Editorial Note on Part 702
Editorial Note: Nomenclature changes to part 702 appear at 84 FR 1606, Feb. 5, 2019.

§ 702.2 Definitions. Unless otherwise provided in this part, the terms used in this part have the same meanings as set forth in FCUA sections 101 and 216, 12 U.S.C. 1752, 1790d. All accounting terms not otherwise defined in this section have meanings consistent with the commonly-accepted meanings under United States generally accepted accounting principles (U.S. GAAP). The following definitions apply to this part: *Allowances for loan and lease losses (ALLL)* means valuation allowances that have been established through a charge against earnings to cover estimated credit losses on loans, lease financing receivables or other extensions of credit as determined in accordance with GAAP.
*Amortized cost* means the purchase price of a security adjusted for amortizations of premium or accretion of discount if the security was purchased at other than par or face value.
*Appropriate state official* means the state commission, board or other supervisory authority that chartered the affected credit union.
*Call Report* means the Call Report required to be filed by all credit unions under § 741.6(a)(2) of this chapter.
*Carrying value* means the value of the asset or liability on the statement of financial condition of the credit union, determined in accordance with GAAP.
*CCULR* means the complex credit union leverage ratio. It is calculated in the same manner as the net worth ratio under § 702.2.
*Central counterparty (CCP)* means a counterparty (for example, a clearing house) that facilitates trades between counterparties in one or more financial markets by either guaranteeing trades or novating contracts.
*Charitable donation account* means an account that satisfies all of the conditions in § 721.3(b)(2)(i), (b)(2)(ii), and (b)(2)(v) of this chapter.
*Commercial loan* means any loan, line of credit, or letter of credit (including any unfunded commitments) for commercial, industrial, and professional purposes, but not for investment or personal expenditure purposes. Commercial loan excludes loans to CUSOs, first- or junior-lien residential real estate loans, and consumer loans.
*Commitment* means any legally binding arrangement that obligates the credit union to extend credit, purchase or sell assets, enter into a borrowing agreement, or enter into a financial transaction.
*Consumer loan* means a loan or lease for household, family, or other personal expenditures, including any loans or leases that, at origination, are wholly or substantially secured by vehicles generally manufactured for personal, family, or household use regardless of the purpose of the loan or lease. Consumer loan excludes commercial loans, loans to CUSOs, first- and junior-lien residential real estate loans, and loans for the purchase of one or more vehicles to be part of a fleet of vehicles.
*Contractual compensating balance* means the funds a commercial loan borrower must maintain on deposit at the lender credit union as security for the loan in accordance with the loan agreement, subject to a proper account hold and on deposit as of the measurement date.
*Credit conversion factor (CCF)* means the percentage used to assign a credit exposure equivalent amount for selected off-balance sheet accounts.
*Credit derivative* means a financial contract executed under standard industry credit derivative documentation that allows one party (the protection purchaser) to transfer the credit risk of one or more exposures (reference exposure(s)) to another party (the protection provider) for a certain period of time.
*Credit union* means a federally insured, natural person credit union, whether federally- or state-chartered.
*Current* means, with respect to any loan or lease, that the loan or lease is less than 90 days past due, not placed on non-accrual status, and not restructured.
*CUSO* means a credit union service organization as defined in part 712 and 741 of this chapter.
*Custodian* means a financial institution that has legal custody of collateral as part of a qualifying master netting agreement, clearing agreement, or other financial agreement.
*Depository institution* means a financial institution that engages in the business of providing financial services; that is recognized as a bank or a credit union by the supervisory or monetary authorities of the country of its incorporation and the country of its principal banking operations; that receives deposits to a substantial extent in the regular course of business; and that has the power to accept demand deposits. Depository institution includes all federally insured offices of commercial banks, mutual and stock savings banks, savings or building and loan associations (stock and mutual), cooperative banks, credit unions and international banking facilities of domestic depository institutions, and all privately insured state chartered credit unions.
*Derivative contract* means a financial contract that derives its value from the value and performance of some other underlying financial instrument or variable, such as an index or interest rate.
