64786 Federal Register / Vol. 75, No. 202 / Wednesday, October 20, 2010 / Rules and Regulations 

NATIONAL CREDIT UNION 

ADMINISTRATION 

12 CFR Parts 702, 703, 704, 709, and 

747 

RIN 3133–AD58 

Corporate Credit Unions 

AGENCY: National Credit Union 

Administration (NCUA). 

ACTION: Final rule. 

SUMMARY: NCUA is issuing final 

amendments to its rule governing 

corporate credit unions. The major 

revisions involve corporate credit union 

capital, investments, asset-liability 

management, governance, and credit 

union service organization (CUSO) 

activities. The amendments establish a 

new capital scheme, including riskbased capital requirements; impose new 

prompt corrective action requirements; 

place various new limits on corporate 

investments; impose new asset-liability 

management controls; amend some 

corporate governance provisions; and 

limit a corporate CUSO to categories of 

services preapproved by NCUA. In 

addition, this rulemaking contains 

conforming amendments to rules 

governing Prompt Corrective Action (for 

natural person credit unions); 

Investments and Deposit Activities (for 

federal credit unions); Administrative 

Actions, Adjudicative Hearings, Rules of 

Practice and Procedure, and 

Investigations; and Involuntary 

Liquidation of Federal Credit Unions 

and Adjudication of Creditor Claims 

Involving Federally Insured Credit 

Unions. These amendments will 

strengthen individual corporates and 

the corporate credit union system as a 

whole. 

DATES: This rule is effective January 18, 

2011, except that the amendments to 12 

CFR 702.105(a), 703.14(b), 704.2, 704.3, 

704.4, and subpart M of 12 CFR part 

747, are effective October 20, 2011. 

FOR FURTHER INFORMATION CONTACT: 

David Shetler, Deputy Director, Office of 

Corporate Credit Unions, at telephone 

(703) 518–6640, National Credit Union 

Administration, 1775 Duke Street, 

Alexandria, Virginia 22314; Ross 

Kendall, Staff Attorney, Office of 

General Counsel, at the address above or 

telephone (703) 518–6540; or Paul 

Peterson, Associate General Counsel, at 

the address above or telephone (703) 

518–6540. 

SUPPLEMENTARY INFORMATION: 

I. Background 

In January 2009, NCUA solicited 

public comment on whether 

comprehensive changes to the structure 

of the corporate credit union (corporate) 

system were warranted. 74 FR 6004 

(Feb. 4, 2009). This corporate Advanced 

Notice of Proposed Rulemaking (ANPR) 

sought comment on how best to define 

and structure the role of corporates in 

the credit union system, whether to 

modify the level of required capital for 

corporates, whether to modify or limit 

the range of permissible investments for 

corporates, whether to impose new 

standards and limits on asset-liability 

management (ALM) and credit risk, and 

whether to make modifications in the 

area of corporate governance. NCUA 

received some 445 comments in 

response to the ANPR. NCUA reviewed 

these public comments closely and 

considered them carefully. 

On November 19, 2009, the NCUA 

Board issued a Notice of Proposed 

Rulemaking (NPR) containing extensive, 

specific proposed revisions to NCUA’s 

rule governing corporate credit unions 

(corporates) and related rule provisions. 

74 FR 65210 (Dec. 9, 2009). The 

proposed revisions covered corporate 

capital, prompt corrective action (PCA), 

investments, ALM, CUSOs, and 

governance. Briefly summarized, the 

major provisions in the proposal would 

have: 

• Imposed new minimum capital 

ratios, new risk based capital 

calculations, and new elements of 

capital, all in general accordance with 

the Basel I capital requirements 

imposed by the banking regulators on 

banks. 

• Required that retained earnings (RE) 

constitute a certain portion of corporate 

capital, and that corporates build 

retained earnings over time. 

• Eliminated the current prohibition 

on conditioning membership, the 

receipt of services, or the pricing of 

services upon the purchase of paid-in 

capital. 

• Added new PCA provisions similar 

to those currently applicable to banks. 

• Prohibited investments in 

collateralized debt obligations (CDOs) 

and net interest margin (NIM) securities. 

• Toughened the capital requirements 

for expanded investment authority, and 

restricted the credit ratings for 

investments purchased by such 

corporates to a minimum of ‘‘A¥.’’ 

• Required that a corporate examine 

every available Nationally Recognized 

Statistical Rating Organization (NRSRO) 

rating for a particular security and only 

employ the lowest of those ratings, and 

that at least 90 percent of a corporate’s 

investments be rated by at least two 

NRSROs. 

• Tightened the existing single 

obligor concentration limit and imposed 

new sector concentration limits. 

• Placed limits on subordinated 

positions in structured securities. 

• Imposed new limits on the 

maximum difference between the 

estimated average life of the asset cash 

flows and the average life of the liability 

cash. 

• Restricted the weighted average life 

(WAL) of a corporate’s cash-flowing 

assets to two years. 

• Limited a corporate’s aggregate 

borrowing to the lesser of 10 times 

capital or 50 percent of shares and 

capital; and further restrict secured 

borrowing to maximum maturities of 30 

days and only for liquidity purposes. 

