Corporate Credit Unions, 25932-25939 [2015-10546]
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Federal Register / Vol. 80, No. 87 / Wednesday, May 6, 2015 / Rules and Regulations
II. Summary of Comments and Final
Amendments
NATIONAL CREDIT UNION
ADMINISTRATION
12 CFR Part 704
RIN 3133–AE43
Corporate Credit Unions
National Credit Union
Administration (NCUA).
AGENCY:
ACTION:
Final rule.
The NCUA Board (Board) is
amending its regulations governing
corporate credit unions (Corporates) and
the scope of their activities. The
amendments clarify the mechanics of a
number of regulatory provisions and
make several non-substantive, technical
corrections.
SUMMARY:
This final rule is effective June
5, 2015.
DATES:
John
Sozanski, Supervision Analyst, Office of
National Examinations and Supervision,
1775 Duke Street, Alexandria, Virginia
22314–3428 or telephone (703) 518–
6640; or Justin M. Anderson, Senior
Staff Attorney, Office of General
Counsel, 1775 Duke Street, Alexandria,
Virginia 22314–3428 or telephone (703)
518–6540.
FOR FURTHER INFORMATION CONTACT:
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Background
II. Summary of Comments and Final
Amendments
III. Regulatory Procedures
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I. Background
In 2010, in response to the preceding
financial crisis, the Board
comprehensively revised NCUA’s
regulations governing Corporates and
their activities.1 The Board also
amended those regulations twice more
in 2011.2 In November 2014, the Board
issued a proposed rule (Proposal) to
further amend the Corporate regulations
by clarifying or modifying several
provisions and making several nonsubstantive, technical corrections.3 The
Proposal not only clarified and
streamlined the Corporate regulations,
but it also enhanced their readability
and provided a degree of regulatory
relief to Corporates. This final rule
adopts all of the amendments in the
Proposal, with one change.
1 12
CFR part 704; 75 FR 64786 (Oct. 20, 2010).
FR 23861 (Apr. 29, 2011); 76 FR 79531 (Dec.
22, 2011). The Board also made technical changes
to the regulations in 2011 and 2013. 76 FR 16235
(Mar. 23, 2011); 78 FR 77563 (Dec. 24, 2013).
3 79 FR 65353 (Nov. 4, 2014).
2 76
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In response to the Proposal, NCUA
received 20 comments, nine from
Corporates, 10 from trade associations
and state credit union leagues, and one
from a natural person credit union. All
of the commenters generally supported
the clarifications and technical changes.
As discussed more fully below,
however, most commenters suggested
additional changes beyond the scope of
the Proposal or commented on
provisions of the current Corporate
regulations that were not addressed in
the Proposal. The Board adopts the
Proposal as issued with only one
modification.
1. Section 704.2—Definitions
In the definitions section, the Board
deleted several terms it determined
were duplicative and redefined a
number of other terms to minimize
confusion and enhance the effectiveness
of the Corporate regulations. The Board
removed the definitions of ‘‘adjusted
core capital’’ and ‘‘core capital’’ and
incorporated them into the definition of
‘‘Tier 1 capital.’’ The Board also deleted
the term ‘‘capital’’ when that term was
used as a specific measure, and replaced
it with the term ‘‘total capital.’’ The
Board removed the definition of
‘‘supplementary capital’’ and
incorporated it into the definition of
‘‘Tier 2 capital.’’ The Board also
eliminated the definitions of certain
terms in Appendix C to part 704, which
are no longer relevant to Corporates.
Finally, the Board modified a number of
additional definitions to provide greater
clarity or to make them consistent with
other NCUA regulations.
In response to these proposed
changes, NCUA received one comment
that supported the proposed definition
of retained earnings, stating that the
change would make it easier for the
continuing credit union in a merger
situation to count retained earnings
carried on the books of the merging
credit union. In addition, there were a
number of comments on definitions in
the Corporate regulations that were
outside the scope of the Proposal.
Specifically, 16 commenters objected to
the requirement that perpetual
contributed capital (PCC) be discounted
over time from what may be counted as
Tier 1 capital. This requirement, which
is in the current rule, was not the
subject of any proposed amendment.
Commenters, however, stated that PCC
is consistent with the definition of ‘‘Tier
1 capital’’ or ‘‘core capital’’ as used by
banking regulators, the Securities and
Exchange Commission, and the U.S.
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Treasury, and thus questioned the
rationale of requiring certain amounts to
be excluded from the calculation of Tier
1 Capital, as discussed below. Some
commenters suggested that the
mandatory phase-out of PCC would
have the effect of altering a Corporate’s
Tier 1 Capital after the specified dates,
even though nothing substantive had
changed in the structure of the PCC
account because of its nature as
permanent capital. Another commenter
suggested that the rule be changed to
provide for a more explicit retained
earnings requirement.
With respect to the comments on PCC
and a more explicit retained earnings
requirement, the Board notes that these
are outside the scope of the Proposal.
However, the Board notes that it was
NCUA’s intent, with the adoption of the
final Corporate regulations in 2010, to
ensure that the Corporates would never
again present the sort of systemic risk to
the entire credit union system that the
Corporates did in that time period and
which required NCUA to take
extraordinary regulatory action.
An aspect of the 2010 Corporate
regulations was to incent Corporates to
build greater reserves of retained
earnings to absorb potential losses.
Retained earnings are considered to be
the most superior form of capital carried
by a Corporate, as retained earnings
absorb losses without causing a
corresponding loss to another party,
such as a natural person credit union
that purchased contributed capital from
that Corporate. As referenced in the
comment letters, part 704 contains
provisions, effective in 2016, that limit
the amount of contributed capital,
including PCC, which may be counted
toward a Corporate’s regulatory capital.
NCUA intended this provision to
encourage a Corporate to build its
retained earnings. By increasing
retained earnings, a Corporate could
count more contributed capital as
regulatory capital.
As noted by commenters, PCC has
elements that are consistent with Tier 1
capital. However, one distinguishing
element of PCC is that it is almost
entirely sourced from member credit
unions. Accordingly, losses that deplete
PCC would summarily impair
investments made by credit union
members and their corresponding
capital. This downstream effect poses
increased risk to the National Credit
Union Share Insurance Fund that
capital sourced from external sources
would not. Should Corporates
successfully raise meaningful amounts
of capital from external sources, the
Board may consider easing the
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restrictions on contributed capital in a
future rulemaking.
The Board is finalizing the proposed
amendments to the definitions section
and Appendix C to part 704 without
change.
2. Section 704.3—Corporate credit
union capital
The Proposal included amendments
to § 704.3(b)(5) and (c)(3) regarding
corporate capital. The proposed
amendments clarified that upon
redeeming or calling nonperpetual
capital accounts or PCC instruments, a
Corporate must continue to meet its
minimum required capital and net
economic value ratios. These
clarifications made the provisions
consistent with each other and with the
terms and conditions of contributed
capital included in the Model Forms in
Appendix A to part 704. The Proposal
also deleted § 704.3(f)(4), as that
provision refers to a regulatory
requirement that Corporates were to
have complied with before December
20, 2011.
NCUA received only one comment on
this section. That commenter requested
that the rule be modified to provide
enhanced guidance to Corporates on
how to handle the redemption of PCC.
The Board notes that this comment is
outside the scope of the Proposal.
Further, the Board does not believe it is
appropriate to consider issuing a
proposed rule to address this comment
at this time. However, if Corporates
continue to satisfactorily rebuild
retained earnings that were depleted
during the credit crisis of 2007, then
NCUA may consider revisiting this issue
in the future.
The Board is finalizing the proposed
amendments to this section as proposed.
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3. Section 704.5—Investments
The Proposal included an amendment
to § 704.5(j) regarding grandfathering
certain Corporate investments. This
amendment clarified that, while a
Corporate may continue to hold an
investment that was permissible at the
time of purchase but later became
impermissible because of a regulatory
change, the investment is still subject to
all other sections of part 704 that apply
to investments, including those
pertaining to credit risk management,
asset and liability management,
liquidity management, and investment
action plans.
NCUA received no comments on this
section and is adopting the amendment
as proposed.
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4. Section 704.6—Credit risk
management
The Proposal provided clarification
on how to value investments when
calculating whether a Corporate is in
compliance with various sector and
issuer limits. NCUA received one
comment on this section, which
suggested that the Board should amend
the rule to provide an exception to the
single issuer limit for auto and
equipment dealer floor plan assetbacked securities so that such securities
would receive treatment similar to
credit card master trust asset-backed
securities. This comment is outside the
scope of the Proposal, and the Board
does not believe such an exception is
warranted as auto and equipment assetbacked security issuances are widely
available. The Board is adopting the
amendments to this section as proposed.
5. Section 704.7—Lending
Section 704.7(c) currently restricts a
Corporate’s unsecured member lending
to 50 percent of capital and its secured
member lending to 100 percent of
capital. The Proposal provided greater
flexibility to Corporates by permitting
them to lend on a secured basis up to
150 percent of their total capital to any
individual credit union borrower. No
commenters opposed this change, but
eight commenters recommended that
NCUA include an additional exclusion
from the lending limit for a bridge loan
made to a natural person member credit
union in connection with that credit
union receiving approval for a loan from
the Central Liquidity Facility (CLF). All
of the commenters who commented on
this aspect of the Proposal supported a
ten-day maturity limit on these bridge
loans.
The Board agrees with these
commenters and intends to provide an
exclusion from the lending limit for
bridge loans related to CLF loans. As
this issue was not included in the
Proposal, the Board, in compliance with
the Administrative Procedure Act, will
issue a subsequent notice of proposed
rulemaking to effect this change.
6. Section 704.8—Asset and liability
management
Current § 704.8 establishes
requirements to identify, measure,
monitor, and control risk in the
management of assets and liabilities.
These requirements include interest rate
sensitivity analyses, net interest income
modeling, and limiting the weighted
average life of assets. Current § 704.8(j)
also imposes reporting and other
requirements on Corporates that
experience a decline in net economic
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value (NEV) or other NEV-related
measures beyond certain thresholds.
The Proposal included an amendment
to clarify that if a Corporate experiences
such NEV-related breaches, but is able
to adjust its balance sheet to meet
required regulatory limits within 10
days, then the Corporate will not be
considered to be in violation of the
regulation. The Proposal clarified that a
regulatory violation would exist only if
a Corporate could not timely resolve a
breach.
NCUA received several comments on
this section. One commenter suggested
that Corporates should be given more
than 10 days to complete an adjustment
to its balance sheet to satisfy the
requirements of § 704.8(d), (f), and (g).
This commenter suggested a 60-day
grace period and an opportunity to retest at the expiration of the grace period.
The Board recognizes that, through
the normal course of business, a
Corporate may temporarily experience
an NEV-related breach. Often, a
Corporate can resolve the breach within
a timely manner, which is why the
current regulation permits a Corporate
to resolve any breach within 10 days
prior to further regulatory action being
taken. The Board is concerned that
lengthening the grace period could
allow a Corporate to circumvent the
purpose of the regulation, which is to
address breaches that are not resolved in
a timely manner. The Board, therefore,
continues to believe the proposed 10day grace period is appropriate.
In addition, four commenters
suggested that the rule be expanded to
provide for treatment of government
securities, including agency securities,
as cash equivalent for purposes of
assigning weighted average life (WAL)
values, resulting in such securities
receiving a zero WAL valuation. The
Board recognizes that governmentguaranteed securities present a different
risk profile than other investments that
Corporates are permitted to purchase.
However, these securities can pose risks
to a Corporate. Specifically,
government-issued or governmentguaranteed securities may have longerdated maturities that do not match a
Corporate’s funding structure. In
addition, they are subject to
prepayment, extension, and interest rate
risks. Given those risks, the Board does
not believe that government-issued or
government-guaranteed securities merit
a cash equivalent designation for
purposes of assigning WAL values. It is
also important to note that governmentguaranteed securities (when compared
to non-government-issued or nongovernment-guaranteed securities) are
allowed a preferential factoring for
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purposes of calculating WAL tests
pursuant to § 704.8.
