[Federal Register: November 29, 2002 (Volume 67, Number 230)]
[Rules and Regulations]
[Page 71078-71094]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr29no02-4]
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NATIONAL CREDIT UNION ADMINISTRATION
12 CFR Parts 702, 741 and 747
Prompt Corrective Action
AGENCY: National Credit Union Administration (NCUA).
ACTION: Final rule.
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SUMMARY: Pursuant to Congressional mandate, the National Credit Union
Administration (NCUA) adopted a comprehensive system of prompt
corrective action consisting of minimum capital standards and
corresponding remedies to restore the net worth of federally-insured
credit unions. After six quarters of implementation, the NCUA Board
issued a proposed rule consisting of revisions and adjustments intended
to improve and simplify the system of prompt corrective action. As
revised to reflect public comments, the NCUA Board now issues a final
rule incorporating these improvements.
DATES: Effective January 1, 2003.
FOR FURTHER INFORMATION CONTACT: Legal: Steven W. Widerman, Trial
Attorney, Office of General Counsel, National Credit Union
Administration, 1775 Duke St., Alexandria, VA 22314. Telephone: 703/
518-6557; Technical: Jon Flagg, Loss/Risk Analysis Officer, Office of
Examination and Insurance, at the address above. Telephone: 703/518-
6378.
SUPPLEMENTARY INFORMATION:
A. Background
1. Development of Part 702
2. Where Credit Unions Stand Today
3. Comments on Proposed Rule
B. Section-by-section Analysis of Final Rule
1. Section 702.2--Definitions
2. Section 702.101--Measure and effective date of net worth
classification
3. Section 702.106--Standard calculation of RBNW requirement
4. Section 702.107--Alternative component for loans sold with
recourse
5. Section 702.108--Risk mitigation credit
6. Section 702.201--PCA for ``Adequately Capitalized'' credit
unions
7. Section 702.204--PCA for ``Critically Undercapitalized''
credit unions
8. Section 702.205--Consultation with State officials on
proposed PCA
9. Section 702.206--Net worth restoration plans
10. Section 702.303--PCA for ``Adequately Capitalized'' new
credit unions
11. Section 702.304--PCA for ``Moderately Capitalized,''
``Marginally Capitalized'' and ``Minimally Capitalized'' new credit
unions
12. Section 702.305--PCA for ``Uncapitalized'' new credit unions
13. Section 702.306--Revised business plans for new credit
unions
14. Section 702.401--Charges to the regular reserve
15. Section 702.403--Payment of dividends
16. Section 741.3--Adequacy of reserves
17. Section 747.2005--Enforcement of orders
The following acronyms are used throughout:
CUMAA Credit Union Membership Access Act
DSA Discretionary Supervisory Action
MBL Member Business Loan
MSA Mandatory Supervisory Action
NWRP Net Worth Restoration Plan
OCA Other Corrective Action
PCA Prompt Corrective Action
RBNW Risk-Based Net Worth
RBP Revised Business Plan
RMC Risk Mitigation Credit
Throughout the Supplementary Information section, citations to part
702 refer to the current version of 12 CFR 702 et seq. (2002) and are
abbreviated to the section number only.
A. Background
1. Development of Part 702
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 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. 12 U.S.C. 1790d et seq. In February 2000, the NCUA Board
adopted part 702 and subpart L of part 747, establishing a
comprehensive system of PCA that combines mandatory supervisory actions
prescribed by statute with discretionary supervisory actions developed
by NCUA, all indexed to five statutory net worth categories. 65 FR 8560
(Feb. 18, 2000).
Subpart A of part 702 consists of standards for calculating a
credit union's net worth and classifying it among five statutory net
worth categories. 12 CFR 702.101-108. Also included in subpart A is a
separate risk-based net worth (``RBNW'') component that applies to non-
``new'' credit unions, Sec. 702.102(a)(1)-(2), that satisfy minimum
RBNW and asset size requirements, Sec. 702.103, and whose portfolios
of assets and liabilities carry above average risk exposure. Sec.
702.104; 65 FR 44950 (July 20, 2000). Subpart B combines mandatory and
discretionary supervisory actions indexed to the five categories, as
well as PCA-based conservatorship and liquidation. Sec. Sec. 702.201-
206. Subpart C consists of a system of PCA for ``new'' credit unions.
Sec. Sec. 702.301-307. Subpart D prescribes reserve accounts,
requirements for full and fair disclosure of financial condition, and
prerequisites for paying dividends consistent with the earnings
retention requirement in subpart B. Sec. Sec. 702.401-403. In addition
to these substantive provisions, subpart L of part 747 established an
independent review process allowing affected credit unions and
officials to challenge PCA decisions. 12 CFR 747.2001 et seq. (2000).
Part 702 and subpart L of part 747 were effective August 7, 2000,
and first applied to activity in the fourth quarter of 2000 as
reflected in the Call Report for that period. The RBNW component of
part 702 was effective January 1, 2001, and first applied (for
quarterly Call Report filers) to activity in the first quarter of 2001
as reflected in the Call Report for that period.\1\
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\1\ Part 702 has since been amended twice--once to incorporate
limited technical corrections, 65 FR 55439 (Sept. 14, 2000), and
once to delete sections made obsolete by the adoption of a uniform
quarterly schedule for filing Call Reports regardless of asset size.
67 FR 12459 (March 19, 2002).
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At the conclusion of the initial PCA rulemaking process, the NCUA
Board directed the ``PCA Oversight Task Force'' (a working group
consisting of NCUA staff and State regulators) to review at least a
full year of PCA implementation and recommend necessary modifications.
65 FR at
[[Page 71079]]
44964. This final rule is the result of those recommendations, as
modified to reflect public comments. The final rule takes effect
January 1, 2003, and first applies to activity in the first quarter of
2003 as reflected in the Call Report for that period.
2. Where Credit Unions Stand Today
a. Net worth classification. As of June 30, 2002, federally-insured
credit unions are classified as follows within the PCA net worth
categories:
[GRAPHIC] [TIFF OMITTED] TR29NO02.064
b. RBNW requirement. As of June 30, 2002, 448 federally-insured
credit unions--4 percent of the total--were required to meet an RBNW
requirement. Of these, 446 met the requirement using the ``standard
calculation.'' Sec. 702.106. The two that failed under the ``standard
calculation'' succeeded in meeting their RBNW requirements using the
``alternative components.'' Sec. 702.107. To date, no credit union has
completely failed its RBNW requirement, and no credit union has applied
for a ``risk mitigation credit.'' Sec. 702.108.
3. Comments on Proposed Rule
On June 4, 2002, NCUA issued a proposed rule consisting of
revisions and adjustments intended to improve and simplify the system
of PCA. 67 FR 38431 (June 4, 2002). By the close of the comment period
for the proposed rule, August 5, 2002, NCUA received 26 comment
letters. Comments were received from seven federal credit unions, four
state credit unions, eight state credit union leagues, two credit union
industry trade associations, an association of state credit union
supervisors, two banking industry trade associations, and a Federal
Home Loan Bank. Nearly all of the comments supported the series of
proposed revisions and adjustments to part 702.
This rulemaking will not address the few comments that suggested
modifications to part 702 that exceed the scope of NCUA's statutory
authority or that are completely unsupported. Comments on the concept
of ``safe harbor'' approval of a net worth restoration plan are
addressed in a separate proposed rule found elsewhere in this volume of
the Federal Register. All other comments are analyzed generally in
section B. below.
B. Section-by-Section Analysis of Final Rule
Part 702--Prompt Corrective Action
1. Section 702.2--Definitions
a. Dividend. Subpart D of part 702 sets various restrictions and
requirements regarding the payment of dividends to members. Sec. Sec.
702.403, 702.401(d), 702.402(d)(5). To extend these restrictions and
requirements to interest that many State-chartered credit unions pay on
shares and deposits, the proposed rule introduced a definition of
``dividend'' that included ``a payment of interest on a deposit by a
State-chartered credit union.'' 67 FR at 38433. While one commenter
supported the definition as proposed, two others pointed out that
State-chartered credit unions pay interest on non-share deposits
pursuant to a contractual obligation, and that restricting the payment
of interest would cause a credit union to breach its deposit contract
with the member. By comparison, dividends paid on shares entail no such
contractual obligation. NCUA concurs with the commenters' point.
Accordingly, the final rule omits the proposed definition of
``dividends'' and, further, eliminates the reference to ``interest'' in
the discretionary supervisory action (``DSA'') restricting the payment
of dividends. Sec. Sec. 702.202(b)(3), 702.203(b)(3), 702.204(b)(3).
As a result, the term ``dividends'' as used in part 702 excludes only
those payments on shares and deposits that meet a statutory or other
legal definition of contractual interest, regardless of the label a
credit union gives to such payments.
[[Page 71080]]
b. Senior executive officer. Part 702 neglected to define who is a
``senior executive officer'' for purposes of the DSAs that authorize
dismissing ``a director or senior executive officer,'' Sec. Sec.
702.202(b)(7), 702.203(b)(8), 702.204(b)(8); hiring of a ``qualified
senior executive officer,'' Sec. Sec. 702.202(b)(8), 702.203(b)(9),
702.204(b)(9); and limiting compensation paid to a ``senior executive
officer,'' Sec. Sec. 702.203(b)(10), 702.204(b)(10). See also 12 CFR
747.2004(a) (review of dismissal of senior executive officer). To
correct this oversight, NCUA proposed incorporating by reference the
definition of a ``senior executive officer'' in 12 CFR 701.14(b)(2). 67
FR at 38433. Apart from a misquotation in the preamble to the proposed
rule, the sole commenter supported the proposed definition.
