[Federal Register Volume 86, Number 34 (Tuesday, February 23, 2021)]
[Rules and Regulations]
[Pages 10729-10731]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-01399]


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NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 704

RIN 3133-AF13


Corporate Credit Unions

AGENCY: National Credit Union Administration (NCUA).

ACTION: Final rule.

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SUMMARY: The NCUA Board (Board) is issuing a final rule that amends the 
NCUA's corporate credit union regulation. The final rule updates the 
definitions in this regulation and makes clear that corporate credit 
unions may purchase subordinated debt instruments issued by natural 
person credit unions. The final rule also specifies the capital 
treatment of these instruments for corporate credit unions that 
purchase them.

DATES: The final rule is effective January 1, 2022.

FOR FURTHER INFORMATION CONTACT: Policy and Analysis: Robert Dean, 
National Supervision Analyst, Office of National Examinations and 
Supervision, (703) 518-6652; Legal: Rachel Ackmann, Senior Staff 
Attorney, Office of General Counsel, (703) 548-2601; or by mail at 
National Credit Union Administration, 1775 Duke Street, Alexandria, VA 
22314.

SUPPLEMENTARY INFORMATION: 

I. Introduction

a. Legal Authority and Background

    The Board is issuing this rule pursuant to its authority under the 
Federal Credit Union Act (FCU Act).\1\ Under the FCU Act, the NCUA is 
the chartering and supervisory authority for Federal credit unions 
(FCUs) and the federal supervisory authority for federally insured 
credit unions (FICUs). The FCU Act grants the NCUA a broad mandate to 
issue regulations governing both FCUs and FICUs. Section 120 of the FCU 
Act is a general grant of regulatory authority and authorizes the Board 
to prescribe regulations for the administration of the FCU Act.\2\ 
Section 209 of the FCU Act is a plenary grant of regulatory authority 
to the NCUA to issue regulations necessary or appropriate to carry out 
its role as share insurer for all FICUs.\3\ The FCU Act also includes 
an express grant of authority for the Board to subject federally 
chartered central, or corporate, credit unions to such rules, 
regulations, and orders as the Board deems appropriate.\4\
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    \1\ 12 U.S.C. 1751 et seq.
    \2\ 12 U.S.C. 1766(a).
    \3\ 12 U.S.C. 1789.
    \4\ 12 U.S.C. 1766(a).
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    Part 704 of the NCUA's regulations implements the requirements of 
the FCU Act regarding corporate credit unions.\5\ In 2010, the Board 
comprehensively revised the regulations governing corporate credit 
unions to provide longer-term structural enhancements to the corporate 
system in response to the financial crisis of 2007-2009.\6\ The 
provisions of the 2010 rule successfully stabilized the corporate 
system and improved corporate credit unions' ability to function and 
provide services to natural person credit unions. Since 2010, and as 
part of the Board's continuous reevaluation of its regulation of 
corporate credit unions, the Board has amended part 704 on several 
occasions.\7\ In 2017, the Board amended corporate credit union capital 
standards to change the calculation of capital after a consolidation 
and to set a retained earnings ratio target in meeting prompt 
corrective action (commonly referred to as PCA) standards.\8\ In 
October 2020, the Board issued a final rule to amend several provisions 
relating to corporate credit union investments in credit union service 
organizations (CUSOs) and other provisions relating to corporate credit 
union governance and technical matters, as discussed in the following 
sections.
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    \5\ 12 CFR part 704.
    \6\ 75 FR 64786 (Oct. 20, 2010).
    \7\ See e.g., 80 FR 25932 (May 6, 2015), 80 FR 57283 (Sept. 23, 
2015), and 82 FR 55497 (Nov. 22, 2017).
    \8\ 82 FR 55497 (Nov. 22, 2017).
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b. February 2020 Proposed Rule on Part 704

    On February 20, 2020, the Board approved a notice of proposed 
rulemaking to update, clarify, and simplify several provisions of part 
704 (proposed rule).\9\ The proposed rule provided for a 60-day comment 
period, which the Board later extended by 60 days because of COVID-
19.\10\ The comment period ended on July 27, 2020.
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    \9\ 85 FR 17288 (Mar. 27, 2020).
    \10\ 85 FR 20431 (Apr. 13, 2020).
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c. October 2020 Final Rule on Part 704

