[Federal Register Volume 61, Number 23 (Friday, February 2, 1996)]
[Rules and Regulations]
[Pages 3788-3792]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-2018]
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NATIONAL CREDIT UNION ADMINISTRATION
12 CFR Parts 701, 709 and 741
Organization and Operations of Federal Credit Unions
AGENCY: National Credit Union Administration (NCUA).
ACTION: Interim final rule with request for comments.
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SUMMARY: This interim rule authorizes credit unions serving
predominantly low-income members to raise secondary capital from
foundations and other philanthropic-minded institutional investors.
Increased capital will in turn enable these credit unions to make more
loans and improve other financial services for the limited income
groups and communities they serve.
This rule establishes a new section in NCUA's Regulations providing
authority for secondary capital accounts and amending existing
regulatory provisions concerning designation of low-income status. The
rule also amends an existing rule to address the authority of federally
insured state credit unions to issue secondary capital accounts, and
amends another rule to establish that secondary capital accounts are
paid after all other claims in the event of liquidation.
Secondary capital accounts will not be issued as share accounts and
will not establish voting or ownership rights. The applicability of
this rule is limited to credit unions having a low-income designation
from NCUA or the appropriate state regulator.
DATES: The interim rule is effective January 25, 1996. Comments must be
received on or before April 1, 1996.
ADDRESSES: Comments should be directed to Becky Baker, Secretary of the
Board. Mail or hand-deliver comments to National Credit Union
Administration, 1775 Duke Street, Alexandria, Virginia 22314-3428. Fax
comments to (703) 518-6319. Post comments on NCUA's electronic bulletin
board by dialing (703) 518-6480. Please send comments by one method
only.
FOR FURTHER INFORMATION CONTACT: Joyce Jackson, Special Assistant,
Office of Community Development Credit Unions, at the above address or
telephone (703) 518-6610, or David Marquis, Director, Office of
Examination and Insurance, or Stephen Austin, Director of the
Department of Supervision, Office of Examination and Insurance, both at
the above address or telephone (703) 518-6360, or Robert M. Fenner,
General Counsel, at the above address or telephone (703) 518-6540.
SUPPLEMENTARY INFORMATION:
Background
As of November, 1995, there were 260 federally insured credit
unions designated by NCUA or the appropriate state regulator as serving
predominantly low-income members. Like other credit unions serving
members of limited financial means, these credit unions perform an
important mission of providing loans and other financial services to
individuals and communities who most need these services and most often
do not have them available from other sources. Like all insured credit
unions, the low-income designated credit unions are, as a group, quite
healthy and financially strong. For example, the average net capital
ratio for low-income designated credit unions as of May, 1995 was 9.8
percent.
Individual low-income designated credit unions find it difficult,
however, in view of the limited resources of their members, to
accumulate capital. (As cooperatives, credit unions build their primary
capital--statutory reserves--solely by setting aside a portion of their
income each accounting period.) To ease this burden, and to facilitate
an additional opportunity for low-income designated credit unions to
build capital that will support greater lending and financial services
in their communities, the NCUA Board is issuing this interim final rule
authorizing secondary capital accounts. These capital accounts, to the
extent that low-income designated credit unions choose to offer them,
will supplement rather than reduce existing statutory reserve
requirements.
Overview
The Board has established certain key safety and soundness elements
in this interim rule to ensure both that secondary capital accounts
serve the purpose of capital--i.e. that they are available to absorb
loss and thus prevent losses to members or the failure of the
institution--and that there is no misunderstanding on the part of
investors as to the nature of the accounts and the risks involved.
Included are the following:
The accounts may be offered only to organizational
investors, not to natural person members or other natural person
investors.
The accounts are subordinate to all other claims on the
assets of the credit union.
The accounts are not insured by the National Credit Union
Share Insurance Fund or any other government entity, and may not be
offered as share accounts. It is anticipated that credit unions will
issue these accounts as a form of subordinated debt.
Funds in the accounts must be available to cover losses,
after depletion of reserves and undivided earnings, but prior to
liquidation of the credit union.
