[Federal Register Volume 82, Number 243 (Wednesday, December 20, 2017)]
[Rules and Regulations]
[Pages 60283-60290]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-27410]


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NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 701

RIN 3133-AE76


Emergency Mergers--Chartering and Field of Membership

AGENCY: National Credit Union Administration (NCUA).

ACTION: Final rule.

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SUMMARY: The NCUA Board (Board) is issuing this final rule to amend, in 
its Chartering and Field of Membership

[[Page 60284]]

Manual, the definition of the term ``in danger of insolvency'' for 
emergency merger purposes. The previous definition, adopted in 2010 
(2010 definition), required a credit union to fall into at least one of 
three net worth categories over a period of time to be ``in danger of 
insolvency.'' For two of those three categories, the final rule 
lengthens by six months the forecast horizons, the time periods in 
which the NCUA projects a credit union's net worth will decline to the 
point that it falls into one of the categories. This extends the time 
period in which a credit union's net worth is projected to either 
render it insolvent or drop below two percent from 24 to 30 months and 
from 12 to 18 months, respectively. Additionally, the final rule adds a 
fourth category to the three existing net worth categories to include 
credit unions that have been granted or received assistance under 
section 208 of the Federal Credit Union Act (FCU Act) in the 15 months 
prior to the NCUA regional office's determination that the credit union 
is in danger of insolvency.

DATES: The effective date for this rule is January 19, 2018.

FOR FURTHER INFORMATION CONTACT: Thomas I. Zells, Staff Attorney, 
Office of General Counsel, or Amanda Parkhill, Loss/Risk Analysis 
Officer, Office of Examination and Insurance, at 1775 Duke Street, 
Alexandria, VA 22314 or telephone: (703) 548-2478 (Mr. Zells) or (703) 
518-6385 (Ms. Parkhill).

SUPPLEMENTARY INFORMATION:

I. Background
II. Summary of Comments
III. Final Rule
IV. Regulatory Procedures

I. Background

    Credit unions that experience a sharp decline in net worth have a 
much higher likelihood of failing. From the second quarter of 1996 
through the second quarter of 2016, there were 11,734 federally insured 
credit unions. As shown in the table below, 2,502 of these credit 
unions fell below the well-capitalized threshold (7 percent net worth 
ratio) after having a net worth ratio above that threshold for at least 
one quarter. The net worth ratios of 490 of these 2,502 credit unions 
eventually declined to below two percent. Importantly, only 15 percent 
of those credit unions whose net worth dropped below two percent 
sometime in this period remain currently active.

                    Table 1--Credit Unions Falling Below Critical Net Worth Ratio Thresholds
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                      Net worth ratio fell:                        Number of CUs      Active         % Active
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Below 7%........................................................           2,502           1,104              44
Below 6%........................................................           1,563             475              30
Below 5%........................................................           1,126             254              23
Below 4%........................................................             825             151              18
Below 3%........................................................             647             102              16
Below 2%........................................................             490              73              15
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    Credit union failures are costly to the entire credit union system 
through their effect on the National Credit Union Share Insurance Fund 
(NCUSIF). The NCUA, as a prudential safety and soundness regulator, is 
charged with protecting the safety and soundness of the credit union 
system and, in turn, the NCUSIF through regulation and supervision.\1\ 
One way to mitigate some of the cost to the NCUSIF and minimize 
disruption to credit union members is to find appropriate merger 
partners for at-risk credit unions.
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    \1\ NCUA's mission is to ``provide, through regulation and 
supervision, a safe and sound credit union system, which promotes 
confidence in the national system of cooperative credit.'' https://www.ncua.gov/About/Pages/Mission-and-Vision.aspx.
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    Under the emergency merger provision of section 205(h) of the FCU 
Act, the Board may allow a credit union that is either insolvent or in 
danger of insolvency to merge with another credit union if the Board 
finds that: (1) An emergency requiring expeditious action exists; (2) 
no other reasonable alternatives are available; and (3) the action is 
in the public interest.\2\ Under these circumstances, the Board may 
approve an emergency merger without regard to common bond or other 
legal constraints, such as obtaining the approval of the members of the 
merging credit union. The emergency merger provision addresses exigent 
circumstances and is intended to serve the public interest and credit 
union members by providing for the continuation of credit union 
services to members and by preserving credit union assets and the 
NCUSIF.
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    \2\ 12 U.S.C. 1785(h).
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    To take such action, the NCUA must first determine that a credit 
union is either insolvent or in danger of insolvency before the agency 
can make the additional findings that an emergency exists, other 
alternatives are not reasonably available, and the public interest 
would be served by the merger. The FCU Act, however, does not define 
when a credit union is ``in danger of insolvency.''
    In 2009, the NCUA proposed a definition of in danger of insolvency 
to establish an objective standard to aid it in making in danger of 
insolvency determinations.\3\ In doing so, the NCUA aimed to provide 
certainty and consistency regarding how it interprets the in danger of 
insolvency standard. In 2010, the NCUA finalized the 2009 proposed 
definition, which provided for the above-referenced three net worth 
categories, and it has remained the definition since.\4\
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    \3\ 74 FR 68722 (Dec. 29, 2009).
    \4\ 75 FR 36257 (June 25, 2010).
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    Experience gained since 2010, including the analysis of Call 
Reports and other NCUA internal data, led the Board to conclude that an 
update to the 2010 definition of in danger of insolvency is needed. For 
these reasons, the Board published proposed changes to the definition 
in the Federal Register in July 2017.\5\
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    \5\ 82 FR 35493 (July 31, 2017).
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II. Summary of Comments

