Public Unit and Nonmember Shares, 58305-58309 [2019-23679]

Download as PDF Federal Register / Vol. 84, No. 211 / Thursday, October 31, 2019 / Rules and Regulations by removing ‘‘$1,410’’ and adding in its place ‘‘$1,440’’. Kevin K. McAleenan, Acting Secretary. [FR Doc. 2019–23778 Filed 10–30–19; 8:45 am] BILLING CODE 9111–97–P NATIONAL CREDIT UNION ADMINISTRATION 12 CFR Parts 701 and 741 RIN 3313–AF00 Public Unit and Nonmember Shares National Credit Union Administration (NCUA). ACTION: Final rule. AGENCY: The NCUA Board (Board) is amending the NCUA’s public unit and nonmember share rule to allow federal credit unions (FCU) to receive public unit and nonmember shares up to 50 percent of the credit union’s net amount of paid-in and unimpaired capital and surplus less any public unit and nonmember shares. This final rule also makes a conforming change to the NCUA’s regulations that apply the public unit and nonmember share limit to all federally insured credit unions (FICUs). The final rule follows publication of a May 30, 2019, proposed rule and takes into consideration the public comments received on the proposed rule. DATES: This final rule is effective January 29, 2020. FOR FURTHER INFORMATION CONTACT: Ariel Pereira, Staff Attorney, Office of General Counsel, 1775 Duke Street, Alexandria, Virginia 22314, or by telephone at (703) 548–2778. SUPPLEMENTARY INFORMATION: SUMMARY: I. Introduction II. This Final Rule; Changes to Proposed Rule III. Legal Authority IV. Discussion of Public Comments Received on Proposed Rule V. Regulatory Procedures I. Introduction khammond on DSKJM1Z7X2PROD with RULES A. Background Section 107(6) of the Federal Credit Union Act (FCU Act) provides that an FCU may receive payment on shares from its members (including public units that are members) and from other credit unions.1 Section 107(6) also permits an FCU to receive payments on shares from nonmembers under certain circumstances, including payment on shares from nonmember public units 1 12 U.S.C. 1757(6). VerDate Sep<11>2014 16:08 Oct 30, 2019 Jkt 250001 and their political subdivisions.2 The term ‘‘public unit’’ generally refers to ‘‘the United States, any state of the United States, the District of Columbia, the Commonwealth of Puerto Rico, the Panama Canal Zone, any territory or possession of the United States, any county, municipality, or political subdivision thereof, or any Indian tribe as defined in section 3(c) of the Indian Financing Act of 1974.’’ 3 Moreover, an FCU that predominantly serves low-income members may receive payment on shares from any source regardless of membership.4 Section 701.34 of the NCUA’s regulations defines a ‘‘low-income member’’ as, among other things, a member ‘‘whose family income is 80 [percent] or less than the median family income for the metropolitan area where [the member] live[s] or [the] national metropolitan area, whichever is greater.’’ 5 Alternatively, a ‘‘low-income member’’ is a member ‘‘who earn[s] 80 [percent] or less than the total median earnings for individuals for the metropolitan area where [the member] live[s] or [the] national metropolitan area, whichever is greater.’’ 6 Section 701.32 of the NCUA’s regulations limits the total amount of nonmember shares that an FCU may receive up to 20 percent of the credit union’s total shares, or $3 million, whichever is greater, unless the shares are U.S. Treasury accounts or matching funds accounts required by the NCUA’s Community Development Revolving Loan Fund Program.7 This limit also applies to public unit shares regardless of whether the public unit is a member of the credit union. B. Regulatory Reform Agenda Consistent with the spirit of Executive Order 13777, entitled ‘‘Enforcing the Regulatory Reform Agenda,’’ 8 the Board established a Regulatory Reform Task Force (Task Force) to identify NCUA regulations that the agency should repeal, replace, or modify. The Task Force reviewed the NCUA regulations and submitted its first report to the Board in June 2017. In August 2017, the Board published the substance of the Task Force’s first report in the Federal Register for public comment.9 After the close of the public comment period, the 2 Id. CFR 745.1(c). 4 Supra note 1. 5 12 CFR 701.34(a)(2). 6 Id. 7 12 CFR 701.32(b), (c). 8 Executive Order 1377 was issued on February 24, 2017, and subsequently published in the Federal Register on March 1, 2017 (82 FR 12285). 9 82 FR 39702 (August 22, 2017). PO 00000 Frm 00003 Board published the Task Force’s second and final report in the Federal Register in December 2018.10 The Task Force’s final report recommended that the Board increase the public unit and nonmember share limit in § 701.32 of the NCUA’s regulations.11 Specifically, the Task Force recommended raising the nonmember deposit limit from 20 percent to 50 percent. The Task Force stated that public unit and nonmember shares are the functional equivalent of borrowings. The change will parallel the ability of FCUs, as authorized under section 107(9) of the FCU Act,12 to borrow from any source up to 50 percent of the credit union’s paid-in and unimpaired capital and surplus subject to such rules and regulations as the Board may prescribe.13 However, this limitation does not apply to discounts or sales of eligible obligations to any federal intermediate credit bank or loans from the Central Liquidity Facility.14 C. NCUA’s May 30, 2019, Proposed Rule On May 30, 2019, the NCUA published a proposed rule to implement the Task Force’s recommendation.15 Specifically, the Board proposed to amend § 701.32 of the NCUA’s regulations to allow an FCU to receive public unit and nonmember shares up to 50 percent of the credit union’s net amount of paid-in and unimpaired capital and surplus less any public unit and nonmember shares. The Board also proposed making conforming amendments to § 741.204, which applies to all FICUs, to reflect the changes to § 701.32. (Hereinafter, this preamble will refer to FICUs when discussing the applicability of the proposed and final rules, except where the discussion specifically applies to FCUs or federally insured, statechartered credit unions (FISCUs)). The change in standard from ‘‘total shares’’ to ‘‘paid-in and unimpaired capital and surplus less any public unit and nonmember shares’’ is not only consistent with the treatment of borrowings under the FCU Act, but is also intended to provide FICUs with greater ability to accept public unit and nonmember deposits because undivided earnings are included in the measurement of a FICU’s paid-in and 10 83 3 12 Fmt 4700 Sfmt 4700 58305 FR 65926 (December 21, 2018). at 65940. 12 12 U.S.C. 1757(9). 13 The term ‘‘paid-in and unimpaired capital and surplus’’ means shares and undivided earnings, plus net income or minus net loss. See 12 CFR 741.2. 14 Supra note 13. For rules governing loans from the Central Liquidity Facility, see 12 CFR part 725. 15 84 FR 35525. 11 Id. E:\FR\FM\31OCR1.SGM 31OCR1 58306 Federal Register / Vol. 84, No. 211 / Thursday, October 31, 2019 / Rules and Regulations unimpaired capital and surplus, thus increasing the base. The proposed rule subtracts public unit and nonmember shares from unimpaired capital and surplus for purposes of this 50 percent limit.16 This restriction is intended to provide a meaningful limit on the ability of an FICU to increase its leverage indefinitely, which could pose a clear risk to FICUs and the National Credit Union Share Insurance Fund (NCUSIF). The proposed rule does not allow a waiver process for a FICU to exceed the 50 percent limit as a matter of safety and soundness. The proposed rule also requires a FICU to develop and maintain a written plan if its public unit and nonmember shares, taken together with borrowings, exceed 70 percent of paidin and unimpaired capital and surplus. This approach was designed to provide a FICU with flexibility to adopt a diverse funding structure without the regulatory burden of developing a plan regarding the intended use of those funds unless the credit union borrows a significant amount of funds or accepts a significant number of public unit and nonmember shares. The proposed rule provided for a 60day comment period, which closed on July 29, 2019. khammond on DSKJM1Z7X2PROD with RULES II. This Final Rule; Change to Proposed Rule This final rule follows publication of the May 30, 2019, proposed rule and takes into consideration the public comments received on the proposed rule. The NCUA received 17 public comments on the proposal. Comments were received from: (1) Individual FICUs; (2) national, state, and regional organizations representing FICUs; and (3) national banking trade