Four commenters also suggested that
NCUA should anticipate that certain
government-sponsored enterprises will
increasingly require that investors in
their mortgage-backed securities agree to
certain credit-risk sharing features.
These commenters suggested that NCUA
should amend its regulations to
specifically allow Corporates to acquire
these types of investments. This issue is
outside the scope of the Proposal, but
the Board will continue to consider
these comments for future rulemakings.
7. Section 704.9—Liquidity management
Section 704.9(b) currently restricts a
Corporate’s general borrowing limit to
the lower of 10 times capital or 50
percent of capital and shares. The
Proposal included several changes to
this section. First, the Proposal changed
the limit to 10 times total capital,
consistent with the definitional changes
discussed above. Second, the Proposal
removed the restriction of 50 percent of
capital and shares. Finally, the Proposal
increased the secured borrowing
maturity limit from 30 days to 120 days
to accommodate seasonality in the
borrowing patterns of member credit
unions.
Fifteen commenters requested that the
borrowing maturity limit be increased
beyond 120 days. Most of the
commenters addressing this topic
advocated an extension of one to two
years. In addition, one commenter
advocated the elimination of any
specific maturity limit. Another
commenter sought to tie the maturity
limit to the use of highly liquid
collateral. Finally, several commenters
argued for a system that would allow a
Corporate to request a waiver from the
borrowing limits.
The Board has considered all of these
comments and has determined to extend
the maturity limit to 180 days. The
Board believes this additional extension
will not materially increase risk, yet will
provide the corporate greater flexibility
in accommodating the fluctuation of its
share base attributed to seasonal
changes in member credit union
liquidity demands. For example, credit
unions incur routine deposit and
withdrawal patterns associated with
payrolls and consumer spending that
can occur on an intra-month or multimonth basis. This seasonality of
behavior has a direct impact on credit
union funds held on deposit with the
corporate. The Board believes the
extension of the maturity limit will
allow corporate credit unions to better
serve the unique attributes of their
members.
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One commenter recommended that
the Board remove the current limitation
on the amount of secured borrowings
permitted for non-liquidity purposes,
and to simply allow such borrowings as
long as all capital ratios continue to
exceed the levels required to remain
well capitalized. The Board believes
that Corporates should be limited in
their ability to borrow on a secured
basis for other than liquidity purposes.
The borrowing limitation is intended to
preclude leveraging for investment
purposes, which can introduce greater
risk when markets encounter
disruption. Secured lenders require
collateral to be valued at market, and
they impose an additional margin to
ensure the borrowing is fully and
continuously collateralized. Market
shocks can create short-term market
values that are significantly below longterm intrinsic values, which can
magnify potential losses if the creditor
seizes the collateral and sells it as
permitted by the lending agreements.
The Board is adopting the amendments
as proposed, except as noted above.
8. Section 704.11—Corporate credit
union service organizations (Corporate
CUSOs)
The Proposal included several
amendments to this section of the
regulations. First, the Proposal
eliminated dates included in § 704.11(e)
that have since passed and are no longer
relevant. Second, the Proposal added a
requirement to § 704.11(g) that a
Corporate CUSO provide to NCUA and,
if applicable, the appropriate state
supervisory authority (SSA), the kinds
of reports required to be produced and
submitted by natural person credit
union service organizations pursuant to
a recent revision to NCUA’s natural
person credit union service organization
rule.4
Three commenters opposed this
provision, all of whom challenged
NCUA’s authority to impose this
requirement. Two of these commenters
noted that the effect of this provision is
likely to place CUSOs at a competitive
disadvantage relative to other service
providers. One commenter noted that
this provision could expose a CUSO to
the public release of confidential
materials should its report become the
subject of a Freedom of Information Act
(FOIA) request. One commenter
requested further clarification in the
rule of the term ‘‘level of activity of each
credit union’’ which the commenter
mistakenly asserted appears in this
section. One commenter, while not
4 12 CFR 712.3(d)(4) and (5); 78 FR 72537 (Dec.
3, 2013).
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opposing the substance of this
provision, opposed NCUA’s use of
incorporation by reference to the natural
person credit union service organization
rule.
The Board recognizes the concerns
raised by commenters and notes that
FOIA, as well as applicable FOIA
exemptions, apply to any data or
information submitted by natural person
credit union service organizations and
Corporate CUSOs to NCUA. The Board
anticipates that natural person credit
union service organization and
Corporate CUSO submissions often will
contain or consist of ‘‘trade secrets and
commercial or financial information
obtained from a person [that is]
privileged or confidential.’’ 5 This type
of information generally is subject to
withholding under exemption 4 of
FOIA. In addition, information that is
‘‘contained in or related to examination,
operating, or condition reports prepared
by, on behalf of, or for the use of an
agency responsible for the regulation or
supervision of financial institutions’’ is
generally subject to withholding under
exemption 8 of FOIA. To the extent,
however, that natural person credit
union service organization or Corporate
CUSO submissions may contain or
consist of data or information not
subject to an applicable FOIA
exemption, for example, an entity’s
name, address, or other publicly
available information, that data or
information would be releasable under
FOIA.
Further, pursuant to approved
Corporate CUSO activities, as found on
the agency Web site, all Corporate
CUSOs engaged in a particular approved
activity must currently provide NCUA
with quarterly and annual reports. Most
of the reporting required by the Proposal
is currently required by NCUA via the
agency Web site. The Board is adopting
the proposed changes to this section.
9. Section 704.14—Representation
The Proposal clarified the provisions
in the current regulation pertaining to
the qualifications required of a
Corporate’s directors, and specified that
any candidate for a position on the
board of a Corporate must currently
hold a senior management position at a
member credit union and hold that
position at the time he or she is seated
on the board of a Corporate. The Board
received no comments in opposition to
this proposed changed and is adopting
it as proposed.
55
U.S.C. 552(b)(4).
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10. Section 704.15—Audit and reporting
requirements
comments on these changes and is
adopting them as proposed.
The Proposal made technical changes
to this section by eliminating dates that
are no longer relevant and corrected a
typographical error. The Board received
no comment on these changes and is
adopting them as proposed.
15. Appendix C to Part 704—Risk-Based
Capital Credit Risk-Weight Categories
11. Section 704.18—Fidelity bond
coverage
The Proposal changed the measure in
this section from core capital to Tier 1
capital, consistent with the definitional
changes discussed above. The Board
received no comments on this change
and is adopting it as proposed.
12. Section 704.21—Enterprise risk
management (ERM)
The Proposal removed the minimum
education and background requirements
in this section applicable to an
independent risk management expert.
The Board received two comments,
which advocated that this entire section
be the subject of guidance, rather than
included in the regulations. The Board
disagrees with these comments and
believes ERM should be addressed
formally through regulation. Without
emphasis placed on a strong ERM
program, Corporates may be practicing
good risk management on an exposureby-exposure basis, but they may not be
paying close enough attention to the
aggregation of exposures across the
entire institution. A Corporate must
measure and understand all the
individual risks associated with its
various business components, and also
understand how they interact
dynamically. Accordingly, the Board is
adopting the changes in this section as
proposed.
13. Appendix A to Part 704—Capital
Prioritization and Model Forms
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The Proposal removed expired forms
and redesignated the remaining forms as
A–D. The Proposal also removed a
sentence from the introductory note to
current Model Form G, redesignated as
Model Form C, to clarify that in some
instances previously issued ‘‘paid-in
capital’’ may not be considered PCC.
The Board received no comments on
these changes and is adopting them as
proposed.
14. Appendix B to Part 704—Expanded
Authorities and Requirements
Consistent with the earlier discussion
regarding the simplification of terms
relating to capital, the Proposal
substituted ‘‘leverage ratio’’ for ‘‘capital
ratio’’ and ‘‘total capital’’ for ‘‘capital’’
in this appendix. The Board received no
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The Proposal removed references to
assets and activities that are not
consistent with the regular business
activities of Corporates. The Board
received no comments on these changes
and is adopting them as proposed.
III. Regulatory Procedures
1. Regulatory Flexibility Act
The Regulatory Flexibility Act
requires NCUA to prepare an analysis of
any significant economic impact a
regulation may have on a substantial
number of small entities (primarily
those under $50 million in assets).6 This
final rule only affects Corporates, all of
which have more than $50 million in
assets. Furthermore, the final rule
consists primarily of technical and
clarifying amendments. Accordingly,
NCUA certifies the rule will not have a
significant economic impact on a
substantial number of small credit
unions.
2. Paperwork Reduction Act
The Paperwork Reduction Act of 1995
(PRA) applies to rulemakings in which
an agency by rule creates a new
paperwork burden or increases an
existing burden.7 For purposes of the
PRA, a paperwork burden may take the
form of a reporting or recordkeeping
requirement, both referred to as
information collections. Under the final
rule, a Corporate with an investment in
or loan to a Corporate CUSO will need
to revise the current agreement it has
with the Corporate CUSO to provide
that the Corporate CUSO will prepare
and submit basic or expanded reports
directly to NCUA and, if applicable, the
appropriate SSA.
Currently, there are 13 Corporates and
approximately 16 Corporate CUSOs, 13
of which provide the complex or highrisk services that require expanded
reporting. The information collection
burdens imposed, on an annual basis,
are analyzed below.
Changing the written agreement
relating to reports to NCUA.
Frequency of response: One-time.
Initial hour burden: 4.
4 hours × 13 = 52 hours.
Initial Corporate CUSO reporting to
NCUA and SSA—basic information.
Frequency of response: One-time.
Initial hour burden: 0.5.
0.5 hours × 16 = 8 hours.
65
U.S.C. 603(a); 12 U.S.C. 1787(c)(1).
U.S.C. 3507(d); 5 CFR part 1320.
7 44
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25935
Initial Corporate CUSO reporting to
NCUA and SSA—expanded
information.
Frequency of response: One-time.
Initial hour burden: 3.
3 hours × 13 = 39 hours.
Annual Corporate CUSO reporting to
NCUA and SSA—expanded
information.
Frequency of response: Annual.
Annual hour burden: 3.
3 hours × 13 = 39 hours.
As required by the PRA, NCUA
submitted a copy of this Proposal to
OMB for its review and approval.
3. Executive Order 13132
Executive Order 13132 encourages
independent regulatory agencies to
consider the impact of their actions on
state and local interests. NCUA, an
independent regulatory agency as
defined in 44 U.S.C. 3502(5), voluntarily
complies with the executive order to
adhere to fundamental federalism
principles. The final rule does not have
substantial direct effects 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. NCUA has,
therefore, determined that this final rule
does not constitute a policy that has
federalism implications for purposes of
the executive order.
4. Assessment of Federal Regulations
and Policies on Families
NCUA has determined that this final
rule will not affect family well-being
within the meaning of section 654 of the
Treasury and General Government
Appropriations Act, 1999, Public Law
105–277, 112 Stat. 2681 (1998).
5. Small Business Regulatory
Enforcement Fairness Act
The Small Business Regulatory
Enforcement Fairness Act of 1996 8
(SBREFA) provides generally for
congressional review of agency rules. A
reporting requirement is triggered in
instances where NCUA issues a final
rule as defined by Section 551 of the
Administrative Procedure Act.9 NCUA
does not believe this final rule is a
‘‘major rule’’ within the meaning of the
relevant sections of SBREFA because it
only clarifies the mechanics of a number
of regulatory provisions and makes
several non-substantive, technical
corrections. NCUA has submitted the
rule to the Office of Management and
8 Public
95
Law 104–121, 110 Stat. 857 (1996).
U.S.C. 551.
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Budget for its determination in that
regard.
List of Subjects in 12 CFR Part 704
Credit unions, Corporate credit
unions, Reporting and recordkeeping
requirements.
