[Federal Register Volume 84, Number 104 (Thursday, May 30, 2019)]
[Proposed Rules]
[Pages 25018-25022]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-11296]
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NATIONAL CREDIT UNION ADMINISTRATION
12 CFR Parts 701 and 741
RIN 3313-AF00
Public Unit and Nonmember Shares
AGENCY: National Credit Union Administration (NCUA).
ACTION: Proposed rule.
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SUMMARY: The NCUA Board (Board) is proposing to amend the NCUA's public
unit and nonmember share rule to allow Federal credit unions (FCU) to
receive public unit and nonmember shares up to 50 percent of the credit
union's paid-in and unimpaired capital and surplus less any public unit
and nonmember shares.
DATES: Comments must be received by July 29, 2019.
ADDRESSES: You may submit comments by any of the following methods
(Please send comments by one method only):
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
NCUA website: http://www.ncua.gov/RegulationsOpinionsLaws/proposed_regs/proposed_regs.html. Follow the instructions for
submitting comments.
Email: Address to [email protected]. Include ``[Your
name] Comments on Public Unit and Nonmember Shares Proposed Rule'' 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.
Public inspection: All public comments are available on the
agency's website at http://www.ncua.gov/RegulationsOpinionsLaws/comments as submitted, except as may not be possible for technical
reasons. Public comments will not be edited to remove any identifying
or contact information. Paper copies of comments may be inspected 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) 518-6540 or send an email to [email protected].
FOR FURTHER INFORMATION CONTACT: Benjamin M. Litchfield, Staff
Attorney, Office of General Counsel, 1775 Duke Street, Alexandria,
Virginia 22314, or by telephone at (703) 518-6540.
SUPPLEMENTARY INFORMATION:
I. Background
II. Legal Authority
III. Summary of the Proposed Rule
IV. Section-by-Section Analysis
V. Regulatory Procedures
I. Background
Section 107(6) of the Federal Credit Union Act (FCU Act) permits an
FCU to receive payment on shares from nonmembers under certain
circumstances.\1\ An FCU may receive payment on shares from nonmember
credit unions.\2\ An FCU may also receive payment on shares from
nonmember public units and their political subdivisions.\3\ The term
``public unit'' generally refers to ``the United States, any state of
the United States, the District of Columbia, the Commonwealth of Puerto
Rico, the Panama Canal Zone, any territory or possession of the United
States, any county, municipality, or political subdivision thereof, or
any Indian tribe as defined in section 3(c) of the Indian Financing Act
of 1974.'' \4\
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\1\ 12 U.S.C. 1757(6).
\2\ Id.
\3\ Id.
\4\ 12 CFR 745.1(c).
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Moreover, an FCU that predominantly serves low-income members may
[[Page 25019]]
receive payment on shares from any source regardless of membership.\5\
Section 701.34 of the NCUA's regulations defines a ``low-income
member'' as, among other things, a member ``whose family income is 80
[percent] or less than the median family income for the metropolitan
area where [the member] live[s] or [the] national metropolitan area,
whichever is greater.'' \6\ Alternatively, a ``low-income member'' is a
member ``who earn[s] 80 [percent] or less than the total median
earnings for individuals for the metropolitan area where [the member]
live[s] or [the] national metropolitan area, whichever is greater.''
\7\
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\5\ 12 U.S.C. 1757(6).
\6\ 12 CFR 701.34(a)(2).
\7\ Id.
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Section 701.32 of the NCUA's regulations limits the total amount of
nonmember shares that an FCU may have to 20 percent of the credit
union's total shares, or $3 million, whichever is greater, unless the
shares are U.S. Treasury accounts or matching funds accounts required
by the NCUA's Community Development Revolving Loan Fund Program.\8\
This limit also applies to public unit shares regardless of whether the
public unit is a member of the credit union. The Board imposed this 20
percent limitation on both member public unit and nonmember shares
because of the asset/liability management problems related to public
unit and nonmember shares that arose at certain FCUs, which resulted in
material losses for the National Credit Union Share Insurance Fund
(NCUSIF).\9\
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\8\ 12 CFR 701.32(b), (c).
