[Federal Register Volume 86, Number 44 (Tuesday, March 9, 2021)]
[Proposed Rules]
[Pages 13494-13498]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-01396]


 ========================================================================
 Proposed Rules
                                                 Federal Register
 ________________________________________________________________________
 
 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
 
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 

  Federal Register / Vol. 86, No. 44 / Tuesday, March 9, 2021 / 
Proposed Rules  

[[Page 13494]]



NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Parts 700, 701, 703, 704, and 713

RIN 3133-AF32


CAMELS Rating System

AGENCY: National Credit Union Administration (NCUA).

ACTION: Proposed rule with request for comments.

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SUMMARY: The Board is proposing to add the ``S'' (Sensitivity to Market 
Risk) component to the existing CAMEL rating system and redefine the 
``L'' (Liquidity Risk) component, thus updating the rating system from 
CAMEL to CAMELS. The proposal to add the ``S'' component will enhance 
transparency and allow the NCUA, State Supervisory Authorities, and 
federally insured credit unions to better distinguish between liquidity 
risk (``L'') and sensitivity to market risk (``S''). The amendment 
would also enhance consistency between the regulation of credit unions 
and other financial institutions. The Board is proposing to implement 
the addition of the ``S'' rating component and a redefined ``L'' rating 
as early as the first quarter of 2022.

DATES: Comments must be received on or before May 10, 2021.

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: Send messages to ncua.gov">regcomments@ncua.gov. Use the 
subject line: ``[Your name] Comments on Notice of Proposed Rulemaking 
Regarding CAMELS Rating System.''
     Fax: (703) 518-6319. Include ``[Your name] Comments on 
Notice of Proposed Rulemaking Regarding CAMELS Rating System'' on the 
cover page.
     USPS/Hand Delivery/Courier: Address to Melane Conyers-
Ausbrooks, Secretary of the Board, National Credit Union 
Administration, 1775 Duke Street, Alexandria, Virginia 22314-3428.
    Public Inspection: All public comments will be made available on 
the NCUA's website (http://www.ncua.gov/Legal/Regs/Pages/PropRegs.aspx) 
as submitted, except for those we cannot post for technical reasons. 
The NCUA will not edit or remove any identifying or contact information 
from the public comments submitted.

FOR FURTHER INFORMATION CONTACT: Thomas Fay, Director of Capital 
Markets at (703) 518-1179 or Robert Bruneau, Senior Capital Markets 
Specialist at 703 945-2491, Office of Examination and Insurance, or 
Marvin Shaw, Staff Attorney Office of General Counsel at (703) 518-
6554.

SUPPLEMENTARY INFORMATION:

I. Background

    The NCUA adopted its current rating system, known as CAMEL, in 
1987.\1\ The current CAMEL rating is based upon an evaluation of five 
critical elements of a credit union's operations: Capital adequacy, 
asset quality, management, earnings, and liquidity and asset-liability 
management. CAMEL is designed to take into account and reflect all 
significant financial, operational, and management factors examiners 
assess in their evaluation of a credit union's performance and risk 
profile.
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    \1\ NCUA Letter No. 93. Letter to Credit Unions, (September 25, 
1987).
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    Under this system, the NCUA assigns each credit union a composite 
CAMEL rating based on the agency's evaluation and rating of five 
components of an institution's financial condition and operations. As 
specified in the 2007 Letter to Credit Unions,\2\ these components 
address a credit union's:
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    \2\ NCUA Letter to Credit Unions 07-CU-12 (Dec. 2007).
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     Capital adequacy;
     Asset quality;
     Management;
     Earnings; and
     Liquidity and asset liability management.
    Examiners assign composite and component CAMEL ratings using a 
scale that ranges from ``1'' to ``5.'' The highest rating is a ``1,'' 
indicating the strongest performance and risk management practices, and 
the least degree of supervisory concern. The lowest rating is a ``5,'' 
indicating the weakest performance, inadequate risk management 
practices, and the highest degree of supervisory concern. When 
evaluating these components, examiners use their professional judgement 
and consider both qualitative and quantitative factors when analyzing a 
credit unions performance.
    In 1997, members of the Federal Financial Institution Examination 
Council (FFIEC),\3\ with the exception of the NCUA, proposed and 
subsequently adopted revisions to the Uniform Financial Institutions 
Rating System (UFIRS) and a Policy Statement that reaffirmed the five 
CAMEL rating system components and added a sixth component, Sensitivity 
to Market Risk (``S''), to address price and interest rate risks 
(IRR).\4\ The NCUA opted not to use the ``S'' component and retained 
its existing CAMEL rating system based on the relative lack of 
complexity in the consolidated balance sheets of credit unions at the 
time. However, since 1997, credit unions have increased in size and 
complexity by significantly increasing their mortgage-related assets 
from 19 percent of total assets to 42 percent at September 2020.
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    \3\ At the time, the FFIEC was comprised of the Federal Deposit 
Insurance Corporation (FDIC), the Board of Governors of the Federal 
Reserve (Federal Reserve), and the Office of Comptroller of the 
Currency (OCC), the NCUA, and the Office of Thrift Supervision 
(OTS). OTS merged into OCC as a result of the Dodd Frank Wall Street 
Reform and Consumer Protection Act. See Section 312 of Public Law 
111-203.
    \4\ 62 FR 752, (Jan. 6, 1997).
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    The NCUA has made several pertinent modifications to the CAMEL 
rating system since 1997. These involve changes to financial ratios,\5\ 
adding and subsequently eliminating a CAMEL matrix,\6\ accommodating 
the adoption of Prompt Corrective Action (PCA),\7\ and

