[Federal Register Volume 64, Number 95 (Tuesday, May 18, 1999)]
[Proposed Rules]
[Pages 27090-27118]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-11837]
[[Page 27089]]
_______________________________________________________________________
Part III
National Credit Union Administration
_______________________________________________________________________
12 CFR Parts 702 and 747
Prompt Corrective Action; Proposed Rule
Federal Register / Vol. 64, No. 95 / Tuesday, May 18, 1999 / Proposed
Rules
[[Page 27090]]
NATIONAL CREDIT UNION ADMINISTRATION
12 CFR Parts 702 and 747
Prompt Corrective Action
AGENCY: National Credit Union Administration (NCUA).
ACTION: Proposed Rule.
-----------------------------------------------------------------------
SUMMARY: In 1998, Congress amended the Federal Credit Union Act to
require the NCUA Board to adopt, by regulation, a system of ``prompt
corrective action'' to be taken by NCUA and by federally-insured credit
unions if they become undercapitalized. The new FCUA provision imposes
a series of progressively more stringent restrictions and requirements
indexed to five capital categories which it establishes for federally-
insured credit unions. It also mandates a separate system of prompt
corrective action for ``new'' credit unions and an additional risk-
based net worth requirement for ``complex'' credit unions. The proposed
rule combines the components of prompt corrective action which are
expressly prescribed by statute (except the risk-based net worth
requirement for ``complex'' credit unions) with those NCUA is
responsible for developing to suit credit unions. The rule also
establishes conforming reserve and dividend payment requirements, and
procedures for reviewing and enforcing directives imposing prompt
corrective action.
DATES: Comments must be received on or before August 16, 1999.
ADDRESSES: Direct comments 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. Please send comments by one method only.
FOR FURTHER INFORMATION CONTACT: Herbert S. Yolles, Deputy Director,
Office of Examination and Insurance, at the above address or telephone
(703) 518-6362; or Steven W. Widerman, Trial Attorney, Office of
General Counsel, at the above address or telephone (703) 518-6557.
SUPPLEMENTARY INFORMATION:
A. Background
1. The Credit Union Membership Access Act
On August 7, 1998, Congress enacted the Credit Union Membership
Access Act, Public Law No. 105-219, 112 Stat. 913 (1998). Section 103
of the statute added a new section 216 to the Federal Credit Union Act
(FCUA), 12 U.S.C. 1790d (hereinafter referred to as ``CUMAA'' or ``the
statute'' and cited as ``Sec. 1790d''). Section 1790d requires the NCUA
Board to adopt by regulation a system of ``prompt corrective action''
(sometimes referred to as ``PCA'') to be taken by NCUA when a
federally-insured ``natural person'' credit union becomes
undercapitalized. The stated purpose of Sec. 1790d is to ``resolve the
problems of insured credit unions at the least possible long-term loss
to the [National Credit Union Share Insurance Fund (NCUSIF)].''
Sec. 1790d(a)(1). The system of PCA for credit unions must take into
account the distinguishing features of credit unions: that they are
cooperatives that do not issue capital stock, must rely on retained
earnings to build net worth, and have primarily volunteer boards of
directors. Sec. 1790d(b)(1)(B).
Much of the system of PCA for credit unions is expressly prescribed
by Sec. 1790d. This includes the five net worth categories and the net
worth measures for each, the requirement to submit a Net Worth
Restoration Plan, the requirement to annually transfer a portion of
earnings to net worth, restrictions on increasing assets and on
increasing member business loans, and conditions triggering mandatory
conservatorship and liquidation. Secs. 1790d(c), (e), (f), (g), (i); 12
U.S.C. 1786(h)(1)(F) and (G), 1787(a)(3)(A). The implementing
regulations adhere to the substance of the statutory components of PCA.
To complete the framework of PCA for credit unions, CUMAA
authorizes NCUA to develop, by regulation, a comprehensive series of
discretionary supervisory actions to complement the mandatory
supervisory actions prescribed by statute. The statutory criteria for
these discretionary actions are that they must be consistent with the
purpose of Sec. 1790d, and must be ``comparable'' \1\ to the
``discretionary safeguards'' which the Federal banking agencies \2\ are
permitted to impose under section 38 of the Federal Deposit Insurance
Act, 12 U.S.C. 1831o (FDIA Sec. 38) \3\--the statute which established
prompt corrective action for federally-insured depository institutions.
Sec. 1790d(b)(1)(A); S. Rep. No. 193, 105th Cong., 2d Sess. 12 (1998)
(S. Rep.); H.R. Rep. No. 472, 105th Cong., 2d Sess. 23 (1998) (H.R.
Rep. at 23). Accordingly, the proposed implementing regulations
establish a series of discretionary supervisory actions indexed to the
``undercapitalized'' and lower net worth categories. NCUA has the
discretion to impose these restrictions and requirements to further the
purpose of prompt corrective action. Although comparable to FDIA
Sec. 38, these discretionary supervisory actions are tailored to suit
the distinctive characteristics of credit unions.
---------------------------------------------------------------------------
\1\ ``Comparable'' is defined as ``parallel in substance (though
not necessarily identical in detail) and equivalent in rigor.'' S.
Rep. at 12.
\2\ The Federal banking agencies consist of the Federal Reserve
Board, the Office of Comptroller of the Currency, the Federal
Deposit Insurance Corporation (FDIC) and the Office of Thrift
Supervision. Sec. 1790d(o)(1) incorporating 12 U.S.C. 1813(z). Their
Joint Final Rule establishing a system of prompt corrective action
pursuant to 12 U.S.C. 1831o is published at 57 FR 44886 (Sept. 29,
1992).
\3\ Section 38 of the Federal Deposit Insurance Act, 12 U.S.C.
1831o, was added by section 131 of the Federal Deposit Insurance
Corporation Improvement Act, Pub. L 102-242, 105 Stat. 2236 (1991).
---------------------------------------------------------------------------
For credit unions which CUMAA defines as ``new''--those in
operation less than ten years and which have $10 million or less in
assets--the statute requires NCUA to develop an alternative system of
prompt corrective action to apply in lieu of the system prescribed by
CUMAA for all other federally-insured credit unions.
Sec. 1790d(b)(2)(A); see U.S. Dept. of Treasury, Credit Unions
(Washington, D.C. 1997) at 79. The alternative system of PCA must
recognize 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 are no longer ``new.''
Sec. 1790d(b)(2)(B). Accordingly, although it follows the ``net worth
category'' model, the system of PCA for new credit unions has relaxed
net worth ratios, allows regulatory forbearance, and offers incentives
to build net worth.
CUMAA requires NCUA to formulate the definition of a ``complex''
credit union according to the risk level of its portfolio of assets and
liabilities. Sec. 1790d(d)(1). ``Well capitalized'' and ``adequately
capitalized'' credit unions which meet that definition will be subject
to an additional ``risk-based net worth requirement'' to compensate for
``any material risks against which the [statutory net worth ratio for
``adequately capitalized''] may not provide adequate protection.''
Sec. 1790d(d)(2). The ``risk-based net worth requirement'' for
``complex'' credit unions will be the subject of a separate proposed
rule to be issued by the NCUA Board in late 1999.
CUMAA requires NCUA to implement an independent appeal process by
which affected credit unions and certain officials can appeal to the
NCUA Board decisions by NCUA staff to impose discretionary restrictions
or requirements. Sec. 1790d(k). To fulfill this mandate, the proposed
rule adds a new subpart L to part 747 of NCUA's
[[Page 27091]]
regulations, 12 CFR 747.2001, establishing procedures for issuance,
review and enforcement of directives requiring prompt corrective
action. Subpart L generally provides a right of notice of the decision
to impose a discretionary restriction or requirement, and an
opportunity to respond to the notice, an informal hearing if requested
in certain cases, and NCUA Board review of the decision.
Although not required by CUMAA, the proposed rule retains in
substance certain of NCUA's current reserve and dividend payment
requirements. In subpart C, these requirements have been modified to
reflect repeal of FCUA Sec. 116, 12 U.S.C. 1762, and to conform to
CUMAA's earnings retention requirement. Sec. 1790d(e).
Finally, in formulating regulations to implement a system of PCA
for credit unions, CUMAA required NCUA to consult with the Secretary of
the Treasury, the Federal banking agencies, and State officials having
jurisdiction over federally-insured, State-chartered credit unions.
CUMAA Sec. 301(c). To that end, the proposed rule is a product of
consultation with representatives of the Department of the Treasury,
solicitation of comments from the Federal banking agencies, and
collaboration with a committee of representative State credit union
supervisors.
2. Statutory Timetable
CUMAA set deadlines for NCUA to issue proposed rules and final
rules on PCA, and dates for those rules to take effect. Congress
directed NCUA to commence rulemaking by issuing an Advance Notice of
Proposed Rulemaking (ANPR) addressing only the ``risk-based net worth
requirement'' for ``complex'' credit unions, no later than February 3,
1999. CUMAA Sec. 301(d)(2)(A). To fulfill that requirement, NCUA issued
an ANPR soliciting public comment not only on the ``risk-based net
worth requirement'' for ``complex'' credit unions, but also regarding
PCA for ``new'' credit unions and the contents, criteria, and deadlines
for a Net Worth Restoration Plan. 63 FR 57938 (October 29, 1998). The
great majority of the 34 comments NCUA received by the January 27,
1999, deadline addressed the risk-based net worth requirement for
``complex'' credit unions, which is not the subject of this rule.
CUMAA directs NCUA to propose rules for PCA (other than the ``risk-
based net worth requirement'' for ``complex'' credit unions) no later
than May 4, 1999, and to adopt final rules no later than February 7,
2000, to take effect August 7, 2000. CUMAA Sec. 301(d)(1) and (e)(1).
While no date is prescribed for a proposed rule on the ``risk-based net
worth requirement'' for ``complex'' credit unions, NCUA is required to
issue the final no later than August 7, 2000, to take effect January 1,
2001. CUMAA Sec. 301(d)(2)(B) and (e)(2). NCUA plans to issue a
proposed rule on the ``risk-based net worth requirement'' for
``complex'' credit unions in late 1999.
3. Report to Congress
CUMAA requires NCUA to report to Congress twice in the rulemaking
process for prompt corrective action---first when proposed rules are
published, and again when final rules are adopted (February 7, 2000).
CUMAA Sec. 301(f); S. Rep. at 19; H.R. Rep. at 23. The report must
explain how NCUA's implementing regulations establish a system of PCA
which is consistent with the cooperative character of credit unions.
CUMAA Sec. 301(f)(1); see Sec. 1790d(b)(1)(B). Further, the report must
identify how NCUA's implementing regulations differ from FDIA Sec. 38
and the reasons for those differences. CUMAA Sec. 301(f)(2). NCUA
expects to report that the proposed rule is comparable in nearly all
respects to FDIA Sec. 38, i.e., that it is parallel in substance and
equivalent in rigor.
4. Notice of Proposed Rulemaking
Through this notice, NCUA invites public comment on all aspects of
its proposed rule. Broad public input addressing the proposed rule will
assist the NCUA Board in tailoring a system of prompt corrective action
that is workable, fair and effective in light of the cooperative
character of credit unions. See S. Rep. at 14. Although NCUA lacks
discretion to modify the substance of components of prompt corrective
action prescribed by statute, the proposed rule establishes a
comprehensive array of discretionary restrictions and requirements
adapted, with modifications, from FDIA Sec. 38. Comments addressing
these and other non-statutory components of the proposed rule--such as
the contents and criteria for approval of a net worth restoration plan,
and the alternative system of PCA for new credit unions-will be most
helpful.
B. Framework of Proposed Rule
The proposed rule consists of four parts. Subpart A is the system
of PCA for all federally-insured credit unions except those which meet
the statutory definition of ``new.'' Subpart B is the alternative
system of PCA which the statute required NCUA to develop exclusively
for ``new'' credit unions. For ease of access, in subparts A and B, all
of the supervisory actions which apply to a credit union in a
particular net worth category are combined in a single section devoted
exclusively to that category. The supervisory actions and corresponding
net worth categories are depicted in Appendices A and B to the preamble
of this rule. Subpart C restates certain reserve, dividend payment and
other requirements, modified to facilitate the earnings retention
requirement in subparts A and B. Finally, subpart L of part 747
provides for notice, review and enforcement of certain supervisory
actions imposed under subparts A and B.
1. Net Worth Classification
Statutory net worth categories. Section 702.101(a) sets forth the
five net worth categories which CUMAA establishes for all federally-
insured credit unions, other than those which are ``new,'' and the
corresponding net worth ratio of each. Sec. 1790d(c). The range of net
worth ratios for each net worth category (assuming no risk-based net
worth requirement) and the percentage and number of federally-insured
credit unions that fall within each category as of December 1998, are
depicted as follows:
----------------------------------------------------------------------------------------------------------------
Percent of all Number of all
Net worth category Net worth ratio FICUs FICUs
----------------------------------------------------------------------------------------------------------------
``Well Capitalized''....................... 7% or above........................ 94.03 10,339
``Adequately Capitalized''................. 6% to 6.99%........................ 2.80 308
``Undercapitalized''....................... 4% to 5.99%........................ 2.06 227
``Significantly Undercapitalized''......... 2% to 3.99%........................ 0.59 65
``Critically Undercapitalized''............ Less than 2%....................... 0.51 56
----------------------------------------------------------------------------------------------------------------
[[Page 27092]]
Adjustment of Net Worth Category. Part 702 incorporates the two
statutory criteria for requiring a downward adjustment of a credit
union's original net worth category to a lower one.\4\
Secs. 702.101(a)(4)(B) and (a)(1)-(2). First, a credit union classified
as ``undercapitalized,'' and which has a net worth ratio of less than
5%, must be downgraded to ``significantly undercapitalized'' if it
fails to timely file or implement a Net Worth Restoration Plan.\5\
Sec. 1790d(c)(1)(D)(ii). See also Sec. 702.109(g). Second, credit
unions otherwise categorized as either ``well capitalized'' or
``adequately capitalized,'' and which meet the definition of
``complex,'' will be subject to a risk-based net worth requirement.
Sec. 1790d(c)(1)(A)(ii) and (c)(1)(B)(2). Credit unions which do not
meet the risk-based requirement in either category are required to be
reclassified ``undercapitalized.'' Sec. 1790d(c)(1)(C)(ii).
---------------------------------------------------------------------------
\4\ Apart from adjustments to net worth category classification,
the proposed rule gives NCUA the authority to adjust a credit
union's net worth net worth ratio to reflect the impact of certain
accounting adjustments. Sec. 702.3(d).
\5\ 5% falls mid-way between the 4% floor of the
``undercapitalized'' category and its 5.99% ceiling. See
Sec. 702.101(a)(3). An ``undercapitalized'' credit union having a
new worth ratio of between 5% and 5.99% is not subject to a downward
adjustment for failure to timely file or implement at New Worth
Restoration Plan, although it would be subject to other means of
enforcement.
---------------------------------------------------------------------------
Reclassification of Net Worth Category. Apart from statutory
adjustment, CUMAA authorizes reclassification of a credit union on
safety and soundness grounds, consistent with FDIA Sec. 38(g).
Sec. 1790d(h). The proposed rule thus provides that the NCUA Board may
reclassify to the next lower net worth category a credit union
originally classified above ``significantly undercapitalized'' if that
credit union is either in an unsafe or unsound condition or has failed
to correct an unsafe or unsound practice. Secs. 702.101(b) and
702.202(d). The authority to make a final decision to reclassify on
these grounds cannot be delegated, Sec. 1790d(h)(2), and when
exercised, requires notice to the credit union and an opportunity to
respond and to request an informal hearing. Sec. 747.2003.
The statutory criteria for mandatory adjustment of a net worth
category and for discretionary reclassification on safety and soundness
grounds under part 702 are summarized as follows:
----------------------------------------------------------------------------------------------------------------
Grounds to reclassify Adjusted or
Original category Additional criterion or adjust category reclassified to . . .
----------------------------------------------------------------------------------------------------------------
``Well Capitalized''................. Must be ``complex''....
``Adequately Capitalized''........... Must be ``complex''.... Fails to meet risk- Adjusted to
based net worth ``Undercapitalized''.
Requirement.
``Undercapitalized''................. Net worth ratio less Fails to timely file or ``Significantly
than 5%. implement Net Worth Undercapitalized''.
Restoration Plan.
``Well Capitalized'' or ``Adequately None................... Discretion to
Capitalized''. reclassify to next
lower category.
``Undercapitalized'' or None................... Unsafe or unsound...... Discretion to treat as
``significantly undercapitalized''. if in next lower
category.
``Well Capitalized'' or ``Adequately must be ``new''........ condition or practice.. Discretion to
Capitalized'' new credit union. reclassify to next
lower category.
``Moderately Capitalized'' or Must be ``new''........ Discretion to treat as
``Marginally Capitalized'' new if in next lower
credit union. category.
----------------------------------------------------------------------------------------------------------------
Notice and effective date of net worth classification. Section
1790d is silent about how and when a credit union has notice of its net
worth ratio and corresponding classification. Part 702 generally deems
a credit union to have notice of its net worth ratio and to have become
classified within the corresponding net worth category on a quarterly
basis, coinciding with the end of the credit union's quarterly dividend
period or every monthly dividend period, as the case may be.
Sec. 702.3(b)(1). This imposes no additional burden on credit unions
because the net worth ratio is derived from their financial statements,
which federally- and State-chartered credit unions already prepare
monthly.\6\ See Standard By-Law Art. VIII, Sec. 5(d). Once a credit
union has notice that a change in its net worth places it in a lower
net worth category, the credit union must notify NCUA in writing within
15 days. Sec. 702.3(c). A credit union may rely on NCUA or the
appropriate State official for notice of its net worth category only
when it is given in an examination report, notice of reclassification
on safety and soundness grounds, or notice of adjustment to its net
worth ratio to reflect an accounting adjustment. Secs. 702.3(b)(2)-(3),
747.2003(a)(1)(ii).
---------------------------------------------------------------------------
\6\ Federal depository institutions rely on quarterly Call
Reports to determine the ``leverage ratio'' (the equivalent of a net
worth ratio) on a quarterly basis. Part 702 does not rely on Call
Reports to determine credit union's net worth because only credit
unions having $50 million or more in assets file them quarterly, 12
CFR 741.6(a); other credit unions file Call Reports semi-annually.