    The NCUA received 12 comments on the 2017 proposal to amend the 
definition of in danger of insolvency for emergency merger purposes 
(the Proposal). The comments were overwhelmingly supportive of the 
proposed definition and generally agreed with the NCUA's rationale for 
amending the definition. No commenters specifically opposed the 
proposed amendments to the definition. However, the commenters did 
raise several issues and made several suggestions. Specifically, 
commenters: Raised concerns about the impact on small credit unions and 
the impact of mergers on the federal charter generally; asked the NCUA 
to continue to study

[[Page 60285]]

section 208 assistance generally and the data the NCUA has on recipient 
credit unions; requested increased transparency in the emergency merger 
process; and asked the NCUA to avoid using any definition that is 
overly rigid and results in the premature merger of a credit union. A 
number of these issues and suggestions, while relevant to emergency 
mergers or section 208 assistance generally, fall outside the scope of 
this rulemaking, which is only concerned with the definition of in 
danger of insolvency for emergency merger purposes. The Board addresses 
these concerns, to the extent that they fall within the scope of the 
rulemaking, below. Based on the rationale previously set forth, the 
commenters overwhelming support, and for the reasons explained in more 
detail below, the Board has decided to finalize the Proposal without 
amendment.

III. Final Rule

A. Overview

    After reviewing and considering the comments, the Board is issuing 
this final rule to implement the changes as proposed in the Proposal. 
The 2010 definition of in danger of insolvency required a credit union 
to fall into at least one of three net worth categories to be found to 
be in danger of insolvency. Consistent with the Proposal, this final 
rule amends the 2010 definition in three ways.
    First, the final rule lengthens by six months the ``forecast 
horizons,'' the time periods in which the NCUA projects a credit 
union's net worth for determining if it is in danger of insolvency. 
This change applies to two of the three current categories. It results 
in forecast horizons of 30 months for the insolvency (zero net worth) 
category, up from 24 months, and 18 months for the critically 
undercapitalized (under two percent net worth) category, up from 12 
months. The third category of the 2010 definition, in which a credit 
union is significantly undercapitalized and the NCUA determines there 
is no reasonable prospect of the credit union becoming adequately 
capitalized in the succeeding 36 months, remains unchanged.
    The second change the final rule makes is the addition of a fourth 
category to the definition. Specifically, a credit union will be 
considered in danger of insolvency if it has been granted or received 
assistance under section 208 of the FCU Act in the 15 months prior to 
the NCUA regional office's determination that the credit union is in 
danger of insolvency.
    Third, the final rule makes a technical spelling correction to the 
first category of the definition to replace the word ``relay'' with the 
word ``rely''.
    The Board believes these changes to the 2010 definition provide the 
NCUA with a more appropriate degree of flexibility and better allow the 
NCUA to act when the statutory criteria for an emergency merger are 
met, namely an emergency requiring expeditious action exists, no other 
reasonable alternatives are available, and the action is in the public 
interest.\6\ As detailed in the Proposal and restated below, both the 
experience the NCUA gained in applying the current definition and 
quantitative data persuaded the Board that these changes are necessary. 
Commenters' overwhelming support for the changes further strengthened 
the Board's position. Under the time frames of the 2010 definition, the 
NCUA was, on several occasions, prevented from instituting an emergency 
merger because a struggling credit union had not yet met the regulatory 
time frames to be considered in danger of insolvency, although it had 
otherwise met the statutory criteria. The lack of flexibility in the 
2010 definition can result in continued decline in the health of a 
credit union, leading to a reduction in member services as the 
institution moves towards resolution. As shown in the chart below, 
credit union loan growth declines in the quarters leading up to an 
emergency merger.
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    \6\ 12 U.S.C. 1785(h).
    [GRAPHIC] [TIFF OMITTED] TR20DE17.002
    