The accounts must have a minimum maturity of five years.
These and other key provisions must be reflected in an
account agreement and in disclosures prescribed as an Appendix to the
interim rule.
When the remaining maturity of a secondary capital account
is less than five years, the credit union will reflect through a
footnote to its financial statement, and NCUA will recognize, the
capital value of the account as a percentage of the account's face
value, on a sliding scale ranging from 80% of face value (four years to
less than five years remaining maturity) to zero (less than one year
remaining maturity).
Additional Explanation of Amendments
This interim rule contains four separately numbered amendments. The
following is an additional explanation of each.
Amendment 1 removes from Section 701.32 of NCUA's rules the
provisions concerning designation of low-income status. Those
provisions are now placed in new Section 701.34. As a result, Section
701.32 now deals solely with the limitations on federally insured
credit unions receiving nonmember shares above certain levels without
prior NCUA approval. Such shares include public unit shares in all
federally insured credit unions and other nonmember shares in the case
of low-income designated credit unions. Section 701.34 contains the
provisions related solely to low-income designated credit unions: The
rules concerning designation of low-income status and the new
provisions concerning receipt of secondary capital accounts.
Because secondary capital accounts are not share accounts, they are
not subject to the Section 701.32 limitations. A reference in Section
701.32(b)(1) to ``accounts'' is replaced
[[Page 3789]]
with ``shares'' to eliminate any possible confusion over the fact that
Section 701.32 is limited in its applicability to nonmember share
accounts.
Amendment 2 establishes the new Section 701.34. Section 701.34(a)
contains the provisions concerning designation of low-income status,
Section 701.34(b) contains the provisions authorizing secondary capital
accounts and setting forth the terms and conditions for these accounts,
and Section 701.34(c) establishes the sliding scale capital values for
accounts with remaining maturities of less than five years.
As previously discussed, the Board has established a number of
requirements in this interim rule to ensure both that these accounts
actually serve as capital and that there is no misunderstanding on the
part of investors as to the risks involved. A credit union offering
these accounts must adopt a written plan addressing how the credit
union will use the funds and how the credit union will meet liquidity
needs to repay the funds upon maturity. The plan must be submitted to
the appropriate NCUA Regional Director. The submission is for purposes
of notice to NCUA; the credit union need not await NCUA approval.
Other requirements include that the accounts may be offered only to
nonnatural person investors, that the accounts have a minimum maturity
of five years, that they are not insured, that they may not be provided
as security on other obligations of the accountholder, that the
accounts will not ``carry over'' in the event of merger into a credit
union that is not low-income designated, that claims represented by
these accounts are subordinate to all other claims on the credit union,
and that they are available to cover losses. The accounts may not be
offered as share accounts. Lowincome designated Federal credit unions
that choose to offer these accounts will do so pursuant to their
borrowing authority, and this will presumably be the case for
federally-insured state chartered credit unions as well, depending on
their authority under state law.
Funds in secondary capital accounts must be available to cover
losses in an operating credit union, i.e. the funds are available
without having to liquidate the credit union. The funds must be
available to cover losses that exceed available ``reserves and
undivided earnings''. For this purpose, reserves and undivided earnings
are exclusive of all allowance accounts for loan and investment losses,
inasmuch as such allowance accounts are already earmarked to cover
other anticipated losses.
To avoid overreliance on the availability of these temporary
accounts to cover future operating losses, the rule establishes a
declining scale for the capital value of accounts with less than five
years remaining maturity. (All of the funds, however, will continue to
be at risk to cover losses that exceed reserves and undivided
earnings.) Accounts with remaining maturities of at least four years
but less than five are counted as capital at 80 percent of face value,
remaining maturities of at least three but less than four years are
counted at 60 percent, and so on, to the point of less than one year
remaining maturity, where the account reflects no capital value. In
addition to preventing overstatement of the true value of these
accounts as continuing capital, this feature will encourage credit
unions to continually replenish their sources of maturing secondary
capital to the extent such funds are needed to support ongoing lending
programs and other operations. The reduced capital value of the
accounts will be shown through a footnote to the credit union's
financial statement.