---------------------------------------------------------------------------
2. Prompt Corrective Action by Net Worth Category
The following is a summary of the mandatory and discretionary
supervisory actions that apply under part 702 to each statutory net
worth category. These are also depicted in Appendix A and B to the
preamble of this rule. Each supervisory action is explained in greater
detail beginning in subsequent sections:
``Well Capitalized''. A credit union classified ``well
capitalized'' under part 702 is subject to no prompt corrective action.
``Adequately Capitalized''. A credit union classified ``adequately
capitalized'' must comply with a single mandatory supervisory action--
an ``earnings retention requirement'' under which the credit union
transfers to its regular reserve an amount of earnings equal to a
proportion of the credit union's total assets. Sec. 702.104. It is not
subject to any discretionary supervisory actions.
``Undercapitalized''. A credit union classified
``undercapitalized'' must comply with four mandatory supervisory
actions--
Transfer of earnings to its regular reserve an amount of
earnings equal to no less than 4/10ths percent of the credit union's
average total assets;
Restrict total assets to the average of the credit union's
assets over the preceding 12 calendar months (unless
[[Page 27093]]
an approved Net Worth Restoration Plan provides for increasing assets);
Submit and implement a Net Worth Restoration Plan; and
Restrict the making of member business loans (unless
primarily in the business of making such loans.
Sec. 702.105(a). An ``undercapitalized'' credit union also is
subject to one or more of the following discretionary supervisory
actions which NCUA is authorized to impose to further the purpose of
part 702: Prior approval by NCUA for acquisitions, branching, new lines
of business.
Restrict CUSO transactions and ownership.
Restrict dividends paid on shares.
Prohibit asset growth or reduce it (below the preceding
year's average.
Alter, terminate or reduce any activity.
Prohibit nonmember deposits.
Other actions no more severe than the preceding
discretionary actions.
Order new election of board of directors.
Dismiss directors or senior executive officers.
Require employment of qualified senior executive officers.
Sec. 702.105(b).
``Significantly Undercapitalized''. Credit unions classified
``significantly undercapitalized'' are subject to all of the same
mandatory and discretionary supervisory actions as an
``undercapitalized'' credit union, except for the ``no more severe''
limitation on ``other actions'' taken in addition to those enumerated
for that category. Sec. 702.106(a)-(b). A ``significantly
undercapitalized'' credit union also is subject to the following
additional discretionary supervisory actions:
Restrict senior executive officers' compensation and
bonus.
Require merger with another financial institution if
grounds exist for conservatorship or liquidation.
Sec. 702.106(b)(7) and (9).
Apart from these mandatory and discretionary supervisory actions,
the NCUA Board may place a ``significantly undercapitalized'' credit
union into conservatorship or liquidation if it ``has no reasonable
prospect of becoming `adequately capitalized'.''
Sec. 702.106(c); 12 U.S.C. 1786(h)(1)(f), 1787(a)(3)(A)(i).
``Critically Undercapitalized''. A credit union classified
``critically undercapitalized'' is subject to all of the same mandatory
and discretionary supervisory actions as a ``significantly
undercapitalized'' credit union. Sec. 702.107(a)-(b). A ``critically
undercapitalized'' credit union also is subject to the following
additional discretionary supervisory actions:
Restrict payments on uninsured secondary capital.
Require NCUA prior approval for certain actions.
Sec. 702.107(b)(9)-(10).
Apart from these mandatory and discretionary supervisory actions,
the NCUA Board must place a ``critically undercapitalized'' credit
union into conservatorship or liquidation within 90 days, unless the
NCUA Board determines that other corrective action in lieu of
conservatorship or liquidation would better achieve the purposes of
prompt corrective action. Sec. 702.107(c)(1). That determination
expires at the end of a period of no more than 180 days,
Sec. 702.107(c)(1)(C), and if not affirmed within that period, the
credit union must be conserved or liquidated. Sec. 702.107(c)(2). Even
if that determination is renewed for another period of up to 180 days,
the NCUA Board must conserve or liquidate a ``critically
undercapitalized'' credit union which remains in that category on
average for a full calendar quarter following a period of 18 months
from the date it initially became ``critically undercapitalized,
Sec. 702.107(c)(3)(i), unless certain statutory requirements for an
exception are met. Sec. 702.07(c)(3)(ii).
3. Proposed Rule Provisions Applicable to All Credit Unions
The following provisions of part 702 form the framework of prompt
corrective action under both subparts A and B, and apply to all net
worth categories:
Definitions. Section 702.2 adopts the statutory definitions set
forth in Sec. 1790d(o), with four additions. First, the term
``appropriate State official'' is defined so as to abbreviate
references throughout part 702. Sec. 702.2(a). Second, the definition
of ``Credit Union Service Organization'' (CUSO) is expanded beyond the
existing definition, 12 C.F.R. 712.3(a), which is limited to federally-
chartered credit unions. Sec. 702.2(c). This will ensure that CUSOs of
federally-insured State-chartered credit unions are within the scope of
discretionary restrictions on CUSO transactions and ownership. E.g.,
Sec. 702.105(b)(2). Third, the terms ``credit union'' and ``shares''
are defined to ensure that part 702 encompasses State-chartered credit
unions and analogous terms for shares under applicable State law.
Sec. 702.2(b) and (h). Finally, the term ``total assets' is defined as
the average of total assets reported by a credit union on its most
recent four quarterly Call Reports, or for semiannual filers, on its
two most recent semi-annual Call Reports. Sec. 702.2(i).
The statutory definition of ``net worth''--''retained earnings
balance of the credit union, as determined under generally accepted
accounting principles [GAAP]''--will in some cases distort the ``net
worth ratio'' as a true measure of actual capital strength.
Sec. 702.2(e); Sec. 1790d(o)(2)(A). The GAAP definition of ``retained
earnings'' does not include items of ``other comprehensive income''
such as unrealized gains or losses on available-for-sale (AFS)
securities (Call Report account 945).\7\ As a result, when the fair
value of AFS securities falls, that reduction is not reflected in net
worth, artificially overstating the credit union's ``net worth ratio''
and possibly forestalling appropriate prompt corrective action.\8\ In
response to this dilemma, the proposed rule authorizes the NCUA Board
to adjust a credit union's net worth ratio to reflect accounting
adjustments such as gains and losses in the fair value of AFS
securities. Sec. 702.203(d).
---------------------------------------------------------------------------
\7\ Under GAAP, ``retained earnings'' consists of undivided
earnings, statutory reserves, and other appropriations as defined by
management or regulatory authorities. AICPA, Audit & Accounting
Guide: Audits of Credit Unions at Sec. 11.01 (1998).
\8\ For example, assume a credit union has retained earnings
under GAAP of $6500 and total assets of $100,000; it would have a
net worth ratio of 6.5% and would be classified ``adequately
capitalized.'' Assume that during the next quarter, the credit union
experiences an $8,000 decrease in the fair value of its available-
for-sale (AFS) securities. This unrealized loss would be reflected
in total assets (the denominator of the net worth ratio), reducing
them to $92,000. However, under the statutory definition of ``net
worth,'' the unrealized loss would not be reflected at all in
retained earnings (the numerator of the net worth ratio), and would
still be $6500. As result, the credit union would have a net worth
ratio of 7.06% and be classified ``well capitalized'' despite having
sustained a decline in the fair value of its AFS securities.
Conversely, an understated net worth ratio results when the credit
union experiences an unrealized gain in the fair value of its AFS
securities.
---------------------------------------------------------------------------
Consultation With State Officials. Part 702 tracks the statutory
requirement that NCUA consult with the appropriate State credit union
official when taking prompt corrective action against a federally-
insured State-chartered credit union (FISCU). Sec. 1790d(l). Before
placing a FISCU into conservatorship or liquidation to facilitate
prompt corrective action, NCUA must consult with the appropriate State
official, provide reasons for the proposed action, give the official an
opportunity to respond, and allow the official to place the FISCU into
conservatorship or liquidation. Sec. 702.108(a). If the State official
does not concur in the conservatorship or liquidation decision, the
NCUA Board cannot proceed unless it makes certain findings of risk of
loss to the NCUSIF. Sec. 702.108(a)(3); see also 12 U.S.C.
1786(h)(2)(C), 1787(b).
[[Page 27094]]
To satisfy the requirement that NCUA ``consult and seek to work
cooperatively with State officials'' when implementing prompt
corrective action, Sec. 1790d(I)(1), part 702 generally provides
throughout for participation by the appropriate State official in
decisions about a FISCU on which prompt corrective action is
predicated. Specifically, part 702 provides that NCUA ``shall notify
the appropriate State official before taking any discretionary action''
concerning a FISCU and ``shall allow the appropriate State official to
take the proposed action independently or jointly with NCUA.''
Sec. 702.108(c). When evaluating a FISCU's Net Worth Restoration Plan,
NCUA must consult with State officials. Sec. 702.109(d)(2). To
facilitate consultation, a FISCU which submits a Net Worth Restoration
Plan to NCUA must submit a duplicate to the appropriate State official.
Sec. 702.109(a)(1). When a FISCU, or an official who it has been
ordered to dismiss, seeks review of a decision to impose a
discretionary supervisory action, the appropriate State official must
be served with a copy of all notices and decisions issued by NCUA, and
responses and requests filed by the FISCU or its official.
Sec. 747.2001(b).
C. Mandatory and Discretionary Supervisory Actions
1. Mandatory Actions Prescribed by Statute
Under the proposed rule, each of the following mandatory
supervisory actions is a self-executing legal obligation of a credit
union once it is classified within a net worth category requires that
action. The legal obligation is not triggered by notification from
NCUA.
Earnings transfer to regular reserve. The proposed rule adopts the
mandatory ``earnings retention requirement'' under which credit unions
classified ``adequately capitalized'' or lower must ``annually set
aside as net worth an amount equal to not less than 0.4% of its total
assets.'' Sec. 1790d(e)(1). However, CUMAA does not answer how or when
a credit union's total assets should be measured for this purpose, or
where the earnings set aside should be held. To measure ``total
assets,'' part 702 uses the average of the credit union's total assets
as set forth in its most recent four quarterly Call Reports or most
recent two semi-annual Call Reports, as the case may be. Sec. 702.2(i).
Measuring total assets on a single day, such as the last day the prior
quarter or prior year, would not take into account seasonal
fluctuations in asset size. The rule also directs that the resulting
amount of earnings to be set aside over the ensuing year is to be
transferred in installments to the credit union's regular reserve. A
credit union having a monthly dividend period for regular shares must
make monthly transfers of at least 8.334%, or 1/12th , of the annual
sum. Sec. 702.104(a)(1). A credit union having a quarterly or less
frequent dividend period for regular shares must make a quarterly
transfer of at least 25%, or \1/4\ of the annual sum.
Sec. 702.104(a)(2).
Part 702 also amplifies the terms of the statutory exception to the
0.4% minimum set aside. Sec. 1790d(e)(2). First, the NCUA Board
interprets the phrase ``by order'' to indicate that exceptions to 0.4%
statutory minimum are to be granted on a case-by-case basis.
Sec. 702.104(b). Second, the proposed rule implements the mandate to
``periodically review any order'' decreasing the 0.4% statutory minimum
by requiring ``review and revocation no less frequently than
quarterly,'' to coincide with the dividend period for regular shares
which is common among credit unions. Id.
Net Worth Restoration Plan. The requirement to implement a Net
Worth Restoration Plan (NWRP) emerges as the hallmark of prompt
corrective action. To restore a credit union's net worth to the
``adequately capitalized'' level, CUMAA provides that credit unions
classified ``undercapitalized'' or lower must timely submit to the NCUA
Board and implement a NWRP. Sec. 1790d(f)(1). The statute requires NCUA
to establish ``reasonable'' deadlines for submission of NWRPs; set
``expeditious'' deadlines for NCUA to act on them; allow credit unions
which fail to timely submit an NWRP a further opportunity to do so; and
allow a credit union whose NWRP is not approved an opportunity to
submit a revised NWRP. Sec. 1790d(f)(3)-(4). Further, credit unions
having less than $10 million in assets are entitled to receive
assistance in preparing an NWRP. Sec. 1790d(f)(2).
To fulfill this mandate, the proposed rule sets a 45-day period for
submitting an NWRP, and if that deadline is not met, allows an
additional 15 days to submit an NWRP. Sec. 702.109(a)(1). The NCUA
Board is required to act on an initial NWRP within 60 days, and to
provide reasons in the event of disapproval. Sec. 702.109(e)(1). When
an initial NWRP is not approved, the credit union is given 30 days to
file a revised NWRP, on which the NCUA Board is required to act within
30 days of receipt. Sec. 702.109(f). The periods for submission and
review of an initial NWRP parallel those which FDIA
Sec. 38(e)(2)(D)(ii) sets for ``capital restoration plans''--the
federally-insured depository institutions' analog to an NWRP--and are
consistent with comments on the topic received in response to the ANPR.
The NCUA Board has declined to set a deadline by which a credit union
having less than $10 million in assets must request assistance in
preparing an NWRP; under the proposed rule, NCUA will provide
assistance simply ``upon timely request.'' Sec. 702.109(b).
CUMAA is silent as to the contents of an NWRP, and sets just a
single standard for approving one. Sec. 1790d(f)(5). As comments
received in response to the ANPR suggested, the NCUA Board has examined
the contents and criteria that FDIA Sec. 38 prescribes for a ``capital
restoration plan.'' With certain additions and adjustments to
distinguish between credit unions and other depository institutions,
the NCUA Board proposes to require for an NWRP much of the content
information that FDIA Sec. 38(e)(2)(B) demands of a ``capital
restoration plan.'' Accordingly, section 702.109(c) requires a proposed
NWRP to specify--
The steps the credit union will take to become
``adequately capitalized'';
A specific timetable for increasing net worth during each
year in which the NWRP will be in effect;
How the credit union will comply with the mandatory and
discretionary restrictions or requirements imposed on it under this
part;
The types and levels of activities in which the credit
union will engage;
The amount of earnings the credit union will transfer to
its regular reserve account pursuant to the earnings retention
requirement in section 702.104; and
In the case of a plan submitted by a credit union which
has been reclassified under Sec. 702.101(b) on safety and soundness
grounds, the steps the credit union will take to correct the unsafe or
unsound practice(s) or condition(s).
Sec. 702.109(c)(1) (i)-(vi).
Finally, an NWRP must be accompanied by pro-forma financial
statements covering the next two years, and financial data submitted in
connection with an NWRP must generally conform to GAAP. Sec. 702.109
(c)(2) and (c)(4).
Similarly, to supplement the single statutory criterion for
approval of a NWRP--that it be ``based on realistic assumptions'' and
be ``likely to succeed in restoring * * * net worth''--the NCUA Board
proposes to adopt as appropriate for approving an NWRP the additional
criteria which FDIA
[[Page 27095]]
Sec. 38(e)(2)(c) establishes for accepting a ``capital restoration
plan,'' with significant modifications addressed below. To be approved,
section 702.109(d) requires an NWRP to--
Be based on realistic assumptions and likely to succeed in
restoring net worth;
Comply with content requirements in section 702.109(c);
Not unreasonably increase the credit union's exposure to
risk (including credit risk, interest-rate risk, and other types of
risk); and be supported by appropriate assurances from the credit union
that it will comply with the plan until it has remained ``adequately
capitalized'' for four (4) consecutive calendar quarters.
Whereas a ``capital restoration plan'' cannot ``appreciably
increase'' risk exposure, an NWRP must ``not unreasonably increase the
credit union's exposure to risk.'' (emphasis added.) Compare FDIA
Sec. 38(e)(2)(C)(I)(III) with Sec. 702.109(d)(3). This permits a credit
union with little or no risk exposure to incur reasonable exposure to
improve net worth. Approval of a ``capital plan'' requires a financial
``guarantee'' of compliance until ``the institution becomes adequately
capitalized on average during each of 4 consecutive calendar
quarters,'' and ``appropriate assurances'' of performance. FDIA
Sec. 38(e)(2)(c)(ii). Section 702.109(d)(4) combines and condenses this
pair of requirements into a single, criterion appropriate for credit
unions--requiring ``appropriate assurances'' of compliance with the
NWRP until the credit union ``has remained `adequately capitalized' for
four (4) consecutive calendar quarters'' on an absolute basis rather
than just on average. The NCUA Board may delegate to its Regional
Directors the authority to evaluate an NWRP according to the proposed
criteria.
Restriction on increase in assets. Part 702 adopts CUMAA's
limitation on increasing assets, which provides that a credit union
classified ``undercapitalized'' or lower shall ``not generally permit
its average total assets to increase'' unless doing so is consistent
with the credit union's approved NWRP and the credit union increases
assets and net worth at the rate the Plan prescribes. Sec. 1790d(g)(1);
Sec. 702.105(a)(3). However, the statute does not specify the period
over which ``average total assets'' should be calculated for purposes
of limiting asset growth. Therefore, to avoid seasonal fluctuations in
asset size, section 702.105(a)(3) relies on the definition of total
assets in section 702.2(i).
In many cases, at the time a credit union becomes subject to the
limit on increasing assets, its total assets already will exceed the
average for the preceding twelve months, raising the question whether
it should be required to reduce assets to that level. Section
702.105(b)(4) gives the NCUA Board discretionary authority to prohibit
a credit union classified ``undercapitalized'' or lower from increasing
its total assets or an individual category of assets beyond an absolute
level, or even to require the credit union to reduce total assets or a
category of assets. Due to the availability of this complementary
restriction, the NCUA Board declines to interpret the statutory asset
limitation as requiring a reduction in assets to the level of average
total assets over the preceding 12 months.
Restriction on increase in member business loans. CUMAA prohibits
credit unions classified ``undercapitalized'' or lower from ``mak[ing]
any increase in the total amount of member business loans * * *
outstanding at that credit union at any one time * * *'' 1790d(g)(2).
This imposes a freeze on member business lending, rather than confining
it to an average. Part 702 incorporates within this restriction the
exemptions Title II of CUMAA prescribes for ``a credit union chartered
for the purpose of making, or that has a history of primarily making,
member business loans to its members,'' or which is designated low
income, or which participates in the Community Development Financial
Institutions program. 12 U.S.C. 1757a(b). Applying these exemptions to
the proposed rule's member business loan restriction will ensure that
prompt corrective action does not defeat the net worth restoration
efforts of credit unions which rely heavily on member business lending.