    The NCUA received 35 comment letters on the proposed rule. Comments 
were received from credit unions, both corporate and natural persons, 
credit union leagues and trade associations, individuals, corporate 
CUSOs, and an association of state credit union supervisors. In October 
2020, the Board issued a final rule that: (1) Permits a corporate 
credit union to make a minimal investment in a CUSO without the CUSO 
being classified as a corporate CUSO and subject to heightened NCUA 
oversight; (2) expands the categories of senior staff positions at 
member credit unions eligible to serve on a corporate credit union's 
board; (3) removes the experience and independence requirement for a 
corporate credit union's enterprise risk management expert; (4) 
clarifies the definition of a collateralized debt obligation; and (5) 
simplifies the requirement for net interest income modeling.\11\
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    \11\ 85 FR 71817 (Nov. 12, 2020).
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    The October 2020 final rule deferred final action on the provisions 
in the proposed rule that addressed the permissibility and capital 
treatment for corporate credit union purchases of subordinated debt 
instruments under the Board's January 2020 proposed rule on 
subordinated debt.\12\ In the October 2020 final rule, the Board 
discussed the comments on this part of the proposed rule and noted that 
the commenters that addressed these provisions all supported them. The 
Board did not adopt the provisions at that time because it had not yet 
finalized the January 2020 proposed rule on subordinated debt.
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    \12\ 85 FR 13982 (Mar. 10, 2020).
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d. Final Rule on Subordinated Debt

    The Board has now adopted the January 2020 proposed rule on 
subordinated debt as final.\13\ These

[[Page 10730]]

changes include a reduction in the duration of required pro forma 
financial statements from five to two years, an adjustment to the 
definition of Accredited Investor, an increase in the expiration to 
issue period from one year to two years, clarifying the territorial 
restrictions on issuances, and clarifying when the Board will publish a 
fee schedule. The Board notes that none of these changes impact its 
rationale for requiring corporate credit unions to deduct natural 
person subordinated debt instruments. Therefore, the Board is now 
adopting the amendments that it proposed to the corporate credit union 
regulation in the February 2020 proposed rule.
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    \13\ See, https://www.ncua.gov/files/agenda-items/AG20201217Item5b.pdf.
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II. This Final Rule