organizations. Based on its review of the comments, and as further discussed in Section IV of this preamble, the Board has revised the proposal by retaining the alternative limit of $3 million. Specifically, the final rule provides that a FICU may receive public unit and nonmember shares in an amount up to 50 percent of the credit union’s net amount of paidin and unimpaired capital and surplus less any public unit and nonmember shares, or $3 million, whichever is greater. III. Legal Authority The Board is issuing this final rule pursuant to its authority under the FCU Act. Under the FCU Act, the NCUA is 16 In mathematical terms, the limitation is calculated as total public unit and nonmember shares/paid-in and unimpaired capital and surplus ¥ total public unit and nonmember shares = maximum of 50%. VerDate Sep<11>2014 16:08 Oct 30, 2019 Jkt 250001 the chartering and supervisory authority for FCUs and the federal supervisory authority for FICUs.17 The FCU Act grants the NCUA a broad mandate to issue regulations governing both FCUs and all FICUs. Section 120 of the FCU Act is a general grant of regulatory authority and authorizes the Board to prescribe rules and regulations for the administration of the FCU Act.18 Section 207 of the FCU Act is a specific grant of authority over share insurance coverage, conservatorships, and liquidations.19 Section 209 of the FCU Act is a plenary grant of regulatory authority to the Board to issue rules and regulations necessary or appropriate to carry out its role as share insurer for all FICUs.20 In addition, Section 107 of the FCU Act specifically recognizes that the Board may prescribe limitations governing shares accepted by FCUs.21 Accordingly, the FCU Act grants the Board broad rulemaking authority to ensure that the credit union industry and the NCUSIF remain safe and sound. IV. Discussion of the Public Comments Received on the Proposed Rule A. The Public Comments, Generally The comments from FICUs and their representative organizations generally supported the proposed rule. In particular, the FICUs supported the revised aggregate limit. Several of the commenters explicitly agreed with the statement in the proposed rule’s preamble that public unit and nonmember shares are the functional equivalent of, and no more volatile than, borrowings and, therefore, warrant a higher level of authority than what the current regulation allows. In general, the commenters wrote that the proposal would provide a greater balance between nonmember funding sources and borrowings, and better enable FICUs to seek more reasonably priced funding options. Several of these commenters also offered suggested changes to the proposed rule. In particular, the commenters expressed concerns about the proposed elimination of the $3 million alternative limit, especially the effects on newly chartered FICUs and low-income credit unions (LICUs). In contrast to the support expressed by the FICUs, the comments received from the banking trade organizations strongly objected to the proposed rule. These commenters wrote that the proposal would undermine the 17 12 U.S.C. 1752–1775. U.S.C. 1766(a). 19 12 U.S.C. 1787(b)(1). 20 12 U.S.C. 1789(a)(11). 21 12 U.S.C. 1757(6). 18 12 PO 00000 Frm 00004 Fmt 4700 Sfmt 4700 historical mission of FICUs, increase risk to the NCUSIF, and have negative economic impacts. B. Discussion of FICU Comments on Specific Provisions of the Proposed Rule 1. Minor effect on most FICUs. One of the commenters, while writing in overall support of the rule, indicated the proposal would have minimal effect on most FICUs. Based on its review of March 2019, Call Report data, the commenter wrote that the proposal would not increase the overall funding capacity (i.e., aggregate nonmember/ public unit deposits and borrowings) for 51 percent of FICUs. The commenter believes the proposal will be most beneficial to small FICUs and LICUs because they tend to have the higher net worth ratios necessary to take full advantage of the proposed limit. The Board continues to believe that the proposal will provide all FICUs, and in particular small credit unions, with greater flexibility in their sources of funding. The commenter also wrote that the majority of FICUs rely on member shares for the ‘‘overwhelming majority’’ of their funds, and that this is unlikely to change. Another commenter, however, wrote that the current reluctance of some FICUs to use nonmember funding could be explained by the fact that these credit unions, as a liquidity risk management tool, have historically been reluctant to exhaust the availability of nonmember funds. The increase in the aggregate limit will provide these FICUs with additional flexibility in managing their liquidity needs and encourage them to seek more reasonably priced funding options. Further, this commenter noted other incentives for FICUs to increase their use of nonmember funds. According to the commenter, in recent years FICUs that have employed nonmember deposits have tended to be more active lenders and, therefore, achieved higher earnings on average than their peers. 2. $3 million alternative limit. The NCUA specifically sought comment on the proposed elimination of the alternative limit of $3 million. As noted, the current regulation limits FICUs to accepting public unit and nonmember shares up to 20 percent of total shares, or $3 million, whichever is greater. The Board thought that the proposed regulatory limit of 50 percent of the FICU’s net amount of paid-in and unimpaired capital and surplus less any public unit and nonmember shares was appropriate and that an alternative $3 million limit would no longer be necessary. However, the Board also noted in the preamble to the proposed E:\FR\FM\31OCR1.SGM 31OCR1 khammond on DSKJM1Z7X2PROD with RULES Federal Register / Vol. 84, No. 211 / Thursday, October 31, 2019 / Rules and Regulations rule that some small credit unions, particularly LICUs that rely on large volumes of nonmember shares as a necessary source of funding or newly chartered credit unions, might be adversely impacted by the elimination of the $3 million dollar limit. Consequently, the Board noted that it was actively considering retaining the alternative $3 million limit and specifically sought comments on whether to retain it or provide a special exemption for small LICUs. The majority of the comments on this issue supported retaining some form of the alternative limit. At a minimum, these commenters urged the Board to either ‘‘grandfather’’ FICUs that currently use the limit or establish an exemption for newly chartered FICUs and LICUs. A minority of commenters supported the elimination of the alternative limit; however, several of them also suggested that the NCUA monitor the change for adverse consequences. These commenters recommended that the Board use the review to consider re-instituting the alternative limit. One of the commenters also urged that the alternative limit be increased to at least $5 million. The commenter wrote that the NCUA, in its 2011–2012 rulemaking raising the limit to $3 million, had benchmarked the amount on a hypothetical FCU with $7.5 million in total shares.22 According to the commenter, the increase to $5 million is necessary to maintain parity for a similarly situated FCU in 2019 (i.e., the 36th percentile of credit unions ranked by share value). The Board has decided to revise its proposal given the broad support from the commenters for keeping the alternative limit. Specifically, the final rule retains the current alternative limit of $3 million. Upon further consideration, the Board agrees that the elimination of the limit could negatively impact some small credit unions, particularly those that are newly chartered and have not had the time to become adequately capitalized, which may rely on nonmember funding. The final rule, therefore, provides that a FICU may receive public unit and nonmember shares in an amount up to 50 percent of the FICU’s net amount of paid-in and unimpaired capital and surplus less any public unit and nonmember shares, or $3 million, whichever is greater. 