Part 702's member business loan restriction is imposed
``[n]otwithstanding'' the Title II maximum on member business loans--
1.75 times net worth for less than ``well capitalized'' credit unions;
12.25% of assets for those which are ``well capitalized'' (but not
``complex''). 12 U.S.C. 1757a(a)(1). This makes it clear that the part
702 restriction is overriding. Thus, a credit union cannot claim to be
entitled to increase member business loans to the Title II maximum
before the part 702 restriction can take effect.
Conservatorship and Liquidation. CUMAA prescribes criteria for
allowing and for mandating conservatorship and liquidation of a credit
union classified ``significantly undercapitalized'' or ``critically
undercapitalized,'' Sec. 1790d(i) (1)-(2), and amends the FCUA
accordingly. CUMAA Sec. 301(b). Section 702.106(b) faithfully reflects
the statutory authority to place a ``significantly undercapitalized''
credit union into conservatorship or liquidation to facilitate prompt
corrective action upon finding that the credit union ``has no
reasonable prospect of becoming adequately capitalized.'' 12 U.S.C.
1786(h)(1)(F), 1787(a)(3)(A)(i).
In the case of a ``critically undercapitalized'' credit union,
regardless of its prospect of becoming ``adequately capitalized,'' the
NCUA Board must--
not later than 90 days after the date on which an insured credit
union becomes critically undercapitalized--
(A) appoint a conservator or liquidating agent for the credit union;
or (B) take such other action as the Board determines would better
achieve the purpose of [Sec. 1790d], after documenting why the
action would better achieve that purpose.
Sec. 1790d(i)(1). Section 702.107(c) restates this mandate.
The statute provides that the determination to take other
corrective action shall ``cease to be effective not later than the end
of the 180-day period beginning on the date on which the determination
is made,'' and the credit union shall be placed into conservatorship or
liquidation ``unless the Board makes a new determination * * * before
the end of the effective period of the prior determination'' that
continuing other corrective action will further the purpose of
Sec. 1790d. Sec. 1790d(d)(2). Section 702.107(c)(2) implements this
procedure for renewing other corrective action in lieu of
conservatorship and liquidation. The NCUA Board interprets the
``documenting'' prerequisite for initially taking other corrective
action as setting a standard for renewing that determination.
Regardless whether other corrective action restores net worth, the
NCUA Board is required by statute to place the credit union into
liquidation ``if [it] is critically undercapitalized on average during
the calendar quarter beginning 18 months after the date on which the
credit union became critically undercapitalized.'' Sec. 1790d(i)(3)(A).
An exception to mandatory liquidation is allowed, however, and other
corrective action may continue, if the NCUA Board makes three findings:
That the credit union has substantially complied with a
Net Worth Restoration Plan requiring improvement in net worth since the
date the plan was approved;
[[Page 27096]]
That the credit union has positive net income or a
sustainable upward trend in earnings; and
That the credit union is viable and not expected to fail.
Sec. 1790d(i)(3)(B).
The mandate for liquidation of a ``critically undercapitalized''
credit union after 18 months, and the grounds for an exception to it,
are incorporated in section 702.107(c)(3).\9\
---------------------------------------------------------------------------
\9\ The authority to elect among conservatorship, liquidation,
or other action concerning a ``critically undercapitalized'' credit
union cannot be delegated unless the credit union has less than
$5,000,000 in assets. Sec. 1790d(l)(4)(A). If made by delegation,
the decision is directly appealable to the NCUA Board.
Sec. 1790d(i)(4)(B); Sec. 702.107(c)(4). Finally, a ``significantly
undercapitalized'' or ``critically undercapitalized'' credit union
which is placed into conservatorship or liquidation under part 702
retains the right to challenge NCUA Board's decision in court within
10 days. 12 U.S.C. 1786(h)(3), 1787(a)(1)(b).
---------------------------------------------------------------------------
Although faithful to the statutory language, section 702.107(c) is
phrased to reveal flexibility that may not be apparent. First, the
effective period of a determination to take ``other corrective action''
need not extend for the maximum duration of 180 days. The NCUA Board
has the discretion to establish a shorter effective period. Further,
the NCUA Board may reconsider any determination periodically, and
reverse and discontinue the ``other corrective action'' altogether. To
continue the action beyond an effective period, the NCUA Board must
make a new finding prior to the end of the effective period that its
``other corrective action'' still furthers the purpose of prompt
corrective action. If the new finding is made, the ``other corrective
action'' can continue for a new effective period that is appropriate to
achieve the ``other corrective action,'' which the NCUA Board may
specify as any period of up to 180 days from the date of the
determination. The new determination still can be reconsidered
periodically, and renewed for an additional effective period or
discontinued.
Second, if the credit union first became ``critically
undercapitalized'' at the end of a calendar quarter, the last possible
day for ``other corrective action'' may be as soon as 18 months plus 3
months of the next calendar quarter, for a total of 21 months. If the
date the credit union first became ``critically undercapitalized'' was
other than the end of a calendar quarter, the last possible day for
``other corrective action'' would extend to the end of the calendar
quarter following the 21 months, for a total of up to 23 months.\10\
---------------------------------------------------------------------------
\10\ In any event, a credit union's net worth ratio need only
average 2% or more over the full calendar quarter following 18
months from the date the credit union was first classified
``critically undercapitalized.''
---------------------------------------------------------------------------
2. Discretionary Actions Under Statutory Authority
CUMAA requires NCUA to develop discretionary supervisory actions to
complement the mandatory ones it prescribes, provided they are
consistent with the purpose of prompt corrective action, and are
``comparable'' to the ``discretionary safeguards'' in FDIA Sec. 38.
Sec. 1790d(b)(1)(A). The discretionary supervisory actions NCUA
proposes are generally allocated among the five statutory net worth
categories in part 702 by corresponding capital category in FDIA
Sec. 38.\11\ Throughout the proposed rule, the use of discretionary
actions is conditioned upon furthering the purpose of part 702.
However, NCUA is not required to give mandatory supervisory actions an
opportunity to improve net worth before resorting to discretionary
actions. Except as noted, there is no limit to the number or sequence
in which the NCUA Board imposes one or more discretionary actions. Each
discretionary requirement and restriction is adapted as follows from
FDIA Sec. 38 with appropriate modifications to suit the distinct
features of credit unions in the net worth categories established by
statute and those developed for ``new'' credit unions:
---------------------------------------------------------------------------
\11\ The Federal banking agencies' Joint Final Rule does not
restate or establish by regulation the ``discretionary safeguards''
prescribed in FDIA Sec. 38; it merely incorporates them by general
reference to the statute. See, e.g., 12 CFR 325.105(a)(2). However,
FDIA Sec. 38(b)(1)'s five capital categories and corresponding range
of ``leverage ratios'' (the equivalent of a net worth ratio) are the
same as part 702's five net worth categories and corresponding range
of net worth ratios. Compare FDIA Sec. 38(b)(1) with Sec. 1790d(c);
see e.g., 12 CFR 325.103(b).
Part 702--Discretionary Supervisory Actions
----------------------------------------------------------------------------------------------------------------
Applies in which
Discretionary supervisory action statutory and ``new'' Comparison with FDIA Sec. 38 and
net worth categories appropriateness of discretionary actions for
---------------------------------------------------------------------------------credit unions.-----------------
1. Requiring NCUA prior approval for Statutory: NCUA may prohibit a credit union ``from,
acquisitions, branching, new lines ``Undercapitalized'' directly or indirectly, acquiring any interest
of business. and lower. in any CUSO or credit union, establishing or
New: ``Moderately acquiring any additional branch office, or
Capitalized'' and engaging in any new line of business unless the
lower. NCUA Board has approved the credit union's net
worth restoration plan, the credit union is
implementing its plan, and the NCUA Board
determines that the proposed action is
consistent with and will further the objectives
of that plan.'' Sec. 702.105(b)(1). This
authority extends to ownership interests in a
CUSO and is a discretionary supervisory action
in part 702, whereas in FDIA Sec. 38 the
approval plan is a mandatory supervisory
action.
2. Restricting transactions with and Statutory: NCUA may restrict transactions between a credit
ownership of CUSOs. ``Undercapitalized'' union and its wholly- or partially-owned
and lower. CUSO(s), and require that credit union to
New: ``Moderately reduce or divest its ownership interest in a
Capitalized'' and CUSO. Sec. 702.105(b)(2). This is an analog to
lower. FDIA Sec. 38(f)(2)(B), which restricts a
depository institution from transactions with
its affiliate institutions. The authority to
require a credit union to reduce or divest it
ownership interest in a CUSO is appropriate
because CUSO ownership can be a drain on the
credit union's financial resources and
attention at a time when both need to be
devoted to improving net worth.
3. Restricting dividends paid........ Statutory: NCUA may restrict the dividend rates a credit
``Undercapitalized'' union pays on shares to the prevailing rates
and lower. paid on comparable accounts and maturities in
New: ``Moderately the region where the credit union is located,
Capitalized'' and but may not apply this restriction
lower. retroactively to dividends on shares already
issued. Sec. 702.105(b)(3). This is an analog
to the FDIA Sec. 38(f)(2)(c), which imposes
the same restriction on interest rates. In
order not to undermine the ability of a credit
union to attract new members, the rate
reduction is limited to ``prevailing rates paid
on comparable accounts'' in the region, thus
permitting a credit union to remain competitive
in the rates it pays.
[[Page 27097]]
4. Prohibiting or reducing asset Statutory: NCUA may place an absolute limit on increases in
growth. ``Undercapitalized'' assets generally or on increases in a
and lower. particular asset category, or may compel the
New: ``Moderately credit union to reduce its total assets or a
Capitalized'' and certain category of assets. Sec.
lower. 702.105(b)(4). This is a modified version of
the FDIA provision ``restricting the
institution's asset growth more stringently''
than limiting increases in total average
assets. FDIA Sec. 38(f)(2)(D). This authority
is appropriate for credit unions because it can
be targeted to limit growth in one or more
specific asset categories and complements the
mandatory action limiting assets to total
average assets. See Sec. 702.105(a)(3).
5. Alter, reduce or terminate any Statutory: NCUA may compel a credit union to alter, reduce
activity by credit union or its CUSO. ``Undercapitalized'' or terminate any activity in which it or its
and lower. CUSO engages. Secs. 702.105(b)(5),
New: ``Moderately 702.106(b)(5), 702.107(b)(5). This is adapted
Capitalized'' and from FDIA's similar restriction, but is
lower. extended to CUSOs and is without the
prerequisite that the subject activity poses
``excessive risk to the institution. `` FDIA
Sec. 38(f)(2)(E). This is appropriate for
credit unions because activities which may not
be excessively risky still may distract the
attention of management, compromise a CUSOs
internal controls, or pose cost efficiency or
conflict of interest problems--all of which can
impact on net worth.
6. Prohibiting nonmember deposits.... Statutory: NCUA may prohibit a credit union from accepting
``Undercapitalized'' all or certain nonmember deposits as otherwise
and lower. permitted under 12 U.S.C. 1757(6) and 12 CFR
New: ``Moderately 701.32. Sec. 702.105(b)(6). This is an analog
Capitalized'' and to the FDIA Sec. 38 provision prohibiting
lower. deposits from correspondent banks. FDIA Sec.
38(f)(2)(G). This restriction may serve a
critical purpose for credit unions when large
nonmember depositors are unduly influential in
credit union affairs affecting its net worth.
7. Other actions to further the Statutory: NCUA may ``restrict or require such other action
purpose of part 702. ``Undercapitalized'' as [it] determines will carry out the purpose
and lower. of [part 702] better than any of the
New: ``Moderately [discretionary] actions prescribed [for that
Capitalized'' and category.]'' Secs. 702.106(b)(10),
lower. 702.107(b)(11). For the ``undercapitalized''
category only, however, ``such other
restriction or requirement [must be] no more
severe than the [other discretionary] actions
prescribed'' for that category. Sec.
702.105(b)(7). FDIA Sec. 38(f)(2)(J) is
analogous, but without the ``no more severe''
limitation. NCUA has added the ``no more
severe'' limitation to ensure that in the case
of an ``undercapitalized'' credit union--whose
net worth ratio may, for example, be just tens
of basis points short of ``adequately
capitalized''--that the least intrusive means
is used to further the purpose of part 702.
This is not the case with ``significantly
undercapitalized'' and ``critically
undercapitalized'' credit unions, who, by
definition, are not near to being ``adequately
capitalized.''
8. Ordering new election of board of Statutory: As one means of improving management, NCUA may
directors. ``Undercapitalized'' compel a credit union to hold a new election of
and lower. its board of directors. Sec. 702.105(c)(1).
New: ``Moderately FDIA Sec. 38(f)(2)(F)(i) is identical. This
Capitalized'' and action is an appropriate means of improving
lower. management where the board of directors is
determined to be responsible for a net worth
deficiency and is either unwilling or not
capable of taking action needed to correct the
deficiency. NCUA intervention is minimal
because a new election gives the credit union
membership an opportunity to change member
representation on the board of directors,
possibly eliminating the need for further
action by NCUA. For ``undercapitalized'' credit
unions only, this and other means of
``improving management'' may be imposed only
after NCUA takes one or more of the
discretionary prescribed for that category
(i.e., Sec. 702.105(b)(1)-(7)) or determines
that none of those actions would further the
purpose of part 702.\12\ Sec. 702.105(c).
Similarly to ``other actions'' in paragraph 7
above, this is to ensure that the least extreme
discretionary action is used in the case of a
credit union whose net worth ratio may fall
just short of being ``adequately capitalized.''
9. Dismissing directors or senior Statutory: As a second means of improving management, NCUA
executive officers. ``Undercapitalized'' may require a credit union to dismiss one or
and lower. more directors or senior executive officers.
New: ``Moderately Sec. 702.105(c)(2). This action is appropriate
Capitalized'' and when a surgical approach to replacing
lower. management is warranted. FDIA Sec.
38(f)(2)(F)(ii) is identical, except that it
provides a period of protection from dismissal
for persons who have held office 180 or fewer
days prior to the date the institution was
classified ``undercapitalized'' or lower. The
theory behind this period of protection from
dismissal is that such persons have not held
office long enough to be responsible for net
worth problems causing the institution to be
classified ``undercapitalized'' or lower. NCUA
proposes to eliminate this period of protection
so that no official who is responsible for a
credit union's rapidly declining net worth, or
who is incapable reversing the decline, can
have a ``safe harbor'' from dismissal. This
action is subject to the prerequisite only in
the ``undercapitalized'' category that other
discretionary actions in that category be used
first or be determined not to further the
purpose of part 702. Subpart L of part 747
provides a specific review procedure for
dismissals pursuant to this action. 12 CFR
747.2004.
10. Employing qualified senior Statutory: As a third means of improving management, NCUA
executive officers. ``Undercapitalized'' may require the credit union to employ
and lower. qualified senior executive officers, who may be
New: ``Moderately subject to the NCUA Board's approval. Sec.
Capitalized'' and 702.105(c)(3). FDIA Sec. 38(f)(2)(F)(iii) is
lower. identical. This action can be a means of
supplementing existing management, or replacing
a dismissed officer, with persons who are
competent to deal with and to correct the
causes of declining net worth. NCUA can
authorize the credit union to identify and to
hire a sufficiently qualified person, or NCUA
may condition hiring upon its approval of the
credit union's candidate. This action is
subject to the prerequisite in the
``undercapitalized'' category only that other
discretionary actions in that category be used
first or be determined not to further the
purpose of part 702.
[[Page 27098]]
11. Restricting senior executive Statutory: NCUA may limit or reduce the compensation a
officers' compensation and bonus. ``Significantly credit union pays to its senior executive
Undercapitalized'' and officers; limit, reduce, or prohibit bonuses
lower. paid to such officers; or condition payment of
New: ``Marginally either compensation or a bonus upon NCUA
Capitalized'' and approval. Secs. 702.106(b)(7), 702.107(b)(7).
lower. FDIA Sec. 38(f)(4)(A) is similar except that
it does not authorize unilaterally limiting,
reducing or prohibiting compensation or
bonuses. Instead, it provides for approval by
the appropriate Federal banking agency for
compensation in excess of the officer's average
compensation over the 12 calendar months
preceding classification of the credit union as
``significantly undercapitalized'' or lower,
and for a bonus in any amount. Such approval
for either is prohibited if an institution has
failed to submit an acceptable ``capital
restoration plan.'' FDIA Sec. 38(f)(4)(B).
12. Requiring merger if grounds exist Statutory: NCUA may require a credit union to merge with
for conser-vatorship or liquidation. ``Significantly another financial institution, but only if
Undercapitalized'' and grounds exist to place the credit union into
lower. conservatorship or liquidation. Sec.
New: ``Marginally 702.106(b)(9), 702.107(b)(9). The statutory
Capitalized'' and grounds for conserving or liquidating a
lower. ``significantly undercapitalized'' or
``critically undercapitalized'' credit union to
facilitate prompt corrective action is whether
the credit union has a reasonable prospect of
becoming ``adequately capitalized.'' 12 U.S.C.
1786(h)(1)(F), 1787(a)(3)(A)(i). FDIA Sec.
38(f)(2)(A)(iii) is analogous, requiring an
institution to be acquired by a depository
institution holding company, or to combine with
another depository institution if grounds exist
for conservatorship or receivership. This
action is appropriate for credit unions because
NCUA's insistence on merger with another
financial institution gives credit union
management the opportunity to consummate a
merger to avoid inevitable conservatorship or
liquidation, thereby permitting the credit
union to survive in merged form.
13. Restrict payments on uninsured Statutory: ``Critically NCUA may prohibit a credit union, beginning 60
secondary capital. Undercapitalized''. days after it becomes ``critically
New: ``Minimally undercapitalized'', from making payments of
Capitalized'' and principal or interest on uninsured secondary
``Uncapitalized''. capital.'' Sec. 702.107(b)(9). This is
analogous to FDIA Sec. 38(h)(2)'s restriction
on payment of principal and interest on
subordinated debt. However, for Federal banking
agencies that restriction is a mandatory
supervisory action, whereas in part 702 it is
discretionary. This restriction will have
limited effect because only low-income credit
unions are permitted by law to accept uninsured
secondary capital. 12 U.S.C. 1757(6).