*Derivatives Clearing Organization* has the meaning as defined by the Commodity Futures Trading Commission (CFTC) in 17 CFR 1.3.
*Equity investment* means investments in equity securities and any other ownership interests, including, for example, investments in partnerships and limited liability companies.
*Equity investment in CUSOs* means the unimpaired value of the credit union's equity investments in a CUSO as recorded on the statement of financial condition in accordance with GAAP.
*Exchange* means a central financial clearing market where end users can enter into derivative transactions.
*Excluded goodwill* means the outstanding balance, maintained in accordance with GAAP, of any goodwill originating from a supervisory merger or combination that was completed on or before December 28, 2015.
*Excluded other intangible assets* means the outstanding balance, maintained in accordance with GAAP, of any other intangible assets such as core deposit intangible, member relationship intangible, or trade name intangible originating from a supervisory merger or combination that was completed on or before December 28, 2015.
*Exposure amount* means: ( 1 ) The amortized cost for investments classified as held-to-maturity and available-for-sale, and the fair value for trading securities.
( 2 ) The outstanding balance for Federal Reserve Bank Stock, Central Liquidity Facility Stock, Federal Home Loan Bank Stock, nonperpetual capital and perpetual contributed capital at corporate credit unions, and equity investments in CUSOs.
( 3 ) The carrying value for non-CUSO equity investments, and investment funds.
( 4 ) The carrying value for the credit union's holdings of general account permanent insurance, and separate account insurance.
( 5 ) The amount calculated under § 702.105 of this part for derivative contracts.
*Fair value* has the same meaning as provided in GAAP.
*Financial collateral* means collateral approved by both the credit union and the counterparty as part of the collateral agreement in recognition of credit risk mitigation for derivative contracts.
*First-lien residential real estate loan* means a loan or line of credit primarily secured by a first-lien on a one-to-four family residential property where: ( 1 ) The credit union made a reasonable and good faith determination at or before consummation of the loan that the member will have a reasonable ability to repay the loan according to its terms; and
( 2 ) In transactions where the credit union holds the first-lien and junior lien(s), and no other party holds an intervening lien, for purposes of this part the combined balance will be treated as a single first-lien residential real estate loan.
*Forward agreement* means a legally binding contractual obligation to purchase assets with certain drawdown at a specified future date, not including commitments to make residential mortgage loans or forward foreign exchange contracts.
*GAAP* means generally accepted accounting principles in the United States as set forth in the Financial Accounting Standards Board's (FASB) Accounting Standards Codification (ASC).
*General account permanent insurance* means an account into which all premiums, except those designated for separate accounts are deposited, including premiums for life insurance and fixed annuities and the fixed portfolio of variable annuities, whereby the general assets of the insurance company support the policy.
*General obligation* means a bond or similar obligation that is backed by the full faith and credit of a public sector entity.
*Goodwill* means an intangible asset, maintained in accordance with GAAP, representing the future economic benefits arising from other assets acquired in a business combination (e.g., merger) that are not individually identified and separately recognized. Goodwill does not include excluded goodwill.
*Government guarantee* means a guarantee provided by the U.S. Government, FDIC, NCUA or other U.S. Government agency, or a public sector entity.
*Government-sponsored enterprise (GSE)* means an entity established or chartered by the U.S. Government to serve public purposes specified by the U.S. Congress, but whose debt obligations are not explicitly guaranteed by the full faith and credit of the U.S. Government.
*Grandfathered Secondary Capital* means any secondary capital issued under § 701.34 of this chapter, before January 1, 2022 or, in the case of a federally insured, state-chartered credit union, with § 741.204(c) of this chapter, before January 1, 2022. (12 CFR 701.34 was recodified as § 702.414 as of January 1, 2022). This term also includes issuances of secondary capital to the U.S. Government or any of its subdivisions, under applications approved before January 1, 2022, pursuant to § 701.34 or § 741.204(c) of this chapter, irrespective of the date of issuance.
*Guarantee* means a financial guarantee, letter of credit, insurance, or similar financial instrument that allows one party to transfer the credit risk of one or more specific exposures to another party.