[[Page 13495]]

incorporating the NCUA's risk-focused exam approach.\8\
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    \5\ Letter to Credit Unions 00-CU-08 (Nov. 2000).
    \6\ NCUA Letter to Credit Unions 07-CU-12 (Dec. 2007).
    \7\ In 1998, Congress enacted the Credit Union Membership Access 
Act (``CUMAA''). (Pub. L. 105-219, 112 Stat. 913 (1998). CUMAA 
amended the Federal Credit Union Act (``the Act'') to require the 
NCUA to adopt, by regulation, a system of prompt corrective action 
(PCA) consisting of minimum capital standards and corresponding 
remedies to improve the net worth of federally-insured ``natural 
person'' credit unions.
    \8\ NCUA Letter to Credit Unions -03-CU-04 (March 2003).
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    As balance sheets of credit unions have become larger and more 
complex, the NCUA consistently provided supervision and guidance 
regarding exposures to market risk to the credit union industry. The 
NCUA also advised credit unions that IRR was a supervisory priority 
from 2012 through 2019.
    Since 2012, the Board implemented regulations that introduced 
standards and expectations affecting examiner procedures and the NCUA's 
IRR assessment requirements. The NCUA's IRR rule became effective for 
credit unions in September 2012.\9\ The rule requires credit unions 
that have more than $50 million in assets to maintain a written IRR 
policy and an effective risk management program. The NCUA also 
finalized its derivatives rule in April 2014 providing authority for 
qualified federal credit unions to use financial derivatives to conduct 
hedging activities to better optimize their interest rate risk 
management.\10\
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    \9\ 77 FR 5155 (Feb. 2, 2012).
    \10\ 79 FR 5228 (Jan 31, 2014).
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    The NCUA also implemented its revised IRR supervision program in 
January 2017 \11\ incorporating the regulatory requirements from parts 
741 (IRR) and 703 (derivatives), enhancing examiner guidance, improving 
the consistency of IRR ratings, and to identify outlier credit unions 
with excessive risk levels.
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    \11\ Revised Interest Rate Risk Supervision  National 
Credit Union Administration (ncua.gov) 16-CU-08/October 2016.
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II. Rationale for Proposed Rule