By the National Credit Union
Administration Board on April 30, 2015.
Gerard Poliquin,
Secretary of the Board.
For the reasons discussed above, the
National Credit Union Administration
amends 12 CFR part 704 as follows:
PART 704—CORPORATE CREDIT
UNIONS
1. The authority citation for part 704
continues to read as follows:
■
Authority: 12 U.S.C. 1766(a), 1781, and
1789.
2. Amend § 704.2 by:
a. Removing the definitions of
‘‘Adjusted core capital’’ and ‘‘Assetbacked commercial paper program’’;
■ b. Revising the first two sentences of
the definition of ‘‘Available to cover
losses that exceed retained earnings’’;
■ c. Removing the definitions of
‘‘Capital’’, ‘‘Capital ratio’’, ‘‘Core
capital’’, ‘‘Core capital ratio’’, and
‘‘Credit-enhancing interest-only strip’’;
■ d. Revising the definition of
‘‘Derivatives’’;
■ e. Removing the definition of ‘‘Eligible
ABCP liquidity facility’’;
■ f. Revising the definitions of ‘‘Equity
investment’’, ‘‘Equity security’’, ‘‘Fair
value’’, and ‘‘Internal control’’;
■ g. Removing the two definitions of
‘‘Leverage ratio’’;
■ h. Adding a new definition, in
alphabetical order, for ‘‘Leverage ratio’’;
■ i. Revising the definitions of ‘‘Net
assets’’, ‘‘Net risk-weighted assets’’, and
‘‘Retained earnings’’;
■ j. Removing the definition of
‘‘Supplementary Capital’’;
■ k. Revising the definitions of ‘‘Tier 1
capital’’;
■ l. Adding a definition, in alphabetical
order, for ‘‘Tier 1 risk-based capital
ratio’’;
■ m. Revising the definition of ‘‘Tier 2
capital’’; and
■ n. Revising the definition of ‘‘Total
capital’’.
The revisions and additions read as
follows:
tkelley on DSK3SPTVN1PROD with RULES
■
■
§ 704.2
Definitions.
*
*
*
*
*
Available to cover losses that exceed
retained earnings means that the funds
are available to cover operating losses
realized, in accordance with generally
accepted accounting principles (GAAP),
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by the corporate credit union that
exceed retained earnings and equity
acquired in a combination. Likewise,
available to cover losses that exceed
retained earnings and perpetual
contributed capital (PCC) means that the
funds are available to cover operating
losses realized, in accordance with
GAAP, by the corporate credit union
that exceed retained earnings and equity
acquired in a combination and PCC.
* * *
*
*
*
*
*
Derivatives means a financial contract
which derives its value from the value
and performance of some other
underlying financial instrument or
variable, such as an index or interest
rate.
*
*
*
*
*
Equity investment means an
investment in an equity security and
other ownership interest, including, for
example, an investment in a partnership
or limited liability company.
Equity security means any security
representing an ownership interest in an
enterprise (for example, common,
preferred, or other capital stock) or the
right to acquire (for example, warrants
and call options) or dispose of (for
example, put options) an ownership
interest in an enterprise at fixed or
determinable prices. However, the term
does not include Federal Home Loan
Bank stock, convertible debt, or
preferred stock that by its terms either
must be redeemed by the issuing
enterprise or is redeemable at the option
of the investor.
*
*
*
*
*
Fair value means the price that would
be received to sell an asset, or paid to
transfer a liability, in an orderly
transaction between market participants
at the measurement date, as defined by
GAAP.
*
*
*
*
*
Internal control means the process,
established by the corporate credit
union’s board of directors, officers and
employees, designed to provide
reasonable assurance of reliable
financial reporting and safeguarding of
assets against unauthorized acquisition,
use, or disposition. A credit union’s
internal control structure generally
consists of five components: Control
environment; risk assessment; control
activities; information and
communication; and monitoring.
Reliable financial reporting refers to
preparation of Call Reports as well as
financial data published and presented
to members that meet management’s
financial reporting objectives. Internal
control over safeguarding of assets
against unauthorized acquisition, use, or
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disposition refers to prevention or
timely detection of transactions
involving such unauthorized access,
use, or disposition of assets which could
result in a loss that is material to the
financial statements.
*
*
*
*
*
Leverage ratio means the ratio of Tier
1 capital to moving daily average net
assets.
*
*
*
*
*
Net assets means total assets less
Central Liquidity Facility (CLF) stock
subscriptions, loans guaranteed by the
National Credit Union Share Insurance
Fund (NCUSIF), and member reverse
repurchase transactions. For its own
account, a corporate credit union’s
payables under reverse repurchase
agreements and receivables under
repurchase agreements may be netted
out if the GAAP conditions for offsetting
are met. Also, any amounts deducted in
calculating Tier 1 capital are also
deducted from net assets.
*
*
*
*
*
Net risk-weighted assets means riskweighted assets less CLF stock
subscriptions, CLF loans guaranteed by
the NCUSIF, and member reverse
repurchase transactions. For its own
account, a corporate credit union’s
payables under reverse repurchase
agreements and receivables under
repurchase agreements may be netted
out if the GAAP conditions for offsetting
are met. Also, any amounts deducted in
calculating Tier 1 capital are also
deducted from net risk-weighted assets.
*
*
*
*
*
Retained earnings means undivided
earnings, regular reserve, reserve for
contingencies, supplemental reserves,
reserve for losses, and other
appropriations from undivided earnings
as designated by management or NCUA.
*
*
*
*
*
Tier 1 capital means the sum of
paragraphs (1) through (4) of this
definition from which paragraphs (5)
through (9) of this definition are
deducted:
(1) Retained earnings;
(2) Perpetual contributed capital;
(3) The retained earnings of any
acquired credit union, or of an
integrated set of activities and assets,
calculated at the point of acquisition, if
the acquisition was a mutual
combination;
(4) Minority interests in the equity
accounts of CUSOs that are fully
consolidated;
(5) Deduct the amount of the
corporate credit union’s intangible
assets that exceed one half percent of its
moving daily average net assets
(however, NCUA may direct the
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corporate credit union to add back some
of these assets on NCUA’s own
initiative, by petition from the
applicable state regulator, or upon
application from the corporate credit
union);
(6) Deduct investments, both equity
and debt, in unconsolidated CUSOs;
(7) Deduct an amount equal to any
PCC or NCA that the corporate credit
union maintains at another corporate
credit union;
(8) Beginning on October 20, 2016,
and ending on October 20, 2020, deduct
any amount of PCC that causes PCC
minus retained earnings, all divided by
moving daily net average assets, to
exceed two percent; and
(9) Beginning after October 20, 2020,
deduct any amount of PCC that causes
PCC to exceed retained earnings.
Tier 1 risk-based capital ratio means
the ratio of Tier 1 capital to the moving
monthly average net risk-weighted
assets.
Tier 2 capital means the sum of
paragraphs (1) through (4) of this
definition:
(1) Nonperpetual capital accounts, as
amortized under § 704.3(b)(3);
(2) Allowance for loan and lease
losses calculated under GAAP to a
maximum of 1.25 percent of riskweighted assets;
(3) Any PCC deducted from Tier 1
capital; and
(4) Forty-five percent of unrealized
gains on available-for-sale equity
securities with readily determinable fair
values. Unrealized gains are unrealized
holding gains, net of unrealized holding
losses, calculated as the amount, if any,
by which fair value exceeds historical
cost. NCUA may disallow such
inclusion in the calculation of Tier 2
capital if NCUA determines that the
securities are not prudently valued.
*
*
*
*
*
Total capital means the sum of Tier
1 capital and Tier 2 capital, less the
corporate credit union’s equity
investments not otherwise deducted
when calculating Tier 1 capital.
*
*
*
*
*
■ 3. Amend § 704.3 by revising
paragraphs (b)(5), (c)(3), and (e)(3)(i) and
removing paragraph (f)(4) to read as
follows:
§ 704.3
Corporate credit union capital.
tkelley on DSK3SPTVN1PROD with RULES
*
*
*
*
*
(b) * * *
(5) Redemption. A corporate credit
union may redeem NCAs prior to
maturity or prior to the end of the notice
period only if it meets its minimum
required capital and net economic value
ratios after the funds are redeemed and
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only with the prior approval of NCUA
and, for state chartered corporate credit
unions, the applicable state regulator.
*
*
*
*
*
(c) * * *
(3) Callability. A corporate credit
union may call PCC instruments only if
it meets its minimum required capital
and net economic value ratios after the
funds are called and only with the prior
approval of the NCUA and, for state
chartered corporate credit unions, the
applicable state regulator. PCC accounts
are callable on a pro-rata basis across an
issuance class.
*
*
*
*
*
(e) * * *
(3) * * * (i) Notwithstanding the
definitions of Tier 1 capital and Tier 2
capital in paragraph (d) of this section,
NCUA may find that a particular asset
or Tier 1 capital or Tier 2 capital
component has characteristics or terms
that diminish its contribution to a
corporate credit union’s ability to absorb
losses, and NCUA may require the
discounting or deduction of such asset
or component from the computation of
Tier 1 capital, Tier 2 capital, or total
capital.
*
*
*
*
*
■ 4. Amend § 704.5 by revising
paragraph (j) to read as follows:
§ 704.5
Investments.
*
*
*
*
*
(j) Grandfathering. A corporate credit
union’s authority to hold an investment
is governed by the regulation in effect at
the time of purchase. However, all
grandfathered investments are subject to
the other requirements of this part.
■ 5. Amend § 704.6 by revising
paragraphs (c), (d), and (e) to read as
follows:
§ 704.6
Credit risk management.
*
*
*
*
*
(c) Issuer concentration limits—(1)
General rule. The aggregate value
recorded on the books of the corporate
credit union of all investments in any
single obligor is limited to 25 percent of
total capital or $5 million, whichever is
greater.
(2) Exceptions. (i) Investments in one
obligor where the remaining maturity of
all obligations is less than 30 days are
limited to 50 percent of total capital;
(ii) Investments in credit card master
trust asset-backed securities are limited
to 50 percent of total capital in any
single obligor;
(iii) Aggregate investments in
repurchase and securities lending
agreements with any one counterparty
are limited to 200 percent of total
capital;
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25937
(iv) Investments in non-money market
registered investment companies are
limited to 50 percent of total capital in
any single obligor;
(v) Investments in money market
registered investment companies are
limited to 100 percent of total capital in
any single obligor; and
(vi) Investments in corporate CUSOs
are subject to the limitations of section
11 of this part.
(d) Sector concentration limits. (1) A
corporate credit union must establish
sector limits based on the value
recorded on the books of the corporate
credit union that do not exceed the
following maximums:
(i) Mortgage-backed securities
(inclusive of commercial mortgagebacked securities)—the lower of 1000
percent of total capital or 50 percent of
assets;
(ii) Commercial mortgage-backed
securities—the lower of 300 percent of
total capital or 15 percent of assets;
(iii) Federal Family Education Loan
Program student loan asset-backed
securities—the lower of 1000 percent of
total capital or 50 percent of assets;
(iv) Private student loan asset-backed
securities—the lower of 500 percent of
total capital or 25 percent of assets;
(v) Auto loan/lease asset-backed
securities—the lower of 500 percent of
total capital or 25 percent of assets;
(vi) Credit card asset-backed
securities—the lower of 500 percent of
total capital or 25 percent of assets;
(vii) Other asset-backed securities not
listed in paragraphs (d)(1)(ii) through
(vi) of this section—the lower of 500
percent of total capital or 25 percent of
assets;
(viii) Corporate debt obligations—the
lower of 1000 percent of total capital or
50 percent of assets; and
(ix) Municipal securities—the lower
of 1000 percent of total capital or 50
percent of assets.
(2) Registered investment
companies—A corporate credit union
must limit its investment in registered
investment companies to the lower of
1000 percent of total capital or 50
percent of assets. In addition to
applying the limit in this paragraph, a
corporate credit union must also
include the underlying assets in each
registered investment company in the
relevant sectors described in paragraph
(d)(1) of this section when calculating
those sector limits.