*Identified losses* means those items that have been determined by an evaluation made by NCUA, or in the case of a state chartered credit union the appropriate state official, as measured on the date of examination in accordance with GAAP, to be chargeable against income, equity or valuation allowances such as the allowances for loan and lease losses. Examples of identified losses would be assets classified as losses, off-balance sheet items classified as losses, any provision expenses that are necessary to replenish valuation allowances to an adequate level, liabilities not shown on the books, estimated losses in contingent liabilities, and differences in accounts that represent shortages.
*Industrial development bond* means a security issued under the auspices of a state or other political subdivision for the benefit of a private party or enterprise where that party or enterprise, rather than the government entity, is obligated to pay the principal and interest on the obligation.
*Intangible assets* mean assets, maintained in accordance with GAAP, other than financial assets, that lack physical substance.
*Investment fund* means an investment with a pool of underlying investment assets. Investment fund includes an investment company that is registered under section 8 of the Investment Company Act of 1940, and collective investment funds or common trust investments that are unregistered investment products that pool fiduciary client assets to invest in a diversified pool of investments.
*Junior-lien residential real estate loan* means a loan or line of credit secured by a subordinate lien on a one-to-four family residential property.
*Loan secured by real estate* means a loan that, at origination, is secured wholly or substantially by a lien(s) on real property for which the lien(s) is central to the extension of the credit. A lien is “central” to the extension of credit if the borrowers would not have been extended credit in the same amount or on terms as favorable without the liens on real property. For a loan to be “secured wholly or substantially by a lien(s) on real property,” the estimated value of the real estate collateral at origination (after deducting any more senior liens held by others) must be greater than 50 percent of the principal amount of the loan at origination.
*Loan to a CUSO* means the outstanding balance of any loan from a credit union to a CUSO as recorded on the statement of financial condition in accordance with GAAP.
*Loans transferred with limited recourse* means the total principal balance outstanding of loans transferred, including participations, for which the transfer qualified for true sale accounting treatment under GAAP, and for which the transferor credit union retained some limited recourse (*i.e.,* insufficient recourse to preclude true sale accounting treatment). Loans transferred with limited recourse excludes transfers that qualify for true sale accounting treatment but contain only routine representation and warranty clauses that are standard for sales on the secondary market, provided the credit union is in compliance with all other related requirements, such as capital requirements.
*Mortgage-backed security (MBS)* means a security backed by first- or junior-lien mortgages secured by real estate upon which is located a dwelling, mixed residential and commercial structure, residential manufactured home, or commercial structure.
*Mortgage partnership finance program* means a Federal Home Loan Bank program through which loans are originated by a depository institution that are purchased or funded by the Federal Home Loan Banks, where the depository institution receives fees for managing the credit risk of the loans. The credit risk must be shared between the depository institution and the Federal Home Loan Banks.
*Mortgage servicing assets* mean those assets, maintained in accordance with GAAP, resulting from contracts to service loans secured by real estate (that have been securitized or owned by others) for which the benefits of servicing are expected to more than adequately compensate the servicer for performing the servicing.
*Multilateral development bank* (MDB) means the International Bank for Reconstruction and Development, the Multilateral Investment Guarantee Agency, the International Finance Corporation, the Inter-American Development Bank, the Asian Development Bank, the African Development Bank, the European Bank for Reconstruction and Development, the European Investment Bank, the European Investment Fund, the Nordic Investment Bank, the Caribbean Development Bank, the Islamic Development Bank, the Council of Europe Development Bank, and any other multilateral lending institution or regional development bank in which the U.S. government is a shareholder or contributing member.
*NCUSIF* means the National Credit Union Share Insurance Fund as defined by 12 U.S.C. 1783.
*Net worth* means, with respect to any federally insured, natural person credit union, as of any date of determination: ( 1 ) The retained earnings balance of the credit union at the most recent quarter end, as determined in accordance with U.S. GAAP, subject to paragraph (3) of this definition.
( 2 ) With respect to a low-income designated credit union, the outstanding principal amount of Subordinated Debt treated as Regulatory Capital in accordance with § 702.407, and the outstanding principal amount of Grandfathered Secondary Capital treated as Regulatory Capital in accordance with § 702.414, in each case that is: ( i ) Uninsured; and
( ii ) Subordinate to all other claims against the credit union, including claims of creditors, shareholders, and the National Credit Union Share Insurance Fund.