[[Page 60286]]


    In some instances, the rigidity of the 2010 regulatory definition 
unnecessarily limited the NCUA's ability to resolve failing 
institutions. This came at a greater cost to a credit union's members 
and the NCUSIF, particularly in the case of an eventual liquidation. 
The FCU Act grants the Board broad authority to define the term ``in 
danger of insolvency'' for emergency merger purposes. The new 
definition increases agency flexibility and will enable the NCUA to act 
more timely to preserve credit union services and credit union assets 
and to protect the safety and soundness of the credit union system and 
the NCUSIF. Specifically, commenters agreed that the changes will: (1) 
Modernize and provide increased flexibility to the emergency merger 
process; (2) improve merger prospects and help the NCUA and credit 
unions find appropriate merger partners for declining credit unions; 
(3) allow the NCUA to capture more credit unions that are in danger of 
insolvency earlier in their decline; (4) help to preserve and protect 
assets, liquidity, and net worth; (5) protect and mitigate costs to the 
NCUSIF; and (6) preserve continuity in services to members. One 
commenter also specifically agreed that identifying struggling credit 
unions and allowing them to merge is more desirable than total 
liquidation.

B. Extending the Forecast Horizons

    The Proposal amended the definition of in danger of insolvency in 
the glossary to appendix B to part 701 to extend the forecast horizons. 
Under the 2010 definition, to be deemed in danger of insolvency under 
the definition's first two categories, the NCUA had to project that a 
credit union's future net worth would decline at a rate that would 
either render the credit union insolvent within 24 months or drop below 
two percent (critically undercapitalized) within 12 months. In the 
Proposal, the Board proposed extending these periods to 30 months and 
18 months, respectively. The Proposal left as is the forecast horizon 
of the third category of the definition pertaining to significantly 
undercapitalized credit unions that NCUA projects have no reasonable 
prospect of becoming adequately capitalized in the succeeding 36 
months. After reviewing the data and considering the overwhelmingly 
supportive comments, the Board is finalizing these amendments to the 
forecast horizons as proposed.
    As noted in the Proposal, the Board believes that these changes to 
the definition will capture more credit unions that are in danger of 
insolvency earlier in their decline, before their net worth declines 
most rapidly, and will provide value to both the members of the credit 
union being merged and the NCUSIF. Increasing the likelihood that a 
distressed credit union would be eligible for an emergency merger 
earlier could help to protect net worth, reduce payouts on deposit 
insurance or merger assistance, and improve merger prospects. The 
changes also provide the NCUA with additional flexibility to resolve 
the distressed credit union through a merger and help to better ensure 
continuity of financial services for members. This additional 
flexibility is especially beneficial when circumstances deplete a 
credit union's capital slowly and steadily rather than abruptly, such 
as in the case of an institution with a large portfolio of declining 
illiquid assets.
    As provided in the Proposal, the NCUA used a simple forecast of the 
net worth ratios of 46 credit unions that underwent an emergency merger 
between the second quarter of 2010, when the 2010 definition of in 
danger of insolvency was put into place, and the fourth quarter of 2016 
to evaluate the benefit of shifting the critically undercapitalized 
threshold from 12 to 18 months and the insolvency threshold from 24 to 
30 months.\7\ Of the 46 credit unions that underwent an emergency 
merger since the rule was previously revised by the NCUA Board, 11 
credit unions with total assets of $812 million would have qualified 
for an emergency merger earlier under the new definition of in danger 
of insolvency. The 11 credit unions had $12 million more in net worth 
at the time the credit unions first qualified under the new definition 
compared with the 2010 definition. The $12 million additional net worth 
meant the credit unions had net worth ratios one to three percentage 
points higher.
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    \7\ This simple hypothetical forecast was used exclusively for 
purposes of analyzing emergency merger data and forecast horizons. 
It is not representative of, and does not limit, how the NCUA 
projects credit unions to meet the in danger of insolvency 
categories. The forecast of the net worth ratio uses the change in 
the net worth ratio during the most recently available four quarters 
and projects that change in net worth through the forecast horizon 
for each threshold. In other words, the NCUA calculated whether the 
credit union would fall below either of the critical thresholds 
using a simple straight line projection approach, with the projected 
rate of decline in net worth equal to the most recently available 
four-quarter change.
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    Also, the longer forecast horizon allows the NCUA to identify a 
significant number of additional potential credit union emergency 
merger candidates. The largest diagnostic improvements from extending 
the forecast horizon occur in the two quarters prior to an emergency 
merger. Instead of 31% of the credit unions estimated to be below the 
critically undercapitalized threshold within 12 months two quarters 
before the emergency merger and 50% one quarter before, 42% and 58% of 
the credit unions are estimated to be below the critically 
undercapitalized threshold within 18 months. The identification of 
these additional credit unions represent an opportunity for the NCUA to 
preserve services to members and member assets through the emergency 
merger process prior to the quarters when the net worth of these credit 
unions declines the most. As the chart below illustrates, credit union 
net worth generally declines the most in the quarters leading up to an 
emergency merger.