14. Require NCUA prior approval for Statutory: ``Critically NCUA may require a credit union to obtain its
certain actions. Undercapitalized''. approval before engaging in certain activities
New: ``Minimally on the operational level, such as entering into
Capitalized'' and a material transaction outside the normal
``Uncapitalized''. course of business, amending by-laws, or
changing accounting methods. Sec.
702.107(b)(10). FDIA Sec. 38(i) imposes a
similar ``prior approval'' requirement which
addresses the same actions and a few others not
relevant to credit unions.
----------------------------------------------------------------------------------------------------------------
\12\ The ``prerequisite'' provisions in the proposed rule--Secs. 702.104(b)(7) and (c), 702.105(b)(10),
702.106(b)(10), 702.107(b)(11)--requiring certain discretionary actions to be taken before other more
stringent or intrusive discretionary actions, are modeled conversely to FDIA Sec. 38(f)(3), which establishes
a ``presumption in favor of certain actions'' (requiring merger, restricting transactions with affiliates, and
restricting interest rates) which are relatively more stringent than other available discretionary actions.
D. Alternative Prompt Corrective Action for New Credit Unions
CUMAA charged NCUA with the responsibility of developing ``a system
of prompt corrective action that shall apply to new credit unions'' in
lieu of the system of statutory PCA applicable to all other federally-
insured credit unions. Sec. 1790d(b)(2)(A). The statute defines a
``new'' credit union as having been in operation for less than 10 years
and having $10 million or less in assets, Sec. 1790d(o)(4). In
addition, it requires the alternative system of PCA for new credit
unions to:
Recognize that new credit unions initially have no net
worth, and must be given reasonable time to accumulate net worth;
Create adequate incentives for new credit unions to become
``adequately capitalized'' by the time they either are in operation for
more than 10 years or reach $10 million in total assets;
Impose appropriate restrictions and requirements on new
credit unions that do not make sufficient progress toward becoming
``adequately capitalized''; and
Prevent evasion of the purpose of part 702.
Sec. 1790d(b)(2)(B).
In carrying out this mandate, the NCUA Board has relied upon two
resources--comments on the topic in response to the ANPR and the advice
of a ``new'' credit union committee assembled by NCUA for the purpose
of studying field staff experience in dealing with new credit unions
over the last decade. Among the members of the committee is a combined
81 years of field experience with credit unions and 10 years of private
sector credit union experience.
A consensus of ANPR comments recommended that NCUA create a system
of PCA for new credit unions which--
Follows a modified ``net worth category'' model;
Allows for gradual capital accumulation;
Allows new credit unions to have no net worth in the early
years;
Sets no minimum on earnings transfers to the regular
reserve; and
Allows regulatory forbearance in imposing supervisory
actions.
Based on field experience with new credit unions over the last 10
years, the ``new'' credit union committee made the following findings:
The ability to accumulate capital through earnings is
limited during a new credit union's early years of operation due to
small asset size, the low ratio of loans to assets, and high fixed
expenses;
Historical data and field experience indicate that it
takes between 3 and 5 years for a new credit union to accumulate a net
worth of 2%;
A business plan which establishes a strategy for achieving
operational and financial objectives, and which is revised on an
ongoing basis to reflect changing business conditions, is essential;
[[Page 27099]]
A credit union which is unable to meet even modest net
worth goals (established in its business plan) in its early years is
unlikely to become ``adequately capitalized'' by the end of 10 years;
Member business lending, although permitted for new credit
unions, involves significant risks and requires a level of expertise
not normally present in newly-chartered credit unions;
Net worth categories for new credit unions should allow
for gradual accumulation of net worth over 10 years; and
Discretionary supervisory actions should be imposed
commensurately with a new credit union's failure to meet net worth
goals and the consequent increase in risk of loss to the NCUSIF.
The NCUA Board believes that the system of prompt corrective action
for new credit unions which it proposes in subpart B reflects the
intent of CUMAA, while incorporating the recommendations of commenters
and the findings of the ``new'' credit union committee.
1. Provisions Applicable to All New Credit Unions
Section 702.2(f) adopts the statutory definition of a ``new''
credit union--in operation for less than 10 years and having $10
million or less in assets--which determines which credit unions will be
subject to the alternative system of prompt corrective action under
subpart B. For purposes of subpart B, a new credit union begins
``operation'' when it engages in a transaction that is required by GAAP
to be reflected in the credit union's financial statement. The
statutory definition significantly expands the definition in section
116 of the FCUA, which CUMAA repeals. CUMAA Sec. 301(g)(3). The
repealed provision defined a ``new'' credit union as having been in
operation less than 4 years or having assets of less than $500,000. 12
U.S.C. 1762(a)(2).
Subpart B augments the new statutory definition. First, it makes
clear that ``[a] credit union which exceeds $10 million in total assets
may become ``new'', or may regain that status, ``if its total assets
fall below $10 million while it is still in operation for less than 10
years.'' Sec. 702.201(b). Second, it addresses the impact of a ``spin-
off'' of a group in determining whether the newly-formed or surviving
credit union has been in operation less than 10 years. Sec. 702.201(c).
Third, it allows the NCUA Board to deny ``new'' status under subpart B
to any credit union formed primarily to qualify as ``new'' for purposes
of subpart A. Sec. 702.201(d).
Subpart B incorporates by reference the general provisions of part
702 concerning measurement of net worth, notice to a new credit union
of its net worth ratio and the effective date of classification in the
corresponding net worth category, notice to NCUA of a change in net
worth category, and adjustments to a credit union's net worth ratio to
reflect accounting adjustments. Sec. 702.202(b) incorporating 702.3.
Similarly to subpart A, subpart B provides for reclassification of new
credit unions in certain net worth categories due to the existence of
an unsafe or unsound condition or practice. Sec. 702.202(d).
2. Net Worth Categories for New Credit Unions
Following the ``net worth category'' model of subpart A, subpart B
establishes six net worth categories for new credit unions, denominated
to indicate that they are building net worth anew, rather than
restoring it from decline. Sec. 702.202(c). The net worth categories,
corresponding net worth ratio range for each (assuming no risk-based
net worth requirement), and corresponding number of years in which a
new credit union is reasonably expected, but not required, to attain
each category, are depicted below:
------------------------------------------------------------------------
New credit union net worth Net worth ratio Expected by year-
category (percent) end of operation
------------------------------------------------------------------------
``Well Capitalized''.......... 7 or above........... n/a
``Adequately Capitalized''.... 6 to 6.99............ 10th
``Moderately Capitalized''.... 3.5 to 5.99.......... 7th
``Marginally Capitalized''.... 2 to 3.49............ 5th
``Minimally Capitalized''..... 0 to 1.99............ 3rd
``Uncapitalized''............. Less than 0.......... n/a
------------------------------------------------------------------------
In general, the net worth categories for new credit unions are
designed to allow gradual accumulation of net worth over a ten year
period. The ``minimally capitalized'' and ``marginally capitalized''
categories reflect the finding that it generally takes up to 3 years
for a newly-chartered credit union to develop positive net worth and
may take up to 5 years to attain a 2% net worth. The time frame in
which a new credit union is ``reasonably expected'' to reach a given
net worth category is a guide only, based on NCUA field experience; it
does not establish a mandatory deadline nor trigger any supervisory
action. Unlike subpart A, subpart B establishes an ``uncapitalized''
category which permits credit unions having no net worth to continue
operating under limited time constrains before mandatory supervisory
action must be taken. As commenters and the ``new'' credit union
committee have emphasized, new credit unions which eventually succeed
in becoming ``adequately capitalized'' may suffer periods of negative
net worth while striving toward that goal, particularly in the early
years of operation.
Unlike subpart A, there is no downward adjustment of a new credit
union's net worth category if fails to comply with any particular
supervisory action. Compare Sec. 702.101(a)(4)(ii) with
Sec. 702.202(c)(3). However, new credit unions categorized as either
``well capitalized'' or ``adequately capitalized,'' and which meet the
definition of ``complex,'' will be subject to a risk-based net worth
requirement. Sec. 1790d(c)(1)(A)(ii) and (c)(1)(B)(2). Like credit
unions subject to subpart A, new credit unions which do not meet the
risk-based requirement in either category will be reclassified
``moderately capitalized.''
3. Prompt Corrective Action for New Credit Unions by Net Worth Category
``Well Capitalized'' and ``Adequately Capitalized''. New credit
unions classified ``well capitalized'' and ``adequately capitalized''
under subpart B are treated the same as their counterparts in subpart
A. Thus, a ``well capitalized'' new credit union is subject to no
prompt corrective action at all. An ``adequately capitalized'' credit
union is subject to a single mandatory supervisory action--the
requirement to transfer to the credit union's regular reserve earnings
equal to not less than 4/10th percent of its average total assets.
Sec. 702.203. The alternative system of
[[Page 27100]]
prompt corrective action subjects an ``adequately capitalized'' new
credit union to the same supervisory action as its counterpart in
subpart A in order to facilitate a smooth transition to subpart A at
the end of 10 years or by the time the credit union accumulates assets
of $10 million or more.
``Moderately Capitalized,'' ``Minimally Capitalized'' and
``Marginally Capitalized''. Credit unions in these categories are
subject to three mandatory supervisory actions which are similar to
those which apply to credit unions categorized ``undercapitalized'' or
lower in subpart A. The first is the requirement to annually transfer
earnings to its regular reserve; however, for new credit unions there
is no required minimum percentage of average total assets to determine
the amount to be transferred. Sec. 702.204(a)(1). The second is the
restriction on increasing the credit union's total amount of member
business loans until the credit union becomes ``adequately
capitalized'' unless it qualifies under 12 U.S.C. 1757a(b) for any of
the exemptions from the statutory maximum on member business loans.\13\
Sec. 702.204(a)(3). Third, each time a credit union fails to timely
meet the net worth goals prescribed in its current approved business
plan, it must submit a revised business plan to the NCUA Board for
approval and implementation. Sec. 702.204(a)(2). Because new credit
unions in these categories are not restoring net worth, but are
building it, they are not required to submit Net Worth Restoration
Plans.
---------------------------------------------------------------------------
\13\ The NCUA Board will consider, for ``new'' credit unions
only, whether to narrow the restriction on increasing members
business loans to the origination of such loans. In that even, a
``new'' credit union would be prohibited from increasing member
business loans which it originates, but would not necessarily be
prohibited from participating in member business loans originated by
another credit union which has expertise in originating such loans.
---------------------------------------------------------------------------
In both subparts A and B, a credit union is subject to mandatory
and discretionary supervisory actions when it becomes classified
``undercapitalized'' or lower under subpart A or ``moderately
capitalized'' or lower under subpart B. Under subpart A, a credit union
also becomes subject to discretionary supervisory actions according to
its classification among those net worth categories. Under subpart B,
however, NCUA's authority to impose discretionary supervisory actions
upon a new credit union is triggered by the failure to meet a net worth
goal prescribed in the credit union's then-current business plan.
Sec. 702.204(b). In that event, the credit union becomes obligated to
comply with the mandatory supervisory action requiring it to submit a
revised business plan to NCUA for approval (which will set new net
worth goals and timetables). NCUA then is authorized to impose one or
more of discretionary supervisory actions according to the new credit
union's net worth category, which incorporates as follows the
discretionary actions in its corresponding statutory net worth
category:
------------------------------------------------------------------------
It is subject to the
same discretionary Subpart A section
If a new credit union is actions as a credit No. incorporated by
classified union in subpart A reference
classified as
------------------------------------------------------------------------
``Moderately Capitalized''.. ``Undercapitalized'' 702.105(b)-(c)
``Marginally Capitalized''.. ``Significantly 702.106(b)
Undercapitalized''.
``Minimally Capitalized''... ``Critically 702.107(b)
Undercapitalized''.
``Uncapitalized''........... ``Critically 702.107(b)
Undercapitalized''.
------------------------------------------------------------------------
Whereas a net worth restoration plan under subpart A is designed to
restore net worth, the NCUA Board has developed the revised business
plan (RBP) under subpart B to build net worth. While an RBP shares
similar submission and decision deadlines and criteria for approval
with an NWRP, the required contents of an RBP is broader in scope.
First, the RBP calls for the credit union to progressively update the
business plan elements originally required for charter approval, and to
revise them as warranted by circumstances and experience since the date
of charter. Sec. 702.208(b)(1). Second, among other information, the
RBP must specify the amount of earnings the credit union will transfer
to its regular reserve (in view of the fact that subpart B sets no
minimum) and establish at least quarterly targets for increasing net
worth in each year in which the RBP is in effect. Sec. 702.208(b)(2).
Approval of RBP is effectively a charter to operate for the period
covered by the plan.
Finally, as with a ``significantly undercapitalized'' credit union
under subpart A, subpart B gives the NCUA Board discretion to place the
credit union into conservatorship or liquidation pursuant to 12 U.S.C.
Secs. 1786(h)(1)(F), 1787(a)(3)(A)(i), if there is no reasonable
prospect that the credit union will become ``adequately capitalized.''
Sec. 702.204(c). Providing conservatorship and liquidation as an option
is consistent with the purpose of prompt corrective action. Regardless
of a new credit union's inadequate net worth at present, it should be
allowed to survive under prompt corrective action if there is a
reasonable prospect that it will be ``adequately capitalized'' by the
time it is in operation for 10 years. Conversely, when a new credit
union has no prospect of eventually becoming ``adequately
capitalized,'' it is consistent with the purpose of prompt corrective
action to prevent that credit union from exposing the NCUSIF to greater
risk of loss.
``Uncapitalized''. The net worth classification of
``uncapitalized'' is designed to permit a new credit union to
periodically and temporarily operate while having negative net worth.
As commenters and NCUA's ``new'' credit union committee suggested, new
credit unions which eventually become ``adequately capitalized'' may,
while striving toward that goal, suffer periods when they have no net
worth, particularly in the early years of operation. In view of this
reality, the proposed rule treats a new credit union which is
``uncapitalized'' when it commences operating differently than one
which subsequently declines from a higher net worth category to
``uncapitalized.''
A new credit union which is classified ``uncapitalized'' when it
commences operating need only adhere to the requirements and net worth
goals set forth in its initial business plan, approved at the time its
charter was granted. That business plan (in the required pro-forma
financial statement) may set quite modest net worth goals, allowing the
credit union to remain ``uncapitalized'' for a substantial period. The
authority to impose discretionary supervisory actions under section
702.207(b) is triggered only when the credit union fails to meet those
net worth goals (as is the mandatory
[[Page 27101]]
supervisory action requiring the credit union to file a revised
business plan).
A new credit union classified in a net worth category above
``uncapitalized,'' which declines to that category from a higher one
may continue operating, but is required (like other less than
``adequately capitalized'' credit unions) both to transfer earnings to
its regular reserve and to not increase the total amount of member
business loans. Sec. 702.207(a)(1) and (3). However, within a period of
time set by the NCUA Board, but not to exceed 90 days from the date the
credit union declined to ``uncapitalized,'' the credit union must
submit an RBP which provides for alternative means of funding the
credit union's earnings deficit. Sec. 702.207(a)(2). If the credit
union fails to submit an RBP within the time prescribed by the NCUA
Board, the credit union may be liquidated. Sec. 702.207(c)(1). If the
credit union remains ``uncapitalized'' 90 calendar days following
approval of that RBP, the proposed rule requires the NCUA Board to
liquidate the credit union. Sec. 702.207(c)(2). The credit union can
avoid mandatory liquidation at this point, however, only if it
documents to the NCUA Board's satisfaction that it still is viable and
has a reasonable prospect of becoming ``adequately capitalized.'' Id.
4. Incentives for New Credit Unions
Apart from regulatory forbearance in imposing discretionary
supervisory actions, the NCUA Board proposes three types of incentives
for new credit unions to become ``adequately capitalized'' before they
are either in operation for more than 10 years or reach $10 million in
total assets. Sec. 1790d(b)(2)(B).\14\ The first two of these
incentives can be funded under 12 U.S.C. 1766(f)(2)(A) and (i)(3).
First, NCUA will offer training in management, lending and product
development for directors, officers and employees of new credit unions.
Sec. 702.209(a). This is envisioned as classroom training to generally
educate officials in matters of importance to a new credit union's
long-term survival. This training may commence before a new credit
union begins operating and should continue as needed.
---------------------------------------------------------------------------
\14\ Once chartered and in operation, a new credit union is
eligible to receive special assistance under FCUA Sec. 208, 12
U.S.C. 1788, ``to prevent the closing of an insured credit union
which the Board has determined is in danger of closing.''
---------------------------------------------------------------------------
Second, NCUA will offer individualized guidance and training to
directors, officers and employees of new credit unions in the
preparation and revision of business plans. Sec. 702.209(b). The
purpose of this incentive is to build the skills within the credit
union that are needed to revise business plans as required under
subpart B, so that credit union management eventually is able to do so
without assistance. Therefore, this incentive will consist neither of
classroom training on the one hand, nor of engaging an outside
consultant perform the service of revising the business plan for the
credit union, on the other hand. Instead, an expert on business plans
will be engaged to work on-site with credit union management to revise
the credit union's individual business plan. This experience should
build the skills of credit union management in addressing, through the
credit union's business plan, the causes of its inability to improve
net worth.
Third, a new credit union will be eligible to join and receive the
benefits of NCUA's Small Credit Union Program. Sec. 702.209(c). Under
this program, an economic development specialist will be assigned at
the Regional level to train and serve as a mentor to officials and
management, and to advise and assist in areas such as--
Arranging to receive mentoring by another credit union or
trade association;
Interacting with community organizations, trade
associations, and other government agencies that may impact the credit
union;
Expanding fields of membership, where appropriate;
Developing requests for financial assistance; and
Developing and preparing business plans, capitalization
plans, and marketing plans, Call Reports, financial statements and
other reports.
NCUA Instruction no. 6052.00 (March 24, 1999) at 3-4.