( 3 ) For a credit union that acquires another credit union in a mutual combination, net worth also includes the retained earnings of the acquired credit union, or of an integrated set of activities and assets, less any bargain purchase gain recognized in either case to the extent the difference between the two is greater than zero. The acquired retained earnings must be determined at the point of acquisition under GAAP. A mutual combination, including a supervisory combination, is a transaction in which a credit union acquires another credit union or acquires an integrated set of activities and assets that is capable of being conducted and managed as a credit union.
( 4 ) The term “net worth” also includes loans to and accounts in an insured credit union, established pursuant to section 208 of the Act [12 U.S.C. 1788], provided such loans and accounts: ( i ) Have a remaining maturity of more than 5 years;
( ii ) Are subordinate to all other claims including those of shareholders, creditors, and the NCUSIF;
( iii ) Are not pledged as security on a loan to, or other obligation of, any party;
( iv ) Are not insured by the NCUSIF;
( v ) Have non-cumulative dividends;
( vi ) Are transferable; and
( vii ) Are available to cover operating losses realized by the insured credit union that exceed its available retained earnings.
*Net worth ratio* means the ratio of the net worth of the credit union to the total assets of the credit union, expressed as a percentage rounded to two decimal places.
*New credit union* has the same meaning as in § 702.201.
*Nonperpetual capital* has the same meaning as in § 704.2 of this chapter.
*Non-security beneficial interest* is defined as the residual equity interest in the Special Purpose Entity (SPE) that represents a right to receive possible future payments after specified payment amounts are made to third-party investors in the securitized receivables. For purposes of this definition, a SPE means a trust, bankruptcy remote entity or other special purpose entity which is wholly owned, directly or indirectly, by the credit union and which is formed for the purpose of, and engages in no material business other than, acting as an issuer or a depositor in a securitization.
*Off-balance sheet exposure* means: ( 1 ) For unfunded commitments, excluding unconditionally cancellable commitments, the remaining unfunded portion of the contractual agreement.
( 2 ) For loans transferred with limited recourse, or other seller-provided credit enhancements, and that qualify for true sales accounting, the maximum contractual amount the credit union is exposed to according to the agreement, net of any related valuation allowance.
( 3 ) For loans transferred under the Federal Home Loan Bank (FHLB) mortgage partnership finance program, the outstanding loan balance as of the reporting date, net of any related valuation allowance.
( 4 ) For financial standby letters of credit, the total potential exposure of the credit union under the contractual agreement.
( 5 ) For forward agreements that are not derivative contracts, the future contractual obligation amount.
( 6 ) For sold credit protection through guarantees and credit derivatives, the total potential exposure of the credit union under the contractual agreement.
( 7 ) For off-balance sheet securitization exposures, the notional amount of the off-balance sheet credit exposure (including any credit enhancements, representations, or warranties that obligate a credit union to protect another party from losses arising from the credit risk of the underlying exposures) that arises from a securitization.
( 8 ) For securities borrowing or lending transactions, the amount of all securities borrowed or lent against collateral or on an uncollateralized basis.
*Off-balance sheet items* means off-balance sheet exposures and the off-balance sheet exposure amount of repurchase transactions.
*On-balance sheet* means a credit union's assets, liabilities, and equity, as disclosed on the statement of financial condition at a specific point in time.
*Other intangible assets* means intangible assets, other than servicing assets and goodwill, maintained in accordance with GAAP. Other intangible assets does not include excluded other intangible assets.
*Over-the-counter (OTC) interest rate derivative contract* means a derivative contract that is not cleared on an exchange.
*Part 703 compliant investment fund* means an investment fund that is restricted to holding only investments that are permissible under § 703.14(c) of this chapter.
*Perpetual contributed capital* has the same meaning as in § 704.2 of this chapter.
*Public sector entity (PSE)* means a state, local authority, or other governmental subdivision of the United States below the sovereign level.