22 The proposed rule to raise the alternative limit to $3 million was published on December 28, 2011 (76 FR 81 421). The subsequent final rule was published on May 31, 2012 (77 FR 31981). VerDate Sep<11>2014 16:08 Oct 30, 2019 Jkt 250001 3. Waivers from the appropriate regional director. The proposed rule would eliminate the procedures for obtaining a waiver from the appropriate regional director. The majority of commenters on this provision supported the removal of the waiver procedures. The commenters opposed to the change wrote that a regulatory waiver might be necessary to address fact-specific situations that merit a higher limit without increasing risk to the NCUSIF. The Board has not revised the proposal in response to these comments. Although the Board seeks to provide FICUs with greater flexibility, it also continues to believe that the removal of the waiver procedures is prudent given the increased regulatory limit. The NCUA does not envision situations arising like the hypothetical posed by the commenter that would merit a higher aggregate limit without consequently increasing the risk to the NCUSIF. Allowing a FICU to exceed this limit could lead to safety and soundness concerns and unnecessary risk for the NCUSIF. The Board also notes that currently effective waivers granted pursuant to the existing regulations are superseded by the final rule. These waivers are no longer necessary given the higher aggregate limit established by the rule. Accordingly, any such waivers will be considered expired upon the effective date of this final rule. 4. Plan Regarding Use of Funds. Under the proposed rule, a FICU would be required to develop a plan regarding the intended use of any borrowings, public unit, or nonmember shares that, taken together, exceed 70 percent of the FICU’s paid-in and unimpaired capital and surplus. The majority of the commenters writing on this issue supported the plan requirement, with only a single commenter disagreeing. The commenter opposing the plan requirement wrote that any risk associated with such a high level of borrowing should more appropriately be addressed in the contract between the lender and the FICU. This final rule adopts the proposed plan requirements without change. The Board believes that requiring a plan for material levels of external funding sources is prudent due diligence. The Board expects FICUs that accept elevated levels of public unit and nonmember shares and borrowings to document how the credit union will use those funds consistent with prudent risk management principles. As the Board explained in the proposed rule, FICUs will not need to submit these plans for approval before accepting funds that in total would exceed 70 percent of paid- PO 00000 Frm 00005 Fmt 4700 Sfmt 4700 58307 in and unimpaired capital and surplus. Instead, they must simply maintain the plan and make it available to NCUA examiners. Even though the Board expects that most FICUs will not need to develop a specific plan regarding the use of external funds, a FICU should continue to manage its balance sheet in a prudent manner. The NCUA will continue to review a FICU’s business model and liquidity management to ensure the FICU is operating in a safe and sound manner. Unsafe or unsound funding sources or utilization of funds in an unsafe and unsound manner may affect a credit union’s CAMEL 23 and risk ratings and could result in supervisory action. One commenter urged the NCUA to not establish new or more complex supervisory procedures for review of the plans. At the same time, however, the commenter also suggested that the NCUA communicate its expectations for such plans in advance of examinations to ensure consistent review. Given the changes to the regulation and the higher level of combined non-member funding allowed before a plan is required, the NCUA will be updating the related examination procedures and supervisory expectations accordingly. This information will be incorporated into the Examiner’s Guide, which is posted on the NCUA’s website. As always, the NCUA will continue to emphasize the importance of timely, ongoing and open communications between examiners and credit union management and officials. 5. Applicability to FISCUs. One commenter wrote that the incorporation of regulations by reference in part 741 and the repeated use of the term ‘‘federal credit union’’ within regulations applicable to FISCUs is confusing and creates regulatory burden. The commenter suggested that the NCUA incorporate the limits for public unit and nonmember shares applicable to FISCUs, in their entirety, within part 741. At this time, the Board is not prepared to adopt the change suggested by the commenter. The Board, however, has taken the suggestion under advisement for future rulemakings and has elaborated in this preamble on how the rule applies to FISCUs. 23 CAMEL is an internal rating system used for evaluating the soundness of credit unions on a uniform basis and for identifying those institutions requiring special supervisory attention or concern. The name CAMEL is an acronym derived from the first letter of each of the five critical elements of the credit union’s operations: (1) Capital Adequacy, (2) Asset Quality, (3) Management, (4) Earnings, and (5) Liquidity/Asset-Liability Management. E:\FR\FM\31OCR1.SGM 31OCR1 khammond on DSKJM1Z7X2PROD with RULES 58308 Federal Register / Vol. 84, No. 211 / Thursday, October 31, 2019 / Rules and Regulations C. Discussion of Comments From the Banking Trade Organizations The two comments from the banking trade organizations were strongly opposed to the proposal. Both commenters wrote that the proposed rule would undermine the cooperative character of FICUs and make them beholden to nonmember institutions. The commenters also saw little reason for the change, writing that concerns regarding fraud have arguably only grown since the NCUA originally promulgated the limit to address this problem. One of the banking trade organizations also asserted that the broad application of the ‘‘low-income’’ designation, which allows FICUs to secure nonmember deposits from any source, amplifies the safety and soundness concerns of the proposal. This commenter also raised potential impacts on the broader economy, writing that the peak of the economic cycle is the wrong time to increase leverage and fuel growth in expensive funding sources. Further, the commenter asserted that providing a new funding source for tax-free lending would decrease lendable funds at taxpaying financial institutions. The commenter wrote that this reallocation of deposits would reduce tax receipts to municipalities, thus reducing available government revenue to support necessary government programs. The Board disagrees with the assertions made by the banking trade organizations, and has not revised the proposal in response to these comments. Contrary to the statements made by the commenters that the proposal will undermine the purpose of credit unions, Congress explicitly recognized that nonmember shares could be a valuable source of funding for FICUs. As noted above, the FCU Act, which establishes the federal credit union system, authorizes FICUs to receive payment on shares from nonmembers, ‘‘within limitations prescribed by the Board.’’ 24 The final rule will amend the nonmember share regulations to better reflect congressional intent. Specifically, the final rule updates the regulations to recognize the significant changes the credit union industry has undergone in the 31 years since this limit was adopted, including credit unions’ growing need for diversified sources of funding to serve their members. The banking trade organizations also expressed concerns regarding fraud and safety and soundness. Unfortunately, as the 2008 housing crisis demonstrated, 24 Supra note 1. State law governs the authority for FISCUs to accept nonmember shares. VerDate Sep<11>2014 16:08 Oct 30, 2019 Jkt 250001 these are potential issues for the financial services sector as a whole. The Board remains committed to addressing market risks and to ensuring FICU compliance with applicable laws and regulations. The final rule adopts a balanced approach that provides FICUs with greater flexibility to determine an appropriate funding structure to support ongoing credit union operations in a financially sound and prudent manner. The commenters also raised potential impacts on the national and local economies but did not provide any data on which to assess these concerns. The Board believes that, by enabling FICUs to better serve the needs of their communities, any impact of the rule on the broader economy will be positive. However, the Board, as it does for all its regulations, will monitor the effects of this final rule and make necessary policy adjustments as the circumstances warrant. While this final rule will provide individual credit unions with additional flexibility regarding funding options, it will not materially increase the aggregate level of public unit and nonmember shares and borrowings the credit union system can collectively utilize. Credit unions could grow by 56 percent in aggregate if they all utilized the full authority under current regulation and net worth constraints.25 With this final rule, credit unions could grow by 65 percent in aggregate. Thus, this final rule only provides a modest amount of additional balance sheet leverage in total. Additionally, credit unions currently have about $69 billion in outstanding public unit, nonmember shares, and borrowings representing only 4 percent of total assets.26 V. Regulatory Procedures A. Regulatory Flexibility Act The Regulatory Flexibility Act 27 requires the NCUA to prepare an analysis to describe any significant economic impact a regulation may have on a substantial number of small entities (primarily those under $100 million in assets).28 This rule will provide FICUs with additional flexibility to accept public unit and nonmember shares. Accordingly, the Board believes that the 25 These percentages take into account a practical limit on the amount of funding credit unions can obtain before their net worth ratio would decline below 7 percent—the level necessary to be well capitalized for prompt corrective action purposes. See 12 CFR part 702. 