• Prohibited a corporate from 

accepting investments or loans from any 

one entity that exceed ten percent of the 

corporate’s assets. 

• Required that a corporate CUSO 

only engage in categories of services 

preapproved by NCUA, including, 

initially, brokerage and investment 

advisory services. 

• Required that a corporate CUSO 

agree with the corporate by contract to 

permit NCUA access to the CUSO’s 

books, records, personnel, equipment, 

and facilities. 

• Required that all corporate board 

members hold either a CEO, CFO, or 

COO position at a member credit union 

or other member entity. 

• Generally limited corporate board 

members to no more than six years of 

service. 

• Required that a majority of a 

corporate’s board members be 

representatives of natural person credit 

unions (NPCUs). 

• Required that each corporate 

annually disclose to its members the 

compensation of each senior executive 

officer and director. 

• Required a merging federallychartered corporate affirmatively 

disclose to both NCUA and its members 

any material, merger-related increase in 

compensation for any senior executive 

or director. 

• Prohibited parties affiliated with a 

corporate from receiving 1) 

indemnification in connection with 

administrative or civil proceedings 

instituted by NCUA or a state regulatory 

authority where the party is ultimately 

found liable and 2) golden parachute 

payments. 

The preamble to the NPR included an 

extensive discussion of the crisis in the 

corporates giving rise to the need for 

regulatory reform, followed by a 

discussion of the nature of, and 

justification for, each proposed revision. 

Id. at 65211–65255. 


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Federal Register / Vol. 75, No. 202 / Wednesday, October 20, 2010 / Rules and Regulations 64787 

The public comment period for the 

NPR closed on March 9, 2010. NCUA 

received 815 public, written comments 

letters totaling more than 2,600 pages of 

comments. In addition, NCUA held 

several town halls and webinars during 

the comment period during which 

NCUA both answered questions about 

the proposed rulemaking and listened to 

oral comments about the proposal. 

Most commenters liked some portions 

of the proposed rule and disliked other 

portions. The most common comment 

on the overall rulemaking was support 

for the proposed stronger capital 

requirements; increased limits on single 

obligors; concentration limits on certain 

investment sectors; and prohibitions on 

certain high risk securities—but also 

serious reservations about other 

portions of the proposal, including 

certain ALM, investment, CUSO, and 

corporate governance provisions. 

Of those commenters who expressed 

a general opinion on the overall 

rulemaking, many, including some trade 

groups and various larger NPCUs (i.e., 

over $1.2 billion in assets), generally 

support the rule. Many more 

commenters, however, generally oppose 

the proposed rule, among them many 

small and medium-sized NPCUs ranging 

up to over $1 billion in assets. Many of 

the commenters in opposition believed 

that the various investment and ALM 

restrictions in the proposed rule would 

cause major changes in corporate 

operations; that these changes would 

threaten the ability of corporates to 

provide liquidity and other valuable 

services to NPCUs; and that these 

changes might force NPCUs to turn to 

banks (their competitors) for services— 

considered by the commenters as a more 

expensive and less reliable alternative to 

today’s corporate system. The comments 

that pertain to specific, proposed 

revisions are discussed in more detail in 

the section-by-section analysis below. 

The NCUA Board has now 

determined to issue final revisions 

based on the proposal and the 

comments received. Generally, these 

revisions will become effective 90 days 

following the publication in the Federal 

Register, but the effective date for many 

of the revisions will be delayed beyond 

90 days. 

The remainder of this preamble 

contains four sections: A summary of 

the significant revisions in the final 

rule, a section-by-section analysis of all 

the revisions, an analysis of how the 

final investment, credit risk, and asset 

liability provisions might affect a 

corporate’s ability to achieve its capital 

requirements, and a discussion of the 

regulatory procedures affecting this 

rulemaking. 

II. Summary of Significant, Final 

Revisions 

A. Overview 

Ultimately, the primary purposes of 

this extensive rulemaking were twofold. 

First, NCUA wanted to design a 

corporate rule that would prevent the 

catastrophic losses that occurred in the 

corporate system beginning in 2007 

from ever recurring. Second, NCUA 

wanted to allow for the survival of some 

form of a well-run corporate system that 

could provide necessary services, 

including payments systems services, to 

its members, and build and attract 

sufficient capital. 

The Board believes this final rule 

accomplishes these two purposes. 

First, and as discussed in more detail 

below, the 2007 losses resulted almost 

entirely from private label residential 

mortgage backed securities (RMBS), 

with many of the worst performing of 

these securities being subordinated 

RMBS. The final rule prohibits 

corporates from purchasing either 

private label RMBS, or subordinatedtype securities, going forward. In the 

most specific sense, then, the rule will 

make it impossible for corporates to 

repeat what happened in 2007. Of 

course, the next financial crisis may not 

be a credit or mortgage crisis, so the 

final rule includes a series of other 

investment, credit risk, ALM, liquidity, 

and capital measures that together 

should greatly reduce the systemic risk 

posed by the corporates regardless of the 

source of the next crisis. 