(3) A corporate credit union must
limit its aggregate holdings in any
investments not described in paragraphs
(d)(1) or (2) of this section to the lower
of 100 percent of total capital or 5
percent of assets. The NCUA may
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approve a higher percentage in
appropriate cases.
(4) Investments in other federally
insured credit unions, deposits and
federal funds investments in other
federally insured depository
institutions, and investment repurchase
agreements are excluded from the
concentration limits in paragraphs
(d)(1), (2), and (3) of this section.
(e) Corporate debt obligation
subsector limits. In addition to the
limitations in paragraph (d)(1)(viii) of
this section, a corporate credit union
must not exceed the lower of 200
percent of total capital or 10 percent of
assets in any single North American
Industry Classification System (NAICS)
industry sector based on the value
recorded on the books of the corporate
credit union. If a corporation in which
a corporate credit union is interested in
investing does not have a readily
ascertainable NAICS classification, a
corporate credit union will use its
reasonable judgment in assigning such a
classification. NCUA may direct,
however, that the corporate credit union
change the classification.
*
*
*
*
*
■ 6. Amend § 704.7 by revising
paragraph (c) to read as follows:
§ 704.7
Lending.
tkelley on DSK3SPTVN1PROD with RULES
*
*
*
*
*
(c) Loans to members—(1) Credit
unions. (i) The maximum aggregate
amount in unsecured loans and lines of
credit from a corporate credit union to
any one member credit union, excluding
pass-through and guaranteed loans from
the CLF and the NCUSIF, must not
exceed 50 percent of the corporate
credit union’s total capital.
(ii) The maximum aggregate amount
in secured loans (excluding those
secured by shares or marketable
securities and member reverse
repurchase transactions) and unsecured
loans (excluding pass-through and
guaranteed loans from the CLF and the
NCUSIF) and lines of credit from a
corporate credit union to any one
member credit union must not exceed
150 percent of the corporate credit
union’s total capital.
(2) Corporate CUSOs. Any loan or line
of credit from a corporate credit union
to a corporate CUSO must comply with
§ 704.11.
(3) Other members. The maximum
aggregate amount of loans and lines of
credit from a corporate credit union to
any other one member must not exceed
15 percent of the corporate credit
union’s total capital plus pledged
shares.
*
*
*
*
*
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7. Amend § 704.8 by revising
paragraph (j) to read as follows:
■
§ 704.8
Asset and liability management.
*
*
*
*
*
(j) Limit breaches. (1)(i) If a corporate
credit union’s decline in NEV, base case
NEV ratio, or any NEV ratio calculated
under paragraph (d) of this section
exceeds established or permitted limits,
or the corporate is unable to satisfy the
tests in paragraphs (f) or (g) of this
section, the operating management of
the corporate must immediately report
this information to its board of directors
and ALCO; and
(ii) If the corporate credit union
cannot adjust its balance sheet to meet
the requirements of paragraphs (d), (f),
or (g) of this section within 10 calendar
days after detection by the corporate,
the corporate must notify in writing the
Director of the Office of National
Examinations and Supervision.
(2) If any breach described in
paragraph (j)(1) of this section persists
for 30 or more calendar days, the
corporate credit union:
(i) Must immediately submit a
detailed, written action plan to the
NCUA that sets forth the time needed
and means by which it intends to come
into compliance and, if the NCUA
determines that the plan is
unacceptable, the corporate credit union
must immediately restructure its
balance sheet to bring the exposure back
within compliance or adhere to an
alternative course of action determined
by the NCUA; and
(ii) If presently categorized as
adequately capitalized or well
capitalized for prompt corrective action
purposes, and the breach was of
paragraph (d) of this section, the
corporate credit union will immediately
be recategorized as undercapitalized
until coming into compliance, and
(iii) If presently categorized as less
than adequately capitalized for prompt
corrective action purposes, and the
breach was of paragraph (d) of this
section, the corporate credit union will
immediately be downgraded one
additional capital category.
*
*
*
*
*
■ 8. Amend § 704.9 by revising
paragraph (b) to read as follows:
§ 704.9
Liquidity management.
*
*
*
*
*
(b) Borrowing limits. A corporate
credit union may borrow up to 10 times
its total capital.
(1) Secured borrowings. A corporate
credit union may borrow on a secured
basis for liquidity purposes, but the
maturity of the borrowing may not
exceed 180 days. Only a corporate credit
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union with Tier 1 capital in excess of
five percent of its moving daily average
net assets (DANA) may borrow on a
secured basis for nonliquidity purposes,
and the outstanding amount of secured
borrowing for nonliquidity purposes
may not exceed an amount equal to the
difference between the corporate credit
union’s Tier 1 capital and five percent
of its moving DANA.
(2) Exclusions. CLF borrowings and
borrowed funds created by the use of
member reverse repurchase agreements
are excluded from the limit in paragraph
(b)(1) of this section.
■ 9. Amend § 704.11 by:
■ a. Revising paragraphs (b)(1) and (2)
and (e)(1) introductory text;
■ b. Removing paragraph (e)(2);
■ c. Redesignating paragraph (e)(3) as
paragraph (e)(2);
■ d. Redesignating paragraphs (g)(4)
through (7) as paragraphs (g)(5) through
(8), respectively; and
■ e. Adding new paragraph (g)(4).
The revisions and addition read as
follows:
§ 704.11 Corporate Credit Union Service
Organizations (Corporate CUSOs).
*
*
*
*
*
(b) Investment and loan limitations.
(1) The aggregate of all investments in
member and non-member corporate
CUSOs that a corporate credit union
may make must not exceed 15 percent
of a corporate credit union’s total
capital.
(2) The aggregate of all investments in
and loans to member and nonmember
corporate CUSOs a corporate credit
union may make must not exceed 30
percent of a corporate credit union’s
total capital. A corporate credit union
may lend to member and nonmember
corporate CUSOs an additional 15
percent of total capital if the loan is
collateralized by assets in which the
corporate has a perfected security
interest under state law.
*
*
*
*
*
(e) Permissible activities. (1) A
corporate CUSO must agree to limit its
activities to:
*
*
*
*
*
(g) * * *
(4) Will provide the reports as
required by § 712.3(d)(4) and (5) of this
chapter;
*
*
*
*
*
■ 10. Amend § 704.14 by revising
paragraphs (a)(2), (a)(9), and (e)(2) to
read as follows:
§ 704.14
Representation.
(a)* * *
(2) Only an individual who currently
holds the position of chief executive
officer, chief financial officer, chief
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operating officer, or treasurer/manager
at a member credit union, and will hold
that position at the time he or she is
seated on the corporate credit union
board if elected, may seek election or reelection to the corporate credit union
board;
*
*
*
*
*
(9) At least a majority of directors of
every corporate credit union, including
the chair of the board, must serve on the
corporate board as representatives of
natural person credit union members.
*
*
*
*
*
(e)* * *
(2) The provisions of § 701.14 of this
chapter apply to corporate credit
unions, except that where ‘‘Regional
Director’’ is used, read ‘‘Director of the
Office of National Examinations and
Supervision.’’
■ 11. Amend § 704.15 by revising
paragraph (a)(2)(iii) introductory text,
the first sentence of paragraph (b)(2),
and the first sentence of paragraph (d)(1)
to read as follows:
§ 704.15
Audit and reporting requirements.
(a) * * *
(2) * * *
(iii) An assessment by management of
the effectiveness of the corporate credit
union’s internal control structure and
procedures as of the end of the past
calendar year that must include the
following:
*
*
*
*
*
(b) * * *
(2) * * *The independent public
accountant who audits the corporate
credit union’s financial statements must
examine, attest to, and report separately
on the assertion of management
concerning the effectiveness of the
corporate credit union’s internal control
structure and procedures for financial
reporting.* * *
*
*
*
*
*
(d) * * *
(1)* * * Each corporate credit union
must establish a supervisory committee,
all of whose members must be
independent.* * *
*
*
*
*
*
§ 704.18
[Amended]
12. Amend § 704.18 by:
a. Removing the words ‘‘core capital
ratio’’ from the introductory text of
paragraph (e)(1) and adding in their
place ‘‘leverage ratio’’;
■ b. Removing the words ‘‘Core capital
ratio’’ from the table heading of
paragraph (e)(1) and adding in their
place ‘‘Leverage ratio’’; and
■ c. Removing the words ‘‘of core
capital’’ wherever they appear in the
table in paragraph (e)(1) and adding in
their place ‘‘of Tier 1 capital’’.
tkelley on DSK3SPTVN1PROD with RULES
■
■
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13. Amend § 704.21 by revising
paragraph (c) to read as follows:
■
§ 704.21
Enterprise risk management.
*
*
*
*
*
(c) The ERMC must include at least
one independent risk management
expert. The risk management expert
must have at least five years of
experience in identifying, assessing, and
managing risk exposures. This
experience must be commensurate with
the size of the corporate credit union
and the complexity of its operations.
The board of directors may hire the
independent risk management expert to
work full-time or part-time for the
ERMC or as a consultant for the ERMC.
*
*
*
*
*
Appendix A to Part 704—[Amended]
14. Amend Appendix A to part 704
by:
■ a. Removing Model Forms A, B, E, and
F and redesignating Model Forms C, D,
G, and H as Model Forms A, B, C, and
D, respectively; and
■ b. Removing the second sentence of
the note in newly redesignated Model
Form C.
■
Appendix B to Part 704—[Amended]
15. Amend Appendix B to part 704 by:
a. Removing the words ‘‘capital ratio’’
wherever they appear and adding in
their place ‘‘leverage ratio’’;
■ b. Removing the words ‘‘corporate
credit union’s capital’’ wherever they
appear and adding in their place
‘‘corporate credit union’s total capital’’;
■ c. Removing the words ‘‘25 percent of
capital’’ from paragraph (b)(3) of Part II
and adding in their place ‘‘25 percent of
total capital’’; and
■ d. Removing paragraph (e) from part
1.
■ 16. Amend Appendix C to part 704 by:
■ a. In part I(b):
■ (i) Revising paragraph (8) of the
definition of ‘‘Direct credit substitute’’;
■ (ii) Revising paragraph (8) of the
definition of ‘‘Recourse’’; and
■ (iii) Revising paragraph (2) of the
definition of ‘‘Residual interest’’;
■ b. In part II(a), revising paragraph
(4)(xiii);
■ c. In part II(b):
■ (i) Removing paragraphs (1)(iv) and
(4);
■ (ii) Redesignating paragraphs (5) and
(6) as paragraphs (4) and (5),
respectively;
■ (iii) Revising newly redesignated
paragraph (4)(i); and
■ (iv) Removing newly redesignated
paragraph (5)(v)(C).
■ d. In part II(c):
■ (i) Removing paragraph (2)(i);
■
■
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25939
(ii) Redesignating paragraphs (2)(ii)
and (iii) as paragraphs (2)(i) and (ii),
respectively; and
■ (iii) Revising newly redesignated
paragraph (2)(i) and the introductory
text of newly redesignated paragraph
(2)(ii).
The revisions read as follows:
■
Appendix C to Part 704—Risk-Based
Capital Credit Risk-Weight Categories
*
*
*
*
*
Part I: Introduction
*
*
*
*
*
*
*
(b) Definitions
*
*
*
Direct credit substitute* * *
(8) Liquidity facilities that provide support
to asset-backed commercial paper.
*
*
*
*
*
Recourse * * *
(8) Liquidity facilities that provide support
to asset-backed commercial paper.
*
*
*
*
*
Residual interest* * *
(2) Residual interests generally include
spread accounts, cash collateral accounts,
retained subordinated interests (and other
forms of overcollateralization), and similar
assets that function as a credit enhancement.
