard Poliquin, Secretary of the Board, 
National Credit Union Administration, 1775 Duke Street, Alexandria, 
Virginia 22314-3428.
     Hand Delivery/Courier: Same as mail address.
    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 9:00 a.m. and 3:00 p.m. To make an appointment, call 
(703) 518-6546 or send an email to [email protected].

FOR FURTHER INFORMATION CONTACT: Technical: Steven Farrar, Loss/Risk 
Analyst, Office of Examination and Insurance, at 1775 Duke Street, 
Alexandria, VA 22314 or telephone: (703) 518-6393, or Legal: John H. 
Brolin, Staff Attorney, Office of General Counsel, at 1775 Duke Street, 
Alexandria, VA 22314 or telephone: (703) 518-6438.

SUPPLEMENTARY INFORMATION:

I. Summary of the Proposed Rule
II. Section-by-Section Analysis
III. Effective Date
IV. Regulatory Procedures

I. Summary of the Proposed Rule

    The Board is proposing to revise and replace NCUA's current PCA 
rules for federally insured natural person credit unions.\1\ The 
proposed revisions would include a new method for computing NCUA's 
risk-based capital measure that is more consistent with the risk-based 
capital measure for corporate credit unions \2\ and the risk-based 
capital measures used by the Other Federal Banking Regulatory 
Agencies.\3\ In general, the revisions would adjust the risk-weights 
for many asset classifications to lower the minimum risk-based capital 
requirement for credit unions with low risk operations. Conversely, the 
revisions would require higher minimum levels of risk-based capital for 
credit unions with concentrations of assets in real estate loans, MBLs, 
or high levels of delinquent loans. In addition, due to the known 
limitations of any widely applied risk-based measurement system, the 
proposed rule includes procedures for NCUA to require an individual 
credit union to hold a higher level of risk-based capital where 
specific supervisory concerns arise regarding the credit union's 
condition. Finally, the revisions would eliminate the provisions of 
current Sec.  702.401(b) relating to transfers to the regular reserve 
account, current Sec.  702.106 regarding the standard calculation of 
risk-based net worth requirement, current Sec.  702.107 regarding 
alternative components for standard calculation, and current Sec.  
702.108 regarding risk-mitigation credit.
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    \1\ 12 CFR Part 702.
    \2\ See 12 CFR Part 704.
    \3\ See 78 FR 55339 (Sept. 10, 2013).
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A. Background

    NCUA's primary mission is to ensure the safety and soundness of 
federally insured credit unions. NCUA performs this public function by 
examining and supervising all federal credit unions, participating in 
the examination and supervision of federally insured state chartered 
credit unions in coordination with state regulators, and insuring 
federally insured credit union members' accounts.\4\ In its role as 
administrator of the National Credit Union Share Insurance fund 
(NCUSIF), NCUA insures and regulates approximately 6,753 federally 
insured credit unions, holding total assets exceeding $1 trillion and 
representing approximately 94.6 million members.
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    \4\ Within the nine states that allow privately insured credit 
unions, approximately 133 state-chartered credit unions are 
privately insured and are not subject to NCUA regulation or 
oversight.
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    In 1998, Congress enacted the Credit Union Membership Access Act 
(CUMAA).\5\ Section 301 of CUMAA added new section 216 to the Federal 
Credit Union Act (FCUA),\6\ which requires the Board to adopt by 
regulation a system of PCA to restore the net worth of federally 
insured ``natural person'' credit unions (credit unions) that become 
inadequately capitalized. In developing the system, the Board is 
required to take into account that credit unions do not issue capital 
stock, must rely on retained earnings to build net worth, and have 
boards of directors that consist primarily of volunteers. In 2000, the 
Board implemented the required system of PCA primarily under part 702 
of NCUA's regulations.\7\
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    \5\ Public Law 105-219, 112 Stat. 913 (1998).
    \6\ 12 U.S.C. 1790d.
    \7\ 12 CFR Part 702; see also 65 FR 8584 (Feb. 18, 2000) and 65 
FR 44950 (July 20, 2000).

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[[Page 11185]]

    The purpose of section 216 of the FCUA is to ``resolve the problems 
of [federally] insured credit unions at the least possible long-term 
loss to the [NCUSIF].'' \8\ To carry out that purpose, Congress set 
forth a basic structure for PCA in section 216 that consists of three 
principal components: (1) A framework combining mandatory actions 
prescribed by statute with discretionary actions developed by NCUA; (2) 
an alternative system of PCA to be developed by NCUA for credit unions 
defined as ``new''; and (3) a risk-based net worth requirement to apply 
to credit unions that NCUA defines as ``complex.'' This proposed rule 
is primarily focused on principal components (1) and (3), although 
amendments to part 702 of NCUA's regulations relating to principal 
component (2) are also being proposed.
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    \8\ 12 U.S.C. 1790d(a)(1).
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    Section 216(c) of the FCUA requires NCUA to, among other things, 
use a credit union's net worth ratio to determine its classification 
among five ``net worth categories'' set forth in the statute.\9\ In 
general, ``net worth'' is defined as the retained earnings balance of 
the credit union,\10\ and a credit union's ``net worth ratio'' is the 
ratio of its net worth to its total assets.\11\ As a credit union's net 
worth ratio declines, so does its classification among the five net 
worth categories, thus subjecting it to an expanding range of mandatory 
and discretionary supervisory actions.\12\
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    \9\ Section 1790d(c).
    \10\ Section 1790d(o)(2).
    \11\ Section 1790d(o)(3).
    \12\ Section 1790d(c)-(g); 12 CFR 702.204(a)-(b).
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    In addition to the net worth ratio component described above, 
section 216(d) of the FCUA requires NCUA to define the term ``complex'' 
credit union ``based on the portfolios of assets and liabilities of 
credit unions.'' \13\ It also requires NCUA to formulate a risk-based 
net worth (RBNW) requirement to apply to credit unions meeting that 
definition.\14\ The RBNW requirement must ``take account of any 
material risks against which the net worth ratio required for [a 
federally] insured credit union to be adequately capitalized [(6 
percent net worth ratio)] may not provide adequate protection.'' \15\ 
Congress encouraged NCUA to, ``for example, consider whether the 6 
percent requirement provides adequate protection against interest-rate 
risk and other market risks, credit risk, and the risks posed by 
contingent liabilities, as well as other relevant risks. The design of 
the [RBNW] requirement should reflect a reasoned judgment about the 
actual risks involved.'' \16\
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    \13\ Section 1790d(d).
    \14\ Id.
    \15\ Section 1790d(d)(2).
    \16\ S. Rep. No. 193, 105th Cong., 2d Sess. 13 (1998) (S. Rep.).
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    Under current Sec.  702.103 of NCUA's regulations, a credit union 
is defined as ``complex'' if ``[i]ts quarter-end total assets exceed 
fifty million dollars ($50,000,000); and . . . [i]ts [RBNW] 
requirement, as calculated under Sec.  702.106, exceeds six percent 
(6%).'' \17\ Current Sec.  702.104 of NCUA's regulations defines eight 
risk portfolios of complex credit union assets, liabilities, or 
contingent liabilities (Table 1); and current Sec.  702.106 sets forth 
the specific risk-weightings that are applied to the assets (Table 2).
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    \17\ See 12 CFR 702.103 & .104 and 12 U.S.C. 1790d(c).

         Table 1--Current Sec.   702.104 Risk Portfolios Defined
------------------------------------------------------------------------
                                   Assets, liabilities, or contingent
        Risk portfolio                        liabilities
------------------------------------------------------------------------
(a) Long-term real estate      Total real estate loans and real estate
 loans.                         lines of credit (excluding MBLs) with a
                                maturity (and next rate adjustment
                                period if variable rate) greater than 5
                                years.
(b) MBLs outstanding.........  MBLs outstanding.
(c) Investments..............  As defined by federal regulation or
                                applicable state law.
(d) Low-risk assets..........  Cash on hand and NCUSIF deposit.
(e) Average-risk assets......  100% of total assets minus sum of risk
                                portfolios above.
(f) Loans sold with recourse.  Outstanding balance of loans sold or
                                swapped with recourse, except for loans
                                sold to the secondary mortgage market
                                with a recourse period of 1 year or
                                less.
(g) Unused MBL commitments...  Unused commitments for MBLs.
(h) Allowance................  Allowance for Loan and Lease Losses
                                limited to equivalent of 1.50% of total
                                loans.
------------------------------------------------------------------------


    Table 2--Sec.   702.106 Standard Calculation of RBNW Requirement
------------------------------------------------------------------------
                                  Amount of risk portfolio
                                   (as percent of quarter-
         Risk portfolio            end total assets) to be      Risk-
                                     multiplied by risk-      weighting
                                          weighting
------------------------------------------------------------------------
(a) Long-term real estate loans.  0 to 25.00%.............          .06
                                  over 25.00%.............          .14
(b) MBLs outstanding............  0 to 15.00%.............          .06
                                  >15.00% to 25.00%.......          .14
                                  over 25.00%.............
(c) Investments.................  By weighted-average       ............
                                   life:
                                   0 to 1 year............          .03
                                   >1 year to 3 years.....          .06
                                   >3 years to 10 years...          .12
                                   >10 years..............          .20
(d) Low-risk assets.............  All %...................          .00
(e) Average-risk assets.........  All %...................          .06
(f) Loans sold with recourse....  All %...................          .06
(g) Unused MBL commitments......  All %...................          .06
(h) Allowance...................  Limited to equivalent of        (1.00) 
                                   1.50% of total loans
                                   (expressed as a percent
                                   of total assets).
------------------------------------------------------------------------
A credit union's RBNW requirement is the sum of eight standard
  components. A standard component is calculated for each of the eight
  risk portfolios, equal to the sum of each amount of a risk portfolio
  times its risk-weighting. A credit union is classified
  ``undercapitalized'' if its net worth ratio is less than its
  applicable RBNW requirement.


[[Page 11186]]

    Section 216(c) of the FCUA requires that a credit union that meets 
the definition of ``complex,'' and whose net worth ratio initially 
places it in either of the ``adequately capitalized'' or ``well 
capitalized'' net worth categories, also satisfy a separate RBNW 
requirement. Under this separate RBNW requirement, the credit union 
must meet or exceed the minimum RBNW ratio corresponding to its net 
worth category (adequately capitalized or well capitalized) in order to 
remain classified in that category.\18\ A complex credit union that 
meets the net worth ratio requirement for being adequately capitalized 
or well capitalized, but that fails to meet the corresponding RBNW 
requirement for either net worth category, is classified by section 
216(c)(1) as ``undercapitalized'', and is subject to the mandatory and 
discretionary supervisory actions applicable to that category.\19\
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    \18\ The RBNW requirement also indirectly impacts credit unions 
in the ``undercapitalized'' and lower net worth categories, which 
are required to operate under an approved net worth restoration 
plan. The plan must provide the means and a timetable to reach the 
``adequately capitalized'' category. Section 1790d(f)(5); 12 CFR 
702.206(c). However, for ``complex'' credit unions in the 
``undercapitalized'' or lower net worth categories, the minimum net 
worth ratio ``gate'' to that category will be 6 percent or the 
credit union's RBNW requirement, if higher than 6 percent. In that 
event, a complex credit union's net worth restoration plan will have 
to prescribe the steps a credit union will take to reach a higher 
net worth ratio ``gate'' to that category. See 12 CFR 
702.206(c)(1)(i)(A). Section 1790d(c)(1)(A)(ii) and (c)(1)(B)(ii).
    \19\ 12 U.S.C. 1790d(c)(1)(c)(ii).
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    The RBNW requirement for credit unions meeting the definition of 
``complex'' was first applied on the basis of data in the Call Report 
reflecting activity in the first quarter of 2001.\20\ NCUA's RBNW 
requirement has been largely unchanged since its implementation, with 
the following limited exceptions:
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    \20\ 65 FR 44950 (July 20, 2000).
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     Revisions were made in 2003 to amend the RBNW requirements 
for MBLs.\21\
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    \21\ 68 FR 56537 (Oct. 1, 2003).
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     Revisions were made in 2008 to incorporate a change in the 
statutory definition of ``net worth.''\22\
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    \22\ 73 FR 72688 (Dec. 1, 2008).
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    In addition, the Board amended part 702 in 2011 to expand the 
definition of ``low-risk assets'' to include debt instruments on which 
the payment of principal and interest is unconditionally guaranteed by 
NCUA,\23\ and again in 2013 to exclude credit unions with total assets 
of $50 million or less from the definition of ``complex'' credit 
union.\24\
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    \23\ 76 FR 16234 (Mar. 23, 2011).
    \24\ 78 FR 4033 (Jan. 18, 2013).
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B. Why is the NCUA Board issuing this rule?

    The Board is proposing to change NCUA's general risk-based capital 
rules for determining the minimum level of required capital to enhance 
risk sensitivity and address weaknesses in the existing regulatory 
capital framework for credit unions. Capital and risk go hand-in-hand, 
and credit union senior management, boards, and regulators are all 
accountable for ensuring that appropriate capital levels are in place 
based on the credit union's risk exposure. The proposed rule reflects 
an effort to establish a risk-weighting system that is more indicative 
of the potential risks existing within credit unions. The proposed rule 
is intended to help credit unions better absorb losses and establish a 
safer, more resilient, and more stable credit union system. The 
improved resilience will enhance credit unions' ability to function 
during periods of financial stress and reduce risks to the NCUSIF.
    In general, credit unions have high quality capital, with retained 
earnings being the predominant form of capital. However, in recent 
years, the NCUSIF did experience several hundred millions of dollars in 
losses due to failures of individual credit unions holding inadequate 
levels of capital relative to the levels of risk associated with their 
assets and operations. Examiners did warn officials at these credit 
unions that they needed to hold higher levels of capital to offset the 
risks in their portfolios, but the credit union officials ignored the 
examiners' recommendations, which were unenforceable. This proposal 
seeks to incorporate the lessons learned from those failures and better 
account for risks not addressed by the current rule.
    The new risk-based capital requirements being proposed in this rule 
would apply to all credit unions with over $50 million in total assets. 
The capital requirements and PCA supervisory actions for ``new'' credit 
unions and credit unions with $50 million or less in assets would 
remain largely unchanged, with a few exceptions discussed in more 
detail below.
    In developing the new risk-based capital requirement for 
``complex'' credit unions, NCUA set forth the following goals for the 
proposed rule. First, the requirement should address weaknesses in the 
net worth ratio measure. Second, the requirement should address credit 
risk, interest rate risk, concentration risk, liquidity risk, 
operational risk, and market risk. Third, the requirement should 
enhance the stability of the credit union system. Fourth, the rule 
should rely primarily on data already collected on the Call Report to 
minimize additional recordkeeping burdens. Fifth, the requirement 
should be, given the preceding four goals, as easy as possible to 
understand and implement.
    The proposed rule would replace the RBNW method currently used by 
credit unions to apply risk-weightings to their assets with a new risk-
based capital ratio method that is more commonly applied to depository 
institutions worldwide. The proposed risk-based capital ratio is the 
percentage of a credit union's net worth available to cover losses, 
divided by the credit union's defined risk-weighted asset base. The 
Board believes the change in methodology would improve the comparison 
of assets and risk-adjusted capital levels across financial 
institutions. Use of a consistent framework for assigning risk-weights 
would promote improved understanding between all types of federally 
insured financial institutions.
    This proposed rule would provide a common measure of asset risk and 
ensure that credit unions retain levels of capital that are 
commensurate with their level of risk. The proposal would also help 
NCUA identify, and credit unions to avoid, inadequately capitalized 
concentrations of asset classes that can lead to a credit union's 
failure. Further, under the proposed rule, credit unions would be 
better able to implement strategic plans based on their unique member 
service objectives and the corresponding risk by holding the 
appropriate level of capital.
    The measure for a credit union's ``net worth ratio,'' which is 
defined in section 216(o)(3) of the FCUA, is a generalized measure of a 
credit union's net worth.\25\ The net worth ratio of a credit union 
includes balance sheet accounts in the numerator that may have little 
or no value in the event of liquidation and excludes off-balance sheet 
exposures from the numerator. Recognizing these limitations of the net 
worth measure, Congress directed the Board in section 216(d)(2) of the 
FCUA to develop a RBNW requirement that ``take[s] account of any 
material risks against which the net worth ratio . . . may not provide 
adequate protection.''\26\ The proposed risk-based capital measure 
includes only capital available to cover losses and takes into

[[Page 11187]]

consideration the credit union's off-balance sheet items and other risk 
factors.
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    \25\ 12 U.S.C. 1790d(0)(3) (``The term `net worth ratio' means, 
with respect to a credit union, the ratio of the net worth of the 
credit union to the total assets of the credit union.'').
    \26\ 12 U.S.C. 1790d(d)(2).
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    Operating a credit union involves taking and managing a variety of 
risks, with the major types of risks identified and defined in Table 3 
below.

 Table 3--Major Types of Risks Identified in Credit Union Business \27\
------------------------------------------------------------------------
             Risk                              Definition
------------------------------------------------------------------------
Credit risk..................  The potential for loss resulting from the
                                failure of a borrower or counterparty to
                                perform on an obligation.
Compliance risk..............  The potential for loss arising from
                                violations of laws or regulations or
                                nonconformance with internal policies or
                                ethical standards.
Concentration risk...........  The risk arising from excessive exposure
                                to certain markets, industries, or
                                groups.
Interest rate risk...........  A type of market risk that involves the
                                potential for loss due to adverse
                                movements in interest rates.
Liquidity risk...............  The risk that a credit union will be
                                unable to meet its obligations when they
                                become due, because of an inability to
                                liquidate assets or obtain adequate
                                funding.
Market risk..................  The potential for loss resulting from
                                movements in market prices, including
                                interest rates, commodity prices, stock
                                prices, and foreign exchange rates.
Operational risk.............  The risk of loss resulting from
                                inadequate or failed internal processes,
                                people, and systems or from external
                                events.
Reputation risk..............  The potential for loss arising from
                                negative publicity regarding an
                                institution's business practices.
Strategic risk...............  The potential for loss arising from
                                adverse business decisions or improper
                                implementation of decisions.
------------------------------------------------------------------------

    The current RBNW measure focuses primarily on interest rate risk. 
However, the proposed risk-based capital ratio measure would focus more 
broadly on the various types of risks to credit unions by addressing 
additional risk factors and assigning specific risk-weights to:
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    \27\ See U.S. Govt. Accountability Office, GAO-07-253, Bank 
Regulators Need to Improve Transparency and Overcome Impediments to 
Finalizing The Proposed Basel II Framework 9-10 (2007), available at 
http://www.gao.gov/new.items/d07253.pdf.
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     Delinquent loans,
     Concentrations of MBLs and real estate-secured loans,
     Equity investments, and
     Additional off-balance sheet exposures.
    Rigorous and disciplined risk-based (risk-based capital ratio 
measure) and non-risk-based (net worth ratio measure) capital 
requirements working well together can enhance the ability of a credit 
union to cope with capital impairment during economic downturns. 
Moreover, an adequate capital buffer can cushion performance 
deterioration during times of stress, thereby promoting safety and 
soundness of the credit union system.
    The proposed risk-based capital ratio measure primarily uses 
existing information contained in the Call Report. As compared to the 
current RBNW measure, the proposed risk-based capital ratio measure 
would include a greater number of exposure categories for purposes of 
calculating total risk-weighted assets. Thus, some additional data 
would need to be collected on the Call Report. This additional data 
would not, however, represent a material increase to the burden of 
completing the Call Report. The proposed extended effective date of the 
final rule would provide ample time for credit unions to adjust their 
systems to account for the additional data items that would be required 
in the Call Report.
    Through this notice, NCUA invites public comment on all aspects of 
the proposed rule. Commenters are urged to recognize, however, that 
NCUA lacks discretion to deviate from the statutory requirements of 
section 216 of the FCUA.\28\ To facilitate consideration of public 
comments on the proposed rule, the Board urges commenters to organize 
their comment letters on a section-by-section basis that corresponds 
with the proposed sections of the rule, and to include any general 
comments in its own section of the letter.
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    \28\ 12 U.S.C. 1790d.
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C. Impact of the Proposed Regulation

    The proposed rule would make changes to the minimum regulatory 
capital requirement for credit unions that would be more reflective of 
risk, including additional subcategories of assets for risk measurement 
and additional concentration levels. This shift in emphasis would 
encourage credit unions to more actively manage risk in relation to the 
minimum required capital levels. As proposed, the rule would modify the 
current calculation method for computing RBNW to be more consistent 
with the risk-based capital measures used by the Other Federal Banking 
Regulatory Agencies. The proposed change in the calculation would allow 
setting specific risk-based capital ratio requirements for the top 
three capital classifications.
    NCUA's analysis of 2013 Call Report data indicates that the 
overwhelming majority of credit unions with over $50 million in assets 
already have sufficient capital to comply with the proposed risk-based 
capital rules. In particular, NCUA estimates that over 90 percent of 
these credit unions, if subject to the requirements of the proposed 
rule today, would be in compliance with the minimum risk-based capital 
requirement under the rule. The Board recognizes, however, that some 
credit unions would likely need a transition period to accumulate 
additional capital or change their asset structure to achieve their 
desired capital classification. The Board also recognizes that credit 
unions would need a reasonable period of time to update their internal 
systems, policies, and procedures to account for these changes. As a 
result, the Board is proposing to delay the effective date of the new 
requirements after the final rule is published in the Federal Register, 
which is discussed in more detail below.
    Using Call Report data as of June 2013, NCUA estimates that 
approximately 2,237 credit unions reported over $50 million in total 
assets, all of which would be subject to the proposed risk-based 
capital measures.
    Existing data available to NCUA, including Call Report data, does 
not contain all of the information required to analyze the impact of 
every aspect of the proposal. However, NCUA believes the current Call 
Report data available provides sufficient information for NCUA to 
reasonably estimate the impact of the proposed regulation. Accordingly, 
NCUA analyzed the impact of the proposed rule on credit unions using 
Call Report data as of June 30, 2013.
    Over 90 percent of credit unions subject to the proposed capital 
measures currently hold capital in excess of the minimum net worth 
ratio and the risk-based capital ratio required to be

[[Page 11188]]

classified as well capitalized. As of June 2013, the proposed changes 
to the risk-based capital measure, if applied immediately, would cause 
189 credit unions to experience a decline in their PCA classification 
from well capitalized to adequately capitalized and 10 well capitalized 
credit unions to experience a decline to undercapitalized. NCUA 
estimates that, collectively, the 10 credit unions that would 
experience a decline to undercapitalized would need to retain an 
additional $63 million in risk-based capital to become adequately 
capitalized, assuming no other adjustments. Affected credit unions may 
be required to change internal policies and practices to meet the new 
risk-based capital requirements of the proposed rule.
    Based on June 2013 Call Report data, NCUA estimates that if the 
proposed risk-based capital requirements were applied today, the 
aggregate risk-based capital ratio for credit unions subject to the 
proposed risk-based capital measure would be 14.6 percent and the 
average risk-based capital ratio would be 15.7 percent. These numbers 
are well above the proposed 10.5 percent requirement for classification 
as well-capitalized.

II. Section-by-Section Analysis

Part 702--Capital Adequacy

Revised Structure of Part 702
    The proposed rule would retitle current part 702, replacing the 
current title ``Prompt Corrective Action'' with the new title ``Capital 
Adequacy.'' \29\ The more general term Capital Adequacy better 
characterizes the components of proposed part 702, which include the 
prompt corrective action, minimum regulatory capital measures, and 
supervisory actions required under section 216 of the FCUA.\30\
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    \29\ The Board recently approved a proposed rule regarding 
capital planning and stress testing that also proposes to change the 
title of part 702 to ``Capital Adequacy.'' 78 FR 65583 (Nov. 1, 
2013).
    \30\ 12 U.S.C. 1790d.
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    The proposed rule would also reorganize part 702 by consolidating 
NCUA's PCA requirements, which were previously included under 
subsections A, B, C, and D, under new subparts A and B. Proposed 
subpart A would be titled ``Prompt Corrective Action'' and proposed 
subpart B would be titled ``Alternative Prompt Corrective Action for 
New Credit Unions.'' \31\ The reorganization of the proposed rule is 
designed so that credit unions need only reference the subpart applying 
to their institution to identify the applicable minimum capital 
standards and PCA regulations. The Board believes this consolidation 
will reduce confusion and avoid credit unions having to frequently flip 
back and forth through the four subparts of the current PCA rule.
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    \31\ Under both current Sec.  702.301(b) and proposed Sec.  
702.201(b), a credit union is ``new'' if it is ``a federally-insured 
credit union that both has been in operation for less than ten (10) 
years and has total assets of not more than $10 million. A credit 
union which exceeds $10 million in total assets may become `new' if 
its total assets subsequently decline below $10 million while it is 
still in operation for less than 10 years.''
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    In general, the proposed rule would restructure part 702 by 
consolidating most of the rules relating to capital and PCA that are 
applicable to credit unions that are not ``new'' credit unions under 
new subpart A. This change is intended to simplify the structure of 
part 702 by grouping the sections of the rule that are applicable only 
to credit unions not classified as new into a single subpart. The 
specific sections that would be included in new subpart A and the 
proposed changes to those sections are discussed in more detail below.
    Similarly, the proposed rule would consolidate most of NCUA's rules 
relating to alternative capital and PCA requirements for ``new'' credit 
unions under new subpart B. This change is intended to simplify the 
structure of part 702 by grouping the sections of the rule that are 
applicable only to credit unions that are classified as new into one 
subpart. The sections under new subpart B would remain largely 
unchanged from the requirements of current part 702 relating to 
alternative capital and PCA, except for revisions to the sections 
relating to reserves and the payment of dividends. The specific 
sections included in new subpart B and the specific changes to the 
sections under new subpart B are discussed in more detail below.
Section 702.1 Authority, Purpose, Scope, and Other Supervisory 
Authority
    Proposed Sec.  702.1 would remain substantially similar to current 
Sec.  702.1, but would be amended to update terminology and internal 
cross references within the section, consistent with the changes being 
proposed in other sections of part 702. No substantive changes to the 
section are intended.
Section 702.2 Definitions
    Proposed Sec.  702.2 would retain many of the definitions in 
current Sec.  702.2 with no substantive changes. The proposed rule 
would, however, remove the paragraph number assigned to each definition 
under current Sec.  702.2 and reorganize the section so the new and 
existing definitions are listed in alphabetic order. This reformatting 
would make Sec.  702.2 more consistent with current Sec. Sec.  700.2, 
703.2 and 704.2 of NCUA's regulations.\32\
---------------------------------------------------------------------------

    \32\ 12 CFR 700.2; 12 CFR 703.2; 12 CFR 704.2.
---------------------------------------------------------------------------

    In addition, proposed Sec.  702.2 would add a number of new 
definitions, and amend some existing definitions in Sec.  702.2. These 
changes are intended to help clarify the meaning of terms used in new 
part 702. The definitions that would be added, amended, or removed are 
as follows:
    Allowance for loan and lease loss (ALLL). The term ``allowance for 
loan and lease loss (ALLL)'' would be defined as reserves that have 
been established through charges against earnings to absorb future 
losses on loans, leases financing receivables or other extensions of 
credit. The definition would be consistent with the related Call Report 
field and the definition contained in the Call Report instructions.
    Call Report. The proposed rule would define the term ``Call 
Report'' as the Call Report required to be filed by credit unions under 
Sec.  741.6(a)(2). The term Call Report is a common expression within 
the credit union industry and is defined for clarification.
    Capital. The proposed rule would define the term ``capital'' as the 
equity, as measured by GAAP, available to a credit union to cover 
losses. The term capital is a common expression within the financial 
services industry and is defined for clarification.
    Cash equivalents. The proposed rule would define the term ``cash 
equivalents'' to mean short-term highly liquid investments that have 
original maturities of 3 months or less, at the time of purchase; are 
readily convertible to known amounts of cash; and are used as part of 
the credit union's cash-management activities. The definition would be 
consistent with the related Call Report field and the definition 
contained in the Call Report instructions.
    Commitment. The proposed rule would define the term ``commitment'' 
as any legally binding arrangement that obligated the credit union to 
extend credit or to purchase assets. The definition would be consistent 
with the related Call Report field and the definition contained in the 
Call Report instructions.
    CUSO. The proposed rule would define the term ``CUSO'' as a credit 
union service organization as defined in parts 712 and 741.
    Delinquent loans. The proposed rule would define the term 
``delinquent loans'' as loans that are 60 days or more

[[Page 11189]]

past due and loans placed on nonaccrual status. The definition would be 
consistent with the related Call Report field and the definition 
contained in the Call Report instructions.
    Derivatives contract.\33\ The proposed rule would define the term 
``derivatives contract'' as, in general, a financial instrument, traded 
on or off an exchange, the value of which is directly depended upon the 
value on or more underlying securities, equity indices, debt 
instruments, commodities, interest rates other derivative instruments, 
or any agreed upon pricing index or arrangement. Derivatives contracts 
include interest rate derivatives contracts and any other instrument 
that poses similar counterparty credit risks. Derivatives contracts 
also include unsettled securities with a contractual settlement or 
delivery lag that is longer than the lesser of the market standard for 
the particular instrument or five business days.
---------------------------------------------------------------------------

    \33\ In May 2013, the Board issued a proposed rule that would 
permit credit unions to engage in limited derivatives activities for 
the purpose of mitigating interest rate risk. 78 FR 32191 (May 29, 
2013). NCUA is still developing its derivatives rule and had not 
issued a final rule as of the date this proposal was presented to 
the Board. However, NCUA anticipates amending this rule to be 
consistent with any final rule issued by the Board related to the 
May 2013 derivatives proposal.
---------------------------------------------------------------------------

