[Code of Federal Regulations]

[Title 12, Volume 6]

[Revised as of January 1, 2006]

From the U.S. Government Printing Office via GPO Access

[CITE: 12CFR702.204]



[Page 384-386]

 

                       TITLE 12--BANKS AND BANKING

 

            CHAPTER VII--NATIONAL CREDIT UNION ADMINISTRATION

 

PART 702_PROMPT CORRECTIVE ACTION--Table of Contents

 

        Subpart B_Mandatory and Discretionary Supervisory Actions

 

Sec. 702.204  Prompt corrective action for ``critically 

undercapitalized'' credit unions



    (a) Mandatory supervisory actions by credit union. A federally-

insured credit union which is ``critically undercapitalized'' must--

    (1) Earnings retention. Increase net worth and transfer earnings to 

its regular reserve account in accordance with Sec. 702.201;

    (2) Submit net worth restoration plan. Submit a net worth 

restoration plan pursuant to Sec. 702.206;

    (3) Restrict increase in assets. Not permit the credit union's total 

assets to increase except as provided in Sec. 702.202(a)(3); and

    (4) Restrict member business loans. Not increase the total dollar 

amount of member business loans (defined as loans outstanding and unused 

commitments to lend) as provided in Sec. 702.202(a)(4).

    (b) Discretionary supervisory actions by NCUA. Subject to the 

applicable procedures for issuing, reviewing and enforcing directives 

set forth in subpart L of part 747 of this chapter, the NCUA Board may, 

by directive, take one or more of the following actions with respect to 

any ``critically undercapitalized'' credit union, or a director, officer 

or employee of such credit union, if it determines that those actions 

are necessary to carry out the purpose of this part:

    (1) Requiring prior approval for acquisitions, branching, new lines 

of business. Prohibit a credit union from, directly or indirectly, 

acquiring any interest in any business entity or financial institution, 

establishing or acquiring any additional branch office, or engaging in 

any new line of business, except as provided by Sec. 702.202(b)(1);

    (2) Restricting transactions with and ownership of CUSO. Restrict 

the credit union's transactions with a CUSO, or require the credit union 

to divest or reduce its ownership interest in a CUSO;

    (3) Restricting dividends paid. Restrict the dividend rates that the 

credit



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union pays on shares as provided in Sec. 702.202(b)(3).

    (4) Prohibiting or reducing asset growth. Prohibit any growth in the 

credit union's assets or in a category of assets, or require the credit 

union to reduce assets or a category of assets;

    (5) Alter, reduce or terminate activity. Require the credit union or 

its CUSO(s) to alter, reduce, or terminate any activity which poses 

excessive risk to the credit union;

    (6) Prohibiting nonmember deposits. Prohibit the credit union from 

accepting all or certain nonmember deposits;

    (7) New election of directors. Order a new election of the credit 

union's board of directors;

    (8) Dismissing director or senior executive officer. Require the 

credit union to dismiss from office any director or senior executive 

officer, provided however, that a dismissal under this clause shall not 

be construed to be a formal administrative action for removal under 12 

U.S.C. 1786(g);

    (9) Employing qualified senior executive officer. Require the credit 

union to employ qualified senior executive officers (who, if the NCUA 

Board so specifies, shall be subject to its approval);

    (10) Restricting senior executive officers' compensation. Reduce or, 

with the prior written approval of the NCUA Board, limit compensation to 

any senior executive officer to that officer's average rate of 

compensation (excluding bonuses and profit sharing) during the four (4) 

calendar quarters preceding the effective date of classification of the 

credit union as ``critically undercapitalized,'' and prohibit payment of 

a bonus or profit share to such officer;

    (11) Restrictions on payments on uninsured secondary capital. 