26 The total amount of public unit and nonmember shares is $16 billion or 1 percent of total assets and the total amount of borrowings is $53 billion or 3 percent of total assets. 27 5 U.S.C. 601 et seq. 28 5 U.S.C. 603(a). PO 00000 Frm 00006 Fmt 4700 Sfmt 4700 rule will not have a significant economic impact on a substantial number of small credit unions. Therefore, a regulatory flexibility analysis is not required. B. Paperwork Reduction Act The Paperwork Reduction Act of 1995 (PRA) (44 U.S.C. 3501 et seq.) requires that the Office of Management and Budget (OMB) approve all collections of information by a Federal agency from the public before they can be implemented. Respondents are not required to respond to any collection of information unless it displays a current, valid OMB control number. In accordance with the PRA, the information collection requirements included in this final rule has been submitted to OMB for approval under control number 3133–0114. C. Executive Order 13132 Executive Order 13132 encourages independent regulatory agencies to consider the impact of their actions on state and local interests.29 The 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 will 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. The Board has therefore determined that this final rule does not constitute a policy that has federalism implications for purposes of the executive order. D. Assessment of Federal Regulations and Policies on Families The NCUA has determined that this final rule will not affect family wellbeing within the meaning of Section 654 of the Treasury and General Government Appropriations Act, 1999, Public Law 105–277, 112 Stat. 2681 (1998). E. Small Business Regulatory Enforcement Fairness Act The Small Business Regulatory Enforcement Fairness Act of 1996 (SBREFA) 30 generally provides for congressional review of agency rules. A reporting requirement is triggered in instances where the NCUA issues a final rule as defined by section 551 of the Administrative Procedure Act.31 An agency rule, in addition to being subject 29 64 FR 43255 (Aug. 4, 1999). Law 104–121. 31 5 U.S.C. 551. 30 Public E:\FR\FM\31OCR1.SGM 31OCR1 Federal Register / Vol. 84, No. 211 / Thursday, October 31, 2019 / Rules and Regulations 12 CFR Part 741 Bank deposit insurance, Credit unions, Reporting and recordkeeping requirements. By the National Credit Union Administration Board on October 24, 2019. Gerard Poliquin, Secretary of the Board. Credit unions, Public units, Nonmember accounts. (ii) $3 million. (2) Required due diligence. Before receiving public unit or nonmember shares that, taken together with any borrowings, exceed 70 percent of paidin and unimpaired capital and surplus, the board of directors must adopt a specific written plan concerning the intended use of these funds that is consistent with prudent risk management principles. * * * * * DEPARTMENT OF TRANSPORTATION FOR FURTHER INFORMATION CONTACT: Federal Aviation Administration 14 CFR Part 25 [Docket No. FAA–2019–0541; Special Conditions No. 25–758–SC] Special Conditions: The Boeing Company Model 777 Series Airplanes; Seats With Inertia Locking Devices Federal Aviation Administration (FAA), DOT. ACTION: Final special conditions. AGENCY: PART 741—REQUIREMENTS FOR INSURANCE 3. The authority for part 741 continues to read as follows: ■ 4. In § 741.204, revise paragraph (a) to read as follows: ■ § 741.204 Maximum public unit and nonmember accounts, and low-income designation. khammond on DSKJM1Z7X2PROD with RULES * * * * * (a) Adhere to the requirements of § 701.32 of this chapter regarding public unit and nonmember accounts, provided it has the authority to accept such accounts. * * * * * [FR Doc. 2019–23679 Filed 10–30–19; 8:45 am] BILLING CODE 7535–01–P VerDate Sep<11>2014 16:08 Oct 30, 2019 Jkt 250001 These special conditions are issued for The Boeing Company (Boeing) Model 777 series airplanes. These airplanes will have a novel or unusual design feature when compared to the state of technology envisioned in the airworthiness standards for transport-category airplanes. This design feature is an inertia locking device (ILD) installed in passenger seats. The applicable airworthiness regulations do not contain adequate or appropriate safety standards for this design feature. These special conditions contain the additional safety standards that the Administrator considers necessary to establish a level of safety equivalent to that established by the existing airworthiness standards. DATES: Effective December 2, 2019. SUMMARY: Authority: 12 U.S.C. 1757, 1766(a), 1781– 1790, and 1790d; 31 U.S.C. 3717. § 701.32 Payment on shares by public units and nonmembers. Authority: 12 U.S.C. 1752(5), 1755, 1756, 1757, 1758, 1759, 1761a, 1761b, 1766, 1767, 1782, 1784, 1786, 1787, 1789. Section 701.6 is also authorized by 15 U.S.C. 3717. Section PART 701—ORGANIZATION AND OPERATION OF FEDERAL CREDIT UNIONS 1. The authority for part 701 continues to read as follows: 12 CFR Part 701 2. In § 701.32, revise paragraph (b) to read as follows: ■ * * * * (b) Limitations—(1) Aggregate limit on public unit and nonmember shares. Except as permitted under paragraph (c) of this section, a federal credit union may not receive public unit and nonmember shares in excess of the greater of: (i) 50 percent of the net amount of paid-in and unimpaired capital and surplus less any public unit and nonmember shares, as measured at the time of acceptance of each public unit or nonmember share (i.e., For the reasons stated above, NCUA amends 12 CFR parts 701 and 741 as follows: ■ List of Subjects 701.31 is also authorized by 15 U.S.C. 1601 et seq.; 42 U.S.C. 1981 and 3601–3610. Section 701.35 is also authorized by 42 U.S.C. 4311–4312. PO 00000 Frm 00007 Fmt 4700 Sfmt 4700 * Shannon Lennon, Cabin and Airframe Safety Section, AIR–675, Transport Standards Branch, Policy and Innovation Division, Aircraft Certification Service, Federal Aviation Administration, 2200 South 216th Street, Des Moines, Washington 98198; telephone and fax 206–231–3209; email shannon.lennon@faa.gov. SUPPLEMENTARY INFORMATION: Background On December 6, 2013, Boeing applied for Type Certificate No. T00001SE for Model 777 series airplanes. On September 19, 2018, Boeing applied for a change to Type Certificate No. T00001SE for seats with inertia locking devices in Model 777 series airplanes. The Model 777 series airplane is a twinengine, transport-category airplane with a maximum takeoff weight of 775,000 pounds and seating for 495 passengers. Type Certification Basis Under the provisions of title 14, Code of Federal Regulations (14 CFR) 21.101, Boeing must show that the Model 777 series airplanes, as changed, continue to meet the applicable provisions of the regulations listed in Type Certificate No. T00001SE, or the applicable regulations in effect on the date of application for the change, except for earlier amendments as agreed upon by the FAA. E:\FR\FM\31OCR1.SGM 31OCR1 ER31OC19.019</GPH> to congressional oversight, may also be subject to a delayed effective date if the rule is a ‘‘major rule.’’ The NCUA does not believe this rule is a ‘‘major rule’’ within the meaning of the relevant sections of SBREFA. As required by SBREFA, the NCUA has submitted this final rule to the Office of Management and Budget (OMB) for it to determine if the final rule is a ‘‘major rule’’ for purposes of SBREFA. The OMB determined that the rule is not major. The NCUA also will file appropriate reports with Congress and the Government Accountability Office so this rule may be reviewed. 58309