    First mortgage real estate loan. The proposed rule would define the 
term ``first mortgage real estate loan'' as loans and lines of credit 
fully secured by first liens on real estate (excluding MBLs), where the 
original amortization of the mortgage exposure does not exceed 30 
years; the loan underwriting took into account all the borrower's 
obligations, including mortgage obligations, principal, interest, 
taxes, insurance (including mortgage guarantee insurance) and 
assessments; and the loan underwriting concluded the borrower is able 
to repay the exposure using the maximum interest rate that may apply in 
the first five years, the maximum contract exposure over the life of 
the mortgage, and verified income.
    GAAP. The proposed rule would define the term ``GAAP'' as generally 
accepted accounting principles as used in the United States. The term 
``GAAP'' is a common expression within the industry and is defined for 
clarification.
    Goodwill. The proposed rule would define the term ``goodwill'' as 
an intangible asset representing the future economic benefits arising 
from other assets acquired in a business combination (i.e. merger) that 
are not individually identified and separately recognized. The 
definition would be consistent with the related Call Report field and 
the definition contained in the Call Report instructions.
    Intangible assets. The proposed rule would define the term 
``intangible assets'' as those assets that are required to be reported 
as intangible assets in a credit union's Call Report, including but not 
limited to purchased credit card relationships, goodwill, favorable 
leaseholds, and core deposit value. The definition would be consistent 
with the related Call Report field and the definition contained in the 
Call Report instructions.
    Investment in CUSO. The proposed rule would define the term 
``investment in CUSO'' as the unimpaired value of the credit union's 
aggregate CUSO investments as measured under generally accepted 
accounting principles on an unconsolidated basis. The definition would 
be consistent with the related Call Report field and the definition 
contained in the Call Report instructions.
    Identified losses. The proposed rule would define the term 
``identified losses'' to mean those items that have been determined by 
an evaluation made by a state or federal examiner, as measured on the 
date of examination, to be chargeable against income, capital and/or 
valuation allowances such as the allowance for loan and lease losses. 
The proposed definition would also provide the following examples of 
identified losses: assets classified as losses, off-balance sheet items 
classified as losses, any provision expenses that are necessary to 
replenish valuation allowances to an adequate level, liabilities not 
shown on the books, estimated losses in contingent liabilities, and 
differences in accounts that represent shortages.
    Loans to CUSO. The proposed rule would define the term ``loans to 
CUSO'' as the aggregate outstanding loan balance, available line(s) of 
credit from the credit union, and guarantees the credit union has made 
to or on behalf of a CUSO. The definition would be consistent with the 
related Call Report field and the definition contained in the Call 
Report instructions.
    Loans transferred with limited recourse. The proposed rule would 
define the term ``loans transferred with limited recourse'' as the 
total principal balance outstanding of loans transferred, including 
participations, for which the transfer qualified for true sale 
accounting treatment under GAAP, and for which the transferor credit 
union retained some limited recourse (i.e. insufficient recourse to 
preclude true sale accounting treatment). The proposed definition would 
also clarify that the term does not include transfers that qualify for 
true sale accounting treatment but contain only routine representation 
and warranty paragraphs that are standard for sale on the secondary 
market provided the credit union is in compliance with all other 
related requirements such as capital requirements. The definition would 
be consistent with the related Call Report field and the definition 
contained in the Call Report instructions.
    Mortgage servicing asset. The proposed rule would define the term 
``mortgage servicing asset (MSA)'' as those assets (net of any related 
valuation allowances) resulting from contracts to service loans secured 
by real estate (that have been securitized or owned by others) for 
which the benefits of servicing are expected to more than adequately 
compensate the services for performing the servicing. The definition 
would be consistent with the related Call Report field and the 
definition contained in the Call Report instructions.
    Off-balance sheet items. The proposed rule would define the term 
``off-balance sheet items'' as items such as commitments, contingent 
items, guarantees, certain repo-style transactions, financial standby 
letters of credit, and forward agreements that are not included on the 
balance sheet but are normally included in the financial statement 
footnotes. The definition would be consistent with the related Call 
Report field and the definition contained in the Call Report 
instructions.
    Qualifying master netting agreement. The proposed rule would define 
the term ``qualifying master netting agreement'' as a written, legally 
enforceable agreement, provided that: (1) The agreement creates a 
single legal obligation for all individual transactions covered by the 
agreement upon an event of default, including upon an event of 
conservatorship, receivership, insolvency, liquidation, or similar 
proceeding, of the counterparty; (2) the agreement provides the credit 
union the right to accelerate, terminate, and close out on a net basis 
all transactions under the agreement and to liquidate or set off 
collateral promptly upon an event of default, including upon an event 
of conservatorship, receivership, insolvency, liquidation, or similar 
proceeding, of the counterparty, provided that, in any such case, any 
exercise of rights under the agreement will not be stayed or avoided 
under applicable law in the relevant jurisdictions, other than in 
receivership, conservatorship, resolution under the Federal Deposit 
Insurance Act, Title II

[[Page 11190]]

of the Dodd-Frank Act, or under any similar insolvency law applicable 
to GSEs; (3) the agreement does not contain a walkaway clause (that is, 
a provision that permits a non-defaulting counterparty to make a lower 
payment than it otherwise would make under the agreement, or no payment 
at all, to a defaulter or the estate of a defaulter, even if the 
defaulter or the estate is a net creditor under the agreement): and (4) 
in order to recognize an agreement as a qualifying master netting 
agreement for purposes of part 702, a credit union must conduct 
sufficient legal review, at origination and in response to any changes 
in applicable law, to conclude with a well-founded basis (and maintain 
sufficient written documentation of that legal review) that the 
agreement meets the requirements of paragraph (2) of the definition of 
qualifying master netting agreement; and in the event of a legal 
challenge (including one resulting from default or from 
conservatorship, receivership, insolvency, liquidation, or similar 
proceeding), the relevant court and administrative authorities would 
find the agreement to be legal, valid, binding, and enforceable under 
the law of relevant jurisdictions.
    Risk-based capital ratio. The proposed rule would define the term 
``risk-based capital ratio'' as the percentage, rounded to two decimal 
places, of the risk-based capital numerator to total risk-weighted 
assets, as calculated in accordance with Sec.  702.104(a).
    Risk-weighted assets. The proposed rule would define the term 
``risk-weighted assets'' as the total risk-weighted assets as 
calculated in accordance with Sec.  702.104(c).
    Senior executive officer. The proposed rule would define the term 
``senior executive officer'' as a senior executive officer as defined 
by Sec.  701.14(b)(2).
    Total assets. The proposed rule would retain the definition of 
``total assets'' in current Sec.  702.2, but would restructure the 
definition and provide additional clarifying language. Under proposed 
paragraph (1) under the definition of ``total assets,'' for each 
quarter, a credit union must elect one of the four measures of total 
assets listed in paragraph (2) of the definition to apply for all 
purposes under part 702 except Sec. Sec.  702.103 through 702.105 
(risk-based capital ratio requirements). Proposed paragraph (2) under 
the definition of total assets would provide that ``total assets'' 
means a credit union's total assets as measured by either: (i) The 
credit union's total assets measured by the average of quarter-end 
balances of the current and three preceding calendar quarters; (ii) the 
credit union's total assets measured by the average of month-end 
balances over the three calendar months of the applicable calendar 
quarter; (iii) the credit union's total assets measured by the average 
daily balance over the applicable calendar quarter; or (iv) the credit 
union's total assets measured by the quarter-end balance of the 
applicable calendar quarter as reported on the credit union's Call 
Report.
    U.S. Government agency. The proposed rule would define the term 
``U.S. Government agency'' as an instrumentality of the U.S. Government 
whose obligations are fully and explicitly guaranteed as to the timely 
payment of principal and interest by the full faith and credit of the 
U.S. Government.
    Verified income. The proposed rule would define the term ``verified 
income'' as receipt and retention of corroborative information to 
establish the reality of the income supporting the repayment of the 
loan. The term ``verified income'' is a common expression within the 
industry and is defined for clarification.
    Weighted-average life. The proposed rule would remove the term 
``weighted-average life'' from current Sec.  702.2 and replace it with 
the newly defined term ``weighted-average life of investments.''
    Weighted-average life of investments. The proposed rule would move 
the definition of ``weighted-average life of investments'' contained 
within current Sec.  702.105 to proposed Sec.  702.2 and would add 
additional clarifying language. The weighted-average life of 
investments for registered investment companies, collective investment 
funds, money market funds, callable fixed rate debt obligations and 
deposits, variable rate debt obligations and deposits, capital in 
mixed-ownership government corporations, and other equity securities 
would remain unchanged. The proposal would assign specific risk-weights 
to investments in CUSOs and capital in corporate credit unions, as 
addressed below, thus removing them from the weighted-average life 
measure.
    The proposed rule would define the term ``weighted-average life of 
investments'' as follows: For investments in registered investment 
companies (e.g., mutual funds) and collective investment funds (e.g., 
common trusts), the term ``weighted-average life of investments'' would 
mean the maximum weighted-average life or duration target of the 
investment disclosed, directly or indirectly, in the most recent 
prospectus or trust instrument (if the maximum weighted-average life or 
duration target is not disclosed, the weighted-average life of 
investments means greater than 5 years, but less than 10 years). For 
investments in money market funds, as defined in 17 CFR 270.2a-7, and 
collective investment funds operated in accordance with short-term 
investment fund rules set forth in 12 CFR 9.18(b)(4)(ii)(B)(1) through 
(3), the term ``weighted-average life of investments'' would mean 1 
year or less. For fixed rate debt obligations and deposits that are 
callable in whole, the term ``weighted-average life of investments'' 
would mean the period remaining to the maturity date. For fixed rate 
debt obligations and deposits that are non-callable and non-amortizing 
(e.g. bullet maturity instruments), the term ``weighted-average life of 
investments'' would mean the period remaining to the maturity date. For 
fixed rate debt obligations or deposits with periodic principal pay 
downs (e.g., mortgage-backed securities), the term ``weighted-average 
life of investments'' would be defined according to industry standard 
calculations, which include the impact of unscheduled payments. For 
variable rate debt obligations and deposits (regardless of whether the 
investment amortizes), the term ``weighted-average life of 
investments'' would mean the period remaining to the next rate 
adjustment date. For capital stock in mixed-ownership Government 
corporations, as defined in 31 U.S.C. 9101(2), the term ``weighted-
average life of investments'' would mean greater than 1 year but less 
than or equal to 3 years. For other equity securities, the term 
``weighted-average life of investments'' would mean greater than 10 
years. For any other investments not addressed above, the term 
``weighted-average life of investments'' would mean the 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 taking the total of these time-weighted payments and dividing 
by the total amount of principal. The proposed definition of weighted-
average life of investments reflects the current method used by credit 
unions to report investments on the Statement of Financial Condition on 
the Call Report. The definition has remained largely unchanged from 
when the risk-based net worth requirements of part 702 were first 
implemented.\34\
---------------------------------------------------------------------------

    \34\ See 65 FR 8597 (Feb. 18, 2000) (providing that: ``The 
definition [of weighted-average life] is adopted in modified form 
from Fabozzi, Frank and T. Dessa, eds., The Handbook of Fixed Income 
Securities (4th ed. 1995) at 518, and reflects the method by which 
credit unions report investments in Schedule C of the Call 
Report.'').

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[[Page 11191]]

A. Subpart A--Prompt Corrective Action

    The proposed rule would establish new subpart A titled ``Prompt 
Corrective Action.'' New subpart A would contain the sections of part 
702 relating to capital measures, supervisory PCA actions, requirements 
for net worth restoration plans, and reserve requirements for all 
credit unions not defined as ``new'' pursuant to section 216(b)(2) of 
the FCUA.\35\
---------------------------------------------------------------------------

    \35\ 12 U.S.C. 1790d(b)(2).
---------------------------------------------------------------------------

Section 702.101 Capital Measures, Effective Date of Classification, and 
Notice to NCUA
    The requirements of proposed Sec.  702.101 would remain largely 
unchanged from current Sec.  702.101. The title of proposed Sec.  
702.101, however, would be changed to ``Capital measures, effective 
date of classification, and notice to NCUA'' to better reflect the 
three major topics that would be covered in the section. In addition, 
the proposed rule would replace the terms ``net worth measures'' with 
``capital measure,'' ``net worth classification'' with ``capital 
classification,'' and ``net worth category'' with ``capital category'' 
to reflect the terminology changes being made throughout the proposed 
rule, which were discussed above and are discussed in further detail 
below.
Section 702.102 Capital Classifications
    The proposal would change the title of Sec.  702.102 from 
``Statutory net worth categories'' to ``Capital classifications.'' 
Although section 216(c) of the FCUA uses the general term ``net worth 
categories,'' NCUA believes that replacing the term ``net worth'' with 
the general term ``capital categories'' better describes the combined 
``net worth ratio'' and ``risk-based net worth'' measurements that make 
up the five categories listed in the statute. Moreover, the term 
``capital'' is generally more inclusive of all accounts available to 
pay losses than the term ``net worth'' and is more commonly used in the 
financial services industry. No substantive changes to the requirements 
of section 216(c) are intended by these changes in terminology. This 
section would continue to list the five statutory capital categories 
that are provided in section 216(c) of the FCUA.\36\
---------------------------------------------------------------------------

    \36\ 12 U.S.C. 1790d(c).
---------------------------------------------------------------------------

102(a) Capital Categories
    Proposed Sec.  702.102(a) would replace current Sec.  702.102(a) 
and would set forth new minimum capital measures for complex credit 
unions. Although sections 216(c)(1)(A)(ii), (B)(ii), (C)(ii) and 216(d) 
of the FCUA use the term ``risk-based net worth'' requirement, NCUA 
believes that replacing the term ``risk-based net worth'' with the 
functionally equivalent term ``risk-based capital'' in the proposed 
rule would better describe the equity and assets the requirement would 
measure. Moreover, the term ``risk-based capital'' is more commonly 
used in the financial services industry, and is defined in a manner 
consistent with the requirements set forth in section 216. No changes 
to the requirements of the statute are intended by the use of the 
alternative term risk-based capital in the proposed rule.
    Consistent with subsections 216(c)(1)(A) through (E) of the FCUA, 
the net worth ratio measures listed in proposed Sec. Sec.  
702.102(a)(1) through (5) would continue to match those listed in the 
statute for each capital category, and would use both the net worth 
ratio and the new risk-based capital ratio as elements of the capital 
categories for ``well capitalized'', ``adequately capitalized'' and 
``undercapitalized'' credit unions. The risk-based capital ratio 
measure complements the net worth ratio, and section 216(d) of the FCUA 
requires the risk-based capital requirement be designed ``to take 
account of any material risks against which the net worth ratio 
required for an insured credit union to be adequately capitalized may 
not provide adequate protection.'' Accordingly, the risk-based capital 
ratio includes components that require higher capital levels to reflect 
increased risk due to interest rate risk, concentration risk, credit 
risk, market risk, and liquidity risk.
    In essence, the current RBNW requirement is evaluated on a pass/
fail basis. The proposed rule, in contrast, would introduce a new 
scaled risk-based capital measurement approach for assigning capital 
classifications for well capitalized, adequately capitalized, and 
undercapitalized credit unions. This scaled approach would recognize 
the relationship between higher risk-based capital ratios and the 
creditworthiness of credit unions.

                                      Table 4--Proposed Capital Categories
----------------------------------------------------------------------------------------------------------------
     A credit union's net worth                                Risk-based capital      And subject to following
      classification is . . .            Net worth ratio             ratio *              condition(s) . . .
----------------------------------------------------------------------------------------------------------------
Well Capitalized...................  7% or above...........  10.5% or above........  Must pass both net worth
                                                                                      ratio and risk-based
                                                                                      capital ratio.
Adequately Capitalized.............  6% to 6.99%...........  8% to 10.49%..........  Must pass both net worth
                                                                                      ratio and risk-based
                                                                                      capital ratio.
Undercapitalized...................  4% to 5.99%...........  Less than 8%..........  Must pass both net worth
                                                                                      ratio and risk-based
                                                                                      capital ratio.
Significantly Undercapitalized.....  2% to 3.99%...........  N/A...................  Or if undercapitalized at
                                                                                      <5% net worth and fails to
                                                                                      timely submit or
                                                                                      materially implement an
                                                                                      approved net worth
                                                                                      restoration plan.
Critically Undercapitalized........  Less than 2%..........  N/A...................  None.
----------------------------------------------------------------------------------------------------------------
* Applies only to credit unions with quarter-end total assets exceeding $50 million.


[[Page 11192]]

102(a)(1) Well Capitalized
    Under proposed Sec.  702.102(a)(1), to be classified as well 
capitalized, a credit union must maintain a net worth ratio of 7 
percent or greater and, if a complex credit union, must also have a 
risk-based capital ratio of 10.5 percent or greater. The higher 
proposed risk-based capital requirement for the well capitalized 
classification is designed to bolster the resiliency of complex credit 
unions throughout financial cycles. The proposed 10.5 percent risk-
based capital ratio target is comparable to the Other Federal Banking 
Regulatory Agencies' 8 percent Total Risk-based Capital ratio plus the 
2.5 percent capital conservation buffer which is expected to be fully 
implemented in 2019.\37\ NCUA is proposing the 10.5 percent risk-based 
capital ratio requirement, rather than the Other Federal Banking 
Regulatory Agencies' 8 percent, to avoid the complexity of implementing 
a capital conservation buffer.
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    \37\ On September 10, 2013, FDIC published an interim final rule 
that revised it risk-based and leverage capital requirements for 
FDIC-supervised institutions. 78 FR 55339 (Sept. 10, 2013).
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102(a)(2) Adequately Capitalized
    Under proposed Sec.  702.102(a)(2), to be classified as adequately 
capitalized, a credit union must maintain a net worth ratio of 6 
percent or greater and, if a complex credit union, must also have a 
risk-based capital ratio of 8 percent or greater. For example, a 
complex credit union with an 8 percent net worth ratio and an 8.5 
percent risk-based capital ratio would be adequately capitalized under 
the proposed rule. The 8 percent risk-based capital ratio requirement 
for the credit union industry is a measure comparable to the 8 percent 
total risk-based capital ratio required by the Other Federal Banking 
Regulatory Agencies' for a bank to be adequately capitalized.
102(a)(3) Undercapitalized
    Under proposed Sec.  702.102(a)(3), to be classified as 
undercapitalized, a credit union must maintain a net worth ratio of 4 
percent or greater and, if a complex credit union, fail to meet the 
minimum 8 percent total risk-based capital ratio requirement. For 
example, a complex credit union with an 8 percent net worth ratio and a 
7.5 percent risk-based capital ratio would be undercapitalized under 
the proposed rule.
102(a)(4) Significantly Undercapitalized
    Under proposed Sec.  702.102(a)(4), a credit union is classified as 
significantly undercapitalized if: (1) It has a net worth ratio of less 
than 5 percent, and has received notice that its net worth restoration 
plan has not been approved; \38\ (2) the credit union has a net worth 
ratio of 2 percent or more but less than 4 percent; or (3) the credit 
union has a net worth ratio of 4 percent or more but less than 5 
percent, and the credit union either fails to submit an acceptable net 
worth restoration plan within the time prescribed in Sec.  702.111, or 
materially fails to implement a net worth restoration plan approved by 
NCUA. Although proposed Sec.  702.102(a)(4) has been worded differently 
to help clarify the requirements of the paragraph, the proposed rule 
would not change the criteria for being classified as significantly 
undercapitalized under part 702.
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    \38\ To qualify for a higher net worth classification, a 
significantly undercapitalized credit union must have a net worth 
restoration plan approved by NCUA.
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102(a)(5) Critically Undercapitalized
    Under proposed Sec.  702.102(a)(5), a credit union is classified as 
critically undercapitalized if it has a net worth ratio of less than 2 
percent. The proposal would not change the criteria for being 
classified as critically undercapitalized.
102(b) Reclassification Based on Supervisory Criteria Other Than Net 
Worth
    Proposed Sec.  702.102(b) would remain mostly unchanged from 
current Sec.  702.102(b), with only a few amendments to update 
terminology and make minor edits for clarity. No substantive changes 
are intended.
102(c) Non-Delegation
    Proposed Sec.  702.102(c) would be unchanged from current Sec.  
702.102(c).
102(d) Consultation With State Officials
    Proposed Sec.  702.102(d) would remain mostly unchanged from 
current Sec.  702.102(d), with only a few small amendments for 
consistency with other sections of NCUA's regulations. No substantive 
changes are intended.
Section 702.103 Applicability of Risk-Based Capital Ratio Measure
    Proposed Sec.  702.103 would change the title of current Sec.  
702.103 from ``Applicability of risk-based net worth requirement'' to 
``Applicability of risk-based capital ratio measure.'' Proposed Sec.  
702.103 would provide that, for purposes of Sec.  702.102, a credit 
union is defined as ``complex,'' and a risk-based capital ratio 
requirement is applicable, only if the credit union's quarter-end total 
assets exceed $50 million, as reflected in its most recent Call Report. 
The proposal would eliminate current Sec.  702.103(b) and define all 
credit unions with over $50 million in assets as ``complex.'' Under the 
current rule, credit unions are ``complex'' and subject to the RBNW 
requirement only if they have quarter-end total assets over $50 million 
and they have an RBNW over 6 percent. In the proposed rule all credit 
unions with total quarter end assets over $50 million would be 
considered ``complex'' and subject to the risk-based capital ratio.
    In January 2013, NCUA revised part 702 by increasing the asset size 
of credit unions subject to the risk-based net worth requirement from 
$10 million to $50 million.\39\ In setting the $50 million asset 
threshold, the Board considered the following factors for a variety of 
asset size ranges:
---------------------------------------------------------------------------

    \39\ On January 18, 2013, NCUA published a final rule and IRPS 
13-1 redefining ``small entity'' as a credit union with less than 
$50 million in assets and amending 12 CFR 702.103 increasing to $50 
million the asset threshold used to define ``complex'' credit union 
for determined whether RBNW requirements apply. 78 FR 4032 (Jan. 18, 
2013).
---------------------------------------------------------------------------

     The percentage of industry assets and units;
     Credit union complexity as measured by products and 
services;
     The history of failures; and
     The risk to the NCUSIF.
    NCUA estimates that, as of June 30, 2013, approximately 2,237 of 
6,681 credit unions reported total assets over $50 million. These 
credit unions hold approximately 94 percent of total credit union 
system assets.
Section 702.104 Risk-Based Capital Ratio Measures
    Proposed Sec.  702.104 would change the title of current Sec.  
702.104 from ``Risk portfolio defined'' to ``Risk-based capital ratio 
measures.'' Proposed Sec.  702.104 would entirely replace the 
requirements for calculating the RBNW requirement for ``complex'' 
credit unions under current Sec.  702.104 with a new risk-based capital 
ratio requirement.\40\ The proposed section would require all 
``complex'' credit unions to calculate the risk-based capital ratio as 
directed in this section. The proposed risk-based capital ratio is 
designed to enhance sound capital management and help ensure that 
credit unions maintain adequate levels of loss-absorbing capital going 
forward, strengthening the stability of the credit union system and 
ensuring credit unions serve as a source of credit in times of stress.
---------------------------------------------------------------------------

    \40\ 12 U.S.C. 1790d(d).

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[[Page 11193]]

104(a) Calculation of Capital for the Risk-Based Capital Ratio
    Proposed Sec.  702.104(a) would provide that to determine its risk-
based capital ratio, a complex credit union must calculate the 
percentage, rounded to two decimal places, of its risk-based capital 
numerator as described in Sec.  702.104(b) to its total risk-weighted 
assets denominator as described in Sec.  702.104(c). In simplest terms, 
the proposed risk-based capital ratio would be the percentage of a 
defined measure of the equity and other accounts held by a credit union 
that are available to cover losses, divided by a defined risk-weighted 
asset base. The proposed method of calculating risk-based capital would 
be generally consistent with the methods used in other sectors of the 
financial services industry. Conversely, the method of computing the 
RBNW measure in current Sec.  702.104 is unique within the financial 
services industry, and frequently results in confusion and incorrect 
analyses when industry analysts attempt to compare credit union risk-
weights for assets to bank risk-weights for assets. As with the current 
RBNW ratio, the proposed risk-based capital ratio calculation would be 
calculated primarily using information credit unions already report on 
the Call Report form required under Sec.  741.6(a)(2) of NCUA's 
regulations.
104(b) Risk-based Capital Ratio Numerator
    Proposed Sec.  702.104(b) would provide that the risk-based capital 
numerator is the sum of the specific certain capital elements listed in 
Sec.  702.104(b)(1), minus certain regulatory adjustments listed in 
Sec.  702.104(b)(2). The proposed numerator for the risk-based capital 
ratio would continue to consist primarily of the components of a credit 
union's net worth. In order to capture all of the material risks while 
keeping the calculation from becoming overly complex, the proposed rule 
would add some additional equity items and other specified balance 
sheet items would be subtracted. The goal of the proposed risk-based 
capital ratio numerator is to achieve a measure that reflects a more 
accurate amount of equity and reserves available to cover losses.

             Table 5--Proposed Risk-Based Capital Numerator
------------------------------------------------------------------------
               Additions                            Deductions
------------------------------------------------------------------------
Undivided earnings (includes any         NCUSIF deposit.
 regular reserve).
Appropriations for non-conforming        Goodwill.
 investments.
Other reserves.........................  Other intangible assets.
Equity acquired in merger..............  Identified losses not reflected
                                          as adjustments to components
                                          of the risk-based numerator.
Net income.............................
ALLL (limited to 1.25% of risk assets).
Secondary capital accounts included in
 net worth.
Section 208 assistance included in net
 worth (as defined in Sec.   702.2).
------------------------------------------------------------------------

104(b)(1) Capital Elements of the Risk-Based Capital Ratio Numerator
    Proposed Sec.  702.104(b)(1) would list the capital elements of the 
risk-based capital numerator as follows:
     Undivided earnings (includes any regular reserve);
     Appropriation for non-conforming investments;
     Other reserves;
     Equity acquired in merger;
     Net income;
     ALLL, limited to 1.25% of risk assets;
     Secondary capital accounts included in net worth (as 
defined in Sec.  702.2); and
     Section 208 assistance included in net worth (as defined 
in Sec.  702.2).
    The proposed risk-based numerator would include the equity acquired 
in merger component of the balance sheet. This equity item would be 
used in place of the total adjusted retained earnings acquired through 
business combinations amount credit unions report on the PCA Net Worth 
Calculation Worksheet in the Call Report. The equity acquired in merger 
is the GAAP equity recorded in a business combination and can vary from 
the amount of total adjusted retained earning acquired through business 
combinations, which is not a GAAP accounting item. The use of equity 
acquired in a merger, as measured using GAAP, more accurately reflects 
the overall value of the business combination transaction.
    Because the ALLL is available to cover expected levels of loan 
losses, the proposed numerator also would include the ALLL, but it 
would be limited to 1.25 percent of total risk-weighted assets.\41\ The 
RBNW calculation for ALLL in current Sec.  702.104(h) is limited to 
1.50 percent of loans and is included as a reduction in the level of 
risk assets. By establishing a limit in the amount of ALLL included in 
the numerator, the proposed rule would provide an incentive for 
granting quality loans and recording loan losses in a timely manner. 
The proposed 1.25 percent limit should not result in a disincentive to 
fully fund the ALLL above the 1.25 percent ceiling, because complex 
credit unions are bound by GAAP in maintaining the ALLL. NCUA estimates 
that, as of June 30, 2013, approximately 468 of the 2,237 ``complex'' 
credit unions have an ALLL greater than 1.25 percent of total risk 
assets.
---------------------------------------------------------------------------

    \41\ The 1.25 percent of risk-weighted assets limitation is 
consistent with the Basel III framework and the regulatory capital 
rules for U.S. banks.
---------------------------------------------------------------------------

    The proposed risk-based capital numerator would not include the 
following Call Report equity items:
     Accumulated unrealized gains (losses) on available for 
sale securities;
     Accumulated unrealized losses for OTTI on debt securities;
     Accumulated unrealized net gains (losses) on cash flow 
hedges; and
     Other comprehensive income.
    NCUA recognizes the items listed above reflect a credit union's 
actual loss absorption capacity at a specific point in time, but 
includes gains or losses that may or may not be realized. NCUA also 
recognizes that including these items in the risk-based numerator could 
lead to volatility in the risk-based capital measure, difficulty in 
capital planning and asset-management and other unintended 
consequences.\42\ Accordingly, NCUA chose to exclude these items from 
the proposed risk-based capital numerator.
---------------------------------------------------------------------------

    \42\ The Other Federal Banking Agencies' regulatory capital 
rules (12 CFR 324.22) allow institutions to make an opt-out election 
for similar accounts. See, e.g., 78 FR 55339 (Sept. 10, 2013).
---------------------------------------------------------------------------

104(b)(2) Risk-Based Capital Numerator Deductions
    Proposed Sec.  702.104(b)(2) would provide that the elements 
deducted

[[Page 11194]]

from the sum of the risk-based capital elements are:
     NCUSIF Capitalization Deposit;
     Goodwill;
     Other intangible assets; and
     Identified losses not reflected in the risk-based capital 
ratio numerator.
    In order to achieve a risk-based capital numerator reflecting 
equity available to cover losses in the event of liquidation, goodwill 
and other intangible assets would be deducted from both the risk-based 
capital numerator and denominator. Goodwill and other intangible assets 
contain a high level of uncertainty regarding a credit union's ability 
to realize value from these assets, especially under adverse financial 
conditions.
    The proposed rule would address concerns about the NCUSIF deposit 
reflected on the NCUSIF's balance sheet both as equity to pay losses 
and as an asset of the insured credit unions. In the proposed rule, the 
NCUSIF deposit is subtracted from both the numerator and denominator of 
the risk-based capital ratio.\43\ This treatment for the risk-based 
regulatory capital standard would not alter the NCUSIF deposit 
accounting treatment for credit unions.
---------------------------------------------------------------------------

    \43\ See U.S. Govt. Accountability Office, GAO-04-849, Available 
Information Indicates No Compelling Need for Secondary Capital 
(2004), available at http://www.gao.gov/assets/250/243642.pdf.
---------------------------------------------------------------------------

    The proposed rule would include a provision to allow for identified 
losses, not otherwise reflected as adjustments in the risk-based 
capital numerator, to be deducted to reflect an accurate risk-based 
capital ratio. The inclusion of identified losses would allow for the 
calculation of an accurate risk-based capital ratio. Examples of items 
that would be subject to this provision include shortages in the ALLL, 
underfunded pension accounts, and unsupported valuations of bond claim 
receivables.
104(c) Total Risk-Weighted Assets
    In developing the proposed risk-weights, NCUA reviewed the Basel 
accords and both the U.S. and international banking system's existing 
risk-weight measures.\44\ NCUA considered the comments contained in 
material loss reviews prepared by the NCUA Inspector General and GAO 
comments in their reviews of the financial services industry's 
implementation of PCA.\45\ As previously mentioned, because the FCUA 
requires the risk-based measure to include all material risks, 
consideration was given to credit risk, concentration risk, market 
risk, interest rate risk, operational risk, and liquidity risk.
---------------------------------------------------------------------------

    \44\ The Basel Committee on Banking Supervision (BCBS) published 
Basel III in December 2010 and revised it in June 2011, available at 
http://www.bis.org/publ/bcbs189.htm.
    \45\ Section 988 of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act obligates the NCUA's Inspector General to 
conduct material loss reviews (MLRs) of credit unions that incurred 
a loss of $25 million or more to the NCUSIF. In addition, section 
988 requires the NCUA's Inspector General to review all losses under 
the $25 million threshold to assess whether an in-depth review is 
warranted due to unusual circumstances. The MLRs are available at 
http://www.ncua.gov/about/Leadership/CO/OIG/Pages/MaterialLossReviews.aspx; see also GAO/GGD-98-153 (July 1998); GAO-
07-253 (Feb. 2007), GAO-11-612 (June 2011), GAO-12-247 (Jan. 2012), 
and GAO-13-71 (Jan. 2013).
---------------------------------------------------------------------------

    Proposed Sec.  702.104(c) would address concentration risk by 
assigning higher risk-weights to larger percentages of assets in MBLs 
and real estate loans. The concentration threshold amounts are 
generally based on the average percentage of assets held in the asset 
types.
104(c)(1) General
    Proposed Sec.  702.104(c)(1) would provide that total risk-weighted 
assets include risk-weighted on-balance sheet assets as described in 
Sec.  702.104(c)(2), plus the risk-weighted off-balance sheet assets in 
Sec.  702.104(c)(3), plus the risk-weighted derivatives in Sec.  
702.104(c)(4), minus the risk-based capital numerator deductions in 
Sec.  702.104(b)(2). The proposal would require a complex credit union 
to calculate its risk-weighted asset amount for its on- and off-balance 
sheet exposures. (NCUA's Call Report system would be upgraded to 
conduct the calculations automatically.) In the proposal, risk-weighted 
asset amounts would generally be determined by assigning an on-balance 
sheet asset to broad risk-weight categories according to the asset 
type, collateral, and level of concentration. Similarly, risk-weighted 
assets amounts for off-balance sheet items would be calculated using a 
two-step process: (1) Multiplying the amount of the off-balance sheet 
exposure by a credit conversion factor (CCF) to determine a credit 
equivalent amount, and (2) assigning the credit equivalent amount to a 
relevant risk-weighted category. A credit union would determine its 
total risk-weighted assets by calculating (1) its risk-weighted assets, 
minus (2) goodwill and other intangibles, and minus (3) the NCUSIF 
deposit.
104(c)(2) Risk-Weights for On-Balance Sheet Assets
    Proposed Sec.  702.104(c)(2) would define the risk categories and 
risk-weights to be assigned to each specifically defined on-balance 
sheet asset. All on-balance sheet assets would be assigned to one of 
the categories and risk-weights listed in Table 6.