\9\ See Nonmember and Public Unit Accounts, 53 FR 50918 (Dec.
19, 1988).
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Regulatory Reform Agenda
Consistent with the spirit of Executive Order 13777, entitled
``Enforcing the Regulatory Reform Agenda,'' \10\ the Board established
a Regulatory Reform Task Force (Task Force) to identify NCUA
regulations that the agency should repeal, replace, or modify. The Task
Force performed an exhaustive review and submitted its first report to
the Board in June 2017. In August 2017, the Board published the
substance of the Task Force's first report in the Federal Register for
public comment.\11\ After the close of the public comment period, the
Board published the Task Force's second and final report in the Federal
Register in December 2018.\12\
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\10\ See Enforcing the Regulatory Reform Agenda, E.O. 13777, 82
FR 12285 (Mar. 1, 2017).
\11\ See Regulatory Reform Agenda, 82 FR 39702 (Aug. 22, 2017).
\12\ See Regulatory Reform Agenda, 83 FR 65926 (Dec. 21, 2018).
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The Task Force's final report recommends that the Board increase
the public unit and nonmember share limit in Sec. 701.32 of the NCUA's
regulations.\13\ The Task Force stated that public unit and nonmember
shares are the functional equivalent of borrowings and, therefore,
should be subject to the borrowing limit for FCUs set out in the FCU
Act. Section 107(9) of the FCU Act permits an FCU to borrow from any
source up to 50 percent of the credit union's paid-in and unimpaired
capital and surplus subject to such rules and regulations as the Board
may prescribe.\14\ However, this limitation does not apply to discounts
or sales of eligible obligations to any Federal intermediate credit
bank or loans from the Central Liquidity Facility.\15\ The proposed
rule implements the essence of the Task Force's recommendation.
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\13\ 12 CFR 701.32.
\14\ 12 U.S.C. 1757(9).
\15\ Id. For rules governing loans from the Central Liquidity
Facility see 12 CFR 725.
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II. Legal Authority
The Board has issued this proposed rule pursuant to its authority
under the FCU Act. Under the FCU Act, the NCUA is the chartering and
supervisory authority for FCUs and the Federal supervisory authority
for FICUs.\16\ The FCU Act grants the NCUA a broad mandate to issue
regulations governing both FCUs and all FICUs. Section 120 of the FCU
Act is a general grant of regulatory authority and authorizes the Board
to prescribe rules and regulations for the administration of the FCU
Act.\17\ Section 207 of the FCU Act is a specific grant of authority
over share insurance coverage, conservatorships, and liquidations.\18\
Section 209 of the FCU Act is a plenary grant of regulatory authority
to the Board to issue rules and regulations necessary or appropriate to
carry out its role as share insurer for all FICUs.\19\ Accordingly, the
FCU Act grants the Board broad rulemaking authority to ensure that the
credit union industry and the NCUSIF remain safe and sound.
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\16\ 12 U.S.C. 1752-1775.
\17\ 12 U.S.C. 1766(a).
\18\ 12 U.S.C. 1787(b)(1).
\19\ 12 U.S.C. 1789(a)(11).
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III. Summary of the Proposed Rule
The proposed rule amends Sec. 701.32 of the NCUA's regulations to
allow an FCU to receive payment on shares from public unit and
nonmember shares up to 50 percent of the credit union's paid-in and
unimpaired capital and surplus less any public unit and nonmember
shares from public units and nonmembers without requesting a waiver
from the appropriate regional director. As discussed below, the
proposed rule does not allow a waiver process for an FCU to exceed this
50 percent limit as a matter of safety and soundness. The proposed rule
also requires an FCU to develop and maintain a written plan if its
public unit and nonmember shares, taken together with borrowings,
exceed 70 percent of paid-in and unimpaired capital and surplus.