Agencies

[Federal Register Volume 84, Number 211 (Thursday, October 31, 2019)]
[Rules and Regulations]
[Pages 58305-58309]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-23679]


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NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Parts 701 and 741

RIN 3313-AF00


Public Unit and Nonmember Shares

AGENCY: National Credit Union Administration (NCUA).

ACTION: Final rule.

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SUMMARY: The NCUA Board (Board) is amending the NCUA's public unit and 
nonmember share rule to allow federal credit unions (FCU) to receive 
public unit and nonmember shares up to 50 percent of the credit union's 
net amount of paid-in and unimpaired capital and surplus less any 
public unit and nonmember shares. This final rule also makes a 
conforming change to the NCUA's regulations that apply the public unit 
and nonmember share limit to all federally insured credit unions 
(FICUs). The final rule follows publication of a May 30, 2019, proposed 
rule and takes into consideration the public comments received on the 
proposed rule.

DATES: This final rule is effective January 29, 2020.

FOR FURTHER INFORMATION CONTACT: Ariel Pereira, Staff Attorney, Office 
of General Counsel, 1775 Duke Street, Alexandria, Virginia 22314, or by 
telephone at (703) 548-2778.

SUPPLEMENTARY INFORMATION:

I. Introduction
II. This Final Rule; Changes to Proposed Rule
III. Legal Authority
IV. Discussion of Public Comments Received on Proposed Rule
V. Regulatory Procedures

I. Introduction

A. Background

    Section 107(6) of the Federal Credit Union Act (FCU Act) provides 
that an FCU may receive payment on shares from its members (including 
public units that are members) and from other credit unions.\1\ Section 
107(6) also permits an FCU to receive payments on shares from 
nonmembers under certain circumstances, including payment on shares 
from nonmember public units and their political subdivisions.\2\ The 
term ``public unit'' generally refers to ``the United States, any state 
of the United States, the District of Columbia, the Commonwealth of 
Puerto Rico, the Panama Canal Zone, any territory or possession of the 
United States, any county, municipality, or political subdivision 
thereof, or any Indian tribe as defined in section 3(c) of the Indian 
Financing Act of 1974.'' \3\
---------------------------------------------------------------------------

    \1\ 12 U.S.C. 1757(6).
    \2\ Id.
    \3\ 12 CFR 745.1(c).
---------------------------------------------------------------------------

    Moreover, an FCU that predominantly serves low-income members may 
receive payment on shares from any source regardless of membership.\4\ 
Section 701.34 of the NCUA's regulations defines a ``low-income 
member'' as, among other things, a member ``whose family income is 80 
[percent] or less than the median family income for the metropolitan 
area where [the member] live[s] or [the] national metropolitan area, 
whichever is greater.'' \5\ Alternatively, a ``low-income member'' is a 
member ``who earn[s] 80 [percent] or less than the total median 
earnings for individuals for the metropolitan area where [the member] 
live[s] or [the] national metropolitan area, whichever is greater.'' 
\6\
---------------------------------------------------------------------------

    \4\ Supra note 1.
    \5\ 12 CFR 701.34(a)(2).
    \6\ Id.
---------------------------------------------------------------------------

    Section 701.32 of the NCUA's regulations limits the total amount of 
nonmember shares that an FCU may receive up to 20 percent of the credit 
union's total shares, or $3 million, whichever is greater, unless the 
shares are U.S. Treasury accounts or matching funds accounts required 
by the NCUA's Community Development Revolving Loan Fund Program.\7\ 
This limit also applies to public unit shares regardless of whether the 
public unit is a member of the credit union.
---------------------------------------------------------------------------

    \7\ 12 CFR 701.32(b), (c).
---------------------------------------------------------------------------

B. Regulatory Reform Agenda

    Consistent with the spirit of Executive Order 13777, entitled 
``Enforcing the Regulatory Reform Agenda,'' \8\ the Board established a 
Regulatory Reform Task Force (Task Force) to identify NCUA regulations 
that the agency should repeal, replace, or modify. The Task Force 
reviewed the NCUA regulations and submitted its first report to the 
Board in June 2017. In August 2017, the Board published the substance 
of the Task Force's first report in the Federal Register for public 
comment.\9\ After the close of the public comment period, the Board 
published the Task Force's second and final report in the Federal 
Register in December 2018.\10\
---------------------------------------------------------------------------

    \8\ Executive Order 1377 was issued on February 24, 2017, and 
subsequently published in the Federal Register on March 1, 2017 (82 
FR 12285).
    \9\ 82 FR 39702 (August 22, 2017).
    \10\ 83 FR 65926 (December 21, 2018).
---------------------------------------------------------------------------

    The Task Force's final report recommended that the Board increase 
the public unit and nonmember share limit in Sec.  701.32 of the NCUA's 
regulations.\11\ Specifically, the Task Force recommended raising the 
nonmember deposit limit from 20 percent to 50 percent. The Task Force 
stated that public unit and nonmember shares are the functional 
equivalent of borrowings. The change will parallel the ability of FCUs, 
as authorized under section 107(9) of the FCU Act,\12\ to borrow from 
any source up to 50 percent of the credit union's paid-in and 
unimpaired capital and surplus subject to such rules and regulations as 
the Board may prescribe.\13\ However, this limitation does not apply to 
discounts or sales of eligible obligations to any federal intermediate 
credit bank or loans from the Central Liquidity Facility.\14\
---------------------------------------------------------------------------

    \11\ Id. at 65940.
    \12\ 12 U.S.C. 1757(9).
    \13\ The term ``paid-in and unimpaired capital and surplus'' 
means shares and undivided earnings, plus net income or minus net 
loss. See 12 CFR 741.2.
    \14\ Supra note 13. For rules governing loans from the Central 
Liquidity Facility, see 12 CFR part 725.
---------------------------------------------------------------------------

C. NCUA's May 30, 2019, Proposed Rule

    On May 30, 2019, the NCUA published a proposed rule to implement 
the Task Force's recommendation.\15\ Specifically, the Board proposed 
to amend Sec.  701.32 of the NCUA's regulations to allow an FCU to 
receive public unit and nonmember shares up to 50 percent of the credit 
union's net amount of paid-in and unimpaired capital and surplus less 
any public unit and nonmember shares. The Board also proposed making 
conforming amendments to Sec.  741.204, which applies to all FICUs, to 
reflect the changes to Sec.  701.32. (Hereinafter, this preamble will 
refer to FICUs when discussing the applicability of the proposed and 
final rules, except where the discussion specifically applies to FCUs 
or federally insured, state-chartered credit unions (FISCUs)).
---------------------------------------------------------------------------

    \15\ 84 FR 35525.
---------------------------------------------------------------------------

    The change in standard from ``total shares'' to ``paid-in and 
unimpaired capital and surplus less any public unit and nonmember 
shares'' is not only consistent with the treatment of borrowings under 
the FCU Act, but is also intended to provide FICUs with greater ability 
to accept public unit and nonmember deposits because undivided earnings 
are included in the measurement of a FICU's paid-in and