[[Page 60287]]

[GRAPHIC] [TIFF OMITTED] TR20DE17.003

    The data closely aligns with the views and experiences of the NCUA. 
The agency found that the 2010 definition's forecast horizons for these 
two categories could result in the unnecessary delay or even rejection 
of emergency merger requests that did not meet the 2010 regulatory 
definition of in danger of insolvency, but would otherwise meet the 
statutory criteria for an emergency merger. The NCUA believes that 
extending these forecast horizons will lessen the potential for such 
occurrences. When a credit union cannot be timely merged through an 
emergency merger and no other credit unions with compatible fields of 
membership submit a merger proposal, the NCUA must consider alternative 
and usually less desirable means of resolution. These less desirable 
means of resolution could even include the liquidation of the credit 
union. In general, merging a credit union into another institution is 
more desirable than liquidating the credit union because a merger is 
generally lower cost to the NCUSIF and provides continued and, in most 
cases, expanded service to the membership.
    The NCUA believes that the delay associated with waiting for an 
institution to deteriorate to the point where it satisfies the 2010 
regulatory definition of in danger of insolvency has too frequently 
resulted in struggling institutions being allowed to deteriorate over 
time to the point where they are no longer viable merger partners and 
have to be resolved by means that are more costly to the NCUSIF and 
more disruptive to the members. Rather than continue to operate under 
the 2010 definition, which hampered the NCUA's ability to take 
responsible supervisory action on a timely basis and ensure the safety 
and soundness of the credit union system, the Board is adopting the 
Proposal's amendments to the forecast horizons of the regulatory 
definition of in danger of insolvency to facilitate those mergers that 
satisfy the statutory requirements.
    The vast majority of commenters specifically expressed support for 
the extended forecast horizons. No commenters opposed the change. 
Commenters' reasons for supporting the extended forecast horizons 
mirrored those expressed by the NCUA in the Proposal. Commenters 
specifically stated that the change will: (1) Improve merger prospects 
as credit unions will not continue to deteriorate until they are no 
longer viable merger partners; (2) allow undercapitalized institutions, 
where merited, to sooner be eligible for emergency mergers; (3) allow 
the NCUA to act more timely to preserve credit union services, 
liquidity, and assets for the benefit of members; (4) protect the 
NCUSIF; and (5) allow for continued (and often expanded) service to the 
membership. Additionally, one commenter specifically noted that the 
desire to preserve the NCUSIF will help federally insured credit unions 
avoid additional premium cost due to NCUSIF depletion. Another 
commenter stated that because of how expensive and draining mergers are 
to the acquiring organization, particularly when there is limited 
capital remaining or the membership base has departed, earlier 
identification and action by the NCUA to preserve the capital and 
membership base will make finding a merger partner for the merging 
credit union easier.
    One commenter described how its credit union's experiences support 
the changes. The commenter stated that, as the continuing credit union, 
their members would have benefited greatly from an extra six months of 
cushion before the merging credit union deteriorated further. The 
commenter reiterated that mergers require months or years of due 
diligence and that, under the current rule, strong credit unions are 
reluctant to consider mergers with safety and soundness concerns 
because qualifying in danger of insolvency credit unions are often too 
far gone to allow sufficient time for proper due diligence. The 
commenter opined that on a few occasions they had to turn down 
emergency merger opportunities presented by the NCUA regional office