Accordingly, the final rule adds a new subsection (i) to Sec. 702.2
that incorporates by reference the definition of ``senior executive
officer'' in 12 CFR 701.14(b)(2).
c. Total assets. The ``average quarterly balance'' definition of
``total assets'' was ambiguous as to whether the phrase ``[t]he average
of quarter-end balances of the four most recent calendar quarters,''
Sec. 702.2(j)(1)(i), refers to the four consecutive quarters preceding
the then-current quarter, or to the then-current quarter plus the
preceding three consecutive quarters. The proposed rule revised the
definition to adopt the latter meaning. 67 FR at 38433. Apart from a
misquotation in the preamble to the proposed rule, the two comments on
the definition favored the latter meaning. Accordingly, the final rule
redefines the ``average quarterly balance'' as the average of quarter-
end balances of ``the current and three preceding calendar quarters.''
In addition, the final rule deletes the reference to semiannual first
and third quarter Call Reports from the ``quarter end balance''
definition of ``total assets,'' Sec. 702.2(l)(1)(iv), to reflect the
adoption of a uniform quarterly schedule for filing Call Reports. 67 FR
12457 (March 19, 2002).
2. Section 702.101--Measures and Effective Date of Net Worth
Classification
For nearly all credit unions, the effective date of net worth
classification is the ``quarter-end effective date''--``the last day of
the calendar month following the end of the calendar quarter.'' Sec.
702.101(b)(1). Occasionally, however, an interim effective date between
quarter-ends applies instead because ``the credit union's net worth
ratio is recalculated by or as a result of its most recent final report
of examination.'' Sec. 702.101(b)(2). This typically results when an
NCUA examination that takes place after the quarter-end effective date
discloses that the credit union erred in calculating its net worth
ratio and the corrected ratio puts it in a different net worth
category. In that case, the date the credit union receives the final
examination report becomes the new effective date of classification to
the proper net worth category.
Several flaws have made it difficult to implement subsection
(b)(2). First, it extended to instances where there was no error or
misstatement in calculating net worth, but rather, data or conditions
simply had changed since the date of the Call Report (which would be
reflected in the next quarter's Call Report). Second, notice to the
credit union to correct its net worth ratio had to await the ``most
recent report of final examination'' even when an earlier supervision
contact disclosed a calculating error or misstatement. Third,
postponing such notice may deprive the credit union of the opportunity
to take corrective action sooner. To rectify these flaws, the proposed
rule revised subsection (b)(2) to define the effective date of
classification to a ``corrected net worth category'' as ``the date the
credit union receives subsequent written notice . . . of a decline in
net worth category due to correction of an error or misstatement in the
credit union's most recent Call Report.'' 67 FR 38434. NCUA received
three comments on this section, all favoring these revisions.
Therefore, the final rule adopts them as proposed.
3. Section 702.106--Standard Calculation of RBNW Requirement
The proposed rule suggested no modifications to the standard
component for ``member business loans outstanding'' (``MBLs''). Sec.
702.106(b). However, one commenter contended that the 12.25 percent
risk-weighting threshhold in that component was arbitrarily based on
CUMAA's restriction on member business lending, 12 U.S.C. 1757a(a)(2),
and proposed that the threshhold be increased to 25 percent. After
considering this suggestion, the NCUA Board has determined that the
existing 12.25 percent threshold warrants reconsideration in connection
with its review of the current MBL regulation, 12 CFR 723. Pending
reconsideration, a credit union has two alternatives if it finds that
the 12.25 percent threshhold distinguishes risk weightings among MBLs
imprecisely. First, to resort to the corresponding alternative
component for MBLs, Sec. 702.107(b), which measures finer increments
of risk among fixed- and variable rate MBLs. And second, to seek a risk
mitigation credit, Sec. 702.108, to moderate the impact of the
standard risk-weightings. Accordingly, the existing 12.25 percent
threshold is retained at this time.
4. Section 702.107--Alternative Components for Standard Calculation
a. Alternative component for long-term real estate loans callable
in 5 years or less. For long-term real estate loans, part 702 features
both a ``standard component'' and an ``alternative component'' for the
RBNW calculation. Sec. Sec. 702.106(a), 702.107(a). The longer the
maturity of the loan, the greater the interest rate risk and credit
risk exposure, justifying a correspondingly greater risk-weighting. See
65 FR at 44960-44961. Both components scheduled loans by contractual
maturity date regardless whether there is a ``call'' feature permitting
the lender to redeem the loan before the maturity date. The NCUA Board
declined to propose scheduling ``callable'' loans by ``call'' date,
rather than by maturity date, for reasons explained in the proposed
rule. 67 FR at 38435. Instead, the NCUA Board suggested than an
offsetting risk mitigation credit under Sec. 702.108 was well suited
to recognize when a credit union's program and history of efficiently
exercising ``call'' options truly mitigates risk.
Six commenters objected that the NCUA Board's position denies them
a reduced risk-weighting even though a ``call'' feature gives them the
flexibility to shorten the term of real estate loans, thereby
mitigating interest rate risk, and credit risk due to deterioration of
the borrower's ability to repay or the collateral's value. One
commended the ``call'' feature as a risk management tool. Another
advocated allowing use of the ``call'' date, in lieu of the maturity
date, on a credit union-by-credit union basis. And finally, a commenter
recommended categorizing ``callable'' and non-``callable'' loans
separately and assigning lower risk weightings to the ``callable''
category to reflect its reduced interest rate risk. In light of these
comments, the NCUA Board has reconsidered its position and now
recognizes that a ``call'' feature, when exercised in good faith,
provides some measure of risk mitigation for real estate loans.\2\
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\2\ The alternative component for MBLs continues to categorize
MBLs by fixed- and variable-rate and then schedules the loans in
each category for risk-weighting by remaining maturity. Sec.
702.107(b). The NCUA Board is not scheduling MBLs by ``call'' date
at this time out of concern for credit risk upon exercise of the
``call'' feature. However, this issue also may receive further
consideration in connection with NCUA's review of the current MBL
regulation, 12 CFR.
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[[Page 71081]]
Accordingly, the final rule expands the existing alternative
component for ``long-term real estate loans'' to add a separate
schedule for loans that are ``callable'' within a maximum period of 5
years. Sec. 702.107(a)(2). The schedule consists of three maturity
buckets that correspond to the buckets in the non-``callable''
schedule. See new Table 5(a) and new Appendixes C in rule text below. A
loan that is ``callable'' within 5 years, and that has remaining
maturity of less than 5 years, receives the same six percent risk-
weighting that the existing alternative component gives to a non-
``callable'' loan with a remaining maturity of less than 5 years. A
loan that is ``callable'' within 5 years, and that has a remaining
maturity of more than 5 years, receives a risk weighting that is two
percentage points lower than the weighting for the corresponding non-
``callable'' maturity bucket. To qualify for the ``callable'' schedule,
the ``call'' feature must be contractually specified in the loan
documents and the credit union must maintain records documenting the
breakdown of ``callable'' loans by maturity bucket.
b. Alternative component for loans sold with recourse. The standard
component for loans sold with recourse assigns a uniform risk-weighting
of 6 percent to the entire balance, Sec. 702.106(f), regardless
whether it includes loans sold with only partial recourse against the
seller. Since part 702 was adopted, recourse loan activity among credit
unions has nearly doubled, and loan programs have emerged that
contractually limit the extent of the purchaser's recourse to the
seller.\3\ Thus, credit unions have gained the ability to cap their
credit risk exposure from the sale of recourse loans.
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\3\ For example, documentation for the loan sale transaction may
provide for recourse in the form of a contractually-specified
recourse obligation measured either by a designated dollar amount
that is fixed for the life of the loan, or by a designated
percentage of the unpaid balance of a pool of loans.
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In view of these developments, the proposed rule added a fourth
alternative component to Sec. 702.107 that would allow variable risk-
weighting according to the actual credit risk exposure of loans sold
with a contractual recourse obligation of less than 6 percent. 67 FR at
38434. The proposed alternative component is the sum of two risk-
weighting buckets. The first bucket consists of the balance of loans
sold with contractual recourse obligations of six percent or greater;
it is risk-weighted at a uniform six percent. Sec. 702.107(d)(1). The
second bucket consists of the balance of loans sold with contractual
recourse obligations of less than six percent; it is risk-weighted
according to the weighted average recourse percent of its contents, as
computed by the credit union.\4\ Sec. 702.107(d)(2); see new Table
5(d) and new Appendixes F and G in rule text below. Eight comments
addressed the proposed ``alternative component'' for loans sold with
recourse, all supporting it. Therefore, the final rule adopts the new
alternative component in Sec. 702.107(d) as proposed.
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\4\ To caluate the ``weighted average recourse percent'' of the
bucket of loans sold with recourse <6%, multiply each percentage of
contractual recourse obligation by the corresponding balance of
loans sold with that recourse to derive the total dollars of
recourse. Divide the total dollars of recourse by the total dollar
balance of loans sold with <6% recourse to derive the alternative
risk weighting. See Appendix G in rule text below.
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c. Alternative component for short-term government obligations.
Although the proposed rule did not reference government obligations, a
single commenter proposed an alternative component for government
obligations with maturity of one year or less. Under the proposal,
these obligations, up to a total equivalent to 25 percent of a credit
union's total assets, would receive a zero risk weighting. The NCUA
Board is unsympathetic to this proposal because the existing standard
component for ``investments'' gives a risk-weighting of three 3
percent-half the six percent risk weighting assigned to average risk
assets--to government obligations with a maturity of one year or less.
Sec. 702.106(c)(1). Government obligations are not completely risk
free, as a zero risk-weighting suggests. On the contrary, they carry
interest rate risk and transaction risk that justify a three percent
risk weighting. Accordingly, the commenter's proposal is not adopted.
5. Section 702.108--Risk Mitigation Credit
Part 702 permits a credit union that fails an applicable RBNW
requirement under both the ``standard calculation'' and the
``alternative components'' to apply for a ``risk mitigation credit''
(``RMC''). Sec. 702.108(a). If granted, an RMC will reduce the RBNW
requirement that must be met.\5\ But NCUA will not consider an
application for this relief until after the effective date that a
credit union fails its RBNW requirement. Submission Guidelines Sec.
