[Federal Register Volume 70, Number 206 (Wednesday, October 26, 2005)]
[Rules and Regulations]
[Pages 61713-61716]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-21326]


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NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Parts 713 and 741


Fidelity Bond and Insurance Coverage for Federal Credit Unions

AGENCY: National Credit Union Administration (NCUA).

ACTION: Final rule.

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SUMMARY: NCUA is amending its fidelity bond rule to increase the 
maximum allowable deductible, presently $200,000, and to change the 
minimum required coverage. NCUA is also removing its listing of 
approved bonds in the rule but will continue to list and update them on 
its Web site, and has concluded it will be useful to include in the 
rule some additional factors credit unions should consider in 
determining whether to raise their bond coverage above the regulatory 
requirements.

[[Page 61714]]

NCUA believes these changes modernize the rule and provide flexibility 
while addressing safety and soundness concerns. In response to public 
comment, NCUA has elected not to rescind its approval of Blanket Bond 
Standard Form 23. Finally, NCUA is making a technical correction in the 
regulation that requires fidelity bond coverage for federally insured, 
state chartered credit unions.

DATES: This rule is effective on November 25, 2005.

FOR FURTHER INFORMATION CONTACT: Ross P. Kendall, Staff Attorney, 
Office of General Counsel, at the above address or telephone (703) 518-
6540.

SUPPLEMENTARY INFORMATION:

Background

    On May 19, 2005, the NCUA Board requested comment on a proposal to 
change part 713 of its regulations to provide for higher required 
fidelity bond coverages for credit unions and allow for higher 
deductibles. 70 FR 30017 (May 25, 2005). The amendments update the 
dollar amount thresholds in the rule, which were last amended over 20 
years ago, and conform bond coverage to reflect risks in the current 
financial environment more accurately. The proposal also called for 
removing the listing in the rule of approved bond forms and carriers, 
as this information is available and updated on the NCUA Web site. The 
proposal invited comment on whether to rescind NCUA approval of Blanket 
Bond Standard Form 23 and on whether additional criteria ought to be 
included in the rule for consideration by credit unions in determining 
appropriate bond coverage amounts.

Summary of Comments

    NCUA received twelve comments to the proposal. All the commenters 
supported increasing the maximum allowable deductible and the required 
coverage limits for both larger and small credit unions. Several noted 
these changes would provide needed flexibility for credit unions and 
would enable them to better manage risk.
    Six commenters recommended that NCUA consider other additional risk 
factors besides eligibility under NCUA's Regulatory Flexibility 
(RegFlex) Program, 12 CFR part 742, in determining permissible 
deductible limits, and suggested factors such as capital ratios, 
earnings, net worth, risk profile, and loss history as appropriate 
limits. A few of these commenters suggested using the categories in 
NCUA's prompt corrective action rule as a basis for determining 
eligibility for higher deductibles, for example, permitting credit 
unions that are deemed ``well capitalized'' as eligible for higher 
deductibles. 12 CFR part 702. One commenter noted that asset size alone 
is not an indicator of risk and suggested that more focus on risk 
assessment, including the items described above, is appropriate for the 
coverage limit changes as well as for determining eligibility for the 
maximum deductible.
    NCUA invited comment in the preamble to the proposed rule on 
whether to include additional risk factors in the rule for credit 
unions to consider in determining appropriate coverage limits. One 
commenter responded in the negative, while three others acknowledged 
additional risks. Of these, two expressed concern that listing 
additional risk factors in the rule should not result in a requirement 
that credit union management must necessarily consider those specific 
items. Rather, the commenters said, the rule should continue to allow 
for individual boards of directors to retain discretion to make 
determinations applicable to their unique circumstances.
    Most commenters offered no view on whether NCUA should declare the 
standard bond form number 23 obsolete. Three commenters supported its 
removal from the approved listing of bond forms, but two opposed its 
removal. Of these, a trade association strongly urged NCUA to retain 
the standard form 23, indicating that its removal would restrict 
competition in the marketplace and adversely affect credit unions. This 
commenter noted that the form is likely to be updated in the near 
future.
    One commenter noted support for removing the listing of approved 
bond forms and bond carriers from the regulation and including this 
information exclusively on the agency's Web site.