    The NCUA's existing CAMEL rating process addresses both sensitivity 
to market risk and liquidity risk within the ``L'' component.\12\ While 
there is an interrelationship between sensitivity to market risk and 
liquidity risk, there are also differences that support separating the 
risks into distinct components. The proposed rule would enhance the 
existing CAMEL rating system by adding an ``S'' component to assess 
sensitivity to market risk and modify the ``L'' component to include 
only liquidity evaluation content and rating criteria.
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    \12\ NCUA Letter to Credit Unions 07-CU-12, CAMEL Rating System. 
(Dec. 2007).
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    Adding an ``S'' component and modifying the ``L'' component will 
provide greater clarity and transparency regarding credit unions' 
sensitivity to market risk and liquidity risk exposures. The proposed 
addition would make the NCUA's rating system more consistent with the 
other financial institution regulators' ratings system both at the 
federal and state levels.\13\
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    \13\ The banking regulators (Federal Reserve, FDIC, and OCC) 
each include the ``S'' component to evaluate sensitivity to market 
place risk. In addition, 24 state supervisory authorities adopted 
the ``S'' component.
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    Separating the ``S'' and ``L'' component ratings will allow NCUA to 
enhance the:
     Monitoring of sensitivity to market risk and liquidity 
risk in the credit union system;
     Communication of specific concerns to individual credit 
unions; and
     Allocation of resources.
    Evaluating, rating, and disclosing assessments of interest rate and 
liquidity risks to credit union management is a long-standing 
examination procedure at the NCUA. The proposed change to add the ``S'' 
provides greater transparency into the NCUA's evaluation and 
conclusions regarding these two risks.
    In 2015, the NCUA Office of Inspector General (OIG) recommended the 
addition of an ``S'' component to better capture a credit union's 
sensitivity to market risk and improve clarity and transparency in the 
CAMEL rating system.\14\ The NCUA OIG also recommended the NCUA revise 
its ``L'' component rating to reflect only liquidity factors.
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    \14\ OIG-15-11 Review of NCUA's Interest Rate Risk Program.
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    Also in 2015, the NCUA initiated a comprehensive restructuring of 
its supervision activities through the Enterprise Solution 
Modernization program (ESM). The ESM is a multi-year introduction of 
emerging and secure technology solutions supporting the NCUA's 
examination, data collection, and reporting efforts to improve key, 
integrated business processes. The NCUA planned the implementation of 
the OIG's 2015 CAMELS recommendations as part of the development of a 
new examination platform, known as the Modern Examination and Risk 
Identification Tool, or MERIT. The NCUA anticipates completing the 
transition from its legacy examination software to MERIT (which has 
been configured to support the ``S'' in ``CAMELS'') in 2021. Other 
revisions to examiner supervision guidance and procedures will also be 
updated as part of the transition.
    In general, the NCUA Board expects that adopting a sixth CAMELS 
rating component will not have any adverse effect on a credit union's 
CAMEL composite rating. The proposed separation of sensitivity to 
market risk and liquidity risk into individual CAMELS rating components 
will reduce potential rating inconsistencies. Currently, examiners 
combine the risk evaluation of these related, but separate, risk areas 
into the ``L'' component. The separation into two components provides 
greater clarity of the assessment of each risk area. The Board 
anticipates the agency can make this transition smoothly and without 
significant disruption to the exam process or agency operations as 
early as the first quarter of 2022.

III. Summary of the Proposed Rule

    The Board is proposing to add the ``S'' component to the existing 
CAMEL rating system and redefine the current ``L'' component. 
Evaluation of these as individual components will enhance the 
communication and monitoring of credit unions' sensitivity to market 
risk and liquidity risk. The Board is requesting comments on this 
proposal, such as, but not limited to, the definitions of both the 
``L'' and ``S'' components and the criteria for each of the specific 1-
5 assigned ratings. For example, the Board may consider modifying the 
rating descriptions used for the ``L'' and ``S'' ratings used by the 
other banking agencies rating system (The Uniform Financial 
Institutions Rating System (UFIRS)), detailed below in Sections IIA and 
IIB of this proposal.\15\
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    \15\ https://www.fdic.gov/regulations/laws/rules/5000-900.html.
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A. ``S'' Component for Sensitivity to Market Risk

    The sensitivity to market risk reflects the exposure of a credit 
union's current and prospective earnings level and economic capital 
position arising from changes in market prices and the general level of 
interest rates. Effective risk management programs include 
comprehensive interest rate risk policies, appropriate and identifiable 
risk limits, clearly defined risk mitigation strategies, and a suitable 
governance framework.
    Sensitivity to Market Risk ratings are based on, but not limited 
to, the following evaluation factors:
     Sensitivity of a credit union's current and future 
earnings and economic value of capital to adverse changes in market 
prices and interest rates;
     Management's ability to identify, measure, monitor, and 
control exposure

[[Page 13496]]

to market risk considering a credit union's size, complexity, and risk 
profile; and
     The nature and complexity of interest rate risk exposure.
    Examiners will rate a credit union's ``S'' CAMELS rating component 
on a scale of ``1'' to ``5'' using the same rating descriptions for 
``S'' as the other banking agencies.

