16234 Federal Register / Vol. 76, No. 56 / Wednesday, March 23, 2011 / Rules and Regulations 

1Part 702 has been amended five times since it 

was originally adopted in 2000: First, to incorporate 

limited technical corrections. 65 FR 55439 (Sept. 

14, 2000). Second, to delete sections made obsolete 

by adoption of a uniform quarterly schedule for 

filing Call Reports. 67 FR 12459 (March 19, 2002). 

Third, to incorporate a series of revisions and 

adjustments to improve and simplify PCA 

implementation. 67 FR 71078 (Nov. 29, 2002). A 

proposal to modify the criteria for filing a net worth 

restoration plan, 67 FR 7113 (Nov. 29, 2002), was 

never adopted. Fourth, to add a third risk-weighting 

tier to the standard risk-based net worth component 

for member business loans. 68 FR 56537, 56546 

(Oct. 1, 2003). Fifth, to implement a statutory 

amendment allowing the acquirer in a credit union 

merger to combine the merging credit union’s 

retained earnings with its own to determine the 

acquirer’s post-merger ‘‘net worth.’’ 73 FR 72688 

(Dec. 1, 2008). A proposed rule to expand the 

definition of ‘‘net worth’’ to include assistance 

provided under section 208 of the Federal Credit 

Union Act, 12 U.S.C. 1788, was issued by the 

NCUA Board on March 17, 2011. 

2 ‘‘Long-term real estate loans,’’ ‘‘Member Business 

Loans (‘‘MBL’’) outstanding,’’ ‘‘Investments,’’ ‘‘Lowrisk assets,’’ ‘‘Average-risk assets,’’ ‘‘Loans sold with 

recourse,’’ ‘‘Unused MBL commitments’’ and 

‘‘Allowance.’’ 12 CFR 702.104. 

3See joint letter dated October 13, 2010, from the 

Federal Reserve Board, Office of Comptroller of the 

Currency, the Federal Deposit Insurance 

Corporation and the Office of Thrift Supervision to 

Director, Division of Supervision, NCUA Office of 

Examination and Insurance. 

4To maximize the opportunity for credit union 

participation in the NGN offerings, the NCUA Board 

issued the Interim Final Rule and made it effective 

immediately under the good cause exception to the 

Administrative Procedure Act’s requirement of a 

public comment period preceding the adoption of 

a final rule, and of a waiting period of at least 30 

days between publication of a final rule and its 

effective date. 75 FR at 66299. 

NATIONAL CREDIT UNION 

ADMINISTRATION 

12 CFR Part 702 

RIN 3133–AD81 

Prompt Corrective Action; Amended 

Definition of Low-Risk Assets 

AGENCY: National Credit Union 

Administration (NCUA). 

ACTION: Final rule. 

SUMMARY: In 2010, NCUA issued an 

Interim Final Rule expanding the 

definition of ‘‘low-risk assets’’ to include 

debt instruments on which the payment 

of principal and interest is 

unconditionally guaranteed by NCUA. 

Assets in this category receive a riskweighting of zero for regulatory capital 

purposes to reflect the absence of credit 

risk. Having considered the public 

comments addressing the Interim Final 

Rule, NCUA is issuing this Final Rule 

permanently adopting the expanded 

definition of ‘‘low risk assets’’ without 

alteration. 

DATES: This rule is effective March 23, 

2011. 

FOR FURTHER INFORMATION CONTACT: 

Steven W. Widerman, Trial Attorney, at 

the above address, or telephone: (703) 

518–6557. 

SUPPLEMENTARY INFORMATION: 

Background 

1. Prompt Corrective Action. In 1998, 

the Credit Union Membership Access 

Act, Public Law 105–219, 112 Stat. 913, 

mandated a system of regulatory capital 

standards for ‘‘natural person’’ credit 

unions entitled ‘‘Prompt Corrective 

Action’’ (‘‘PCA’’), 12 U.S.C. 1790d et seq. 

The NCUA Board adopted a 

comprehensive system of PCA, 

primarily in Part 702,1 that imposes 

minimum capital standards and 

corresponding remedies to improve a 

credit union’s net worth. 12 CFR 702 et 

seq. 

Under PCA, a ‘‘natural person’’ credit 

union’s ‘‘net worth ratio’’ determines its 

classification among five statutory net 

worth categories. 12 U.S.C. 1790d(c); 12 

CFR 702.102. As a credit union’s ‘‘net 

worth ratio’’ declines, so does its 

classification among the five net worth 

categories, thus subjecting it to an 

expanding range of mandatory and 

discretionary supervisory actions. 12 

U.S.C. 1790d(e), (f) and (g); 12 CFR 

702.204(a)–(b). For a credit union that is 

subject to an additional Risk-Based Net 

Worth Requirement, id. § 702.103, its 

minimum required ‘‘net worth ratio’’ 

depends upon a risk-weighting applied 

to each of eight different portfolios of 

credit union assets.2 Id. § 702.104. 