[[Page 60288]]

due to safety and soundness concerns. The commenter concluded that the 
extended forecast horizons will help ease this pressure and bring 
needed flexibility.
    Commenters' support for the extended forecast horizons and their 
description of their own real world experiences bolsters the need for 
the extended forecast horizons. As such, the Board is finalizing the 
30-month insolvency and 18-month critically undercapitalized forecast 
horizons as proposed.
    As proposed, the final rule leaves the forecast horizon for the 
third category of the current definition as is. Rather than 
establishing a time period in which credit unions are projected to 
decline to a certain point, as the other two categories do, the third 
category only allows the NCUA to find that a credit union is in danger 
of insolvency if the credit union has no reasonable prospect of 
improving its net worth from the significantly undercapitalized level 
to the adequately capitalized level in the succeeding 36 months. The 
Board believes that the forecast horizon for this category adopted in 
2010 already provides credit unions significant time to become 
adequately capitalized and is concerned that any extension to the 
forecast horizon would make it exceedingly difficult to accurately 
determine if a credit union has a reasonable possibility of returning 
its net worth to the adequately capitalized level.

C. Section 208 Assistance

    In the Proposal, the Board proposed expanding the definition of in 
danger of insolvency in the glossary to appendix B to part 701 to add a 
fourth category that provides that a credit union will satisfy the 
definition of in danger of insolvency if the credit union has been 
granted or received assistance under section 208 of the FCU Act in the 
15 months prior to the NCUA regional office making such a 
determination. Section 208 allows the Board to provide special 
assistance to credit unions to avoid liquidation. After reviewing the 
data and the comments, the Board has decided to adopt this change as 
proposed.
    In the Proposal the Board noted that, in analyzing credit union 
Call Reports and other internal NCUA data, the NCUA has found that an 
overwhelming number of credit unions that received section 208 
assistance eventually left the credit union system. Specifically, 
between the first quarter of 2001 and the fourth quarter of 2016, 181 
credit unions received at least one type of section 208 assistance. 
Since then, 165, or 91.2%, of these credit unions have stopped filing 
Call Reports.
    Further, the data shows that not only did the overwhelming majority 
of the credit unions that received section 208 assistance stop filing 
Call Reports, but did so not long after, or prior to, receiving the 
assistance. Notably, 13.9% of the total number of credit unions that 
received section 208 assistance began receiving such assistance after 
they filed their final Call Report. An additional 37.0% of these 165 
credit unions filed their final Call Report in the same quarter in 
which they first began receiving section 208 assistance. Another 41.2% 
of these credit unions filed their final Call Report within the four 
quarters after the quarter they first received section 208 assistance. 
In total, 152 of the 165 credit unions, or 92.1%, stopped filing Call 
Reports prior to or within 15 months of receiving the section 208 
assistance.