The interim rule sets forth prescribed disclosures, as Appendix A
to section 701.34, that must be provided to investors in secondary
capital accounts, and requires that signed originals of the disclosure
and account agreement be retained by the credit union at least for the
life of the agreement.
Amendment 3 updates NCUA's regulatory provisions for federally
insured state credit unions related to low-income designation and
receipt of secondary capital accounts. This amendment revises Part 741
Requirements for Insurance by adding a new 741.204(c) and making
conforming amendments to Section 741.204(b). The new 741.204(c)
establishes that state chartered federally insured credit unions may
offer secondary capital accounts on the same terms and conditions as
Federal credit unions, as long as the credit union has a low-income
designation pursuant to 741.204(b) and the accounts are not
inconsistent with state law or regulation. State chartered credit
unions must submit their plan to both the Regional Director and their
state supervisor, and should coordinate with the state supervisor to
confirm that these accounts are permissible under state law and to
determine whether preapproval of the state supervisor is required.
Amendment 4 revises Section 709.5 Payout Priorities in Involuntary
Liquidation by adding a new Section 709.5(b)(8) to establish that
secondary capital accounts in low-income designated credit unions are
paid after all other claims in the event of involuntary liquidation.
Also, Section 709.5(e) is revised to specify that, in the unlikely
event of a liquidation surplus, secondary capital holders would be
repaid before payment of a liquidation dividend.
Effective Date; Interim Rule; Comment Period
Although this amendment is being issued as an interim final rule
and is effective immediately, the NCUA Board encourages credit unions
to submit comments. Comments may be submitted on or before April 1,
1996.
Because this rule provides a new authority to low-income designated
credit unions and use of the authority is voluntary, the NCUA Board
finds that good cause exists for an immediate effective date. Moreover,
the Board finds it necessary and appropriate to act quickly in this
matter in order to allow credit unions an additional avenue to meet the
matching fund requirements established by the Community Development
Financial Institutions (CDFI) Fund. 60 FR 54110, 54112 (October 19,
1995).
Institutions, including credit unions, seeking funds under the CDFI
Program are to submit applications to CDFI by January 29, 1996. NCUA is
aware of several low-income credit unions that have submitted or will
submit applications to CDFI. CDFI will in turn grant funding in the
form of loans, deposits/shares, or capital grants to qualifying
institutions. However, one of the major qualifications of the CDFI
Program is the requirement that the institution ``obtain matching funds
from sources other than the Federal government.'' 60 FR at 54112.
Institutions must have ``firm commitments for the matching funds
requirements * * * not later than July 1, 1996.'' 60 FR 54136.
This interim rule will provide low-income credit unions that have
applied for CDFI funds with a method of raising secondary capital that
may be counted as matching funds for either capital grants or loans,
depending on the approach ultimately followed by the CDFI Fund. If this
was a proposed rule and not an interim rule with an immediate effective
date, federally-insured credit unions would have a very limited window
of opportunity from the date of a final rule to solicit secondary
capital funds. Any delay in the effective date of this rule is contrary
to the best interests of federally-insured credit
[[Page 3790]]
unions which qualify under the CDFI Program.
Request for Comments
Although this interim rule is effective immediately, the NCUA Board
welcomes comment on any aspect of the rule. After the close of the
comment period and analysis of the comments, the Board will determine
whether any changes in the rule are necessary or appropriate.
Regulatory Procedures
Regulatory Flexibility Act
The NCUA Board certifies that this rule will not have a significant
impact on a substantial number of small credit unions. The rule affects
only low-income designated credit unions, and imposes no mandatory
regulatory burden on those credit unions. Rather, it increases
flexibility by providing a new method of raising capital through
secondary capital accounts. Accordingly, a Regulatory Flexibility
Analysis is not required.