2. NCUA Guaranteed Notes. Chief 

among the problems experienced by 

corporate credit unions (‘‘CCUs’’) during 

the Nation’s recent economic downturn 

is the substantial devaluation of the 

mortgage-backed and asset-backed 

securities (‘‘the distressed assets’’) held 

in their investment portfolios. In five 

such cases, the realization of losses on 

these distressed assets has driven the 

CCU into insolvency, requiring NCUA 

to place the CCU into liquidation. 

To monetize the distressed assets held 

by the liquidated CCUs, NCUA 

embarked on a program in 2010 to 

securitize and sell those assets in a 

series of public offerings of senior debt 

instruments denominated ‘‘NCUA 

Guaranteed Notes’’ (‘‘NGNs’’). Under the 

NGN program, the Asset Management 

Estate of each liquidated CCU sells its 

distressed assets to a trust established 

by NCUA, which then resecuritizes the 

distressed assets in the form of NGNs. 

The trust then passes through to the 

NGN-holders the monthly cash flows 

produced by the underlying distressed 

assets. The NGNs benefit from the credit 

enhancement provided by the 

overcollateralization and excess interest 

generated by the underlying distressed 

assets. 

To reinforce investor confidence in 

the NGNs, NCUA, as an agency of the 

Executive Branch of the United States, 

fully and unconditionally guarantees to 

investors the timely payment of 

principal and interest (‘‘the NCUA 

Guaranty’’). The NCUA Guaranty is 

backed by the full faith and credit of the 

United States. As a result of the NCUA 

Guaranty, the NGNs are legally 

permissible investments for federal 

‘‘natural person’’ and CCUs, 12 U.S.C. 

1757(7)(B); 12 CFR 704.5(c)(1) (2011), 

and for state-chartered ‘‘natural person’’ 

credit unions to the extent permitted by 

state law at the time of purchase. 

3. Risk-Weighting of ‘‘Low-Risk 

Assets’’. Under PCA as it existed prior 

to this rulemaking, the NGNs held by a 

natural person credit union would fall 

within the ‘‘investments’’ risk portfolio. 

Id. § 702.104(c). The minimum riskweighting applied to assets in that 

portfolio, based on their weighted 

average life, is 3 percent. Id. 

§ 702.106(c)(1). The ‘‘investments’’ 

portfolio does not apply a riskweighting of zero even when an 

investment carries no credit risk. The 

‘‘Low-risk assets’’ risk portfolio, in 

contrast, does apply a risk-weighting of 

zero, but the NGNs did not fall within 

its scope. Id. § 702.106(d). Its scope was 

limited to ‘‘Cash on hand * * * and the 

NCUSIF deposit.’’ Id. § 702.104(d). 

Recognizing that an obligation 

supported by the full faith and credit of 

the United States carries no credit risk, 

the four other federal financial 

institution regulators jointly permit 

their respective institutions to apply a 

zero percent risk-weighting to the NGNs 

those institutions purchase because of 

the unconditional NCUA Guaranty.3

The purpose of this rulemaking is to 

accord the same zero percent riskweighting to NGNs purchased by 

‘‘natural person’’ credit unions. 

Otherwise, potential credit union 

investors in the NGNs would face a 

disincentive to invest: A minimum 3 

percent risk-weighting—and the adverse 

effect on PCA net worth—even though 

the NGNs are free of credit risk. 

4. Comments on Interim Final Rule. 

To accord the NGNs a risk-weighting of 

zero for regulatory capital purposes, the 

NCUA Board issued an ‘‘Interim final 

rule with request for comments,’’ 

expanding the definition ‘‘low risk 

assets’’ to include ‘‘debt instruments 

unconditionally guaranteed by the 

National Credit Union Administration,’’ 

and thus backed by the full faith and 

credit of the United States.4 75 FR 

66298 (October 28, 2010). NCUA 


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Federal Register / Vol. 76, No. 56 / Wednesday, March 23, 2011 / Rules and Regulations 16235 

received two comment letters in 

response to the Interim Final Rule, both 

from national credit union industry 

trade associations. 

Both commenters supported the 

Interim Final Rule without reservation, 

addressing collateral matters as well. 

One commenter advocated a separate 

rulemaking to consider further 

broadening the definition of ‘‘low risk 

assets’’ to add other ‘‘similar low-risk 

assets such as credit union investments 

in Federal Home Loan Bank securities.’’ 

This final rule leaves open to the NCUA 

Board the option of adding debt 

instruments guaranteed by other 

Government entities to the ‘‘low risk 

assets’’ portfolio once NCUA has had an 

opportunity to assess its experience 

with the NGN offerings in retrospect 

(including whether the NCUA Guaranty 

was tapped), and to consider other risks 

associated with those instruments. 

In regard to the NGN offerings, the 

other commenter encouraged maximum 

transparency and disclosure of 

information about the NGNs in order to 

help those credit unions that lack the 

expertise and resources to 

independently asses the NGNs and to 

make informed business decisions about 

whether to invest. To ensure 

comprehensive transparency and 

disclosure of information about each 

NGN offering, the offerings are being 

conducted for NCUA by a Wall Street 

investment banking firm that specializes 

in the issuance of structured debt 

products by governmental entities. 