Second, the Board believes that a 

well-run corporate should be able to 

operate within the confines of the new 

rule and construct a business model, 

and an investment portfolio, that 

permits it to attract capital and grow 

retained earnings going forward. Again, 

this is discussed and demonstrated in 

some detail in Section IV. of the 

preamble below. 

Affected Sections of NCUA’s Rules and 

Regulations 

The final revisions affect part 704, 

Corporate Credit Unions, and several 

other sections of NCUA’s regulations. 

The following chart lists the affected 

sections. It also summarizes the 

applicability dates for each section and, 

in some cases, the applicability dates for 

particular paragraphs or individual 

definitions. 

Current rule provision Amended? 

Delayed applicability date? 

(e.g., ‘‘+12 months’’ means delayed 12 months following date of publication of final rule in Federal Register) 

704.1 Scope .................................. No .................................................. Not applicable (N/A). 

704.2 Definitions ........................... Yes. Removed and replaced twice. 

Second replacement introduces 

capital and PCA definitions.

First replacement of 704.2. +90 days. 

Second replacement of 704.2. +12 months. 

Adjusted core capital. 

—deduct PCC or NCA at another corporate. +12 months 

—deduct certain excess PCC. +72 months to +120 months 

—deduct PCC in excess of retained earnings. +120 months 

Permanent leverage ratio. +36 months 

704.3 Corporate credit union capital.Yes ................................................. Current 704.3 replaced. +12 months. 

704.3(a)(3): If RE ratio less than 0.45, must submit REAP. +36 

months. 

704.3(f)(4): Corporate with unconverted MCAs must notify MCA holders of account status. +14 months. 

704.4 Board responsibilities ......... Yes. The current Board responsibilities is redesignated as 

704.13. New 704.4 Prompt corrective action (PCA) added.

Current 704.4 replaced with PCA section. +12 months. 

704.5 Investments ........................ Yes ................................................. +90 days. 

704.6 Credit risk management ..... Yes ................................................. +90 days. 

704.7 Lending ............................... No .................................................. N/A. 


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Current rule provision Amended? 

Delayed applicability date? 

(e.g., ‘‘+12 months’’ means delayed 12 months following date of publication of final rule in Federal Register) 

704.8 Asset and liability management.Yes ................................................. Generally, +90 days. 

704.8(k): Prohibition on a corporate receiving more than 15 percent 

of business from one member or credit union. +30 months. 

704.9 Liquidity management ........ Yes ................................................. +90 days. 

704.10 Investment action plan ..... No .................................................. N/A. 

704.11 Corporate CUSOs ............ Yes ................................................. Generally, +90 days. 

704.11(e)(1): Requirement for NCUA approval of corporate CUSO 

activities. +180 days. 

704.11(e)(2): Requirement that corporate divest from CUSO engaged 

in unapproved activities. +12 months. 

704.12 Permissible services ......... No .................................................. N/A. 

704.13 [Reserved] ........................ Yes ................................................. The current 704.4 Board responsibilities redesignated as 704.13. 

+90 days. 

704.14 Representation ................. Yes ................................................. Generally, +90 days. 

704.14(a)(2): Requirement that only CEO, CFO, or COO may seek 

election to corporate board. +120 days. 

704.14(a)(9): Requirement that at least a majority of each corporate’s 

directors be representatives of NPCUs. +36 months. 

704.15 Audit requirements ........... No .................................................. N/A. 

704.16 Contract/written agreements.No .................................................. N/A. 

704.17 State-chartered corporate 

credit unions.

No .................................................. N/A. 

704.18 Fidelity bond coverage ..... No .................................................. N/A. 

704.19 Wholesale corporate credit 

unions.

Yes ................................................. Current 704.19 removed, and new 704.19, Disclosure of executive 

and director compensation, added. +90 days. 

704.20 None. ................................ Yes ................................................. New 704.20, Golden parachute and indemnification payments, 

added. +90 days. 

Appendix A Model forms .............. Yes ................................................. Amended and renamed Capital Prioritization and Model Forms. +90 

days. 

Appdx A, Part I: Corporates may determine that newly contributed 

capital has priority over existing capital. +90 days. 

Appendix B Expanded Authorities 

and Requirements.

Yes ................................................. Generally, +90 days. 

Part I(e): Substitute ‘‘leverage ratio’’ for ‘‘capital ratio.’’ +12 months. 

Appendix C None. ........................ Yes ................................................. New Appendix C, Risk-Based Capital Credit Risk-Weight Categories, added. +12 months. 

702.105 ........................................... Yes ................................................. Conforming amendment (to substitute new capital terms). +12 

months. 

703.14(b) ......................................... Yes ................................................. Conforming amendment (to substitute new capital terms). +12 

months. 

709.5(b) ........................................... Yes ................................................. Conforming amendment (to substitute new capital terms). +90 days. 

Part 747, subpart M ........................ Yes ................................................. Add new subpart M on due process for PCA actions. +12 months. 