I.3. This forces a failing credit union to remain classified
``undercapitalized'' while its RMC application is pending, id.
Sec. Sec. I.4, I.8, even when it reasonably expects to fail because it
either failed or barely passed in a preceding quarter.
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\5\ To aid credit unions seeking a ``Risk Mitigation Credit,''
NCUA has released two publications: Guidelines for Submission of an
Application for PCA ``Risk Mitigation Credit'' (NCUA form 8507)
(``Submission Guidelines'') and Guidelines for Evaluation of an
Application for PCA ``Risk Mitigation Credit'' (NCUA for 8508). The
Submission Guidelines will be modified to reflect the revisions to
Sec. 702.108 adopted in this final rule.
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To spare credit unions that are genuinely in danger of failing an
RBNW requirement from the ``fail first'' prerequisite, the proposed
rule allowed them to apply for an RMC preemptively--that is, to apply
in advance of the quarter-end so that the credit union receives any RMC
for which it qualifies before the approaching effective date when it
would fail its RBNW requirement. 67 FR at 38434. As revised, Sec.
702.108 would allow a credit union to apply for an RMC at any time
before the next quarter-end effective date if on any of the current or
three preceding effective dates of classification it has either failed
an applicable RBNW requirement, or met it by less than 100 basis
points. An RMC granted preemptively would allow a credit union
genuinely at risk of failing an RBNW requirement to seamlessly maintain
its initial classification as either ``adequately capitalized'' or
``well capitalized.'' The nine commenters who addressed this endorsed
the proposed relaxation of the RMC application prerequisites.
Therefore, the final rule adopts the revisions to Sec. 702.108 as
proposed.
6. Section 702.201--PCA for ``Adequately Capitalized'' Credit Unions
a. Earnings retention. The proposed rule identified two flaws in
the operation of the quarterly earnings retention requirement that
applies to credit unions classified ``adequately capitalized'' or
lower. First, that subsection (a) failed to specify that it is the
dollar amount of net worth that must increase by the equivalent of 0.1
percent of assets per quarter, not the net worth ratio itself. (Changes
in the net worth ratio will not match changes in the dollar amount of
net worth unless net worth and total assets were to increase or
decrease by exactly the same percentage.) Second, that subsection (a)
technically does not allow credit unions to meet the statutory annual
minimum transfer of the equivalent of 0.4 percent of total assets on an
average basis over four quarters. As originally written, that
subsection requires that the equivalent of 0.1 percent of assets be set
aside in each and every quarter of the year, regardless whether the
credit union has set aside more than the quarterly minimum in prior
quarters.
To address both flaws, the proposed rule revised subsection (a) to
specify that it is the ``the dollar amount'' of net
[[Page 71082]]
worth that must be increased, not the net worth ratio itself, and to
permit the minimum increase to be made ``either in the current quarter,
or on average over the current and three preceding quarters.'' None of
the commenters addressed these revisions. Therefore, the final rule
adopts them as proposed.
b. Decrease in retention. Subsection (b) authorized NCUA, on a
case-by-case basis, to permit a credit union to increase net worth by
an amount that is less than the quarterly minimum (equivalent of 0.1
percent of assets) when necessary to avoid a significant redemption of
shares and to further the purpose of PCA. Sec. 702.201(b); 12 U.S.C.
1790d(e)(2). Since the adoption of part 702, however, some credit
unions have decreased their quarterly earnings retention, either
without seeking NCUA's permission at all, or prior to seeking NCUA's
permission, in order to pay dividends as they deem necessary. To
prevent unilateral decreases in earnings retention, the proposed rule
revised subsection (b) to add the requirement that a request to
decrease earnings retention must be submitted in writing no later than
14 days before the quarter end. NCUA would be under no obligation to
grant applications submitted after the 14-day deadline expires or after
the quarter-end. Further, NCUA would be entitled to take supervisory or
other enforcement action against credit unions that either decrease
their earnings retention without permission, or persist in failing to
timely apply for permission.
Two commenters advocated a more flexible approach--making the
application period negotiable, and accepting verbal applications after
the deadline, both on a case-by-case basis. The NCUA Board continues to
believe that a documented request submitted within a ``bright line''
time frame is necessary for two reasons. First, to give credit unions
clear notice of when they must apply for a decrease. Second, to
facilitate uniform discipline of credit unions that unilaterally pay
dividends without advance permission to decrease their earnings
retention. A third commenter objected that a request to decrease
earnings retention should not be required when a credit union is
operating under an approved net worth restoration plan (``NWRP'') that
projects quarterly earnings retention that is less than the minimum.
See Sec. 702.206(c)(1)(ii). In fact, a separate request for a decrease
is not required under these circumstances because, as explained below,
earnings retention is effectively subject to quarterly evaluation as a
function of the NWRP. For these reasons, the final rule adopts the
revisions to subsection (b) as proposed.
c. Decrease by FISCU. The requirement to ``consult and seek to work
cooperatively'' with State officials when deciding whether a State-
chartered credit union may decrease its earnings retention was
originally located in Sec. 702.205(c), where it was misidentified as a
DSA. Because Sec. 702.205(c) applies only to DSAs, the final rule
relocates the ``consult and work cooperatively'' requirement to a new
subsection (c) of Sec. 702.201.
d. Periodic review. Part 702 provides that a decision permitting a
decrease in earnings retention is ``subject to review and revocation no
less frequently than quarterly.'' Sec. 702.201(b); 12 U.S.C.
1790d(e)(2)(B). In practice, the ``no less frequently than quarterly''
timetable is too vague to indicate when such a review must take place.
To coincide with the quarterly Call Reporting schedule that drives part
702, the proposed rule added a new subsection (d) to require uniform
``quarterly review and revocation,'' except when a credit union
classified ``undercapitalized'' or lower is operating under an approved
NWRP. NCUA received no comments on this modification.
For ``adequately capitalized'' credit unions (for whom earnings
retention is the only MSA), quarterly review is implicit because a
request to decrease earnings retention already must be renewed on a
quarter-by-quarter basis. However, for credit unions classified
``undercapitalized'' or lower, separate quarterly review would be
redundant when an approved NWRP is in place. To be approved, an NWRP
must, in addition to prescribing quarterly net worth targets, Sec.
702.206(c)(1)(i), project the amount of earnings retention, decreased
as permitted by NCUA, for each quarter of the term of the NWRP. Sec.
702.206(c)(1)(ii). Typically, approved NWRPs permit decreases in
earnings retention extending for successive quarters over the term of
the plan. These decreases are effectively subject to quarterly review
and revocation as a function of the NWRP. A credit union that falls to
a lower net worth category because it failed to implement the steps or
to meet the quarterly net worth targets in its NWRP may be required to
file a new NWRP, Sec. 702.206(a)(3), thereby revoking the then-current
NWRP approving future decreases in earnings retention. See also 12 CFR
747.2005(b)(3) (civil money penalty for failure to implement NWRP). In
contrast, when a credit union is implementing the prescribed steps and
meeting its net worth targets, there likely would be no reason to
discontinue the decreased earnings retention approved in its NWRP.
Because quarterly review is effectively built-in to the NWRP,
proposed new subsection (d) exempted credit unions operating under an
NWRP from the quarterly review that Sec. 702.201 imposes on
``adequately capitalized'' credit unions. NCUA received no comments on
this exemption. Accordingly, the final rule adopts new subsection (d)
as proposed.
7. Section 702.204--PCA for ``Critically Undercapitalized'' Credit
Unions
a. ``Other corrective action''. When a credit union becomes
``critically undercapitalized'' (net worth ratio <2%), part 702 gives
the NCUA Board 90 days in which to either place the credit union into
conservatorship, liquidate it, or impose ``other corrective action * *
* to better achieve the purpose of [PCA].'' 12 U.S.C. 1790d(i)(1);
Sec. 702.204(c)(1). NCUA so far has interpreted the option to impose
``other corrective action'' (``OCA'') as requiring some further action
in addition to complying with the steps prescribed in an approved NWRP
for meeting quarterly net worth targets. Some further action would seem
appropriate when a credit union either is not complying with its
approved NWRP, or is implementing the prescribed action steps but still
failing to achieve its quarterly net worth targets. But when a credit
union has been both implementing the steps in its NWRP and timely
achieving its net worth targets, demanding further action is
superfluous, if not punitive. NCUA has found it difficult to fashion
OCA that is more than a makeweight in these circumstances.
Congress left it entirely to the NCUA Board to ``take such other
action'' in lieu of conservatorship and liquidation ``as the Board
determines would better achieve the purpose of [PCA], after documenting
why the action would better achieve that purpose.'' 12 U.S.C.
1790d(i)(1)(b). See also S. Rep. No. 193, 105th Cong., 2d Sess. 15
(1998). The NCUA Board has determined that the purpose of PCA--building
net worth to minimize share insurance losses--is not undermined by
declining to impose OCA when it is documented that a credit union
already is achieving the purpose of PCA by complying with an approved
NWRP and achieving its prescribed net worth targets. In other words,
there would be no reason to demand more than complete success from a
credit union that, so far, is completely successful in building net
worth.
[[Page 71083]]
To implement a more flexible approach to imposing OCA in lieu of
conservatorship and liquidation, the proposed rule revised subsection
(c)(1)(iii) to provide that ``[OCA] may consist, in whole or in part,
of complying with the timetable of quarterly steps and meeting
quarterly net worth targets prescribed in an approved [NWRP].'' Sec.
702.204 (c)(1)(iii). This would permit, but not require, NCUA to limit
OCA to directing a credit union that already is in compliance with its
approved NWRP to simply continue to comply, without undertaking any
further action beyond what the NWRP already requires. NCUA received two
comments; both supported this shift in approach to implementing OCA.