                           Table 6--Risk-Weight Categories and Associated Risk-Weights
----------------------------------------------------------------------------------------------------------------
         Risk-weight category                         Risk-weight                        Items included
----------------------------------------------------------------------------------------------------------------
Category 1............................  0 percent.............................   Cash on hand, which
                                                                                 includes the change fund (coin,
                                                                                 currency, and cash items),
                                                                                 vault cash, vault funds in
                                                                                 transit, and currency supplied
                                                                                 from automatic teller machines.
                                                                                 NCUSIF capitalization
                                                                                 deposit.
                                                                                 Debt instruments
                                                                                 unconditionally guaranteed by
                                                                                 the NCUA or the FDIC.
                                                                                 U.S. Government
                                                                                 obligations directly and
                                                                                 unconditionally guaranteed by
                                                                                 the full faith and credit of
                                                                                 the U.S. Government, including
                                                                                 U.S. Treasury bills, notes,
                                                                                 bonds, zero coupon bonds, and
                                                                                 separate trading of registered
                                                                                 interest and principal
                                                                                 securities (STRIPS).
                                                                                 Non-delinquent student
                                                                                 loans unconditionally
                                                                                 guaranteed by a U.S. Government
                                                                                 agency.
Category 2............................  20 percent............................   Cash on deposit, which
                                                                                 includes balances on deposit in
                                                                                 insured financial institutions
                                                                                 and deposits in transit. These
                                                                                 amounts may or may not be
                                                                                 subject to withdrawal by check,
                                                                                 and they may or may not bear
                                                                                 interest. Examples include
                                                                                 overnight accounts, corporate
                                                                                 credit union daily accounts,
                                                                                 money market accounts, and
                                                                                 checking accounts.
                                                                                 Cash equivalents
                                                                                 (investments with original
                                                                                 maturities of three months or
                                                                                 less). Cash equivalents are
                                                                                 short-term, highly liquid non-
                                                                                 security investments that have
                                                                                 an original maturity of 3
                                                                                 months or less at the time of
                                                                                 purchase, are readily
                                                                                 convertible to known amounts of
                                                                                 cash, and are used as part of
                                                                                 the credit union's cash
                                                                                 management activities.
                                                                                 The total amount of
                                                                                 investments with a weighted-
                                                                                 average life of one year or
                                                                                 less.
                                                                                 Residential mortgages
                                                                                 guaranteed by the federal
                                                                                 government through the FHA or
                                                                                 the VA.

[[Page 11195]]

 
                                                                                 Loans guaranteed 75
                                                                                 percent or more by the SBA,
                                                                                 U.S. Department of Agriculture,
                                                                                 or other U.S. Government
                                                                                 agency.
Category 3............................  50 percent............................   The total amount of
                                                                                 investments with a weighted-
                                                                                 average life of greater than
                                                                                 one year, but less than or
                                                                                 equal to three years.
                                                                                 The total amount of
                                                                                 current and non-delinquent
                                                                                 first mortgage real estate
                                                                                 loans less than or equal to 25
                                                                                 percent of total assets.
Category 4............................  75 percent............................   The total amount of
                                                                                 investments with a weighted-
                                                                                 average life of greater than
                                                                                 three years, but less than or
                                                                                 equal to five years.
                                                                                 Current and non-
                                                                                 delinquent unsecured credit
                                                                                 card loans, other unsecured
                                                                                 loans and lines of credit,
                                                                                 short-term, small amount loans
                                                                                 (STS), new vehicle loans, used
                                                                                 vehicle loans, leases
                                                                                 receivable and all other loans.
                                                                                 (Excluding loans reported as
                                                                                 MBLs).
                                                                                 Current and non-
                                                                                 delinquent first mortgage real
                                                                                 estate loans greater than 25
                                                                                 percent of total assets and
                                                                                 less than or equal to 35
                                                                                 percent of assets.
Category 5............................  100 percent...........................   Corporate credit union
                                                                                 nonperpetual capital.
                                                                                 The total outstanding
                                                                                 principal amount loaned to
                                                                                 CUSOs.
                                                                                 Current and non-
                                                                                 delinquent first mortgage real
                                                                                 estate loans greater than 35
                                                                                 percent of total assets.
                                                                                 Delinquent first
                                                                                 mortgage real estate loans.
                                                                                 Other real estate-
                                                                                 secured loans less than or
                                                                                 equal to 10 percent of assets.
                                                                                 MBLs less than or equal
                                                                                 to 15 percent of assets.
                                                                                 Loans held for sale.
                                                                                 The total amount of any
                                                                                 foreclosures and repossessed
                                                                                 assets.
                                                                                 Land and building, less
                                                                                 depreciation on building.
                                                                                 Any other fixed assets,
                                                                                 such as furniture and fixtures
                                                                                 and leasehold improvements,
                                                                                 less related depreciation.
                                                                                 Current non-federally
                                                                                 insured student loans.
                                                                                 All other assets not
                                                                                 specifically assigned a risk-
                                                                                 weight but included in the
                                                                                 balance sheet.
Category 6............................  125 percent...........................   Total amount of all
                                                                                 other real estate-secured loans
                                                                                 greater than 10 percent of
                                                                                 assets and less than or equal
                                                                                 to 20 percent of assets.
Category 7............................  150 percent...........................   The total amount of
                                                                                 investments with a weighted-
                                                                                 average life of greater than
                                                                                 five years, but less than or
                                                                                 equal to ten years.
                                                                                 Any delinquent
                                                                                 unsecured credit card loans;
                                                                                 other unsecured loans and lines
                                                                                 of credit; short-term, small
                                                                                 amount loans; non-federally
                                                                                 guaranteed student loans; new
                                                                                 vehicle loans; used vehicle
                                                                                 loans; leases receivable; and
                                                                                 all other loans (excluding
                                                                                 loans reported as MBLs).
                                                                                 The total amount of all
                                                                                 other real estate-secured loans
                                                                                 greater than 20 percent of
                                                                                 assets.
                                                                                 Any MBLs greater than
                                                                                 15 percent of assets and less
                                                                                 than or equal to 25 percent of
                                                                                 assets.
Category 8............................  200 percent...........................   Corporate credit union
                                                                                 perpetual capital.
                                                                                 The total amount of
                                                                                 investments with a weighted-
                                                                                 average life of greater than 10
                                                                                 years.
                                                                                 The total amount of
                                                                                 MBLs greater than 25 percent of
                                                                                 assets, other than MBLs
                                                                                 included in Category 3 above.
Category 9............................  250 percent...........................   The total value of
                                                                                 investments in CUSOs.
                                                                                 The total value of
                                                                                 mortgage servicing assets.
Category 10...........................  1,250 percent.........................   An asset-backed
                                                                                 investment for which the credit
                                                                                 union is unable to demonstrate,
                                                                                 as required under Sec.
                                                                                 702.104(d), a comprehensive
                                                                                 understanding of the features
                                                                                 of the asset-backed investment
                                                                                 that would materially affect
                                                                                 its performance.
----------------------------------------------------------------------------------------------------------------

    A further explanation of risk-weights based on balance sheet asset 
type follows.
    Cash and investment risk-weights. The proposal generally would 
maintain the existing structure for measuring risk-weights for most 
cash items and investments. For specific investments, the risk-weights 
would continue to be based upon the ``weighted-average life of 
investments'' (WAL), as defined within the regulation. The WAL is 
generally the average time until a dollar of principal is repaid.

         Table 7--Proposed Risk-Weights for Cash and Investments
------------------------------------------------------------------------
                                                               Proposed
                            Item                             risk-weight
                                                              (percent)
------------------------------------------------------------------------
Cash on hand...............................................            0
NCUA and FDIC issued Guaranteed Notes......................            0
Direct, unconditional U.S. Government obligations..........            0
Cash on deposit............................................           20
Cash equivalents...........................................           20
Total investments with WAL <= 1-year.......................           20
Total investments with WAL >1-year and <= 3-years..........           50
Total investments with WAL >3-year and <= 5-years..........           75
Corporate credit union nonperpetual capital................          100
Total investments with WAL >5-year and <= 10-years.........          150
Total investments with WAL > 10-years......................          200

[[Page 11196]]

 
Corporate credit union perpetual capital...................          200
------------------------------------------------------------------------

    Cash held by a credit union for normal operations--such as vault 
cash, ATM cash, and teller cash--typically present no risk because it 
is protected from loss by a credit union's fidelity bond and would be 
assigned a zero risk-weight.
    To maintain continuity and provide a fair measure of the interest 
rate and liquidity risks associated with longer term investments, the 
proposed rule would continue to use the measure in current Sec.  
702.105 for investments. The current risk-weights for investments 
relied on the results of 300 basis point interest rate ``shock tests'' 
to corroborate the assigned risk-weights. The 300 basis point shock 
test is a widely accepted measure of interest rate risk. The proposed 
risk-weight for investments with a WAL of less than 5 years would be 
lower, relative to the existing rule, to reflect lower interest rate 
risk and liquidity risk. The proposed risk-weight for investments with 
a WAL from 5 to 10 years would be about the same and the risk-weight 
for investments with a WAL over 10 years would be decreased slightly.
    The proposal would lower the risk-weight for direct and 
unconditional U.S. Government obligations (FDIC issued Guaranteed 
Notes, and other U.S. Government obligations) from the WAL measure to 
zero risk-weighted assets, and maintain the current zero risk-weight 
for NCUA Guaranteed Notes.
    In the current rule, the investment in nonperpetual and perpetual 
capital in a corporate credit union are reported in the ``>1-3 Years'' 
WAL bucket on the Call Report and assigned the associated risk-weight.
    Member Business Loans (MBLs). Consistent with the existing rule, 
the risk portfolio for ``member business loans outstanding'' in the 
proposal will consist of loans outstanding that qualify as MBLs under 
NCUA's definition,\46\ or under a state's NCUA-approved definition.\47\ 
If a loan qualifies as a MBL when it is originated, it will remain so 
until it has been repaid in full, sold, or otherwise disposed of. 
Unused MBL commitments would be addressed in a separate off-balance 
sheet risk portfolio.
---------------------------------------------------------------------------

    \46\ See 12 CFR 723.1.
    \47\ See 12 CFR 723.20.
---------------------------------------------------------------------------

    In the current rule, the risk-weights for MBLs apply across three 
thresholds based on the amount of MBLs as a percentage of total assets. 
The first threshold applies to concentrations between 0 and 15 percent, 
the second applies to concentrations over 15 percent and up to 25 
percent, and the third applies to concentrations in excess of 25 
percent. The proposed rule would maintain the same threshold levels for 
assigning risk-weights. Since current MBL regulations generally limit 
MBLs to 12.25 percent of total assets,\48\ typically only those credit 
unions with an MBL exemption are subject to the higher risk-weightings 
assigned to the higher concentrations of MBLs.
---------------------------------------------------------------------------

    \48\ See 12 CFR 723.16(a).
---------------------------------------------------------------------------

    Supervisory experience has demonstrated that certain MBLs present 
multiple risks for which credit unions should hold additional capital. 
Many of the largest losses to the NCUSIF occurred in credit unions with 
high concentrations of MBLs.\49\ Similarly, the failures of many small 
banks between 2008 and 2011 were also largely driven by high 
concentrations of MBLs. The GAO reported that in the 10 states with 10 
or more bank failures between 2008 and 2011, the failure of the small 
and medium-size banks were largely associated with high concentrations 
of commercial real estate loans.\50\
---------------------------------------------------------------------------

    \49\ See NCUA Office of the Inspector General, OIG-10-20, OIG 
Capping Report on Material Loss Reviews (Nov. 23, 2010), Chart G, 
available at http://www.ncua.gov/about/Leadership/CO/OIG/Documents/OIG201020CappRpt.pdf.
    \50\ U.S. Government Accountability Office, GAO-13-704T, Causes 
and Consequences of Recent Community Bank Failures (June 12, 2013), 
page 4, available at http://www.gao.gov/assets/660/655193.pdf.
---------------------------------------------------------------------------

    As illustrated in Table 8, the proposed rule would moderately 
increase all of the risk-weights for MBLs.

                      Table 8--Comparison of Current Regulation and Proposed MBL Component
----------------------------------------------------------------------------------------------------------------
                                                                            Current MBL risk-
                                                                            weightings \51\--
                                                                              (converted for      Proposed MBL
                                Total MBLs                                    8% adequately     risk-weightings
                                                                               capitalized         (percent)
                                                                            level)  (percent)
----------------------------------------------------------------------------------------------------------------
0 to 15% of Assets........................................................                 75           \52\ 100
>15 to 25% of Assets......................................................                100                150
Amount over 25%...........................................................                175                200
----------------------------------------------------------------------------------------------------------------

    MBLs that are government guaranteed at least 75 percent, normally 
by the Small Business Administration (SBA) or U.S. Department of 
Agriculture, would receive a lower risk-weight of 20 percent under the 
proposed rule.
---------------------------------------------------------------------------

    \51\ The current MBL risk-weightings were converted to a 
comparable risk-weight by dividing the current risk-weighting by 8 
percent, with 8 percent representing the level of risk-weighted 
capital needed to be adequately capitalized. In the current rule 
total MBLs less than the threshold 15 percent of assets receive a 6 
percent risk-weighting, which is equivalent to a 75 percent risk-
weight under this proposal (6% divided by 8%). The next threshold in 
the current regulation for total MBLs from 15 percent to 25 percent 
of assets received an 8 percent risk-weighting, which is equivalent 
to a 100 percent risk-weight under this proposal (8% divided by 8%) 
and the highest concentrations of MBLs received a 14 percent risk-
weight, which is equivalent to a 175 percent risk-weight under this 
proposal (14% divided by 8%).
    \52\ This is consistent with the Other Federal Banking 
Regulatory Agencies' capital rules (e.g., 12 CFR 324.32), which 
maintain a 100 percent risk-weight for commercial real estate (CRE) 
and includes a 150 percent risk-weigh for loans defined as high 
volatility commercial real estate (HVCRE). See, e.g., 78 FR 55339 
(Sept. 10, 2013).
---------------------------------------------------------------------------

    As of June 2013, for the 1,579 complex credit unions with 
outstanding MBLs, MBLs comprise an aggregate of

[[Page 11197]]

4.80 percent of assets and an average 5.14 percent of assets. Only 70 
of the credit unions holding MBLs have MBL portfolios in excess of 15 
percent of total assets. The threshold of 15 percent was selected to 
provide for the possibility of a decline in asset size once a credit 
union reaches the 12.25 percent statutory limit for MBLs.
    NCUA considered developing an alternative version of the current 
method for computing the MBL's 15 percent concentration level that 
would have addressed the potential for reduced risk in a well-
diversified MBL portfolio. However, before developing such a method, 
NCUA staff evaluated the diversity of MBL loan types using the data 
reported in the Call Report. The data was summarized into the following 
five subcategories: (1) Construction and development, (2) agriculture 
related loans, (3) non-farm, non-residential property, (4) commercial 
and industrial loans, and (5) unsecured business loans. NCUA noted as 
they evaluated the Call Report data that, of the 70 credit unions with 
MBLs over the 15 percent of assets threshold that would be subject to 
higher risk-weights on a portion of their MBLs, most tended to 
primarily originate one particular type of MBL. The Call Report data 
provides no information on the geographic distribution of the MBL 
portfolio and the additional information needed to properly identify 
the nature and extent of any diversification would place an additional 
data reporting burden on credit unions with an uncertain result. Due to 
the lack of diversity in the types of MBLs held by credit unions and 
the reporting requirements to potentially identify diversification, the 
Board decided to propose maintaining the current risk-weight 
concentration levels. The Board believes that maintaining the current 
methodology avoids adding the complexity required to define the 
adequate level of diversification and associated reporting necessary to 
implement such an alternative method in the proposed rule.
    Real Estate Loans. The current rule excludes from the real estate 
risk-weights those real estate loans reported as MBLs. The proposed 
rule would continue this exclusion.
    The current standard risk-weighting approach establishes higher 
capital requirements only for ``long term'' real estate loans, 
excluding loans that re-price, refinance, or mature within five years 
or less. By excluding loans that re-price, refinance, or mature within 
five years or less from higher capital requirements, the current 
formula does not address a large amount of real estate loans. As a 
result, credit unions build real estate loan concentrations without 
appropriate capital. Additionally, the junior lien real estate loans, 
with a significantly higher loss history, are combined with first 
mortgage real estate loans. An unintended consequence of the current 
real estate loan risk-weight is the structuring of mortgage products to 
minimize capital requirements which could impact the marketability of 
such loans.
    The proposed rule would recognize the lower loss history for 
current, prudently written first lien real estate-secured loans by 
assigning a lower risk-weight of 50 percent to the first 25 percent of 
assets.\53\ To account for concentration risk, the risk-weight for 
first lien real estate loans would increase for loans between 25 and 35 
percent of assets from 50 percent to 75 percent. First lien real estate 
loans over 35 percent of assets would be accorded a 100 percent risk-
weight. The threshold of 25 percent is based on the average percent of 
first mortgage real estate loans to total assets, which, as of June 30, 
2013, is 24.9 percent for all complex credit unions. Out of the 2,188 
complex credit unions with first mortgage real estate loans, 510 have a 
concentration in excess of 25 percent of assets and 160 have a 
concentration in excess of 35 percent of assets.
---------------------------------------------------------------------------

    \53\ This is consistent with the Other Federal Banking 
Regulatory Agencies' capital rules (e.g., 12 CFR 324.32), which 
maintained the 50 percent risk-weight for one to four family real 
estate loans that are prudently underwritten, not 90 days or more 
past due, and not restructured or modified, and a 100 percent risk-
weight for such loans otherwise. See, e.g., 78 FR 55339 (Sept. 10, 
2013).
---------------------------------------------------------------------------

    In the proposed rule, if a credit union holds the first and junior 
lien(s) on a property, and no other party holds an intervening lien, 
the credit union could treat the combined exposure as a single loan 
secured by a first lien for purpose of assigning a risk-weight. A first 
lien real estate loan could be assigned to the 50 percent risk-weight 
category only if it is not restructured or modified. A first lien real 
estate loan modified or structured on a permanent or trial basis solely 
pursuant to the U.S. Treasury's Home Affordability Mortgage Program 
(HAMP) would not be considered to be restructured or modified. A first 
lien real estate loan guaranteed by the federal government through the 
Federal Housing Administration (FHA) or the Department of Veterans 
Affairs (VA) generally would be risk-weighted at 20 percent. While a 
government guarantee against default mitigates credit risk, it does not 
affect interest rate risk.
    During the recent market turmoil, the U.S. housing market 
experienced significant deterioration and unprecedented levels of 
mortgage loan defaults and home foreclosures. The cause for the 
significant increase in loan defaults and home foreclosures included 
inadequate underwriting standards, high-risk mortgage products 
providing for negative amortization and significant payment shock to 
the borrowers, unverified or undocumented income, and a rise in 
unemployment.\54\ Therefore, NCUA is proposing that real estate-secured 
loans not meeting the definition of first mortgage real estate loans 
would be referred to as ``other real estate loans'' and assigned a 
higher risk-weight. First lien real estate loans delinquent for 60 days 
or more or carried on non-accrual status would be included in the 
category of other real estate loans for the purpose of assigning the 
risk-weight.
---------------------------------------------------------------------------

    \54\ In drafting these proposed regulations, NCUA is mindful of 
the implications of other recently published regulations that have 
been issued to improve the quality of mortgage underwriting.
---------------------------------------------------------------------------

    In the proposed rule, other real estate loans would be assigned a 
risk-weight of 100 percent for the first 10 percent of assets. To 
account for concentration risk, the risk-weight for other real estate 
loans would increase to 125 percent for loans between 10 and 20 percent 
of assets. Other real estate loans over 20 percent of assets would be 
risk-weighted 150 percent. The threshold of 10 percent is roughly based 
on the average percent of other real estate loans to total assets, 
which, as of June 30, 2013, is 6.85 percent for all complex credit 
unions. Out of the 2,218 complex credit unions with other real estate 
loans, 533 have a concentration in excess of 10 percent of assets and 
100 have a concentration in excess of 20 percent of assets.
    Tables 9, 10, and 11 below provide a comparison of current and 
proposed risk-weights for real estate-secured loans:

      Table 9--Current Risk-Weights for Long Term Real Estate Loans
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Current Risk-Weights for Long-Term Real Estate Loans (revised for an 8
 percent adequately capitalized standard)
------------------------------------------------------------------------
Definition: RE Loans--Loans Maturing, Refinancing, or Re-Pricing in 5
 years--RE Loans also reported as MBLs = Long-Term RE Loans.
------------------------------------------------------------------------
Threshold                                                        Current
                                                             risk-weight
                                                                    \55\
                                                               (percent)
------------------------------------------------------------------------
0-25% of assets............................................           75
Excess over 25% of assets..................................          175
------------------------------------------------------------------------


[[Page 11198]]


    Table 10--Proposed Risk-Weights for First Lien Real Estate Loans
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Proposed Risk-Weights for First Lien Real Estate Loans
------------------------------------------------------------------------
Definition: 1st Lien RE Loans--1st Lien RE Loans also reported as MBLs--
           Delinquent 1st Lien RE Loans = First Lien RE Loans.
------------------------------------------------------------------------
Threshold                                                       Proposed
                                                             risk-weight
                                                               (percent)
------------------------------------------------------------------------
0-25% of assets............................................           50
>25-35% of assets..........................................           75
Excess over 35% of assets..................................          100
------------------------------------------------------------------------


    Table 11--Proposed Risk-Weights for Junior Lien Real Estate Loans
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Proposed Risk-Weights for Junior Lien Real Estate Loans
------------------------------------------------------------------------
Definition: Junior Lien RE Loans + Delinquent 1st Lien RE Loans--Junior
 Lien RE Loans also reported as MBLs = Junior Lien Real Estate Loans.
------------------------------------------------------------------------
Threshold                                                       Proposed
                                                             risk-weight
                                                               (percent)
------------------------------------------------------------------------
0-10% of assets............................................          100
>10-20% of assets..........................................          125
Excess over 20% of assets..................................          150
------------------------------------------------------------------------

    The aggregate minimum capital requirement, using the proposed risk-
weights for first lien and junior lien real estate loans, is slightly 
less than the current minimum requirement.\56\ The proposed risk-
weights for real estate loans, however, would result in a higher 
variance in the minimum capital requirement for individual affected 
credit unions because the risk-weights better differentiate the risk 
associated with lien position and concentration.
---------------------------------------------------------------------------

    \55\ The risk-weightings were converted to a comparable risk-
weight by dividing the current risk-weighting by 8 percent, 
representing the level of risk-weighted capital need to be 
adequately capitalized. In the current rule, long-term real estate 
loans less than the 25 percent threshold receive a 6 percent risk-
weighting, which is equivalent to a 75 percent risk weight under 
this proposal (6% divided by 8%). Total long-term real estate loans 
over the 25 percent threshold receive a 14 percent risk-weighting, 
which is equivalent to a 175 percent risk weight under this proposal 
(14% divided by 8%).
    \56\ Analysis of call report data indicates that the proposed 
risk weights produce an aggregate minimum capital requirement, at 
the well capitalized level, of 97 percent of the current minimum 
RBNW requirement for real estate loans when applied to affected 
credit unions.
---------------------------------------------------------------------------

    Current consumer loans. Consumer loans (unsecured credit card 
loans, lines of credit, automobile loans, and leases) are generally 
highly desired credit union assets and a key element of providing basic 
financial services. For most current consumer loans, the proposed rule 
would assign a risk-weight of 75 percent, which maintains the existing 
risk-based capital requirement.\57\ Non-federally guaranteed student 
loans, which contain higher risks (e.g., default risk and extension 
risk), would be risk-weighted at 100 percent in the proposal. Federally 
guaranteed student loans would receive a zero percent risk-weight.\58\ 
Table 12 below lists the proposed risk-weights for each current 
consumer loan type reported on the Call Report.
---------------------------------------------------------------------------

    \57\ This is consistent with the Other Federal Banking 
Regulatory Agencies' capital rules (e.g., 12 CFR 324.32), which 
maintained the 100 percent risk-weight for non-delinquent consumer 
loans. See, e.g., 78 FR 55339 (Sept. 10, 2013).
    \58\ Up until 2010, guaranteed student loans were available 
through private lending institutions under the Federal Family 
Education Loan Program (FFELP). These loans were funded by the 
Federal government, and administered by approved private lending 
organizations. In effect, these loans were underwritten and 
guaranteed by the Federal government, ensuring that the private 
lender would assume no risk should the borrower ultimately default. 
Loans issued under this program prior to June 30, 2012 will remain 
on the books of credit unions for many years.

Table 12--Proposed Risk-Weights for Consumer Loan Types Reported on Call
                                 Report
------------------------------------------------------------------------
                                                               Proposed
      Consumer loan type--Less than 60 days delinquent       risk-weight
                                                               (percent)
------------------------------------------------------------------------
Unsecured Credit Card Loan.................................           75
All Other Unsecured Loans/Lines of Credit..................           75
Short-Term, Small Amount Loans.............................           75
Federally Guaranteed Student Loans.........................            0
Non-Federally Guaranteed Student Loans.....................          100
New Vehicle Loans..........................................           75
Used Vehicle Loans.........................................           75
Leased Receivable..........................................           75
All Other Loans/Lines of Credit............................           75
------------------------------------------------------------------------

    Delinquent consumer loans. The current risk-based capital measure 
does not contain a higher risk-weight for delinquent consumer loans. 
Rising levels of delinquent loans are an indicator of increased risk. 
To reflect the impaired credit quality of past due loans, the proposal 
would require credit unions to assign a 150 percent risk-weight to a 
non-real estate loan if it is 60 days or more past due or in nonaccrual 
status. NCUA realizes that the ALLL is already reflected in the risk-
based capital numerator and increased provision expenses decrease 
retained earnings. However, the ALLL is intended to cover estimated, 
incurred losses as of the balance sheet date, rather than unexpected 
losses. The higher risk-weight on past due exposures ensures sufficient 
regulatory capital for the increased probability of unexpected losses 
on these exposures. The higher risk-weights better capture the risk 
associated with the impaired credit quality of these exposures.

      Table 13--Proposed Risk-Weights for Delinquent Consumer Loans
------------------------------------------------------------------------
                                                               Proposed
      Consumer loan type--Delinquent more than 60 days       risk-weight
                                                               (percent)
------------------------------------------------------------------------
Unsecured Credit Card Loan.................................          150
All Other Unsecured Loans/Lines of Credit..................          150
Short-Term, Small Amount Loans.............................          150
Non-Federally Guaranteed Student Loans.....................          150
New Vehicle Loans..........................................          150
Used Vehicle Loans.........................................          150
Leased Receivable..........................................          150
All Other Loans/Lines of Credit............................          150
------------------------------------------------------------------------

    Loans to CUSOs and CUSO investments. Since Call Reports are 
prepared on a consolidated basis, wholly owned or majority owned CUSO 
assets are consolidated with the credit union's books and records with 
applicable risk-weights assigned by the asset type. The current risk-
based measure assigns the risk-weight for average-risk assets to the 
amount of the credit union's investments in CUSOs and loans to CUSOs, 
as reported in the Other Asset Call Report item. The proposal would 
increase the risk-weight to 250 percent for investments in CUSOs. This 
increase is due to the risk of this unsecured equity investment, which 
is almost always in a non-publicly traded entity. Loans to CUSOs are 
normally a higher payout priority in the event of liquidation of a 
CUSO, and thus would be assigned a risk-weight of 100 percent.

   Table 14--Proposed Risk-Weights for Loans to CUSOs & Investments in
                                  CUSOs
------------------------------------------------------------------------
                                                               Proposed
                                                             risk-weight
                                                               (percent)
------------------------------------------------------------------------
Loans to CUSO..............................................          100
Investment in CUSO.........................................          250
------------------------------------------------------------------------

    Mortgage servicing asset (MSA). The proposal would address the 
complexity and variability of the risks, including interest rate risk 
and market risk, associated with a MSA by assigning a 250 percent risk-
weight. MSAs can become impaired when interest rates fall and borrowers 
refinance or prepay their mortgage loans. This impairment

[[Page 11199]]

can lead to earnings volatility and erosion of capital. Additional 
risks include those associated with valuation and modeling processes.

      Table 15--Proposed Risk-Weight for Mortgage Servicing Assets
------------------------------------------------------------------------
                                                               Proposed
                                                             risk-weight
                                                               (percent)
------------------------------------------------------------------------
MSA........................................................          250
------------------------------------------------------------------------

    Other on-balance sheet assets. The current risk-based measure for 
all other balance sheet assets not otherwise assigned a specific risk-
weight is 100 percent of the risk-based target. Under the proposed 
rule, these same assets would receive a 100 percent risk-weight.\59\ 
Credit unions with high levels of other assets, predominately non-
earning assets, often have lower net income resulting in pressure on 
capital.
---------------------------------------------------------------------------

    \59\ This is consistent with the Other Federal Banking 
Regulatory Agencies' capital rules (e.g., 12 CFR 324.32), which 
maintained the 100 percent risk-weight for assets not assigned to a 
risk weight category. See, e.g., 78 FR 55339 (Sept. 10, 2013).