Natural Person Credit Union Subordinated Debt Instruments

    As discussed previously, in January 2020, the Board issued a 
proposed rule to permit low-income designated credit unions, complex 
credit unions, and new credit unions to issue subordinated debt 
instruments for purposes of regulatory capital treatment.\14\ 
Subsequently, in the February 2020 proposed rule on corporate credit 
unions, the Board proposed to address whether corporate credit unions 
may purchase such instruments and, if so, the treatment of the 
investments under part 704. In the October 2020 final rule on part 704, 
the Board discussed and analyzed the comments it received on this part 
of the February 2020 proposed rule but deferred final action in order 
to coordinate it with the final rule on subordinated debt. Because the 
Board has now issued the final rule on subordinated debt without any 
changes that affect the proposed revisions to part 704 on which the 
Board already solicited and received public comment, the Board is now 
also finalizing the proposed changes to part 704.
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    \14\ Id.
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    The February 2020 proposed rule created a new definition for the 
term natural person credit union subordinated debt instrument. The 
proposed rule defined a natural person credit union subordinated debt 
instrument as any debt instrument issued by a natural person credit 
union that is subordinate to all other claims against the credit union, 
including the claims of creditors, shareholders, and either the 
National Credit Union Share Insurance Fund (NCUSIF) or the insurer of a 
privately insured credit union. This definition is designed to include 
all instruments issued under the authority of the subordinated debt 
rule. No commenters to the February 2020 proposed rule objected to this 
proposed definition. Now that the Board has finalized the subordinated 
debt proposed rule without substantial changes from its proposed form, 
the Board is now adopting this proposed definition in part 704.
    The February 2020 proposed rule also clarified that corporate 
credit unions may purchase the natural person credit union subordinated 
debt instruments. This authority is derived from their lending 
authority because subordinated debt instruments are issued under a 
natural person credit union's borrowing authority. Additionally, 
natural person credit unions are also permitted, subject to various 
restrictions and limits, to purchase such subordinated debt instruments 
from other natural person credit unions under their lending authority. 
Treating the purchase of such subordinated debt instruments as lending 
ensures consistent treatment between natural person credit unions and 
corporate credit unions. The Board is not making any amendment to the 
regulatory text in part 704 to this effect because corporate credit 
unions' current lending authority is sufficiently broad to include 
purchasing subordinated debt instruments. However, the Board reiterates 
that these purchases are permissible to avoid doubt.
    In addition, the February 2020 proposed rule included a requirement 
for a corporate credit union to fully deduct the amount of the 
subordinated debt instrument from its Tier 1 capital to ensure 
consistent treatment between investments in the capital of other 
corporate credit unions and natural person credit unions. Under the 
current regulation, corporate credit unions are currently required to 
deduct from Tier 1 capital any investments in perpetual contributed 
capital and nonperpetual capital accounts that are maintained at other 
corporate credit unions.\15\ The proposed rule also asked a question on 
whether it would be more appropriate to prohibit corporate credit 
unions from purchasing subordinated debt instruments. No commenter 
recommended restricting corporate credit union authority to purchase 
subordinated debt instruments.
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    \15\ 12 CFR 704.2 (definition of ``Tier 1 capital'').
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    The Board believes that investments in natural person credit union 
subordinated debt instruments should be treated similarly to 
investments in perpetual contributed capital and nonperpetual capital 
accounts that are maintained at other corporate credit unions as such 
instruments may qualify as regulatory capital for the natural person 
credit union. The Board is also concerned about systemic risk if 
corporate credit unions own a significant amount of natural person 
credit union issued subordinated debt. Finally, a natural person credit 
union subordinated debt instrument would be in a first loss position, 
even before the NCUSIF and any private insurance fund or entity. 
Therefore, an involuntary liquidation of the issuing credit union would 
potentially mean large, and likely total, losses for the holders of 
those subordinated obligations. The Board believes that fully deducting 
such instruments from Tier 1 capital ensures any potential losses do 
not affect the capital position of the investing corporate credit 
union. This measured approach strikes the right balance between 
providing corporate credit unions the flexibility to purchase natural 
person credit union subordinated debt instruments and avoiding undue 
systemic risk to the credit union system. As discussed previously, the 
Board's final rule on subordinated debt made no substantial changes to 
that rule to change this conclusion regarding corporate credit unions' 
purchases of the instruments. Therefore, the Board is adopting the Tier 
1 capital deductions that it proposed in the February 2020 proposed 
rule.

III. Regulatory Procedures

Final Rule Under the Administrative Procedure Act

    The Administrative Procedure Act (APA) generally requires agencies 
to issue a notice of proposed rulemaking and give interested persons an 
opportunity to participate in the rule making through submission of 
comments.\16\ As detailed in the background section of this preamble, 
the Board provided notice and an opportunity to comment on the changes 
made in this final rule in the proposed rule issued in February 2020. 
The Board deferred final action on certain provisions of the February 
2020 proposed rule to coordinate with the separate rulemaking on 
subordinated debt. The final rule on subordinated debt is substantially 
similar to its proposed form, which means that commenters on the 
February 2020 proposed rule received notice and an opportunity to 
comment on these provisions. Therefore, the Board is adopting the 
amendments in this final rule without issuing a new notice of

[[Page 10731]]

proposed rulemaking, which would be duplicative in this case.
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    \16\ 5 U.S.C. 553.
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Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) generally requires that, in 
connection with a final rule, an agency prepare and make available for 
public comment a final regulatory flexibility analysis that describes 
the impact of a final rule on small entities (defined for purposes of 
the RFA to include credit unions with assets less than $100 
million).\17\ A regulatory flexibility analysis is not required, 
however, if the agency certifies that the rule will not have a 
significant economic impact on a substantial number of small entities 
and publishes its certification and a short, explanatory statement in 
the Federal Register together with the rule.
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    \17\ See 80 FR 57512 (Sept. 24, 2015).
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    This final rule does not have a significant economic impact on a 
substantial number of small entities. There are no corporate credit 
unions under $100 million in assets. Therefore, the Board certifies 
that the rule will not have a significant economic impact on a 
substantial number of small entities.

Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (PRA) applies to information 
collection requirements in which an agency 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, recordkeeping, or third-party disclosure 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.
    The final rule amends 12 CFR part 704 to address the permissibility 
and capital treatment of natural person subordinated debt instruments 
purchased by corporate credit unions. The amendments to part 704 revise 
the Corporate Credit Union Call Report cleared under OMB Control number 
3133-0067. Public comments were solicited in a separate Federal 
Register notice (85 FR 65435, October 15, 2020) and no comment were 
received. The information collection request has been submitted to the 
Office of Management Budget for approval.

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 principles of 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 determined that this final rule does not 
constitute a policy that has federalism implications for purposes of 
the Executive order.

Assessment of Federal Regulations and Policies on Families

    The NCUA has determined that this final rule does not affect family 
well-being within the meaning of section 654 of the Treasury and 
General Government Appropriations Act, 1999.\18\
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    \18\ Public Law 105-277, 112 Stat. 2681 (1998).
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Small Business Regulatory Enforcement Fairness Act

    The Small Business Regulatory Enforcement Fairness Act of 1996 
(Pub. L. 104-121) (SBREFA) generally provides for congressional review 
of agency rules.\19\ A reporting requirement is triggered in instances 
where the NCUA issues a final rule as defined by Section 551 of the 
APA.\20\ An agency rule, in addition to being subject to congressional 
oversight, may also be subject to a delayed effective date if the rule 
is a ``major rule.'' \21\ The NCUA does not believe this rule is a 
``major rule'' within the meaning of the relevant sections of SBREFA. 
As required by SBREFA, the NCUA will submit this final rule to OMB for 
it to determine if the final rule is a ``major rule'' for purposes of 
SBREFA. The NCUA also will file appropriate reports with Congress and 
the Government Accountability Office so this rule may be reviewed.
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    \19\ 5 U.S.C. 801-804.
    \20\ 5 U.S.C. 551.
    \21\ 5 U.S.C. 804(2).
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List of Subjects in 12 CFR Part 704

    Credit unions, Corporate credit unions, Reporting and recordkeeping 
requirements.

    By the National Credit Union Administration Board on January 14, 
2021.
Melane Conyers-Ausbrooks,
Secretary of the Board.

    For the reasons discussed in the preamble, the Board amends 12 CFR 
part 704 as follows:

PART 704--CORPORATE CREDIT UNIONS

0
1. The authority citation for part 704 continues to read as follows:

    Authority: 12 U.S.C. 1766(a), 1781, 1789.


0
2. In Sec.  704.2:
0
a. Add in alphabetical order a definition of ``Natural person credit 
union subordinated debt instrument''; and
0
b. Revise the definition of ``Tier 1 capital''.
    The addition and revision read as follows:


Sec.  704.2  Definitions.

* * * * *
    Natural person credit union subordinated debt instrument is any 
debt instrument issued by a natural person credit union that is 
subordinate to all other claims against the credit union, including the 
claims of creditors, shareholders, and either the National Credit Union 
Share Insurance Fund or the insurer of a privately insured credit 
union.
* * * * *
    Tier 1 capital means the sum of items in paragraphs (1) and (2) of 
this definition from which items in paragraphs (3) through (7) of this 
definition are deducted:
    (1) Retained earnings;
    (2) Perpetual contributed capital;
    (3) Deduct the amount of the corporate credit union's intangible 
assets that exceed one half percent of its moving daily average net 
assets (however, the NCUA may direct the corporate credit union to add 
back some of these assets on the NCUA's own initiative, or the NCUA's 
approval of petition from the applicable state regulator or application 
from the corporate credit union);
    (4) Deduct investments, both equity and debt, in unconsolidated 
CUSOs;
    (5) Deduct an amount equal to any PCC or NCA that the corporate 
credit union maintains at another corporate credit union;
    (6) Deduct any amount of PCC received from federally insured credit 
unions that causes PCC minus retained earnings, all divided by moving 
daily average net assets, to exceed two percent when a corporate credit 
union's retained earnings ratio is less than two and a half percent; 
and
    (7) Deduct any natural person credit union subordinated debt 
instrument held by the corporate credit union.
* * * * *
[FR Doc. 2021-01399 Filed 2-22-21; 8:45 am]
BILLING CODE 7535-01-P