Credit Unions Receiving Section 208 Assistance--First Receipt of Section
                208 Assistance to Last Call Report Filed
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                                                        Number      %
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Same quarter.........................................        61     37.0
1 year...............................................        68     41.2
2 years..............................................         3      1.8
3 years..............................................         2      1.2
4 or more years......................................         8      4.8
Assistance began after final call report was filed...        23     13.9
                                                      ------------------
  Total..............................................       165    100.0
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    The quantitative evidence, along with the NCUA's experiences and 
observations, demonstrate that credit unions receiving section 208 
assistance within the last 15 months are in danger of insolvency for 
emergency merger purposes.
    The majority of commenters explicitly supported the proposed fourth 
category and felt the NCUA's data clearly showed that credit unions 
receiving 208 assistance are in danger of insolvency. While no 
commenter opposed the addition of the fourth category, a number did 
provide suggestions and feedback. However, much of this feedback falls 
outside the scope of this rulemaking.
    Specifically, one commenter who supported the change also argued 
that the data shows problems with 208 assistance generally and that the 
current process covers up foundational problems inherent in credit 
unions approaching insolvency. The commenter urged the NCUA to explore 
ways to either improve the success of 208 assistance or to seek more 
effective remedies to help struggling credit unions. Additionally, four 
commenters requested that the NCUA further analyze the credit unions 
that survived after receiving 208 assistance to ensure the success of 
future recipients. One of these commenters specifically asked the NCUA 
to consider whether more stringent criteria is warranted when receiving 
208 assistance. Another of these commenters recommended that the NCUA 
continue to collect and analyze the 208 assistance data. Another 
commenter specifically asked that the NCUA exhaust all efforts to 
assist credit unions receiving 208 assistance to regain strength.
    The Proposal sought comment on amendments to the in danger of 
insolvency standard for purposes of determining credit unions' 
eligibility for emergency mergers. This included whether the addition 
of the fourth category is proper. The comments received addressing 
section 208 assistance in a capacity other than its merits as an 
indication that a credit union is in danger of insolvency for emergency 
merger purposes, while generally helpful and appreciated, fall outside 
the scope of this rulemaking. However, the Board does note that the 
NCUA has previously and will continue to evaluate the 208 assistance 
program and the data the agency collects on it on an ongoing basis.
    One commenter noted the delicate balance the NCUA must strike 
between the public policy behind 208 assistance and the implementation 
of this fourth category. The commenter stressed that the in danger of 
insolvency determination should be holistic and not based solely or 
primarily on a credit union's request or acceptance of 208 assistance. 
A separate commenter supported the addition of the fourth category, but 
cautioned that adding 208 assistance to the definition could deter 
credit unions from seeking 208 assistance.
    The Board agrees that the determination that a credit union is 
eligible for an emergency merger must be made holistically rather than 
just based on a credit union's request for or acceptance of 208 
assistance. The Board reiterates that it is not proposing that every 
credit union that receives section 208 assistance, thus meeting the new 
definition of in danger of insolvency, is destined for an emergency 
merger. In fact, the Board cannot authorize an emergency merger on this 
determination alone. Credit unions to be merged on an emergency basis 
still must meet the statutory requirements that an emergency exists, 
other alternatives are

[[Page 60289]]

not reasonably available, and the public interest would be served by 
the merger.\8\ However, quantitative evidence and the NCUA's experience 
do indicate that a credit union's receipt of section 208 assistance is 
a reliable indicator of a credit union being in danger of insolvency 
and a safety and soundness concern.
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    \8\ 12 U.S.C. 1785(h).
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    For similar reasons, the Board does not believe that using section 
208 assistance to determine that a credit union is in danger of 
insolvency is likely to deter credit unions from seeking 208 
assistance. The Board's determination that an emergency merger is 
necessary is a holistic one and subject to the above strict statutory 
requirements. Further, credit unions that receive section 208 
assistance typically do so only when necessary to avoid liquidation or 
reduce risk to the NCUSIF. Whether they would potentially be part of an 
emergency merger down the line should they survive seems a minor 
concern.

D. Technical Correction

    The final rule replaces the word ``relay'' with the word ``rely'' 
as proposed. One commenter specifically supported this change.