Paperwork Reduction Act
NCUA has determined that the requirements that low-income
designated credit unions choosing to offer secondary capital accounts
must adopt a written plan, send a copy of the plan to their NCUA
Regional Director, and have account contract documents and disclosure
forms constitute collection of information requirements under the
Paperwork Reduction Act of 1995. The Paperwork Reduction Act and
regulations of the Office of Management and Budget (OMB) require that
the public be provided an opportunity to comment on information
collection requirements, including an agency's estimate of the burden
of the collection of information. NCUA believes that these requirements
are essential both to ensure the safe and sound operation of a
secondary capital program and to ensure that account holders fully
understand the nature of their investment in the credit union and the
risks involved.
NCUA estimates that the increase in paperwork requirements will
affect less than 50 credit unions. The requirements will affect only
those credit unions that have a low-income designation and voluntarily
choose to offer secondary capital accounts. NCUA estimates that it
should reasonably take no more than three hours to comply with the
paperwork requirements. This translates to 150 burden hours. The NCUA
Board invites comment on: (1) Whether the collection of information is
necessary for the proper performance of the functions of NCUA,
including whether the information will have practical utility; (2) the
accuracy of NCUA's estimate of the burden of the collection of
information; (3) ways to enhance the quality, utility, and clarity of
the information to be collected; and (4) ways to minimize the burden of
the collection on respondents, including through the use of automated
collection techniques or other forms of information technology. Send
comments to Suzanne Beauchesne, National Credit Union Administration,
1775 Duke Street, Alexandria, VA 22314-3428. Comments should be
postmarked by April 2, 1996.
NCUA will, after 60 days from the effective date of the interim
rule, submit the paperwork requirements to OMB for review under the
Paperwork Reduction Act and publish a notice to that effect in the
Federal Register. NCUA will also publish a notice in the Federal
Register once OMB takes action on the submission. Federally insured
credit unions are not required, pursuant to the terms of the Paperwork
Reduction Act, to comply with paperwork requirements until OMB approval
and an OMB control number are received. Low-income designated credit
unions that choose to offer secondary capital accounts will be
expected, however, as a matter of safety and soundness, to adopt
written plans, forward a copy of the credit union's plan to the
Regional Director (and state supervisor in the case of state credit
unions) and use account contract documents and disclosure forms that
meet the requirements of this rule in every respect. Failure to do so
may jeopardize the ability of low-income designated credit unions to
use this authority pending completion of the rulemaking process.
Executive Order 12612
Executive Order 12612 requires NCUA to consider the effects of its
actions on state interests. This rule has no adverse effects on state
interests. The rule provides additional authority for federally insured
state chartered credit unions, but only to the extent not inconsistent
with state law and regulations. The NCUA Board, however, specifically
requests the comments of State credit union regulators to obtain their
guidance in how the rule may affect their credit unions.
List of Subjects in 12 CFR Parts 701, 709 and 741
Bank deposit insurance, Credit unions, Reporting and recordkeeping
requirements.
By the National Credit Union Administration Board on January 25,
1996.
Becky Baker,
Secretary of the Board.
Accordingly, NCUA amends 12 CFR chapter VII as follows:
PART 701--ORGANIZATION AND OPERATIONS OF FEDERAL CREDIT UNIONS
1. The authority citation for part 701 continues to read as
follows:
Authority: 12 U.S.C. 1752(5), 1755, 1756, 1757, 1759, 1761a,
1761b, 1766, 1767, 1782, 1784, 1787, 1789 and Public Law 101-73.
Section 701.6 is also authorized by 31 U.S.C. 3717. Section 701.31
is also authorized by 12 U.S.C. 1601, et seq., 42 U.S.C. 1981 and 42
U.S.C. 3601-3610. Section 701.35 is also authorized by 12 U.S.C.
4311-4312.
2. Section 701.32 is amended by revising the section heading and
paragraphs (a) and (b)(1) to read as follows:
Sec. 701.32 Payment on shares by public units and nonmembers.