Third Party Evaluation of Proposed 

Rulemaking 

NCUA commissioned an outside 

consultant, Kamakura, Inc., to provide 

NCUA with an assessment of the 

proposed corporate rule. Kamakura 

issued its final report, entitled Impact 

Analysis—Proposed Modification of 12 

Code of Federal Regulations Part 704— 

National Credit Union Administration 

(the ‘‘Kamakura Report’’), on July 12, 

2010. Interested parties can download a 

copy of the Kamakura Report from 

NCUA’s Web site at http:// 

www.ncua.gov. As discussed throughout 

the following preamble, NCUA carefully 

considered the Kamakura Report when 

finalizing the investment and ALM 

provisions of this rulemaking. 

Legacy Assets 

The ability of some corporates to 

comply with the provisions of this final 

rule depends on managing certain 

‘‘legacy assets’’ on their balance sheet. 

These legacy assets are securities, 

generally private label RMBS, that 

continue to carry significant credit risk 

and market values far below their 

intrinsic values. 

NCUA has been working for some 

time on a plan to isolate such legacy 

assets in those corporates where the 

exposure represents the greatest risk to 

the insurance fund. In general, these 

cases represent corporate credit unions 

where expected future credit losses 

exceed the corporate’s total capital, and 

recapitalization would not occur 

without agency assistance. NCUA has, 

as promised, released its plans for 

dealing with those corporates’ legacy 

assets. Information about the plans can 

be obtained from NCUA’s Web site at 

http://www.ncua.gov. 

Some corporates have lesser positions 

in RMBS assets where NCUA does not 

expect the associated credit losses to 

exceed the corporate’s total capital. 

They may also have other assets with 

long WALs, positions that are 

concentrated beyond the prescribed 

diversification limits, or other portfolios 

that otherwise inhibit compliance with 

new rule. NCUA expects these 

institutions to develop business plans 

and take action to become compliant 

with the rule. Generally, NCUA will 

want these corporates to sell these 

legacy assets as soon as possible so as 

to come into compliance with the 

corporate rule. If the corporate decides 

an alternative approach to selling the 

legacy assets is sound and supportable, 

the corporate will have to submit a draft 

investment action plan to NCUA for its 

approval under § 704.10 and other 

provisions of the corporate rule, such as 

§ 704.8(j)(2)(i). For example, NCUA will 

consider approval of an action plan that 

includes retention of these legacy assets 

while they amortize if the corporate can 


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Federal Register / Vol. 75, No. 202 / Wednesday, October 20, 2010 / Rules and Regulations 64789 

1Corporates have other capital-related 

requirements, such as a core capital ratio and a 

retained earnings ratio, but failure to meet these 

requirements only triggers future earnings retention 

requirements and does not trigger a capital 

restoration plan requirement or other particular 

supervisory actions. 

2These numerator formulas are simplifications. 

The proposal actually contains certain adjustments 

to each capital calculation, and those proposed 

adjustments that received comments are discussed 

below. 

3The Net Economic Value (NEV) limitations that 

exist in the current rule have not changed under 

this final rule. 12 CFR 704.8(d). Thus, these NEV 

limits continue to be in effect and no 

implementation delay for these NEV limits is 

warranted. 

document that the expected future 

credit losses on these assets are 

significantly less than the losses the 

corporate would take if the investments 

were sold at current market prices. 

Depending on the circumstances of the 

corporate, an NCUA-approved action 

plan might permit the corporate to 

operate temporarily outside the WAL 

limitations and other applicable 

investment, credit risk, or ALM 

limitations in the corporate rule. In 

addition, NCUA might grant these 

corporates a waiver of time to build the 

retained earnings required by this 

regulation—but only to the extent of 

documented losses flowing from legacy 

assets identified in an approved action 

plan. 12 CFR 704.1(b). 

Effect of the Dodd-Frank Act on the Use 

of Credit Ratings 

Just recently, on July 21, 2010, 

Congress enacted the Dodd-Frank Wall 

Street Reform and Consumer Protection 

Act (DFA). The DFA, which contains 

848 pages divided into 16 separate 

Titles, has multiple impacts on NCUA, 

its regulations, and its enforcement 

authority. The Board is carefully 

considering the implications of the DFA 

and the actions NCUA is required to 

take under the DFA. 

Section 939A of the DFA is likely to 

affect NCUA’s regulations, including the 

corporate credit union regulation. Both 

NCUA’s current and revised corporate 

rules include references to NRSRO 

credit ratings. As stated in section 939A, 

NCUA has one year to review all its 

regulations and modify them to remove 

such references and ‘‘substitute in such 

regulations such standard of creditworthiness as [the Board] shall 

determine to be appropriate.’’ Until the 

Board completes that review and 

modification, however, corporates will 

be expected to comply with all the 

provisions of the corporate rule that 

make reference to NRSRO ratings. 

Section 704.2 contains a definition of 

small business related securities, and 

that definition refers to the definition of 

the same term in Section 3(a)(53) of the 

Securities Exchange Act of 1934 (SEA). 

The Dodd Frank Act, however, changed 

the SEA definition, and the Board 

determined that it wanted to continue to 

use the older definition. Accordingly, 

this final rule revises the § 704.2 

definition of small business related 

securities to remove the reference to the 

SEA definition. 