*Qualifying master netting agreement* means a written, legally enforceable agreement, provided that: ( 1 ) The agreement creates a single legal obligation for all individual transactions covered by the agreement upon an event of default, including upon an event of conservatorship, receivership, insolvency, liquidation, or similar proceeding, of the counterparty;
( 2 ) The agreement provides the credit union the right to accelerate, terminate, and close out on a net basis all transactions under the agreement and to liquidate or set off collateral promptly upon an event of default, including upon an event of conservatorship, receivership, insolvency, liquidation, or similar proceeding, of the counterparty, provided that, in any such case, any exercise of rights under the agreement will not be stayed or avoided under applicable law in the relevant jurisdictions, other than in receivership, conservatorship, resolution under the Federal Deposit Insurance Act, Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act, or under any similar insolvency law applicable to GSEs;
( 3 ) The agreement does not contain a walkaway clause (that is, a provision that permits a non-defaulting counterparty to make a lower payment than it otherwise would make under the agreement, or no payment at all, to a defaulter or the estate of a defaulter, even if the defaulter or the estate is a net creditor under the agreement); and
( 4 ) In order to recognize an agreement as a qualifying master netting agreement for purposes of this part, a credit union must conduct sufficient legal review, at origination and in response to any changes in applicable law, to conclude with a well-founded basis (and maintain sufficient written documentation of that legal review) that: ( i ) The agreement meets the requirements of paragraph (2) of this definition; and
( ii ) In the event of a legal challenge (including one resulting from default or from conservatorship, receivership, insolvency, liquidation, or similar proceeding), the relevant court and administrative authorities would find the agreement to be legal, valid, binding, and enforceable under the law of relevant jurisdictions.
*Recourse* means a credit union's retention, in form or in substance, of any credit risk directly or indirectly associated with an asset it has transferred that exceeds a *pro rata* share of that credit union's claim on the asset and disclosed in accordance with GAAP. If a credit union has no claim on an asset it has transferred, then the retention of any credit risk is recourse. A recourse obligation typically arises when a credit union transfers assets in a sale and retains an explicit obligation to repurchase assets or to absorb losses due to a default on the payment of principal or interest or any other deficiency in the performance of the underlying obligor or some other party. Recourse may also exist implicitly if the credit union provides credit enhancement beyond any contractual obligation to support assets it has transferred.
*Repurchase transactions* means either a transaction in which a credit union agrees to sell a security to a counterparty and to repurchase the same or an identical security from that counterparty at a specified future date and at a specified price or a transaction in which an investor agrees to purchase a security from a counterparty and to resell the same or an identical security to that counterparty at a specified future date and at a specified price. The off-balance sheet exposure amount for a repurchase transaction equals all of the positions the credit union has sold or bought subject to repurchase or resale, which equals the sum of the current fair values of all such positions.
*Residential mortgage-backed security* means a mortgage-backed security backed by loans secured by a first-lien on residential property.
*Residential property* means a house, condominium unit, cooperative unit, manufactured home, or the construction thereof, and unimproved land zoned for one-to-four family residential use. Residential property excludes boats or motor homes, even if used as a primary residence, or timeshare property.
*Restructured* means, with respect to any loan, a restructuring of the loan in which a credit union, for economic or legal reasons related to a borrower's financial difficulties, grants a concession to the borrower that it would not otherwise consider. Restructured excludes loans modified or restructured solely pursuant to the U.S. Treasury's Home Affordable Mortgage Program.
*Revenue obligation* means a bond or similar obligation that is an obligation of a PSE, but which the PSE is committed to repay with revenues from the specific project financed rather than general tax funds.
*Risk-based capital ratio* means the percentage, rounded to two decimal places, of the risk-based capital ratio numerator to risk-weighted assets, as calculated in accordance with § 702.104(a).
*Risk-weighted assets* means the total risk-weighted assets as calculated in accordance with § 702.104(c).
*Secured consumer loan* means a consumer loan associated with collateral or other item of value to protect against loss where the creditor has a perfected security interest in the collateral or other item of value.
*Senior executive officer* means a senior executive officer as defined by § 701.14(b)(2) of this chapter.