    Table 16--Proposed Risk-Weights for Other On-Balance Sheet Assets
------------------------------------------------------------------------
                                                               Proposed
                      Other asset type                       risk-weight
                                                               (percent)
------------------------------------------------------------------------
Loans Held for Sale........................................          100
Foreclosed and Repossessed Assets..........................          100
Land and Building..........................................          100
Other Fixed Assets.........................................          100
Accrued Interest on Loans..................................          100
Accrued Interest on Investments............................          100
All Other Assets not otherwise specifically assigned a risk-         100
 weight....................................................
------------------------------------------------------------------------

104(c)(2)(i) Category 1--Zero Percent Risk-Weight
    Proposed Sec.  702.104(c)(2)(i) would require that credit unions 
assign a zero percent risk-weight to the following asset types:
     Cash on hand, which includes the change fund (coin, 
currency, and cash items), vault cash, vault funds in transit, and 
currency supplied from automatic teller machines.
     NCUSIF capitalization deposit.
     Debt instruments unconditionally guaranteed by the NCUA or 
the FDIC.
     U.S. Government obligations directly and unconditionally 
guaranteed by the full faith and credit of the U.S. Government, 
including U.S. Treasury bills, notes, bonds, zero coupon bonds, and 
separate trading of registered interest and principal securities 
(STRIPS).
     Non-delinquent student loans unconditionally guaranteed by 
a U.S. Government agency.
104(c)(2)(ii) Category 2--20 Percent Risk-Weight
    Proposed Sec.  702.104(c)(2)(ii) would provide that credit unions 
assign a 20 percent risk-weight to the following on-balance sheet 
assets:
     Cash on deposit, which includes balances on deposit in 
insured financial institutions and deposits in transit. These amounts 
may or may not be subject to withdrawal by check, and they may or may 
not bear interest. Examples include overnight accounts, corporate 
credit union daily accounts, money market accounts, and checking 
accounts.
     Cash equivalents (investments with original maturities of 
three months or less). Cash equivalents are short-term, highly liquid 
non-security investments that have an original maturity of 3 months or 
less at the time of purchase, are readily convertible to known amounts 
of cash, and are used as part of the credit union's cash management 
activities.
     The total amount of investments with a weighted-average 
life of one year or less.
     Residential mortgages guaranteed by the federal government 
through the FHA or the VA.
     Loans guaranteed 75 percent or more by the SBA, U.S. 
Department of Agriculture, or other U.S. Government agency.
104(c)(2)(iii) Category 3--50 Percent Risk-Weight
    Proposed Sec.  702.104(c)(2)(iii) would require that credit unions 
assign a 50 percent risk-weight to the following on-balance sheet 
assets:
     The total amount of investments with a weighted-average 
life of greater than one year, but less than or equal to three years.
     The total amount of current and non-delinquent first 
mortgage real estate loans less than or equal to 25 percent of total 
assets.
104(c)(2)(iv) Category 4--75 Percent Risk-Weight
    Proposed Sec.  702.104(c)(2)(iv) would require that credit unions 
assign a 75 percent risk-weight to the following on-balance sheet 
assets:
     The total amount of investments with a weighted-average 
life of greater than three years, but less than or equal to five years.
     Current and non-delinquent unsecured credit card loans, 
other unsecured loans and lines of credit, short-term, small amount 
loans, new vehicle loans, used vehicle loans, leases receivable and all 
other loans. (Excluding loans reported as MBLs).
     Current and non-delinquent first mortgage real estate 
loans greater than 25 percent of total assets and less than or equal to 
35 percent of assets.
104(c)(2)(v) Category 5--100 Percent Risk-Weight
    Proposed Sec.  702.104(c)(2)(v) would require that credit unions 
assign a 100 percent risk-weight to the following on-balance sheet 
assets:
     Corporate credit union nonperpetual capital.
     The total outstanding principal amount of loans to CUSOs.
     Current and non-delinquent first mortgage real estate 
loans greater than 35 percent of total assets.
     Delinquent first mortgage real estate loans.
     Other real estate-secured loans less than or equal to 10 
percent of assets.
     MBLs less than or equal to 15 percent of assets.
     Loans held for sale.
     The total amount of any foreclosures and repossessed 
assets.
     Land and building, less depreciation on building.
     Any other fixed assets, such as furniture and fixtures and 
leasehold improvements, less related depreciation.
     Current non-federally insured student loans.
     All other assets not specifically assigned a risk-weight 
but included in the balance sheet.
104(c)(2)(vi) Category 6--125 Percent Risk-Weight
    Proposed Sec.  702.104(c)(2)(vi) would require that credit unions 
assign a 125 percent risk-weight to the total amount of all other real 
estate-secured loans greater than 10 percent of assets and less than or 
equal to 20 percent of assets.
104(c)(2)(vii) Category 7--150 Percent Risk-Weight
    Proposed Sec.  702.104(c)(2)(vii) would require that credit unions 
assign a 150 percent risk-weight to the following on-balance sheet 
assets:
     The total amount of investments with a weighted-average 
life of greater than five years, but less than or equal to ten years.
     Any delinquent unsecured credit card loans; other 
unsecured loans and lines of credit; short-term, small amount loans; 
non-federally guaranteed student loans; new vehicle loans; used vehicle

[[Page 11200]]

loans; leases receivable; and all other loans (excluding loans reported 
as MBLs).
     The total amount of all other real estate-secured loans 
greater than 20 percent of assets.
     Any MBLs greater than 15 percent of assets and less than 
or equal to 25 percent of assets.
104(c)(2)(viii) Category 8--200 Percent Risk-Weight
    Proposed Sec.  702.104(c)(2)(viii) would require that credit unions 
assign a 200 percent risk-weight to the following on-balance sheet 
assets:
     Corporate credit union perpetual capital.
     The total amount of investments with a weighted-average 
life of greater than 10 years.
     The total amount of MBLs greater than 25 percent of 
assets, other than MBLs included in Category 3 above.
104(c)(2)(ix) Category 9--250 Percent Risk-Weight
    Proposed Sec.  702.104(c)(2)(ix) would require that credit unions 
assign a 250 percent risk-weight to the following on-balance sheet 
assets:
     The total value of investments in CUSOs.
     The total value of MSAs.
104(c)(2)(x) Category 10--1,250 Percent Risk-Weight
    Proposed Sec.  702.104(c)(2)(x) would require that credit unions 
assign a 1,250 percent risk-weight (8% * 1,250% = 100%) to an asset-
backed investment for which the credit union is unable to demonstrate, 
as required under Sec.  702.104(d), a comprehensive understanding of 
the features of the asset-backed investment that would materially 
affect its performance. A 1,250 percent risk-weight is equivalent to 
holding capital equal to 100 percent of the investment's balance sheet 
value.\60\
---------------------------------------------------------------------------

    \60\ 8 percent adequately capitalized level * 1,250 percent = 
100 percent.
---------------------------------------------------------------------------

    During the recent financial crisis, it became apparent that many 
federally insured financial institutions relied exclusively on ratings 
issued by Nationally Recognized Statistical Organizations (NRSOs) and 
did not perform internal credit analysis of asset-backed investments. 
Complex credit unions must be able to demonstrate a comprehensive 
understanding of any investment, particularly an understanding of the 
features of an asset-backed investment that would materially affect its 
performance. Upon purchase and on an ongoing basis, the credit union 
must evaluate, review, and update as appropriate the analysis performed 
on an asset-backed investment. In the event a credit union is unable to 
demonstrate a comprehensive understanding of an asset-backed 
investment, the proposed rule would provide for assigning a risk-weight 
of 1,250 percent to that investment.
104(c)(3) Risk-Weights for Off-Balance Sheet Activities
    Proposed Sec.  702.104(b)(3) would provide that the risk-weighted 
amounts for all off-balance sheet items are determined by multiplying 
the notional principal, or face value, by the appropriate conversion 
factor and the assigned risk-weight as follows:
     A 75 percent conversion factor with a 100 percent risk-
weight for unfunded commitments for MBLs.
     A 75 percent conversion factor with a 100 percent risk-
weight for MBLs transferred with limited recourse.
     A 75 percent conversion factor with a 50 percent risk-
weight for first mortgage real estate loans transferred with limited 
recourse.
     A 75 percent conversion factor with a 100 percent risk-
weight for other real estate loans transferred with limited recourse.
     A 75 percent conversion factor with a 100 percent risk-
weight for non-federally guaranteed student loans transferred with 
limited recourse.
     A 75 percent conversion factor with a 75 percent risk-
weight for all other loans transferred with limited recourse.
     A 10 percent conversion factor with a 75 percent risk-
weight for total unfunded commitments for non-business loans.
    The risk-based capital measure in current Sec.  702.104 includes 
the amount of commitments outstanding for loans sold with recourse and 
unused member business loan commitments in the calculation of risk-
assets. The current rule recognizes the potential for these commitments 
to quickly become on-balance sheet assets with their related risks.
    Under this proposal, a credit union would calculate the exposure 
amount of an off-balance sheet component, which is usually the 
contractual amount multiplied by the applicable credit conversion 
factor (CCF). This treatment would apply to specific off-balance sheet 
items, including loans sold with recourse, unfunded commitments for 
business loans, and other unfunded commitments. The proposed rule would 
improve risk sensitivity and implement capital requirements for certain 
exposures through a simple methodology.
    Large draws on unused MBL commitments may cause liquidity problems 
and heighten exposure to credit risk. MBL commitments typically do not 
feature a ``material adverse conditions'' clause as grounds for 
revocation. The proposed rule would assign a 75 percent CCF and a 100 
percent risk-weight to unused member business loan commitments.
    The proposal would retain the existing assumption that the risk 
exposure associated with recourse loans is analogous to that associated 
with similar on-balance sheet loans. The proposal would reduce the 
existing capital requirement for first mortgage real estate loans and 
consumer loans by assigning them a 75 percent CCF and a risk-weight 
consistent with the risk-weight assigned for the loan type for on-
balance sheet loans.

 Table 17--Proposed Credit Conversion Factors and Risk-Weights for Off-
                          Balance Sheet Assets
------------------------------------------------------------------------
                                                  Proposed     Proposed
                                                    CCF      risk-weight
                                                 (percent)    (percent)
------------------------------------------------------------------------
Unused MBL commitments........................           75          100
MBLs sold with recourse.......................           75          100
First mortgage real estate loans sold with               75           50
 recourse.....................................
Other real estate loans sold with recourse....           75          100
Non-federally guaranteed student loans sold              75          100
 with recourse................................
All other loans sold with recourse............           75           75
------------------------------------------------------------------------


[[Page 11201]]

    This proposal would add a relatively small capital requirement for 
the total reported unfunded commitments for non-MBL. The proposal would 
apply a CCF of 10 percent with a 75 percent risk-weight. NCUA included 
this commitment with a relatively small capital requirement in order to 
recognize the risk that a credit union with a substantial amount of 
unfunded loan commitments may unexpectedly be required to fund such 
obligations, creating a drain on liquidity and a shifting of assets 
which could cause a significant increase in the minimum capital 
requirement.

  Table 18--Proposed Credit Conversion Factor and Risk-Weight for Total
               Unfunded Commitments for Non-Business Loans
------------------------------------------------------------------------
                                                               Proposed
                                                    CCF      risk-weight
                                                 (percent)    (percent)
------------------------------------------------------------------------
Total unfunded commitments for non-business              10           75
 loans........................................
------------------------------------------------------------------------

    The proposed rule would expressly exclude loans sold to the 
secondary mortgage market that feature representations and warranties 
customarily required by the U.S. Government (e.g., Ginnie Mae) and 
government-sponsored enterprises (e.g., Fannie Mae and Freddie Mac). 
These include representations that the credit union has underwritten 
the loan and appraised the collateral in conformity with identified 
standards. These representations provide for the return of assets to 
the originating credit union in instances of incomplete documentation 
or fraud. Such representations would be exempt provided the history of 
payment on these representations is infrequent. Credit enhancing 
representations and warranties beyond the usual agency requirements 
would be considered recourse and thus would not be excluded from this 
risk portfolio.
104(c)(4) Derivatives
    Proposed Sec.  702.104(c)(4) would adopt an approach to assign 
risk-weights to derivatives that is generally consistent with the 
approach adopted by the FDIC in its recently issued interim final rule 
regarding regulatory capital.\61\
---------------------------------------------------------------------------

    \61\ See 78 FR 55339 (Sept. 10, 2013).
---------------------------------------------------------------------------

    Under the FDIC's interim rule, derivatives transactions covered 
under clearing arrangements are treated differently than non-cleared 
transactions. The NCUA Board is proposing a single regulatory capital 
approach regardless of the credit union's derivatives transaction 
clearing status. This selection of regulatory capital treatment is not 
intended to express a position on credit union clearing. This approach 
was selected because most credit unions have less than $10 billion in 
total assets and are exempt from the Commodity Futures Trading 
Commission's (CFTC) clearing requirements.\62\ Credit unions with more 
than $10 billion in total assets would fall under the CFTC's recently 
issued final rule regarding clearing exemption for certain swaps 
entered into by cooperatives.\63\
---------------------------------------------------------------------------

    \62\ 17 CFR part 50.
    \63\ 78 FR 52285 (Aug. 22, 2013); see also 17 CFR 50.51.
---------------------------------------------------------------------------

    Derivatives transaction risk-weighting. To determine the risk-
weighted asset amount for a derivatives contract under the proposed 
rule, a credit union would first determine its exposure amount for the 
contract. It would then apply to that amount a risk-weight based on the 
counterparty or recognized collateral. For a single derivatives 
contract that is not subject to a qualifying master netting agreement 
(as defined further below in this section), the proposed rule would 
require the exposure amount to be the sum of (1) the credit union's 
current credit exposure (CCE), which is the greater of the fair value 
or zero, and (2) potential future exposure (PFE), which is calculated 
by multiplying the notional principal amount of the derivatives 
contract by the appropriate conversion factor, in accordance with Table 
19 below.
---------------------------------------------------------------------------

    \64\ This would include all other derivatives contracts 
including foreign exchange, equity, credit, and commodity.

                      Table 19--Proposed Conversion Factor Matrix for Derivatives Contracts
----------------------------------------------------------------------------------------------------------------
                                                                               Interest rate
                             Remaining maturity                                  risk hedge         All other
                                                                                derivatives     derivatives \64\
----------------------------------------------------------------------------------------------------------------
One year or less...........................................................              0.00               0.10
Greater than one year and less than or equal to five years.................              0.005              0.12
Greater than five years....................................................              0.015              0.15
----------------------------------------------------------------------------------------------------------------

    For multiple derivatives contracts subject to a qualifying master 
netting agreement, a credit union would calculate the exposure amount 
by adding the net CCE and the adjusted sum of the PFE amounts for all 
derivatives contracts subject to that qualifying master netting 
agreement.
    The net CCE is the greater of zero and the net sum of all positive 
and negative fair values of the individual derivatives contracts 
subject to the qualifying master netting agreement. The adjusted sum of 
the PFE amounts would be calculated as described in Sec.  
702.104(c)(4)(ii)(B) of the proposed rule.
    To recognize the netting benefit of multiple derivatives contracts, 
the contracts would have to be subject to the same qualifying master 
netting agreement. For example, a credit union with multiple 
derivatives contracts with a single counterparty could add the 
counterparty exposure if the transactions fall under an International 
Swaps and Derivatives Association, Inc. (ISDA) Master Agreement and 
Schedule.
    If a derivatives contract is collateralized by financial 
collateral, a credit union would first determine the exposure amount of 
the derivatives contract as described in Sec.  702.14(c)(4)(i). Next, 
to recognize the credit risk mitigation benefits of the financial 
collateral, the credit union would use

[[Page 11202]]

the approach for collateralized transactions as described in Sec.  
702.104(c)(4)(v)(B) of the proposed rule.
    Collateralized transactions. Under the proposed rule, NCUA would 
permit a credit union to recognize risk-mitigating effects of financial 
collateral. The collateralized portion of the exposure receives the 
risk-weight applicable to the collateral. In all cases, (1) the 
collateral must be subject to a collateral agreement (for example, an 
ISDA Credit Support Annex) for at least the life of the exposure; (2) 
the credit union must revalue the collateral at least every three 
months; and (3) the collateral and the exposure must be denominated in 
U.S. dollars.
    Generally, the risk-weight assigned to the collateralized portion 
of the exposure would be no less than 20 percent. However, the 
collateralized portion of an exposure may be assigned a risk-weight of 
less than 20 percent for the following exposures. Derivatives contracts 
that are marked to fair value on a daily basis and subject to a daily 
margin maintenance agreement could receive (1) a zero percent risk-
weight to the extent that contracts are collateralized by cash on 
deposit, or (2) a 10 percent risk-weight to the extent that the 
contracts are collateralized by an exposure that qualifies for a zero 
percent risk-weight under Sec.  702.104(c)(2)(i) of the proposed rule. 
In addition, a credit union could assign a zero percent risk-weight to 
the collateralized portion of an exposure where the financial 
collateral is cash on deposit. It also could do so if the financial 
collateral is an exposure that qualifies for a zero percent risk-weight 
under Sec.  702.104(c)(2)(i) of the proposed rule, and the credit union 
has discounted the fair value of the collateral by 20 percent. The 
credit union would be required to use the same approach for similar 
exposures or transactions.
    Risk management guidance for recognizing collateral. Before a 
credit union recognizes collateral for credit risk mitigation purposes, 
it should: (1) Conduct sufficient legal review to ensure, at the 
inception of the collateralized transaction and on an ongoing basis, 
that all documentation used in the transaction is binding on all 
parties and legally enforceable in all relevant jurisdictions; (2) 
consider the correlation between risk of the underlying direct exposure 
and collateral in the transaction; and (3) fully take into account the 
time and cost needed to realize the liquidation proceeds and the 
potential for a decline in collateral value over this time period.
    A credit union should also ensure that the legal mechanism under 
which the collateral is pledged or transferred ensures that the credit 
union has the right to liquidate or take legal possession of the 
collateral in a timely manner in the event of the default, insolvency, 
or bankruptcy (or other defined credit event) of the counterparty and, 
where applicable, the custodian holding the collateral.
    In addition, a credit union should ensure that it (1) has taken all 
steps necessary to fulfill any legal requirements to secure its 
interest in the collateral so that it has, and maintains, an 
enforceable security interest; (2) has set up clear and robust 
procedures to ensure satisfaction of any legal conditions required for 
declaring the borrower's default and prompt liquidation of the 
collateral in the event of default; (3) has established procedures and 
practices for conservatively estimating, on a regular ongoing basis, 
the fair value of the collateral, taking into account factors that 
could affect that value (for example, the liquidity of the market for 
the collateral and deterioration of the collateral); and (4) has in 
place systems for promptly requesting and receiving additional 
collateral for transactions whose terms require maintenance of 
collateral values at specified thresholds.
104(d) Due Diligence Requirements for Asset-Backed Investments
    Proposed Sec.  702.104(d) would contain due diligence requirements 
credit unions would have to implement in demonstrating a comprehensive 
understanding of the features of an asset-backed investment. The NCUSIF 
has experienced significant losses by credit unions that invested 
heavily in asset-backed investments without the board of directors or 
staff having sufficient expertise to understand and manage the risks. 
The proposed rule defines the general content of an adequate analysis 
and the timing of the analysis.
(d)(1)
    Proposed Sec.  702.104(d)(1) would provide that if a credit union 
is unable to demonstrate a comprehensive understanding, as required 
under proposed Sec.  702.104(d)(2), of the features of an asset-backed 
investment exposure that would materially affect the performance of the 
exposure, the credit union must assign a 1,250 percent risk-weight to 
the asset-backed investment exposure. The proposed rule would also 
require that the credit union's analysis be commensurate with the 
complexity of the asset-backed investment and the materiality of the 
position in relation to regulatory capital according to this part.
(d)(2)
    Proposed Sec.  702.104(d)(2) would provide that a credit union must 
demonstrate its comprehensive understanding of each asset-backed 
investment exposure under Sec.  702.104(d)(1) by:
     Conducting an analysis of the risk characteristics of an 
investment's exposure prior to acquiring the investment and documenting 
such analysis within three business days after acquiring the exposure, 
considering:
    [cir] Structural features of the investment that would materially 
impact the performance of the exposure, for example, the contractual 
cash flow waterfall, waterfall-related triggers, credit enhancements, 
liquidity enhancements, fair value triggers, the performance of 
organizations that service the position, and deal-specific definitions 
of default;
    [cir] Relevant information regarding the performance of the 
underlying credit exposure(s), for example, the percentage of loans 30, 
60, and 90 days past due; default rates; prepayment rates; loans in 
foreclosure; property types; occupancy; average credit score or other 
measures of creditworthiness; average loan-to-value ratio; and industry 
and geographic diversification data on the underlying exposure(s);
    [cir] Relevant market data of the asset-backed investment, for 
example, bid-ask spreads, most recent sales price and historical price 
volatility, trading volume, implied market rating, and size, depth, and 
concentration level of the market for the investment; and
    [cir] For reinvestment exposures, performance information on the 
underlying investment exposures, for example, the issuer name and 
credit quality, and the characteristics and performance of the 
exposures underlying the investment exposures; and
     On an ongoing basis (no less frequently than quarterly), 
evaluating, reviewing, and updating as appropriate the analysis 
required under this section for each investment exposure.
Current Section 702.105 Weighted-Average Life of Investments
    As discussed above in the definitions part of the section-by-
section analysis, proposed Sec.  702.105 would replace current Sec.  
702.105 regarding weighted-average life of investments, and the 
definition in the current section would be moved to the definition of 
``weighted-average life of investments'' in proposed Sec.  702.2.

[[Page 11203]]

Section 702.105 Individual Minimum Capital Requirements
    Capital helps ensure individual credit unions can continue to serve 
as credit intermediaries even during times of stress, thereby promoting 
the safety and soundness of the U.S. credit union system. As with the 
current Part 702, the proposed capital rules would be minimum standards 
generally based on broad credit risk and concentration considerations.
    A complex credit union is generally expected to have internal 
processes for assessing capital adequacy that reflects a full 
understanding of its risk exposure and to ensure that it holds capital 
corresponding to those risks. The nature of such capital adequacy 
assessments should be commensurate with the credit union's size, 
complexity, and risk profile. Supervisory assessment of capital 
adequacy will take into account whether a credit union plans 
appropriately to maintain an adequate level of capital given its 
activities and risk profile, as well as risks and other factors that 
can affect a credit union's financial condition. The supervisory 
assessment will also consider the potential impact on earnings and the 
capital base from prospective economic conditions. For this reason, a 
supervisory assessment of capital adequacy may differ significantly 
from conclusions that might be drawn solely from the level of a credit 
union's regulatory capital ratios.
    In light of these considerations, as a prudent matter, a complex 
credit union is generally expected to operate with capital positions 
above the minimum risk-based capital measures and hold capital 
commensurate with the level and nature of the risk to which it is 
exposed. Credit unions contemplating significant expansion proposals 
are expected to maintain strong capital levels above the minimum ratios 
and should not allow significant diminution of financial strength below 
these strong levels to fund their expansion plans. Complex credit 
unions with high levels of risk are also expected to operate with 
capital well above minimum risk-based standards.
    This proposed rule includes a provision that NCUA may require a 
higher minimum risk-based capital ratio for an individual credit union 
in any case where the circumstances, such as the level of risk of a 
particular investment portfolio, the risk management systems, or other 
information, indicate that a higher minimum risk-based capital 
requirement is appropriate. For example, higher capital may be 
appropriate for a credit union that has significant exposure to 
declines in the economic value of its capital due to changes in 
interest rates. Part 747 would contain procedures for requiring a 
credit union to maintain a higher minimum capital.
105(a) General
    Proposed Sec.  702.105(a) would provide that the rules and 
procedures specified in this paragraph apply to the establishment of an 
individual minimum capital requirement for a credit union that varies 
from any of the risk-based capital requirement(s) that would otherwise 
apply to the credit union under this part.
105(b) Appropriate Considerations for Establishing Individual Minimum 
Capital Requirements
    Proposed Sec.  702.105(b) would provide that minimum capital levels 
higher than the risk-based capital requirements under this part may be 
appropriate for individual credit unions. NCUA may establish increased 
individual minimum capital requirements upon its determination that the 
credit union's capital is or may become inadequate in view of the 
credit union's circumstances. In addition, the proposed rule provides 
the following situations in which NCUA may find that higher capital 
levels are appropriate:
     A credit union is receiving special supervisory attention.
     A credit union has or is expected to have losses resulting 
in capital inadequacy.
     A 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.
     A credit union has poor liquidity or cash flow.
     A credit union is growing, either internally or through 
acquisitions, at such a rate that supervisory problems are presented 
that are not adequately addressed by other NCUA regulations or other 
guidance.
     A 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.
     A credit union with a portfolio reflecting weak credit 
quality or a significant likelihood of financial loss, or which has 
loans or securities in nonperforming status or on which borrowers fail 
to comply with repayment terms.
     A credit union has inadequate underwriting policies, 
standards, or procedures for its loans and investments.
     A credit union has failed to properly plan for, or 
execute, necessary retained earnings growth.
     A credit union has a record of operational losses that 
exceeds the average of other similarly situated 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.
105(c) Standards for Determination of Appropriate Individual Minimum 
Capital Requirements
    Proposed Sec.  702.105(c) would provide that the appropriate 
minimum capital levels for an individual credit union cannot be 
determined solely through the application of a rigid mathematical 
formula or wholly objective criteria, and that the decision is 
necessarily based, in part, on a subjective judgment grounded in agency 
expertise. The proposed rule provides the following additional factors 
that may be considered by NCUA in making its determination:
     The conditions or circumstances leading to the 
determination that a higher minimum capital requirement is appropriate 
or necessary for the credit union.
     The urgency of those circumstances or potential problems.
     The overall condition, management strength, and future 
prospects of the credit union and, if applicable, its subsidiaries, 
affiliates, and business partners.
     The credit union's liquidity, capital, and other 
indicators of financial stability, particularly as compared with those 
of similarly situated credit unions.
     The policies and practices of the 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.
Current Section 702.106 Standard Calculation of Risk-Based Net Worth 
Requirement
    The proposed rule would eliminate current Sec.  702.106 regarding 
the standard RBNW requirement. The current rule is structured so that 
credit unions have a standard measure and optional alternatives for 
measuring a credit union's RBNW. The proposed rule, on the other hand, 
would contain only a single measurement for calculating a credit 
union's risk-based capital ratio.

[[Page 11204]]

Accordingly, current Sec.  702.106 would no longer be necessary and has 
been eliminated from the proposed rule.
Current Section 702.107 Alternative Component for Standard Calculation
    The proposed rule would eliminate current Sec.  702.107 regarding 
the use of alternative risk-weight measures. NCUA believes the current 
alternative risk-weight measures add unnecessary complexity to the 
rule. The current alternative risk-weights focus almost exclusively on 
interest rate risk, which has resulted in some credit unions with 
higher risk operations reducing their regulatory minimum capital 
requirement to a level inconsistent with the risk of the credit union's 
business model. The proposed risk-weights would provide for lower risk-
based capital requirements for those credit unions making good quality 
loans, investing prudently, and avoiding concentrations of assets.
Current Section 702.108 Risk Mitigation Credit
    This proposed rule would eliminate Sec.  702.108 regarding the risk 
mitigation credit. The risk mitigation credit provides a system for 
reducing a credit union's risk-based capital requirement if it can 
demonstrate significant mitigation of credit or interest rate risk. 
Credit unions have rarely taken advantage of risk mitigation credits, 
with only one credit union receiving a risk mitigation credit. The 
review of a credit union's application for a risk mitigation credit 
requires a substantial commitment of NCUA and credit union resources. 
In practice, it is very difficult to determine the validity of the 
credit union's mitigation efforts and how much mitigation credit to 
allow.
Mandatory and Discretionary Supervisory Actions
    Section 216(a)(2) of the FCUA directs NCUA to take prompt 
corrective actions to resolve the problems of insured credit 
unions.\65\ To facilitate this purpose, the FCUA defined five 
regulatory capital categories that include capital thresholds for a 
defined net worth ratio and risk-based capital measure for ``complex'' 
credit unions. These five PCA categories are: Well capitalized, 
adequately capitalized, undercapitalized, significantly 
undercapitalized, and critically undercapitalized. Credit unions that 
fail to meet these capital measures are subject to increasingly strict 
limits on their activities.\66\
---------------------------------------------------------------------------

    \65\ 12 U.S.C. 1790d(a)(2).
    \66\ Credit union defined as ``new credit unions'' under section 
1790(d)(2) of the FCUA are subject to an alternative PCA system.
---------------------------------------------------------------------------

    The proposal would generally maintain the existing mandatory and 
discretionary supervisory actions (PCA actions) currently contained in 
Sec. Sec.  702.201 through 702.204.\67\ The PCA actions aid in 
accomplishing the PCA's purpose and provide a transparent guide of 
supervisory actions that a credit union can expect as capital measures 
decline.
---------------------------------------------------------------------------

    \67\ The requirements would be moved to proposed Sec. Sec.  
702.106 through 702.109.
---------------------------------------------------------------------------

Section 702.106 Prompt Corrective Action for Adequately Capitalized 
Credit Unions
    The proposed rule would renumber current Sec.  702.201 as proposed 
Sec.  702.106, and would make only minor conforming amendments to the 
text of the section. Consistent with the proposed elimination of the 
regular reserve requirement in current Sec.  702.401(b), proposed Sec.  
702.106(a) would be amended to remove the requirement that adequately 
capitalized credit unions transfer the earnings retention amount from 
undivided earnings to their regular reserve account.
Section 702.107 Prompt Corrective Action for Undercapitalized Credit 
Unions
    The proposed rule would renumber current Sec.  702.202 as proposed 
Sec.  702.107, and would make only minor conforming amendments to the 
text of the section. Consistent with the proposed elimination of the 
regular reserve requirement in current Sec.  702.401(b), proposed Sec.  
702.107(a)(1) would be amended to remove the requirement that 
undercapitalized credit unions transfer the earnings retention amount 
from undivided earnings to their regular reserve account.
Section 702.108 Prompt Corrective Action for Significantly 
Undercapitalized Credit Unions
    The proposed rule would renumber current Sec.  702.203 as proposed 
Sec.  702.108, and would make only minor conforming amendments to the 
text of the section. Consistent with the proposed elimination of the 
regular reserve requirement in current Sec.  702.401(b), proposed Sec.  
702.108(a)(1) would be amended to remove the requirement that 
significantly undercapitalized credit unions transfer the earnings 
retention amount from undivided earnings to their regular reserve 
account.
Section 702.109 Prompt Corrective Action for Critically 
Undercapitalized Credit Unions
    The proposed rule would renumber current Sec.  702.204 as proposed 
Sec.  702.109, and would make only minor conforming amendments to the 
text of the section. Consistent with the proposed elimination of the 
regular reserve requirement in current Sec.  702.401(b), proposed Sec.  
702.109(a)(1) would be amended to remove the requirement that 
critically undercapitalized credit unions transfer the earnings 
retention amount from undivided earnings to their regular reserve 
account.
Section 702.110 Consultation With State Official on Proposed Prompt 
Corrective Action
    The proposed rule would renumber current Sec.  702.205 as proposed 
Sec.  702.110, and would make only minor conforming amendments to the 
text of the section.
Section 702.111 Net Worth Restoration Plans (NWRPs)
    The proposed rule would renumber current Sec.  702.206 as proposed 
Sec.  702.111, and would make only minor conforming amendments to the 
text of most of the subsections, with a few exceptions discussed in 
more detail below.
111(c) Contents of NWRP
    Proposed Sec.  702.111(c)(1)(i) would provide that the contents of 
an NWRP must specify a quarterly timetable of steps the credit union 
will take to increase its net worth ratio and risk-based capital ratio, 
if applicable, so that it becomes adequately capitalized by the end of 
the term of the NWRP, and will remain so for four (4) consecutive 
calendar quarters; and that if complex, the credit union is subject to 
a RBNW requirement that may require a net worth ratio higher than 6 
percent to become adequately capitalized. The proposed rule would add 
the italicized words ``and risk-based capital ratio, if applicable'' 
above to clarify that an NWRP prepared by a complex credit union must 
specify the steps the credit union will take to increase its risk-based 
capital ratio.
    In addition, consistent with the proposed elimination of the 
regular reserve requirement in current Sec.  702.401(b), proposed Sec.  
702.111(c)(1)(ii) would be amended to remove the requirement that 
credit unions transfer the earnings retention amount from undivided 
earnings to their regular reserve account.