Section 939(e)(2) the DFA, however, 

eliminates the reference to NRSRO 

ratings in Section 3(a)(53), and 

substitutes a reference to ‘‘meets 

standards of credit-worthiness 

established by the [Securities and 

Exchange] Commission (SEC).’’ Again, 

until such time as either the SEC or 

NCUA can provide some content to the 

latter phrase, NCUA believes that the 

definition of small business related 

security in § 704.2 should remain 

unchanged. 

B. Capital 

Summary of Current Capital Provisions 

Currently, corporates have only one 

mandatory minimum capital 

requirement: they must maintain total 

capital (i.e., retained earnings (RE), 

paid-in capital, and membership capital 

accounts) in an amount equal to or 

greater than 4 percent of their moving 

daily average net assets.1 Failure by a 

corporate to meet this minimum capital 

ratio triggers the requirement to file a 

capital restoration plan with NCUA and 

may cause NCUA to issue a capital 

restoration directive and take other 

administrative action. 

The current rule allows a corporate to 

issue Paid in Capital (PIC) to both 

members and nonmembers, while 

Membership Capital Accounts (MCAs) 

may only be issued to members. The 

current rule also prohibits a corporate 

from conditioning membership, the 

receipt of services, or the pricing of 

services upon the purchase of PIC. 

Summary of Proposed Capital Revisions 

(November 2009) 

The proposal contains a capital 

scheme based on the Basel I capital 

regimes of the other banking regulators. 

The proposal renames PIC as Perpetual 

Contributed Capital (PCC), and makes 

certain changes to the MCA 

requirements and labels those MCAs as 

Nonperpetual Capital Accounts (NCAs). 

The proposal then seeks to replace the 

one existing total capital ratio with three 

minimum capital ratios, including two 

Risk Based Capital (RBC) ratios. These 

RBC ratio calculations involve credit 

risk-weighting the corporate’s assets and 

off balance sheets activities to produce 

a moving daily average net riskweighted assets (MDANRA). 

The three new proposed ratios are 

described in the following chart: 

Ratio Numerator 2 Denominator 

Minimum level 

(adequate cap.) 

(percent) 

Minimum level 

(well cap.) 

(percent) 

Leverage Ratio ............................. RE + PCC ................................... MDANA ....................................... 4 5 

Tier-One RBC Ratio ..................... RE + PCC ................................... MDANRA ..................................... 4 6 

Total RBC Ratio ........................... RE + PCC + NCAs ..................... MDANRA ..................................... 8 10 

The proposal also requires that, in the 

leverage ratio and Tier 1 RBC ratio, the 

corporate may only count PCC to the 

extent that it does not exceed the 

corporate’s RE. That results in the 

corporate needing 200 basis points (BP) 

of RE to reach a 4 percent leverage ratio 

and so be adequately capitalized, and 

250 BP to be well-capitalized. This RE 

requirement, and the various other 

proposed capital measures, are phasedin over a ten-year time period, as 

discussed below. 

Summary of Proposed Phase-In of 

Capital Provisions 

The proposal contains a multi-step, 

multi-year phase-in of the new capital 

requirements: 

• Year one. None of the new capital 

requirements would apply during the 

first year following publication of the 

final rule. During this period the current 

total capital ratio would remain in 

effect, as well as the revised capital 

order, and associated waivers, issued by 

the NCUA Board on April 29, 2010.3

• Years two and three. The two new 

risk based capital ratios would come 

into effect on the first anniversary of the 

publication of the final rule. Corporates 


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4Except, of course, for the standard federal share 

insurance of up to $250,000, as mandated by the 

Federal Credit Union Act. 

5The Board also believes that all NPCUs now 

understand the nature of any capital commitment 

to a corporate and the need to be involved in the 

direction and management of their corporates. 

6As indicated above, after the TCCUSGP and the 

TCCULGP have served their purposes and been 

terminated NCUA will no longer provide corporates 

with extraordinary support. NCUA will disabuse 

the public, the members, any potential creditors of 

a corporate, and any potential vendors of a 

corporate, of the idea that NCUA will again 

intervene to protect insolvent corporates. 

would be required to meet a minimum 

4 percent Tier 1 RBC ratio and a 

minimum 8 percent Total RBC ratio. In 

addition, corporates would be required 

to satisfy an interim leverage ratio, 

defined almost identically to the 

existing total capital ratio. Because 

NCUA should have resolved the legacy 

assets at this point, and most corporates 

will have very low-risk weighted assets, 

neither of the two RBC ratios will likely 

dictate the amount of capital corporates 

need at this point. Instead, actual 

minimum capital requirement will 

likely be dictated by the interim 

leverage ratio, meaning a corporate will 

need 200 BP in PCC/RE and another 200 

BP in NCAs. 

• Years four through six. At the third 

anniversary of the publication of the 

final rule, the 4 percent minimum 

leverage ratio goes into effect. In 

addition, any corporate that does not 

have at least 45 BP of RE on the third 

anniversary must file a retained 

earnings action plan (REAP) with the 

NCUA illustrating how it is going to 

achieve the upcoming RE requirements 

at the sixth and tenth anniversaries of 

the final rule. 