(a) Authority. A Federal credit union may, to the extent permitted
under Section 107(6) of the Act and this section, receive payments on
shares, (regular shares, share certificates, and share draft accounts)
from public units and political subdivisions thereof (as those terms
are defined in Sec. 745.1) and nonmember credit unions, and to the
extent permitted under the Act, this section and Sec. 701.34, receive
payments on shares (regular shares, share certificates, and share draft
accounts) from other nonmembers.
(b) Limitations. (1) Unless a greater amount has been approved by
the Regional Director, the maximum amount of all public unit and
nonmember shares shall not, at any given time, exceed 20% of the total
shares of the federal credit union or $1.5 million, whichever is
greater.
* * * * *
3. Section 701.34 is added by redesignating paragraph (d) of
Sec. 701.32 as paragraph (a) of Sec. 701.34, by revising the third
sentence of newly designated paragraph (a)(1) and by adding new
paragraphs (b) and (c) and an Appendix as follows:
Sec. 701.34 Designation of low-income status; receipt of secondary
capital accounts by low-income designated credit unions.
(a) Designation of low-income status. (1) * * * The designation may
be removed by the Regional Director upon notice to the federal credit
union if the definitions set forth in paragraphs (a)(2)
[[Page 3791]]
and (3) of this section are no longer met. * * *
* * * * *
(b) Receipt of secondary capital accounts by low-income designated
credit unions. A Federal credit union having a designation of low
income status pursuant to paragraph (a) of this section may offer
secondary capital accounts to nonnatural person members and nonnatural
person nonmembers on the following conditions:
(1) Prior to offering secondary capital accounts, the credit union
shall adopt, and forward to the appropriate NCUA Regional Director, a
written plan for use of the funds in the secondary capital accounts and
subsequent liquidity needs to meet repayment requirements upon maturity
of the accounts.
(2) The secondary capital account must be established as a
subordinated debt account or other form of non-share account.
(3) The maturity of the secondary capital account must be for a
minimum of five years.
(4) The secondary capital account must not be redeemable prior to
maturity.
(5) The secondary capital account shall not be insured by the
National Credit Union Share Insurance Fund or any governmental or
private entity.
(6) The secondary capital account holder's claim against the credit
union must be subordinate to all other claims including those of
shareholders, creditors and the National Credit Union Share Insurance
Fund.
(7) Funds in the secondary capital account (including both
principal and interest) must be available to cover operating losses
realized by the credit union that exceed its net available reserves and
undivided earnings (i.e., reserves and undivided earnings exclusive of
allowance accounts for loan and investment losses), and to the extent
funds are so used, the credit union shall under no circumstances
restore or replenish the account. Losses shall be distributed pro-rata
among all secondary capital accounts held by the credit union at the
time the losses are realized.
(8) The secondary capital account may not be pledged or provided by
the account-holder as security on a loan or other obligation with the
credit union or any other party.
(9) In the event of merger or other voluntary dissolution of the
credit union, other than merger into another low-income designated
credit union, the secondary capital accounts will, to the extent they
are not needed to cover losses at the time of merger or dissolution, be
closed and paid out to the account-holder.
(10) A secondary capital account contract agreement must be
executed between an authorized representative of the account holder and
the credit union accurately establishing the terms and conditions of
this section and containing no provisions inconsistent therewith.
(11) A disclosure and acknowledgment as set forth in the Appendix
to this section must be provided to and executed by an authorized
representative of the secondary capital account holder at the time of
entering into the account agreement, and original copies of the account
agreement and the disclosure and acknowledgment must be retained by the
credit union for the term of the agreement.
(c) Accounting treatment; weighted value for purposes of
recognizing capital value of secondary capital accounts. A low-income
designated credit union that issues secondary capital accounts pursuant
to paragraph (b) of this section shall record the funds on its balance
sheet in an equity account entitled ``secondary capital account''. For
such accounts with remaining maturities of less than five years, the
credit union shall reflect the capital value of the accounts in a
footnote to its financial statement in accordance with the following
scale:
1. Four to less than five years remaining maturity--80 percent.
2. Three to less than four years remaining maturity--60 percent.
3. Two to less than three years remaining maturity--40 percent.
4. One to less two years remaining maturity--20 percent.
5. Less than one year remaining maturity--0 percent
Appendix to Sec. 701.34
Disclosures and acknowledgment in the following form must be
provided to any investor in secondary capital accounts in a low-
income designated credit union.