Finally, the proposed rule makes conforming amendments to Sec.
741.204, which applies to all FICUs, to reflect the changes to Sec.
701.32.
IV. Section-by-Section Analysis
Section 701.32(b)--Limitations
Current Sec. 701.32(b) limits the amount of public unit and
nonmember shares that an FCU may have to 20 percent of total shares, or
$3 million dollars, whichever is greater, and sets forth procedures
that an FCU must follow if it wishes to receive from the appropriate
regional director a waiver to accept additional public unit or
nonmember shares.
Before accepting any public unit or nonmember shares in excess of
20 percent of total shares, the credit union's board of directors
``must adopt a specific written plan concerning the intended use of
these shares and forward a copy of the plan to the [r]egional
[d]irector.'' \20\ The plan must include a ``statement of the credit
union's needs, sources and intended uses of public unit and nonmember
shares.'' \21\ The plan must also make provision for ``matching
maturities of public unit and nonmember shares with corresponding
assets'' and ``adequate income spread between public unit and nonmember
shares and corresponding assets.'' \22\ If there is any mismatch
between maturities of public unit and nonmember shares with
corresponding assets, the credit union must justify the mismatch.\23\
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\20\ 12 CFR 701.32(b)(2).
\21\ 12 CFR 701.32(b)(2)(i).
\22\ 12 CFR 701.32(b)(2)(ii) and (iii).
\23\ 12 CFR 701.32(b)(2)(ii).
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In addition to the written plan adopted by the FCU's board of
directors, the FCU also must submit a written request for a waiver of
the 20 percent limit to the appropriate regional director.\24\ The
waiver request must include: (1) The new level of public unit and
nonmember shares requested (either as a dollar amount or a percentage
of total shares); (2) the current plan adopted by the FCU's board of
directors regarding the use of new public unit and nonmember shares;
(3) a copy of the
[[Page 25020]]
FCU's latest financial statements; and (4) a copy of the FCU's loan and
investment policies.\25\ If the FCU's financial condition and
management are sound, and the credit union's plan for the funds is
reasonable, Sec. 701.32 establishes a presumption in favor of granting
a waiver.\26\
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\24\ 12 CFR 701.32(b)(3).
\25\ 12 CFR 701.32(b)(3)(i) through (iv).
\26\ 12 CFR 701.32(b)(4).
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The regional director will typically grant a waiver for a two-year
period unless the regional director believes that a lesser time is
appropriate.\27\ Upon expiration of the waiver, the NCUSIF will
continue to insure public unit and nonmember shares currently held in
the FCU within applicable limits.\28\ However, an FCU may not accept
any new public unit or nonmember shares or rollover existing public
unit or nonmember share certificates in excess of the 20 percent of
total shares limit.\29\
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\27\ Id.
\28\ 12 CFR 701.32(b)(6). See 12 CFR 745 on share insurance
limits.
\29\ Id.
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The 20 percent total shares limit and the procedures set out in
Sec. 701.32(b) do not apply to treasury tax and loan (TT&L) remittance
accounts, TT&L note accounts, U.S. Treasury general accounts, and U.S.
Treasury time deposit-open accounts, which are all subject to the
requirements of Sec. 701.37 of the NCUA's regulations.\30\ Section
701.32 also does not apply to matching fund accounts required by the
NCUA's Community Development Revolving Loan Program unless the credit
union has already repaid the loan granted under that program that
required matching funds.\31\
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\30\ 12 CFR 701.32(c). See 12 CFR 701.37.
\31\ Id. For information on the Community Development Revolving
Loan Program, see 12 CFR 705.