Accordingly, the final rule adopts revised subsection (c)(1)(iii) as
proposed.
b. 10-day appeal period. The NCUA Board's authority to decide
whether to conserve a ``critically undercapitalized'' credit union,
liquidate it, or allow OCA may be delegated only in the case of credit
unions having assets of less than $5 million. 12 U.S.C. 1790d(i)(4);
Sec. 702.204(c)(4). In such cases, the credit union has a statutory
``right of direct appeal to the NCUA Board of any decision made by
delegated authority.'' Id. However, neither the Act nor part 741 sets a
deadline by which a credit union must appeal a delegated decision to
the NCUA Board. The lack of a deadline for exercising the right to
appeal delegated decisions to the NCUA Board gives ``critically
undercapitalized'' credit unions at least the appearance of an
unlimited opportunity to challenge a Regional Director's decision.
To impose similar finality upon the unfolding timetable of
decisions that starts when a credit union becomes ``critically
undercapitalized,'' the proposed rule revised subsection (c)(4) to set
a deadline of ten calendar days in which to appeal a delegated
decision. Objecting that 10 days is too few for small credit unions
with unsophisticated management, the one commenter who addressed this
section advocated a 30-day appeal period instead. However, the final
rule adopts the proposed 10-day appeal period for two reasons. First,
it parallels the 10-day window that the Act provides for seeking
judicial review of any statutory conservatorship or liquidation. 12
U.S.C. 1786(h)(3), 1787(a)(1)(B). Second, a longer appeal period would
unreasonably delay the payout of shares to members that must promptly
follow a liquidation.
c. Insolvent FCU. The NCUA Board generally must liquidate a credit
union eventually if it remains ``critically undercapitalized.'' Sec.
702.204(c). Independently of PCA, however, the Act directs that
``[u]pon its finding that a Federal credit union * * * is insolvent,
the Board shall close such credit union for liquidation.'' 12 U.S.C.
1787(a)(1)(A). Therefore, in the case of a ``critically
undercapitalized'' federal credit union that is insolvent (i.e., has a
net worth ratio of less than zero), NCUA has the option of an
insolvency-based liquidation. To clarify that this option is available,
new subsection (d) to Sec. 702.204 provides that ``a `critically
undercapitalized' federal credit union that has a net worth ratio of
less than zero percent (0%) may be placed into liquidation on grounds
of insolvency pursuant to [Sec. 1787(a)(1)(A)].''
8. Section 702.205--Consultation With State Officials on Proposed PCA
As explained above in reference to new subsection (c) of Sec.
702.201, a cross-reference in Sec. 702.205(c) misidentified the
decision whether to permit a decrease in a FISCU's quarterly earnings
retention as a DSA. To correct this error, the final rule deletes the
erroneous cross-reference and relocates the ``consult and seek to work
cooperatively'' requirement in Sec. 702.201(c).
9. Section 702.206--Net Worth Restoration Plans
a. Contents of NWRP. Section 702.206 prescribes the contents of an
NWRP that must be submitted for approval by credit unions classified
``undercapitalized'' or lower.\6\ Among the items an NWRP must address
is how the credit union will comply with MSAs and DSAs. Sec.
702.206(c)(1)(iii). Some credit unions that were not subject to a DSA
interpreted that requirement as a demand either to consent to a DSA, or
to explain prospectively how the credit union would comply with DSAs if
the NCUA Board were to impose any. The proposed rule revised subsection
(c)(1)(iii) to clarify that an NWRP need only address whatever DSAs, if
any, the NCUA Board already has imposed on the credit union. The one
commenter who addressed this revision supported it. The final rule
adopts revised subsection (c)(1)(iii) as proposed.
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\6\ As noted earlier in this preamble, the comments on the
concept of ``safe harbor'' approval of an NWRP are addressed in a
separate proposed rule found elsewhere in this volume of the Federal
Register.
---------------------------------------------------------------------------
b. Publication of NWRP. Publication of an NWRP is not a
prerequisite to enforcing its provisions as authorized in 12 CFR
747.2005, but this fact is not expressly stated in Sec. 702.206
itself. The omission has led some to assume that an NWRP, like a
``Letter of Understanding and Agreement,'' must be published in order
to subsequently be enforceable. The Act mandates that a ``written
agreement or other written statement'' must be published in order for a
violation to be enforceable ``unless the Board, in its discretion,
determines that publication would be contrary to the public interest.''
12 U.S.C. 1786(s)(1)(A). To the extent an NWRP qualifies as a ``written
agreement or other written statement'' under Sec. 1786(s)(1)(A), the
NCUA Board does not intend to publish NWRPs because it has determined
that publication would expose the credit union to reputation risk that
would be contrary to the public interest. Therefore, the proposed rule
added new subsection (i) to Sec. 702.206, clarifying that ``An NWRP
need not be published to be enforceable because publication would be
contrary to the public interest.'' NCUA received two comments on the
clarification and both supported it. Therefore, the final rule adopts
new subsection (i) as proposed.
c. Alternative capital. The proposed rule did not reference
subsection (e), which permits consideration of any ``regulatory
capital'' a credit union may have in evaluating an NWRP. Nonetheless,
NCUA received three comments urging the adoption of some form of
alternative capital not only to be considered in evaluating an NWRP,
but also to offset an applicable RBNW requirement. A fourth commenter
opposed alternative capital in any form. The final rule does not
address these comments because this rulemaking was not intended by the
NCUA Board to be a forum for exploring or introducing alternative forms
of capital.
10. Section 702.303--PCA for ``Adequately Capitalized'' New Credit
Unions
Under the original alternative system of PCA for new credit unions,
a credit union that managed to become ``adequately capitalized'' while
still new was subject to the same minimum earnings retention that
applies to non-new credit unions that are ``adequately capitalized.''
\7\ Sec. 702.201(a). In contrast, ``new'' credit unions that stayed
classified below ``adequately capitalized'' were not subject to minimum
earnings retention; they had to increase net worth only ``by an amount
reflected in the credit union's
[[Page 71084]]
approved initial or revised business plan.'' Sec. 702.304(a)(1). This
created a disincentive for a ``new'' credit union to become
``adequately capitalized'' because the reward for keeping its net worth
ratio below 6 percent is that it is relieved from complying with a
minimum earnings retention amount.
---------------------------------------------------------------------------
\7\ The final rule corrects the wording of Sec. 702.303, which
inadvertently extended that section to ``new'' credit unions
classified lower than ``adequately capitalized.'' Sections 702.304
and 702.305 continue to prescribe PCA for new credit unions in those
net worth categories.
---------------------------------------------------------------------------
To eliminate the disincentive, the proposed rule put all new credit
unions having a net worth lower than 7 percent in parity for purposes
of earnings retention. 67 FR at 38437. An ``adequately capitalized''
new credit union would no longer be subject to the same minimum
earnings retention as a non-new counterpart. Instead, like new credit
unions in lower categories, it would be required to increase net worth
quarterly by ``an amount reflected in its approved initial or revised
business plan'' until it becomes ``well capitalized.'' In the absence
of such a plan, however, the credit union would remain subject to the
same quarterly minimum earnings retention as non-``new'' credit unions.
Two commenters supported parity among new credit unions for
earnings retention purposes. Advocating a far less flexible approach, a
third commenter (a banking industry trade association) objected that
exempting any new credit unions from the statutory minimum earnings
retention is not in accordance with CUMAA. That commenter overlooks the
fact that CUMAA applies a minimum earnings retention requirement to
non-new credit unions; it prescribed no earnings retention requirement
at all for new credit unions. 12 U.S.C. 1790d(e)(1). Instead, CUMAA
gave NCUA discretion in developing an alternative system of PCA,
provided that it recognized that new credit unions initially have no
net worth; need reasonable time to accumulate net worth; and need
incentives to become ``adequately capitalized'' by the time they no
longer qualify as ``new.'' 12 U.S.C. 1790d(b)(2)(B). See 64 FR 27090,
27098 (May 18, 1999) (justification for flexible approach). It is
entirely consistent with this last statutory criterion to eliminate any
disincentive--such as minimum earnings retention--for a new credit
union to reach ``adequately capitalized'' while it is still ``new.''
11. Section 702.304--PCA for ``Moderately Capitalized,''
``Marginally Capitalized'' and ``Minimally Capitalized'' New Credit
Unions
As explained above, the final rule modifies Sec. 702.201(a) to
specify that earnings retention must increase the ``the dollar amount''
of net worth, not simply the net worth ratio itself. To conform to that
modification, Sec. 702.304(a)(1) is revised accordingly.
12. Section 702.305--PCA for ``Uncapitalized'' New Credit Unions
a. Member business loan restriction. Part 702 originally gave an
``uncapitalized'' new credit union full relief from all MSAs while it
was operating within the period allowed by its initial business plan to
have no net worth. Sec. 702.305(a). An unintended consequence of this
forbearance was that ``uncapitalized'' credit unions were free of the
MSA restricting MBLs; that restriction applied only when a credit union
managed to attain some net worth and rise to the ``minimally
capitalized'' net worth category.\8\ Yet a ``minimally capitalized''
credit union arguably is better suited to expand its MBL portfolio than
one that remains ``uncapitalized.'' Further, making PCA more demanding
as a credit union's net worth and category classification improve,
rather than relaxing it, is contrary to the purpose of PCA. To rectify
this unintended consequence, the proposed rule extended subsection (a)
to include an ``uncapitalized'' new credit union that is operating with
no net worth as permitted by an initial business plan. 67 FR at 38437.
As a result, ``uncapitalized'' new credit unions are all subjected to
the MBL restriction, Sec. 702.305(a)(3), regardless whether they are
operating with no net worth under an initial business plan, or have
declined to ``uncapitalized'' after reaching a higher net worth
category. NCUA received no comments on this section. Accordingly, the
final rule adopts revised subsection (a) as proposed.
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\8\ The earnings retention requirement, Sec. 702.305(a)(1), is
ineffective against an ``uncapitalized'' credit union because a
credit union that has an undivided earnings deficit has no net worth
to retain.