E. Reserve Requirements To Conform to Prompt Corrective Action
Subpart C retains much of the substance of the current reserve
transfer and dividend payment, modified to reflect the repeal of FCUA
Sec. 116, 12 U.S.C. 1762, and to conform with the requirements imposed
by CUMAA. The ``statutory reserve'' requirement has been eliminated as
inconsistent with CUMAA. The allowance for loan losses will no longer
be combined with the regular reserve, and the subsequent reversing of
the current period provision will no longer be allowed. The segregated
regular reserve is retained in a form that comports with the earnings
retention requirement in subparts A and B, and without noted
adjustments. Sec. 702.301(b). Reserve transfers continue to be
reflected in the regular reserve account. Sec. 702.301(c).
Provisions of full and fair disclosure are retained in a revised
form. Sec. 702.302. Subpart C addresses implementation of full and fair
disclosure but excludes references to NCUA's Accounting Manual for
Federal Credit Unions. Sec. 702.301(b). Further, subpart C omits terms
which may have suggested that proper full and fair disclosure
implementation requires audited financial statements. Id.
The requirement to maintain an allowance for loan losses was
retained for credit unions regardless of asset size. Sec. 702.302(d).
The allowance must provide for estimates of existing probable loses
inherent in the loan portfolio. Sec. 702.302(d)(2). The descriptive
language was revised to reflect current guidance under Generally
Accepted Accounting Principles.
The restriction on the payment of dividends was retained in
substance. Amended language was added to address instances in which
dividend payments cannot be made because credit union operations,
allowance estimates, and/or reserve transfer requirements create a
deficit condition in undivided earnings. Sec. 702.303(a). In that
event, subpart C provides that only a credit union classified ``well
capitalized'' may transfer of funds from its regular reserve to
undivided earnings to pay dividends, provided that doing so will not
cause the credit union to decline from ``well capitalized.''
Sec. 702.303(b)(1). Credit unions which can not meet these conditions
may pay dividends from funds transferred from the regular reserve only
with the permission of the appropriate Regional Director.
Sec. 702.303(b).
Finally, as with current section 702, subpart C will apply to
State-as well as federally-chartered credit unions as provided under 12
CFR 741.3(a)(2).
F. Issuance, Review and Enforcement of Directives Imposing Prompt
Corrective Action
Subpart L of part 747 establishes the means to challenge
discretionary supervisory actions imposed by NCUA under authority of
part 702. 12 C.F.R. 747.2001 et seq. CUMAA provides that ``material
supervisory determinations, including decisions to require prompt
corrective action, made * * * by [NCUA] officials other than the [NCUA]
Board may be appealed to the [NCUA] Board'' through an independent
appellate process required under 12 U.S.C. 4806(a)-(b), or ``pursuant
to separate procedures prescribed by regulation.'' Sec. 1790d(k). The
NCUA Board established a Supervisory Review Committee to fulfill the
requirements of
[[Page 27102]]
Sec. 4806,\15\ but has concluded that a more expeditious process is
needed to facilitate prompt corrective action. Therefore, the proposed
rule incorporates, by regulation, the substance of the Federal banking
agencies' procedure for giving notice and an opportunity to respond
before issuing a directive imposing prompt corrective action. See,
e.g., 12 C.F.R. 308.201. For purposes of section 747.2002, NCUA staff
decisions to impose discretionary supervisory actions under subpart A
or B of part 702 are considered material supervisory decisions.
Sec. 747.2001(a).
---------------------------------------------------------------------------
\15\ See Interpretive Ruling and Policy Statement 95-1, 60 FR
14795 (March 20, 1995).
---------------------------------------------------------------------------
Notice, opportunity to respond, and review of directive. Under
section 747.2002, the NCUA Board must generally give advance notice to
a credit union when it intends to issue a directive imposing a
discretionary supervisory action. Sec. 747.2002(a)(1). Such a directive
may take effect immediately only when necessary to further the purpose
of prompt corrective action. Sec. 747.2002(a)(2). The credit union may
then respond, explaining why the proposed action is not appropriate and
requesting that the directive not be issued or be modified.
Sec. 747.2002(c). However, the credit union is not entitled to a
hearing, nor does Sec. 4806 require the opportunity to have one. The
NCUA Board may then decide not to issue the directive or to issue it as
proposed or as modified. Sec. 747.2002(d). The NCUA Board's decision is
final. Under this procedure, a credit union which already is subject to
a discretionary supervisory action may request reconsideration of a
directive due to changed circumstances. Sec. 747.2002(f).
Review of reclassification to lower category. CUMAA requires the
NCUA Board to exercise its authority to reclassify a credit union on
safety and soundness grounds ``under regulations comparable to [FDIA
Sec. 38(g)].'' Sec. 1790d(h)(1). That provision requires that an
institution may be reclassified on safety and soundness grounds only
after ``notice and an opportunity for hearing.'' FDIA Sec. 38(g)(1). To
that end, the NCUA Board has adopted in section 747.2003 a version of
the Federal banking agencies' procedure for notice of proposed
reclassification and an opportunity to respond and to request a
hearing. See, e.g., 12 C.F.R. 308.202. This procedure applies to
reclassification pursuant to section 702.101(b) or 702.202(d) of part
702.
Under section 747.2003, the NCUA Board must give notice of its
intention to reclassify a credit union, or to treat it as if it were
the next lower net worth category, on safety and soundness grounds.
Sec. 747.2003(a). The notice must include reasons for the
reclassification. Sec. 747.2003(a)(2)(ii). The credit union may then
respond, explaining why it is not in an unsafe or unsound condition or
has not corrected an unsafe or unsound practice and providing evidence
to support its position. Sec. 747.2003(a)(3). The credit union also may
request a hearing and the opportunity to present witnesses at the
hearing. Sec. 747.2003(a)(4).
If requested, a hearing shall be held before a presiding officer
designated by the NCUA Board, but shall not be a formal adjudication
subject to the Administrative Procedure Act, 5 U.S.C. 554-557, nor to
the Uniform Rules of Practice and Procedure, 12 C.F.R. 747.1.
Sec. 747.2003(a)(5) and (6)(A). At the hearing, the credit union may
introduce relevant documents, present oral argument, and if authorized,
present witnesses. Sec. 747.2003(a)(6)(i). At the close of the hearing
the presiding officer shall make a recommended decision to the NCUA
Board, Sec. 747.2003(a)(7), and the NCUA Board shall then decide
whether to reclassify the credit union. Sec. 747.2003(a)(8). The
decision of the NCUA Board is final. Apart from appointing a presiding
officer to conduct a hearing and to recommend a decision, the NCUA
Board may not delegate its authority to reclassify a credit union.
Sec. 747.2003(c); Sec. 1790d(h)(2). Under this procedure, a credit
union which has been reclassified may seek reconsideration.
Sec. 747.2003(b).
Review of dismissal of director or officer. FDIA Sec. 38 requires
that a director or senior executive officer dismissed pursuant to a
discretionary supervisory action ``may obtain review of that order by
filing a written petition for reinstatement. * * *'' FDIA Sec. 38(n).
In order to give directors and senior officers dismissed under part 702
a comparable opportunity for review, the NCUA Board has adopted in
section 747.2004 of this subpart a procedure similar to that developed
by the Federal banking agencies. See, e.g., 12 C.F.R. Sec. 308.203.
Under section 747.2004, when the NCUA Board directs the credit
union to dismiss a director or senior executive officer, it must also
serve that person with a copy of the directive. Sec. 747.2004(a). The
affected person may then file a written request for reinstatement,\16\
which may include a request for an informal hearing before the NCUA
Board and the opportunity to present witness testimony at the hearing.
Sec. 747.2004(b). The dismissal shall remain in effect while the
request for reinstatement is pending. Sec. 747.2004(b)(3).
---------------------------------------------------------------------------
\16\ The credit union which was directed to dismiss a director
or officer may not seek reinstatement of the dismissed director or
officer under section 747.2004, but that credit union may challenge
the directive under Sec. 747.2002.
---------------------------------------------------------------------------
Under section 747.2004, the procedure for conducting an informal
hearing before a presiding officer designated by the NCUA Board is
identical to that which section 747.2003 provides in cases of
reclassification, except as follows. First, the affected person may
appear at the hearing through counsel if he or she wishes.
Sec. 747.2004(d)(1). Second, the affected person bears the burden of
proving that his or her continued employment would materially
strengthen the credit union's ability to become ``adequately
capitalized'' or to correct an unsafe or unsound condition, as the case
may be. Sec. 747.2004(e). Third, if the NCUA Board, after hearing,
denies reinstatement, it must provide reasons for its action.
Sec. 747.2004(g). The NCUA Board's decision is final.
Enforcement of supervisory actions. CUMAA amended the FCUA to
ensure that supervisory actions imposed under part 702 to facilitate
prompt corrective action are enforceable. 12 U.S.C. Secs. 1786(k)(1)
and (2)(A). When a credit union fails to comply with a directive
imposing a discretionary requirement or restriction, the NCUA Board may
apply to the appropriate U.S. District Court to enforce that directive.
Sec. 747.2005(a). Alternatively, the NCUA Board may assess a civil
money penalty against a credit union (and any institution affiliated
party acting in concert with it) which violates or fails to comply with
a directive, or fails to implement an approved net worth restoration
plan under subpart A or revised business plan under subpart B.
Sec. 747.2005(b). Finally, subpart L allows the NCUA Board to enforce a
directive under part 702 ``through any other judicial or administrative
proceeding authorized by law.'' Sec. 747.2005(c).
BILLING CODE 7535-01-U
[[Page 27103]]
[GRAPHIC] [TIFF OMITTED] TP18MY99.006
[[Page 27104]]
[GRAPHIC] [TIFF OMITTED] TP18MY99.007
[[Page 27105]]
[GRAPHIC] [TIFF OMITTED] TP18MY99.008
[[Page 27106]]
[GRAPHIC] [TIFF OMITTED] TP18MY99.009
BILLING CODE 7535-01-C
[[Page 27107]]
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 NCUA Board has determined and
certifies that the proposed rule, if adopted, will not have a
significant economic impact on a substantial number of small credit
unions. Thus, a Regulatory Flexibility Analysis is not required.
Paperwork Reduction Act
NCUA has determined that five requirements of the proposed rule
constitute collections of information under the Paperwork Reduction
Act. The requirements are: (1) To provide written notice to the
regional director and state supervisory authority, if appropriate, of a
change to the credit union's net worth ratio that places the credit
union in a lower net worth category; (2) To submit a net worth
restoration plan if the credit union is undercapitalized, significantly
undercapitalized, or critically undercapitalized; (3) To submit a
revised net worth restoration plan when the initial plan is not
approved; (4) For new credit unions, to submit a revised business plan;
and (5) For new credit unions, to submit a new revised business plan
when the revised business plan is not approved. NCUA is submitting a
copy of the proposed regulation to the Office of Management and Budget
(OMB) for its review.
NCUA estimates that 500 federally insured credit unions would have
to prepare a notice to the regional director and state supervisory
authority of a change to the credit union's net worth ratio. It is
expected that this would take 1 hour per year, resulting in a total
burden of 500 hours. NCUA estimates that 300 federally insured credit
unions would be required to submit a net worth restoration plan, and
each plan would require an average of 60 hours to prepare, resulting in
18,000 burden hours. NCUA further estimates that 30 federally insured
credit unions' initial plans would not be approved, requiring an
additional burden of 30 hours each and a total of 900 burden hours.
NCUA estimates 50 new federally insured credit unions would be required
to submit a revised business plan, and each plan would require an
average of 80 hours to prepare, for a total burden of 4,000 hours. NCUA
further estimates that 10 new federally insured credit unions' plans
would not be approved, requiring an additional burden of 40 hours each,
for a total of 400 hours. In total, the burden created by the proposed
rule is 23,800 hours. It is NCUA's view that the additional
requirements are necessary for affected federally insured credit unions
to adequately address the net worth requirements of the proposed rule.
The Paperwork Reduction Act of 1995 and OMB regulations 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. The NCUA Board invites comment on:
(1) whether the collection of information is necessary; (2) the
accuracy of NCUA's estimate of the burden of collecting the
information; (3) ways to enhance the quality, utility, and clarity of
the information to be collected; and (4) ways to minimize the burden of
collection of information. Comments should be sent to: OMB Reports
Management Branch, New Executive Office Building, Room 10202,
Washington, D.C. 20503; Attention: Alex T. Hunt, Desk Officer for NCUA.
Please send NCUA a copy of any comments you submit to OMB.
Executive Order 12612
Executive Order 12612 requires NCUA to consider the effect of its
actions on state interests. As prescribed by CUMAA, part 702 applies to
all federally-insured credit unions, including federally-insured,
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 for federally-insured credit unions.
Agency Regulatory Goal
NCUA's goal is clear, understandable regulations that impose a
minimal regulatory burden. Although much of the language of this rule
is mandated by Congress, we request your comments on whether the
proposed rule is understandable and minimally intrusive if implemented
as proposed.
List of Subjects
12 CFR Part 702
Credit unions, Reporting and recordkeeping requirements.
12 CFR Part 747
Administrative practices and procedures, Credit unions.
By the National Credit Union Administration Board on May 3,
1999.
Becky Baker,
Secretary of the Board.
Accordingly, it is proposed that 12 CFR, parts 702 and 747 be
amended as set forth below:
Part 702 is revised to read as follows:
PART 702--PROMPT CORRECTIVE ACTION
Sec.
702.1 Authority, purpose, scope, and other supervisory authority.
702.2 Definitions.
702.3 Measure, notice and effective date of net worth
classification.
Subpart A--Statutory Prompt Corrective Action
702.101 Statutory net worth categories.
702.102 Complex credit unions defined [Reserved].
702.103 Risk-based net worth requirements for complex credit unions
[Reserved].
702.104 Prompt corrective action for ``adequately capitalized''
credit unions.
702.105 Prompt corrective action for ``undercapitalized'' credit
unions.
702.106 Prompt corrective action for ``significantly
undercapitalized'' credit unions.
702.107 Prompt corrective action for ``critically
undercapitalized'' credit unions.
702.108 Consultation with State officials on proposed prompt
corrective action.
702.109 Net worth restoration plans.
Subpart B--Alternative Prompt Corrective Action for New Credit Unions
702.201 Scope and definition.
702.202 Net worth categories for new credit unions.
702.203 Prompt corrective action for ``adequately capitalized'' new
credit unions.
702.204 Prompt corrective action for ``moderately capitalized'' new
credit unions.
702.205 Prompt corrective action for ``marginally capitalized'' new
credit unions.
702.206 Prompt corrective action for ``minimally capitalized'' new
credit unions.
702.207 Prompt corrective action for ``uncapitalized'' new credit
unions.
702.208 Revised business plans for new credit unions.
702.209 Incentives for new credit unions.
Subpart C--Reserves
702.301 Reserves
702.302 Full and fair disclosure of financial condition.
702.303 Payment of dividends.
Authority: 12 U.S.C. 1766(a), 1790d.
Sec. 702.1 Authority, purpose, scope, and other supervisory authority.
(a) Authority. This part (except for subpart C) and subpart L of
part 747 of this chapter are issued by the National
[[Page 27108]]
Credit Union Administration pursuant to section 216 of the Federal
Credit Union Act (FCUA), 12 U.S.C. 1790d (section 1790d), as added by
section 301 of the Credit Union Membership Access Act, Public Law 105-
219, 112 Stat. 913 (1998). Subpart C of this part is issued pursuant to
FCUA section 120, 12 U.S.C. 1766.
(b) Purpose. The express purpose of prompt corrective action under
section 1790d is to resolve the problems of federally-insured credit
unions at the least possible long-term loss to the National Credit
Union Share Insurance Fund. This part carries out the purpose of prompt
corrective action by establishing a framework of supervisory
requirements and restrictions designed to restore and improve the
capital levels of federally-insured credit unions according to a credit
union's net worth ratio.
(c) Scope. This part implements the provisions of section 1790d as
they apply to federally-insured credit unions, whether federally- or
state-chartered; to such credit unions defined as ``new'' pursuant to
12 U.S.C. 1790d(b)(2); and to such credit unions defined as ``complex''
pursuant to 12 U.S.C. 1790d(d). Certain of these provisions also apply
to officers and directors of federally-insured credit unions. This Part
does not apply to corporate credit unions. Procedures for issuing,
reviewing and enforcing orders and directives issued under this part
are set forth in subpart L of Part 747 of this chapter, 12 CFR
747.2001.
(d) Other supervisory authority. Neither FCUA section 1790d nor
this Part in any way limits the authority of the NCUA Board under any
other provision of law to take additional supervisory actions to
address unsafe or unsound practices or conditions, or violations of
applicable law or regulations. Action taken under this part may be
taken independently of, in conjunction with, or in addition to any
other enforcement action available to the NCUA Board, including
issuance of cease and desist orders, orders of prohibition, suspension
and removal, or assessment of civil money penalties, or any other
actions authorized by law.
Sec. 702.2 Definitions.
Except as provided below, the terms used in this part have the same
meanings as set forth in FCUA sections 101 and 216, 12 U.S.C. 1752,
1790d.
(a) Appropriate State official means the commission, board or other
supervisory authority having jurisdiction over credit unions chartered
by the State which chartered the affected credit union.
(b) Credit union means a federally-insured, federally-chartered or
State-chartered, unless otherwise indicated.
(c) CUSO means a credit union service organization defined for
purposes of this part as a legal entity established under state law,
which is owned in whole or in part by one of more federally-insured
credit unions (including a state-chartered credit union) and which--
(1) Provides services associated with the routine operations of
credit unions; or
(2) Engages in activities incidental to the conduct of a credit
union; or
(3) Engages in activities that further or facilitate the purposes
of a credit union; or
(4) Furnishes services to a credit union.
(d) NCUSIF means the National Credit Union Share Insurance Fund as
defined by 12 U.S.C. 1783.
(e) Net worth means the retained earnings balance of the credit
union as determined under generally accepted accounting principles.
With respect to a credit union designated low-income (as defined in 12
U.S.C. 1757(6)), net worth includes secondary capital accounts that are
uninsured and subordinate to all other claims against the low-income
credit union, including the claims of creditors, shareholders and the
NCUSIF.
(f) Net worth ratio means, with respect to a credit union, the
ratio of the net worth of the credit union to the total assets of the
credit union.
(g) New credit union means a federally-insured credit union which
both has been in operation for less than ten (10) years and has
$10,000,000 or less in total assets.
(h) Shares means insured shares as defined in 12 CFR 741.4(b)(2).