E. Other Issues Raised by Commenters

Rigid Guidelines
    Two commenters specifically cautioned against any regime that would 
result in rigid guidelines forcing credit union mergers. One of the 
commenters cited data in the Proposal that showed that roughly 73 
credit unions that fell below two percent net worth during the last 20 
years remain active today as evidence of the need to avoid ``impos[ing] 
an inflexible, one-size-fits-all rubric to resolve financially-
challenged institutions.'' The Board understands this concern, and 
reiterates that the aim of this rulemaking is to return flexibility to 
the in danger of insolvency definition, not to force credit unions that 
meet the definition into emergency mergers. Further, credit unions are 
not forced into emergency mergers. While it is true that fledgling 
institutions may be left with limited options, including liquidation, a 
credit union's Board of Directors must consent to an emergency merger 
for it to occur.
Transparency
    One commenter argued for a more transparent emergency merger 
process. The commenter suggested prospective merger partners be fully 
apprised of important information regarding the selection process and 
have the opportunity to make their case for the merger. To increase 
transparency and guide future emergency mergers, the commenter asked 
the NCUA to provide prospective merger partners with a written 
explanation of the reasons for its decision. The emergency merger 
process is a collaborative one between the merging credit union, the 
potential acquiring credit unions, the state regulator if applicable, 
and the NCUA. The Board believes that potential acquiring credit unions 
are currently provided with a transparent view of the emergency merger 
process. Further, this rulemaking focuses on the in danger of 
insolvency definition rather than the emergency merger process 
generally. As such, this comment is beyond the scope of this rulemaking 
but nevertheless appreciated.
Impact on Small Credit Unions
    One commenter said that small credit unions' lack of resources 
often frustrates the merger process and requested the NCUA try to 
alleviate these potential issues by providing more streamlined 
procedures for merger of small institutions. The commenter noted that 
even with the increased forecast horizons, there may still be delays in 
the actual emergency merger process. The commenters did not specify how 
the procedures for emergency mergers could be streamlined to assist 
small institutions. This rulemaking relates only to the in danger of 
insolvency definition. As such, comments relating to procedures 
governing other aspects of the emergency merger process are beyond the 
scope of this rulemaking but still appreciated.
    Another commenter read the proposal's Paperwork Reduction Act and 
Regulatory Flexibility Act sections to mean that the NCUA believed the 
proposed changes focused on regulating larger credit unions and did not 
impact a significant number of smaller credit unions. The commenter 
advised the NCUA to review how the proposal will actually impact 
smaller credit unions. Specifically, the commenter suggested the NCUA 
research whether the Proposal affects small credit unions through 
evaluation forecasts, prompt corrective action, and net worth 
restoration plans. The commenter requested that the NCUA analyze and 
explain whether subjective application of the definition will 
disproportionately affect small credit unions, as examiners may be more 
likely to accept (or even push for) a forecast for small credit unions 
that reflects a danger of insolvency.
    The Proposal's Paperwork Reduction Act and Regulatory Flexibility 
Act analyses do not state that the changes to the in danger of 
insolvency definition are focused on regulating larger institutions. 
Instead, they convey that the changes do not have a significant 
economic impact on a substantial number of small credit unions and do 
not require additional information collection requirements. The 
analyses state that the proposed amendments instead are intended to 
return flexibility to the NCUA in making the in danger of insolvency 
determination.
Other
    One commenter was particularly concerned that the NCUA ``emphasize 
and uphold the importance and viability of the credit union charter.'' 
The commenter said the NCUA has a dual obligation to preserve and 
protect the NCUSIF and the federal credit union system. The commenter 
stressed the value federal credit union charters hold and asserted that 
while a strong emphasis on finances is important in the emergency 
merger context, a more holistic evaluation that includes the three 
other statutory criteria should be incorporated to preserve the value 
of FCU charters.
    The Board appreciates its responsibility to serve both as the 
charterer and prudential regulator of federal credit unions and the 
insurer of all federally insured credit unions. As the Board has noted 
both in the Proposal and above, it appreciates that the emergency 
merger evaluation is a holistic one that, in addition to the insolvent 
or in danger of insolvency determination, includes the Board's 
determination that the credit union meets the three other statutory 
criteria that: Exigent circumstances exist; there are no other 
reasonable alternatives available; and the emergency merger is in the 
public interest.\9\ To reiterate, this final rule is not intended to 
encourage more emergency mergers or promote consolidation, but to 
return some flexibility to the definition of in danger of insolvency so 
that credit unions that are in fact in danger of insolvency can become 
eligible for an emergency merger.
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    \9\ Id.
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    Another commenter suggested that ``the Board consider standardizing 
timeframes contained both within this final rule as well as throughout 
all regulations relative to capitalization and net worth.'' The 
commenter noted that for risk-based capital purposes, the NCUA uses a 
24-month look-back period and that for the in danger of insolvency 
determination the timelines would now be: 30 months for the

[[Page 60290]]

insolvency category; 18 months for the critically undercapitalized 
category; 36 months for the significantly undercapitalized category; 
and 15 months for the proposed 208 assistance category. The commenter 
said that while it ``supports the extensions and additions suggested in 
the proposed rule, it is recommended that a holistic view of look-back 
and forecast timeframes is important and suggests that standardization 
of such timeframes may assist the industry.'' The Board does not 
necessarily agree that standardization of timeframes across NCUA's 
regulations relative to capitalization and net worth is desirable or 
would benefit credit unions. Further, the Board believes this comment 
to beyond the scope of this rulemaking.