Residual interests further include those
exposures that, in substance, cause the
corporate credit union to retain the credit
risk of an asset or exposure that had qualified
as a residual interest before it was sold.
*
*
*
*
*
Part II: Risk-Weightings
(a) On-Balance Sheet Assets
*
*
*
*
*
(4)* * *
(xiii) Interest-only strips receivable;
*
*
*
*
*
(b) Off-Balance Sheet Activities
*
*
*
*
*
(4) * * * (i) Unused portions of
commitments with an original maturity of
one year or less;
*
*
*
*
*
(c) Recourse Obligations, Direct Credit
Substitutes, and Certain Other Positions
*
*
*
*
*
(2)(i) Other residual interests. A corporate
credit union must maintain risk-based capital
for a residual interest equal to the face
amount of the residual interest, even if the
amount of risk-based capital that must be
maintained exceeds the full risk-based
capital requirement for the assets transferred.
(ii) Residual interests and other recourse
obligations. Where a corporate credit union
holds a residual interest and another recourse
obligation in connection with the same
transfer of assets, the corporate credit union
must maintain risk-based capital equal to the
greater of:
*
*
*
*
*
[FR Doc. 2015–10546 Filed 5–5–15; 8:45 am]
BILLING CODE 7535–01–P
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Agencies
[Federal Register Volume 80, Number 87 (Wednesday, May 6, 2015)]
[Rules and Regulations]
[Pages 25932-25939]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-10546]
[[Page 25932]]
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NATIONAL CREDIT UNION ADMINISTRATION
12 CFR Part 704
RIN 3133-AE43
Corporate Credit Unions
AGENCY: National Credit Union Administration (NCUA).
ACTION: Final rule.
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SUMMARY: The NCUA Board (Board) is amending its regulations governing
corporate credit unions (Corporates) and the scope of their activities.
The amendments clarify the mechanics of a number of regulatory
provisions and make several non-substantive, technical corrections.
DATES: This final rule is effective June 5, 2015.
FOR FURTHER INFORMATION CONTACT: John Sozanski, Supervision Analyst,
Office of National Examinations and Supervision, 1775 Duke Street,
Alexandria, Virginia 22314-3428 or telephone (703) 518-6640; or Justin
M. Anderson, Senior Staff Attorney, Office of General Counsel, 1775
Duke Street, Alexandria, Virginia 22314-3428 or telephone (703) 518-
6540.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Background
II. Summary of Comments and Final Amendments
III. Regulatory Procedures
I. Background
In 2010, in response to the preceding financial crisis, the Board
comprehensively revised NCUA's regulations governing Corporates and
their activities.\1\ The Board also amended those regulations twice
more in 2011.\2\ In November 2014, the Board issued a proposed rule
(Proposal) to further amend the Corporate regulations by clarifying or
modifying several provisions and making several non-substantive,
technical corrections.\3\ The Proposal not only clarified and
streamlined the Corporate regulations, but it also enhanced their
readability and provided a degree of regulatory relief to Corporates.
This final rule adopts all of the amendments in the Proposal, with one
change.
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\1\ 12 CFR part 704; 75 FR 64786 (Oct. 20, 2010).
\2\ 76 FR 23861 (Apr. 29, 2011); 76 FR 79531 (Dec. 22, 2011).
The Board also made technical changes to the regulations in 2011 and
2013. 76 FR 16235 (Mar. 23, 2011); 78 FR 77563 (Dec. 24, 2013).
\3\ 79 FR 65353 (Nov. 4, 2014).
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II. Summary of Comments and Final Amendments
In response to the Proposal, NCUA received 20 comments, nine from
Corporates, 10 from trade associations and state credit union leagues,
and one from a natural person credit union. All of the commenters
generally supported the clarifications and technical changes. As
discussed more fully below, however, most commenters suggested
additional changes beyond the scope of the Proposal or commented on
provisions of the current Corporate regulations that were not addressed
in the Proposal. The Board adopts the Proposal as issued with only one
modification.
1. Section 704.2--Definitions
In the definitions section, the Board deleted several terms it
determined were duplicative and redefined a number of other terms to
minimize confusion and enhance the effectiveness of the Corporate
regulations. The Board removed the definitions of ``adjusted core
capital'' and ``core capital'' and incorporated them into the
definition of ``Tier 1 capital.'' The Board also deleted the term
``capital'' when that term was used as a specific measure, and replaced
it with the term ``total capital.'' The Board removed the definition of
``supplementary capital'' and incorporated it into the definition of
``Tier 2 capital.'' The Board also eliminated the definitions of
certain terms in Appendix C to part 704, which are no longer relevant
to Corporates. Finally, the Board modified a number of additional
definitions to provide greater clarity or to make them consistent with
other NCUA regulations.
In response to these proposed changes, NCUA received one comment
that supported the proposed definition of retained earnings, stating
that the change would make it easier for the continuing credit union in
a merger situation to count retained earnings carried on the books of
the merging credit union. In addition, there were a number of comments
on definitions in the Corporate regulations that were outside the scope
of the Proposal. Specifically, 16 commenters objected to the
requirement that perpetual contributed capital (PCC) be discounted over
time from what may be counted as Tier 1 capital. This requirement,
which is in the current rule, was not the subject of any proposed
amendment. Commenters, however, stated that PCC is consistent with the
definition of ``Tier 1 capital'' or ``core capital'' as used by banking
regulators, the Securities and Exchange Commission, and the U.S.
Treasury, and thus questioned the rationale of requiring certain
amounts to be excluded from the calculation of Tier 1 Capital, as
discussed below. Some commenters suggested that the mandatory phase-out
of PCC would have the effect of altering a Corporate's Tier 1 Capital
after the specified dates, even though nothing substantive had changed
in the structure of the PCC account because of its nature as permanent
capital. Another commenter suggested that the rule be changed to
provide for a more explicit retained earnings requirement.
With respect to the comments on PCC and a more explicit retained
earnings requirement, the Board notes that these are outside the scope
of the Proposal. However, the Board notes that it was NCUA's intent,
with the adoption of the final Corporate regulations in 2010, to ensure
that the Corporates would never again present the sort of systemic risk
to the entire credit union system that the Corporates did in that time
period and which required NCUA to take extraordinary regulatory action.
An aspect of the 2010 Corporate regulations was to incent
Corporates to build greater reserves of retained earnings to absorb
potential losses. Retained earnings are considered to be the most
superior form of capital carried by a Corporate, as retained earnings
absorb losses without causing a corresponding loss to another party,
such as a natural person credit union that purchased contributed
capital from that Corporate. As referenced in the comment letters, part
704 contains provisions, effective in 2016, that limit the amount of
contributed capital, including PCC, which may be counted toward a
Corporate's regulatory capital. NCUA intended this provision to
encourage a Corporate to build its retained earnings. By increasing
retained earnings, a Corporate could count more contributed capital as
regulatory capital.
As noted by commenters, PCC has elements that are consistent with
Tier 1 capital. However, one distinguishing element of PCC is that it
is almost entirely sourced from member credit unions. Accordingly,
losses that deplete PCC would summarily impair investments made by
credit union members and their corresponding capital. This downstream
effect poses increased risk to the National Credit Union Share
Insurance Fund that capital sourced from external sources would not.
Should Corporates successfully raise meaningful amounts of capital from
external sources, the Board may consider easing the
[[Page 25933]]
restrictions on contributed capital in a future rulemaking.
The Board is finalizing the proposed amendments to the definitions
section and Appendix C to part 704 without change.
2. Section 704.3--Corporate credit union capital
The Proposal included amendments to Sec. 704.3(b)(5) and (c)(3)
regarding corporate capital. The proposed amendments clarified that
upon redeeming or calling nonperpetual capital accounts or PCC
instruments, a Corporate must continue to meet its minimum required
capital and net economic value ratios. These clarifications made the
provisions consistent with each other and with the terms and conditions
of contributed capital included in the Model Forms in Appendix A to
part 704. The Proposal also deleted Sec. 704.3(f)(4), as that
provision refers to a regulatory requirement that Corporates were to
have complied with before December 20, 2011.
NCUA received only one comment on this section. That commenter
requested that the rule be modified to provide enhanced guidance to
Corporates on how to handle the redemption of PCC. The Board notes that
this comment is outside the scope of the Proposal. Further, the Board
does not believe it is appropriate to consider issuing a proposed rule
to address this comment at this time. However, if Corporates continue
to satisfactorily rebuild retained earnings that were depleted during
the credit crisis of 2007, then NCUA may consider revisiting this issue
in the future.
The Board is finalizing the proposed amendments to this section as
proposed.
3. Section 704.5--Investments
The Proposal included an amendment to Sec. 704.5(j) regarding
grandfathering certain Corporate investments. This amendment clarified
that, while a Corporate may continue to hold an investment that was
permissible at the time of purchase but later became impermissible
because of a regulatory change, the investment is still subject to all
other sections of part 704 that apply to investments, including those
pertaining to credit risk management, asset and liability management,
liquidity management, and investment action plans.
NCUA received no comments on this section and is adopting the
amendment as proposed.
4. Section 704.6--Credit risk management
The Proposal provided clarification on how to value investments
when calculating whether a Corporate is in compliance with various
sector and issuer limits. NCUA received one comment on this section,
which suggested that the Board should amend the rule to provide an
exception to the single issuer limit for auto and equipment dealer
floor plan asset-backed securities so that such securities would
receive treatment similar to credit card master trust asset-backed
securities. This comment is outside the scope of the Proposal, and the
Board does not believe such an exception is warranted as auto and
equipment asset-backed security issuances are widely available. The
Board is adopting the amendments to this section as proposed.
5. Section 704.7--Lending
Section 704.7(c) currently restricts a Corporate's unsecured member
lending to 50 percent of capital and its secured member lending to 100
percent of capital. The Proposal provided greater flexibility to
Corporates by permitting them to lend on a secured basis up to 150
percent of their total capital to any individual credit union borrower.
No commenters opposed this change, but eight commenters recommended
that NCUA include an additional exclusion from the lending limit for a
bridge loan made to a natural person member credit union in connection
with that credit union receiving approval for a loan from the Central
Liquidity Facility (CLF). All of the commenters who commented on this
aspect of the Proposal supported a ten-day maturity limit on these
bridge loans.
The Board agrees with these commenters and intends to provide an
exclusion from the lending limit for bridge loans related to CLF loans.
As this issue was not included in the Proposal, the Board, in
compliance with the Administrative Procedure Act, will issue a
subsequent notice of proposed rulemaking to effect this change.
6. Section 704.8--Asset and liability management
Current Sec. 704.8 establishes requirements to identify, measure,
monitor, and control risk in the management of assets and liabilities.
These requirements include interest rate sensitivity analyses, net
interest income modeling, and limiting the weighted average life of
assets. Current Sec. 704.8(j) also imposes reporting and other
requirements on Corporates that experience a decline in net economic
value (NEV) or other NEV-related measures beyond certain thresholds.
The Proposal included an amendment to clarify that if a Corporate
experiences such NEV-related breaches, but is able to adjust its
balance sheet to meet required regulatory limits within 10 days, then
the Corporate will not be considered to be in violation of the
regulation. The Proposal clarified that a regulatory violation would
exist only if a Corporate could not timely resolve a breach.
NCUA received several comments on this section. One commenter
suggested that Corporates should be given more than 10 days to complete
an adjustment to its balance sheet to satisfy the requirements of Sec.
704.8(d), (f), and (g). This commenter suggested a 60-day grace period
and an opportunity to re-test at the expiration of the grace period.
The Board recognizes that, through the normal course of business, a
Corporate may temporarily experience an NEV-related breach. Often, a
Corporate can resolve the breach within a timely manner, which is why
the current regulation permits a Corporate to resolve any breach within
10 days prior to further regulatory action being taken. The Board is
concerned that lengthening the grace period could allow a Corporate to
circumvent the purpose of the regulation, which is to address breaches
that are not resolved in a timely manner. The Board, therefore,
continues to believe the proposed 10-day grace period is appropriate.