[[Page 58306]]

unimpaired capital and surplus, thus increasing the base. The proposed 
rule subtracts public unit and nonmember shares from unimpaired capital 
and surplus for purposes of this 50 percent limit.\16\ This restriction 
is intended to provide a meaningful limit on the ability of an FICU to 
increase its leverage indefinitely, which could pose a clear risk to 
FICUs and the National Credit Union Share Insurance Fund (NCUSIF).
---------------------------------------------------------------------------

    \16\ In mathematical terms, the limitation is calculated as 
total public unit and nonmember shares/paid-in and unimpaired 
capital and surplus - total public unit and nonmember shares = 
maximum of 50%.
---------------------------------------------------------------------------

    The proposed rule does not allow a waiver process for a FICU to 
exceed the 50 percent limit as a matter of safety and soundness. The 
proposed rule also requires a FICU to develop and maintain a written 
plan if its public unit and nonmember shares, taken together with 
borrowings, exceed 70 percent of paid-in and unimpaired capital and 
surplus. This approach was designed to provide a FICU with flexibility 
to adopt a diverse funding structure without the regulatory burden of 
developing a plan regarding the intended use of those funds unless the 
credit union borrows a significant amount of funds or accepts a 
significant number of public unit and nonmember shares.
    The proposed rule provided for a 60-day comment period, which 
closed on July 29, 2019.

II. This Final Rule; Change to Proposed Rule

    This final rule follows publication of the May 30, 2019, proposed 
rule and takes into consideration the public comments received on the 
proposed rule. The NCUA received 17 public comments on the proposal. 
Comments were received from: (1) Individual FICUs; (2) national, state, 
and regional organizations representing FICUs; and (3) national banking 
trade organizations.
    Based on its review of the comments, and as further discussed in 
Section IV of this preamble, the Board has revised the proposal by 
retaining the alternative limit of $3 million. Specifically, the final 
rule provides that a FICU may receive public unit and nonmember shares 
in an amount up to 50 percent of the credit union's net amount of paid-
in and unimpaired capital and surplus less any public unit and 
nonmember shares, or $3 million, whichever is greater.

III. Legal Authority

    The Board is issuing this final rule pursuant to its authority 
under the FCU Act. Under the FCU Act, the NCUA is the chartering and 
supervisory authority for FCUs and the federal supervisory authority 
for FICUs.\17\ The FCU Act grants the NCUA a broad mandate to issue 
regulations governing both FCUs and all FICUs. Section 120 of the FCU 
Act is a general grant of regulatory authority and authorizes the Board 
to prescribe rules and regulations for the administration of the FCU 
Act.\18\ Section 207 of the FCU Act is a specific grant of authority 
over share insurance coverage, conservatorships, and liquidations.\19\ 
Section 209 of the FCU Act is a plenary grant of regulatory authority 
to the Board to issue rules and regulations necessary or appropriate to 
carry out its role as share insurer for all FICUs.\20\ In addition, 
Section 107 of the FCU Act specifically recognizes that the Board may 
prescribe limitations governing shares accepted by FCUs.\21\ 
Accordingly, the FCU Act grants the Board broad rulemaking authority to 
ensure that the credit union industry and the NCUSIF remain safe and 
sound.
---------------------------------------------------------------------------

    \17\ 12 U.S.C. 1752-1775.
    \18\ 12 U.S.C. 1766(a).
    \19\ 12 U.S.C. 1787(b)(1).
    \20\ 12 U.S.C. 1789(a)(11).
    \21\ 12 U.S.C. 1757(6).
---------------------------------------------------------------------------

IV. Discussion of the Public Comments Received on the Proposed Rule

A. The Public Comments, Generally

    The comments from FICUs and their representative organizations 
generally supported the proposed rule. In particular, the FICUs 
supported the revised aggregate limit. Several of the commenters 
explicitly agreed with the statement in the proposed rule's preamble 
that public unit and nonmember shares are the functional equivalent of, 
and no more volatile than, borrowings and, therefore, warrant a higher 
level of authority than what the current regulation allows. In general, 
the commenters wrote that the proposal would provide a greater balance 
between nonmember funding sources and borrowings, and better enable 
FICUs to seek more reasonably priced funding options.
    Several of these commenters also offered suggested changes to the 
proposed rule. In particular, the commenters expressed concerns about 
the proposed elimination of the $3 million alternative limit, 
especially the effects on newly chartered FICUs and low-income credit 
unions (LICUs).
    In contrast to the support expressed by the FICUs, the comments 
received from the banking trade organizations strongly objected to the 
proposed rule. These commenters wrote that the proposal would undermine 
the historical mission of FICUs, increase risk to the NCUSIF, and have 
negative economic impacts.

B. Discussion of FICU Comments on Specific Provisions of the Proposed 
Rule

    1. Minor effect on most FICUs. One of the commenters, while writing 
in overall support of the rule, indicated the proposal would have 
minimal effect on most FICUs. Based on its review of March 2019, Call 
Report data, the commenter wrote that the proposal would not increase 
the overall funding capacity (i.e., aggregate nonmember/public unit 
deposits and borrowings) for 51 percent of FICUs. The commenter 
believes the proposal will be most beneficial to small FICUs and LICUs 
because they tend to have the higher net worth ratios necessary to take 
full advantage of the proposed limit. The Board continues to believe 
that the proposal will provide all FICUs, and in particular small 
credit unions, with greater flexibility in their sources of funding.
    The commenter also wrote that the majority of FICUs rely on member 
shares for the ``overwhelming majority'' of their funds, and that this 
is unlikely to change. Another commenter, however, wrote that the 
current reluctance of some FICUs to use nonmember funding could be 
explained by the fact that these credit unions, as a liquidity risk 
management tool, have historically been reluctant to exhaust the 
availability of nonmember funds. The increase in the aggregate limit 
will provide these FICUs with additional flexibility in managing their 
liquidity needs and encourage them to seek more reasonably priced 
funding options. Further, this commenter noted other incentives for 
FICUs to increase their use of nonmember funds. According to the 
commenter, in recent years FICUs that have employed nonmember deposits 
have tended to be more active lenders and, therefore, achieved higher 
earnings on average than their peers.
    2. $3 million alternative limit. The NCUA specifically sought 
comment on the proposed elimination of the alternative limit of $3 
million. As noted, the current regulation limits FICUs to accepting 
public unit and nonmember shares up to 20 percent of total shares, or 
$3 million, whichever is greater. The Board thought that the proposed 
regulatory limit of 50 percent of the FICU's net amount of paid-in and 
unimpaired capital and surplus less any public unit and nonmember 
shares was appropriate and that an alternative $3 million limit would 
no longer be necessary. However, the Board also noted in the preamble 
to the proposed

[[Page 58307]]

rule that some small credit unions, particularly LICUs that rely on 
large volumes of nonmember shares as a necessary source of funding or 
newly chartered credit unions, might be adversely impacted by the 
elimination of the $3 million dollar limit. Consequently, the Board 
noted that it was actively considering retaining the alternative $3 
million limit and specifically sought comments on whether to retain it 
or provide a special exemption for small LICUs.
    The majority of the comments on this issue supported retaining some 
form of the alternative limit. At a minimum, these commenters urged the 
Board to either ``grandfather'' FICUs that currently use the limit or 
establish an exemption for newly chartered FICUs and LICUs. A minority 
of commenters supported the elimination of the alternative limit; 
however, several of them also suggested that the NCUA monitor the 
change for adverse consequences. These commenters recommended that the 
Board use the review to consider re-instituting the alternative limit.
    One of the commenters also urged that the alternative limit be 
increased to at least $5 million. The commenter wrote that the NCUA, in 
its 2011-2012 rulemaking raising the limit to $3 million, had 
benchmarked the amount on a hypothetical FCU with $7.5 million in total 
shares.\22\ According to the commenter, the increase to $5 million is 
necessary to maintain parity for a similarly situated FCU in 2019 
(i.e., the 36th percentile of credit unions ranked by share value).
---------------------------------------------------------------------------