• Years seven through ten. At the 

sixth anniversary of the publication of 

the final rule, a corporate must have at 

least 100 BP of RE to be considered 

adequately capitalized. 

• Year eleven and after. At the tenth 

anniversary of the publication of the 

final rule, a corporate must have at least 

200 BP of RE to be considered 

adequately capitalized. 

Overview of Significant Capital 

Revisions in This Final Rule 

Most of the public comments on the 

capital provisions, including comments 

received from corporate credit unions, 

were supportive of the new proposed 

Basel I capital requirements, including 

the use of risk-based capital measures. 

Some of these commenters specifically 

supported the use of Basel I standards 

over Basel II, stating that Basel I was 

adequate and less complex. 

The Board agrees with these 

commenters, and has generally adopted, 

with some modifications, the minimum 

capital ratios, risk based capital 

calculations, and new elements of 

capital, as set forth in the proposed rule. 

As in the proposed, the final revisions 

will require that RE constitute a certain 

portion of capital. For example, to be 

adequately capitalized, a corporate must 

have at least 100 BP of RE after six 

years, and 200 BP of RE after ten years. 

Other elements of the new capital 

provisions will also be phased in over 

time, beginning one year after 

publication of this final rulemaking. The 

final revisions eliminate the current 

prohibition on conditioning 

membership, services, or the pricing of 

services upon the purchase of paid-in 

capital. Details about each final revision 

are contained in the section-by-section 

analysis below. 

Some commenters, including NPCUs, 

questioned whether corporates need any 

capital. Other commenters stated that 

NCUA should not require any 

contributed capital, and that corporates 

should be given sufficient time to ‘‘earn’’ 

their way to adequate capitalization. 

The Board is concerned that NCUA’s 

extraordinary actions to stabilize and 

protect the corporate system over the 

past few years have been misunderstood 

by some of these commenters. Because 

of NCUA’s actions, including the 

Temporary Corporate Credit Union 

Share Guarantee Program (TCCUSGP) 

and the Temporary Corporate Credit 

Union Liquidity Guarantee Program 

(TCCULGP), many corporates have been 

able to operate as going concerns with 

artificially low levels of capital. 

Measures like the TCCUSGP and 

TCCULGP are, however, temporary 

measures. In the future, NCUA will 

wind down and terminate these 

measures, and corporates will have to 

function on their own. Further, 

corporates and their members cannot 

expect to ever again receive such 

extraordinary government support, 

either explicitly or implicitly, from 

NCUA or any other government entity.4

In fact, it is NCUA’s intention with the 

various revisions in this final rule to 

ensure that the corporates, going 

forward, never again present the sort of 

systemic risk to the entire credit union 

system that requires such extraordinary 

intervention. And this means that, 

without building adequate capital going 

forward, corporates will not be able to 

function. 

Inadequate levels of capital introduce 

unacceptable moral hazards. When the 

owners of an entity have significant 

amounts of their own capital at stake, 

they have incentive to ensure that the 

entity is prudently operated and does 

not engage in overly risky activity, 

because the risk of loss is born by the 

capital owners. However, when the 

owners have little or no capital at stake, 

they have the incentive to overlook, or 

even encourage, risky behavior by the 

entities’ management. We observed 

some of this risky behavior at certain 

corporates in the recent past—and this 

behavior was likely fueled by 

contributed capital levels that were too 

low for the risks undertaken, as well as 

the fact that some member owners of 

these corporates did not fully 

understand the nature and extent of 

their potential capital losses and so 

were not actively engaged in the 

oversight of their corporates. NCUA will 

not permit corporates to operate with 

low capital levels that encourage risky 

behavior. Accordingly, NCUA intends 

with this rulemaking to ensure 

corporates have adequate capital levels 

going forward to mitigate such moral 

hazard.5

In addition to introducing 

unacceptable moral hazards, low capital 

levels have negative, direct effects on an 

entity’s ability to function. For example, 

potential creditors would not likely lend 

to any corporate that does not have 

capital sufficient to absorb losses, 

because the creditors will have 

legitimate fears that any operating losses 

in the corporate will keep the creditors 

from getting repaid. Likewise, potential 

third-party vendors would not do 

business with corporates that do not 

have capital available to absorb 

operating losses, because these vendors 

would be afraid that any losses would 

have negative effects on the corporate’s 

ability to pay the vendors’ invoices.6

In sum, going forward corporates 

must survive on their own and without 

continued government assistance—and 

that means corporates must have their 

own adequate capital. 

In response to the other comments, 

NCUA is not requiring that any of a 

corporate’s capital be contributed 

capital. NCUA will not, however, 

continue its extraordinary support of the 

corporate system over the time it would 

take to build sufficient capital just 

through RE growth alone. For example, 

to achieve a 4 percent capital ratio just 

through RE growth could take 20 years 

or longer. It is inappropriate for the 

NCUA, which is a government entity, to 

provide the necessary guarantees and 

other assistance that would enable a 

corporate to survive that long with such 

low levels of capital. And that means 

that, to survive as a going concern 

without continued government 

assistance, a corporate must solicit and 

achieve sufficient capital in the form of 

contributed capital. Any corporate that 


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7Some corporates may not even need additional 

capital on the first anniversary. 

is unable to obtain the requisite levels 

of capital in a timely manner may have 

to be liquidated or merged. 