In addition, four commenters suggested that the rule be expanded to
provide for treatment of government securities, including agency
securities, as cash equivalent for purposes of assigning weighted
average life (WAL) values, resulting in such securities receiving a
zero WAL valuation. The Board recognizes that government-guaranteed
securities present a different risk profile than other investments that
Corporates are permitted to purchase. However, these securities can
pose risks to a Corporate. Specifically, government-issued or
government-guaranteed securities may have longer-dated maturities that
do not match a Corporate's funding structure. In addition, they are
subject to prepayment, extension, and interest rate risks. Given those
risks, the Board does not believe that government-issued or government-
guaranteed securities merit a cash equivalent designation for purposes
of assigning WAL values. It is also important to note that government-
guaranteed securities (when compared to non-government-issued or non-
government-guaranteed securities) are allowed a preferential factoring
for
[[Page 25934]]
purposes of calculating WAL tests pursuant to Sec. 704.8.
Four commenters also suggested that NCUA should anticipate that
certain government-sponsored enterprises will increasingly require that
investors in their mortgage-backed securities agree to certain credit-
risk sharing features. These commenters suggested that NCUA should
amend its regulations to specifically allow Corporates to acquire these
types of investments. This issue is outside the scope of the Proposal,
but the Board will continue to consider these comments for future
rulemakings.
7. Section 704.9--Liquidity management
Section 704.9(b) currently restricts a Corporate's general
borrowing limit to the lower of 10 times capital or 50 percent of
capital and shares. The Proposal included several changes to this
section. First, the Proposal changed the limit to 10 times total
capital, consistent with the definitional changes discussed above.
Second, the Proposal removed the restriction of 50 percent of capital
and shares. Finally, the Proposal increased the secured borrowing
maturity limit from 30 days to 120 days to accommodate seasonality in
the borrowing patterns of member credit unions.
Fifteen commenters requested that the borrowing maturity limit be
increased beyond 120 days. Most of the commenters addressing this topic
advocated an extension of one to two years. In addition, one commenter
advocated the elimination of any specific maturity limit. Another
commenter sought to tie the maturity limit to the use of highly liquid
collateral. Finally, several commenters argued for a system that would
allow a Corporate to request a waiver from the borrowing limits.
The Board has considered all of these comments and has determined
to extend the maturity limit to 180 days. The Board believes this
additional extension will not materially increase risk, yet will
provide the corporate greater flexibility in accommodating the
fluctuation of its share base attributed to seasonal changes in member
credit union liquidity demands. For example, credit unions incur
routine deposit and withdrawal patterns associated with payrolls and
consumer spending that can occur on an intra-month or multi-month
basis. This seasonality of behavior has a direct impact on credit union
funds held on deposit with the corporate. The Board believes the
extension of the maturity limit will allow corporate credit unions to
better serve the unique attributes of their members.
One commenter recommended that the Board remove the current
limitation on the amount of secured borrowings permitted for non-
liquidity purposes, and to simply allow such borrowings as long as all
capital ratios continue to exceed the levels required to remain well
capitalized. The Board believes that Corporates should be limited in
their ability to borrow on a secured basis for other than liquidity
purposes. The borrowing limitation is intended to preclude leveraging
for investment purposes, which can introduce greater risk when markets
encounter disruption. Secured lenders require collateral to be valued
at market, and they impose an additional margin to ensure the borrowing
is fully and continuously collateralized. Market shocks can create
short-term market values that are significantly below long-term
intrinsic values, which can magnify potential losses if the creditor
seizes the collateral and sells it as permitted by the lending
agreements. The Board is adopting the amendments as proposed, except as
noted above.
8. Section 704.11--Corporate credit union service organizations
(Corporate CUSOs)
The Proposal included several amendments to this section of the
regulations. First, the Proposal eliminated dates included in Sec.
704.11(e) that have since passed and are no longer relevant. Second,
the Proposal added a requirement to Sec. 704.11(g) that a Corporate
CUSO provide to NCUA and, if applicable, the appropriate state
supervisory authority (SSA), the kinds of reports required to be
produced and submitted by natural person credit union service
organizations pursuant to a recent revision to NCUA's natural person
credit union service organization rule.\4\
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\4\ 12 CFR 712.3(d)(4) and (5); 78 FR 72537 (Dec. 3, 2013).
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Three commenters opposed this provision, all of whom challenged
NCUA's authority to impose this requirement. Two of these commenters
noted that the effect of this provision is likely to place CUSOs at a
competitive disadvantage relative to other service providers. One
commenter noted that this provision could expose a CUSO to the public
release of confidential materials should its report become the subject
of a Freedom of Information Act (FOIA) request. One commenter requested
further clarification in the rule of the term ``level of activity of
each credit union'' which the commenter mistakenly asserted appears in
this section. One commenter, while not opposing the substance of this
provision, opposed NCUA's use of incorporation by reference to the
natural person credit union service organization rule.
The Board recognizes the concerns raised by commenters and notes
that FOIA, as well as applicable FOIA exemptions, apply to any data or
information submitted by natural person credit union service
organizations and Corporate CUSOs to NCUA. The Board anticipates that
natural person credit union service organization and Corporate CUSO
submissions often will contain or consist of ``trade secrets and
commercial or financial information obtained from a person [that is]
privileged or confidential.'' \5\ This type of information generally is
subject to withholding under exemption 4 of FOIA. In addition,
information that is ``contained in or related to examination,
operating, or condition reports prepared by, on behalf of, or for the
use of an agency responsible for the regulation or supervision of
financial institutions'' is generally subject to withholding under
exemption 8 of FOIA. To the extent, however, that natural person credit
union service organization or Corporate CUSO submissions may contain or
consist of data or information not subject to an applicable FOIA
exemption, for example, an entity's name, address, or other publicly
available information, that data or information would be releasable
under FOIA.
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\5\ 5 U.S.C. 552(b)(4).
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Further, pursuant to approved Corporate CUSO activities, as found
on the agency Web site, all Corporate CUSOs engaged in a particular
approved activity must currently provide NCUA with quarterly and annual
reports. Most of the reporting required by the Proposal is currently
required by NCUA via the agency Web site. The Board is adopting the
proposed changes to this section.
9. Section 704.14--Representation
The Proposal clarified the provisions in the current regulation
pertaining to the qualifications required of a Corporate's directors,
and specified that any candidate for a position on the board of a
Corporate must currently hold a senior management position at a member
credit union and hold that position at the time he or she is seated on
the board of a Corporate. The Board received no comments in opposition
to this proposed changed and is adopting it as proposed.
[[Page 25935]]
10. Section 704.15--Audit and reporting requirements
The Proposal made technical changes to this section by eliminating
dates that are no longer relevant and corrected a typographical error.
The Board received no comment on these changes and is adopting them as
proposed.
11. Section 704.18--Fidelity bond coverage
The Proposal changed the measure in this section from core capital
to Tier 1 capital, consistent with the definitional changes discussed
above. The Board received no comments on this change and is adopting it
as proposed.
12. Section 704.21--Enterprise risk management (ERM)
The Proposal removed the minimum education and background
requirements in this section applicable to an independent risk
management expert. The Board received two comments, which advocated
that this entire section be the subject of guidance, rather than
included in the regulations. The Board disagrees with these comments
and believes ERM should be addressed formally through regulation.
Without emphasis placed on a strong ERM program, Corporates may be
practicing good risk management on an exposure-by-exposure basis, but
they may not be paying close enough attention to the aggregation of
exposures across the entire institution. A Corporate must measure and
understand all the individual risks associated with its various
business components, and also understand how they interact dynamically.
Accordingly, the Board is adopting the changes in this section as
proposed.
13. Appendix A to Part 704--Capital Prioritization and Model Forms
The Proposal removed expired forms and redesignated the remaining
forms as A-D. The Proposal also removed a sentence from the
introductory note to current Model Form G, redesignated as Model Form
C, to clarify that in some instances previously issued ``paid-in
capital'' may not be considered PCC. The Board received no comments on
these changes and is adopting them as proposed.
14. Appendix B to Part 704--Expanded Authorities and Requirements
Consistent with the earlier discussion regarding the simplification
of terms relating to capital, the Proposal substituted ``leverage
ratio'' for ``capital ratio'' and ``total capital'' for ``capital'' in
this appendix. The Board received no comments on these changes and is
adopting them as proposed.
15. Appendix C to Part 704--Risk-Based Capital Credit Risk-Weight
Categories
The Proposal removed references to assets and activities that are
not consistent with the regular business activities of Corporates. The
Board received no comments on these changes and is adopting them as
proposed.
III. Regulatory Procedures
1. Regulatory Flexibility Act
The Regulatory Flexibility Act requires NCUA to prepare an analysis
of any significant economic impact a regulation may have on a
substantial number of small entities (primarily those under $50 million
in assets).\6\ This final rule only affects Corporates, all of which
have more than $50 million in assets. Furthermore, the final rule
consists primarily of technical and clarifying amendments. Accordingly,
NCUA certifies the rule will not have a significant economic impact on
a substantial number of small credit unions.
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\6\ 5 U.S.C. 603(a); 12 U.S.C. 1787(c)(1).
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2. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (PRA) applies to rulemakings in
which an agency by rule creates a new paperwork burden or increases an
existing burden.\7\ For purposes of the PRA, a paperwork burden may
take the form of a reporting or recordkeeping requirement, both
referred to as information collections. Under the final rule, a
Corporate with an investment in or loan to a Corporate CUSO will need
to revise the current agreement it has with the Corporate CUSO to
provide that the Corporate CUSO will prepare and submit basic or
expanded reports directly to NCUA and, if applicable, the appropriate
SSA.
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\7\ 44 U.S.C. 3507(d); 5 CFR part 1320.
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Currently, there are 13 Corporates and approximately 16 Corporate
CUSOs, 13 of which provide the complex or high-risk services that
require expanded reporting. The information collection burdens imposed,
on an annual basis, are analyzed below.
Changing the written agreement relating to reports to NCUA.
Frequency of response: One-time.
Initial hour burden: 4.
4 hours x 13 = 52 hours.
Initial Corporate CUSO reporting to NCUA and SSA--basic
information.
Frequency of response: One-time.
Initial hour burden: 0.5.
0.5 hours x 16 = 8 hours.
Initial Corporate CUSO reporting to NCUA and SSA--expanded
information.
Frequency of response: One-time.
Initial hour burden: 3.
3 hours x 13 = 39 hours.
Annual Corporate CUSO reporting to NCUA and SSA--expanded
information.
Frequency of response: Annual.
Annual hour burden: 3.
3 hours x 13 = 39 hours.
As required by the PRA, NCUA submitted a copy of this Proposal to
OMB for its review and approval.
3. Executive Order 13132
Executive Order 13132 encourages independent regulatory agencies to
consider the impact of their actions on state and local interests.
NCUA, an independent regulatory agency as defined in 44 U.S.C. 3502(5),
voluntarily complies with the executive order to adhere to fundamental
federalism principles. The final rule does not have substantial direct
effects 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. NCUA has,
therefore, determined that this final rule does not constitute a policy
that has federalism implications for purposes of the executive order.
4. Assessment of Federal Regulations and Policies on Families
NCUA has determined that this final rule will not affect family
well-being within the meaning of section 654 of the Treasury and
General Government Appropriations Act, 1999, Public Law 105-277, 112
Stat. 2681 (1998).
5. Small Business Regulatory Enforcement Fairness Act
The Small Business Regulatory Enforcement Fairness Act of 1996 \8\
(SBREFA) provides generally for congressional review of agency rules. A
reporting requirement is triggered in instances where NCUA issues a
final rule as defined by Section 551 of the Administrative Procedure
Act.\9\ NCUA does not believe this final rule is a ``major rule''
within the meaning of the relevant sections of SBREFA because it only
clarifies the mechanics of a number of regulatory provisions and makes
several non-substantive, technical corrections. NCUA has submitted the
rule to the Office of Management and
[[Page 25936]]
Budget for its determination in that regard.