    \22\ The proposed rule to raise the alternative limit to $3 
million was published on December 28, 2011 (76 FR 81 421). The 
subsequent final rule was published on May 31, 2012 (77 FR 31981).
---------------------------------------------------------------------------

    The Board has decided to revise its proposal given the broad 
support from the commenters for keeping the alternative limit. 
Specifically, the final rule retains the current alternative limit of 
$3 million. Upon further consideration, the Board agrees that the 
elimination of the limit could negatively impact some small credit 
unions, particularly those that are newly chartered and have not had 
the time to become adequately capitalized, which may rely on nonmember 
funding. The final rule, therefore, provides that a FICU may receive 
public unit and nonmember shares in an amount up to 50 percent of the 
FICU's net amount of paid-in and unimpaired capital and surplus less 
any public unit and nonmember shares, or $3 million, whichever is 
greater.
    3. Waivers from the appropriate regional director. The proposed 
rule would eliminate the procedures for obtaining a waiver from the 
appropriate regional director. The majority of commenters on this 
provision supported the removal of the waiver procedures. The 
commenters opposed to the change wrote that a regulatory waiver might 
be necessary to address fact-specific situations that merit a higher 
limit without increasing risk to the NCUSIF.
    The Board has not revised the proposal in response to these 
comments. Although the Board seeks to provide FICUs with greater 
flexibility, it also continues to believe that the removal of the 
waiver procedures is prudent given the increased regulatory limit. The 
NCUA does not envision situations arising like the hypothetical posed 
by the commenter that would merit a higher aggregate limit without 
consequently increasing the risk to the NCUSIF. Allowing a FICU to 
exceed this limit could lead to safety and soundness concerns and 
unnecessary risk for the NCUSIF.
    The Board also notes that currently effective waivers granted 
pursuant to the existing regulations are superseded by the final rule. 
These waivers are no longer necessary given the higher aggregate limit 
established by the rule. Accordingly, any such waivers will be 
considered expired upon the effective date of this final rule.
    4. Plan Regarding Use of Funds. Under the proposed rule, a FICU 
would be required to develop a plan regarding the intended use of any 
borrowings, public unit, or nonmember shares that, taken together, 
exceed 70 percent of the FICU's paid-in and unimpaired capital and 
surplus. The majority of the commenters writing on this issue supported 
the plan requirement, with only a single commenter disagreeing. The 
commenter opposing the plan requirement wrote that any risk associated 
with such a high level of borrowing should more appropriately be 
addressed in the contract between the lender and the FICU.
    This final rule adopts the proposed plan requirements without 
change. The Board believes that requiring a plan for material levels of 
external funding sources is prudent due diligence. The Board expects 
FICUs that accept elevated levels of public unit and nonmember shares 
and borrowings to document how the credit union will use those funds 
consistent with prudent risk management principles. As the Board 
explained in the proposed rule, FICUs will not need to submit these 
plans for approval before accepting funds that in total would exceed 70 
percent of paid-in and unimpaired capital and surplus. Instead, they 
must simply maintain the plan and make it available to NCUA examiners.
    Even though the Board expects that most FICUs will not need to 
develop a specific plan regarding the use of external funds, a FICU 
should continue to manage its balance sheet in a prudent manner. The 
NCUA will continue to review a FICU's business model and liquidity 
management to ensure the FICU is operating in a safe and sound manner. 
Unsafe or unsound funding sources or utilization of funds in an unsafe 
and unsound manner may affect a credit union's CAMEL \23\ and risk 
ratings and could result in supervisory action.
---------------------------------------------------------------------------

    \23\ CAMEL is an internal rating system used for evaluating the 
soundness of credit unions on a uniform basis and for identifying 
those institutions requiring special supervisory attention or 
concern. The name CAMEL is an acronym derived from the first letter 
of each of the five critical elements of the credit union's 
operations: (1) Capital Adequacy, (2) Asset Quality, (3) Management, 
(4) Earnings, and (5) Liquidity/Asset-Liability Management.
---------------------------------------------------------------------------

    One commenter urged the NCUA to not establish new or more complex 
supervisory procedures for review of the plans. At the same time, 
however, the commenter also suggested that the NCUA communicate its 
expectations for such plans in advance of examinations to ensure 
consistent review. Given the changes to the regulation and the higher 
level of combined non-member funding allowed before a plan is required, 
the NCUA will be updating the related examination procedures and 
supervisory expectations accordingly. This information will be 
incorporated into the Examiner's Guide, which is posted on the NCUA's 
website. As always, the NCUA will continue to emphasize the importance 
of timely, ongoing and open communications between examiners and credit 
union management and officials.
    5. Applicability to FISCUs. One commenter wrote that the 
incorporation of regulations by reference in part 741 and the repeated 
use of the term ``federal credit union'' within regulations applicable 
to FISCUs is confusing and creates regulatory burden. The commenter 
suggested that the NCUA incorporate the limits for public unit and 
nonmember shares applicable to FISCUs, in their entirety, within part 
741.
    At this time, the Board is not prepared to adopt the change 
suggested by the commenter. The Board, however, has taken the 
suggestion under advisement for future rulemakings and has elaborated 
in this preamble on how the rule applies to FISCUs.

[[Page 58308]]

C. Discussion of Comments From the Banking Trade Organizations

    The two comments from the banking trade organizations were strongly 
opposed to the proposal. Both commenters wrote that the proposed rule 
would undermine the cooperative character of FICUs and make them 
beholden to nonmember institutions. The commenters also saw little 
reason for the change, writing that concerns regarding fraud have 
arguably only grown since the NCUA originally promulgated the limit to 
address this problem. One of the banking trade organizations also 
asserted that the broad application of the ``low-income'' designation, 
which allows FICUs to secure nonmember deposits from any source, 
amplifies the safety and soundness concerns of the proposal. This 
commenter also raised potential impacts on the broader economy, writing 
that the peak of the economic cycle is the wrong time to increase 
leverage and fuel growth in expensive funding sources. Further, the 
commenter asserted that providing a new funding source for tax-free 
lending would decrease lendable funds at taxpaying financial 
institutions. The commenter wrote that this reallocation of deposits 
would reduce tax receipts to municipalities, thus reducing available 
government revenue to support necessary government programs.
    The Board disagrees with the assertions made by the banking trade 
organizations, and has not revised the proposal in response to these 
comments. Contrary to the statements made by the commenters that the 
proposal will undermine the purpose of credit unions, Congress 
explicitly recognized that nonmember shares could be a valuable source 
of funding for FICUs. As noted above, the FCU Act, which establishes 
the federal credit union system, authorizes FICUs to receive payment on 
shares from nonmembers, ``within limitations prescribed by the Board.'' 
\24\ The final rule will amend the nonmember share regulations to 
better reflect congressional intent. Specifically, the final rule 
updates the regulations to recognize the significant changes the credit 
union industry has undergone in the 31 years since this limit was 
adopted, including credit unions' growing need for diversified sources 
of funding to serve their members.
---------------------------------------------------------------------------