Further, as reflected primarily in the 

Offering Memorandum for each NGN 

offering, NCUA is relying on the advice 

of two law firms that have substantial 

expertise in the legal disclosure 

requirements that apply to these 

transactions. 

In view of the commenters’ support of 

the Interim Final Rule, there is no 

reason to revise the amendatory 

language. Accordingly, the NCUA Board 

adopts in final the language of the 

Interim Final Rule without alteration. 

Regulatory Procedures 

Regulatory Flexibility Act 

The Regulatory Flexibility Act 

requires NCUA to prepare an analysis to 

describe any significant economic 

impact a rule may have on a substantial 

number of small entities (primarily 

those under ten million dollars in 

assets). This rule will not have a 

significant economic impact on a 

substantial number of small credit 

unions. Thus, a Regulatory Flexibility 

Analysis is not required. 

Paperwork Reduction Act 

NCUA has determined that this rule 

will not increase paperwork 

requirements under the Paperwork 

Reduction Act of 1995 and regulations 

of the Office of Management and 

Budget. Control number 3133–0129 has 

been issued for Part 702 and will be 

displayed at the table at 12 CFR part 

795. 

Executive Order 13132 

Executive Order 13132 encourages 

independent regulatory agencies to 

consider the impact of their regulatory 

actions on State and local interests. 

NCUA, an independent regulatory 

agency as defined in 44 U.S.C. 3502(5), 

voluntarily adheres to the fundamental 

federalism principles addressed by the 

Executive Order. This rule would not 

have a substantial direct effect on the 

States, on the relationship between the 

national government and the States, or 

on the distribution of power and 

responsibilities among the various 

levels of government. Accordingly, this 

rule does not constitute a policy that has 

federalism implications for purposes of 

the Executive Order. 

Treasury and General Government 

Appropriations Act, 1999 

NCUA has determined that the 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). 

Small Business Regulatory Enforcement 

Fairness Act 

The Small Business Regulatory 

Enforcement Fairness Act of 1996 

(Pub. L. 104–121) (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 APA. 5 U.S.C. 551. NCUA 

does not believe this rule is a ‘‘major 

rule’’ within the meaning of the relevant 

sections of SBREFA. The Office of 

Management and Budget has 

determined that the Interim Final Rule 

is not a ‘‘major rule’’ for purposes of 

SBREFA. As required by SBREFA, 

NCUA will file appropriate reports with 

Congress and the General 

Accountability Office so this rule may 

be reviewed. 

List of Subjects in 12 CFR Part 702 

Credit unions, Reporting and 

recordkeeping requirements. 

By the National Credit Union 

Administration Board on March 17, 2011. 

Mary F. Rupp, 

Secretary of the Board. 

Accordingly, the Interim Final Rule 

amending 12 CFR part 702, which was 

published at 75 FR 66298 on October 

28, 2010, is adopted as a Final Rule 

without change. 

[FR Doc. 2011–6754 Filed 3–22–11; 8:45 am] 

BILLING CODE 7535–01–P 

NATIONAL CREDIT UNION 

ADMINISTRATION 

12 CFR Part 707 

RIN 3133–AD58 

Corporate Credit Unions, Technical 

Corrections 

AGENCY: National Credit Union 

Administration (NCUA). 

ACTION: Final rule. 

SUMMARY: In 2010, NCUA issued 

technical corrections to its corporate 

credit union rule, published in the 

Federal Register of October 20, 2010. 

NCUA is issuing this final rule adopting 

the technical corrections without 

alteration. 

DATES: This rule is effective March 23, 

2011. 

FOR FURTHER INFORMATION CONTACT: 

Elizabeth Wirick, Staff Attorney, Office 

of General Counsel, National Credit 

Union Administration, 1775 Duke 

Street, Alexandria, Virginia 22314– 

3428, or telephone: (703) 518–6540. 

SUPPLEMENTARY INFORMATION: 

I. Background 

In October 2010, NCUA published a 

comprehensive overhaul to its corporate 

credit union rule, 12 CFR part 704. 75 

FR 64786 (Oct. 20, 2010). After 

publication, NCUA discovered that 

three technical corrections were 

necessary, and NCUA issued an interim 

final rule containing the corrections in 

December. 75 FR 47173 (Dec. 20, 2010). 

The technical corrections are as follows: 

Section 704.2 Definition of 

‘‘collateralized debt obligation’’ 

The final revisions to part 704 

prohibited corporate credit unions 

(corporates) from purchasing certain 

overly complex or leveraged 

investments, including collateralized 

debt obligations (CDOs). 75 FR 64786, 

64793 (October 20, 2010). These 

prohibitions were intended to protect 

the corporates from the potential for 

excessive investment losses. 74 FR 

65210, 65237 (December 9, 2009) 


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