Beginning 60 days after the effective date of classification of a credit 

union as ``critically undercapitalized,'' prohibit payments of 

principal, dividends or interest on the credit union's uninsured 

secondary capital accounts established after August 7, 2000, except that 

unpaid dividends or interest shall continue to accrue under the terms of 

the account to the extent permitted by law;

    (12) Requiring prior approval. Require a ``critically 

undercapitalized'' credit union to obtain the NCUA Board's prior written 

approval before doing any of the following:

    (i) Entering into any material transaction not within the scope of 

an approved net worth restoration plan (or approved revised business 

plan under subpart C of this part);

    (ii) Extending credit for transactions deemed highly leveraged by 

the NCUA Board or, if State-chartered, by the appropriate State 

official;

    (iii) Amending the credit union's charter or bylaws, except to the 

extent necessary to comply with any law, regulation, or order;

    (iv) Making any material change in accounting methods; and

    (v) Paying dividends or interest on new share accounts at a rate 

exceeding the prevailing rates of interest on insured deposits in its 

relevant market area;

    (13) Other action to carry out prompt corrective action. Restrict or 

require such other action by the credit union as the NCUA Board 

determines will carry out the purpose of this part better than any of 

the actions prescribed in paragraphs (b)(1) through (12) of this 

section; and

    (14) Requiring merger. Require the credit union to merge with 

another financial institution if one or more grounds exist for placing 

the credit union into conservatorship pursuant to 12 U.S.C. 

1786(h)(1)(F), or into liquidation pursuant to 12 U.S.C. 

1787(a)(3)(A)(i).

    (c) Mandatory conservatorship, liquidation or action in lieu 

thereof--(1) Action within 90 days. Notwithstanding any other actions 

required or permitted to be taken under this section (and regardless of 

a credit union's prospect of becoming ``adequately capitalized''), the 

NCUA Board must, within 90 calendar days after the effective date of 

classification of a credit union as ``critically undercapitalized''--

    (i) Conservatorship. Place the credit union into conservatorship 

pursuant to 12 U.S.C. 1786(h)(1)(G); or

    (ii) Liquidation. Liquidate the credit union pursuant to 12 U.S.C. 

1787(a)(3)(A)(ii); or

    (iii) Other corrective action. Take other corrective action, in lieu 

of conservatorship or liquidation, to better



[[Page 386]]



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.

    (2) Renewal of other corrective action. A determination by the NCUA 

Board to take other corrective action in lieu of conservatorship or 

liquidation under paragraph (c)(1)(iii) of this section shall expire 

after an effective period ending no later than 180 calendar days after 

the determination is made, and the credit union shall be immediately 

placed into conservatorship or liquidation under paragraphs (c)(1)(i) 

and (ii), unless the NCUA Board makes a new determination under 

paragraph (c)(1)(iii) of this section before the end of the effective 

period of the prior determination;

    (3) Mandatory liquidation after 18 months--(i) Generally. 

Notwithstanding paragraphs (c)(1) and (2) of this section, the NCUA 

Board must place a credit union into liquidation if it remains 

``critically undercapitalized'' for a full calendar quarter, on a 

monthly average basis, following a period of 18 months from the 

effective date the credit union was first classified ``critically 

undercapitalized.''

    (ii) Exception. Notwithstanding paragraph (c)(3)(i) of this section, 

the NCUA Board may continue to take other corrective action in lieu of 

liquidation if it certifies that the credit union--

    (A) Has been in substantial compliance with an approved net worth 

restoration plan requiring consistent improvement in net worth since the 

date the net worth restoration plan was approved;

    (B) Has positive net income or has an upward trend in earnings that 

the NCUA Board projects as sustainable; and

    (C) Is viable and not expected to fail.

    (iii) Review of exception. The NCUA Board shall, at least quarterly, 

review the certification of an exception to liquidation under paragraph 

(c)(3)(ii) of this section and shall either--

    (A) Recertify the credit union if it continues to satisfy the 

criteria of paragraph (c)(3)(ii) of this section; or

    (B) Promptly place the credit union into liquidation, pursuant to 12 

U.S.C. 1787(a)(3)(A)(ii), if it fails to satisfy the criteria of 

paragraph (c)(3)(ii) of this section.

    (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).



[65 FR 8584, Feb. 18, 2000, as amended at 67 FR 71092, Nov. 29, 2002]