IV. Regulatory Procedures

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act requires the NCUA to prepare an 
analysis of any significant economic impact a regulation may have on a 
substantial number of small entities (primarily those under $100 
million in assets).\10\ This final rule merely provides the NCUA 
greater flexibility to authorize emergency mergers and will not have a 
significant economic impact on a substantial number of small credit 
unions. Accordingly, the NCUA certifies that the final rule will not 
have a significant economic impact on a substantial number of small 
credit unions.
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    \10\ 5 U.S.C. 603(a).
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B. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (PRA) applies to rulemakings in 
which an agency creates new or amends existing information collection 
requirements.\11\ For the purpose of the PRA, an information collection 
requirement may take the form of a reporting, recordkeeping, or a 
third-party disclosure requirement. The final rule does not contain 
information collection requirements that require approval by OMB under 
the PRA.\12\ The final rule will merely provide the NCUA greater 
flexibility to authorize emergency mergers.
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    \11\ 44 U.S.C. 3507(d); 5 CFR part 1320.
    \12\ 44 U.S.C. chap. 35.
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C. Executive Order 13132

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

D. Assessment of Federal Regulations and Policies on Families

    The NCUA has determined that this final rule will not affect family 
well-being within the meaning of Section 654 of the Treasury and 
General Government Appropriations Act, 1999.\13\
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    \13\ Public Law 105-277, 112 Stat. 2681 (1998).
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E. Small Business Regulatory Enforcement Fairness Act

    The Small Business Regulatory Enforcement Fairness Act of 1996 
(Pub. L. 104-121) (SBREFA) provides generally for congressional review 
of agency rules. A reporting requirement is triggered in instances 
where the NCUA issues a final rule as defined by Section 551 of the 
Administrative Procedure Act. The NCUA does not believe this final rule 
is a ``major rule'' within the meaning of the relevant sections of 
SBREFA. As required by SBREFA, the NCUA has filed the appropriate 
reports so that this final rule may be reviewed.

List of Subjects in 12 CFR Part 701

    Credit, Credit unions, Reporting and recordkeeping requirements.

    By the National Credit Union Administration Board on December 
14, 2017.
Gerard Poliquin,
Secretary of the Board.

    For the reasons discussed above, the NCUA Board amends 12 CFR part 
701 as follows:

PART 701--ORGANIZATION AND OPERATION OF FEDERAL CREDIT UNIONS

0
1. The authority citation for part 701 is revised to read as follows:

    Authority:  12 U.S.C. 1752(5), 1755, 1756, 1757, 1758, 1759, 
1761a, 1761b, 1766, 1767, 1782, 1784, 1785, 1786, 1787, 1788, 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.


0
2. In appendix B to part 701, in the glossary, revise the definition of 
``in danger of insolvency'' to read as follows:

Appendix B to Part 701--Chartering and Field of Membership Manual

* * * * *
    In danger of insolvency--In making the determination that a 
particular credit union is in danger of insolvency, NCUA will 
establish that the credit union falls into one or more of the 
following categories:
    1. The credit union's net worth is declining at a rate that will 
render it insolvent within 30 months. In projecting future net 
worth, NCUA may rely on data in addition to Call Report data. The 
trend must be supported by at least 12 months of historic data.
    2. The credit union's net worth is declining at a rate that will 
take it under two percent (2%) net worth within 18 months. In 
projecting future net worth, NCUA may rely on data in addition to 
Call Report data. The trend must be supported by at least 12 months 
of historic data.
    3. The credit union's net worth, as self-reported on its Call 
Report, is significantly undercapitalized, and NCUA determines that 
there is no reasonable prospect of the credit union becoming 
adequately capitalized in the succeeding 36 months. In making its 
determination on the prospect of achieving adequate capitalization, 
NCUA will assume that, if adverse economic conditions are affecting 
the value of the credit union's assets and liabilities, including 
property values and loan delinquencies related to unemployment, 
these adverse conditions will not further deteriorate.
    4. The credit union has been granted or received assistance 
under section 208 of the Federal Credit Union Act, 12 U.S.C. 1788, 
in the 15 months prior to the Region's determination that the credit 
union is in danger of insolvency.
* * * * *
[FR Doc. 2017-27410 Filed 12-19-17; 8:45 am]
 BILLING CODE 7535-01-P