[[Page 11205]]

111(g) NWRP Not Approved
111(g)(4) Submission of Multiple Unapproved NWRPs
    Proposed Sec.  702.111(g)(4) would provide that the submission of 
more than two NWRPs that are not approved is considered an unsafe and 
unsound condition and may subject the credit union to administrative 
enforcement actions under section 206 of the FCUA.\68\ NCUA regional 
directors have expressed concerns that some credit unions have in the 
past submitted multiple NWRPs that could not be approved due to non-
compliance with the requirements of the current rule, resulting in 
delayed implementation of actions to improve the credit union's net 
worth. The proposed amendments are intended to clarify that submitting 
multiple NWRPs that are rejected by NCUA, or the applicable state 
official, because of the inability of the credit union to produce an 
acceptable NWRP is an unsafe and unsound practice and may subject the 
credit union to further actions as permitted under the FCUA.
---------------------------------------------------------------------------

    \68\ 12 U.S.C. 1786 and 1790d.
---------------------------------------------------------------------------

111(j) Termination of NWRP
    Proposed Sec.  702.111(j) would provide that, for purposes of part 
702, an NWRP terminates once the credit union has been classified as 
adequately capitalized or well capitalized and for four consecutive 
quarters. The proposed paragraph would also provide as an example that 
if a credit union with an active NWRP attains the classification as 
adequately capitalized on December 31, 2015, this would be quarter one 
and the fourth consecutive quarter would end September 30, 2016. The 
proposed paragraph is intended to provide clarification for credit 
unions on the timing of an NWRP's termination.
Section 702.112 Reserves
    The proposed rule would renumber current Sec.  702.401 as proposed 
Sec.  702.112. Consistent with the text of current Sec.  702.401(a), it 
also would require that each credit union establish and maintain such 
reserves as may be required by the FCUA, by state law, by regulation, 
or, in special cases, by the NCUA Board or appropriate state official.
    Regular reserve account. As mentioned above, the proposed rule 
would eliminate current Sec.  702.401(b) regarding the regular reserve 
account from the earnings retention process. Additionally, the process 
and substance of requesting permission for charges to the regular 
reserve would be eliminated upon the effective date of a final rule. 
Upon the effective date of a final rule, federal credit unions would 
close out the regular reserve balance into undivided earnings. A state-
chartered, federally insured credit union may still be required to 
maintain a regular reserve account by its respective state supervisory 
authority.
    The Board initially included the regular reserve in part 702 for 
purposes of continuity from past regulatory expectations that involved 
this account to ease credit unions' transition to the then new PCA 
rules. The regular reserve account is not necessary to satisfying the 
statutory ``earnings retention requirement'' and is not required under 
GAAP. CUMAA requires credit unions that are not well capitalized to 
``annually set aside as net worth an amount equal to not less than 0.4 
percent of its total assets.'' \69\ The earnings retention requirement 
in current Sec.  702.201(a) requires a credit union that is not well 
capitalized to increase the ``dollar amount of its net worth either in 
the current quarter, or on average over the current and three preceding 
quarters by an amount equivalent to at least 1/10th percent of total 
assets.'' Under the current rule, the credit union must then 
``quarterly transfer that amount'' from undivided earnings to the 
regular reserve account. Increasing net worth alone satisfies the 
statutory earnings retention requirement. The additional step of 
transferring earnings from the undivided earnings account to the 
regular reserve account is not necessary to meet the PCA statutory 
requirement.
---------------------------------------------------------------------------

    \69\ 12 U.S.C. 1790(e)(1).
---------------------------------------------------------------------------

    The regular reserve was initially incorporated into the earnings 
retention process because of familiarity. Prior to PCA, credit unions 
used the regular reserve account under the former reserving process 
prescribed by the now repealed section 116 of the FCUA.\70\ However, 
examiner experience indicates that since PCA was first implemented, the 
regular reserve account in part 702 has been a source of unnecessary 
confusion. Some credit unions have continued to make transfers as if 
the repealed section 116 were still in force. Other credit unions have 
confused the purpose of the regular reserve in the current PCA process. 
Thus, some credit unions have made earnings transfers that are not 
required and others have done so without first increasing net worth.
---------------------------------------------------------------------------

    \70\ 12.U.S.C. 1762.
---------------------------------------------------------------------------

    For these reasons, the Board now considers the regular reserve 
account to be obsolete and proposes its elimination upon the effective 
date of a final rule. The proposed rule eliminates the cross references 
to the regular reserve requirement as discussed in more detail in each 
corresponding part of the section-by-section analysis.
Section 702.113 Full and Fair Disclosure of Financial Condition
    The proposed rule would renumber current Sec.  702.402 as proposed 
Sec.  702.113, and would make only minor conforming amendments to the 
text of the section with one exception, which is discussed in more 
detail below.
113(d) Charges for Loan Losses
    Consistent with the proposed elimination of the regular reserve 
requirement in current Sec.  702.401(b), proposed Sec.  702.113(d) 
would be amended to remove paragraph (d)(4) of the current rule, which 
provided that the maintenance of an ALLL shall not affect the 
requirement to transfer earnings to a credit union's regular reserve 
when required under subparts B or C of this part.
Section 702.114 Payment of Dividends
    The proposed rule would renumber current Sec.  702.402 as proposed 
Sec.  702.114 and make a number of amendments to the text of 
subsections (a) and (b), and add new subsection (c).
114(a) Restriction on Dividends
    Current Sec.  702.402(a) permits credit unions with a depleted 
undivided earnings balance to pay dividends out of the regular reserve 
account without regulatory approval, as long as the credit union will 
remain at least adequately capitalized. Proposed Sec.  702.114(a), 
however, would allow only credit unions that have substantial net 
worth, but no undivided earnings, to pay dividends without regulatory 
approval.
114(b) Payment of Dividends if Retained Earnings Depleted
    Proposed Sec.  702.114(b) would provide that well capitalized 
credit unions could pay dividends only if their net worth 
classification do not fall below adequately capitalized. As with the 
current Sec.  702.402(b)(2), proposed Sec.  702.114(b)(2) would require 
approval from the appropriate Regional Director, and if state-
chartered, the appropriate state official, if after payment of the 
dividend the credit union's net worth classification would fall below 
adequately capitalized. In addition, the proposed rule would require 
that the credit union's request for written approval include the credit 
union's plan for eliminating any negative retained earnings balance. 
Secondary capital accounts would continue to be excluded

[[Page 11206]]

as a direct source of dividend payments. Dividends would not be 
considered operating losses and could not be paid out of secondary 
capital.
114(c) Restriction on Payments of Dividends if, After Payment of 
Dividends, the Credit Union's Net Worth Ratio Would Be Less Than 6 
Percent
    Proposed Sec.  702.114(c) would prohibit a credit union from 
unreasonably dissipating its capital through excessive dividend 
payments or a refund of interest in a manner that would undermine the 
safety and soundness of the credit union. In particular, the proposed 
rule would prohibit a credit union currently classified as well 
capitalized from paying dividend rates that are higher than the 
prevailing market rates, declaring a non-repetitive dividend, or 
approving a refund of interest if, after the payment of the dividend, 
the credit union's net worth ratio would decline to less than 6 percent 
in the current quarter. This new provision would prevent the unsafe 
dissipation of capital through the payment of special or bonus 
dividends or interest refunds while still allowing for continuity of 
operations.

B. Subpart B--Alternative Prompt Corrective Action for New Credit 
Unions

    The proposed rule would add new subpart B, which would contain most 
of the capital adequacy rules that would apply to ``new'' credit 
unions. Section 216(b)(2)(B)(iii) of the FCUA defines a ``new'' credit 
union as one that has been in operation for 10 years or less, or has 
$10 million or less in total assets.\71\
---------------------------------------------------------------------------

    \71\ 12 U.S.C. 1790d(b)(2)(B)(iii).
---------------------------------------------------------------------------

    The current net worth measures, net worth classification, and text 
of the PCA requirements applicable to new credit unions would be 
renumbered. They would remain mostly unchanged in the proposed rule, 
however, except for the following substantive amendments:
    (1) Elimination of the regular reserve account requirement in 
current Sec.  702.401(b) and all cross references to the requirement;
    (2) Addition of new Sec.  701.206(f)(3) clarifying that the 
submission of more than two revised business plans would be considered 
and unsafe and unsound condition; and
    (3) Amendment of the requirements of current Sec.  702.403 
regarding the payment of dividends.
    Each of these substantive amendments is discussed in more detail 
below.
Section 702.201 Scope and Definition
    The proposed rule would renumber current Sec.  702.301 as proposed 
Sec.  702.201. The proposed rule would eliminate the ability of a 
credit union to regain a designation of new after reporting total 
assets in excess of $10 million.
    Section 216(b)(2) of the FCUA requires the NCUA to prepare 
regulations that apply to new credit unions. The FCUA further requires 
that rules for new credit unions prevent evasion of the purpose of 
section 216, which provides new credit unions a period of time to 
accumulate net worth. NCUA recently conducted a postmortem review of a 
credit union failure that caused a loss to the NCUSIF. The review 
revealed that the credit union intentionally reduced its total assets 
below $10 million to regain the designation ``new'' credit union under 
current part 702 and the associated lower net worth requirement. 
Shifting back and forth between the minimum capital requirement for 
``new'' and all other credit unions resulted in slowed capital 
accumulation, which contributed to the loss incurred by the NCUSIF. 
Accordingly, NCUA is now proposing to amend the definition of ``new'' 
credit union in current Sec.  702.301 to eliminate such practices in 
the future.
    In general, credit unions attaining an asset size of $10 million 
begin to offer a greater range of services and loans, which increase 
the credit union's complexity and risk to the NCUSIF. In the event a 
new credit union reports total assets of over $10 million and then 
subsequently declines to under $10 million, the additional PCA 
regulatory requirements under the proposed rule would not be 
substantially increased. Both new credit unions and non-new credit 
unions with net worth ratios of less than 6 percent, but over 2 
percent, are required under either Sec.  702.206 or Sec.  702.111 of 
the proposal to operate under substantially similar plans to restore 
their net worth. For example, a new credit union with a net worth ratio 
of 5 percent is required to operate under a revised business plan, and 
a non-new credit union with a net worth ratio of 5 percent is required 
to operate under a NWRP. Therefore, any burden associated with this 
change to the requirements of part 702 should be minimal.
Section 702.202 Net Worth Categories for New Credit Unions
    The proposed rule would renumber current Sec.  702.302 as proposed 
Sec.  702.202, and would make only minor conforming amendments to the 
text of the section.
Section 702.203 Prompt Corrective Action for Adequately Capitalized New 
Credit Unions
    The proposed rule would renumber current Sec.  702.303 as proposed 
Sec.  702.203, and would make only minor conforming amendments to the 
text of the section. Consistent with the proposed elimination of the 
regular reserve requirement in current Sec.  702.401(b), proposed Sec.  
702.203 would be amended to remove the requirement that adequately 
capitalized credit unions transfer the earnings retention amount from 
undivided earnings to their regular reserve account.
Section 702.204 Prompt Corrective Action for Moderately Capitalized, 
Marginally Capitalized or Minimally Capitalized New Credit Unions
    The proposed rule would renumber current Sec.  702.304 as proposed 
Sec.  702.204, and would make only minor conforming amendments to the 
text of the section. Consistent with the proposed elimination of the 
regular reserve requirement in current Sec.  702.401(b), which is 
discussed in more detail below, proposed Sec.  702.204(a)(1) would be 
amended to remove the requirement that such credit unions transfer the 
earnings retention amount from undivided earnings to their regular 
reserve account.
Section 702.205 Prompt Corrective Action for Uncapitalized New Credit 
Unions
    The proposed rule would renumber current Sec.  702.305 as proposed 
Sec.  702.205, and would make only minor conforming amendments to the 
text of the section.
Section 702.206 Revised Business Plans (RBP) for New Credit Unions
    The proposed rule would renumber current Sec.  702.306 as proposed 
Sec.  702.206, would make mostly minor conforming amendments to the 
text of the section, and would add new Sec.  702.206(g)(3). Consistent 
with the proposed elimination of the regular reserve requirement in 
current Sec.  702.401(b), which is discussed in more detail below, 
proposed Sec.  702.206(b)(3) would be amended to remove the requirement 
that new credit unions transfer the earnings retention amount from 
undivided earnings to their regular reserve account.
206(g)(3) Submission of Multiple Unapproved Revised Business Plans
    Proposed Sec.  702.206(g)(3) would provide that the submission of 
more than two RBPs that are not approved is considered an unsafe and 
unsound condition and may subject the credit

[[Page 11207]]

union to administrative enforcement actions under section 206 of the 
FCUA.\72\ NCUA regional directors have expressed concerns that some 
credit unions have in the past submitted multiple RBPs that could not 
be approved due to non-compliance with the requirements of the current 
rule, resulting in delayed implementation of actions to improve the 
credit union's net worth. The proposed amendments are intended clarify 
that submitting multiple RBPs that are rejected by NCUA, or the state 
official, because of the failure of the credit union to produce an 
acceptable RBP is an unsafe and unsound practice and may subject the 
credit union to further actions as permitted under the FCUA.
---------------------------------------------------------------------------

    \72\ 12 U.S.C. 1786 and 1790d.
---------------------------------------------------------------------------

Section 702.207 Incentives for New Credit Unions
    The proposed rule would renumber current Sec.  702.307 as proposed 
Sec.  702.207, and would make only minor conforming amendments to the 
text of the section.
Section 702.208 Reserves
    The proposed rule would add new Sec.  702.208 regarding reserves 
for new credit unions to the rule and, consistent with the text of 
current reserve requirement at Sec.  702.401(a), would require that 
each new credit union establish and maintain such reserves as may be 
required by the FCUA, by state law, by regulation, or in special cases 
by the NCUA Board or appropriate state official.
    As explained under Sec.  702.112, the proposed rule would eliminate 
the regular reserve account under current Sec.  702.402(b) from the 
earnings retention requirement. Additionally the process and substance 
of requesting permission for charges to the regular reserve would be 
eliminated upon the effective date of a final rule. Upon the effective 
date of a final rule federal credit unions would close out the regular 
reserve balance into undivided earnings. A federally insured state 
chartered credit union may still be required to maintain a regular 
reserve account as dictated by state law or by its respective state 
supervisory authority.
Section 702.209 Full and Fair Disclosure of Financial Condition
    The proposed rule would move the full and fair disclosure of 
financial condition requirements contained in the current Sec.  
702.402, and applicable to new credit unions, to new Sec.  702.209 of 
the proposed rule. No substantive changes to the current full and fair 
disclosure of financial condition requirements for new credit unions 
are intended.
Section 702.210 Payment of Dividends
    The proposed rule would reorganize the rules regarding the payment 
of dividends contained in the current Sec.  702.403, which also apply 
to new credit unions, to new Sec.  702.210 of the proposed rule. The 
proposed rule would make a number of amendments to the text of 
paragraphs (a) and (b) of the current rule, and add a new paragraph 
(c). Each of these changes is discussed in more detail below.
210(a) Restriction on Dividends
    Current Sec.  702.402(a) permits credit unions with a depleted 
undivided earnings balance to pay dividends out of the regular reserve 
account without regulatory approval, as long as the credit union will 
remain at least adequately capitalized. Proposed Sec.  702.210(a), 
however, would allow only new credit unions that have substantial net 
worth, but no undivided earnings, to pay dividends without regulatory 
approval.
210(b) Payment of Dividends if Retained Earnings Depleted
    Proposed Sec.  702.210(b) would provide that well capitalized new 
credit unions could pay dividends only if their net worth 
classification do not fall below adequately capitalized. As with the 
current Sec.  702.402(b)(2), proposed Sec.  702.210(b)(2) would require 
approval from the appropriate Regional Director, and if state-
chartered, the appropriate state official, if after payment of the 
dividend the credit union's net worth classification would fall below 
adequately capitalized. In addition, the proposed rule would require 
that the credit union's request for written approval include the credit 
union's plan for eliminating any negative retained earnings balance. 
Secondary capital accounts would continue to be excluded as a direct 
source of dividend payments. Dividends would not be considered 
operating losses and could not be paid out of secondary capital.
210(c) Restriction on Payments of Dividends if, After Payment of 
Dividends, the Credit Union's Net Worth Ratio Would Be Less Than 6 
Percent
    Proposed Sec.  702.210(c) would prohibit a new credit union from 
unreasonably dissipating its capital through excessive dividend 
payments or a refund of interest in a manner that would undermine the 
safety and soundness of the credit union. In particular, the proposed 
rule would prohibit a new credit union currently classified as well 
capitalized from paying dividend rates that are higher than the 
prevailing market rates, declaring a non-repetitive dividend, or 
approving a refund of interest if, after the payment of the dividend or 
a refund of interest, the credit union's net worth ratio would decline 
to less than 6 percent in the current quarter. This new provision would 
prevent the unsafe dissipation of capital through the payment of 
special or bonus dividends or interest refunds while still allowing for 
continuity of operations.

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

Subpart L--Issuance, Review and Enforcement of Orders Imposing Prompt 
Corrective Action

Section 747.2006 Review of Order Imposing Individual Minimum Capital 
Requirements
    Section 216(k) of the FCUA provides that ``material supervisory 
determinations, including decisions to require prompt corrective 
action, made . . . by [NCUA] officials other than the [NCUA] Board may 
be appealed to the [NCUA] Board'' through an independent appellate 
process ``pursuant to separate procedures prescribed by regulation.'' 
\73\ Consistent with the requirements of section 216(k), decisions of 
NCUA staff to impose a discretionary supervisory action (including 
imposing individual minimum capital requirements on a credit union) 
would continue to be treated as ``material supervisory 
determinations.'' Proposed Sec.  747.2006 would require that NCUA 
provide reasonable prior notice and an independent process for 
appealing NCUA staff decisions to impose individual minimal capital 
requirements (IMCR) under proposed Sec.  702.105.
---------------------------------------------------------------------------

    \73\ Section 1790d(k).
---------------------------------------------------------------------------

2006(a) Notice of Proposed Individual Minimum Capital Requirements
    Proposed Sec.  747.2006(a) would require NCUA to provide a credit 
union with reasonable prior notice when NCUA proposes to impose IMCR 
for a particular credit union pursuant to proposed Sec.  702.105. In 
addition, the proposed rule would require NCUA to forward a copy of the 
notifying letter to the appropriate state supervisory authority (SSA) 
if a state-chartered credit union would be subject to an IMCR.

[[Page 11208]]

2006(b) Contents of the Notice
    Proposed Sec.  747.2006(b) would require that the notice of 
intention to impose IMCR for a credit union based on particular capital 
conditions at a credit union state all of the following: (1) The credit 
union's net worth ratio, risk-based capital ratio and net worth 
classification. (2) The specific minimum capital levels that the NCUA 
Board intends to impose on the credit union under the IMCR, and the 
specific causes for determining that the higher IMCR is necessary or 
appropriate for the credit union. (3) The proposed schedule for 
compliance with the new requirement. (4) That the credit union must 
file a written response to the notice, which shall be no less than 30 
calendar days from the date of service of the notice.
    In addition, proposed Sec.  747.2006(b) would provide that the NCUA 
Board may extend the time period for good cause, and that the time 
period for response by the insured credit union may be shortened for 
good cause when, in the opinion of NCUA, the condition of the credit 
union so requires, and NCUA informs the credit union of the shortened 
response period in the notice; or with the consent of the credit union.
2006(c) Contents of Response to Notice
    Proposed Sec.  747.2006(c) would require that the credit union's 
response to a notice under Sec.  747.2006(b) of this section include 
the following: (1) An explanation of why it contends the IMCR is not an 
appropriate exercise of discretion under this part; (2) a request that 
the NCUA Board modify or not issue the IMCR; (3) any information, 
mitigating circumstances, documentation, or other evidence in support 
of the credit union's position that the credit union wants NCUA to 
consider in deciding whether to establish or to amend an IMCR for the 
credit union; and (4) if desired, a request for a recommendation from 
the NCUA's Ombudsman pursuant to Sec.  747.2006(g).
2006(d) Failure To File Response
    Proposed Sec.  747.2006(d) would provide that failure by the credit 
union to respond within 30 days, or such other time period as may be 
specified by NCUA, may constitute a waiver of any objections to the 
proposed IMCR or to the schedule for complying with it, unless NCUA has 
provided an extension of the response period for good cause.
2006(e) Final Decision by NCUA
    Proposed Sec.  747.2006(e) would provide that after the expiration 
of the response period, NCUA will decide whether or not the proposed 
IMCR should be established for the credit union, or whether that 
proposed requirement should be adopted in modified form, based on a 
review of the credit union's response and other relevant information. 
The proposed rule would require NCUA's decision to address comments 
received within the response period from the credit union and the 
appropriate state supervisory authority (if a state-chartered credit 
union is involved); and to state the level of capital required, the 
schedule for compliance with this requirement, and any specific 
remedial action the credit union could take to eliminate the need for 
continued applicability of the IMCR. In addition, the proposal would 
require NCUA to provide the credit union and the appropriate SSA (if a 
state-chartered credit union is involved) with a written decision on 
the IMCR, addressing the substantive comments made by the credit union 
and setting forth the decision and the basis for that decision. 
Finally, proposed Sec.  747.2006(e) would provide that this decision 
represents final agency action; and that the IMCR becomes effective and 
binding upon the credit union upon receipt of the decision by the 
credit union.
2006(f) Request To Modify or Rescind IMCR
    Proposed Sec.  747.2006(f) would provide that the IMCR shall remain 
in effect while such request is pending unless otherwise ordered by the 
NCUA Board, but would permit a credit union that is subject to an 
existing IMCR to request in writing that the NCUA Board reconsider the 
terms of the IMCR due to changed circumstances. In addition the 
proposed rule would provide that a request under proposed Sec.  
747.2006(f) that remains pending 60 days following receipt by the NCUA 
Board is deemed granted.
2006(g) Ombudsman
    Proposed Sec.  747.2006(g) would permit credit unions to request in 
writing the recommendation of NCUA's ombudsman to modify or to not 
issue a proposed IMCR under Sec.  747.2006(b), or to modify or rescind 
an existing directive due to changed circumstances under Sec.  
747.2006(f). However, the proposed rule would provide that a credit 
union that fails to request the ombudsman's recommendation in a 
response under Sec.  747.2006(c), or in a request under Sec.  
747.2006(f), shall be deemed to have waived the opportunity to do so. 
Finally, the proposed rule would require the ombudsman to promptly 
notify the credit union and the NCUA Board of his or her 
recommendation.

D. Other Conforming Changes to the Regulations

    In addition to the amendments discussed above, the proposed rule 
would make minor conforming amendments to Sec. Sec.  700.2, 701.21, 
701.23, 701.34, 703.14, 713.6, 723.7, 747.2001, 747.2002, and 747.2003. 
The conforming amendments would primarily involve updating terminology 
and cross citations to proposed part 702 and proposed Sec.  747.2006. 
No substantive changes are intended by these amendments.

III. Effective Date

How much time would credit unions have to implement these new 
requirements?

    The proposed amendments would go into effect approximately 18 
months after the publication of a final rule in the Federal Register. 
This would give credit unions lead time to plan for the new risk-based 
capital ratio requirements and other proposed changes to part 702. 
During the 18 month implementation period, credit unions would be 
required to continue to comply with current part 702. The Board 
believes this implementation period is necessary to allow credit unions 
to make adjustments to internal systems, balance sheets and operations 
well in advance of the effective date.

IV. Regulatory Procedures

Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) \74\ requires NCUA to provide 
an initial regulatory flexibility analysis with a proposed rule to 
certify that the rule will not have a significant economic impact on a 
substantial number of small entities (defined for purposed of the RFA 
to include credit unions with assets less than or equal to $50 million) 
and publish its certification and a short explanatory statement in the 
Federal Register also with the proposed rule.\75\ The proposed 
amendments to part 702 will primarily impact only credit unions with 
more than $50 million in total assets. NCUA recognizes that there may, 
however, be some burden associated with the amendments to the current 
rule relating to additional data that will need to be collected on the 
Call Report; the elimination of the regular reserve requirement; and 
changes to the payment of dividends. In particular, implementation of 
the proposed rule will likely impose some one-time costs associated 
with personnel training and updates to

[[Page 11209]]

systems for calculating regulatory capital. NCUA believes these one-
time implementation costs will not constitute a significant economic 
impact on small credit unions. Accordingly, the NCUA Board certifies 
the proposed rule will not have a significant economic impact on a 
substantial number of small credit unions.
---------------------------------------------------------------------------

    \74\ 5 U.S.C. 601 et seq.
    \75\ 78 FR 4032 (Jan. 18, 2013).
---------------------------------------------------------------------------

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.\76\ For purposes of the PRA, 
a paperwork burden may take the form of a reporting or recordkeeping 
requirement, both referred to as information collections. The proposed 
changes to part 702 impose new information collection requirements. As 
required by the PRA, NCUA is submitting a copy of this proposal to OMB 
for its review and approval. Persons interested in submitting comments 
with respect to the information collection aspects of the proposed rule 
should submit them to OMB at the address noted below.
---------------------------------------------------------------------------

    \76\ 44 U.S.C. 3507(d); 5 CFR part 1320.
---------------------------------------------------------------------------

    NCUA has determined that the proposed changes to part 702 will have 
some one-time costs associated with updating internal policies, and 
updating data collection and reporting systems for preparing Call 
Reports. NCUA estimates that all 6,681 credit unions will have to amend 
their procedures and systems for preparing Call Reports. However, a 
separate notice will be published for comment on the regulatory 
reporting requirements.
    In addition, NCUA estimates that approximately 2,606 federally 
insured natural person credit unions hold asset-backed investments and 
would be subject to the proposed due diligence requirements. Credit 
unions are already required to perform due diligence under Sec. Sec.  
703.6, 703.10, and 703.12 of NCUA's regulations. Therefore, NCUA does 
not believe there will be any new burden associated with this 
requirement.
    Finally, NCUA estimates that approximately 33.5 percent, or 2,237 
credit unions, will be defined as ``complex'' under the proposed rule 
and will have new data collection requirements related to the new risk-
based capital requirements.
    Title of Information Collection: Risk-based Capital Ratio data.
    Frequency of Response: On occasion and quarterly.
    Affected Public: All credit unions.
    Estimated Number of Respondents: 6,681.
    Estimated Burden per Respondent: One-time recordkeeping, 122 hours; 
on-going recordkeeping, 20 hours; one time policy review and revision, 
20 hours.
    Title of Information Collection: Risk-Based Capital Ratio policy 
implications for complex credit unions.
    Affected Public: Complex Credit Unions.
    Estimated Number of Respondents: 2,237.
    Estimated Burden per Respondent: One-time policy review and 
revision, 40 hours.
    Total Estimated Annual Burden: One-time recordkeeping and 
disclosures, (122 hours * non-complex credit unions, or 162 hours * 
complex credit unions); ongoing recordkeeping and disclosures (20 hours 
* all credit unions).
    Submission of comments. NCUA considers comments by the public on 
this proposed collection of information in:
     Evaluating whether the proposed collection of information 
is necessary for the proper performance of the functions of NCUA, 
including whether the information will have a practical use;
     Evaluating the accuracy of NCUA's estimate of the burden 
of the proposed collection of information, including the validity of 
the methodology and assumptions used;
     Enhancing the quality, usefulness, and clarity of the 
information to be collected; and
     Minimizing the burden of collection of information on 
those who are to respond, including through the use of appropriate 
automated, electronic, mechanical, or other technological collection 
techniques or other forms of information technology; e.g., permitting 
electronic submission of responses.
    The PRA requires OMB to make a decision concerning the collection 
of information contained in the proposed regulation between 30 and 60 
days after publication of this document in the Federal Register. 
Therefore, a comment to OMB is best assured of having its full effect 
if OMB receives it within 30 days of publication. This does not affect 
the deadline for the public to comment to NCUA on the substantive 
aspects of the proposed regulation.
    Comments on the proposed information collection requirements should 
be sent to:
    Office of Information and Regulatory Affairs, OMB, Attn: Shagufta 
Ahmed, Room 10226, New Executive Office Building, Washington, DC 20503, 
with a copy to the Secretary of the Board, National Credit Union 
Administration, 1775 Duke Street, Alexandria, Virginia 22314-3428.

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 apply to all federally 
insured natural person credit unions, including federally insured, 
state-chartered natural person credit unions. Accordingly, it may have 
a 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. This impact is 
an unavoidable consequence of carrying out the statutory mandate to 
adopt a system of PCA to apply to all federally insured, natural person 
credit unions. Throughout the rulemaking process, NCUA has consulted 
with representatives of state regulators regarding the impact of PCA on 
state-chartered credit unions. The comments and suggestions of those 
state regulators are reflected in the proposed rule.

Assessment of Federal Regulations and Policies on Families

    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.

12 CFR Part 701

    Advertising, Aged, Civil rights, Credit, Credit unions, Fair 
housing, Individuals with disabilities, Insurance, Marital status 
discrimination, Mortgages, Religious discrimination, Reporting and 
recordkeeping requirements, Sex discrimination, Signs and symbols, 
Surety bonds.

12 CFR Part 702

    Credit unions, Reporting and recordkeeping requirements.

12 CFR Part 703

    Credit unions, Investments, Reporting and recordkeeping 
requirements.

12 CFR Part 713

    Bonds, Credit unions, Insurance.

[[Page 11210]]

12 CFR Part 723

    Credit unions, Loan programs--business, Reporting and recordkeeping 
requirements.

12 CFR Part 747

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

    By the National Credit Union Administration Board on January 23, 
2014.
Gerard Poliquin,
Secretary of the Board.

    For the reasons discussed above, NCUA Board proposes to amend 12 
CFR parts 700, 701, 702, 703, 713, 723, and 747 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.


Sec.  700.2  [Amended]

0
2. Amend the definition of ``net worth'' in Sec.  700.2 by removing 
``Sec.  702.2(f)'' and adding in its place ``Sec.  702.2''.

PART 701--ORGANIZATION AND OPERATION 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. 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.


Sec.  701.21  [Amended]

0
4. Amend Sec.  701.21(h)(4)(iv) by removing ``Sec.  702.2(f)'' and 
adding in its place ``Sec.  702.2''.


Sec.  701.23  [Amended]

0
5. Amend Sec.  701.23(b)(2) by removing the words ``net worth'' and 
adding in their place the word ``capital'', and removing the words 
``or, if subject to a risk-based net worth (RBNW) requirement under 
Part 702 of this chapter, has remained `well capitalized' for the six 
(6) immediately preceding quarters after applying the applicable RBNW 
requirement''.


Sec.  701.34  [Amended]

0
6. Amend Sec.  701.34 as follows:
0
a. In paragraph (b)(12) by remove the words ``Sec. Sec.  
702.204(b)(11), 702.304(b) and 702.305(b)'' and add in their place the 
words ``part 702''.
    b. In paragraph (d)(1)(i) remove the words ``net worth'' and add in 
their place the word ``capital''.