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Aggregate Limit on Public Unit and Nonmember Shares
The proposed rule simplifies the current regulatory framework in
Sec. 701.32(b). In establishing the 20 percent of total shares limit
in current Sec. 701.32(b), the Board relied heavily on industry
practices in 1988.\32\ The credit union industry has undergone
significant changes in the intervening 31 years since this limit was
adopted, including credit unions' growing need for additional sources
of funding to serve their members. To respond to these changes, the
proposed rule increases the current 20 percent of total shares limit to
50 percent of paid-in and unimpaired capital and surplus less any
public unit and nonmember shares.
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\32\ 53 FR 50918, 50919 (Dec. 19, 1988).
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The change in standard from ``total shares'' to ``paid-in and
unimpaired capital and surplus less any public unit and nonmember
shares'' provides credit unions with greater ability to accept public
unit and nonmember deposits because undivided earnings are included in
the measurement of a credit union's paid-in and unimpaired capital and
surplus. The proposed rule does not include public unit and nonmember
shares in the calculation of its unimpaired capital and surplus for
purposes of this 50 percent limit. This restriction provides a
meaningful limit on the ability of a credit union to increase its
leverage indefinitely, which could pose a clear risk to credit unions
and the NCUSIF. The Board believes that this balanced approach provides
an FCU with greater flexibility to determine an appropriate funding
structure to support ongoing credit union operations in a prudent
manner.
While the Board recognizes that public unit and nonmember shares
are unique in some respects, particularly with respect to their
sensitivity to interest rate fluctuations,\33\ these shares are in many
other respects the functional equivalent of other types of short-term
borrowings. Accordingly, the Board believes that allowing an FCU to
receive public unit and nonmember shares up to 50 percent of paid-in
and unimpaired capital and surplus, less any public unit and nonmember
shares, similar to the borrowing limit set out in Section 107(9) of the
FCU Act, is a preferable approach to the current 20 percent of total
shares limit set out in Sec. 701.32(b). The Board also believes that
the proposed 50 percent of paid-in and unimpaired capital and surplus
less any public unit and nonmember shares regulatory limit is
sufficiently high that an alternative $3 million dollar limit will be
unnecessary.
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\33\ Id.
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However, the Board is aware that some small FCUs, particularly low-
income credit unions that rely on large volumes of nonmember shares as
a necessary source of funding or newly chartered credit unions, may be
adversely impacted by the elimination of the $3 million dollar limit.
Consequently, the Board seeks specific comments on whether it should
retain the $3 million dollar limit or provide a special exemption for
small low-income credit unions that demonstrate a need for large
volumes of nonmember shares above the 50 percent paid-in and unimpaired
capital and surplus limit and for newly chartered credit unions. The
Board is actively considering these alternatives and may adopt one of
these approaches based on the persuasiveness of the comments.
Because an FCU may currently borrow up to 50 percent of paid-in and
unimpaired capital and surplus under Section 107(9) of the FCU Act, the
Board believes that providing credit unions with the proposed ability
to accept a comparable amount of public unit and nonmember shares will
not present an undue risk to credit unions or the NCUSIF. The Board
recognizes that in some instances public unit and nonmember shares can
be a more stable and cost-effective source of funding than borrowing.
Additionally, public unit and nonmember shares have other benefits for
credit unions and their communities, such as developing or enhancing an
FCU's relationship with political subdivisions, public units, or in the
case of low-income designated credit unions, other charitable or
economic development organizations.
However, the Board notes that an FCU should continue to manage its
balance sheet in a prudent manner. The NCUA will continue to review an
FCU's business model and asset-liability management to ensure the
credit union is operating in a safe and sound manner. Unsafe or unsound
funding sources or utilization of funds in an unsafe and unsound manner
may affect an FCU's CAMEL and risk ratings even if the credit union is
within the aggregate 50 percent limit.
Waiver From the Appropriate Regional Director
The proposed rule also eliminates the procedures that an FCU must
follow to obtain a waiver from its appropriate regional director.