    \24\ Supra note 1. State law governs the authority for FISCUs to 
accept nonmember shares.
---------------------------------------------------------------------------

    The banking trade organizations also expressed concerns regarding 
fraud and safety and soundness. Unfortunately, as the 2008 housing 
crisis demonstrated, these are potential issues for the financial 
services sector as a whole. The Board remains committed to addressing 
market risks and to ensuring FICU compliance with applicable laws and 
regulations. The final rule adopts a balanced approach that provides 
FICUs with greater flexibility to determine an appropriate funding 
structure to support ongoing credit union operations in a financially 
sound and prudent manner. The commenters also raised potential impacts 
on the national and local economies but did not provide any data on 
which to assess these concerns. The Board believes that, by enabling 
FICUs to better serve the needs of their communities, any impact of the 
rule on the broader economy will be positive. However, the Board, as it 
does for all its regulations, will monitor the effects of this final 
rule and make necessary policy adjustments as the circumstances 
warrant.
    While this final rule will provide individual credit unions with 
additional flexibility regarding funding options, it will not 
materially increase the aggregate level of public unit and nonmember 
shares and borrowings the credit union system can collectively utilize. 
Credit unions could grow by 56 percent in aggregate if they all 
utilized the full authority under current regulation and net worth 
constraints.\25\ With this final rule, credit unions could grow by 65 
percent in aggregate. Thus, this final rule only provides a modest 
amount of additional balance sheet leverage in total. Additionally, 
credit unions currently have about $69 billion in outstanding public 
unit, nonmember shares, and borrowings representing only 4 percent of 
total assets.\26\
---------------------------------------------------------------------------

    \25\ These percentages take into account a practical limit on 
the amount of funding credit unions can obtain before their net 
worth ratio would decline below 7 percent--the level necessary to be 
well capitalized for prompt corrective action purposes. See 12 CFR 
part 702.
    \26\ The total amount of public unit and nonmember shares is $16 
billion or 1 percent of total assets and the total amount of 
borrowings is $53 billion or 3 percent of total assets.
---------------------------------------------------------------------------

V. Regulatory Procedures

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act \27\ requires the NCUA to prepare an 
analysis to describe any significant economic impact a regulation may 
have on a substantial number of small entities (primarily those under 
$100 million in assets).\28\ This rule will provide FICUs with 
additional flexibility to accept public unit and nonmember shares. 
Accordingly, the Board believes that the rule will not have a 
significant economic impact on a substantial number of small credit 
unions. Therefore, a regulatory flexibility analysis is not required.
---------------------------------------------------------------------------

    \27\ 5 U.S.C. 601 et seq.
    \28\ 5 U.S.C. 603(a).
---------------------------------------------------------------------------

B. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (PRA) (44 U.S.C. 3501 et seq.) 
requires that the Office of Management and Budget (OMB) approve all 
collections of information by a Federal agency from the public before 
they can be implemented. Respondents are not required to respond to any 
collection of information unless it displays a current, valid OMB 
control number. In accordance with the PRA, the information collection 
requirements included in this final rule has been submitted to OMB for 
approval under control number 3133-0114.

C. Executive Order 13132

    Executive Order 13132 encourages independent regulatory agencies to 
consider the impact of their actions on state and local interests.\29\ 
The 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 will 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. The Board 
has therefore determined that this final rule does not constitute a 
policy that has federalism implications for purposes of the executive 
order.
---------------------------------------------------------------------------

    \29\ 64 FR 43255 (Aug. 4, 1999).
---------------------------------------------------------------------------

D. Assessment of Federal Regulations and Policies on Families

    The 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).

E. Small Business Regulatory Enforcement Fairness Act

    The Small Business Regulatory Enforcement Fairness Act of 1996 
(SBREFA) \30\ generally provides for congressional review of agency 
rules. A reporting requirement is triggered in instances where the NCUA 
issues a final rule as defined by section 551 of the Administrative 
Procedure Act.\31\ An agency rule, in addition to being subject

[[Page 58309]]

to congressional oversight, may also be subject to a delayed effective 
date if the rule is a ``major rule.'' The NCUA does not believe this 
rule is a ``major rule'' within the meaning of the relevant sections of 
SBREFA. As required by SBREFA, the NCUA has submitted this final rule 
to the Office of Management and Budget (OMB) for it to determine if the 
final rule is a ``major rule'' for purposes of SBREFA. The OMB 
determined that the rule is not major. The NCUA also will file 
appropriate reports with Congress and the Government Accountability 
Office so this rule may be reviewed.
---------------------------------------------------------------------------

    \30\ Public Law 104-121.
    \31\ 5 U.S.C. 551.
---------------------------------------------------------------------------

List of Subjects

12 CFR Part 701

    Credit unions, Public units, Nonmember accounts.

12 CFR Part 741

    Bank deposit insurance, Credit unions, Reporting and recordkeeping 
requirements.

    By the National Credit Union Administration Board on October 24, 
2019.
Gerard Poliquin,
Secretary of the Board.

    For the reasons stated above, NCUA amends 12 CFR parts 701 and 741 
as follows:

PART 701--ORGANIZATION AND OPERATION OF FEDERAL CREDIT UNIONS

0
1. The authority for part 701 continues to read as follows:

    Authority: 12 U.S.C. 1752(5), 1755, 1756, 1757, 1758, 1759, 
1761a, 1761b, 1766, 1767, 1782, 1784, 1786, 1787, 1789. Section 
701.6 is also authorized by 15 U.S.C. 3717. Section 701.31 is also 
authorized by 15 U.S.C. 1601 et seq.; 42 U.S.C. 1981 and 3601-3610. 
Section 701.35 is also authorized by 42 U.S.C. 4311-4312.


0
2. In Sec.  701.32, revise paragraph (b) to read as follows:


Sec.  701.32  Payment on shares by public units and nonmembers.

* * * * *
    (b) Limitations--(1) Aggregate limit on public unit and nonmember 
shares. Except as permitted under paragraph (c) of this section, a 
federal credit union may not receive public unit and nonmember shares 
in excess of the greater of:
    (i) 50 percent of the net amount of paid-in and unimpaired capital 
and surplus less any public unit and nonmember shares, as measured at 
the time of acceptance of each public unit or nonmember share (i.e.,
[GRAPHIC] [TIFF OMITTED] TR31OC19.019

    (ii) $3 million.
    (2) Required due diligence. Before receiving public unit or 
nonmember shares that, taken together with any borrowings, exceed 70 
percent of paid-in and unimpaired capital and surplus, the board of 
directors must adopt a specific written plan concerning the intended 
use of these funds that is consistent with prudent risk management 
principles.
* * * * *

PART 741--REQUIREMENTS FOR INSURANCE

0
3. The authority for part 741 continues to read as follows:

    Authority: 12 U.S.C. 1757, 1766(a), 1781-1790, and 1790d; 31 
U.S.C. 3717.


0
4. In Sec.  741.204, revise paragraph (a) to read as follows:


Sec.  741.204  Maximum public unit and nonmember accounts, and low-
income designation.

* * * * *
    (a) Adhere to the requirements of Sec.  701.32 of this chapter 
regarding public unit and nonmember accounts, provided it has the 
authority to accept such accounts.
* * * * *
[FR Doc. 2019-23679 Filed 10-30-19; 8:45 am]
 BILLING CODE 7535-01-P