Appendix to Sec.  701.34 [Amended]

0
7. In the appendix to Sec.  701.34, amend the paragraph beginning ``8. 
Prompt Corrective Action'' by removing the words ``net worth 
classifications (see 12 CFR 702.204(b)(11), 702.304(b) and 702.305(b), 
as the case may be)'' and adding in their place the words ``capital 
classifications (see 12 CFR part 702)''.
0
8. Revise part 702 to read as follows:

PART 702--CAPITAL ADEQUACY

Sec.
702.1 Authority, purpose, scope, and other supervisory authority.
702.2 Definitions.
Subpart A--Prompt Corrective Action
702.101 Capital measures, effective date of classification, and 
notice to NCUA.
702.102 Capital category classification.
702.103 Applicability of risk-based capital ratio measure.
702.104 Risk-based capital ratio measure.
702.105 Individual minimum capital requirements.
702.106 Prompt corrective action for adequately capitalized credit 
unions.
702.107 Prompt corrective action for undercapitalized credit unions.
702.108 Prompt corrective action for significantly undercapitalized 
credit unions.
702.109 Prompt corrective action for critically undercapitalized 
credit unions.
702.110 Consultation with state officials on proposed prompt 
corrective action.
702.111 Net worth restoration plans (NWRP).
702.112 Reserves.
702.113 Full and fair disclosure of financial condition.
702.114 Payment of dividends.
Subpart B--Alternative Prompt Corrective Action for New Credit Unions
702.201 Scope and definition.
702.202 Net worth categories for new credit unions.
702.203 Prompt corrective action for adequately capitalized new 
credit unions.
702.204 Prompt corrective action for moderately capitalized, 
marginally capitalized, or minimally capitalized new credit unions.
702.205 Prompt corrective action for uncapitalized new credit 
unions.
702.206 Revised business plans (RBP) for new credit unions.
702.207 Incentives for new credit unions.
702.209 Reserves.
702.210 Full and fair disclosure of financial condition.
702.211 Payment of dividends.

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


Sec.  702.1  Authority, purpose, scope, and other supervisory 
authority.

    (a) Authority. Subparts A and B of this part and subpart L of part 
747 of this chapter are issued by the National Credit Union 
Administration (NCUA) pursuant to sections 120 and 216 of the Federal 
Credit Union Act (FCUA), 12 U.S.C. 1776 and 1790d (section 1790d), as 
revised by section 301 of the Credit Union Membership Access Act, 
Public Law 105-219, 112 Stat. 913 (1998).
    (b) Purpose. The express purpose of prompt corrective action under 
section 1790d is to resolve the problems of federally insured credit 
unions at the least possible long-term loss to the National Credit 
Union Share Insurance Fund. Subparts A and B of this part carry out the 
purpose of prompt corrective action by establishing a framework of 
minimum capital requirements, mandatory, and discretionary supervisory 
actions applicable according to a credit union's net worth 
classification, designed primarily to restore and improve the capital 
adequacy of federally insured credit unions.
    (c) Scope. This part implements the provisions of section 1790d as 
they apply to federally insured credit unions, whether federally- or 
state-chartered; to such credit unions defined as ``new'' pursuant to 
section 1790d(b)(2); and to such credit unions defined as ``complex'' 
pursuant to section 1790d(d). Certain of these provisions also apply to 
officers and directors of federally insured credit unions. This part 
does not apply to corporate credit unions. Procedures for issuing, 
reviewing and enforcing orders and directives issued under this part 
are set forth in subpart L of part 747 of this chapter.
    (d) Other supervisory authority. Neither section 1790d nor this 
part in any way limits the authority of the NCUA Board or appropriate 
state official under any other provision of law to take additional 
supervisory actions to address unsafe or unsound practices or 
conditions, or violations of applicable law or regulations. Action 
taken under this part may be taken independently of, in conjunction 
with, or in addition to any other enforcement action available to the 
NCUA Board or appropriate state official, including issuance of cease 
and desist orders, orders of prohibition, suspension and removal, or 
assessment of civil money penalties, or any other actions authorized by 
law.


Sec.  702.2  Definitions.

    Unless provided otherwise in this part, the terms used in this part 
have the same meanings as set forth in FCUA

[[Page 11211]]

sections 101 and 216, 12 U.S.C. 1752, 1790d. The following definitions 
apply to this part:
    Allowance for loan and lease loss (ALLL) means reserves that have 
been established through charges against earnings to absorb future 
losses on loans, lease financing receivables, or other extensions of 
credit.
    Appropriate regional director means the director of the NCUA 
regional office having jurisdiction over federally insured credit 
unions in the state where the affected credit union is principally 
located or, for credit unions with $10 billion or more in assets, the 
Director of the Office of National Examinations and Supervision.
    Appropriate state official means the commission, board or other 
supervisory authority having jurisdiction over credit unions chartered 
by the state which chartered the affected credit union.
    Call Report means the Call Report required to be filed by all 
credit unions under Sec.  741.6(a)(2) of this chapter.
    Capital means the equity, as measured by GAAP, available to a 
credit union to cover losses.
    Cash equivalents mean short-term highly liquid investments that:
    (1) Have original maturities of 3 months or less, at the time of 
purchase;
    (2) Are readily convertible to known amounts of cash; and
    (3) Are used as part of the credit union's cash-management 
activities.
    Commitment means any legally binding arrangement that obligated the 
credit union to extend credit or to purchase assets.
    Credit union means a federally insured, natural person credit 
union, whether federally- or state-chartered, as defined by 12 U.S.C. 
1752(6).
    CUSO means a credit union service organization as defined in part 
712 and 741 of this chapter.
    Delinquent loans means loans that are 60 days or more past due and 
loans placed on nonaccrual status.
    Derivatives contract means, in general, a financial instrument, 
traded on or off an exchange, the value of which is directly depended 
upon the value on or more underlying securities, equity indices, debt 
instruments, commodities, interest rates other derivative instruments, 
or any agreed upon pricing index or arrangement. Derivatives contracts 
include interest rate derivatives contracts and any other instrument 
that poses similar counterparty credit risks. Derivatives contracts 
also include unsettled securities with a contractual settlement or 
delivery lag that is longer than the lesser of the market standard for 
the particular instrument or five business days.
    First mortgage real estate loan means loans and lines of credit 
fully secured by first liens on real estate (excluding MBLs), where:
    (1) The original amortization of the mortgage exposure does not 
exceed 30 years,
    (2) The loan underwriting took into account all the borrower's 
obligations, including mortgage obligations, principal, interest, 
taxes, insurance (including mortgage guarantee insurance) and 
assessments, and
    (3) The loan underwriting concluded the borrower is able to repay 
the exposure using the maximum interest rate that may apply in the 
first five years, the maximum contract exposure over the life of the 
mortgage, and verified income.
    GAAP means generally accepted accounting principles as used in the 
United States.
    Goodwill means an intangible asset representing the future economic 
benefits arising from other assets acquired in a business combination 
(e.g., merger) that are not individually identified and separately 
recognized.
    Intangible assets means those assets that are required to be 
reported as intangible assets in a credit union's Call Report, 
including but not limited to purchased credit card relationships, 
goodwill, favorable leaseholds, and core deposit value.
    Investment in CUSO means the unimpaired value of the credit union's 
aggregate CUSO investments as measured under GAAP on an unconsolidated 
basis.
    Identified losses means those items that have been determined by an 
evaluation made by a state or federal examiner, as measured on the date 
of examination, to be chargeable against income, capital and/or 
valuation allowances such as the allowance for loan and lease losses. 
Examples of identified losses would be assets classified as losses, 
off-balance sheet items classified as losses, any provision expenses 
that are necessary to replenish valuation allowances to an adequate 
level, liabilities not shown on the books, estimated losses in 
contingent liabilities, and differences in accounts that represent 
shortages.
    Loans to CUSOs means the aggregate outstanding loan balance, 
available line(s) of credit from the credit union, and guarantees the 
credit union has made to or on behalf of a CUSO.
    Loans transferred with limited recourse means the total principal 
balance outstanding of loans transferred, including participations, for 
which the transfer qualified for true sale accounting treatment under 
GAAP, and for which the transferor credit union retained some limited 
recourse (i.e. insufficient recourse to preclude true sale accounting 
treatment). The term does not include transfers that qualify for true 
sale accounting treatment but contain only routine representation and 
warranty paragraphs that are standard for sales on the secondary market 
provided the credit union is in compliance with all other related 
requirements such as capital requirements.
    Mortgage servicing asset (MSA) means those assets (net of any 
related valuation allowances) resulting from contracts to service loans 
secured by real estate (that have been securitized or owned by others) 
for which the benefits of servicing are expected to more than 
adequately compensate the servicer for performing the servicing.
    NCUSIF means the National Credit Union Share Insurance Fund as 
defined by 12 U.S.C. 1783.
    Net worth means:
    (1) The retained earnings balance of the credit union at quarter-
end as determined under GAAP, subject to paragraph (3) of this 
definition. Retained earnings consists of undivided earnings, regular 
reserves, and any other appropriations designated by management or 
regulatory authorities.
    (2) For a low income-designated credit union, net worth also 
includes secondary capital accounts that are uninsured and subordinate 
to all other claims, including claims of creditors, shareholders, and 
the NCUSIF.
    (3) For a credit union that acquires another credit union in a 
mutual combination, net worth also 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;

[[Page 11212]]

    (ii) Are subordinate to all other claims including those of 
shareholders, creditors, and the NCUSIF;
    (iii) Are not pledged as security on a loan to, or other obligation 
of, any party;
    (iv) Are not insured by the NCUSIF;
    (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.
    Net worth ratio means the ratio of the net worth of the credit 
union to the total assets of the credit union rounded to two decimal 
places.
    New credit union means a federally insured credit union which both 
has been in operation for less than ten (10) years and has $10,000,000 
or less in total assets.
    Off-balance sheet items means items such as commitments, contingent 
items, guarantees, certain repo-style transactions, financial standby 
letters of credit, and forward agreements that are not included on the 
balance sheet but are normally reported in the financial statement 
footnotes.
    Qualifying master netting agreement means a written, legally 
enforceable agreement, provided that:
    (1) The agreement creates a single legal obligation for all 
individual transactions covered by the agreement upon an event of 
default, including upon an event of conservatorship, receivership, 
insolvency, liquidation, or similar proceeding, of the counterparty;
    (2) The agreement provides the credit union the right to 
accelerate, terminate, and close out on a net basis all transactions 
under the agreement and to liquidate or set off collateral promptly 
upon an event of default, including upon an event of conservatorship, 
receivership, insolvency, liquidation, or similar proceeding, of the 
counterparty, provided that, in any such case, any exercise of rights 
under the agreement will not be stayed or avoided under applicable law 
in the relevant jurisdictions, other than in receivership, 
conservatorship, resolution under the Federal Deposit Insurance Act, 
Title II of the Dodd-Frank Wall Street Reform and Consumer Protection 
Act, or under any similar insolvency law applicable to GSEs;
    (3) The agreement does not contain a walkaway clause (that is, a 
provision that permits a non-defaulting counterparty to make a lower 
payment than it otherwise would make under the agreement, or no payment 
at all, to a defaulter or the estate of a defaulter, even if the 
defaulter or the estate is a net creditor under the agreement); and
    (4) In order to recognize an agreement as a qualifying master 
netting agreement for purposes of this part, a credit union must 
conduct sufficient legal review, at origination and in response to any 
changes in applicable law, to conclude with a well-founded basis (and 
maintain sufficient written documentation of that legal review) that:
    (i) The agreement meets the requirements of paragraph (2) of this 
definition of qualifying master netting agreement; and
    (ii) In the event of a legal challenge (including one resulting 
from default or from conservatorship, receivership, insolvency, 
liquidation, or similar proceeding), the relevant court and 
administrative authorities would find the agreement to be legal, valid, 
binding, and enforceable under the law of relevant jurisdictions.
    Risk-based capital ratio means the percentage, rounded to two 
decimal places, of the risk-based capital numerator to total risk-
weighted assets, as calculated in accordance with Sec.  702.104(a).
    Risk-weighted assets means the total risk-weighted assets as 
calculated in accordance with Sec.  702.104(c).
    Senior executive officer means a senior executive officer as 
defined by Sec.  701.14(b)(2) of this chapter.
    Shares means deposits, shares, share certificates, share drafts, or 
any other depository account authorized by federal or state law.
    Total assets. (1) For each quarter, a credit union must elect one 
of the measures of total assets listed in paragraph (2) of this 
definition to apply for all purposes under this part except Sec. Sec.  
702.103 through 702.105 (risk-based capital ratio requirements).
    (2) Total assets means a credit union's total assets as measured by 
either--
    (i) Average quarterly balance. The credit union's total assets 
measured by the average of quarter-end balances of the current and 
three preceding calendar quarters;
    (ii) Average monthly balance. The credit union's total assets 
measured by the average of month-end balances over the three calendar 
months of the applicable calendar quarter;
    (iii) Average daily balance. The credit union's total assets 
measured by the average daily balance over the applicable calendar 
quarter; or
    (iv) Quarter-end balance. The credit union's total assets measured 
by the quarter-end balance of the applicable calendar quarter as 
reported on the credit union's Call Report.
    U.S. Government agency means an instrumentality of the U.S. 
Government whose obligations are fully and explicitly guaranteed as to 
the timely payment of principal and interest by the full faith and 
credit of the U.S. Government.
    Verified income means receipt and retention of corroborative 
information to establish the reality of the income supporting the 
repayment of the loan.
    Weighted-average life of investments means:
    (1) For investments in registered investment companies (e.g., 
mutual funds) and collective investment funds (e.g., common trusts), 
the maximum weighted-average life or duration target of the investment 
disclosed, directly or indirectly, in the most recent prospectus or 
trust instrument (if the maximum weighted-average life or duration 
target is not disclosed, the weighted-average life of investments means 
greater than 5 years, but less than 10 years);
    (2) For investments in money market funds, as defined in 17 CFR 
270.2a-7, and collective investment funds operated in accordance with 
short-term investment fund rules set forth in 12 CFR 
9.18(b)(4)(ii)(B)(1) through (3), 1 year or less;
    (3) For fixed rate debt obligations and deposits that are callable 
in whole, the period remaining to the maturity date;
    (4) For fixed rate debt obligations and deposits that are non-
callable and non-amortizing (e.g., bullet maturity instruments), the 
period remaining to the maturity date;
    (5) For fixed rate debt obligations or deposits with periodic 
principal pay downs (e.g., mortgage-backed securities), the weighted-
average life of investments as defined according to industry standard 
calculations, which include the impact of unscheduled payments;
    (6) For variable rate debt obligations and deposits (regardless of 
whether the investment amortizes), the period remaining to the next 
rate adjustment date;
    (7) For capital stock in mixed-ownership Government corporations, 
as defined in 31 U.S.C. 9101(2), greater than 1 year but less than or 
equal to 3 years;
    (8) For other equity securities, greater than 10 years.
    (9) For any other investments not addressed above, the average time 
to the return of a dollar of principal, calculated by multiplying each 
portion of principal received by the time it is expected to be received 
(based on a reasonable and supportable estimate of that time), and then 
taking the total of these time-weighted payments and dividing by the 
total amount of principal.

[[Page 11213]]

Subpart A--Prompt Corrective Action


Sec.  702.101  Capital measures, effective date of classification, and 
notice to NCUA.

    (a) Capital measure. For purposes of this part, a credit union must 
determine its capital classification at the end of each calendar 
quarter using the following measures:
    (1) The net worth ratio; and
    (2) If determined to be applicable under Sec.  702.103, the risk-
based capital ratio.
    (b) Effective date of capital classification. For purposes of this 
part, the effective date of a federally insured credit union's capital 
classification shall be the most recent to occur of:
    (1) Quarter-end effective date. The last day of the calendar month 
following the end of the calendar quarter; or
    (2) Corrected capital classification. The date the credit union 
received subsequent written notice from NCUA or, if state-chartered, 
from the appropriate state official, of a decline in capital 
classification due to correction of an error or misstatement in the 
credit union's most recent Call Report; or
    (3) Reclassification to lower category. The date the credit union 
received written notice from NCUA or, if state-chartered, the 
appropriate state official, of reclassification on safety and soundness 
grounds as provided under Sec. Sec.  702.102(b) or 702. 202(d).
    (c) Notice to NCUA by filing Call Report. (1) Other than by filing 
a Call Report, a federally insured credit union need not notify the 
NCUA Board of a change in its capital measures that places the credit 
union in a lower capital category;
    (2) Failure to timely file a Call Report as required under this 
section in no way alters the effective date of a change in capital 
classification under paragraph (b) of this section, or the affected 
credit union's corresponding legal obligations under this part.


Sec.  702.102  Capital classifications.

    (a) Capital categories. Except for credit unions defined as ``new'' 
under subpart B of this part, a credit union shall be deemed to be 
classified (Table 1 of this section)--
    (1) Well capitalized if:
    (i) Net worth ratio. The credit union has a net worth ratio of 7.0 
percent or greater; and
    (ii) Risk-based capital ratio. The credit union, if complex, has a 
total risk-based capital ratio of 10.5 percent or greater.
    (2) Adequately capitalized if:
    (i) Net worth ratio. The credit union has a net worth ratio of 6.0 
percent or greater; and
    (ii) Risk-based capital ratio. The credit union, if complex, has a 
total risk-based capital ratio of 8.0 percent or greater.
    (3) Undercapitalized if:
    (i) Net worth ratio. The credit union has a net worth ratio of 4.0 
percent or greater; and
    (ii) Risk-based capital ratio. The credit union, if complex, fails 
to meet the minimum 8.0 percent total risk based capital requirement.
    (4) Significantly undercapitalized if:
    (i) The credit union meets the definition of undercapitalized, has 
a net worth ratio of less than 5.0 percent, and has received notice 
that its net worth restoration plan has not been approved (to qualify 
for a higher net worth classification, a significantly undercapitalized 
credit union must have a net worth restoration plan approved by NCUA);
    (ii) The credit union has a net worth ratio of 2.0 percent or more 
but less than 4.0 percent; or
    (iii) The credit union has a net worth ratio of 4.0 percent or more 
but less than 5.0 percent, and either--
    (A) Fails to submit an acceptable net worth restoration plan within 
the time prescribed in Sec.  702.111; or
    (B) Materially fails to implement a net worth restoration plan 
approved by the NCUA Board.
    (5) Critically undercapitalized if it has a net worth ratio of less 
than 2.0 percent.

                                  Table 1 to Sec.   702.102--Capital Categories
----------------------------------------------------------------------------------------------------------------
      A credit union's capital                                 Risk-based capital      And subject to following
      classification is . . .            Net worth ratio              ratio               condition(s) . . .
----------------------------------------------------------------------------------------------------------------
Well Capitalized...................  7% or above...........  10.5% or above........  Must pass both net worth
                                                                                      ratio and risk-based
                                                                                      capital ratio.
Adequately Capitalized.............  6% to 6.99%...........  8% to 10.49%..........  Must pass both net worth
                                                                                      ratio and risk-based
                                                                                      capital ratio.
Undercapitalized...................  4% to 5.99%...........  Less than 8%..........  Must pass both net worth
                                                                                      ratio and risk-based
                                                                                      capital ratio.
Significantly Undercapitalized.....  2% to 3.99%...........  N/A...................  Or if ``undercapitalized at
                                                                                      < 5% net worth and fails
                                                                                      to timely submit or
                                                                                      materially implement an
                                                                                      approved net worth
                                                                                      restoration plan.
Critically Undercapitalized........  Less than 2%..........  N/A...................  None.
----------------------------------------------------------------------------------------------------------------

    (b) Reclassification based on supervisory criteria other than net 
worth. The NCUA Board may reclassify a well capitalized credit union as 
adequately capitalized and may require an adequately capitalized or 
undercapitalized credit union to comply with certain mandatory or 
discretionary supervisory actions as if it were classified in the next 
lower capital category (each of such actions hereinafter referred to 
generally as ``reclassification'') in the following circumstances:
    (1) Unsafe or unsound condition. The NCUA Board has determined, 
after notice and opportunity for hearing pursuant to Sec.  747.2003 of 
this chapter, that the credit union is in an unsafe or unsound 
condition; or
    (2) Unsafe or unsound practice. The NCUA Board has determined, 
after notice and opportunity for hearing pursuant to Sec.  747.2003 of 
this chapter, that the credit union has not corrected a material unsafe 
or unsound practice of which it was, or should have been, aware.
    (c) Non-delegation. The NCUA Board may not delegate its authority 
to reclassify a credit union under paragraph (b) of this section.
    (d) Consultation with state officials. The NCUA Board shall consult 
and seek to work cooperatively with the appropriate state official 
before reclassifying a federally insured state-chartered credit union 
under paragraph (b) of this section, and shall promptly notify the 
appropriate state official of its decision to reclassify.

[[Page 11214]]

Sec.  702.103  Applicability of risk-based capital ratio measure.

    For purposes of Sec.  702.102, a credit union is defined as 
``complex'' and a risk-based capital ratio requirement is applicable 
only if the credit union's quarter-end total assets exceed fifty 
million dollars ($50,000,000), as reflected in its most recent Call 
Report.


Sec.  702.104  Risk-based capital ratio measures.

    A complex credit union must calculate its risk-based capital ratio 
in accordance with this section.
    (a) Calculation of the risk-based capital ratio. To determine its 
risk-based capital ratio a complex credit union must calculate the 
percentage, rounded to two decimal places, of its risk-based capital 
numerator as described in paragraph (b) of this section to its total 
risk-weighted assets as described in paragraph (c) of this section.
    (b) Risk-based capital ratio numerator. The risk-based capital 
ratio numerator is the sum of the specific capital elements in 
paragraph (b)(1) of this section, minus the regulatory adjustments in 
paragraph (b)(2) of this section.
    (1) Capital elements of the risk-based capital ratio numerator. The 
capital elements of the risk-based capital numerator are:
    (i) Undivided earnings (including any regular reserve);
    (ii) Appropriation for non-conforming investments;
    (iii) Other reserves;
    (iv) Equity acquired in merger;
    (v) Net income;
    (vi) ALLL, limited to 1.25% of risk assets;
    (vii) Secondary capital accounts included in net worth (as defined 
in Sec.  702.2); and
    (viii) Section 208 assistance included in net worth (as defined in 
Sec.  702.2).
    (2) Risk-based capital numerator deductions. The elements deducted 
from the sum of the risk-based capital elements are:
    (i) NCUSIF Capitalization Deposit;
    (ii) Goodwill;
    (iii) Other intangible assets; and
    (iv) Identified losses not reflected in the risk-based capital 
ratio numerator.
    (c) Total risk-weighted assets. (1) General. Total risk-weighted 
assets includes risk-weighted on-balance sheet assets as described in 
paragraph (c)(2) of this section, plus the risk-weighted off-balance 
sheet assets in paragraph (c)(3) of this section, plus the risk-
weighted derivatives in paragraph (c)(4) of this section, less the 
risk-based capital numerator deductions in paragraph (b)(2) of this 
section.
    (2) Risk-weights for on-balance sheet assets. The risk categories 
and weights for assets listed on a complex credit union's balance sheet 
are as follows:
    (i) Category 1--zero percent risk-weight. A credit union must 
assign a zero percent risk-weight to:
    (A) Cash on hand, which includes the change fund (coin, currency, 
and cash items), vault cash, vault funds in transit and currency 
supplied from automatic teller machines.
    (B) NCUSIF capital deposit.
    (C) Debt instruments unconditionally guaranteed by the NCUA or the 
Federal Deposit Insurance Corporation.
    (D) U.S. Government obligations directly and unconditionally 
guaranteed by the full faith and credit of the U.S. Government, 
including U.S. Treasury bills, notes, bonds, zero coupon bonds, and 
separate trading of registered interest and principal securities 
(STRIPS).
    (E) Non-delinquent student loans unconditionally guaranteed by a 
U.S. Government agency.
    (ii) Category 2--20 percent risk-weight. A credit union must assign 
a 20 percent risk-weight to:
    (A) Cash on deposit, which includes balances on deposit in insured 
financial institutions and deposits in transit. These amounts may or 
may not be subject to withdrawal by check, and they may or may not bear 
interest. Examples include overnight accounts, corporate credit union 
daily accounts, money market accounts, and checking accounts.
    (B) Cash equivalents (investments with original maturities of three 
months or less). Cash equivalents are short-term, highly liquid non-
security investments that have an original maturity of 3 months or less 
at the time of purchase, are readily convertible to known amounts of 
cash, and are used as part of the credit union's cash management 
activities.
    (C) The total amount of investments with a weighted-average life of 
one year or less.
    (D) Residential mortgages guaranteed by the U.S. Government through 
the Federal Housing Administration or the Department of Veterans 
Affairs.
    (E) Loans guaranteed 75 percent or more by the Small Business 
Administration, U.S. Department of Agriculture, or other U.S. 
Government agency.
    (iii) Category 3--50 percent risk-weight. A credit union must 
assign a 50 percent risk-weight to:
    (A) The total amount of investments with a weighted-average life of 
greater than one year, but less than or equal to three years.
    (B) The total amount of current and non-delinquent first mortgage 
real estate loans less than or equal to 25 percent of total assets.
    (iv) Category 4--75 percent risk-weight. A credit union must assign 
a 75 percent risk-weight to:
    (A) The total amount of investments with a weighted-average life of 
greater than three years, but less than or equal to five years.
    (B) Current and non-delinquent unsecured credit card loans, other 
unsecured loans and lines of credit, short-term, small amount loans 
(STS), new vehicle loans, used vehicle loans, leases receivable and all 
other loans. (Excluding loans reported as member business loans).
    (C) Current and non-delinquent first mortgage real estate loans 
greater than 25 percent of total assets and less than or equal to 35 
percent of assets.
    (v) Category 5--100 percent risk-weight. A credit union must assign 
a 100 percent risk-weight to:
    (A) Corporate credit union nonperpetual capital.
    (B) The total outstanding principal amount of loans to CUSOs.
    (C) Current and non-delinquent first mortgage real estate loans 
greater than 35 percent of total assets.
    (D) Delinquent first mortgage real estate loans.
    (E) Other real estate-secured loans less than or equal to 10 
percent of assets.
    (F) Member business loans less than or equal to 15 percent of 
assets.
    (G) Loans held for sale.
    (H) The total amount of any foreclosures and repossessed assets.
    (I) Land and building, less depreciation on building.
    (J) Any other fixed assets, such as furniture and fixtures and 
leasehold improvements, less related depreciation.
    (K) Current non-federally insured student loans.
    (L) All other assets not specifically assigned a risk-weight but 
included in the balance sheet.
    (vi) Category 6--125 percent risk-weight. A credit union must 
assign a 125 percent risk-weight to the total amount of all other real 
estate-secured loans greater than 10 percent of assets and less than or 
equal to 20 percent of assets.
    (vii) Category 7--150 percent risk-weight. A credit union must 
assign a 150 percent risk-weight to:
    (A) The total amount of investments with a weighted-average life of 
greater than five years, but less than or equal to ten years.
    (B) Any delinquent unsecured credit card loans; other unsecured 
loans and lines of credit; short-term, small amount loans; non-
federally guaranteed student

[[Page 11215]]

loans; new vehicle loans; used vehicle loans; leases receivable; and 
all other loans (excluding loans reported as member business loans).
    (C) The total amount of all other real estate-secured loans greater 
than 20 percent of assets.
    (D) Any member business loans greater than 15 percent of assets and 
less than or equal to 25 percent of assets.
    (viii) Category 8--200 percent risk-weight. A credit union must 
assign a 200 percent risk-weight to:
    (A) Corporate credit union perpetual capital.
    (B) The total amount of investments with a weighted-average life of 
greater than 10 years.
    (C) The total amount of member business loans greater than 25 
percent of assets, other than member business loans included in 
Category 3 (paragraph (c)(2)(iii) of this section).
    (ix) Category 9--250 percent risk-weight. A credit union must 
assign a 250 percent risk-weight to:
    (A) The total value of investments in CUSOs.
    (B) The total value of mortgage servicing assets.
    (x) Category 10--1,250 percent risk-weight. A credit union must 
assign a 1,250 percent risk-weight (8% * 1,250% = 100%) to an asset-
backed investment for which the credit union is unable to demonstrate, 
as required under paragraph (d) of this section, a comprehensive 
understanding of the features of the asset-backed investment that would 
materially affect its performance.
    (3) Risk-weights for off-balance sheet activities. The risk-
weighted amounts for all off-balance sheet items are determined by 
multiplying the notional principal, or face value, by the appropriate 
conversion factor and the assigned risk-weight as follows:
    (i) A 75 percent conversion factor with a 100 percent risk-weight 
for unfunded commitments for member business loans.
    (ii) A 75 percent conversion factor with a 100 percent risk-weight 
for member business loans transferred with limited recourse.
    (iii) A 75 percent conversion factor with a 50 percent risk-weight 
for first mortgage real estate loans transferred with limited recourse.
    (iv) A 75 percent conversion factor with a 100 percent risk-weight 
for other real estate loans transferred with limited recourse.
    (v) A 75 percent conversion factor with a 100 percent risk-weight 
for non-federally guaranteed student loans transferred with limited 
recourse.
    (vi) A 75 percent conversion factor with a 75 percent risk-weight 
for all other loans transferred with limited recourse.
    (vii) A 10 percent conversion factor with a 75 percent risk-weight 
for total unfunded commitments for non-business loans.
    (4) Derivatives. (i) Single derivatives contract exposure amount. 
Except as modified by paragraph (c)(4)(iii) of this section, the 
exposure amount for a single derivatives contract that is not subject 
to a qualifying master netting agreement is equal to the sum of the 
credit union's current credit exposure and potential future credit 
exposure (PFE) on the derivatives contract.
    (A) Current credit exposure. The current credit exposure for a 
single derivatives contract is the greater of the mark-to-fair value of 
the derivatives contract or zero.
    (B) Potential future credit exposure (PFE). (1) The PFE for a 
single derivatives contract, including a derivatives contract with a 
negative mark-to-fair value, is calculated by multiplying the notional 
principal amount of the derivatives contract by the appropriate 
conversion factor in Table 1 of this section.
    (2) For a derivatives contract that is structured such that on 
specified dates any outstanding exposure is settled and the terms are 
reset so that the fair value of the contract is zero, the remaining 
maturity equals the time until the next reset date.
    (3) For an interest rate derivatives contract with a remaining 
maturity of greater than one year that meets these criteria, the 
minimum conversion factor is 0.005.