(i) Total assets means the average of the total assets reported
(including those that reasonably should be reported) by the credit
union on the line entitled ``TOTAL ASSETS'' on its most recent four (4)
quarterly Call Reports, or for a semi-annual filer, on its most recent
two (2) semi-annual Call Reports.
Sec. 702.3 Measures, notice and effective date of net worth
classification.
(a) Net worth measures. For purposes of this part, a credit union's
net worth category classification will be determined by two measures:
(1) The net worth ratio as defined in Sec. 702.2(f); and
(2) The risk-based net worth requirement applicable to a credit
union defined as ``complex'' under Sec. 702.102.
(b) Notice and effective date of net worth classification. For
purposes of this part, a federally-insured credit union shall have
notice of its net worth ratio (including any applicable risk-based net
worth requirement) and shall be classified within the corresponding net
worth category as of the earliest to occur of:
(1) The last day of the credit union's most recent dividend period
for regular shares, but no less frequently than quarterly; or
(2) The date the credit union received its most recent final report
of examination; or
(3) The date the credit union received written notice from the NCUA
Board or, if State-chartered, the appropriate State official of
reclassification based on safety and soundness grounds as provided
under Secs. 702.101(b) and 702.202(d) of this part, or of an adjustment
to its net worth ratio as provided under paragraph (d) of this section.
(c) Notice by credit union of change in net worth category. A
federally-insured credit union shall provide written notice to the NCUA
Board and, if State-chartered, to the appropriate State official, of a
change in its net worth ratio that places the credit union in a lower
net worth category no later than 15 calendar days after the effective
date of the change as determined under paragraphs (b) (1) and (2) of
this section. Written notice to the NCUA Board shall be deemed
effective if it is delivered to the appropriate Regional Director and,
if State-chartered, to the appropriate State official. Failure to
provide such notice to the NCUA Board within 15 calendar days, or
failure to provide such notice altogether, in no way alters the
effective date of a change of net worth classification under this
subparagraph, nor the affected credit union's legal obligations under
this part.
(d) Adjustment of net worth ratio. To effectuate and further the
purpose of this part, the NCUA Board and, in the case of a State-
chartered credit union, the NCUA Board or appropriate State official,
may adjust a credit union's net worth ratio to reflect the impact of
accounting adjustments made for items of ``other comprehensive income''
such as accumulated unrealized gains and losses on available-for-sale
securities when the failure to do so would overstate or understate the
credit union's net worth ratio, thereby either permitting it to evade
appropriate prompt corrective action or subjecting it to unwarranted
prompt corrective action.
[[Page 27109]]
Subpart A--Statutory Prompt Corrective Action
Sec. 702.101 Statutory net worth categories.
(a) Net worth categories. Except for credit unions defined as
``new'' under subpart B of this part, a federally-insured credit union
shall be classified--
(1) Well capitalized if it has a net worth ratio of seven percent
(7%) or greater and also meets any applicable risk-based net worth
requirement under Sec. 702.102;
(2) Adequately capitalized if it has a net worth ratio of six
percent (6%) or more but less than seven percent (7%), and also meets
any applicable risk-based net worth requirement under Sec. 702.102;
(3) Undercapitalized if it has a net worth ratio of four percent
(4%) or more but less than six percent (6%), or fails to meet any
applicable risk-based net worth requirement under Sec. 702.102;
(4) Significantly undercapitalized if it:
(i) Has a net worth ratio of two percent (2%) or more but less than
four percent (4%); or
(ii) Has a net worth ratio of two percent (2%) or more but less than
five percent (5%), and either--
(A) Fails to submit an acceptable net worth restoration plan within
the time prescribed in section 702.109; or
(B) Materially fails to implement a net worth restoration plan
accepted by the NCUA Board;
(5) Critically undercapitalized if it has a net worth ratio of less
than two percent (2%).
(b) Reclassification based on supervisory criteria other than net
worth. The NCUA Board may reclassify a ``well capitalized'' credit
union as ``adequately capitalized'' and may require an ``adequately
capitalized'' or ``undercapitalized'' credit union to comply with
certain mandatory or discretionary supervisory actions as if it were in
the next lower net worth category (each of such actions hereinafter
referred to generally as ``reclassification'') in the following
circumstances:
(1) Unsafe or unsound condition. The NCUA Board has determined,
after notice and opportunity for hearing pursuant to Sec. 747.2003 of
this chapter, that the credit union is in an unsafe or unsound
condition; or
(2) Unsafe or unsound practice. The NCUA Board has determined,
after notice and opportunity for hearing pursuant to Sec. 747.2003 of
this chapter, that the credit union had notice of, but has not
corrected an unsafe or unsound practice.
(c) Non-delegation. The NCUA Board may not delegate its authority
to reclassify a credit union under paragraph (b) of this section.
(d) Consultation with State officials. The NCUA Board shall seek
and consider the views of the appropriate State official before
reclassifying a credit union under paragraph (b) of this section.
Sec. 702.102 Complex credit unions defined [Reserved].
Sec. 702.103 Risk-based net worth requirements for complex credit
unions [Reserved].
Sec. 702.104 Prompt corrective action for ``adequately capitalized''
credit unions.
(a) Earnings transfer. If a federally-insured credit union becomes
``adequately capitalized,'' it must annually transfer to its regular
reserve account earnings equivalent to not less than \4/10\ths percent
(0.4%) of its total assets as defined by Sec. 702.2(i), at the
following rates:
(1) In the case of a credit union having a monthly dividend period
for regular shares, at a rate of at least eight and one-third percent
(8.334%) per month of the annual amount; and
(2) In the case of a credit union having a quarterly, semi-annual
or annual dividend period for regular shares, at a rate of at least
twenty five percent (25%) per quarter of the annual amount.
(b) Reduction in earnings transfer. On a case-by-case basis and
subject to review and revocation no less frequently than quarterly, the
NCUA Board may permit the credit union to transfer an amount that is
less than the equivalent of \4/10\ths percent (0.4%) of its total
assets, to the extent the credit union demonstrates to the NCUA Board
that such lesser amount--
(1) Is necessary to avoid a significant redemption of shares; and
(2) Would further the purpose of this part.
Sec. 702.105 Prompt corrective action for ``undercapitalized'' credit
unions.
(a) Mandatory action by credit union. If a federally-insured credit
union becomes ``undercapitalized,'' it must immediately--
(1) Earnings transfer. Transfer earnings to its regular reserve
account as provided in Sec. 702.104;
(2) Submit net worth restoration plan. Submit a net worth
restoration plan pursuant to Sec. 702.109;
(3) Restrict increase in assets. Not permit the credit union's
assets to increase beyond its total assets as defined by Sec. 702.2(i),
unless--
(i) The NCUA Board has approved a net worth restoration plan which
provides for an increase in total assets; and
(ii) The assets of the credit union are increasing consistent with the
approved plan; and
(iii) The credit union's net worth ratio is increasing at a rate that
is consistent with the approved plan;
(4) Restrict member business loans. Not increase the total amount
of member business loans until the credit union becomes ``adequately
capitalized'' unless it qualifies for an exception under 12 U.S.C.
1757a(b).
(b) Discretionary action 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, with respect
to any ``undercapitalized'' credit union, or a director, officer or
employee of such credit union, take one or more of the following
actions, 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 CUSO or credit union, establishing or
acquiring any additional branch office, or engaging in any new line of
business, unless the NCUA Board has approved the credit union's net
worth restoration plan, the credit union is implementing its plan, and
the NCUA Board determines that the proposed action is consistent with
and will further the objectives of that plan;
(2) Restricting transactions with and ownership of CUSO. Restrict
the credit union's transactions with a CUSO, or require the credit
union to reduce or divest its ownership interest in a CUSO;
(3) Restricting dividend paid. Restrict the dividend rates the
credit union pays on shares to the prevailing rates paid on comparable
accounts and maturities in the region where the credit union is
located, as determined by the NCUA Board, except that dividend rates
already paid on shares acquired before imposing a restriction under
this paragraph may not be retroactively restricted;
(4) Prohibiting or reducing asset growth. Prohibit any growth
whatsoever in the credit union's assets or in a category of assets, or
require the credit union to reduce its assets or a category of assets;
(5) Alter, reduce or terminate activity. Require the credit union
or its CUSO to alter, reduce, or terminate any activity;
(6) Prohibiting nonmember deposits. Prohibit the credit union from
accepting all or certain nonmember deposits as
[[Page 27110]]
otherwise permitted under 12 U.S.C. 1757(6) and Sec. 701.32 of this
chapter, or under applicable State law;
(7) Other action no more severe. 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 (6) of this section, provided that such
other restriction or requirement is no more severe than the actions
prescribed in paragraphs (b) (1) through (6).
(c) Prerequisite for improving management. The NCUA Board may take
any of the following actions provided that it first takes one or more
of the actions prescribed in paragraphs (b) (1) through (7) of this
section or determines that none of those actions would further the
purpose of this part:
(1) New election of directors. Order a new election of the credit
union's board of directors;
(2) Dismissing directors or senior executive officers. 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);
(3) Employing qualified senior executive officers. Require the
credit union to employ qualified senior executive officers (who, if the
NCUA Board so specifies, shall be subject to its approval).
Sec. 702.106 Prompt corrective action for ``significantly
undercapitalized'' credit unions.
(a) Mandatory action by credit union. Immediately upon becoming
``significantly undercapitalized,'' a federally-insured credit union
must--
(1) Earnings transfer. Transfer earnings to its regular reserve
account as provided in Sec. 702.104;
(2) Submit net worth restoration plan. Submit a net worth
restoration plan pursuant to Sec. 702.109;
(3) Restrict increase in assets. Not permit the credit union's
assets to increase beyond its total assets as defined by section
702.2(i), except as provided in Sec. 702.105(a)(3);
(4) Restrict member business loans. Not increase the total amount
of member business loans except as provided in Sec. 702.105(a)(4).
(b) Discretionary 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, with respect
to any ``significantly undercapitalized'' credit union, or a director,
officer or employee of such credit union, take one or more of the
following actions 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 CUSO or credit union, establishing or
acquiring any additional branch office, or engaging in any new line of
business, except as provided in Sec. 702.105(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 dividend paid. Restrict the dividend rates that the
credit union pays on shares as provided in Sec. 702.105(b)(3);
(4) Prohibiting or reducing asset growth. Prohibit any growth
whatsoever 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;
(6) Prohibiting nonmember deposits. Prohibit the credit union from
accepting all or certain nonmember deposits as otherwise permitted
under 12 U.S.C. 1757(6) and Sec. 701.32 of this chapter, or under
applicable State law;
(7) Restricting senior executive officers' compensation. Limit or
reduce payment of compensation to any senior executive officer, limit
or prohibit payment of a bonus to such officer, or condition payment of
compensation or a bonus to such officer upon the NCUA Board's prior
approval;
(8) Improving management. Order a new election of board of
directors; dismiss directors or senior executive officers; or employ
qualified senior executives, all as provided in Sec. 702.105(c),
without the prerequisite that applies to that section;
(9) 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);
(10) Other actions. 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 (9) of this section.
(c) Discretionary conservatorship or liquidation if no prospect of
becoming ``adequately capitalized.'' Notwithstanding any other actions
required or permitted to be taken under this section, when a credit
union becomes ``significantly undercapitalized'' (including by
reclassification under Sec. 702.101(b)), the NCUA Board may place 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), provided
that the credit union has no reasonable prospect of becoming
``adequately capitalized.''
Sec. 702.107 Prompt corrective action for ``critically
undercapitalized'' credit unions.
(a) Mandatory action by credit union. Immediately upon becoming
``critically undercapitalized,'' a federally-insured credit union
must--
(1) Earnings transfer. Transfer earnings to its regular reserve
account as provided in Sec. 702.104;
(2) Submit net worth restoration plan. Submit a net worth
restoration plan pursuant to Sec. 702.109;
(3) Restrict increase in assets. Not permit the credit union's
assets to increase beyond its total assets as defined by Sec. 702.2(i),
except as provided in Sec. 702.105(a)(3);
(4) Restrict member business loans. Not increase the total amount
of member business loans except as provided in Sec. 702.105(a)(4).
(b) Discretionary 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, with respect
to any ``critically undercapitalized'' credit union, or a director,
officer or employee of such credit union, take one or more of the
following actions 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 CUSO or credit union, establishing or
acquiring any additional branch office, or engaging in any new line of
business, except as provided by Sec. 702.105(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 dividend paid. Restrict the dividend rates that the
credit union pays on shares as provided in Sec. 702.105(b)(3);
[[Page 27111]]
(4) Prohibiting or reducing asset growth. Prohibit any growth
whatsoever 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;
(6) Prohibiting nonmember deposits. Prohibit the credit union from
accepting all or certain nonmember deposits as otherwise permitted
under 12 U.S.C. 1757(6) and Sec. 701.32 of this chapter, or under
applicable State law;
(7) Restricting senior executive officers' compensation. Limit or
reduce payment of compensation to any senior executive officer, limit
or prohibit payment of a bonus to such officer, or condition payment of
compensation or a bonus to such officer upon the NCUA Board's approval;
(8) Improving management. Order a new election of board of
directors; dismiss directors or senior executive officers; or employ
qualified senior executive officers, all as provided in
Sec. 702.105(c), but without the prerequisite required in that section;
(9) Restrictions on payments on uninsured secondary capital.
Beginning 60 days after a credit union becomes ``critically
undercapitalized,'' prohibit payments of principal or dividends on the
credit union's uninsured secondary capital accounts, except that unpaid
dividends shall continue to accrue under the terms of the account to
the extent permitted by law;
(10) 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 other than in the usual
course of business, including any investment, expansion, acquisition,
sale of assets, or other similar action with respect to which the
credit union is required to provide notice to the NCUA Board;
(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 carry out any other requirement of any law,
regulation, or order;
(iv) Making any material change in accounting methods;
(v) Paying dividends on new share accounts at a rate that would
increase the credit union's weighted average cost of funds to a level
significantly exceeding the prevailing rates of interest on insured
deposits in its normal market areas;
(11) Other 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 (10) of this section;
(12) 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 a credit union becomes
``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 achieve the purpose of this
part, provided that the NCUA Board documents why such action in lieu of
conservatorship or liquidation would do so.
(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) of this section, unless the NCUA Board makes a new
determination under paragraph (c)(1)(ii) 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 conservatorship or liquidation if
it remains ``critically undercapitalized'' on average for a full
calendar quarter following a period of 18 months from the date on which
the credit union first became ``critically undercapitalized'';
(ii) Exception. Notwithstanding paragraph (c)(3)(i) of this section
section, the NCUA Board may continue to take other corrective action in
lieu of conservatorship or 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.
(4) Nondelegation. The NCUA Board may not delegate its authority
under paragraphs (c)(1) through (3) 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
under this section by delegated authority.
Sec. 702.108 Consultation with State officials on proposed prompt
corrective action.
(a) Consultation on proposed conservatorship or liquidation. Before
placing a federally-insured State-chartered credit union into
conservatorship (pursuant to 12 U.S.C. 1786(h)(1)(F) or (G)) or
liquidation (pursuant to 12 U.S.C. 1787(a)(3)) as permitted or required
under this part to facilitate prompt corrective action--
(1) The NCUA Board shall seek the views of the appropriate State
official (as defined in Sec. 702.2(a)), and give him or her an
opportunity to place the credit union into conservatorship or
liquidation;
(2) The NCUA Board shall, upon timely request of the appropriate
State official, promptly provide him or her with a written statement of
the reasons for the proposed conservatorship or liquidation, and
reasonable time to respond to that statement;
(3) If the appropriate State official makes a timely written
response that disagrees with the proposed conservatorship or
liquidation and gives reasons for that disagreement, the NCUA Board
shall not place the credit union into conservatorship or liquidation
unless it first considers the views of the appropriate State official
and determines that--
(i) The NCUSIF faces a significant risk of loss if the credit union is
not
[[Page 27112]]
placed into conservatorship or liquidation; and
(ii) Conservatorship or liquidation is necessary to reduce any loss
that the NCUSIF either is expected to incur or risks incurring with
respect to the credit union.
(b) Nondelegation. The NCUA Board may not delegate any
determination under paragraph (a)(3) of this section.
(c) Notification when taking discretionary action. The NCUA Board
shall seek the views of the appropriate State official before taking
any discretionary action with respect to a federally-insured State-
chartered credit union, and shall allow the appropriate State official
to take the proposed action independently or jointly with NCUA.
Sec. 702.109 Net worth restoration plans
(a) Schedule for filing. (1) Generally. A federally-insured credit
union shall file a written net worth restoration plan (Plan) with the
appropriate Regional Director and, if State-chartered, the appropriate
State official within 45 calendar days of becoming either
``undercapitalized,'' ``significantly undercapitalized'' or
``critically undercapitalized,'' unless the NCUA Board notifies the
credit union in writing that its Plan is to be filed within a different
period.
(2) Exception. An ``adequately capitalized'' credit union that is
required, on safety and soundness grounds under Sec. 702.101(b), to
comply with supervisory actions as if it were ``undercapitalized'' is
not required to submit a Plan solely due to the reclassification.
(3) Filing of additional plan. Notwithstanding paragraph (a)(1) of
this section, a credit union that has already submitted and is
operating under a Plan approved under this section is not required to
submit an additional Plan due to a change in net worth ratio or
reclassification under Sec. 702.101(b), unless the NCUA Board notifies
the credit union that it must submit a new Plan. A credit union that is
notified to submit a new or revised Plan shall file the Plan in writing
with the appropriate Regional Director within 45 calendar days of
receiving such notice, unless the NCUA Board notifies the credit union
in writing that the Plan is to be filed within a different period.
(4) Failure to timely file plan. When a credit union fails to
timely file a Plan pursuant to paragraph (a)(1) or (3) of this section,
the NCUA Board shall promptly notify the credit union that it has
failed to file a Plan and that it has 15 calendar days from receipt of
that notice within which to file a Plan.
(b) Assistance in preparing plan. Upon timely request by a credit
union having total assets of less than $10 million (regardless how many
years it has been in operation), the NCUA Board shall provide
assistance in preparing a plan required to be filed under paragraph (a)
of this section.