---------------------------------------------------------------------------
b. Filing of revised business plan. Subsection (a)(2) generally
required an ``uncapitalized'' new credit union to submit a revised
business plan (``RBP'') within 90 days following either of two events--
expiration of the period that the credit union's initial business plan
allows it to operate with no net worth, or the effective date that it
declined to ``uncapitalized'' from a higher net worth category. This
contrasts with the 30-day period that ``moderately capitalized,''
``marginally capitalized'' and ``minimally capitalized'' credit unions
are given to file an RBP. Sec. 702.306(a)(1). Ninety days is an unduly
long filing period given that an ``uncapitalized'' credit union faces
mandatory conservatorship or liquidation if it fails to increase net
worth to at least two percent. Furthermore, it is counterintuitive to
give a credit union that has a net worth deficit three times as long to
devise a plan for generating positive earnings than is given to credit
unions that already have net worth.
The proposed rule put all new credit unions that must file an RBP
in parity. First, it deleted the 90-day filing window for
``uncapitalized'' credit unions, thereby limiting them to the general
30-day window, once they are required to file an RBP. 67 FR at 38438.
Second, it reorganized subsection (a)(2) to parallel the conditions
that trigger other less than ``adequately capitalized'' new credit
unions to revise their business plans, Sec. 702.304(a)(2), even though
only ``uncapitalized'' credit unions are initially allowed to operate
with no net worth. To that end, the proposed rule required an
``uncapitalized'' credit union to submit an RBP if it either: fails to
increase net worth (i.e., reduce its earnings deficit) as its existing
business plan provides; has no approved business plan; or has violated
the MSA restricting MBLs.
The sole commenter on this topic supported the 30-day window for
filing an RBP, while also urging NCUA to relieve the burden on new
credit unions by providing assistance in preparing RBPs. See Sec.
702.307(a) (assistance in preparing RBPs). For the reasons set forth
above in this section, the revisions to subsection (a)(2) are adopted
as proposed.
c. Liquidation or conservatorship if ``uncapitalized'' after 120
days. Subsection (c)(2) generally required the NCUA Board to conserve
or liquidate an ``uncapitalized'' new credit union that remains
``uncapitalized'' 90 days after its RBP is approved. It was silent,
however, regarding conservatorship or liquidation of a credit union
whose RBP is rejected. To correct this oversight, the proposed rule
mandated conservatorship or liquidation of an ``uncapitalized'' new
credit union after a 120-day period regardless whether an RBP has been
approved or rejected. 67 FR at 38438. This period combines the 30-day
window for submitting an RBP, Sec. 702.306(a)(1), and the original 90-
day period allowed for the credit union to develop sufficient positive
earnings to avoid conservatorship and liquidation. The 120-day period
runs from the later of either the effective date of classification as
``uncapitalized'' or, if a credit union is operating with no net worth
in the period prescribed by its initial business plan, the last day of
the calendar month after expiration of that period. Because the period
for operating with no net worth typically runs on a quarterly basis,
the last day of the
[[Page 71085]]
calendar month after it expires parallels the calendar month that
separates the quarter-end and the effective date of classification as
``undercapitalized.''
NCUA received no comments on the revisions to subsection (c)(2)
and, therefore, they are adopted as proposed. In addition, the final
rule relocates to a new subsection (c)(3) the existing exception to
mandatory conservatorship or liquidation for a credit union that is
able to demonstrate that it is viable and has a reasonable prospect of
becoming ``adequately capitalized.''
d. ``Uncapitalized'' new FCU. As explained above in reference to
new subsection (d) of Sec. 702.204, there are two options for
liquidating a federal credit union that has no net worth--a PCA-based
liquidation, 12 U.S.C. 1787(a)(3)(A)(ii), or an insolvency-based
liquidation. 12 U.S.C. 1787(a)(1)(A). Both are available when a new
federal credit union either fails to timely submit an RBP, Sec.
702.305(c)(1), or remains ``uncapitalized'' 120 days after the
effective date of classification, Sec. 702.305(c)(2). To clarify that
this option is available, the final rule adds new subsection (d) to
Sec. 702.305, providing that ``an `uncapitalized' federal credit union
may be placed into liquidation on grounds of insolvency pursuant to
[Sec. 1787(a)(1)(A)].''
13. Section 702.306--Revised Business Plans for New Credit Unions
a. Filing schedule. Subsection (a)(1) required ``moderately
capitalized,'' ``marginally capitalized'' and ``minimally capitalized''
credit unions to file an RBP within 30 days after failing to meet a
quarterly net worth target prescribed in an existing business plan. As
discussed above, the final rule eliminates the 90-day filing window for
``uncapitalized'' credit unions. Sec. 702.305(a)(2). To conform to
that modification, the final rule also modifies subsection (a)(1) to
apply the 30-day filing window uniformly to all new credit unions
classified less than ``adequately capitalized'' or that have violated
the MSA restricting MBLs. Sec. Sec. 702.304(a)(3), 702.305(a)(3).
The original rule's 30-day filing period ran from ``the effective
date (per Sec. 702.101(b)) of the credit union's failure to meet a
quarterly net worth target prescribed in its then-present business
plan.'' Sec. 702.306(a)(1). Even as revised, however, Sec.
702.101(b), which addresses the effective date of classification among
the net worth categories, says nothing to determine when a quarterly
net worth target is met. The subtlety of this distinction may confuse
credit unions that have no then-present approved business plan or have
violated the MSA restricting MBLs. Therefore, the proposed rule further
revised subsection (a)(1) to effectively give new credit unions that
fail to meet a quarterly target 60 days following the quarter-end to
file an RBP. Sec. 702.306(a)(1)(i). The 60-day period combines the
calendar month that separates the quarter-end from the effective date
of classification, with the uniform 30-day filing period that commences
on the effective date. Finally, the proposed rule revised subsection
(a)(1) still further to clarify that, for new credit unions that either
have no approved business plan or that have violated the MBL
restriction, the effective date of classification as less than
``adequately capitalized'' triggers the 30-day window for filing an
RBP. Sec. 702.306(a)(1)(ii)-(iii). NCUA received no comments on the
revisions to the filing schedule for RBPs. Accordingly, revised
subsection (a)(1) is adopted as proposed.
b. Timetable of net worth targets. Subsection (b)(2) prescribed the
contents of an RBP, which must include a timetable of quarterly net
worth targets extending for the term of the plan ``so that the credit
union becomes `adequately capitalized' and remains so for four
consecutive quarters.'' It also warned that a ``complex'' new credit
union that is subject to an RBNW requirement may need to attain a net
worth ratio higher than 6 percent to become ``adequately capitalized.''
The proposed rule rectified two flaws in this section. First, in
contrast to an NWRP, the objective of an RBP is to build net worth so
that a new credit union becomes ``adequately capitalized'' by the time
it no longer is ``new,'' \9\ rather than by the end of the term of the
plan. 65 FR at 8578; 64 FR 27090, 27099 (May 18, 1999) (chart). The
proposed rule revised subsection (b)(2) so that an RBP's net worth
targets ensure the new credit union will become ``adequately
capitalized'' by the time it no longer qualifies as ``new.'' 67 FR at
38438. Second, under part 702 new credit unions cannot be ``complex''
or subject to an RBNW requirement because, by definition, they do not
meet the $10 million asset minimum. Sec. 702.103(a)(1). Therefore, the
proposed rule deleted the warning to new credit unions that are
``complex.'' NCUA received no comments on either of these revisions.
Accordingly, revised subsection (b)(2) is adopted as proposed.
---------------------------------------------------------------------------
\9\ A credit union remains ``new'' as long as it is in operation
less than 10 years and has assets of $10 million or less. 12 U.S.C.
1790d(o)(4); Sec. 702.301(b).
---------------------------------------------------------------------------
c. Publication of RBP. As explained above, the final rule adds a
new subsection (i) to Sec. 702.206, to clarify that publication of an
NWRP is not a prerequisite to enforcing its provisions as authorized in
12 CFR 747.2005. The same is true of an RBP, but this fact was
similarly omitted from Sec. 702.306. To the extent an RBP qualifies as
a ``written agreement or other written statement'' under 12 U.S.C.
1786(s)(1)(A), the NCUA Board does not intend to publish RBPs because
it has determined that publication would expose the credit union to
reputation risk that would be contrary to the public interest.
Therefore, the final rule adds new subsection (h) to Sec. 702.306,
clarifying that ``An RBP need not be published to be enforceable
because publication would be contrary to the public interest.''
13. Section 702.401--Charges to Regular Reserve
a. Regular reserve. Although the proposed rule did not reference
subsection (b), which requires credit unions ``to establish and
maintain a regular reserve account,'' four commenters criticized it as
obsolete. The NCUA Board prefers to retain the regular reserve at this
time primarily for two reasons. First, it facilitates the statutory
earnings retention requirement, 12 U.S.C. 1790d(e), by holding the
earnings that credit unions classified ``adequately capitalized'' or
lower are required to ``set aside.'' Sec. 702.201. And second, it
continues to function as an early warning signal of safety and
soundness problems because, as explained below, regulatory review and
approval is required before a credit union can take certain actions--
charging losses to, and paying dividends from, the regular reserve--
that would cause its net worth to decline below 6 percent.
b. Minimum net worth to charge losses without approval. Subsection
(c)(1) originally allowed the board of directors of a federally-insured
credit union that had depleted the balance of its undivided earnings
and other reserves to charge losses to the regular reserve account
without regulatory approval so long as the charge did not reduce the
credit union's net worth classification below ``well capitalized''
(i.e., net worth ratio of 7 percent or greater). Sec. 702.401(c)(1).
That net worth category was established as the minimum for charging
losses without regulatory approval because the categories below ``well
capitalized'' trigger MSAs. However, the proposed rule lowered the
minimum category to ``adequately capitalized'' (i.e., 6 percent net
worth ratio) in order to give credit unions the flexibility to decide
for
[[Page 71086]]
themselves whether charging losses is worth triggering the single MSA
that applies to that category--the quarterly earnings retention. Sec.