Final Rule

    In view of the comments, NCUA is making the following changes to 
the version published as the proposed rule.

Eligibility for Increased Maximum Deductible

    The proposal provided for raising the maximum deductible for credit 
unions with over a $1 million in assets from its current ceiling of 
$200,000, but restricting the eligibility for the higher deductible to 
credit unions that qualify under NCUA's RegFlex Program. 12 CFR part 
742. The proposal invited comment about whether different criteria 
might present a more appropriate measure of eligibility for a higher 
deductible.
    The Board has fully considered the comments it received and 
particularly those that suggested qualifying as ``well capitalized'' 
under the prompt corrective action rule presents a better measure on 
which to base eligibility for the higher deductible. 12 CFR part 702. 
While being ``well capitalized'' might indicate a credit union has an 
increased ability to absorb losses, the Board has determined that a 
purely quantitative factor such as a credit union's capital level 
ignores the fundamental premise that, in assessing risk, a more 
qualitative approach measuring the overall financial and operational 
health of a credit union is advisable. Call report data for June 2005 
indicate there are almost 2,000 credit unions that, although ``well 
capitalized,'' were assigned a CAMEL 3 or 4 rating. For these reasons, 
the Board has determined to retain in the final rule that credit unions 
over $1 million in assets that qualify under the RegFlex Program may 
have higher deductibles based on the regulatory formula, up to a 
maximum permissible deductible of $1 million.
    The Board, however, recognizes that eligibility for the RegFlex 
Program can fluctuate quarterly but does not believe that credit unions 
should have to review and, if necessary, adjust their bond coverage 
that frequently. For that reason, the Board has clarified in the final 
rule that a credit union must review its continued eligibility under 
the regulation for a higher deductible only once a year. A credit 
union's continued eligibility will be based on its asset size as 
reflected in its most recent, year-end 5300 call report and, for 
purposes of qualifying under the RegFlex program, its net worth as 
reflected in that same year-end 5300 call report. If a credit union 
previously qualified for the higher deductible has a decrease in assets 
based on its most recent year-end 5300 call report or its net worth has 
decreased so that it would no longer qualify for the RegFlex Program, 
then it must obtain the coverage otherwise required by the regulation. 
Nevertheless, even if a credit union has maintained assets in excess of 
$1 million and its net worth would otherwise continue to qualify it for 
the RegFlex Program, the credit union must obtain the required coverage 
if its most recent examination report disqualifies it from the RegFlex 
Program.

Coverage Limits

    The Board outlined its reasons for increasing coverage limits for 
both larger and smaller credit unions in the preamble to the proposed 
rule, including inflation, changes in asset size, and the rate of 
growth in assets for

[[Page 61715]]

larger credit unions, which has approached 80% since 1999. With respect 
to smaller credit unions, the preamble discussed the increased risks 
faced in today's technological environment and their vulnerability to 
catastrophic loss engineered by one or a few dishonest insiders. No 
commenters questioned or disagreed with the Board's views on these 
matters. Accordingly, NCUA is adopting these aspects of the proposed 
amendments as a final rule without change.

Identification of Additional Risk Factors

    The preamble to the proposed rule solicited comment from the public 
as to whether it would be useful to include additional risk factors in 
the rule that credit unions should consider in determining whether to 
obtain additional or enhanced coverage. Comment on this aspect of the 
proposal generally recognized that risks vary depending on a credit 
union's activities and various factors. The Board is aware that 
additional risk factors may exist, based on a credit union's fraud 
trends and loss experience, and the types of programs and activities in 
which it is engaged, such as wire transfer and remittance services. The 
Board believes it will be useful to amplify the considerations noted in 
the rule that credit unions should, but are not required, to consider. 
The Board notes that credit unions are not required by the rule to 
consider specific risk factors but credit unions should undertake their 
own internal risk assessment. The Board recognizes that each credit 
union board of directors should evaluate the unique aspects of its 
business model and associated risks and determine what additional 
coverages may be warranted.

