96-24457. Organization and Operations of Federal Credit Unions  

  • [Federal Register Volume 61, Number 189 (Friday, September 27, 1996)]
    [Rules and Regulations]
    [Pages 50696-50698]
    From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
    [FR Doc No: 96-24457]
    
    
    -----------------------------------------------------------------------
    
    
    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: Final rule.
    
    -----------------------------------------------------------------------
    
    SUMMARY: The final rule allows credit unions serving predominantly low-
    income members (LICU) to raise secondary capital from foundations and 
    other philanthropic-minded institutional investors. The rule will 
    enable LICUs to make more loans and improve other financial services 
    for the groups and communities they serve. The rule also allows 
    federal- and state-chartered LICUs to offer secondary capital accounts 
    and incorporates the existing regulatory provisions concerning the 
    designation of low-income status. The rule also amends NCUA's 
    regulations so that secondary capital accounts are last in payout 
    priorities in the event of an involuntary liquidation.
    
    EFFECTIVE DATE: September 27, 1996.
    
    FOR FURTHER INFORMATION CONTACT: Joyce Jackson, Director, Office of 
    Community Development Credit Unions, at 1775 Duke Street, Alexandria, 
    Virginia 22314-3428 or telephone (703) 518-6610, or David Marquis, 
    Director, or Stephen Austin, Acting Deputy Director, 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
    
        On February 2, 1996, the NCUA Board issued an interim final rule 
    (``Interim Rule''), 61 FR 3788, that authorized LICUs to accept funds 
    as secondary capital from nonnatural persons and philanthropic 
    institutional investors. The Board issued the Interim Rule to achieve 
    the following goals: to assist LICUs in achieving their purpose of 
    serving members and communities in financial need; to ensure that any 
    authorized secondary capital will actually function as capital and be 
    available to absorb losses; to ensure that investors in secondary 
    capital understand the nature of their investment and the risk they are 
    undertaking; and to eliminate any potential risk to the NCUSIF and 
    insured credit unions generally as a result of this activity.
    
    Summary of Comments and Discussion of Issues
    
        NCUA received six comment letters: three from state credit union 
    leagues; two from national credit union trade associations; and one 
    from an accounting trade group. The five credit union commenters 
    expressed strong support for the Interim Rule with one commenter 
    viewing the Interim Rule ``as the most important regulatory innovation 
    of the last two decades in addressing the special needs of [LICUs].'' 
    The accounting trade group neither supported nor opposed the Interim 
    Rule.
    
    Use of Secondary Capital To Replenish Operating Losses
    
        Two commenters expressed support for the Interim Rule's provisions 
    that required LICUs to use the secondary capital to cover the LICU's 
    operating losses. However, both commenters disagreed with NCUA's 
    decision to prohibit LICUs from replenishing the secondary capital when 
    the LICU regained financial health. One of the commenters questioned 
    NCUA's rationale and the other commenter asked the NCUA to reexamine 
    its position. The latter commenter believed NCUA could establish 
    safeguards so the replenishment of secondary capital would be 
    subordinate to the LICU's other goals, such as reinstituting dividends 
    and building capital. The commenter also believed NCUA's position 
    unfairly penalized investors and decreased the secondary capital's 
    attractiveness.
        Permitting LICUs to replenish secondary capital accounts once 
    financial health has been regained would defeat the purpose for 
    establishing secondary capital. The goal of secondary capital is to 
    enhance capital positions. The potential growth of primary capital 
    could be slowed by allowing LICUs to replenish investor funds in the 
    event those funds are depleted. Additionally, permitting replenishment 
    could be interpreted as a ``guaranteed return of principal'' by the 
    investor which was not the Board's original intent.
    
    Secondary Capital as Equity
    
        Two commenters objected to the Interim Rule's provisions that 
    required LICUs to treat secondary capital as equity. Instead, the 
    commenters believed that LICUs should treat secondary capital as debt 
    according to GAAP. One commenter stated that classifying secondary 
    capital as equity was misleading and recommended that NCUA require 
    LICUs to exclude non-GAAP financial information from the LICU's 
    financial statements. The commenter also strongly encouraged NCUA to 
    follow the other federal financial regulators and conform all of NCUA's 
    regulatory accounting practices to GAAP. The other commenter requested 
    additional guidance from NCUA since many LICUs and auditing firms will 
    not be familiar with the accounting issues associated with secondary 
    capital.
        The Board has considered the commenter's position, and acknowledges 
    that while secondary capital accounts have characteristics of both debt 
    and equity, in the final analysis, it believes secondary capital is 
    more analogous to equity. Thus, for reporting purposes, LICUs should 
    record secondary capital accounts consistent with Accounting Bulletin 
    96-1 (the ``Bulletin''), which establishes the accounting entries for 
    secondary capital. The Bulletin requires secondary capital to be 
    treated as part equity and part subordinated debt based on a sliding 
    scale. The Board anticipates that most LICUs will not be seeking audit 
    opinions on their financial statements nor posting GAAP statements for 
    members or other third-party reliance. Most LICUs financial statement 
    reporting efforts will be directed to meeting NCUA regulatory 
    requirements and thus, our approach is not at odds with the other 
    federal banking agencies since they, too, have preserved their option 
    to adopt regulatory reporting requirements for supervisory purposes.
    