702.201(a); 67 FR at 38439. In addition, the proposed rule expressly
reminded credit unions that they must deplete their undivided earnings
balance before making any charge to the regular reserve. All seven of
the commenters who addressed these proposed revisions supported them.
Thus, revised subsection (c)(1) is adopted as proposed.
c. Dual approval to charge losses. Subsection (c)(2) originally
required the prior approval of the ``appropriate State official,'' but
not the approval of the ``appropriate Regional Director,'' when a
State-chartered credit union seeks to charge losses that would cause it
to decline below the minimum category. Omitting the approval of NCUA
Regional Directors was inconsistent with the protocol applied elsewhere
in part 702 requiring joint State and Federal approval of PCA decisions
affecting State-chartered credit unions. E.g., Sec. Sec.
702.206(a)(1), 702.306(a)(1). To correct this inconsistency, the
proposed rule modified Sec. 702.401(c)(2) to require the concurrence
of both the ``appropriate State official'' and ``the appropriate
Regional Director'' to permit a State-chartered credit union to charge
losses to the regular reserve. In addition, the proposed rule clarified
that written approval may consist of an approved NWRP that allows such
charges.
The sole commenter on the revisions proposed for subsection (c)(2)
objected that the dual approval requirement would unnecessarily
overburden NCUA with the oversight of State officials. On the contrary,
the NCUA Board does not consider its approval to be a function of
overseeing State officials. Rather, its approval for a State-chartered
credit union to charge losses to the regular reserve is integral to PCA
because of NCUA's independent role as insurer of the shares and
deposits of federally-insured State-chartered credit unions.
Accordingly, revised subsection (c)(2) is adopted as proposed.
15. Section 702.403--Payment of Dividends
a. Minimum net worth to pay dividends without approval. Subsection
(b)(1) originally allowed the board of directors of a federally-insured
credit union that had depleted the balance of undivided earnings to pay
dividends out of the regular reserve account without regulatory
approval so long as it did not cause the credit union to decline below
``well capitalized.'' Sec. 702.403(b)(1). As explained above in regard
to Sec. 702.401(c)(1), the proposed rule similarly lowered to
``adequately capitalized'' the minimum net worth category in which
credit unions may pay dividends out of the regular reserve without
regulatory approval. This would give credit unions that have depleted
undivided earnings the flexibility to decide for themselves whether
drawing down the regular reserve to pay dividends is worth triggering
the quarterly earnings retention requirement that applies to
``adequately capitalized'' credit unions. Sec. 702.201(a).
b. Dual approval to pay dividends. As with Sec. 702.401(c)(2)
discussed above, subsection (b)(2) originally required the prior
approval of the ``appropriate State official,'' but not the approval of
the ``appropriate Regional Director,'' when paying dividends out of the
regular reserve would cause a State-chartered credit union to decline
below the minimum net worth category. In addition, omitting Regional
Director approval may suggest, incorrectly, that a State official's
approval to pay dividends from the regular reserve under Sec.
702.401(b) makes it unnecessary to independently obtain both the State
official's and the Regional Director's approval under Sec. 702.201(b)
for a State-chartered credit union to decrease its earnings retention
in order to pay dividends. For this reason and the reason explained in
the preceding section, the proposed rule corrected this omission by
revising subsection (b)(2) to require the concurrence of both the
``appropriate State official'' and ``the appropriate Regional
Director'' for a State-chartered credit union to pay dividends out of
its regular reserve. In addition, the proposed rule clarified that
written approval may consist of an approved NWRP that allows such
dividend payments. The two commenters who addressed the revisions
proposed for subsections (b)(1) and (b)(2) supported them. Accordingly,
they are adopted as proposed.
Subpart A of Part 741--Requirements for Insurance
16. Section 741.3--Adequacy of Reserves
Subsection (a)(2) originally allowed State-chartered credit unions
to charge losses other than loan losses to the regular reserve in
accordance with State law or procedures, but without regulatory
approval, provided that the charges did not cause the credit union to
decline below ``well capitalized.'' 12 CFR 741.3(a)(2). The preceding
subsection (a)(1) incorporates by reference all of part 702 as a
prerequisite for insurability of State-chartered credit unions. As
discussed above, Sec. 702.401(c) already imposes on State-chartered
credit unions the same conditions for regulatory approval that
subsection (a)(2) prescribes for an insured credit union seeking to
charge losses to the regular reserve. Because this makes subsection
(a)(2) redundant, the final rule eliminates it from Sec. 741.3.
The final rule's removal of subsection (a)(2) does not mean that
Sec. 702.401(c) preempts ``either state law or procedures established
by the appropriate State official'' that restrict a State-chartered
credit union's ability to charge losses to the regular reserve. On the
contrary, such charges would independently remain subject to applicable
State laws and procedures. Further, an appropriate State official would
retain complete discretion to withhold approval of such charges, under
Sec. 702.401(c)(2), on grounds that they would violate State law or
procedures.
Subpart L of Part 747--Issuance, Review and Enforcement of Orders
Imposing PCA
17. Section 747.2005--Enforcement of Orders
The NCUA Board is authorized to ``assess a civil money penalty
against a credit union which fails to implement a net worth restoration
plan * * * or a revised business plan under * * * part 702.'' 12 CFR
747.2005(b)(2). As explained above, the NCUA Board has determined that
it is not in the public interest to require publication of an NWRP or
an RBP in order for either to be enforceable and Sec. Sec. 702.206 and
702.306 are modified accordingly. The final rule makes a conforming
modification to Sec. 747.2005(b)(2) to provide that a civil money
penalty may be assessed for failure to implement a plan ``regardless
whether the plan was published.''
Regulatory Procedures
Regulatory Flexibility Act
The Regulatory Flexibility Act requires NCUA to prepare an analysis
describing any significant economic impact a proposed regulation may
have on a substantial number of small credit unions (primarily those
under $1 million in assets). The proposed rule improves and simplifies
the existing system of PCA mandated by Congress. 12 U.S.C. 1790d. The
NCUA Board has determined and certifies that the final rule will not
have a significant economic impact on a substantial number of small
credit unions and, therefore, a Regulatory Flexibility Analysis is not
required.
[[Page 71087]]
Paperwork Reduction Act
The reporting requirements in this final rule have been submitted
to the Office of Management and Budget. Under the Paperwork Reduction
Act of 1995, no person is required to respond to a collection of
information unless it displays a valid OMB number. Control number 3133-
0161 has been issued for part 702 and will be displayed in the table at
12 CFR part 795.
Executive Order 13132
Executive Order 13132 encourages independent regulatory agencies to
consider the impact of their regulatory actions on State and local
interests. NCUA, an independent regulatory agency as defined in 44
U.S.C. 3502(5), voluntarily adheres to the fundamental federalism
principles addressed by the executive order. This final rule will apply
to all federally-insured credit unions, including State-chartered
credit unions. Accordingly, it may have a direct effect on the States,
on the relationship between the national government and the States, or
on the distribution of power and responsibilities among the various
levels of government. This impact is an unavoidable consequence of
carrying out the statutory mandate to adopt a system of prompt
corrective action to apply to all federally-insured credit unions. NCUA
staff has consulted with a committee of representative State regulators
regarding the impact of the proposed revisions on State-chartered
credit unions. Their comments and suggestions are reflected in the
proposed rule.
Small Business Regulatory Enforcement Fairness Act
The Small Business Regulatory Enforcement Fairness Act of 1996
(Pub. L. 104-121) provides generally for congressional review of agency
rules. A reporting requirement is triggered in instances where NCUA
issues a final rule as defined by section 551 of the Administrative
Procedure Act, 5 U.S.C. 551. The Office of Management and Budget has
determined that this rule is not a major rule.
List of Subjects
12 CFR Parts 702 and 741
Credit unions, Reporting and recordkeeping requirements.
12 CFR Part 747
Administrative practices and procedures, Credit unions.
By the National Credit Union Administration Board on November
21, 2002.
Becky Baker,
Secretary of the Board.
For the reasons set forth above, 12 CFR parts 702, 741 and 747 are
amended as follows:
PART 702--PROMPT CORRECTIVE ACTION
1. The authority citation for part 702 continues to read as
follows:
Authority: 12 U.S.C. 1766(a), 1790d.
2. Amend Sec. 702.2 as follows:
a. Redesignate current paragraphs (i) through (k) as new paragraphs
(j) through (l) respectively.
b. Add new paragraph (i) to read as set forth below;
c. Revise newly designated paragraph (k)(1)(i) to read as set forth
below;
d. Revise newly designated paragraph (k)(1)(iv) to read as set
forth below; and
e. Remove from newly designated paragraph (k)(2) the cross-
reference to ``paragraph (j)(1)'' and add in its place a cross-
reference to ``paragraph (k)(1)''.
Sec. 702.2 Definitions.
* * * * *
(i) Senior executive officer means a senior executive officer as
defined by 12 CFR 701.14(b)(2).
* * * * *
(k) Total assets. (1) * * *
(i) Average quarterly balance. The average of quarter-end balances
of the current and three preceding calendar quarters; or
* * *
(iv) Quarter-end balance. The quarter-end balance of the calendar
quarter as reported on the credit union's Call Report.
* * * * *
3. Amend Sec. 702.101 as follows:
a. Add a heading to paragraph (b)(1) to read as set forth below;
b. Revise paragraph (b)(2) to read as set forth below;
c. Add a heading to paragraph (b)(3) to read as set forth below;
and
d. Revise the heading of paragraph (c), and paragraph (c)(1), to
read as follows:
Sec. 702.101 Measures and effective date of net worth classification.