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\8\ Public Law 104-121, 110 Stat. 857 (1996).
\9\ 5 U.S.C. 551.
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List of Subjects in 12 CFR Part 704
Credit unions, Corporate credit unions, Reporting and recordkeeping
requirements.
By the National Credit Union Administration Board on April 30,
2015.
Gerard Poliquin,
Secretary of the Board.
For the reasons discussed above, the National Credit Union
Administration amends 12 CFR part 704 as follows:
PART 704--CORPORATE CREDIT UNIONS
0
1. The authority citation for part 704 continues to read as follows:
Authority: 12 U.S.C. 1766(a), 1781, and 1789.
0
2. Amend Sec. 704.2 by:
0
a. Removing the definitions of ``Adjusted core capital'' and ``Asset-
backed commercial paper program'';
0
b. Revising the first two sentences of the definition of ``Available to
cover losses that exceed retained earnings'';
0
c. Removing the definitions of ``Capital'', ``Capital ratio'', ``Core
capital'', ``Core capital ratio'', and ``Credit-enhancing interest-only
strip'';
0
d. Revising the definition of ``Derivatives'';
0
e. Removing the definition of ``Eligible ABCP liquidity facility'';
0
f. Revising the definitions of ``Equity investment'', ``Equity
security'', ``Fair value'', and ``Internal control'';
0
g. Removing the two definitions of ``Leverage ratio'';
0
h. Adding a new definition, in alphabetical order, for ``Leverage
ratio'';
0
i. Revising the definitions of ``Net assets'', ``Net risk-weighted
assets'', and ``Retained earnings'';
0
j. Removing the definition of ``Supplementary Capital'';
0
k. Revising the definitions of ``Tier 1 capital'';
0
l. Adding a definition, in alphabetical order, for ``Tier 1 risk-based
capital ratio'';
0
m. Revising the definition of ``Tier 2 capital''; and
0
n. Revising the definition of ``Total capital''.
The revisions and additions read as follows:
Sec. 704.2 Definitions.
* * * * *
Available to cover losses that exceed retained earnings means that
the funds are available to cover operating losses realized, in
accordance with generally accepted accounting principles (GAAP), by the
corporate credit union that exceed retained earnings and equity
acquired in a combination. Likewise, available to cover losses that
exceed retained earnings and perpetual contributed capital (PCC) means
that the funds are available to cover operating losses realized, in
accordance with GAAP, by the corporate credit union that exceed
retained earnings and equity acquired in a combination and PCC. * * *
* * * * *
Derivatives means a financial contract which derives its value from
the value and performance of some other underlying financial instrument
or variable, such as an index or interest rate.
* * * * *
Equity investment means an investment in an equity security and
other ownership interest, including, for example, an investment in a
partnership or limited liability company.
Equity security means any security representing an ownership
interest in an enterprise (for example, common, preferred, or other
capital stock) or the right to acquire (for example, warrants and call
options) or dispose of (for example, put options) an ownership interest
in an enterprise at fixed or determinable prices. However, the term
does not include Federal Home Loan Bank stock, convertible debt, or
preferred stock that by its terms either must be redeemed by the
issuing enterprise or is redeemable at the option of the investor.
* * * * *
Fair value means the price that would be received to sell an asset,
or paid to transfer a liability, in an orderly transaction between
market participants at the measurement date, as defined by GAAP.
* * * * *
Internal control means the process, established by the corporate
credit union's board of directors, officers and employees, designed to
provide reasonable assurance of reliable financial reporting and
safeguarding of assets against unauthorized acquisition, use, or
disposition. A credit union's internal control structure generally
consists of five components: Control environment; risk assessment;
control activities; information and communication; and monitoring.
Reliable financial reporting refers to preparation of Call Reports as
well as financial data published and presented to members that meet
management's financial reporting objectives. Internal control over
safeguarding of assets against unauthorized acquisition, use, or
disposition refers to prevention or timely detection of transactions
involving such unauthorized access, use, or disposition of assets which
could result in a loss that is material to the financial statements.
* * * * *
Leverage ratio means the ratio of Tier 1 capital to moving daily
average net assets.
* * * * *
Net assets means total assets less Central Liquidity Facility (CLF)
stock subscriptions, loans guaranteed by the National Credit Union
Share Insurance Fund (NCUSIF), and member reverse repurchase
transactions. For its own account, a corporate credit union's payables
under reverse repurchase agreements and receivables under repurchase
agreements may be netted out if the GAAP conditions for offsetting are
met. Also, any amounts deducted in calculating Tier 1 capital are also
deducted from net assets.
* * * * *
Net risk-weighted assets means risk-weighted assets less CLF stock
subscriptions, CLF loans guaranteed by the NCUSIF, and member reverse
repurchase transactions. For its own account, a corporate credit
union's payables under reverse repurchase agreements and receivables
under repurchase agreements may be netted out if the GAAP conditions
for offsetting are met. Also, any amounts deducted in calculating Tier
1 capital are also deducted from net risk-weighted assets.
* * * * *
Retained earnings means undivided earnings, regular reserve,
reserve for contingencies, supplemental reserves, reserve for losses,
and other appropriations from undivided earnings as designated by
management or NCUA.
* * * * *
Tier 1 capital means the sum of paragraphs (1) through (4) of this
definition from which paragraphs (5) through (9) of this definition are
deducted:
(1) Retained earnings;
(2) Perpetual contributed capital;
(3) The retained earnings of any acquired credit union, or of an
integrated set of activities and assets, calculated at the point of
acquisition, if the acquisition was a mutual combination;
(4) Minority interests in the equity accounts of CUSOs that are
fully consolidated;
(5) Deduct the amount of the corporate credit union's intangible
assets that exceed one half percent of its moving daily average net
assets (however, NCUA may direct the
[[Page 25937]]
corporate credit union to add back some of these assets on NCUA's own
initiative, by petition from the applicable state regulator, or upon
application from the corporate credit union);
(6) Deduct investments, both equity and debt, in unconsolidated
CUSOs;
(7) Deduct an amount equal to any PCC or NCA that the corporate
credit union maintains at another corporate credit union;
(8) Beginning on October 20, 2016, and ending on October 20, 2020,
deduct any amount of PCC that causes PCC minus retained earnings, all
divided by moving daily net average assets, to exceed two percent; and
(9) Beginning after October 20, 2020, deduct any amount of PCC that
causes PCC to exceed retained earnings.
Tier 1 risk-based capital ratio means the ratio of Tier 1 capital
to the moving monthly average net risk-weighted assets.
Tier 2 capital means the sum of paragraphs (1) through (4) of this
definition:
(1) Nonperpetual capital accounts, as amortized under Sec.
704.3(b)(3);
(2) Allowance for loan and lease losses calculated under GAAP to a
maximum of 1.25 percent of risk-weighted assets;
(3) Any PCC deducted from Tier 1 capital; and
(4) Forty-five percent of unrealized gains on available-for-sale
equity securities with readily determinable fair values. Unrealized
gains are unrealized holding gains, net of unrealized holding losses,
calculated as the amount, if any, by which fair value exceeds
historical cost. NCUA may disallow such inclusion in the calculation of
Tier 2 capital if NCUA determines that the securities are not prudently
valued.
* * * * *
Total capital means the sum of Tier 1 capital and Tier 2 capital,
less the corporate credit union's equity investments not otherwise
deducted when calculating Tier 1 capital.
* * * * *
0
3. Amend Sec. 704.3 by revising paragraphs (b)(5), (c)(3), and
(e)(3)(i) and removing paragraph (f)(4) to read as follows:
Sec. 704.3 Corporate credit union capital.
* * * * *
(b) * * *
(5) Redemption. A corporate credit union may redeem NCAs prior to
maturity or prior to the end of the notice period only if it meets its
minimum required capital and net economic value ratios after the funds
are redeemed and only with the prior approval of NCUA and, for state
chartered corporate credit unions, the applicable state regulator.
* * * * *
(c) * * *
(3) Callability. A corporate credit union may call PCC instruments
only if it meets its minimum required capital and net economic value
ratios after the funds are called and only with the prior approval of
the NCUA and, for state chartered corporate credit unions, the
applicable state regulator. PCC accounts are callable on a pro-rata
basis across an issuance class.
* * * * *
(e) * * *
(3) * * * (i) Notwithstanding the definitions of Tier 1 capital and
Tier 2 capital in paragraph (d) of this section, NCUA may find that a
particular asset or Tier 1 capital or Tier 2 capital component has
characteristics or terms that diminish its contribution to a corporate
credit union's ability to absorb losses, and NCUA may require the
discounting or deduction of such asset or component from the
computation of Tier 1 capital, Tier 2 capital, or total capital.
* * * * *
0
4. Amend Sec. 704.5 by revising paragraph (j) to read as follows:
Sec. 704.5 Investments.
* * * * *
(j) Grandfathering. A corporate credit union's authority to hold an
investment is governed by the regulation in effect at the time of
purchase. However, all grandfathered investments are subject to the
other requirements of this part.
0
5. Amend Sec. 704.6 by revising paragraphs (c), (d), and (e) to read
as follows:
Sec. 704.6 Credit risk management.
* * * * *
(c) Issuer concentration limits--(1) General rule. The aggregate
value recorded on the books of the corporate credit union of all
investments in any single obligor is limited to 25 percent of total
capital or $5 million, whichever is greater.
(2) Exceptions. (i) Investments in one obligor where the remaining
maturity of all obligations is less than 30 days are limited to 50
percent of total capital;
(ii) Investments in credit card master trust asset-backed
securities are limited to 50 percent of total capital in any single
obligor;
(iii) Aggregate investments in repurchase and securities lending
agreements with any one counterparty are limited to 200 percent of
total capital;
(iv) Investments in non-money market registered investment
companies are limited to 50 percent of total capital in any single
obligor;
(v) Investments in money market registered investment companies are
limited to 100 percent of total capital in any single obligor; and
(vi) Investments in corporate CUSOs are subject to the limitations
of section 11 of this part.
(d) Sector concentration limits. (1) A corporate credit union must
establish sector limits based on the value recorded on the books of the
corporate credit union that do not exceed the following maximums:
(i) Mortgage-backed securities (inclusive of commercial mortgage-
backed securities)--the lower of 1000 percent of total capital or 50
percent of assets;
(ii) Commercial mortgage-backed securities--the lower of 300
percent of total capital or 15 percent of assets;
(iii) Federal Family Education Loan Program student loan asset-
backed securities--the lower of 1000 percent of total capital or 50
percent of assets;
(iv) Private student loan asset-backed securities--the lower of 500
percent of total capital or 25 percent of assets;
(v) Auto loan/lease asset-backed securities--the lower of 500
percent of total capital or 25 percent of assets;
(vi) Credit card asset-backed securities--the lower of 500 percent
of total capital or 25 percent of assets;
(vii) Other asset-backed securities not listed in paragraphs
(d)(1)(ii) through (vi) of this section--the lower of 500 percent of
total capital or 25 percent of assets;
(viii) Corporate debt obligations--the lower of 1000 percent of
total capital or 50 percent of assets; and
(ix) Municipal securities--the lower of 1000 percent of total
capital or 50 percent of assets.
(2) Registered investment companies--A corporate credit union must
limit its investment in registered investment companies to the lower of
1000 percent of total capital or 50 percent of assets. In addition to
applying the limit in this paragraph, a corporate credit union must
also include the underlying assets in each registered investment
company in the relevant sectors described in paragraph (d)(1) of this
section when calculating those sector limits.
(3) A corporate credit union must limit its aggregate holdings in
any investments not described in paragraphs (d)(1) or (2) of this
section to the lower of 100 percent of total capital or 5 percent of
assets. The NCUA may
[[Page 25938]]
approve a higher percentage in appropriate cases.