Some commenters questioned the 

need for any minimum RE requirement. 

One corporate stated that, from a 

NCUSIF standpoint, contributed capital 

acts in the same capacity as RE. This 

commenter believes that the building of 

RE is typically a decision made by the 

organization’s Board and so does not 

believe that the portion of capital that is 

RE should be designated within the 

regulation. Another corporate 

commenter, however, recognized the 

need for a minimum RE requirement. 

As discussed at length in the 

preamble to the proposed rule, NCUA 

believes that, eventually, some part of a 

corporate’s capital must consist of RE. 

This is the only form of corporate 

capital that, when depleted, does not 

result in losses that flow downstream to 

NPCUs. Without some RE, the 

corporates would be a continued source 

of instability to the credit union system 

as a whole. 

A few commenters stated that NCUA 

needed to look at other sources besides 

credit unions to recapitalize the 

corporate system, without specifying 

which sources. The Board is unaware of 

any other logical sources of capital. 

Corporates are member-owned 

cooperatives established to serve their 

member NPCUs, so logically the 

primary source of a corporate’s 

contributed capital should be its 

member-owner NPCUs. Still, corporates 

have always been free to sell paid-in 

capital to nonmembers, including noncredit union nonmembers, but to date 

have been either unwilling or unable to 

do so. The proposal, and these final 

revisions, permit corporates to sell all 

forms of contributed capital, including 

nonperpetual capital, to nonmembers at 

the corporate’s discretion. To the extent, 

however, that some commenters might 

believe that NCUA or the federal 

government can donate capital to 

corporates, that is neither legally 

possible nor a good idea as a policy 

matter. As stated above, credit unions in 

general, and corporates in particular, 

cannot depend on continued 

government assistance to survive. 

Some commenters thought the 

proposed capital requirements were 

overly complex. The NCUA Board 

disagrees. Corporates are complex 

financial entities and so require some 

detail and nuance in their regulation. 

The Board notes that the Basel I 

standards, and associated regulations, 

are no more complex than those capital 

standards imposed on banking entities 

with similarly complex operations and 

activities. 

A few commenters that generally 

opposed the new capital standards 

stated that the NCUA’s basic rationale 

for the proposed changes is that the 

permanence of capital and a risk-based 

capital standard would have mitigated 

the losses at Corporates in the past two 

years. This is not a correct statement. 

NCUA has long been considering 

amendments to improve corporate 

capital standards, even before the credit 

crisis of 2007. The new capital 

standards, as proposed and finalized 

here, are intended to help protect the 

corporates, their members, and the 

NCUSIF from future losses, whether or 

not those future losses are related to 

credit risk in the mortgage markets (as 

in 2007) or are caused by other factors. 

A few commenters questioned why 

NCUA was imposing capital 

requirements on corporates that were 

similar to banking capital requirements 

while at the same time imposing ALM 

and investment requirements that were 

different from those imposed on banks. 

The Board believes that while many 

corporates engage in activities and take 

on risks similar to banks, and thus 

should have a capital regime similar to 

banks, the risks that corporates pose to 

NPCUs are systemic risks, and thus 

different than the risks posed by one 

bank to another bank. It is true that a 

few very large banks may present 

systemic risks to the banking system, 

but the Basel I standards contained in 

this rulemaking are different than the 

Basel II advanced standards that very 

large banks are subject to. 

Several NPCU commenters were 

concerned that the likelihood of ongoing 

corporate consolidation, combined with 

factors in the proposal such as the 

lengthening of the MCA three year 

requirement to five years and the 

requisite NCUA approval for any return 

of PCC, all increased the possibility that 

an NPCU might find itself stuck with 

significant capital in a corporate to 

which that NPCU did not want to 

belong. Natural person credit unions 

will have to decide, going forward, what 

services they want from corporates. As 

part of that decision, they will have to 

decide if they are willing to contribute 

capital to one or more corporates. If they 

decide to contribute capital, they will 

have to take into account the possibility 

that the corporate may then consolidate 

or merge with another corporate. If that 

should happen, and the NPCU no longer 

desires services from the continuing 

corporate, the NPCU does have several 

options. First, it may ask the corporate 

to redeem the capital. If such 

redemption complies with NCUA’s 

regulations, and NCUA approves the 

redemption, the corporate may redeem 

the capital. Second, the member NPCU 

can attempt to transfer (sell) the capital 

to another member. And, third, the 

member NPCU can attempt to transfer 

the capital to a nonmember. 

A few commenters believe the 

proposed capital phase-in period is 

appropriate, and one NPCU labeled it as 

generous. Many commenters, however, 

believe that the proposal provides too 

short a time period for the phase-in of 

the proposed new capital requirements. 