(c) Contents of plan. A net worth restoration plan must--
(1) Specify--
(i) The steps the credit union will take to become ``adequately
capitalized'';
(ii) A specific timetable for increasing net worth during each year in
which the Plan will be in effect;
(iii) The amount of earnings equivalent to not less than 4/10ths
percent (0.4%) of its total assets that the credit union will transfer
to its regular reserve account under section 702.104(a), or such lesser
amount as the credit union justifies to the NCUA Board under section
702.104(b);
(iv) How the credit union will comply with the mandatory and
discretionary restrictions or requirements imposed on it under this
part;
(v) the types and levels of activities in which the credit union will
engage; and
(vi) if required to submit a plan due to reclassification under section
Sec. 702.101(b), the steps the credit union will take to correct the
unsafe or unsound practice(s) or condition(s);
(2) Include pro forma financial statements covering the next two
years;
(3) Contain such other information as the NCUA Board has required;
and
(4) With respect to a credit union having assets of $10 million or
more, financial data submitted in connection with its net worth
restoration plan must be prepared in accordance with generally accepted
accounting principles (GAAP) unless the NCUA Board instructs otherwise.
(d) Criteria for approval of plan. The NCUA Board shall not accept
a net worth restoration plan unless the plan--
(1) Complies with paragraph (c) of this section;
(2) Is based on realistic assumptions, and is likely to succeed in
restoring the credit union's net worth;
(3) Would not unreasonably increase the credit union's exposure to
risk (including credit risk, interest-rate risk, and other types of
risk); and
(4) Is supported by appropriate assurances from the credit union
that it will comply with the plan until it has remained ``adequately
capitalized'' for four (4) consecutive calendar quarters.
(e) Review of plan. (1) Notice of decision. Within 60 calendar days
after receiving a Plan under this part, the NCUA Board will notify the
credit union in writing whether the Plan has been approved, and shall
provide reasons for its decision in the event of disapproval.
(2) Consultation with state officials. In the case of a Plan
submitted by a federally-insured State-chartered credit union, the NCUA
Board shall, when evaluating the Plan, seek and consider the views of
the appropriate State official.
(f) Plan not approved. (1) Submission of revised plan. If a Plan is
not approved by the NCUA Board, the credit union shall submit a revised
Plan within 30 calendar days of receiving notice of disapproval, unless
it is notified in writing by the NCUA Board that the revised Plan is to
be filed within a different period. Upon receipt of notice of
disapproval of a Plan, an ``undercapitalized'' credit union having a
net worth ratio of less than five percent (5%) shall remain subject to
all of the provisions of this part applicable to ``significantly
undercapitalized'' credit unions until a new or revised Plan submitted
by the credit union is approved by the NCUA Board.
(2) Notice of decision on revised plan. Within 30 calendar days
after receiving a revised Plan under paragraph (f)(1) of this section,
the NCUA Board shall notify the credit union in writing whether the
revised Plan is approved. The Board may extend the time within which
notice of its decision shall be provided.
(g) Failure to submit or implement plan. Any ``undercapitalized''
credit union having a net worth ratio of less than five percent (5%)
which fails to submit a written Plan within the applicable period
provided in this section, or which fails in any material respect to
timely implement an approved Plan, shall be remain subject to all of
the provisions of this part applicable to ``significantly
undercapitalized'' credit unions.
(h) Amendment of plan. A credit union that has filed an approved
Plan may, after prior written notice to and approval by the NCUA Board,
amend its Plan to reflect a change in circumstance. Until such time as
a proposed amendment has been approved, the credit union shall
implement the Plan as approved prior to the proposed amendment.
[[Page 27113]]
Subpart B--Alternative Prompt Corrective Action for New Credit
Unions
Sec. 702.201 Scope and definition
(a) Scope. This subpart B applies exclusively to credit unions
defined in paragraph (b) of this section as ``new'' pursuant to 12
U.S.C. 1790d(b)(2) in lieu of subpart A of this part.
(b) New credit union defined. A ``new'' credit union for purposes
of this section is a federally-insured credit union that has both been
in operation for less than ten (10) years and has total assets of not
more than $10 million. A credit union which exceeds $10 million in
total assets may become ``new'' if its total assets subsequently fall
below $10 million while it is still in operation for less than 10
years.
(c) Effect of spin-offs. A credit union formed as the result of a
``spin-off'' of a group from the field of membership of an existing
credit union is deemed to be in operation since the effective date of
the ``spin-off.'' A credit union whose total assets decline below $10
million because a group within its field of membership has been ``spun-
off'' is eligible to become ``new'' if it has been in operation less
than 10 years.
(d) Actions to evade statutory prompt corrective action. If the
NCUA Board determines that a credit union was formed as a result of a
``spin-off,'' or was expanded by merger or by the addition of a group
to its field of membership, primarily to qualify as ``new'' under this
subpart, the credit union shall be deemed subject to prompt corrective
action under subpart A of this part.
Sec. 702.202 Net worth categories for new credit unions.
(a) Net worth measures. For purposes of this part, a new credit
union's net worth category classification will be determined by its net
worth ratio as defined in Sec. 702.2(f), and any risk-based net worth
requirement applicable to a new credit union defined as ``complex''
under Sec. 702.102.
(b) Notice and effective date of net worth classification of new
credit union. A new federally-insured credit union shall have notice of
its net worth ratio (including any applicable risk-based net worth
requirement), and shall be classified within the corresponding net
worth category under this subpart, effective as provided in
Sec. 702.3(b).
(c) Net worth categories. A federally-insured credit union defined
as ``new'' under this section shall be classified--
(1) Well capitalized if it has a net worth ratio of seven percent
(7%) or greater and also meets any applicable risk-based net worth
requirement under Sec. 702.102;
(2) Adequately capitalized if it has a net worth ratio of six
percent (6%) or more but less than seven percent (7%), and also meets
any applicable risk-based net worth requirement under Sec. 702.102;
(3) Moderately capitalized if it has a net worth ratio of three and
one-half percent (3.5%) or more but less than six percent (6%), or
fails to meet any applicable risk-based net worth requirement under
Sec. 702.102;
(4) Marginally capitalized if it has a net worth ratio of two
percent (2%) or more but less than three and one-half percent (3.5%);
(5) Minimally capitalized if it has a net worth ratio of zero
percent (0%) or greater but less than two percent (2%);
(6) Uncapitalized if it has a net worth ratio of less than zero
percent (0%) (e.g., a deficit in retained earnings).
(d) Reclassification based on supervisory criteria other than net
worth. Subject to Sec. 702.101(c) and (d), the NCUA Board may
reclassify a ``well capitalized'' new credit union as ``adequately
capitalized'' and may require an ``adequately capitalized,''
``moderately capitalized'' or marginally capitalized'' new credit union
to comply with certain statutory or discretionary supervisory actions
as if it were in 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. 702.101(b).
Sec. 702.203 Prompt corrective action for ``adequately capitalized''
new credit unions.
Until an ``adequately capitalized'' new credit union becomes ``well
capitalized,'' it must annually transfer earnings to its regular
reserve account as provided in Sec. 702.104.
Sec. 702.204 Prompt corrective action for ``moderately capitalized''
new credit unions.
(a) Mandatory action by new credit union. If a new credit union
becomes ``moderately capitalized'' (including by reclassification under
Sec. 702.202(d)), it must immediately--
(1) Earnings transfer. Annually transfer earnings to its regular
reserve account in an amount and at a rate reflected in the credit
union's initial or revised business plan;
(2) Submit revised business plan. Submit a revised business plan
pursuant to Sec. 702.208 if its net worth ratio has not increased
consistent with its then-present business plan;
(3) Restrict member business loans. Not increase the total amount
of member business loans until the credit union becomes ``adequately
capitalized'' unless it qualifies for an exception under 12 U.S.C.
1757a(b).
(b) Discretionary actions by NCUA. Subject to the applicable
procedures set forth in subpart L of part 747 of this chapter for
issuing, reviewing and enforcing directives, the NCUA Board may take
one or more of the actions prescribed in Sec. 702.105(b) and (c) if the
credit union's net worth has not increased consistent with its then-
present business plan.
(c) Discretionary conservatorship or liquidation. Notwithstanding
any other actions required or permitted to be taken under this section,
when a new credit union becomes ``moderately capitalized'' (including
by reclassification under Sec. 702.202(d)), the NCUA Board may place
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), provided that the credit union has no reasonable
prospect of becoming ``adequately capitalized.''
Sec. 702.205 Prompt corrective action for ``marginally capitalized''
new credit unions.
(a) Mandatory actions by new credit union. If a new credit union
becomes ``marginally capitalized'' (including by reclassification under
Sec. 702.202(d)), it must immediately--
(1) Earnings transfer. Annually transfer earnings to its regular
reserve account in an amount and at a rate reflected in the credit
union's initial or revised business plan;
(2) Submit revised business plan. Submit a revised business plan
pursuant to Sec. 702.208 if its net worth ratio has not increased
consistent with its then-present business plan; and
(3) Restrict member business loans. Not increase the total amount
of member business loans except as provided in Sec. 702.204(a)(3).
(b) Discretionary actions by NCUA. Subject to the applicable
procedures set forth in subpart L of part 747 of this chapter for
issuing, reviewing and enforcing directives, the NCUA Board may take
one or more of the actions prescribed in Sec. 702.106(b) if the credit
union's net worth has not increased consistent with its then-present
business plan.
(c) Discretionary conservatorship or liquidation. Notwithstanding
any other actions required or permitted to be taken under this section,
when a new credit union becomes ``marginally capitalized'' (including
by reclassification under Sec. 702.202(d)), the NCUA Board may place
the credit union into conservatorship pursuant to 12 U.S.C.
1786(h)(1)(F), or into liquidation
[[Page 27114]]
pursuant to 12 U.S.C. 1787(a)(3)(A)(i), provided that the credit union
has no reasonable prospect of becoming ``adequately capitalized.''
Sec. 702.206 Prompt corrective action for ``minimally capitalized''
new credit unions.
(a) Mandatory action by new credit union. If a new credit union
becomes ``minimally capitalized,'' it must immediately--
(1) Earnings transfer. Annually transfer earnings to its regular
reserve account in an amount and at a rate reflected in the credit
union's initial or revised business plan;
(2) Submit revised business plan. Submit a revised business plan
pursuant to Sec. 702.208 if its net worth ratio has not increased
consistent with its then-present business plan; and
(3) Restrict member business loans. Not increase the total amount
of member business loans except as provided in Sec. 702.204(a)(3).
(b) Discretionary actions by NCUA. Subject to the procedures set
forth in subpart L of part 747 of this chapter for issuing, reviewing
and enforcing directives, the NCUA Board may take one or more of the
actions prescribed in Sec. 702.107(b) if the credit union's net worth
has not increased consistent with its then-present business plan.
(c) Discretionary conservatorship or liquidation. Notwithstanding
any other actions required or permitted to be taken under this section,
when a new credit union becomes ``minimally capitalized'' (including by
reclassification under Sec. 702.202(d)), the NCUA Board may place 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), provided
that the credit union has no reasonable prospect of becoming
``adequately capitalized.''
Sec. 702.207 Prompt corrective action for ``uncapitalized'' new credit
unions.
(a) Mandatory action by new credit union. If a federally-insured
new credit union either remains ``uncapitalized'' beyond the time
period provided in its initial business plan (approved at the time the
credit union's charter was granted), or subsequently declines to that
category, it must--
(1) Earnings transfer. Annually transfer earnings to its regular
reserve account in an amount and at a rate determined reflected in the
credit union's initial or revised business plan;
(2) Submit revised business plan. Within the period specified by
the NCUA Board, but not to exceed 90 days from the date the credit
union became ``uncapitalized,'' submit a revised business plan pursuant
to Sec. 702.208 providing for alternative means of funding the credit
union's earnings deficit; and
(3) Restrict member business loans. Not increase the total amount
of member business loans except as provided in Sec. 702.204(a)(3).
(b) Discretionary actions by NCUA. Subject to the procedures set
forth in subpart L of part 747 of this chapter for issuing, reviewing
and enforcing directives, the NCUA Board may take one or more of the
actions prescribed in Sec. 702.107(b) if the credit union's net worth
has not increased consistent with its then-present business plan.
(c) Mandatory liquidation. Notwithstanding any other actions
required or permitted to be taken under this section, the NCUA Board--
(1) May place into liquidation pursuant to 12 U.S.C.
1787(a)(3)(A)(ii) an ``uncapitalized'' new credit union which fails to
submit a revised business plan within the time provided under paragraph
(a)(2) of this section; or
(2) Must place into liquidation pursuant to 12 U.S.C.
1787(a)(3)(A)(ii) an ``uncapitalized'' new credit union which still is
``uncapitalized'' ninety (90) calendar days after the date the NCUA
Board approved the revised business plan submitted by the credit union
pursuant to paragraph (a)(2) of this section, unless the credit union
documents to the NCUA Board why it is viable and has a reasonable
prospect of becoming ``adequately capitalized.''
Sec. 702.208 Revised business plans for new credit unions.
(a) Schedule for filing. (1) Generally. A ``moderately
capitalized,'' ``marginally capitalized'' or ``minimally capitalized''
new credit union 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 the date the
credit union has notice (as provided under Sec. 702.3(b)) that its net
worth ratio has failed to increase consistent with its then-present
business plan, unless the NCUA Board notifies the credit union in
writing that its RBP is to be filed within a different period, or that
the NCUA Board is waiving the requirement that the credit union file an
RBP. An ``uncapitalized'' new credit union must file an RBP within the
time provided under Sec. 702.207(a)(2).
(2) Failure to timely file plan. When a new credit union fails to
file an RBP as provided under paragraph (a)(1) 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) Contents of revised business plan. A new credit union's RBP
must, at a minimum--
(1) Address changes, since the new credit union's current business
plan was approved, in any of the business plan elements required for
charter approval under section IV.D. of NCUA's Chartering and Field of
Membership Manual (IRPS 99-1), 63 FR 71998, 72019 (Dec. 30, 1998), or
for State-chartered credit unions under applicable State law;
(2) Specify the steps the new credit union will take to become
``adequately capitalized'';
(3) Establish at least quarterly targets for increasing net worth
during each year in which the RBP will be in effect;
(4) Specify the amount of earnings that it will annually transfer
to its regular reserve as provided under Sec. 702.204(a)(1);
(5) Explain how the new credit union will comply with the
restrictions or requirements then in effect under this subpart;
(6) Specify the types and levels of activities in which the new
credit union will engage;
(7) In the case of an RBP submitted due to reclassification under
Sec. 702.202(d), specify the steps the credit union will take to
correct the unsafe or unsound condition or practice; and
(8) Include such other information as the NCUA Board may require.
(c) Review of revised business plan. (1) Consultation with State
officials. In the case of an RBP submitted by a federally-insured
State-chartered new credit union, the NCUA Board shall, when evaluating
the RBP, seek and consider the views of the appropriate State official.
(2) Criteria for approval. The NCUA Board shall not approve a new
credit union's RBP unless it--
(i) addresses the items enumerated in paragraph (b) of this section;
(ii) is based on realistic assumptions, and is likely to succeed in
restoring the credit union's net worth;
(iii) would not unreasonably increase the credit union's exposure to
risk (including credit risk, interest-rate risk, and other types of
risk); and
(iv) is supported by appropriate assurances from the credit union that
it will comply with the approved plan until it has been ``adequately
capitalized'' for four (4) consecutive calendar quarters.
(3) Notice of decision. Within 30 calendar days after receiving an
RBP under this section, the NCUA Board shall notify the credit union in
writing
[[Page 27115]]
whether its RBP is approved, and shall provide reasons for its decision
in the event of disapproval. The NCUA Board may extend the time within
which notice of its decision shall be provided.
(d) Plan not approved. (1) Submission of new revised plan. If an
RBP is not approved by the NCUA Board, the new credit union shall
submit a new RBP within 30 calendar days of receiving notice of
disapproval of its initial RBP, unless it is notified in writing by the
NCUA Board that the new RBP is to be filed within a different period.
(2) Notice of decision on revised plan. Within 30 calendar days
after receiving an RBP under paragraph (d)(1) of this section, the NCUA
Board shall notify the credit union in writing whether the new RBP is
approved. The Board may extend the time within which notice of its
decision shall be provided.
(e) Amendment of plan. A credit union that has filed an approved
RBP may, after prior written notice to and approval by the NCUA Board,
amend it to reflect a change in circumstance. Until such time as a
proposed amendment has been approved, the new credit union shall
implement its existing RBP as approved prior to the proposed amendment.
Sec. 702.209 Incentives for new credit unions.
(a) Management training for officers and employees. At the
discretion of the NCUA Board, NCUA (or non-profit organizations funded
through grants or contracts under 12 U.S.C. 1766(f)(2)(A) and (i)(3))
will provide training in management, lending, product development and
other areas for directors, officers and employees of new credit unions.
(b) Assistance in preparing business plans. At the discretion of
the NCUA Board, NCUA (or non-profit organizations funded through grants
or contracts under 12 U.S.C. 1766(f)(2)(A) and (i)(3)) will provide
individualized guidance and training to directors, officers and
employees of new credit unions in the preparation of business plans
required for charter approval and RBPs required under Sec. 702.208.
(c) Small credit union program. A new credit union is eligible to
join and receive comprehensive benefits and assistance under NCUA's
Small Credit Union Program.
Subpart C--Reserves
Sec. 702.301 Reserves.
(a) Special reserve. Each federally-chartered credit union shall
establish and maintain such reserves as may be required by the FCUA, or
by regulation, or in special cases by the NCUA Board.
(b) Regular reserve. Each federally-chartered credit union shall
establish and maintain a regular reserve account. Earnings required to
be transferred annually to a credit union's regular reserve under
subparts A or B of this part shall be held in this account.
(c) Transfers to regular reserve. The transfer of earnings to a
federally-chartered credit union's regular reserve when required under
subparts A or B of this part must occur after charges for loan or other
losses are addressed as provided in Sec. 702.302(d), but before the
declaration or payment of any dividends to members.
Sec. 702.302 Full and fair disclosure of financial condition.
(a) Full and fair disclosure defined. ``Full and fair disclosure''
is the level of disclosure which a prudent person would provide to a
member of a federally-chartered credit union, to NCUA, or, at the
discretion of the board of directors, to creditors to fairly inform
them of the financial condition and the results of operations of the
credit union.