*Separate account insurance* means an account into which a policyholder's cash surrender value is supported by assets segregated from the general assets of the carrier.
*Share-secured loan* means a loan fully secured by shares, and does not include the imposition of a statutory lien under § 701.39 of this chapter.
*Shares* means deposits, shares, share certificates, share drafts, or any other depository account authorized by federal or state law.
*STRIPS* means a separately traded registered interest and principal security.
*Structured product* means an investment that is linked, via return or loss allocation, to another investment or reference pool.
*Subordinated* means, with respect to an investment, that the investment has a junior claim on the underlying collateral or assets to other investments in the same issuance. An investment that does not have a junior claim to other investments in the same issuance on the underlying collateral or assets is non-subordinated. A Security that is junior only to money market eligible securities in the same issuance is also non-subordinated.
*Subordinated Debt* has the meaning as provided in subpart D of this part.
*Supervisory merger or combination* means a transaction that involved the following: ( 1 ) An assisted merger or purchase and assumption where funds from the NCUSIF were provided to the continuing credit union;
( 2 ) A merger or purchase and assumption classified by NCUA as an “emergency merger” where the acquired credit union is either insolvent or “in danger of insolvency” as defined under appendix B to Part 701 of this chapter; or
( 3 ) A merger or purchase and assumption that included NCUA's or the appropriate state official's identification and selection of the continuing credit union.
*Swap Dealer* has the meaning as defined by the CFTC in 17 CFR 1.3.
*Total assets* means a credit union's total assets as measured by either: ( 1 ) ( i ) Average quarterly balance. The credit union's total assets measured by the average of quarter-end balances of the current and three preceding calendar quarters;
( ii ) Average monthly balance. The credit union's total assets measured by the average of month-end balances over the three calendar months of the applicable calendar quarter;
( iii ) Average daily balance. The credit union's total assets measured by the average daily balance over the applicable calendar quarter; or
( iv ) Quarter-end balance. The credit union's total assets measured by the quarter-end balance of the applicable calendar quarter as reported on the credit union's Call Report.
( 2 ) For each quarter, a credit union must elect one of the measures of total assets listed in paragraph (1) of this definition to apply for all purposes under this part except §§ 702.103 through 702.105 (risk-based capital requirement).
( 3 ) Notwithstanding paragraph (1) of this definition, a credit union may exclude loans pledged as collateral for a non-recourse loan that is provided as part of the Paycheck Protection Program Lending Facility, announced by the Federal Reserve Board on April 7, 2020, from the calculation of total assets for the purpose of calculating its net worth ratio. For the purpose of this provision, a credit union's liability under the Facility must be reduced by the principal amount of the loans pledged as collateral for funds advanced under the Facility.
*Trading assets* means securities or other assets acquired, not including loans originated by the credit union, for the purpose of selling in the near term or otherwise with the intent to resell in order to profit from short-term price movements. Trading assets would not include shares of a registered investment company or a collective investment fund used for liquidity purposes.
*Trading liabilities* means the total liability for short positions of securities or other liabilities held for trading purposes.
*Tranche* means one of a number of related securities offered as part of the same transaction. Tranche includes a structured product if it has a loss allocation based off of an investment or reference pool.
*Unconditionally cancelable* means with respect to a commitment, that a credit union may, at any time, with or without cause, refuse to extend credit under the commitment (to the extent permitted under applicable law).
*Unsecured consumer loan* means a consumer loan not secured by collateral.
*U.S. Government agency* means an instrumentality of the U.S. Government whose obligations are fully and explicitly guaranteed as to the timely payment of principal and interest by the full faith and credit of the U.S. Government. U.S. Government agency includes NCUA.
[80 FR 66706, Oct. 29, 2015, as amended at 86 FR 11073, Feb. 23, 2021; 86 FR 72803, Dec. 23, 2021; 86 FR 72809, Dec. 23, 2021] Editorial Note
Editorial Note: At 86 FR 72809, Dec. 23, 2021, § 702.2 was amended by revising the definition of “Regulatory Capital”; however, the definition did not exist. The amendment could not be incorporated due to inaccurate amendatory instruction.