   Table 1 to Sec.   702.104--Conversion Factor Matrix for Derivatives
                                Contracts
------------------------------------------------------------------------
                                                 Interest
              Remaining maturity                   rate         Other
------------------------------------------------------------------------
One year or less.............................         0.00          0.10
Greater than one year and less than or equal          0.005         0.12
 to five years...............................
Greater than five years......................         0.015         0.15
------------------------------------------------------------------------

    (ii) Multiple derivatives contracts subject to a qualifying master 
netting agreement. Except as modified by paragraph (c)(4)(iii) of this 
section, the exposure amount for multiple derivatives contracts subject 
to a qualifying master netting agreement is equal to the sum of the net 
current credit exposure and the adjusted sum of the PFE amounts for all 
derivatives contracts subject to the qualifying master netting 
agreement.
    (A) Net current credit exposure. The net current credit exposure is 
the greater of the net sum of all positive and negative mark-to-fair 
values of the individual derivatives contracts subject to the 
qualifying master netting agreement or zero.
    (B) Adjusted sum of the PFE amounts. The adjusted sum of the PFE 
amounts, Anet, is calculated as Anet = (0.4 x Agross) + (0.6 x NGR x 
Agross), where:
    (1) Agross equals the gross PFE (that is, the sum of the PFE 
amounts as determined under paragraph (c)(4)(i)(B) of this section for 
each individual derivatives contract subject to the qualifying master 
netting agreement); and
    (2) Net-to-gross Ratio (NGR) equals the ratio of the net current 
credit exposure to the gross current credit exposure. In calculating 
the NGR, the gross current credit exposure equals the sum of the 
positive current credit exposures (as determined under 
paragraph(c)(4)(i)(A) of this section) of all individual derivatives 
contracts subject to the qualifying master netting agreement.
    (iii) Recognition of credit risk mitigation of collateralized 
derivatives contracts. A credit union may recognize the credit risk 
mitigation benefits of financial collateral that secures a derivatives 
contract or multiple derivatives contracts subject to a qualifying 
master netting agreement (netting set) by using the simple approach in 
paragraph (c)(4)(v) of this section.
    (iv) Alternative approach. As an alternative to the simple 
approach, a credit union may recognize the credit risk mitigation 
benefits of financial collateral that secures such a contract or 
netting set if the financial collateral is marked-to-fair value on a 
daily basis and subject to a daily margin maintenance requirement by 
applying a risk-weight to the exposure as if it were

[[Page 11216]]

uncollateralized and adjusting the exposure amount calculated under 
paragraph (c)(4)(i) of this section using the collateral approach in 
paragraph (c)(4)(v) of this section. The credit union must substitute 
the exposure amount calculated under paragraph (c)(4)(i)(A) or (B) of 
this section for exposure amount in the equation in paragraph 
(c)(4)(v).
    (v) Collateralized transactions. (A) General. A credit union may 
use the approach in paragraph (c)(4)(v)(B) of this section to recognize 
the risk-mitigating effects of financial collateral.
    (B) Simple collateralized derivatives approach. To qualify for the 
simple approach, the financial collateral must meet the following 
requirements:
    (1) The collateral must be subject to a collateral agreement for at 
least the life of the exposure;
    (2) The collateral must be revalued at least every six months; and
    (3) The collateral and the exposure must be denominated in the same 
currency.
    (C) Risk-weight substitution. (1) A credit union may apply a risk-
weight to the portion of an exposure that is secured by the fair value 
of financial collateral (that meets the requirements for the simple 
collateralized approach of this section) based on the risk-weight 
assigned to the collateral as established under Sec.  702.104(c).
    (2) A credit union must apply a risk-weight to the unsecured 
portion of the exposure based on the risk-weight applicable to the 
exposure under this subpart.
    (D) Exceptions to the 20 percent risk-weight floor and other 
requirements. Notwithstanding the simple collateralized derivatives 
approach in paragraph (c)(4)(v)(B) of this section:
    (1) A credit union may assign a zero percent risk-weight to an 
exposure to a derivatives contract that is marked-to-market on a daily 
basis and subject to a daily margin maintenance requirement, to the 
extent the contract is collateralized by cash on deposit.
    (2) A credit union may assign a 10 percent risk-weight to an 
exposure to an derivatives contract that is marked-to-market daily and 
subject to a daily margin maintenance requirement, to the extent that 
the contract is collateralized by an exposure that qualifies for a zero 
percent risk-weight under Sec.  702.104(c)(2)(ii).
    (E) A credit union may assign a zero percent risk-weight to the 
collateralized portion of an exposure where:
    (1) The financial collateral is cash on deposit; or
    (2) The financial collateral is an exposure that qualifies for a 
zero percent risk-weight under Sec.  702.104(c)(2)(ii), and the credit 
union has discounted the fair value of the collateral by 20 percent.
    (d) Due diligence requirements for asset-backed investments. (1) If 
a credit union is unable to demonstrate to the NCUA a comprehensive 
understanding of the features of an asset-backed investment exposure 
that would materially affect the performance of the exposure, the 
credit union must assign a 1,250 percent risk-weight to the asset-
backed investment exposure. The credit union's analysis must be 
commensurate with the complexity of the asset-backed investment and the 
materiality of the position in relation to regulatory capital according 
to this part.
    (2) A credit union must demonstrate its comprehensive understanding 
of an asset-backed investment exposure under paragraph (d)(1) of this 
section, for each asset-backed investment exposure by:
    (i) Conducting an analysis of the risk characteristics of an 
investment exposure prior to acquiring the exposure and documenting 
such analysis within three business days after acquiring the exposure, 
considering:
    (A) Structural features of the investment that would materially 
impact the performance of the exposure, for example, the contractual 
cash flow waterfall, waterfall-related triggers, credit enhancements, 
liquidity enhancements, fair value triggers, the performance of 
organizations that service the position, and deal-specific definitions 
of default;
    (B) Relevant information regarding the performance of the 
underlying credit exposure(s), for example, the percentage of loans 30, 
60, and 90 days past due; default rates; prepayment rates; loans in 
foreclosure; property types; occupancy; average credit score or other 
measures of creditworthiness; average loan-to-value ratio; and industry 
and geographic diversification data on the underlying exposure(s);
    (C) Relevant market data of the asset-backed investment, for 
example, bid-ask spreads, most recent sales price and historical price 
volatility, trading volume, implied market rating, and size, depth, and 
concentration level of the market for the investment; and
    (D) For reinvestment exposures, performance information on the 
underlying investment exposures, for example, the issuer name and 
credit quality, and the characteristics and performance of the 
exposures underlying the investment exposures; and
    (ii) On an ongoing basis (no less frequently than quarterly), 
evaluating, reviewing, and updating as appropriate the analysis 
required under this section for each investment exposure.


Sec.  702.105  Individual minimum capital requirements.

    (a) General. The rules and procedures specified in this paragraph 
(a) apply to the establishment of an individual minimum capital 
requirement for a credit union that varies from any of the risk-based 
capital requirement(s) that would otherwise apply to the credit union 
under this part.
    (b) Appropriate considerations for establishing individual minimum 
capital requirements. Minimum capital levels higher than the risk-based 
capital requirements under this part may be appropriate for individual 
credit unions. NCUA may establish increased individual minimum capital 
requirements upon its determination that the 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:
    (1) A credit union is receiving special supervisory attention;
    (2) A credit union has or is expected to have losses resulting in 
capital inadequacy;
    (3) A 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;
    (4) A credit union has poor liquidity or cash flow;
    (5) A credit union is growing, either internally or through 
acquisitions, at such a rate that supervisory problems are presented 
that are not adequately addressed by other NCUA regulations or other 
guidance;
    (6) A 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;
    (7) A credit union with a portfolio reflecting weak credit quality 
or a significant likelihood of financial loss, or which has loans or 
securities in nonperforming status or on which borrowers fail to comply 
with repayment terms;
    (8) A credit union has inadequate underwriting policies, standards, 
or procedures for its loans and investments;
    (9) A credit union has failed to properly plan for, or execute, 
necessary retained earnings growth, or
    (10) A credit union has a record of operational losses that exceeds 
the

[[Page 11217]]

average of other similarly situated 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.
    (c) Standards for determination of appropriate individual minimum 
capital requirements. The appropriate minimum capital levels for an 
individual 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:
    (1) The conditions or circumstances leading to the determination 
that a higher minimum capital requirement is appropriate or necessary 
for the credit union;
    (2) The urgency of those circumstances or potential problems;
    (3) The overall condition, management strength, and future 
prospects of the credit union and, if applicable, its subsidiaries, 
affiliates, and business partners;
    (4) The credit union's liquidity, capital, and other indicators of 
financial stability, particularly as compared with those of similarly 
situated credit unions; and
    (5) The policies and practices of the 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.


Sec.  702.106  Prompt corrective action for adequately capitalized 
credit unions.

    (a) Earnings retention. Beginning on the effective date of 
classification as adequately capitalized or lower, a federally insured 
credit union must increase the dollar amount of its net worth quarterly 
either in the current quarter, or on average over the current and three 
preceding quarters, by an amount equivalent to at least 1/10th percent 
(0.1%) of its total assets (or more by choice), until it is well 
capitalized.
    (b) Decrease in retention. Upon written application received no 
later than 14 days before the quarter end, the NCUA Board, on a case-
by-case basis, may permit a credit union to increase the dollar amount 
of its net worth by an amount that is less than the amount required 
under paragraph (a) of this section, to the extent the NCUA Board 
determines that such lesser amount--
    (1) Is necessary to avoid a significant redemption of shares; and
    (2) Would further the purpose of this part.
    (c) Decrease by FISCU. The NCUA Board shall consult and seek to 
work cooperatively with the appropriate state official before 
permitting a federally insured state-chartered credit union to decrease 
its earnings retention under paragraph (b) of this section.
    (d) Periodic review. A decision under paragraph (b) of this section 
to permit a credit union to decrease its earnings retention is subject 
to quarterly review and revocation except when the credit union is 
operating under an approved net worth restoration plan that provides 
for decreasing its earnings retention as provided under paragraph (b) 
of this section.


Sec.  702.107  Prompt corrective action for undercapitalized credit 
unions.

    (a) Mandatory supervisory actions by credit union. A credit union 
which is undercapitalized must--
    (1) Earnings retention. Increase net worth in accordance with Sec.  
702.106;
    (2) Submit net worth restoration plan. Submit a net worth 
restoration plan pursuant to Sec.  702.111, provided however, that a 
credit union in this category having a net worth ratio of less than 
five percent (5%) which fails to timely submit such a plan, or which 
materially fails to implement an approved plan, is classified 
significantly undercapitalized pursuant to Sec.  702.102(a)(4)(ii);
    (3) Restrict increase in assets. Beginning the effective date of 
classification as undercapitalized or lower, not permit the credit 
union's assets to increase beyond its total assets for the preceding 
quarter unless--
    (i) Plan approved. The NCUA Board has approved a net worth 
restoration plan which provides for an increase in total assets and--
    (A) The assets of the credit union are increasing consistent with 
the approved plan; and
    (B) The credit union is implementing steps to increase the net 
worth ratio consistent with the approved plan;
    (ii) Plan not approved. The NCUA Board has not approved a net worth 
restoration plan and total assets of the credit union are increasing 
because of increases since quarter-end in balances of:
    (A) Total accounts receivable and accrued income on loans and 
investments; or
    (B) Total cash and cash equivalents; or
    (C) Total loans outstanding, not to exceed the sum of total assets 
plus the quarter-end balance of unused commitments to lend and unused 
lines of credit provided however that a credit union which increases a 
balance as permitted under paragraphs (a)(3)(ii)(A), (B) or (C) of this 
section cannot offer rates on shares in excess of prevailing rates on 
shares in its relevant market area, and cannot open new branches;
    (4) Restrict member business loans. Beginning the effective date of 
classification as undercapitalized or lower, not increase the total 
dollar amount of member business loans (defined as loans outstanding 
and unused commitments to lend) as of the preceding quarter-end unless 
it is granted an exception under 12 U.S.C. 1757a(b).
    (b) Second tier discretionary supervisory actions by NCUA. Subject 
to the applicable procedures for issuing, reviewing and enforcing 
directives set forth in subpart L of part 747 of this chapter, the NCUA 
Board may, by directive, take one or more of the following actions with 
respect to an undercapitalized credit union having a net worth ratio of 
less than five percent (5%), or a director, officer or employee of such 
a credit union, if it determines that those actions are necessary to 
carry out the purpose of this part:
    (1) Requiring prior approval for acquisitions, branching, new lines 
of business. Prohibit a credit union from, directly or indirectly, 
acquiring any interest in any business entity or financial institution, 
establishing or acquiring any additional branch office, or engaging in 
any new line of business, unless the NCUA Board has approved the credit 
union's net worth restoration plan, the credit union is implementing 
its plan, and the NCUA Board determines that the proposed action is 
consistent with and will further the objectives of that plan;
    (2) Restricting transactions with and ownership of CUSO. Restrict 
the credit union's transactions with a CUSO, or require the credit 
union to reduce or divest its ownership interest in a CUSO;
    (3) Restricting dividends paid. Restrict the dividend rates the 
credit union pays on shares to the prevailing rates paid on comparable 
accounts and maturities in the relevant market area, as determined by 
the NCUA Board, except that dividend rates already declared on shares 
acquired before imposing a restriction under this paragraph may not be 
retroactively restricted;
    (4) Prohibiting or reducing asset growth. Prohibit any growth in 
the credit union's assets or in a category of assets, or require the 
credit union to reduce its assets or a category of assets;

[[Page 11218]]

    (5) Alter, reduce, or terminate activity. Require the credit union 
or its CUSO to alter, reduce, or terminate any activity which poses 
excessive risk to the credit union;
    (6) Prohibiting nonmember deposits. Prohibit the credit union from 
accepting all or certain nonmember deposits;
    (7) Dismissing director or senior executive officer. Require the 
credit union to dismiss from office any director or senior executive 
officer, provided however, that a dismissal under this clause shall not 
be construed to be a formal administrative action for removal under 12 
U.S.C. 1786(g);
    (8) Employing qualified senior executive officer. Require the 
credit union to employ qualified senior executive officers (who, if the 
NCUA Board so specifies, shall be subject to its approval); and
    (9) Other action to carry out prompt corrective action. Restrict or 
require such other action by the credit union as the NCUA Board 
determines will carry out the purpose of this part better than any of 
the actions prescribed in paragraphs (b)(1) through (8) of this 
section.
    (c) First tier application of discretionary supervisory actions. An 
undercapitalized credit union having a net worth ratio of five percent 
(5%) or more, or which is classified undercapitalized by reason of 
failing to satisfy a risk-based net worth requirement under Sec.  
702.104, is subject to the discretionary supervisory actions in 
paragraph (b) of this section if it fails to comply with any mandatory 
supervisory action in paragraph (a) of this section or fails to timely 
implement an approved net worth restoration plan under Sec.  702.111, 
including meeting its prescribed steps to increase its net worth ratio.


Sec.  702.108  Prompt corrective action for significantly 
undercapitalized credit unions.

    (a) Mandatory supervisory actions by credit union. A credit union 
which is significantly undercapitalized must--
    (1) Earnings retention. Increase net worth in accordance with Sec.  
702.106;
    (2) Submit net worth restoration plan. Submit a net worth 
restoration plan pursuant to Sec.  702.111;
    (3) Restrict increase in assets. Not permit the credit union's 
total assets to increase except as provided in Sec.  702.107(a)(3); and
    (4) Restrict member business loans. Not increase the total dollar 
amount of member business loans (defined as loans outstanding and 
unused commitments to lend) as provided in Sec.  702.107(a)(4).
    (b) Discretionary supervisory actions by NCUA. Subject to the 
applicable procedures for issuing, reviewing and enforcing directives 
set forth in subpart L of part 747 of this chapter, the NCUA Board may, 
by directive, take one or more of the following actions with respect to 
any significantly undercapitalized credit union, or a director, officer 
or employee of such credit union, if it determines that those actions 
are necessary to carry out the purpose of this part:
    (1) Requiring prior approval for acquisitions, branching, new lines 
of business. Prohibit a credit union from, directly or indirectly, 
acquiring any interest in any business entity or financial institution, 
establishing or acquiring any additional branch office, or engaging in 
any new line of business, except as provided in Sec.  702.107(b)(1);
    (2) Restricting transactions with and ownership of CUSO. Restrict 
the credit union's transactions with a CUSO, or require the credit 
union to divest or reduce its ownership interest in a CUSO;
    (3) Restricting dividends paid. Restrict the dividend rates that 
the credit union pays on shares as provided in Sec.  702.107(b)(3);
    (4) Prohibiting or reducing asset growth. Prohibit any growth in 
the credit union's assets or in a category of assets, or require the 
credit union to reduce assets or a category of assets;
    (5) Alter, reduce or terminate activity. Require the credit union 
or its CUSO(s) to alter, reduce, or terminate any activity which poses 
excessive risk to the credit union;
    (6) Prohibiting nonmember deposits. Prohibit the credit union from 
accepting all or certain nonmember deposits;
    (7) New election of directors. Order a new election of the credit 
union's board of directors;
    (8) Dismissing director or senior executive officer. Require the 
credit union to dismiss from office any director or senior executive 
officer, provided however, that a dismissal under this clause shall not 
be construed to be a formal administrative action for removal under 12 
U.S.C. 1786(g);
    (9) Employing qualified senior executive officer. Require the 
credit union to employ qualified senior executive officers (who, if the 
NCUA Board so specifies, shall be subject to its approval);
    (10) Restricting senior executive officers' compensation. Except 
with the prior written approval of the NCUA Board, limit compensation 
to any senior executive officer to that officer's average rate of 
compensation (excluding bonuses and profit sharing) during the four (4) 
calendar quarters preceding the effective date of classification of the 
credit union as significantly undercapitalized, and prohibit payment of 
a bonus or profit share to such officer;
    (11) Other actions to carry out prompt corrective action. Restrict 
or require such other action by the credit union as the NCUA Board 
determines will carry out the purpose of this part better than any of 
the actions prescribed in paragraphs (b)(1) through (10) of this 
section; and
    (12) Requiring merger. Require the credit union to merge with 
another financial institution if one or more grounds exist for placing 
the credit union into conservatorship pursuant to 12 U.S.C. 
1786(h)(1)(F), or into liquidation pursuant to 12 U.S.C. 
1787(a)(3)(A)(i).
    (c) Discretionary conservatorship or liquidation if no prospect of 
becoming adequately capitalized. Notwithstanding any other actions 
required or permitted to be taken under this section, when a credit 
union becomes significantly undercapitalized (including by 
reclassification under Sec.  702.102(b)), the NCUA Board may place the 
credit union into conservatorship pursuant to 12 U.S.C. 1786(h)(1)(F), 
or into liquidation pursuant to 12 U.S.C. 1787(a)(3)(A)(i), provided 
that the credit union has no reasonable prospect of becoming adequately 
capitalized.


Sec.  702.109  Prompt corrective action for critically undercapitalized 
credit unions.

    (a) Mandatory supervisory actions by credit union. A credit union 
which is critically undercapitalized must--
    (1) Earnings retention. Increase net worth in accordance with Sec.  
702.106;
    (2) Submit net worth restoration plan. Submit a net worth 
restoration plan pursuant to Sec.  702.111;
    (3) Restrict increase in assets. Not permit the credit union's 
total assets to increase except as provided in Sec.  702.107(a)(3); and
    (4) Restrict member business loans. Not increase the total dollar 
amount of member business loans (defined as loans outstanding and 
unused commitments to lend) as provided in Sec.  702.107(a)(4).
    (b) Discretionary supervisory actions by NCUA. Subject to the 
applicable procedures for issuing, reviewing and enforcing directives 
set forth in subpart L of part 747 of this chapter, the NCUA Board may, 
by directive, take one or more of the following actions with respect to 
any critically undercapitalized credit union, or a director, officer or 
employee of such credit union, if it determines that those

[[Page 11219]]

actions are necessary to carry out the purpose of this part:
    (1) Requiring prior approval for acquisitions, branching, new lines 
of business. Prohibit a credit union from, directly or indirectly, 
acquiring any interest in any business entity or financial institution, 
establishing or acquiring any additional branch office, or engaging in 
any new line of business, except as provided by Sec.  702.107(b)(1);
    (2) Restricting transactions with and ownership of CUSO. Restrict 
the credit union's transactions with a CUSO, or require the credit 
union to divest or reduce its ownership interest in a CUSO;
    (3) Restricting dividends paid. Restrict the dividend rates that 
the credit union pays on shares as provided in Sec.  702.107(b)(3);
    (4) Prohibiting or reducing asset growth. Prohibit any growth in 
the credit union's assets or in a category of assets, or require the 
credit union to reduce assets or a category of assets;
    (5) Alter, reduce or terminate activity. Require the credit union 
or its CUSO(s) to alter, reduce, or terminate any activity which poses 
excessive risk to the credit union;
    (6) Prohibiting nonmember deposits. Prohibit the credit union from 
accepting all or certain nonmember deposits;
    (7) New election of directors. Order a new election of the credit 
union's board of directors;
    (8) Dismissing director or senior executive officer. Require the 
credit union to dismiss from office any director or senior executive 
officer, provided however, that a dismissal under this clause shall not 
be construed to be a formal administrative action for removal under 12 
U.S.C. 1786(g);
    (9) Employing qualified senior executive officer. Require the 
credit union to employ qualified senior executive officers (who, if the 
NCUA Board so specifies, shall be subject to its approval);
    (10) Restricting senior executive officers' compensation. Reduce 
or, with the prior written approval of the NCUA Board, limit 
compensation to any senior executive officer to that officer's average 
rate of compensation (excluding bonuses and profit sharing) during the 
four (4) calendar quarters preceding the effective date of 
classification of the credit union as critically undercapitalized, and 
prohibit payment of a bonus or profit share to such officer;
    (11) Restrictions on payments on uninsured secondary capital. 
Beginning 60 days after the effective date of classification of a 
credit union as critically undercapitalized, prohibit payments of 
principal, dividends or interest on the credit union's uninsured 
secondary capital accounts established after August 7, 2000, except 
that unpaid dividends or interest shall continue to accrue under the 
terms of the account to the extent permitted by law;
    (12) Requiring prior approval. Require a critically 
undercapitalized credit union to obtain the NCUA Board's prior written 
approval before doing any of the following:
    (i) Entering into any material transaction not within the scope of 
an approved net worth restoration plan (or approved revised business 
plan under subpart C of this part);
    (ii) Extending credit for transactions deemed highly leveraged by 
the NCUA Board or, if state-chartered, by the appropriate state 
official;
    (iii) Amending the credit union's charter or bylaws, except to the 
extent necessary to comply with any law, regulation, or order;
    (iv) Making any material change in accounting methods; and
    (v) Paying dividends or interest on new share accounts at a rate 
exceeding the prevailing rates of interest on insured deposits in its 
relevant market area;
    (13) Other action to carry out prompt corrective action. Restrict 
or require such other action by the credit union as the NCUA Board 
determines will carry out the purpose of this part better than any of 
the actions prescribed in paragraphs (b)(1) through (12) of this 
section; and
    (14) Requiring merger. Require the credit union to merge with 
another financial institution if one or more grounds exist for placing 
the credit union into conservatorship pursuant to 12 U.S.C. 
1786(h)(1)(F), or into liquidation pursuant to 12 U.S.C. 
1787(a)(3)(A)(i).
    (c) Mandatory conservatorship, liquidation or action in lieu 
thereof--(1) Action within 90 days. Notwithstanding any other actions 
required or permitted to be taken under this section (and regardless of 
a credit union's prospect of becoming adequately capitalized), the NCUA 
Board must, within 90 calendar days after the effective date of 
classification of a credit union as critically undercapitalized--
    (i) Conservatorship. Place the credit union into conservatorship 
pursuant to 12 U.S.C. 1786(h)(1)(G); or
    (ii) Liquidation. Liquidate the credit union pursuant to 12 U.S.C. 
1787(a)(3)(A)(ii); or
    (iii) Other corrective action. Take other corrective action, in 
lieu of conservatorship or liquidation, to better achieve the purpose 
of this part, provided that the NCUA Board documents why such action in 
lieu of conservatorship or liquidation would do so, provided however, 
that other corrective action may consist, in whole or in part, of 
complying with the quarterly timetable of steps and meeting the 
quarterly net worth targets prescribed in an approved net worth 
restoration plan.
    (2) Renewal of other corrective action. A determination by the NCUA 
Board to take other corrective action in lieu of conservatorship or 
liquidation under paragraph (c)(1)(iii) of this section shall expire 
after an effective period ending no later than 180 calendar days after 
the determination is made, and the credit union shall be immediately 
placed into conservatorship or liquidation under paragraphs (c)(1)(i) 
and (ii) of this section, unless the NCUA Board makes a new 
determination under paragraph (c)(1)(iii) of this section before the 
end of the effective period of the prior determination;
    (3) Mandatory liquidation after 18 months --(i) Generally. 
Notwithstanding paragraphs (c)(1) and (2) of this section, the NCUA 
Board must place a credit union into liquidation if it remains 
critically undercapitalized for a full calendar quarter, on a monthly 
average basis, following a period of 18 months from the effective date 
the credit union was first classified critically undercapitalized.
    (ii) Exception. Notwithstanding paragraph (c)(3)(i) of this 
section, the NCUA Board may continue to take other corrective action in 
lieu of liquidation if it certifies that the credit union--
    (A) Has been in substantial compliance with an approved net worth 
restoration plan requiring consistent improvement in net worth since 
the date the net worth restoration plan was approved;
    (B) Has positive net income or has an upward trend in earnings that 
the NCUA Board projects as sustainable; and
    (C) Is viable and not expected to fail.
    (iii) Review of exception. The NCUA Board shall, at least 
quarterly, review the certification of an exception to liquidation 
under paragraph (c)(3)(ii) of this section and shall either--
    (A) Recertify the credit union if it continues to satisfy the 
criteria of paragraph (c)(3)(ii) of this section; or
    (B) Promptly place the credit union into liquidation, pursuant to 
12 U.S.C. 1787(a)(3)(A)(ii), if it fails to satisfy the criteria of 
paragraph (c)(3)(ii) of this section.
    (4) Nondelegation. The NCUA Board may not delegate its authority 
under paragraph (c) of this section, unless the

[[Page 11220]]

credit union has less than $5,000,000 in total assets. A credit union 
shall have a right of direct appeal to the NCUA Board of any decision 
made by delegated authority under this section within ten (10) calendar 
days of the date of that decision.
    (d) Mandatory liquidation of insolvent federal credit union. In 
lieu of paragraph (c) of this section, a critically undercapitalized 
federal credit union that has a net worth ratio of less than zero 
percent (0%) may be placed into liquidation on grounds of insolvency 
pursuant to 12 U.S.C. 1787(a)(1)(A).


Sec.  702.110  Consultation with state officials on proposed prompt 
corrective action.

    (a) Consultation on proposed conservatorship or liquidation. Before 
placing a federally insured state-chartered credit union into 
conservatorship (pursuant to 12 U.S.C. 1786(h)(1)(F) or (G)) or 
liquidation (pursuant to 12 U.S.C. 1787(a)(3)) as permitted or required 
under subparts A or B of this part to facilitate prompt corrective 
action--
    (1) The NCUA Board shall seek the views of the appropriate state 
official (as defined in Sec.  702.2), and give him or her an 
opportunity to take the proposed action;
    (2) The NCUA Board shall, upon timely request of the appropriate 
state official, promptly provide him or her with a written statement of 
the reasons for the proposed conservatorship or liquidation, and 
reasonable time to respond to that statement; and
    (3) If the appropriate state official makes a timely written 
response that disagrees with the proposed conservatorship or 
liquidation and gives reasons for that disagreement, the NCUA Board 
shall not place the credit union into conservatorship or liquidation 
unless it first considers the views of the appropriate state official 
and determines that--
    (i) The NCUSIF faces a significant risk of loss if the credit union 
is not placed into conservatorship or liquidation; and
    (ii) Conservatorship or liquidation is necessary either to reduce 
the risk of loss, or to reduce the expected loss, to the NCUSIF with 
respect to the credit union.
    (b) Nondelegation. The NCUA Board may not delegate any 
determination under paragraph (a)(3) of this section.
    (c) Consultation on proposed discretionary action. The NCUA Board 
shall consult and seek to work cooperatively with the appropriate state 
official before taking any discretionary supervisory action under 
Sec. Sec.  702.107(b), 702.108(b), 702.109(b), 702.204(b) and 
702.205(b) with respect to a federally insured state-chartered credit 
union; shall provide prompt notice of its decision to the appropriate 
state official; and shall allow the appropriate state official to take 
the proposed action independently or jointly with NCUA.


Sec.  702.111  Net worth restoration plans (NWRP).

    (a) Schedule for filing--(1) Generally. A credit union shall file a 
written net worth restoration plan (NWRP) with the appropriate Regional 
Director and, if state-chartered, the appropriate state official, 
within 45 calendar days of the effective date of classification as 
either undercapitalized, significantly undercapitalized or critically 
undercapitalized, unless the NCUA Board notifies the credit union in 
writing that its NWRP is to be filed within a different period.
    (2) Exception. An otherwise adequately capitalized credit union 
that is reclassified undercapitalized on safety and soundness grounds 
under Sec.  702.102(b) is not required to submit a NWRP solely due to 
the reclassification, unless the NCUA Board notifies the credit union 
that it must submit an NWRP.
    (3) Filing of additional plan. Notwithstanding paragraph (a)(1) of 
this section, a credit union that has already submitted and is 
operating under a NWRP approved under this section is not required to 
submit an additional NWRP due to a change in net worth category 
(including by reclassification under Sec.  702.102(b)), unless the NCUA 
Board notifies the credit union that it must submit a new NWRP. A 
credit union that is notified to submit a new or revised NWRP shall 
file the NWRP in writing with the appropriate Regional Director within 
30 calendar days of receiving such notice, unless the NCUA Board 
notifies the credit union in writing that the NWRP is to be filed 
within a different period.
    (4) Failure to timely file plan. When a credit union fails to 
timely file an NWRP pursuant to this paragraph, the NCUA Board shall 
promptly notify the credit union that it has failed to file an NWRP and 
that it has 15 calendar days from receipt of that notice within which 
to file an NWRP.
    (b) Assistance to small credit unions. Upon timely request by a 
credit union having total assets of less than $10 million (regardless 
how long it has been in operation), the NCUA Board shall provide 
assistance in preparing an NWRP required to be filed under paragraph 
(a) of this section.
    (c) Contents of NWRP. An NWRP must--
    (1) Specify--
    (i) A quarterly timetable of steps the credit union will take to 
increase its net worth ratio, and risk-based capital ratio if 
applicable, so that it becomes adequately capitalized by the end of the 
term of the NWRP, and to remain so for four (4) consecutive calendar 
quarters. If ``complex,'' the credit union is subject to a risk-based 
net worth requirement that may require a net worth ratio higher than 
six percent (6%) to become adequately capitalized;
    (ii) The projected amount of net worth increases in each quarter of 
the term of the NWRP as required under Sec.  702.106(a), or as 
permitted under Sec.  702.106(b);
    (iii) How the credit union will comply with the mandatory and any 
discretionary supervisory actions imposed on it by the NCUA Board under 
this subpart;
    (iv) The types and levels of activities in which the credit union 
will engage; and
    (v) If reclassified to a lower category under Sec.  702.102(b), the 
steps the credit union will take to correct the unsafe or unsound 
practice(s) or condition(s);
    (2) Include pro forma financial statements, including any off-
balance sheet items, covering a minimum of the next two years; and
    (3) Contain such other information as the NCUA Board has required.
    (d) Criteria for approval of NWRP. The NCUA Board shall not accept 
a NWRP plan unless it--
    (1) Complies with paragraph (c) of this section;
    (2) Is based on realistic assumptions, and is likely to succeed in 
restoring the credit union's net worth; and
    (3) Would not unreasonably increase the credit union's exposure to 
risk (including credit risk, interest-rate risk, and other types of 
risk).
    (e) Consideration of regulatory capital. To minimize possible long-
term losses to the NCUSIF while the credit union takes steps to become 
adequately capitalized, the NCUA Board shall, in evaluating an NWRP 
under this section, consider the type and amount of any form of 
regulatory capital which may become established by NCUA regulation, or 
authorized by state law and recognized by NCUA, which the credit union 
holds, but which is not included in its net worth.
    (f) Review of NWRP --(1) Notice of decision. Within 45 calendar 
days after receiving an NWRP under this part, the NCUA Board shall 
notify the credit union in writing whether the NWRP has been approved, 
and shall provide reasons for its decision in the event of disapproval.