Although the Board seeks to provide FCUs with greater flexibility, it
also believes that the NCUA should not allow an FCU to have public unit
and nonmember shares in excess of 50 percent of paid-in and unimpaired
capital and surplus less any public unit and nonmember shares. Allowing
an FCU to exceed this limit could lead to safety and soundness concerns
and unnecessary risk for the NCUSIF. As a result, the proposed rule
does not establish a procedure for an FCU to request a waiver of the
proposed aggregate 50 percent limit.
Requirement To Maintain a Plan Regarding Use of Funds
Furthermore, the proposed rule modifies key safeguards in current
Sec. 701.32(b) designed to ensure that an FCU's board of directors
conducts adequate due diligence before receiving payment on a
significant amount of public unit and nonmember shares. Under the
proposed rule, an FCU must
[[Page 25021]]
develop and maintain for review by NCUA examiners a specific plan
regarding the intended use of any borrowings, public unit, or nonmember
shares that, taken together, exceed 70 percent of the credit union's
paid-in and unimpaired capital and surplus. The proposed rule does not
require FCUs to submit the plans to the NCUA for prior approval.
This approach provides an FCU with significant flexibility to adopt
a prudent funding structure without the regulatory burden of developing
a plan regarding the intended use of those funds unless the credit
union borrows a significant amount of funds or accepts a significant
number of public unit and nonmember shares. Requiring a plan for
material levels of external funding sources is prudent due diligence
and the Board expects FCUs that accept elevated levels of public unit
and nonmember shares to document how the credit union will use those
funds consistent with prudent risk management principles.
Even though the Board expects that most FCUs will not need to
develop a specific plan regarding the use of external funds under the
proposed rule, it still believes that an FCU should continue to manage
its balance sheet in a prudent manner. As noted above, the NCUA will
continue to review an FCU's business model and asset-liability
management to ensure the FCU is operating in a safe and sound manner.
Unsafe or unsound funding sources or utilization of funds in an unsafe
and unsound manner may affect a credit union's CAMEL and risk ratings
and could result in regulatory action.
V. Regulatory Procedures
Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) \34\ requires the NCUA to
prepare an analysis to describe any significant economic impact a
regulation may have on a substantial number of small entities
(primarily those under $100 million in assets).\35\ This rule will
provide a limited number of FCUs receiving public unit and nonmember
share with additional flexibility. Accordingly, the Board believes that
the rule will not have a significant economic impact on a substantial
number of small credit unions. Therefore, a regulatory flexibility
analysis is not required.
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\34\ 5 U.S.C. 601 et seq.
\35\ 5 U.S.C. 603(a).
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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 modifies an existing burden. For purposes of the PRA, a
paperwork burden may take the form of a reporting, disclosure, or
recordkeeping requirement, each referred to as an information
collection. The NCUA may not conduct or sponsor, and the respondent is
not required to respond to, an information collection unless it
displays a currently valid Office of Management and Budget (OMB)
control number.
This rule will amend Sec. 701.32 to eliminate the wavier
requirements for those seeking an exemption to the current 20 percent
limit of the total amount of nonmember shares that an FCU may issue;
due to the proposed increased limit of 50 percent, with no exceptions
to this limit. This will eliminate the existing burden to submit a
waiver.
Under the proposed rule, a credit union must develop a specific
plan regarding the intended use of any borrowings, public unit, or
nonmember shares that, taken together, exceed 70 percent of the credit
union's paid-in and unimpaired capital and surplus. The increased limit
of public unit and nonmember shares could potentially see an increase
in the number of respondents required to develop a plan from 20 to 50
FICUs at an estimated burden of 2 hours to comply annually, per
respondent.
These program changes would revise the information collection
requirement under currently approved OMB number 3133-0114, as follows:
Title of Information Collection: Payments on Shares by Public Units
and Nonmembers, 12 CFR 701.32.
OMB Control Number: 3133-0114.
Estimated Number of Respondents: 50.