* * * * *
(b) * * *
(1) Quarter-end effective date. * * *
(2) Corrected net worth category. The date the credit union
received subsequent written notice from NCUA or, if State-chartered,
from the appropriate State official, of a decline in net worth category
due to correction of an error or misstatement in the credit union's
most recent Call Report; or
(3) Reclassification to lower category. * * *
(c) Notice to NCUA by filing Call Report. (1) Other than by filing
a Call Report, a federally-insured credit union need not notify the
NCUA Board of a change in its net worth ratio that places the credit
union in a lower net worth category;
* * * * *
4. Amend Sec. 702.102 by revising Table 1 immediately preceding
paragraph (b) to read as follows:
Sec. 702.102 Statutory net worth categories.
* * * * *
[[Page 71088]]
[GRAPHIC] [TIFF OMITTED] TR29NO02.065
* * * * *
Sec. 702.103 [Amended]
5. Amend Sec. 702.103 as follows:
a. Remove the heading from paragraph (a);
b. Remove paragraph (b); and
c. Redesignate current paragraph (a) as the sectional introductory
text, and paragraphs (a)(1) and (a)(2) as paragraphs (a) and (b),
respectively.
Sec. 702.104 [Amended]
6. Amend Sec. 702.104 as follows:
a. Remove the number ``1'' from the parenthetical ``(Table 1)'' in
the introductory text and add in its place the number ``2''; and
b. Redesignate Table 1 immediately following paragraph (h) as Table
2.
Sec. 702.105 [Amended]
7. Amend Sec. 702.105 as follows:
a. Remove the number ``2'' from the parenthetical ``(Table 2)'' in
the introductory text and add in its place the number ``3'';
b. Remove the citation ``Sec. 702.2(k)'' in the introductory text
and add in its place the citation ``Sec. 702.2(m)''; and
c. Redesignate Table 2 immediately following paragraph (b) as Table
3.
Sec. 702.106 [Amended]
8. Amend Sec. 702.106 as follows:
a. Remove the number ``3'' from the parenthetical ``(Table 3)'' in
the introductory text and add in its place the number ``4''; and
b. Redesignate Table 3 immediately following paragraph (h) as Table
4.
9. Amend Sec. 702.107 as follows:
a. Remove the number ``4'' from the parenthetical ``(Table 4)'' in
the introductory text and adding in its place the number ``5'';
b. Revise paragraph (a) to read as set forth below;
c. Add new paragraph (d) immediately after paragraph (c)(6) to read
as set forth below;
d. Redesignate Table 4 immediately following new paragraph (d) as
Table 5;
e. Revise section (a) to Table 5 to read as set forth below; and
f. Add new section (d) to Table 5 as follows:
Sec. 702.107 Alternative components for standard calculation.
* * * * *
(a) Long-term real estate loans. The sum of:
(1) Non-callable. Non-callable long-term real estate loans as
follows:
(i) Eight percent (8%) of the amount of such loans with a remaining
maturity of greater than 5 years, but less than or equal to 12 years;
(ii) Twelve percent (12%) of the amount of such loans with a
remaining maturity of greater than 12 years, but less than or equal to
20 years; and
(iii) Fourteen percent (14%) of the amount of such loans with a
remaining maturity greater than 20 years;
(2) Callable. Long-term real estate loans callable in 5 years or
less as follows:
(i) Six percent (6%) of the amount of such loans with a documented
call provision of 5 years or less and with a remaining maturity of
greater than 5 years, but less than or equal to 12 years;
(ii) Ten percent (10%) of the amount of such loans with a
documented call provision of 5 years or less and with a remaining
maturity of greater than 12 years, but less than or equal to 20 years;
and
(iii) Twelve percent (12%) of the amount of such loans with a
documented call provision of 5 years or less and with a remaining
maturity of greater than 20 years;
* * * * *
(d) Loans sold with recourse. The alternative component is the sum
of:
(1) Six percent (6%) of the amount of loans sold with contractual
recourse obligations of six percent (6%) or greater; and
(2) The weighted average recourse percent of the amount of loans
sold with contractual recourse obligations of less than six percent
(6%), as computed by the credit union.
[[Page 71089]]
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10. Amend Sec. 702.108 as follows:
a. Revise the section heading to read as set forth below;
b. Redesignate current paragraphs (a) and (b) as paragraphs (b) and
(c), respectively;
c. Add a new paragraph (a) as set forth below; and
d. Revise newly designated paragraph (b) to read as set forth
below.
Sec. 702.108 Risk mitigation credit.
(a) Who may apply. A credit union may apply for a risk mitigation
credit if on any of the current or three preceding effective dates of
classification it either failed an applicable RBNW requirement or met
it by less than 100 basis points.
(b) Application for credit. Upon application pursuant to guidelines
duly adopted by the NCUA Board, the NCUA Board may in its discretion
grant a credit to reduce a risk-based net worth requirement under
Sec. Sec. 702.106 and 702.107 upon proof of mitigation of:
(1) Credit risk; or
(2) Interest rate risk as demonstrated by economic value exposure
measures.
* * * * *
11. Revise the heading of Appendixes A-F to Subpart A of Part 702
to read as follows:
Appendixes A-H to Subpart A of Part 702
12. Revise Appendix C to Subpart A to read as follows:
[[Page 71090]]
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13. Redesignate Appendix F to Subpart A as Appendix H.
14. Add new Appendixes F and G to Subpart A to read as follows:
[GRAPHIC] [TIFF OMITTED] TR29NO02.068
[[Page 71091]]
[GRAPHIC] [TIFF OMITTED] TR29NO02.069
15. Revise newly designated Appendix H to Subpart A to read as
follows:
[GRAPHIC] [TIFF OMITTED] TR29NO02.070
16. Revise Sec. 702.201 to read as follows:
Sec. 702.201 Prompt corrective action for ``adequately capitalized''
credit unions.
(a) Earnings retention. Beginning the effective date of
classification as ``adequately capitalized'' or lower, a federally-
insured credit union must increase the dollar amount of its net worth
quarterly either in the current quarter, or on average over the current
and three preceding quarters, by an amount equivalent to at least 1/
10th percent (0.1%) of its total assets, and must quarterly transfer
that amount (or more by choice) from undivided earnings to its regular
reserve account until it is ``well capitalized.''
(b) Decrease in retention. Upon written application received no
later than 14 days before the quarter end, the NCUA Board, on a case-
by-case basis, may permit a credit union to increase the dollar amount
of its net worth and quarterly transfer an amount that is less than the
amount required under paragraph (a) of this section, to the extent the
NCUA Board determines that such lesser amount--
(1) Is necessary to avoid a significant redemption of shares; and
(2) Would further the purpose of this part.
(c) Decrease by FISCU. The NCUA Board shall consult and seek to
work cooperatively with the appropriate State official before
permitting a federally-insured State-chartered credit union to decrease
its earnings retention under paragraph (b) of this section.
(d) Periodic review. A decision under paragraph (b) of this section
to permit a credit union to decrease its earnings retention is subject
to quarterly review and revocation except when the credit union is
operating under an approved net worth restoration plan that provides
for decreasing its earnings retention as provided under paragraph (b).
[[Page 71092]]
Sec. 702.202 [Amended]
17. Amend Sec. 702.202 as follows:
a. Remove the word ``transfer'' from the heading of paragraph
(a)(1) and add in its place the word ``retention.''
b. Remove the words ``or interest'' from the heading and from the
text of paragraph (b)(3).
Sec. 702.203 [Amended]
18. Amend Sec. 702.203 as follows:
a. Remove the word ``transfer'' from the heading of paragraph
(a)(1) and add in its place the word ``retention.''
b. Remove the words ``or interest'' from the heading and from the
text of paragraph (b)(3).
19. Amend Sec. 702.204 as follows:
a. Revise the heading of paragraph (a)(1) to read as set forth
below;
b. Revise paragraph (b)(3) to read as set forth below;
c. Revise paragraph (c)(1)(iii) to read as set forth below;
d. Revise paragraph (c)(4) to read as set forth below; and
e. Add new paragraph (d) to read as follows:
Sec. 702.204 Prompt corrective action for ``critically
undercapitalized'' credit unions.
(a) * * *
(1) Earnings retention. * * *
* * * * *
(b) * * *
(3) Restricting dividends paid. Restrict the dividend rates that
the credit union pays on shares as provided in Sec. 702.202(b)(3).
* * * * *
(c) * * *
(1) * * *
(iii) Other corrective action. Take other corrective action, in
lieu of conservatorship or liquidation, to better achieve the purpose
of this part, provided that the NCUA Board documents why such action in
lieu of conservatorship or liquidation would do so, provided however,
that other corrective action may consist, in whole or in part, of
complying with the quarterly timetable of steps and meeting the
quarterly net worth targets prescribed in an approved net worth
restoration plan.
* * *
(4) Nondelegation. The NCUA Board may not delegate its authority
under paragraph (c) of this section, unless the credit union has less
than $5,000,000 in total assets. A credit union shall have a right of
direct appeal to the NCUA Board of any decision made by delegated
authority under this section within ten (10) calendar days of the date
of that decision.
(d) Mandatory liquidation of insolvent federal credit union. In
lieu of paragraph (c) of this section, a ``critically
undercapitalized'' federal credit union that has a net worth ratio of
less than zero percent (0%) may be placed into liquidation on grounds
of insolvency pursuant to 12 U.S.C. 1787(a)(1)(A).
Sec. 702.205 [Amended]
20. Amend Sec. 702.205 as follows:
a. Remove from paragraph (a)(1) the words ``place the credit union
into conservatorship or liquidation'' and add in their place the words
``take the proposed action''; and
b. Remove from paragraph (c) the citation ``702.201(b)''.
21. Amend Sec. 702.206 as follows:
a. Revise paragraph (c)(1)(ii) to read as set forth below;
b. Revise paragraph (c)(1)(iii) to read as set forth below; and
c. Add new paragraph (i) to read as follows:
Sec. 702.206 Net worth restoration plans.
* * * * *
(c) * * *
(1) * * *
(ii) The projected amount of earnings to be transferred to the
regular reserve account in each quarter of the term of the NWRP as
required under Sec. 702.201(a), or as permitted under Sec.