An original, signed copy must be retained by the credit union.
Disclosure and Acknowledgment
I, ________ (name of signatory), hereby acknowledge and agree to
the following in my capacity as ________ (official position or
title) of ________ (name of institutional investor):
________ (name of institutional investor) has committed
________ (amount of funds) to a secondary capital account with
________ (name of credit union).
The funds committed to the secondary capital account
are committed for a period of ____ years and are not redeemable
prior to ________.
The secondary capital account is not a share account
and the funds committed to the secondary capital account are not
insured by the National Credit Union Share Insurance Fund or any
other governmental or private entity.
The funds committed to the secondary capital account and any
interest paid to the account may be used by ________ (name of credit
union) to cover any and all operating losses that exceed the credit
union's net available reserves and undivided earnings (i.e.,
reserves and undivided earnings exclusive of allowance accounts for
loan and investment losses), and in the event the funds are so used
________ (name of credit union) will under no circumstances restore
or replenish those funds to ________ (organization).
In the event of liquidation of ________ (name of credit
union), the funds committed to the secondary capital account shall
be subordinate to all other claims on the assets of the credit
union, including claims of member shareholders, creditors and the
National Credit Union Share Insurance Fund.
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(official title)
PART 709--INVOLUNTARY LIQUIDATION OF FEDERAL CREDIT UNIONS AND
ADJUDICATION OF CREDITOR CLAIMS INVOLVING FEDERALLY INSURED CREDIT
UNIONS IN LIQUIDATION
4. The authority citation for part 709 continues to read as
follows:
Authority: 12 U.S.C. 1766; Public Law 101-73, 103 Stat. 183, 530
(1989) (12 U.S.C. 1787 et seq.).
5. Section 709.5 is amended by revising paragraphs (b)(6) and
(b)(7), by adding a new paragraph (b)(8) and by revising the last
sentence of paragraph (e) to read as follows:
Sec. 709.5 Payout priorities in involuntary liquidation.
(a) * * *
(b) * * *
(6) Shareholders to the extent of their respective uninsured shares
and the National Credit Union Share Insurance Fund to the extent of its
payment of share insurance;
(7) In a case involving liquidation of a corporate credit union,
membership capital share deposits of corporate credit unions; and
(8) In a case involving liquidation of a low-income designated
credit union, any outstanding secondary capital accounts issued
pursuant to the authority of Secs. 701.34 or 741.204(c) of this
chapter.
* * * * *
(e) * * * If a surplus remains after making distribution in full on
all allowed claims described in paragraphs (b)(1) through (b)(8) of
this section, such
[[Page 3792]]
surplus shall be distributed pro rata to the credit union's
shareholders.
PART 741--REQUIREMENTS FOR INSURANCE
6. The authority citation for part 741 continues to read as
follows:
Authority: 12 U.S.C. 1757, 1766, and 1781-1790.
7. Section 741.204 is amended by revising the third sentence of
paragraph (b) and adding a new paragraph (c) to read as follows:
Sec. 741.204 Maximum public unit and nonmember accounts, and low-
income designation.
* * * * *
(a) * * *
(b) * * * The designation will be made and reviewed by the state
regulator on the same basis as that provided in Sec. 701.34(a) of this
chapter for federal credit unions. * * *
(c) Receive secondary capital accounts only if the credit has a
low-income designation pursuant to paragraph (b) of this section, and
then only in accordance with the terms and conditions authorized for
Federal credit unions pursuant to Sec. 701.34 of this chapter and to
the extent not inconsistent with applicable state law and regulation.
State chartered federally insured credit unions offering secondary
capital accounts must submit the plan required by Sec. 701.34 to both
the state supervisory authority and the NCUA Regional Director.
[FR Doc. 96-2018 Filed 2-1-96; 8:45 am]
BILLING CODE 7535-01-P