Other Changes and Clarifications

    The final rule eliminates the listing of approved bond carriers and 
forms, since this information is contained on the agency's Web site. 
One commenter noted that the proposed rule was potentially confusing in 
that it could be read to indicate all RegFlex credit unions, regardless 
of assets size, could have higher deductibles. The final rule has been 
revised to clarify that only credit unions that have $1 million or more 
in assets and are RegFlex eligible qualify for the higher deductibles. 
In addition, any changes to the deductible amount based on changes in 
asset size or RegFlex Program eligibility need only be made annually, 
within 30 days of the filing of the year-end call report. Finally, the 
Board has determined not to rescind its approval for standard bond form 
number 23 at this time, based on a comment submitted by the leading 
trade association for the surety industry indicating that the form is 
still viable.
    The Board believes the changes in the rule are consistent with its 
ongoing efforts to reduce regulatory burden while preserving necessary 
requirements to assure credit union safety and soundness. As noted in 
the preamble to the proposed rule, the Board does not believe the 
increased coverage requirements will add significantly to premium costs 
and expects changes in the deductible ceiling will result in many 
credit unions being able to get fidelity bond coverage at lower cost.

Regulatory Procedures

Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) requires NCUA to prepare an 
analysis to describe any significant economic impact any proposed 
regulation may have on a substantial number of small entities. NCUA 
considers credit unions having less than ten million dollars in assets 
to be small for purposes of RFA. Interpretive Ruling and Policy 
Statement (IRPS) 87-2 as amended by IRPS 03-2. The rule will require 
credit unions with assets under $4 million to obtain higher fidelity 
bond coverage than is currently required. The NCUA believes, based on 
discussions with members of the industry, that the increase in premium 
to obtain the higher coverage will be, relative to the premium already 
required, insignificant. The NCUA has determined and certifies that 
this rule will not have a significant economic impact on a substantial 
number of small credit unions. Accordingly, the NCUA has determined 
that an RFA analysis is not required.

Paperwork Reduction Act

    In accordance with the requirements of the Paperwork Reduction Act 
of 1995, NCUA submitted a copy of its proposed rule to the Office of 
Management and Budget (OMB) at the time of its publication in the 
Federal Register and has applied for a control number. NCUA included in 
its proposed rule an analysis of the time and expense estimated to be 
required to comply with the notice provisions in the rule and solicited 
public comment on all aspects of the paperwork burden. NCUA received no 
comments on its estimate of the paperwork burden. OMB approved NCUA's 
submission and has assigned control number 3133-170 to this information 
collection.

Small Business Regulatory Enforcement Fairness Act

    The Small Business Regulatory Enforcement Fairness Act of 1996 
(Pub. L. 104-121) provides generally for congressional review of agency 
rules. A reporting requirement is triggered in instances where NCUA 
issues a final rule as defined by Section 551 of the Administrative 
Procedure Act. 5 U.S.C. 551. The Office of Management and Budget has 
determined that this rule is not a major rule for purposes of the Small 
Business Regulatory Enforcement Fairness Act of 1996.

Executive Order 13132

    Executive Order 13132 encourages independent regulatory agencies to 
consider the impact of their actions on state and local interests. In 
adherence to fundamental federalism principles, NCUA, an independent 
regulatory agency as defined in 44 U.S.C. 3502(5), voluntarily complies 
with the executive order. 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. NCUA has 
determined that the rule does not constitute a policy that has 
federalism implications for purposes of the executive order.

The Treasury and General Government Appropriations Act, 1999--
Assessment of Federal Regulations and Policies on Families

    The NCUA has determined that the final rule will not affect family 
well-being within the meaning of section 654 of the Treasury and 
General Government Appropriations Act, 1999, Pub. L. 105-277, 112 Stat. 
2681 (1998).

List of Subjects in 12 CFR Parts 713 and 741

    Credit unions, Insurance, Reporting and recordkeeping requirements.

    By the National Credit Union Administration Board on October 20, 
2005.
Mary F. Rupp,
Secretary of the Board.


0
Accordingly, NCUA amends 12 CFR parts 713 and 741 as follows:

PART 713--FIDELITY BONDS AND INSURANCE COVERAGE FOR FEDERAL CREDIT 
UNIONS

0
1. The authority citation for part 713 continues to read as follows:

    Authority: 12 U.S.C. 1756, 1757(5)(D), and (7)(I), 1766, 1782, 
1784, 1785 and 1786.