702.201(b);
(iii) How the credit union will comply with the mandatory and any
discretionary supervisory actions imposed on it by the NCUA Board under
this subpart;
* * * * *
(i) Publication. An NWRP need not be published to be enforceable
because publication would be contrary to the public interest.
22. Amend Sec. 702.302 as follows:
a. Remove the number ``2'' from the parenthetical ``(Table 2)'' in
the introductory text of paragraph (c) and add in its place the number
``6'';
b. Revise the table immediately preceding paragraph (d) to read as
set forth below; and
c. Revise paragraph (d) to read as follows:
Sec. 702.302 Networth categories for new credit unions.
* * * * *
[GRAPHIC] [TIFF OMITTED] TR29NO02.071
(d) Reclassification based on supervisory criteria other than net
worth. Subject to Sec. 702.102(b) and (c), the NCUA Board may
reclassify a ``well capitalized,'' ``adequately capitalized'' or
``moderately capitalized'' new credit union to the next lower net worth
category (each of such actions is hereinafter referred to generally as
``reclassification'') in either of the circumstances prescribed in
Sec. 702.102(b).
* * * * *
23. Revise Sec. 702.303 to read as follows:
Sec. 702.303 Prompt corrective action for ``adequately capitalized''
new credit unions.
Beginning on the effective date of classification, an ``adequately
capitalized'' new credit union must increase the dollar amount of its
net worth by the amount reflected in its approved initial or revised
business plan in accordance with Sec. 702.304(a)(2), or in the absence
of such a plan, in accordance with Sec. 702.201, and quarterly
transfer that amount from undivided earnings to its regular reserve
account, until it is ``well capitalized.''
[[Page 71093]]
24. Amend Sec. 702.304 by revising paragraph (a) to read as
follows:
Sec. 702.304 Prompt corrective action for ``moderately capitalized,''
``marginally capitalized'' and ``minimally capitalized'' new credit
unions.
(a) Mandatory supervisory actions by new credit union. Beginning on
the date of classification as ``moderately capitalized,'' ``marginally
capitalized'' or minimally capitalized'' (including by reclassification
under Sec. 702.302(d)), a new credit union must--
(1) Earnings retention. Increase the dollar amount of its net worth
by the amount reflected in its approved initial or revised business
plan and quarterly transfer that amount from undivided earnings to its
regular reserve account;
(2) Submit revised business plan. Submit a revised business plan
within the time provided by Sec. 702.306 if the credit union either:
(i) Has not increased its net worth ratio consistent with its then-
present approved business plan;
(ii) Has no then-present approved business plan; or
(iii) Has failed to comply with paragraph (a)(3) of this section;
and
(3) Restrict member business loans. Not increase the total dollar
amount of member business loans (defined as loans outstanding and
unused commitments to lend) as of the preceding quarter-end unless it
is granted an exception under 12 U.S.C. 1757a(b).
* * * * *
25. Amend Sec. 702.305 as follows:
a. Revise paragraph (a) as set forth below;
b. Revise paragraph (c)(2) as set forth below; and
c. Add new paragraphs (c)(3) and (d) as follows:
Sec. 702.305 Prompt corrective action for ``uncapitalized'' credit
unions.
(a) Mandatory supervisory actions by new credit union. Beginning on
the effective date of classification as ``uncapitalized,'' a new credit
union must--
(1) Earnings retention. Increase the dollar amount of its net worth
by the amount reflected in the credit union's approved initial or
revised business plan;
(2) Submit revised business plan. Submit a revised business plan
within the time provided by Sec. 702.306, providing for alternative
means of funding the credit union's earnings deficit, if the credit
union either:
(i) Has not increased its net worth ratio consistent with its then-
present approved business plan;
(ii) Has no then-present approved business plan; or
(iii) Has failed to comply with paragraph (a)(3) of this section;
and
(3) Restrict member business loans. Not increase the total dollar
amount of member business loans as provided in Sec. 702.304(a)(3).
* * * * *
(c) * * *
(2) Plan rejected, approved, implemented. Except as provided in
paragraph (c)(3) of this section, must place into liquidation pursuant
to 12 U.S.C. 1787(a)(3)(A)(ii), or conservatorship pursuant to 12
U.S.C. 1786(h)(1)(F), an ``uncapitalized'' new credit union that
remains ``uncapitalized'' one hundred twenty (120) calendar days after
the later of:
(i) The effective date of classification as ``uncapitalized''; or
(ii) The last day of the calendar month following expiration of the
time period provided in the credit union's initial business plan
(approved at the time its charter was granted) to remain
``uncapitalized,'' regardless whether a revised business plan was
rejected, approved or implemented.
(3) Exception. The NCUA Board may decline to place a new credit
union into liquidation or conservatorship as provided in paragraph
(c)(2) of this section if the credit union documents to the NCUA Board
why it is viable and has a reasonable prospect of becoming ``adequately
capitalized.''
(d) Mandatory liquidation of ``uncapitalized'' federal credit
union. In lieu of paragraph (c) of this section, an ``uncapitalized''
federal credit union may be placed into liquidation on grounds of
insolvency pursuant to 12 U.S.C. 1787(a)(1)(A).
26. Amend Sec. 702.306 as follows:
a. Revise paragraph (a) to read as set forth below;
b. Revise paragraph (b)(2) to read as set forth below; and
c. Add new paragraph (h) to read as follows:
Sec. 702.306 Revised business plans for new credit unions.
(a) Schedule for filing. (1) Generally. Except as provided in
paragraph (a)(2) of this section, a new credit union classified
``moderately capitalized'' or lower must file a written revised
business plan (RBP) with the appropriate Regional Director and, if
State-chartered, with the appropriate State official, within 30
calendar days of either:
(i) The last of the calendar month following the end of the
calendar quarter that the credit union's net worth ratio has not
increased consistent with its the-present approved business plan;
(ii) The effective date of classification as less than ``adequately
capitalized'' if the credit union has no then-present approved business
plan; or
(iii) The effective date of classification as less than
``adequately capitalized'' if the credit union has increased the total
amount of member business loans in violation of Sec. 702.304(a)(3).
(2) Exception. The NCUA Board may notify the credit union in
writing that its RBP is to be filed within a different period or that
it is not necessary to file an RBP.
(3) Failure to timely file plan. When a new credit union fails to
file an RBP as provided under paragraphs (a)(1) or (a)(2) of this
section, the NCUA Board shall promptly notify the credit union that it
has failed to file an RBP and that it has 15 calendar days from receipt
of that notice within which to do so.
(b) * * *
(2) Establish a timetable of quarterly targets for net worth during
each year in which the RBP is in effect so that the credit union
becomes ``adequately capitalized'' by the time it no longer qualifies
as ``new'' per Sec. 702.301(b);
* * * * *
(h) Publication. An RBP need not be published to be enforceable
because publication would be contrary to the public interest.
27. Amend Sec. 702.401 by revising paragraph (c) to read as
follows:
Sec. 702.401 Reserves.
* * * * *
(c) Charges to regular reserve after depleting undivided earnings.
The board of directors of a federally-insured credit union may
authorize losses to be charged to the regular reserve after first
depleting the balance of the undivided earnings account and other
reserves, provided that the authorization states the amount and
provides an explanation of the need for the charge, and either--
(1) The charge will not cause the credit union's net worth
classification to fall below ``adequately capitalized'' under subparts
B or C of this part; or
(2) If the charge will cause the net worth classification to fall
below ``adequately capitalized,'' the appropriate Regional Director
and, if State-chartered, the appropriate State official, have given
written approval (in an NWRP or otherwise) for the charge.
* * * * *
28. Amend Sec. 702.403 by revising paragraph (b) to read as
follows:
Sec. 702.403 Payment of dividends.
* * * * *
[[Page 71094]]
(b) Payment of dividends if undivided earnings depleted. The board
of directors of a ``well capitalized'' federally-insured credit union
that has depleted the balance of its undivided earnings account may
authorize a transfer of funds from the credit union's regular reserve
account to undivided earnings to pay dividends, provided that either--
(1) The payment of dividends will not cause the credit union's net
worth classification to fall below ``adequately capitalized'' under
subpart B or C of this part; or
(2) If the payment of dividends will cause the net worth
classification to fall below ``adequately capitalized,'' the
appropriate Regional Director and, if State-chartered, the appropriate
State official, have given prior written approval (in an NWRP or
otherwise) to pay a dividend.
PART 741--REQUIREMENTS FOR INSURANCE
1. The authority citation for part 741 continues to read as
follows:
Authority: 12 U.S.C. 1757, 1766, 1781-1790, and 1790d. Section
741.4 is also authorized by 31 U.S.C. 3717.
Sec. 741.3. [Amended]
2. Amend Sec. 741.3 as follows:
a. Remove from the heading of paragraph (a) the words ``Adequacy
of''.
b. Remove paragraph (a)(2); and
c. Redesignate current paragraph (a)(3) as paragraph (a)(2).
PART 747--ADMINISTRATIVE ACTIONS, ADJUDICATIVE HEARINGS, RULES OF
PRACTICE AND PROCEDURE, AND INVESTIGATIONS
1. The authority citation for part 747 continues to read as
follows:
Authority: 12 U.S.C. 1766, 1786, 1784, 1787, 1790d and 4806(a);
and 42 U.S.C. 4012a.
2. Amend Sec. 747.2005 of subpart L by revising paragraph (b)(2)
to read as follows:
Sec. 747.2005 Enforcement of orders.
* * * * *
(b) * * *
(2) Failure to implement plan. Pursuant to 12 U.S.C. 1786(k)(2)(A),
the NCUA Board may assess a civil money penalty against a credit union
which fails to implement a net worth restoration plan under subpart B
of part 702 of this chapter or a revised business plan under subpart C
of part 702, regardless whether the plan was published.
* * * * *
[FR Doc. 02-30091 Filed 11-27-02; 8:45 am]
BILLING CODE 7535-01-P