(b) Full and fair disclosure implemented. The financial statements
of a federally-insured credit union shall provide for full and fair
disclosure of all assets, liabilities, and members' equity, including
such valuation (allowance) accounts as may be necessary to present
fairly the financial condition; and all income and expenses necessary
to present fairly the statement of income for the reporting period.
(c) Declaration of officials. The Statement of Financial Condition,
when presented to members, creditors or to the NCUA, shall contain a
dual declaration by the treasurer and by the president, or in the
absence of the president, by any other officer designated by the board
of directors of the reporting credit union to make such declaration,
that the report and related financial statements are true and correct
to the best of their knowledge and belief and present fairly the
financial condition and the statement of income for the period covered.
(d) Charges for loan and other losses. Full and fair disclosure
demands that a credit union properly address charges for loan and other
losses as follows:
(1) Charges for loan and other losses shall be made in accordance
with generally accepted accounting principles (GAAP);
(2) The allowance for loan losses established for loans must fairly
present the probable losses for all categories of loans and the proper
valuation of loans. The valuation allowance must encompass specifically
identified loans, as well as estimated losses inherent in the loan
portfolio, such as loans and pools of loans for which losses have been
incurred but are not identifiable on a specific loan-by-loan basis;
(3) Adjustments to the valuation allowance for loan losses will be
recorded in the expense account ``Provision for Loan Losses'';
(4) The maintenance of an allowance for loan losses shall not
affect the requirement to transfer earnings to a credit union's regular
reserve when required under subpart A or B of this part;
(5) At a minimum, adjustments to the allowance for loan losses
shall be made prior to the distribution or posting of any dividend to
the accounts of members.
Sec. 702.303 Payment of dividends.
(a) Restriction on dividends. Dividends shall be available only
from post-closing, post-transfer, unappropriated, undivided earnings,
if any.
(b) Payment of dividends if undivided earnings depleted. The board
of directors of a federally-chartered credit union which has depleted
the post-closing, post-transfer balance of its undivided earnings
account may authorize a transfer of funds from the credit union's
regular reserve to undivided earnings to pay dividends, provided that
the credit union is classified ``well capitalized'' under subpart A or
B of this part and either--
(1) The transfer of funds to undivided earnings will not cause the
credit union's net worth classification to fall below ``well
capitalized''; or
(2) The appropriate Regional Director gives written approval for
the transfer.
PART 747--ADMINISTRATIVE ACTIONS, ADJUDICATIVE HEARINGS, RULES OF
PRACTICE AND PROCEDURE, AND INVESTIGATIONS
1. The authority citation for part 747 is revised to read as
follows:
Authority: 12 U.S.C. 1766, 1786, 1784, 1787, 1790d and 4806(a);
and 42 U.S.C. 4012a.
2. Part 747 is amended by adding a new subpart L to read as
follows:
Subpart L--Issuance, Review and Enforcement of Orders Imposing Prompt
Corrective Action
Sec.
747.2001 Scope.
747.2002 Review of order imposing prompt corrective action.
747.2003 Review of order reclassifying a credit union based on
safety and soundness criteria.
747.2004 Review of order to dismiss a director or senior executive
officer.
747.2005 Enforcement of orders.
[[Page 27116]]
Subpart L--Issuance, Review and Enforcement of Orders Imposing
Prompt Corrective Action
Sec. 747.2001 Scope.
(a) Independent review process. The rules and procedures set forth
in this subpart apply to federally-insured credit unions, whether
federally- or state-chartered (other than corporate credit unions), who
are subject to discretionary supervisory actions and to
reclassification under part 702 of this chapter to facilitate prompt
corrective action under section 216 of the Federal Credit Union Act, 12
U.S.C. Sec. 1790d; and senior executive officers and directors of such
credit unions who are dismissed pursuant to a discretionary supervisory
action imposed under part 702. NCUA staff decisions to impose
discretionary supervisory restrictions or requirements under part 702
shall be considered material supervisory determinations for purposes of
12 U.S.C. 1790d(k). Section 747.2002 of this subpart provides an
independent appellate process to challenge such decisions.
(b) Notice to State officials. With respect to a federally-insured
State-chartered credit union under sections 747.2002, 747.2003 and
747.2004 of this subpart, notices, directives and decisions on appeal
served upon a credit union, or a dismissed director or officer thereof,
by the NCUA Board shall also be served upon the appropriate State
official. Responses, requests for a hearing and to present witnesses,
and requests for reinstatement served upon the NCUA Board by a credit
union, or dismissed director or officer thereof, shall also be served
upon the appropriate State official.
Sec. 747.2002 Review of orders imposing prompt corrective action.
(a) Notice of intent to issue directive.--(1) Generally. Whenever
the NCUA Board intends to issue a directive imposing a discretionary
requirement or restriction on a credit union classified
``undercapitalized'' or lower under Secs. 702.105 (b) and (c),
702.106(b) and 702.107(b) of this chapter, or on a new credit union
classified ``moderately capitalized'' or lower under Secs. 702.204(b),
702.205(b), 702.206(b) and 702.207(b) of this chapter, it must give the
credit union prior notice of the proposed action. The credit union
shall have such time to respond to a proposed directive as the NCUA
Board provides under paragraph (c)(1) of this section.
(2) Immediate issuance of directive without notice. The NCUA Board
may issue a directive to take effect immediately under paragraph (a)(1)
of this section without notice to the credit union if the NCUA Board
finds it necessary in order to carry out the purposes of part 702 of
this chapter. A credit union that is subject to a directive which takes
effect immediately may appeal the directive in writing to the NCUA
Board. Such an appeal must be received by the NCUA Board within 14
calendar days after the directive was issued, unless the NCUA Board
permits a longer period. The NCUA Board shall consider any such appeal,
if timely filed, within 60 calendar days of receiving it. Unless
ordered by the NCUA Board, the directive shall remain in effect pending
a decision on the appeal.
(b) Contents of notice. The NCUA Board's notice to a credit union
of its intention to issue a directive imposing a discretionary
restriction or requirement must state:
(1) The credit union's net worth ratio and net worth
classification;
(2) The specific restrictions or requirements that the NCUA Board
intends to impose, and the reasons therefor;
(3) The proposed date when the restriction or requirement would
take effect and the proposed date for completing the required action or
terminating the restriction; and
(4) The date by which the credit union must file its written
response, if any, to the notice as required by paragraph (c)(1) of this
section.
(c) Response to notice.--(1) Time for response. A credit union must
file a written response, if any, to a notice of intent to issue a
directive within 14 calendar days from the date of the notice, unless
the NCUA Board determines that a shorter period is appropriate in light
of the financial condition of the credit union or other relevant
circumstances.
(2) Content of response. A credit union's response to a notice of
the NCUA Board's intention to issue a directive imposing a
discretionary restriction or requirement must:
(i) Explain why the proposed restriction or requirement is not an
appropriate exercise of discretion under this part;
(ii) Request that the NCUA Board not issue or modify the proposed
directive; and
(iii) Include other relevant information, mitigating circumstances,
documentation, or other evidence in support of the credit union's
position regarding the proposed directive.
(d) NCUA Board consideration of response. After considering a
credit union's response to a notice of the NCUA Board's intention to
issue a directive imposing a discretionary restriction or requirement,
the NCUA Board may:
(1) Issue the directive as originally proposed or as modified;
(2) Determine not to issue the directive and so notify the credit
union; or
(3) Seek additional information or clarification from the credit
union or any other relevant source.
(e) Failure to file response. A credit union which fails to file a
written response to a notice of the NCUA Board's intention to issue a
directive imposing a discretionary restriction or requirement, within
the specified time period, shall be deemed to have waived the
opportunity to respond and to have consented to the issuance of the
directive.
(f) Request to modify or rescind directive. A credit union that is
subject to a directive imposing a discretionary restriction or
requirement may request in writing that the NCUA Board reconsider the
terms of the directive, or rescind or modify it, due to changed
circumstances. Unless otherwise ordered by the NCUA Board, the
directive shall remain in effect while such request is pending.
Sec. 747.2003 Review of order reclassifying a credit union based on
safety and soundness criteria.
(a) Reclassification based on unsafe or unsound condition or
practice. (1) Issuance of notice of proposed reclassification. (i)
Grounds for reclassification. The NCUA Board may reclassify a credit
union or subject it to the supervisory actions applicable to the next
lower net worth category (each such action hereinafter referred to as
``reclassification'') pursuant to Secs. 702.101(b) and 702.202(d) of
this chapter;
(ii) Prior notice to credit union. Prior to reclassification, the NCUA
Board shall issue and serve on the credit union a written notice of the
NCUA Board's intention to reclassify it to a lower net worth category.
(2) Contents of notice. A notice of intention to reclassify a
credit union based on unsafe or unsound condition or practice shall
state:
(i) The credit union's net worth ratio, net worth category
classification, and the net worth category to which the credit union
would be reclassified;
(ii) The reasons for reclassification of the credit union;
(iii) The date by which the credit union must file with the NCUA Board
a
[[Page 27117]]
written response to the proposed reclassification (and a request for a
hearing), which date shall be no less than 14 calendar days from the
date of service of the notice unless the NCUA Board determines that a
shorter period is appropriate in light of the financial condition of
the credit union or other relevant circumstances; and
(iv) That failure to--
(A) File a written response to the notice of proposed
reclassification, within the specified time period, shall be deemed a
waiver of the opportunity to respond and to have consented to the
reclassification;
(B) That failure to request a hearing shall be deemed a waiver of
any right to a hearing; and
(C) That failure to request the opportunity to present witness
testimony shall be deemed a waiver of any right to present such
testimony.
(3) Response to notice of proposed reclassification. A credit union
may file a written response to a notice of proposed reclassification
within the time period set by the NCUA Board. The response should
explain why the credit union is not in an unsafe or unsound condition
or has not corrected an unsafe or unsound practice, or otherwise should
not be reclassified, and include any relevant information, mitigating
circumstances, documentation, or other evidence in support of the
credit union's position. A credit union which fails to file a written
response to a notice of proposed reclassification, within the specified
time period, shall be deemed to have waived the opportunity to respond
and to have consented to the reclassification.
(4) Request for informal hearing and presentation of witness
testimony. A credit union's response to a notice of proposed
reclassification may include a request for an informal hearing before
the NCUA Board under this section. If the credit union wishes to
present witness testimony at the hearing, the credit union shall
include a request to do so which specifies the names of the witnesses
and the general nature of their expected testimony. Failure to request
an informal hearing shall be deemed a waiver of any right to a hearing,
and failure to request the opportunity to present witness testimony
shall be deemed a waiver of any right to present such testimony.
(5) Order for informal hearing. Upon timely receipt of a written
response that includes a request for a hearing, the NCUA Board shall
issue an order commencing an informal hearing no later than 30 days
after receipt of the request, unless the credit union requests a later
date. The hearing shall be held in Alexandria, Virginia, or at such
other place as may be designated by the NCUA Board, before a presiding
officer designated by the NCUA Board to conduct the hearing and to
recommend a decision.
(6) Procedures for informal hearing. (i) The credit union shall
have the right to introduce relevant documents and to present oral
argument at the hearing. The credit union may introduce witness
testimony only if expressly authorized by the NCUA Board or the
presiding officer. Neither the provisions of the Administrative
Procedure Act (5 U.S.C. 554-557) governing adjudications required by
statute to be determined on the record nor the Uniform Rules of
Practice and Procedure (12 CFR 747.1) shall apply to an informal
hearing under this section unless the NCUA Board orders otherwise.
(ii) The informal hearing shall be recorded, and a transcript shall be
furnished to the credit union upon request and payment of the cost
thereof. Witnesses need not be sworn, unless specifically requested by
a party or by the presiding officer. The presiding officer may ask
questions of any witness.
(iii) The presiding officer may order that the hearing be continued for
a reasonable period following completion of witness testimony or oral
argument to allow additional written submissions to the hearing record.
(7) Recommendation of presiding officer. Within 20 calendar days
following the closing of the hearing and the record, the presiding
officer shall make a recommendation to the NCUA Board on the proposed
reclassification.
(8) Time for decision. Not later than 60 calendar days after the
date the record is closed or the date of receipt of the credit union's
response in a case where no hearing was requested, the NCUA Board will
decide whether to reclassify the credit union, and will notify the
credit union of its decision. The decision of the NCUA Board shall be
final.
(b) Request to rescind reclassification. Any credit union that has
been reclassified under this section may file a written request to the
NCUA Board to reconsider or rescind the reclassification, or to modify,
rescind or remove any directives issued as a result of the
reclassification. Unless otherwise ordered by the NCUA Board, the
credit union shall remain reclassified, and subject to any directives
issued as a result, while such request is pending.
(c) Non-delegation. The NCUA Board may not delegate its authority
to reclassify a credit union into a lower net worth category or to
treat a credit union as if it were in a lower net worth category
pursuant to Secs. 702.101(b) or 702.202(d) of this chapter.
Sec. 747.2004 Review of order to dismiss a director or senior
executive officer.
(a) Service of notice. When the NCUA Board issues and serves a
directive on a credit union pursuant to Sec. 747.2002 requiring it to
dismiss from office any director or senior executive officer under
Sec. 702.105(c)(2), 702.106(b)(8), 702.107(b)(8), 702.204(b),
702.205(b), 702.206(b) or 702.207(b) of this chapter, the NCUA Board
shall also serve a copy of the directive (or the relevant portions,
where appropriate) upon the person to be dismissed, and shall advise
that person in writing that failure to--
(1) Request reinstatement shall be deemed a waiver of any right to
seek reinstatement;
(2) Request a hearing shall be deemed a waiver of any right to a
hearing; and
(3) Request the opportunity to present witness testimony shall be
deemed a waiver of the right to present such testimony.
(b) Response to directive. (1) Request for reinstatement. A
director or senior executive officer who has been served with a
directive under paragraph (a) of this section (Respondent) may file a
written request for reinstatement. The request for reinstatement shall
be filed with the NCUA Board within 10 business days after the
Respondent received the directive, unless further time is allowed by
the NCUA Board at the request of the Respondent.
(2) Contents of request for informal hearing. The request for
reinstatement shall include reasons why the Respondent should be
reinstated, and may include a request for an informal hearing before
the NCUA Board under this section. If the Respondent wishes to present
witness testimony at the hearing, the Respondent shall include a
request to do so which specifies the names of the witnesses and the
general nature of their expected testimony. Failure to request a
hearing shall be deemed a waiver of any right to a hearing and failure
to request the opportunity to present witness testimony shall be deemed
a waiver of any right to present such testimony.
(3) Effective date. Unless otherwise ordered by the NCUA Board, the
dismissal shall remain in effect while a request for reinstatement is
pending.
[[Page 27118]]
(c) Order for informal hearing. Upon receipt of a timely written
request from a Respondent for an informal hearing on the portion of a
directive requiring a credit union to dismiss from office any director
or senior executive officer, the NCUA Board shall issue an order
commencing an informal hearing to commence no later than 30 days after
receipt of the request, unless the Respondent requests a later date.
The hearing shall be held in Alexandria, Virginia, or at such other
place as may be designated by the NCUA Board, before a presiding
officer designated by the NCUA Board to conduct the hearing and
recommend a decision.
(d) Procedures for informal hearing--(1) A Respondent may appear at
the hearing personally or through counsel. A Respondent shall have the
right to introduce relevant documents and to present oral argument. A
Respondent may introduce witness testimony only if expressly authorized
by the NCUA Board or by the presiding officer. Neither the provisions
of the Administrative Procedure Act (5 U.S.C. 554-557) governing
adjudications required by statute to be determined on the record nor
the Uniform Rules of Practice and Procedure (12 CFR 741.1) apply to an
informal hearing under this section unless the NCUA Board orders
otherwise.
(2) The informal hearing shall be recorded, and a transcript shall
be furnished to the Respondent upon request and payment of the cost
thereof. Witnesses need not be sworn, unless specifically requested by
a party or the presiding officer. The presiding officer may ask
questions of any witness.
(3) The presiding officer may order that the hearing be continued
for a reasonable period (normally five business days) following
completion of witness testimony or oral argument to allow additional
written submissions to the hearing record.
(e) Standard for review. A Respondent shall bear the burden of
demonstrating that his or her continued employment by or service with
the credit union would materially strengthen the credit union's ability
to--
(1) Become ``adequately capitalized,'' to the extent that the
directive was issued as a result of the credit union's net worth ratio
or failure to submit or implement a net worth restoration plan or
revised business plan; and
(2) Correct the unsafe or unsound condition or unsafe or unsound
practice, to the extent that the directive was issued as a result of
reclassification of the credit union pursuant to Secs. 702.101(d) and
702.202(d) of this chapter.
(f) Recommendation of presiding officer. Within 20 calendar days
following the date the hearing and the record are closed, the presiding
officer shall make a recommendation to the NCUA Board concerning the
Respondent's request for reinstatement with the credit union.
(g) Time for decision. Not later than 60 calendar days after the
date the record is closed or the date of the response in a case where
no hearing was requested, the NCUA Board shall grant or deny the
request for reinstatement and shall notify the Respondent of its
decision. If the NCUA Board denies the request for reinstatement, it
shall set forth in the notification the reasons for the its action. The
decision of the NCUA Board shall be final.
Sec. 747.2005 Enforcement of orders.
(a) Judicial remedies. Whenever a credit union fails to comply with
a directive imposing a discretionary supervisory action or enforcing a
mandatory supervisory action under part 702 of this chapter, the NCUA
Board may seek enforcement of the directive in the appropriate United
States District Court pursuant to 12 U.S.C. 1786(k)(1).
(b) Administrative remedies--(1) Failure to comply with directive.
Pursuant to 12 U.S.C. 1786(k)(2)(A), the NCUA Board may assess a civil
money penalty against any credit union that violates or otherwise fails
to comply with any final directive issued under part 702 of this
chapter against any institution-affiliated party of a credit union who
participates in such violation or noncompliance;
(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 A
of part 702 or a revised business plan under subpart B of part 702.
(c) Other enforcement action. In addition to the actions described
in paragraphs (a) and (b) of this section, the NCUA Board may seek
enforcement of the directives issued under part 702 of this chapter
through any other judicial or administrative proceeding authorized by
law.
[FR Doc. 99-11837 Filed 5-17-99; 8:45 am]
BILLING CODE 7535-01-U