------------------------------------------------------------------------
       ``S'' rating                         Description
------------------------------------------------------------------------
1........................   Market risk sensitivity is well
                            controlled and that there is minimal
                            potential that the earnings performance or
                            capital position will be adversely affected;
                            Risk management practices are strong
                            for the size, sophistication, and market
                            risk accepted by the institution; and
                            The level of earnings and capital
                            provide substantial support for the degree
                            of market risk taken by the institution.
2........................   Market risk sensitivity is
                            adequately controlled and that there is only
                            moderate potential that the earnings
                            performance or capital position will be
                            adversely affected;
                            Risk management practices are
                            satisfactory for the size, sophistication,
                            and market risk accepted by the institution;
                            and
                            The level of earnings and capital
                            provide adequate support for the degree of
                            market risk taken by the institution.
3........................   Control of market risk sensitivity
                            needs improvement or that there is
                            significant potential that the earnings
                            performance or capital position will be
                            adversely affected;
                            Risk management practices need to be
                            improved given the size, sophistication, and
                            level of market risk accepted by the
                            institution; and
                            The level of earnings and capital
                            may not adequately support the degree of
                            market risk taken by the institution.
4........................   Control of market risk sensitivity
                            is unacceptable or that there is high
                            potential that the earnings performance or
                            capital position will be adversely affected;
                            Risk management practices are
                            deficient for the size, sophistication, and
                            level of market risk accepted by the
                            institution; and
                            The level of earnings and capital
                            provide inadequate support for the degree of
                            market risk taken by the institution.
5........................   Control of market risk sensitivity
                            is unacceptable or that the level of market
                            risk taken by the institution is an imminent
                            threat to its viability; and
                            Risk management practices are wholly
                            inadequate for the size, sophistication, and
                            level of market risk accepted by the
                            institution.
------------------------------------------------------------------------

    The Board also requests comments on the proposal to describing the 
``L'' component and the criteria used in determining the 1-5 assigned 
ratings.

B. ``L'' Component for Liquidity Risk

    In evaluating the adequacy of a credit union's liquidity profile, 
examiners consider the current and prospective sources of liquidity 
compared to funding needs and the adequacy of liquidity risk management 
relative to a credit union's size, complexity, and risk profile. A 
credit union's liquidity risk management practices should ensure the 
credit union maintains sufficient liquidity to timely meet its 
financial obligations and member share and loan demands. These 
practices should reflect the credit union's ability to manage unplanned 
changes in funding sources, changes in market conditions affecting its 
ability to quickly liquidate assets with minimal loss, ensure liquidity 
is maintained at a reasonable cost and limit reliance on funding 
sources that may not be available in times of financial stress or 
adverse changes in market conditions.
    A credit union's liquidity risk management practices should also be 
commensurate with the complexity of the balance sheet and its capital 
adequacy. This includes evaluating the reporting mechanisms in place to 
monitor and control risk, management's response when risk exposure 
approaches or exceeds the credit union's risk limits, and the 
prescribed corrective action taken when necessary.
    Examiners will rate a credit union's ``L'' CAMELS rating component 
on a scale of ``1'' to ``5'' using the same rating descriptions for 
``L'' as the other banking agencies.

------------------------------------------------------------------------
       ``L'' rating                         Description
------------------------------------------------------------------------
1........................   Strong liquidity levels and well-
                            developed funds management practices; and
                            The institution has reliable access
                            to sufficient sources of funds on favorable
                            terms to meet present and anticipated
                            liquidity needs.
2........................   Satisfactory liquidity levels and
                            funds management practices;
                            The institution has access to
                            sufficient sources of funds on acceptable
                            terms to meet present and anticipated
                            liquidity needs; and
                            Modest weaknesses may be evident in
                            funds management practices.
3........................   Liquidity levels or funds management
                            practices in need of improvement; and
                            Institutions rated 3 may lack ready
                            access to funds on reasonable terms or may
                            evidence significant weaknesses in funds
                            management practices.
4........................   Deficient liquidity levels or
                            inadequate funds management practices; and
                            Institutions rated 4 may not have or
                            be able to obtain a sufficient volume of
                            funds on reasonable terms to meet liquidity
                            needs.
5........................   Liquidity levels or funds management
                            practices so critically deficient that the
                            continued viability of the institution is
                            threatened; and
                            Institutions rated 5 require
                            immediate external financial assistance to
                            meet maturing obligations or other liquidity
                            needs.
------------------------------------------------------------------------

    The CAMEL rating system is not set forth in a separate section or 
part in the NCUA's regulations. Rather, references to CAMEL appear in 
several parts in the Code of Federal Regulations (CFR). NCUA 
regulations regularly refer to CAMEL composite ``1'' or ``2'' rated 
credit unions, which indicate the ability to safely support additional 
regulatory flexibility, or CAMEL composite ``4'' or ``5'' rated credit 
unions, which warrant increased regulatory scrutiny.