    [[Page 50697]]
    
    Sliding Scale
    
        One commenter objected to the requirement that LICUs add a footnote 
    to their financial statements reflecting the secondary capital's value 
    as a percentage of its face value, on a five year sliding scale. The 
    commenter suggested the footnote should state the secondary capital's 
    total dollar amount and maturity date. According to the commenter, 
    their proposed method would be consistent with GAAP and reflect the 
    economic reality that all of the secondary capital would be available 
    to absorb losses until maturity.
        The Bulletin specifically provides for two separate accounts for 
    recognizing secondary capital. The first, uninsured secondary capital 
    (account #925) shows the amount of secondary capital having a maturity 
    greater than 5 years. Subordinated CDCU Debt (account #867) recognizes 
    the secondary capital accounts with maturities of less than 5 years. 
    The rule establishes a sliding scale for the capital value of accounts 
    with less than 5 years remaining maturity. The Board believes a 
    footnote disclosure recognizing the secondary capital's total dollar 
    amount and maturity date would be appropriate. As a result, the final 
    rule directs LICUs to reflect the secondary capital's full amount in a 
    footnote to its balance sheet, and reflect the secondary capital's 
    capital value based on the sliding scale in the LICU's balance sheet.
    
    Requiring Secondary Capital as a Condition of Charter or Letter of 
    Understanding and Agreement
    
        Finally, two commenters expressed concerns that the rule may result 
    in tougher requirements for new or troubled LICUs. Both commenters 
    believed that NCUA should not require a LICU to obtain secondary 
    capital before the NCUA granted a charter or as a condition of a Letter 
    of Understanding and Agreement. One commenter noted that the Interim 
    Rule did not require LICUs to offer secondary capital and believed that 
    NCUA should only direct a LICU to obtain secondary capital in rare 
    instances.
        The Board strongly believes secondary capital will help support 
    greater lending and financial services for members of LICUs; however, 
    it was never the Board's intention to require secondary capital as a 
    condition for new LICUs. The decision to use secondary capital accounts 
    is within the discretion of the LICU.
    
    Final Rule
    
        The final rule adopts with minor modifications the Interim Rule 
    published on February 2, 1996. (61 FR 3788).
    
    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
    
        The collection of information requirements contained in the rule 
    were approved by the Office of Management and Budget under OMB Control 
    No. 3133-0140. 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 a OMB control number are 
    received. However, NCUA expected LICUs that chose to offer secondary 
    capital accounts, as a matter of safety and soundness, to adopt written 
    plans, forward a copy of the LICU'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.
        Written comments on the collection of information should be sent to 
    the Office of Management and Budget, OMB Reports Management Branch, New 
    Executive Office Building, Room 10202, Washington, DC 20503. Attn: 
    Alexander Hunt. The collection of information requirements relating to 
    the final rule are found at 12 CFR 701.34(b) (1) and (11). NCUA 
    believes 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. The likely recordkeepers are 
    Federally-insured credit unions with a low-income designation.
        Estimated number of respondents and/or recordkeepers: 50.
        Estimated average annual burden hours per respondent/recordkeeper: 
    3 hours.
        Estimated total annual reporting and recordkeeping burden: 150 
    hours.
        Start-up costs to respondents: None.
    
    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 
    requested the comments of State credit union regulators to obtain their 
    guidance in how the rule may affect their credit unions. However, no 
    State credit union regulator commented on the Interim Rule.
    
    List of Subjects in 12 CFR Part 701
    
        Credit unions, Reporting and recordkeeping requirements.
    
        By the National Credit Union Administration Board on September 
    18, 1996.
    Becky Baker,
    Secretary of the Board.
    
        Accordingly, the interim rule amending 12 CFR parts 701, 709, and 
    741, which was published at 61 FR 3788 on February 2, 1996, is adopted 
    as a final rule with the following change:
    
    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 701.34 is amended by revising paragraphs (b)(2) and (c) 
    to read as follows:
    
    
    Sec. 701.34  Designation of low-income status; receipt of secondary 
    capital accounts by low-income designated credit unions.
    
    * * * * *
        (b) * * *
        (2) The secondary capital account must be established as a 
    uninsured secondary capital account or other form of non-share account.
    * * * * *
        (c) Accounting treatment; weighted value for purposes of 
    recognizing capital value of secondary capital accounts. (1) 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 ``uninsured secondary 
    capital
    
    [[Page 50698]]
    
    account.'' For such accounts with remaining maturities of less than 
    five years, the credit union shall reflect the capital value of the 
    accounts in its financial statement in accordance with the following 
    scale:
        (i) Four to less than five years remaining maturity--80 percent.
        (ii) Three to less than four years remaining maturity--60 percent.
        (iii) Two to less than three years remaining maturity--40 percent.
        (iv) One to less than two years remaining maturity--20 percent.
        (v) Less than one year remaining maturity--0 percent.
        (2) The credit union will reflect the full amount of the secondary 
    capital on deposit in a footnote to its financial statement.
    * * * * *
    [FR Doc. 96-24457 Filed 9-26-96; 8:45 am]
    BILLING CODE 7535-01-P
    
    
    

Document Information

Effective Date:
9/27/1996
Published:
09/27/1996
Department:
National Credit Union Administration
Entry Type:
Rule
Action:
Final rule.
Document Number:
96-24457
Dates:
September 27, 1996.
Pages:
50696-50698 (3 pages)
PDF File:
96-24457.pdf
CFR: (1)
12 CFR 701.34