Estimated Annual Frequency of Response: 1.
Estimated Total Annual Reponses: 50.
Estimated Hours per Response: 2.
Estimated Total Annual Burden Hours: 100.
Affected Public: Private Sector: Not-for-profit institutions.
The NCUA invites comments on: (a) Whether the collections of
information are necessary for the proper performance of the agency's
functions, including whether the information has practical utility; (b)
the accuracy of the estimates of the burden of the information
collections, including the validity of the methodology and assumptions
used; (c) ways to enhance the quality, utility, and clarity of the
information to be collected; (d) ways to minimize the burden of the
information collections on respondents, including through the use of
automated collection techniques or other forms of information
technology; and (e) estimates of capital or start-up costs and costs of
operation, maintenance, and purchase of services to provide
information.
All comments are a matter of public record. Comments regarding the
information collection requirements of this rule should be sent to (1)
Dawn Wolfgang, NCUA PRA Clearance Officer, National Credit Union
Administration, 1775 Duke Street, Alexandria, Virginia 22314, or Fax
No. 703-519-8572, or Email at [email protected] and the (2) Office
of Information and Regulatory Affairs, Office of Management and Budget,
Attention: Desk Officer for NCUA, New Executive Office Building, Room
10235, Washington, DC 20503, or email at OIRA_Submission,@OMB.EOP.gov.
Executive Order 13132
Executive Order 13132 encourages independent regulatory agencies to
consider the impact of their actions on state and local interests.\36\
The 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. The proposed rule will not have
substantial direct effects on the states, on the relationship between
the national government and the states, or on the distribution of power
and responsibilities among the various levels of government. The Board
has therefore determined that this proposed rule does not constitute a
policy that has federalism implications for purposes of the executive
order.
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\36\ 64 FR 43255 (Aug. 4, 1999).
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Assessment of Federal Regulations and Policies on Families
The 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 701
Credit unions, Nonmember accounts, Public units.
12 CFR Part 741
Bank deposit insurance, Credit unions, Reporting and recordkeeping
requirements.
[[Page 25022]]
By the National Credit Union Administration Board on May 23,
2019.
Gerard S. Poliquin,
Secretary of the Board.
For the reasons stated above, NCUA proposes to amend 12 CFR parts
701 and 741 as follows:
PART 701--ORGANIZATION AND OPERATION OF FEDERAL CREDIT UNIONS
0
1. The authority 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, 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. Revise Sec. 701.32(b) to read as follows:
Sec. 701.32 Payment on shares by public units and nonmembers.
* * * * *
(b) Limitations--(1) Aggregate limit on public unit and nonmember
shares. Except as permitted under paragraph (c) of this section, a
Federal credit union may not accept public unit and nonmember shares in
excess of 50 percent of the difference of paid-in and unimpaired
capital and surplus and any public unit and nonmember shares, as
measured at the time of acceptance of each public unit or nonmember
share.
(2) Required due diligence. Before accepting public unit or
nonmember shares that, taken together with any borrowings, exceed 70
percent of paid-in and unimpaired capital and surplus, the board of
directors must adopt a specific written plan concerning the intended
use of these funds that is consistent with prudent risk management
principles.
* * * * *
PART 741--REQUIREMENTS FOR INSURANCE
0
3. The authority for part 741 continues to read as follows:
Authority: 12 U.S.C. 1757, 1766(a), 1781-1790, and 1790d; 31
U.S.C. 3717.
0
4. Revise Sec. 741.204(a) to read as follows:
Sec. 741.204 Maximum public unit and nonmember accounts, and low-
income designation.
* * * * *
(a) Adhere to the requirements of Sec. 701.32 of this chapter
regarding public unit and nonmember accounts, provided it has the
authority to accept such accounts.
* * * * *
[FR Doc. 2019-11296 Filed 5-29-19; 8:45 am]
BILLING CODE 7535-01-P