[[Page 13497]]

    The Board is planning technical amendments to the following 
sections in which the term ``CAMEL'' appears by changing the term to 
``CAMELS.'' These sections include:

 Section 700.2 definition of ``Troubled condition''
 Section 701.14 Change in official or senior executive officer 
in credit unions that are newly chartered or are in troubled condition
 Section 701.23 Purchase, sale, and pledge of eligible 
obligations
 Section 703.13 Permissible investment activities
 Section 703.14 Permissible investments
 Section 703.108 Eligibility
 Section 704.4 Prompt corrective action
 Section 713.6 Fidelity Bond and Insurance Coverage for FCUS--
What is the permissible deductible?

    In addition to amendments in the CFR, the Board notes the agency 
will modify certain documents and systems related to its supervisory 
activities to reflect the addition of the ``S'' CAMEL rating component.

IV. Regulatory Procedures

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act requires the NCUA to prepare an 
analysis to describe any significant economic impact a regulation may 
have on a substantial number of small entities.\16\ For purposes of 
this analysis, the NCUA considers small credit unions to be those 
having under $100 million in assets.\17\ This rule would not affect 
FCUs regardless of asset size because it is not adding any substantive 
requirement. Accordingly, the associated cost is minimal. The NCUA 
certifies the rule will not have a significant economic impact on small 
credit unions.
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    \16\ 5 U.S.C. 603(a).
    \17\ Interpretive Ruling and Policy Statement (``IRPS'') 03-2, 
68 FR 31949 (May 29, 2003) as amended by IRPS 13-1, 78 FR 4032 (Jan. 
18, 2013).
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B. 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.\18\ For purposes 
of the PRA, a paperwork burden may take the form of either a reporting 
or a recordkeeping requirement, both referred to as information 
collections. This proposed rule imposes no new paperwork-related 
requirements. Therefore, this proposed rule will not create new 
paperwork burdens or modify any existing paperwork burdens.
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    \18\ 44 U.S.C. 3507(d); 5 CFR part 1320.
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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 rule 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 this 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 proposed rule will not affect 
family well-being within the meaning of Section 654 of the Treasury and 
General Government Appropriations Act, 1999.\19\
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    \19\ Public Law 105-277, 112 Stat. 2681 (1998).
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List of Subjects

12 CFR Part 700

    Credit unions.

12 CFR Part 701

    Credit unions. Insurance. Reporting and recordkeeping requirements.

12 CFR Part 703

    Credit unions. Investments. Reporting and recordkeeping 
requirements.

12 CFR Part 704

    Corporate Credit Unions, Prompt Corrective Action.

12 CFR Part 713

    Bonds. Credit unions. Insurance.

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

    For the reasons discussed above, the Board proposes to amend 12 CFR 
parts 700, 701, 703, 704, and 713 as follows:

PART 700--DEFINITIONS

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

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


Sec.  700.2  [Amended]

0
2. In Sec.  700.2, amend the definition of ``troubled condition'', by 
removing the word, ``CAMEL'', and adding, in its place, the word, 
``CAMELS'', wherever it appears.

PART 701--ORGANIZATION AND OPERATION OF FEDERAL CREDIT UNIONS

0
3. The authority citation for part 701 continues to read as follows:

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


Sec.  701.14  [Amended]

0
4. Amend Sec.  701.14(b) by removing the word, ``CAMEL'', and adding, 
in its place, the word, ``CAMELS'', wherever it appears.


Sec.  701.23  [Amended]

0
5. Amend Sec.  701.23(b)(2) by removing the word, ``CAMEL'', and 
adding, in its place, the word, ``CAMELS.''

PART 703--INVESTMENT AND DEPOSIT ACTIVITIES

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

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


Sec.  703.13  [Amended]

0
7. Amend Sec.  703.13(d)(3)(iii) by removing the word, ``CAMEL'', and 
adding, in its place, the word, ``CAMELS.''


Sec.  703.14  [Amended]

0
8. Amend Sec.  703.14 by removing the word, ``CAMEL'', and adding, in 
its place, the word, ``CAMELS'', wherever it appears.

PART 704--CORPORATE CREDIT UNIONS

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

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


Sec.  704.4  [Amended]

0
10. Amend Sec.  704.4(d)(3)(ii) by removing the word, ``CAMEL'', and 
adding, in its place, the word, ``CAMELS.''

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

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


[[Page 13498]]


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


Sec.  713.6  [Amended]

0
12. Amend Sec.  713.6 by removing the word, ``CAMEL'', and adding, in 
its place, the word, ``CAMELS'', wherever it appears.

[FR Doc. 2021-01396 Filed 3-8-21; 8:45 am]
BILLING CODE 7535-01-P