[[Page 11221]]

    (2) Delayed decision. If no decision is made within the time 
prescribed in paragraph (f)(1) of this section, the NWRP is deemed 
approved.
    (3) Consultation with state officials. In the case of an NWRP 
submitted by a federally insured state-chartered credit union (whether 
an original, new, additional, revised or amended NWRP), the NCUA Board 
shall, when evaluating the NWRP, seek and consider the views of the 
appropriate state official, and provide prompt notice of its decision 
to the appropriate state official.
    (g) NWRP not approved --(1) Submission of revised NWRP. If an NWRP 
is rejected by the NCUA Board, the credit union shall submit a revised 
NWRP within 30 calendar days of receiving notice of disapproval, unless 
it is notified in writing by the NCUA Board that the revised NWRP is to 
be filed within a different period.
    (2) Notice of decision on revised NWRP. Within 30 calendar days 
after receiving a revised NWRP under paragraph (g)(1) of this section, 
the NCUA Board shall notify the credit union in writing whether the 
revised NWRP is approved. The Board may extend the time within which 
notice of its decision shall be provided.
    (3) Disapproval of reclassified credit union's NWRP. A credit union 
which has been classified significantly undercapitalized shall remain 
so classified pending NCUA Board approval of a new or revised NWRP.
    (4) Submission of multiple unapproved NWRPs. The submission of more 
than two NWRPs that are not approved is considered an unsafe and 
unsound condition and may subject the credit union to administrative 
enforcement actions under section 206 of the FCUA, 12 U.S.C. 1786 and 
1790d.
    (h) Amendment of NWRP. A credit union that is operating under an 
approved NWRP may, after prior written notice to, and approval by the 
NCUA Board, amend its NWRP to reflect a change in circumstance. Pending 
approval of an amended NWRP, the credit union shall implement the NWRP 
as originally approved.
    (i) Publication. An NWRP need not be published to be enforceable 
because publication would be contrary to the public interest.
    (j) Termination of NWRP. For purposes of this part, an NWRP 
terminates once the credit union is classified as adequately 
capitalized and remains so for four consecutive quarters. For example, 
if a credit union with an active NWRP attains the classification as 
adequately classified on December 31, 2015 this would be quarter one 
and the fourth consecutive quarter would end September 30, 2016.


Sec.  702.112  Reserves.

    Each credit union shall establish and maintain such reserves as may 
be required by the FCUA, by state law, by regulation, or in special 
cases by the NCUA Board or appropriate state official.


Sec.  702.113  Full and fair disclosure of financial condition.

    (a) Full and fair disclosure defined. ``Full and fair disclosure'' 
is the level of disclosure which a prudent person would provide to a 
member of a credit union, to NCUA, or, at the discretion of the board 
of directors, to creditors to fairly inform them of the financial 
condition and the results of operations of the credit union.
    (b) Full and fair disclosure implemented. The financial statements 
of a credit union shall provide for full and fair disclosure of all 
assets, liabilities, and members' equity, including such valuation 
(allowance) accounts as may be necessary to present fairly the 
financial condition; and all income and expenses necessary to present 
fairly the statement of income for the reporting period.
    (c) Declaration of officials. The Statement of Financial Condition, 
when presented to members, to creditors or to NCUA, shall contain a 
dual declaration by the treasurer and the chief executive officer, or 
in the latter's absence, by any other officer designated by the board 
of directors of the reporting credit union to make such declaration, 
that the report and related financial statements are true and correct 
to the best of their knowledge and belief and present fairly the 
financial condition and the statement of income for the period covered.
    (d) Charges for loan losses. Full and fair disclosure demands that 
a credit union properly address charges for loan losses as follows:
    (1) Charges for loan losses shall be made in accordance with GAAP;
    (2) The ALLL established for loans must fairly present the probable 
losses for all categories of loans and the proper valuation of loans. 
The valuation allowance must encompass specifically identified loans, 
as well as estimated losses inherent in the loan portfolio, such as 
loans and pools of loans for which losses have been incurred but are 
not identifiable on a specific loan-by-loan basis;
    (3) Adjustments to the valuation ALLL will be recorded in the 
expense account ``Provision for Loan and Lease Losses''; and
    (4) At a minimum, adjustments to the ALLL shall be made prior to 
the distribution or posting of any dividend to the accounts of members.


Sec.  702.114  Payment of dividends.

    (a) Restriction on dividends. Dividends shall be available only 
from net worth, if any.
    (b) Payment of dividends if retained earnings depleted. The board 
of directors of a well capitalized credit union that has depleted the 
balance of its retained earnings may authorize dividend payments, 
provided that either--
    (1) The payment of dividends will not cause the credit union's net 
worth classification to fall below adequately capitalized under subpart 
A of this part; or
    (2) If the payment of dividends will cause the net worth 
classification to fall below adequately capitalized, the appropriate 
Regional Director and, if state-chartered, the appropriate state 
official, have given prior written approval (in an NWRP or otherwise) 
to pay a dividend. The request for written approval must include the 
plan for eliminating any negative retained earnings balance.
    (c) Restriction on payment of dividends if, after payment of 
dividends, the credit union's net worth ratio would be less than 6 
percent. If, after payment of a dividend or refund of interest, a well 
capitalized credit union's net worth ratio would fall below 6 percent 
in the current quarter, the board of directors of the credit union may 
not:
    (1) Declare a dividend at a rate that is higher than the prevailing 
rates paid on comparable accounts and maturities in the relevant market 
area;
    (2) Declare a non-repetitive dividend; or
    (3) Authorize a refund of interest.

Subpart B--Alternative Prompt Corrective Action for New Credit 
Unions


Sec.  702.201  Scope and definition.

    (a) Scope. This subpart B applies in lieu of subpart A of this part 
exclusively to credit unions defined in paragraph (b) of this section 
as ``new'' pursuant to section 216(b)(2) of the FCUA, 12 U.S.C. 
1790d(b)(2).
    (b) New credit union defined. A ``new'' credit union for purposes 
of this subpart is a credit union that both has been in operation for 
less than ten (10) years and has total assets of not more than $10 
million. Once a credit union reports total assets of more than $10 
million on a Call Report, the credit union is no longer new, even if 
its assets subsequently decline below $10 million.

[[Page 11222]]

    (c) Effect of spin-offs. A credit union formed as the result of a 
``spin-off'' of a group from the field of membership of an existing 
credit union is deemed to be in operation since the effective date of 
the spin-off. A credit union whose total assets decline below $10 
million because a group within its field of membership has been spun-
off is deemed ``new'' if it has been in operation less than 10 years.
    (d) Actions to evade prompt corrective action. If the NCUA Board 
determines that a credit union was formed, or was reduced in asset size 
as a result of a spin-off, or was merged, primarily to qualify as 
``new'' under this subpart, the credit union shall be deemed subject to 
prompt corrective action under subpart A of this part.


Sec.  702.202  Net worth categories for new credit unions.

    (a) Net worth measures. For purposes of this part, a new credit 
union must determine its capital classification quarterly according to 
its net worth ratio.
    (b) Effective date of net worth classification of new credit union. 
For purposes of subpart B of this part, the effective date of a new 
credit union's classification within a capital category in paragraph 
(c) of this section shall be determined as provided in Sec.  
702.101(b); and written notice to the NCUA Board of a decline in net 
worth classification in paragraph (c) of this section shall be given as 
required by Sec.  702.101(c).
    (c) Net worth categories. A credit union defined as ``new'' under 
this section shall be classified (Table 1 of this section)--
    (1) Well capitalized if it has a net worth ratio of seven percent 
(7%) or greater;
    (2) Adequately capitalized if it has a net worth ratio of six 
percent (6%) or more but less than seven percent (7%);
    (3) Moderately capitalized if it has a net worth ratio of three and 
one-half percent (3.5%) or more but less than six percent (6%);
    (4) Marginally capitalized if it has a net worth ratio of two 
percent (2%) or more but less than three and one-half percent (3.5%);
    (5) Minimally capitalized if it has a net worth ratio of zero 
percent (0%) or greater but less than two percent (2%); and
    (6) Uncapitalized if it has a net worth ratio of less than zero 
percent (0%) (e.g., a deficit in retained earnings).

   Table 1 to Sec.   702.202--Capital Categories for New Credit Unions
------------------------------------------------------------------------
      A new credit union's capital        If it's net worth ratio is . .
        classification is . . .                         .
------------------------------------------------------------------------
Well Capitalized.......................  7% or above.
Adequately Capitalized.................  6 to 7%.
Moderately Capitalized.................  3.5% to 5.99%.
Marginally Capitalized.................  2% to 3.49%.
Minimally Capitalized..................  0% to 1.99%.
Uncapitalized..........................  Less than 0%.
------------------------------------------------------------------------

    (d) Reclassification based on supervisory criteria other than net 
worth. Subject to Sec.  702.102(b), the NCUA Board may reclassify a 
well capitalized, adequately capitalized or moderately capitalized new 
credit union to the next lower capital category (each of such actions 
is hereinafter referred to generally as ``reclassification'') in either 
of the circumstances prescribed in Sec.  702.102(b).
    (e) Consultation with state officials. The NCUA Board shall consult 
and seek to work cooperatively with the appropriate state official 
before reclassifying a federally insured state-chartered credit union 
under paragraph (d) of this section, and shall promptly notify the 
appropriate state official of its decision to reclassify.


Sec.  702.203  Prompt corrective action for adequately capitalized new 
credit unions.

    Beginning on the effective date of classification, an adequately 
capitalized new credit union must increase the dollar amount of its net 
worth by the amount reflected in its approved initial or revised 
business plan in accordance with Sec.  702.204(a)(2), or in the absence 
of such a plan, in accordance with Sec.  702.106 until it is well 
capitalized.


Sec.  702.204  Prompt corrective action for moderately capitalized, 
marginally capitalized, or minimally capitalized new credit unions.

    (a) Mandatory supervisory actions by new credit union. Beginning on 
the date of classification as moderately capitalized, marginally 
capitalized or minimally capitalized (including by reclassification 
under Sec.  702.202(d)), a new credit union must--
    (1) Earnings retention. Increase the dollar amount of its net worth 
by the amount reflected in its approved initial or revised business 
plan;
    (2) Submit revised business plan. Submit a revised business plan 
within the time provided by Sec.  702.206 if the credit union either:
    (i) Has not increased its net worth ratio consistent with its then-
present approved business plan;
    (ii) Has no then-present approved business plan; or
    (iii) Has failed to comply with paragraph (a)(3) of this section; 
and
    (3) Restrict member business loans. Not increase the total dollar 
amount of member business loans (defined as loans outstanding and 
unused commitments to lend) as of the preceding quarter-end unless it 
is granted an exception under 12 U.S.C. 1757a(b).
    (b) Discretionary supervisory actions by NCUA. Subject to the 
applicable procedures set forth in subpart L of part 747 of this 
chapter for issuing, reviewing and enforcing directives, the NCUA Board 
may, by directive, take one or more of the actions prescribed in Sec.  
702.109(b) if the credit union's net worth ratio has not increased 
consistent with its then-present business plan, or the credit union has 
failed to undertake any mandatory supervisory action prescribed in 
paragraph (a) of this section.
    (c) Discretionary conservatorship or liquidation. Notwithstanding 
any other actions required or permitted to be taken under this section, 
the NCUA Board may place a new credit union which is moderately 
capitalized, marginally capitalized or minimally capitalized (including 
by reclassification under Sec.  702.202(d)) into conservatorship 
pursuant to 12 U.S.C. 1786(h)(1)(F), or into liquidation pursuant to 12 
U.S.C. 1787(a)(3)(A)(i), provided that the credit union has no 
reasonable prospect of becoming adequately capitalized.


Sec.  702.205  Prompt corrective action for uncapitalized new credit 
unions.

    (a) Mandatory supervisory actions by new credit union. Beginning on 
the effective date of classification as uncapitalized, a new credit 
union must--
    (1) Earnings retention. Increase the dollar amount of its net worth 
by the amount reflected in the credit union's approved initial or 
revised business plan;
    (2) Submit revised business plan. Submit a revised business plan 
within the time provided by Sec.  702.206, providing for alternative 
means of funding the credit union's earnings deficit, if the credit 
union either:
    (i) Has not increased its net worth ratio consistent with its then-
present approved business plan;
    (ii) Has no then-present approved business plan; or
    (iii) Has failed to comply with paragraph (a)(3) of this section; 
and
    (3) Restrict member business loans. Not increase the total dollar 
amount of member business loans as provided in Sec.  702.204(a)(3).

[[Page 11223]]

    (b) Discretionary supervisory actions by NCUA. Subject to the 
procedures set forth in subpart L of part 747 of this chapter for 
issuing, reviewing and enforcing directives, the NCUA Board may, by 
directive, take one or more of the actions prescribed in Sec.  
702.109(b) if the credit union's net worth ratio has not increased 
consistent with its then-present business plan, or the credit union has 
failed to undertake any mandatory supervisory action prescribed in 
paragraph (a) of this section.
    (c) Mandatory liquidation or conservatorship. Notwithstanding any 
other actions required or permitted to be taken under this section, the 
NCUA Board--
    (1) Plan not submitted. May place into liquidation pursuant to 12 
U.S.C. 1787(a)(3)(A)(ii), or conservatorship pursuant to 12 U.S.C. 
1786(h)(1)(F), an uncapitalized new credit union which fails to submit 
a revised business plan within the time provided under paragraph (a)(2) 
of this section; or
    (2) Plan rejected, approved, implemented. Except as provided in 
paragraph (c)(3) of this section, must place into liquidation pursuant 
to 12 U.S.C. 1787(a)(3)(A)(ii), or conservatorship pursuant to 12 
U.S.C. 1786(h)(1)(F), an uncapitalized new credit union that remains 
uncapitalized one hundred twenty (120) calendar days after the later 
of:
    (i) The effective date of classification as uncapitalized; or
    (ii) The last day of the calendar month following expiration of the 
time period provided in the credit union's initial business plan 
(approved at the time its charter was granted) to remain uncapitalized, 
regardless whether a revised business plan was rejected, approved or 
implemented.
    (3) Exception. The NCUA Board may decline to place a new credit 
union into liquidation or conservatorship as provided in paragraph 
(c)(2) of this section if the credit union documents to the NCUA Board 
why it is viable and has a reasonable prospect of becoming adequately 
capitalized.
    (d) Mandatory liquidation of uncapitalized federal credit union. In 
lieu of paragraph (c) of this section, an uncapitalized federal credit 
union may be placed into liquidation on grounds of insolvency pursuant 
to 12 U.S.C. 1787(a)(1)(A).


Sec.  702.206  Revised business plans (RBP) for new credit unions.

    (a) Schedule for filing--(1) Generally. Except as provided in 
paragraph (a)(2) of this section, a new credit union classified 
moderately capitalized or lower must file a written revised business 
plan (RBP) with the appropriate Regional Director and, if state-
chartered, with the appropriate state official, within 30 calendar days 
of either:
    (i) The last of the calendar month following the end of the 
calendar quarter that the credit union's net worth ratio has not 
increased consistent with its the-present approved business plan;
    (ii) The effective date of classification as less than adequately 
capitalized if the credit union has no then-present approved business 
plan; or
    (iii) The effective date of classification as less than adequately 
capitalized if the credit union has increased the total amount of 
member business loans in violation of Sec.  702.204(a)(3).
    (2) Exception. The NCUA Board may notify the credit union in 
writing that its RBP is to be filed within a different period or that 
it is not necessary to file an RBP.
    (3) Failure to timely file plan. When a new credit union fails to 
file an RBP as provided under paragraphs (a)(1) or (a)(2) of this 
section, the NCUA Board shall promptly notify the credit union that it 
has failed to file an RBP and that it has 15 calendar days from receipt 
of that notice within which to do so.
    (b) Contents of revised business plan. A new credit union's RBP 
must, at a minimum--
    (1) Address changes, since the new credit union's current business 
plan was approved, in any of the business plan elements required for 
charter approval under chapter 1, section IV.D. of appendix B to part 
701 of this chapter, or for state-chartered credit unions under 
applicable state law;
    (2) Establish a timetable of quarterly targets for net worth during 
each year in which the RBP is in effect so that the credit union 
becomes adequately capitalized by the time it no longer qualifies as 
``new'' per Sec.  702.201(b);
    (3) Specify the projected amount of earnings of net worth increases 
as provided under Sec.  702.204(a)(1) or 702.205(a)(1);
    (4) Explain how the new credit union will comply with the mandatory 
and discretionary supervisory actions imposed on it by the NCUA Board 
under this subpart;
    (5) Specify the types and levels of activities in which the new 
credit union will engage;
    (6) In the case of a new credit union reclassified to a lower 
category under Sec.  702.202(d), specify the steps the credit union 
will take to correct the unsafe or unsound condition or practice; and
    (7) Include such other information as the NCUA Board may require.
    (c) Criteria for approval. The NCUA Board shall not approve a new 
credit union's RBP unless it--
    (1) Addresses the items enumerated in paragraph (b) of this 
section;
    (2) Is based on realistic assumptions, and is likely to succeed in 
building the credit union's net worth; and
    (3) Would not unreasonably increase the credit union's exposure to 
risk (including credit risk, interest-rate risk, and other types of 
risk).
    (d) Consideration of regulatory capital. To minimize possible long-
term losses to the NCUSIF while the credit union takes steps to become 
adequately capitalized, the NCUA Board shall, in evaluating an RBP 
under this section, consider the type and amount of any form of 
regulatory capital which may become established by NCUA regulation, or 
authorized by state law and recognized by NCUA, which the credit union 
holds, but which is not included in its net worth.
    (e) Review of revised business plan--(1) Notice of decision. Within 
30 calendar days after receiving an RBP under this section, the NCUA 
Board shall notify the credit union in writing whether its RBP is 
approved, and shall provide reasons for its decision in the event of 
disapproval. The NCUA Board may extend the time within which notice of 
its decision shall be provided.
    (2) Delayed decision. If no decision is made within the time 
prescribed in paragraph (e)(1) of this section, the RBP is deemed 
approved.
    (3) Consultation with state officials. When evaluating an RBP 
submitted by a federally insured state-chartered new credit union 
(whether an original, new or additional RBP), the NCUA Board shall seek 
and consider the views of the appropriate state official, and provide 
prompt notice of its decision to the appropriate state official.
    (f) Plan not approved--(1) Submission of new revised plan. If an 
RBP is rejected by the NCUA Board, the new credit union shall submit a 
new RBP within 30 calendar days of receiving notice of disapproval of 
its initial RBP, unless it is notified in writing by the NCUA Board 
that the new RBP is to be filed within a different period.
    (2) Notice of decision on revised plan. Within 30 calendar days 
after receiving an RBP under paragraph (f)(1) of this section, the NCUA 
Board shall notify the credit union in writing whether the new RBP is 
approved. The Board may extend the time within which notice of its 
decision shall be provided.
    (3) Submission of multiple unapproved RBPs. The submission of more 
than two RBPs that are not approved is considered an unsafe and

[[Page 11224]]

unsound condition and may subject the credit union to administrative 
enforcement action pursuant to section 206 of the FCUA, 12 U.S.C. 1786 
and 1790d.
    (g) Amendment of plan. A credit union that has filed an approved 
RBP may, after prior written notice to and approval by the NCUA Board, 
amend it to reflect a change in circumstance. Pending approval of an 
amended RBP, the new credit union shall implement its existing RBP as 
originally approved.
    (h) Publication. An RBP need not be published to be enforceable 
because publication would be contrary to the public interest.


Sec.  702.207  Incentives for new credit unions.

    (a) Assistance in revising business plans. Upon timely request by a 
credit union having total assets of less than $10 million (regardless 
how long it has been in operation), the NCUA Board shall provide 
assistance in preparing a revised business plan required to be filed 
under Sec.  702.206.
    (b) Assistance. Management training and other assistance to new 
credit unions will be provided in accordance with policies approved by 
the NCUA Board.
    (c) Small credit union program. A new credit union is eligible to 
join and receive comprehensive benefits and assistance under NCUA's 
Small Credit Union Program.


Sec.  702.208  Reserves.

    Each new credit union shall establish and maintain such reserves as 
may be required by the FCUA, by state law, by regulation, or in special 
cases by the NCUA Board or appropriate state official.


Sec.  702.209  Full and fair disclosure of financial condition.

    (a) Full and fair disclosure defined. ``Full and fair disclosure'' 
is the level of disclosure which a prudent person would provide to a 
member of a new credit union, to NCUA, or, at the discretion of the 
board of directors, to creditors to fairly inform them of the financial 
condition and the results of operations of the credit union.
    (b) Full and fair disclosure implemented. The financial statements 
of a new credit union shall provide for full and fair disclosure of all 
assets, liabilities, and members' equity, including such valuation 
(allowance) accounts as may be necessary to present fairly the 
financial condition; and all income and expenses necessary to present 
fairly the statement of income for the reporting period.
    (c) Declaration of officials. The Statement of Financial Condition, 
when presented to members, to creditors or to NCUA, shall contain a 
dual declaration by the treasurer and the chief executive officer, or 
in the latter's absence, by any other officer designated by the board 
of directors of the reporting credit union to make such declaration, 
that the report and related financial statements are true and correct 
to the best of their knowledge and belief and present fairly the 
financial condition and the statement of income for the period covered.
    (d) Charges for loan losses. Full and fair disclosure demands that 
a new credit union properly address charges for loan losses as follows:
    (1) Charges for loan losses shall be made in accordance with 
generally accepted accounting principles (GAAP);
    (2) The allowance for loan and lease losses (ALL) established for 
loans must fairly present the probable losses for all categories of 
loans and the proper valuation of loans. The valuation allowance must 
encompass specifically identified loans, as well as estimated losses 
inherent in the loan portfolio, such as loans and pools of loans for 
which losses have been incurred but are not identifiable on a specific 
loan-by-loan basis;
    (3) Adjustments to the valuation ALL will be recorded in the 
expense account ``Provision for Loan and Lease Losses; and
    (4) At a minimum, adjustments to the ALL shall be made prior to the 
distribution or posting of any dividend to the accounts of members.


Sec.  702.210  Payment of dividends.

    (a) Restriction on dividends. Dividends shall be available only 
from net worth, if any.
    (b) Payment of dividends if retained earnings depleted. The board 
of directors of a well capitalized new credit union that has depleted 
the balance of its retained earnings may authorize dividend payments, 
provided that either--
    (1) The payment of dividends will not cause the credit union's net 
worth classification to fall below adequately capitalized under subpart 
B of this part; or
    (2) If the payment of dividends will cause the net worth 
classification to fall below adequately capitalized, the appropriate 
Regional Director and, if state-chartered, the appropriate state 
official, have given prior written approval (in an NWRP or otherwise) 
to pay a dividend. The request for written approval must include the 
plan for eliminating any negative retained earnings balance.
    (c) Restriction on payment of dividends if, after payment of 
dividends, the new credit union's net worth ratio would be less than 6 
percent. If, after payment of a dividend or refund of interest, a well 
capitalized new credit union's net worth ratio would fall below 6 
percent in the current quarter, the board of directors of the new 
credit union may not:
    (1) Declare a dividend at a rate that is higher than the prevailing 
rates paid on comparable accounts and maturities in the relevant market 
area;
    (2) Declare a non-repetitive dividend; or
    (3) Authorize a refund of interest.

PART 703--INVESTMENT AND DEPOSIT ACTIVITIES

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

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


Sec.  703.14  [Amended]

0
10. Amend Sec.  703.14 as follows:
0
a. In paragraph (i) remove the words ``net worth classification'' and 
add in their place the words ``capital classification'', and remove the 
words ``or, if subject to a risk-based net worth (RBNW) requirement 
under part 702 of this chapter, has remained `well capitalized' for the 
six (6) immediately preceding quarters after applying the applicable 
RBNW requirement,''.
0
b. In paragraph (j)(4) remove the words ``net worth classification'' 
and add in their place the words ``capital classification'', and remove 
the words ``or, if subject to a risk-based net worth (RBNW) requirement 
under part 702 of this chapter, has remained `well capitalized' for the 
six (6) immediately preceding quarters after applying the applicable 
RBNW requirement,''.

PART 713--FIDELITY BOND AND INSURANCE COVERAGE FOR FEDERAL CREDIT 
UNIONS

0
11. The authority citation for part 713 continues to read as follows:

    Authority: 12 U.S.C. 1761a, 1761b, 1766(a), 1766(h), 
1789(a)(11).

0
12. Amend Sec.  713.6 as follows:
0
a. In paragraph (a)(1), revise the table; and
0
b. In paragraph (c) remove the words ``net worth'' each place they 
appear and add in their place the word ``capital'', and remove the 
words ``or, if subject to a risk-based net worth (RBNW) requirement 
under part 702 of this chapter, has remained `well capitalized' for the 
six (6) immediately preceding quarters after applying the applicable 
RBNW requirement,''.

[[Page 11225]]

Sec.  713.6  What is the permissible deductible?

    (a)(1) * * *

------------------------------------------------------------------------
            Assets                         Maximum deductible
------------------------------------------------------------------------
$0 to $100,000...............  No deductible allowed.
$100,001 to $250,000.........  $1,000.
$250,000 to $1,000,000.......  $2,000.
Over $1,000,000..............  $2,000 plus 1/1000 of total assets up to
                                a maximum of $200,000; for credit unions
                                that have received a composite CAMEL
                                rating of ``1'' or ``2'' for the last
                                two (2) full examinations and maintained
                                a capital classification of ``well
                                capitalized'' under part 702 of this
                                chapter for the six (6) immediately
                                preceding quarters the maximum
                                deductible is $1,000,000.
------------------------------------------------------------------------

* * * * *

PART 723--MEMBER BUSINESS LOANS

0
13. The authority citation for part 723 continues to read as follows:

    Authority: 12 U.S.C. 1756, 1757, 1757A, 1766, 1785, 1789.


Sec.  723.7  [Amended]

0
14. Amend Sec.  723.7(c)(1) by removing the words ``as defined by Sec.  
702.102(a)(1)'' and adding in their place the words ``under part 702''.

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

0
15. 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.


Sec.  747.2001  [Amended]

0
16. Amend Sec.  747.2001(a) by removing the citation ``702.302(d)'' and 
adding in its place the citation ``702.202(d)''.


Sec.  747.2002  [Amended]

0
17. Amend Sec.  747.2002(a) by removing the words ``Sec. Sec.  
702.202(b), 702.203(b) and 702.204(b)'' and adding in their place the 
words ``Sec. Sec.  702.107(b), 702.108(b), or 702.109(b)'', and by 
removing the words ``Sec. Sec.  702.304(b) or 702.305(b)'' and adding 
in their place the words ``Sec. Sec.  702.204(b) or 702.205(b)''.


Sec.  747.2003  [Amended]

0
18. Amend Sec.  747.2003(a) by removing the citation ``702.302(d)'' and 
adding in its place the citation ``702.202(d)''.
0
19. Add Sec.  747.2006 to subpart L to read as follows:


Sec.  747.2006  Review of order imposing individual minimum capital 
requirements (IMCR).

    (a) Notice of proposed individual minimum capital requirements. 
When NCUA proposes to impose individualized minimal capital 
requirements for a particular credit union pursuant to Sec.  702.105 of 
this chapter (each such action hereinafter referred to as an ``IMCR''), 
NCUA shall issue and serve on the credit union reasonable prior notice 
of the proposed IMCR. NCUA shall also forward a copy of the notifying 
letter to the appropriate state supervisory authority (SSA) if a state-
chartered corporate credit union would be subject to an IMCR.
    (b) Contents of the Notice. A notice of intention to impose an IMCR 
for a credit union based on particular capital conditions at a credit 
union shall state the following:
    (1) The credit union's net worth ratio, risk-based capital ratio 
and net worth classification.
    (2) The specific minimum capital levels that the NCUA Board intends 
to impose on the credit union under the IMCR, and the specific causes 
for determining that the higher IMCR is necessary or appropriate for 
the credit union.
    (3) The proposed schedule for compliance with the new requirement.
    (4) That the credit union must file a written response to the 
notice, which shall be due no less than 30 calendar days from the date 
of service of the notice. The NCUA Board may extend the time period for 
good cause, and the time period for response by the insured credit 
union may be shortened for good cause:
    (i) When, in the opinion of NCUA, the condition of the credit union 
so requires, and NCUA informs the credit union of the shortened 
response period in the notice; or
    (ii) With the consent of the credit union.
    (c) Contents of response to notice. A credit union's response to a 
notice under paragraph (b) of this section must include:
    (1) An explanation of why it contends the IMCR is not an 
appropriate exercise of discretion under this part;
    (2) A request that the NCUA Board modify or not issue the IMCR;
    (3) Any information, mitigating circumstances, documentation, or 
other evidence in support of the credit union's position that the 
credit union wants NCUA to consider in deciding whether to establish or 
to amend an IMCR for the credit union; and
    (4) If desired, a request for a recommendation from the NCUA's 
Ombudsman pursuant to paragraph (g) of this section.
    (d) Failure to file response. Failure by the credit union to 
respond within 30 days, or such other time period as may be specified 
by NCUA, may constitute a waiver of any objections to the proposed IMCR 
or to the schedule for complying with it, unless NCUA has provided an 
extension of the response period for good cause.
    (e) Final decision by NCUA. After expiration of the response 
period, NCUA will decide whether or not the proposed IMCR should be 
established for the credit union, or whether that proposed requirement 
should be adopted in modified form, based on a review of the credit 
union's response and other relevant information. NCUA's decision will 
address comments received within the response period from the credit 
union and the appropriate state supervisory authority (SSA) (in the 
case of a state-chartered credit union) and will state the level of 
capital required, the schedule for compliance with this requirement, 
and any specific remedial action the credit union could take to 
eliminate the need for continued applicability of the IMCR. NCUA will 
provide the credit union and the appropriate SSA (if a state-chartered 
credit union is involved) with a written decision on the IMCR, 
addressing the substantive comments made by the credit union and 
setting forth the decision and the basis for that decision. Upon 
receipt of this decision by the credit union, the IMCR becomes 
effective and binding upon the credit union. This decision represents 
final agency action.
    (f) Request to modify or rescind IMCR. A credit union that is 
subject to an existing IMCR may request in writing that the NCUA Board 
reconsider the

[[Page 11226]]

terms of the IMCR due to changed circumstances. Unless otherwise 
ordered by the NCUA Board, the IMCR shall remain in effect while such 
request is pending. A request under this paragraph (f) that remains 
pending 60 days following receipt by the NCUA Board is deemed granted.
    (g) Ombudsman. A credit union may request in writing the 
recommendation of NCUA's ombudsman to modify or to not issue a proposed 
IMCR under paragraph (b) of this section, or to modify or rescind an 
existing IMCR due to changed circumstances under paragraph (f) of this 
section. A credit union which fails to request the ombudsman's 
recommendation in a response under paragraph (c) of this section, or in 
a request under paragraph (f) of this section, shall be deemed to have 
waived the opportunity to do so. The ombudsman shall promptly notify 
the credit union and the NCUA Board of his or her recommendation.
[FR Doc. 2014-01702 Filed 2-26-14; 8:45 am]
BILLING CODE 7535-01-P