[[Page 61716]]



0
2. Amend Sec.  713.4 by revising paragraph (a) to read as follows:


Sec.  713.4  What bond forms may be used?

    (a) A current listing of basic bond forms that may be used without 
prior NCUA Board approval is on NCUA's Web site, http://www.ncua.gov. 
If you are unable to access the NCUA Web site, you can get a current 
listing of approved bond forms by contacting NCUA's Public and 
Congressional Affairs Office, at (703) 518-6330.
* * * * *

0
3. Amend Sec.  713.5 by revising paragraphs (a) and (b) to read as 
follows:


Sec.  713.5  What is the required minimum dollar amount of coverage?

    (a) The minimum required amount of fidelity bond coverage for any 
single loss is computed based on a federal credit union's total assets.

------------------------------------------------------------------------
                 Assets                            Minimum bond
------------------------------------------------------------------------
$0 to $4,000,000.......................  Lesser of total assets or
                                          $250,000.
$4,000,001 to $50,000,000..............  $100,000 plus $50,000 for each
                                          million or fraction thereof
                                          over $1,000,000.
$50,000,000 to $500,000,000............  $2,550,000 plus $10,000 for
                                          each million or fraction
                                          thereof over $50,000,000, to a
                                          maximum of $5,000,000.
Over $500,000,000......................  One percent of assets, rounded
                                          to the nearest hundred
                                          million, to a maximum of
                                          $9,000,000.
------------------------------------------------------------------------

    (b) This is the minimum coverage required, but a federal credit 
union's board of directors should purchase additional or enhanced 
coverage when its circumstances warrant. In making this determination, 
a board of directors should consider its own internal risk assessment, 
its fraud trends and loss experience, and factors such as its cash on 
hand, cash in transit, and the nature and risks inherent in any 
expanded services it offers such as wire transfer and remittance 
services.
* * * * *

0
4. Amend Sec.  713.6 by revising paragraph (a)(1) and adding paragraph 
(c) to read as follows:


Sec.  713.6  What is the permissible deductible?

    (a)(1)The maximum amount of allowable deductible is computed based 
on a federal credit union's asset size and capital level, as follows:

------------------------------------------------------------------------
                 Assets                         Maximum deductible
------------------------------------------------------------------------
$0 to $100,000.........................  No deductible allowed.
$100,001 to $250,000...................  $1,000.
$250,000 to $1,000,000.................  $2,000.
Over $1,000,000........................  $2,000 plus 1/1000 of total
                                          assets up to a maximum of
                                          $200,000; for credit unions
                                          over $1 million in assets that
                                          qualify for NCUA's Regulatory
                                          Flexibility Program in Part
                                          742, the maximum deductible is
                                          $1,000,000.
------------------------------------------------------------------------

* * * * *
    (c) A credit union's eligibility to qualify for a deductible in 
excess of $200,000 is determined based on it having assets in excess of 
$1 million as reflected in its most recent year-end 5300 call report 
and, as of that same year-end, qualifying for NCUA's Regulatory 
Flexibility Program under part 742 of this title as determined by its 
most recent examination report. A credit union that previously 
qualified for a deductible in excess of $200,000, but that subsequently 
fails to qualify based on its most recent year-end 5300 call report 
because either its assets have decreased or it no longer meets the net 
worth requirements of part 742 of this title or fails to meet the CAMEL 
rating requirements of part 742 of this title as determined by its most 
recent examination report, must obtain the coverage otherwise required 
by paragraph (b) of this section within 30 days of filing its year-end 
call report and must notify the appropriate NCUA regional office in 
writing of its changed status and confirm that it has obtained the 
required coverage.

PART 741--REQUIREMENTS FOR INSURANCE

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

    Authority: 12 U.S.C. 1757, 1766, 1781-1790, and 1790d.

0
2. Amend Sec.  741.201 by revising paragraph (b) to read as follows:


Sec.  741.201  Minimum fidelity bond requirements.

* * * * *
    (b) Corporate credit unions must comply with Sec.  704.18 of this 
chapter in lieu of part 713 of this chapter.
[FR Doc. 05-21326 Filed 10-25-05; 8:45 am]
BILLING CODE 7535-01-P