(4) Investments in other federally insured credit unions, deposits
and federal funds investments in other federally insured depository
institutions, and investment repurchase agreements are excluded from
the concentration limits in paragraphs (d)(1), (2), and (3) of this
section.
(e) Corporate debt obligation subsector limits. In addition to the
limitations in paragraph (d)(1)(viii) of this section, a corporate
credit union must not exceed the lower of 200 percent of total capital
or 10 percent of assets in any single North American Industry
Classification System (NAICS) industry sector based on the value
recorded on the books of the corporate credit union. If a corporation
in which a corporate credit union is interested in investing does not
have a readily ascertainable NAICS classification, a corporate credit
union will use its reasonable judgment in assigning such a
classification. NCUA may direct, however, that the corporate credit
union change the classification.
* * * * *
0
6. Amend Sec. 704.7 by revising paragraph (c) to read as follows:
Sec. 704.7 Lending.
* * * * *
(c) Loans to members--(1) Credit unions. (i) The maximum aggregate
amount in unsecured loans and lines of credit from a corporate credit
union to any one member credit union, excluding pass-through and
guaranteed loans from the CLF and the NCUSIF, must not exceed 50
percent of the corporate credit union's total capital.
(ii) The maximum aggregate amount in secured loans (excluding those
secured by shares or marketable securities and member reverse
repurchase transactions) and unsecured loans (excluding pass-through
and guaranteed loans from the CLF and the NCUSIF) and lines of credit
from a corporate credit union to any one member credit union must not
exceed 150 percent of the corporate credit union's total capital.
(2) Corporate CUSOs. Any loan or line of credit from a corporate
credit union to a corporate CUSO must comply with Sec. 704.11.
(3) Other members. The maximum aggregate amount of loans and lines
of credit from a corporate credit union to any other one member must
not exceed 15 percent of the corporate credit union's total capital
plus pledged shares.
* * * * *
0
7. Amend Sec. 704.8 by revising paragraph (j) to read as follows:
Sec. 704.8 Asset and liability management.
* * * * *
(j) Limit breaches. (1)(i) If a corporate credit union's decline in
NEV, base case NEV ratio, or any NEV ratio calculated under paragraph
(d) of this section exceeds established or permitted limits, or the
corporate is unable to satisfy the tests in paragraphs (f) or (g) of
this section, the operating management of the corporate must
immediately report this information to its board of directors and ALCO;
and
(ii) If the corporate credit union cannot adjust its balance sheet
to meet the requirements of paragraphs (d), (f), or (g) of this section
within 10 calendar days after detection by the corporate, the corporate
must notify in writing the Director of the Office of National
Examinations and Supervision.
(2) If any breach described in paragraph (j)(1) of this section
persists for 30 or more calendar days, the corporate credit union:
(i) Must immediately submit a detailed, written action plan to the
NCUA that sets forth the time needed and means by which it intends to
come into compliance and, if the NCUA determines that the plan is
unacceptable, the corporate credit union must immediately restructure
its balance sheet to bring the exposure back within compliance or
adhere to an alternative course of action determined by the NCUA; and
(ii) If presently categorized as adequately capitalized or well
capitalized for prompt corrective action purposes, and the breach was
of paragraph (d) of this section, the corporate credit union will
immediately be recategorized as undercapitalized until coming into
compliance, and
(iii) If presently categorized as less than adequately capitalized
for prompt corrective action purposes, and the breach was of paragraph
(d) of this section, the corporate credit union will immediately be
downgraded one additional capital category.
* * * * *
0
8. Amend Sec. 704.9 by revising paragraph (b) to read as follows:
Sec. 704.9 Liquidity management.
* * * * *
(b) Borrowing limits. A corporate credit union may borrow up to 10
times its total capital.
(1) Secured borrowings. A corporate credit union may borrow on a
secured basis for liquidity purposes, but the maturity of the borrowing
may not exceed 180 days. Only a corporate credit union with Tier 1
capital in excess of five percent of its moving daily average net
assets (DANA) may borrow on a secured basis for nonliquidity purposes,
and the outstanding amount of secured borrowing for nonliquidity
purposes may not exceed an amount equal to the difference between the
corporate credit union's Tier 1 capital and five percent of its moving
DANA.
(2) Exclusions. CLF borrowings and borrowed funds created by the
use of member reverse repurchase agreements are excluded from the limit
in paragraph (b)(1) of this section.
0
9. Amend Sec. 704.11 by:
0
a. Revising paragraphs (b)(1) and (2) and (e)(1) introductory text;
0
b. Removing paragraph (e)(2);
0
c. Redesignating paragraph (e)(3) as paragraph (e)(2);
0
d. Redesignating paragraphs (g)(4) through (7) as paragraphs (g)(5)
through (8), respectively; and
0
e. Adding new paragraph (g)(4).
The revisions and addition read as follows:
Sec. 704.11 Corporate Credit Union Service Organizations (Corporate
CUSOs).
* * * * *
(b) Investment and loan limitations. (1) The aggregate of all
investments in member and non-member corporate CUSOs that a corporate
credit union may make must not exceed 15 percent of a corporate credit
union's total capital.
(2) The aggregate of all investments in and loans to member and
nonmember corporate CUSOs a corporate credit union may make must not
exceed 30 percent of a corporate credit union's total capital. A
corporate credit union may lend to member and nonmember corporate CUSOs
an additional 15 percent of total capital if the loan is collateralized
by assets in which the corporate has a perfected security interest
under state law.
* * * * *
(e) Permissible activities. (1) A corporate CUSO must agree to
limit its activities to:
* * * * *
(g) * * *
(4) Will provide the reports as required by Sec. 712.3(d)(4) and
(5) of this chapter;
* * * * *
0
10. Amend Sec. 704.14 by revising paragraphs (a)(2), (a)(9), and
(e)(2) to read as follows:
Sec. 704.14 Representation.
(a)* * *
(2) Only an individual who currently holds the position of chief
executive officer, chief financial officer, chief
[[Page 25939]]
operating officer, or treasurer/manager at a member credit union, and
will hold that position at the time he or she is seated on the
corporate credit union board if elected, may seek election or re-
election to the corporate credit union board;
* * * * *
(9) At least a majority of directors of every corporate credit
union, including the chair of the board, must serve on the corporate
board as representatives of natural person credit union members.
* * * * *
(e)* * *
(2) The provisions of Sec. 701.14 of this chapter apply to
corporate credit unions, except that where ``Regional Director'' is
used, read ``Director of the Office of National Examinations and
Supervision.''
0
11. Amend Sec. 704.15 by revising paragraph (a)(2)(iii) introductory
text, the first sentence of paragraph (b)(2), and the first sentence of
paragraph (d)(1) to read as follows:
Sec. 704.15 Audit and reporting requirements.
(a) * * *
(2) * * *
(iii) An assessment by management of the effectiveness of the
corporate credit union's internal control structure and procedures as
of the end of the past calendar year that must include the following:
* * * * *
(b) * * *
(2) * * *The independent public accountant who audits the corporate
credit union's financial statements must examine, attest to, and report
separately on the assertion of management concerning the effectiveness
of the corporate credit union's internal control structure and
procedures for financial reporting.* * *
* * * * *
(d) * * *
(1)* * * Each corporate credit union must establish a supervisory
committee, all of whose members must be independent.* * *
* * * * *
Sec. 704.18 [Amended]
0
12. Amend Sec. 704.18 by:
0
a. Removing the words ``core capital ratio'' from the introductory text
of paragraph (e)(1) and adding in their place ``leverage ratio'';
0
b. Removing the words ``Core capital ratio'' from the table heading of
paragraph (e)(1) and adding in their place ``Leverage ratio''; and
0
c. Removing the words ``of core capital'' wherever they appear in the
table in paragraph (e)(1) and adding in their place ``of Tier 1
capital''.
0
13. Amend Sec. 704.21 by revising paragraph (c) to read as follows:
Sec. 704.21 Enterprise risk management.
* * * * *
(c) The ERMC must include at least one independent risk management
expert. The risk management expert must have at least five years of
experience in identifying, assessing, and managing risk exposures. This
experience must be commensurate with the size of the corporate credit
union and the complexity of its operations. The board of directors may
hire the independent risk management expert to work full-time or part-
time for the ERMC or as a consultant for the ERMC.
* * * * *
Appendix A to Part 704--[Amended]
0
14. Amend Appendix A to part 704 by:
0
a. Removing Model Forms A, B, E, and F and redesignating Model Forms C,
D, G, and H as Model Forms A, B, C, and D, respectively; and
0
b. Removing the second sentence of the note in newly redesignated Model
Form C.
Appendix B to Part 704--[Amended]
0
15. Amend Appendix B to part 704 by:
0
a. Removing the words ``capital ratio'' wherever they appear and adding
in their place ``leverage ratio'';
0
b. Removing the words ``corporate credit union's capital'' wherever
they appear and adding in their place ``corporate credit union's total
capital'';
0
c. Removing the words ``25 percent of capital'' from paragraph (b)(3)
of Part II and adding in their place ``25 percent of total capital'';
and
0
d. Removing paragraph (e) from part 1.
0
16. Amend Appendix C to part 704 by:
0
a. In part I(b):
0
(i) Revising paragraph (8) of the definition of ``Direct credit
substitute'';
0
(ii) Revising paragraph (8) of the definition of ``Recourse''; and
0
(iii) Revising paragraph (2) of the definition of ``Residual
interest'';
0
b. In part II(a), revising paragraph (4)(xiii);
0
c. In part II(b):
0
(i) Removing paragraphs (1)(iv) and (4);
0
(ii) Redesignating paragraphs (5) and (6) as paragraphs (4) and (5),
respectively;
0
(iii) Revising newly redesignated paragraph (4)(i); and
0
(iv) Removing newly redesignated paragraph (5)(v)(C).
0
d. In part II(c):
0
(i) Removing paragraph (2)(i);
0
(ii) Redesignating paragraphs (2)(ii) and (iii) as paragraphs (2)(i)
and (ii), respectively; and
0
(iii) Revising newly redesignated paragraph (2)(i) and the introductory
text of newly redesignated paragraph (2)(ii).
The revisions read as follows:
Appendix C to Part 704--Risk-Based Capital Credit Risk-Weight
Categories
* * * * *
Part I: Introduction
* * * * *
(b) Definitions
* * * * *
Direct credit substitute* * *
(8) Liquidity facilities that provide support to asset-backed
commercial paper.
* * * * *
Recourse * * *
(8) Liquidity facilities that provide support to asset-backed
commercial paper.
* * * * *
Residual interest* * *
(2) Residual interests generally include spread accounts, cash
collateral accounts, retained subordinated interests (and other
forms of overcollateralization), and similar assets that function as
a credit enhancement. Residual interests further include those
exposures that, in substance, cause the corporate credit union to
retain the credit risk of an asset or exposure that had qualified as
a residual interest before it was sold.
* * * * *
Part II: Risk-Weightings
(a) On-Balance Sheet Assets
* * * * *
(4)* * *
(xiii) Interest-only strips receivable;
* * * * *
(b) Off-Balance Sheet Activities
* * * * *
(4) * * * (i) Unused portions of commitments with an original
maturity of one year or less;
* * * * *
(c) Recourse Obligations, Direct Credit Substitutes, and Certain
Other Positions
* * * * *
(2)(i) Other residual interests. A corporate credit union must
maintain risk-based capital for a residual interest equal to the
face amount of the residual interest, even if the amount of risk-
based capital that must be maintained exceeds the full risk-based
capital requirement for the assets transferred.
(ii) Residual interests and other recourse obligations. Where a
corporate credit union holds a residual interest and another
recourse obligation in connection with the same transfer of assets,
the corporate credit union must maintain risk-based capital equal to
the greater of:
* * * * *
[FR Doc. 2015-10546 Filed 5-5-15; 8:45 am]
BILLING CODE 7535-01-P