The Board believes that the final 

capital phase-in, which mirrors the 

proposed phase-in, is both appropriate 

and feasible. As discussed in the 

preamble to the proposed rule, the 

phase-in period balances the need for 

corporates to (1) quickly achieve 

sufficient capital, and wean themselves 

from government assistance, through 

solicitations of contributed capital and 

growth of RE, while (2) providing for an 

adequate opportunity to make that 

solicitation and achieve that growth. 

The proposed rule was issued ten 

months ago, and corporates have had 

some time since then to consider the 

ramifications of the proposal. Further, 

none of the new capital provisions will 

be effective until the first anniversary of 

the publication of this final rulemaking 

in the Federal Register. This one year 

period gives corporates ample 

opportunity to analyze the elements of 

this final rule, perfect their business 

plans, convince their members of the 

validity of their business plans, and 

solicit contributed capital.7 Corporates 

that are well-run should be able to make 

an effective solicitation so as to garner 

sufficient contributed capital by the first 

anniversary. 

Under the final rule, the first specific 

RE target (e.g. 45 BP of accumulated RE) 

does not go into effect until the third 

anniversary of publication, and the first 

specific RE requirement (100 BP) does 

not go into effect until the sixth 

anniversary of publication. As discussed 

in the sections below on the asset 

liability management provisions of the 

final rule, the final investment and ALM 

provisions permit corporate credit 

unions a bit more leeway in the 

mismatch of their assets and liability 

cash flows than in the proposed rule, 

and the Board believes this should help 

corporate credit unions generate 

additional earnings on their assets. As 

also discussed below, NCUA has 

modeled various investment portfolios 

that corporates could purchase under 

provisions of the final corporate rule, 

and the Board has concluded that a 

well-run corporate can, in fact, generate 


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45 BP of earnings in the first three years 

and 100 BP of earnings in the first six 

years as required by the capital phasein. 

Other, more specific comments on 

capital are discussed in the section-bysection analysis below. 

C. Prompt Corrective Action (PCA) 

Although prompt corrective action 

(PCA) applies to natural person credit 

unions (NPCUs) and to banking entities, 

PCA does not currently apply to 

corporates. The proposed rule contained 

a PCA regime similar to what the other 

banking regulators, and the Federal 

Deposit Insurance Act, impose on 

banks. 

The final rule adopts the proposed 

PCA provisions substantially as 

proposed. Each corporate will be 

assigned to one of five capital 

categories: Well-capitalized, adequately 

capitalized, undercapitalized, 

significantly undercapitalized, and 

critically undercapitalized. The 

potential consequences of failing to 

meet capital standards include 

restrictions on activities, restrictions on 

investments and asset growth, 

restrictions on the payment of 

dividends, restrictions on executive 

compensation, requirements to elect 

new directors or dismiss management, 

and possible conservatorship. The final 

rule does include some due process 

enhancements beyond those contained 

in the proposed rule. 

D. Corporate Investments, Credit Risk, 

and Asset-Liability Management (ALM) 

Summary of Current Investment, Credit 

Risk, and ALM Provisions 

The current Part 704 generally 

prohibits certain types of investments, 

including derivatives, stripped mortgage 

backed securities (MBS), mortgage 

servicing rights, and residual interests 

in asset backed securities (ABS). The 

rule specifies, for permissible 

investment types, that investments must 

be rated no lower than AA- by at least 

one NRSRO at time of purchase. 

Corporates that qualify for Part I 

expanded authority, however, have 

additional investment authority, 

including the purchase of investments 

rated down to A-. Corporates that 

qualify for Part II expanded authority 

may purchase investments rated down 

to BBB(flat). Corporates that qualify for 

Part III expanded authority may invest 

in certain foreign obligations; corporates 

that qualify for Part IV expanded 

authority may engage in derivatives 

transactions for certain specified 

purposes; and corporates with Part V 

expanded authority may engage in 

certain loan participations. 

The current rule requires that 

corporates maintain an internal 

investment policy that includes 

‘‘reasonable and supportable 

concentration limits’’ including limits 

by ‘‘investor type and sector.’’ The 

current rule limits the aggregate of all 

investments in any single obligor to the 

greater of 50 percent of capital or $5 

million, but includes no regulatory 

sector limits. The rule does not limit 

investments that are structured to be 

subordinate, in terms of potential credit 

losses, to other securities. 

Summary of Significant Proposed 

Investment, Credit Risk, and ALM 

Provisions 

NCUA developed the proposed 

changes to the investment, credit risk, 

and ALM provisions based on lessons 

learned from both the recent experience 

with corporate investment portfolios 

and their associated losses and 

comments received from the ANPR. 

NCUA determined that three major 

risk conditions were the primary 

contributors to the current losses in the 

corporate system: (1) Excessive 

investment sector concentrations, 

particularly private label RMBS; (2) 

excessive average-life mismatches 

between assets and liabilities; and (3) 

excessive concentrations in 

subordinated securities, including 

mezzanine securities. The proposed 

revisions to the investment and assetliability provisions of the corporate rule 

control these risk conditions in the 

aggregate through the use of limits, 

many of which are tied to a corporate 

credit union’s capital. The proposal 

provided a framework that allowed for 

a level of risk-taking necessary to 

support the profitability of a corporate 

but which would also be continuously 

and adequately protected by the 

corporate’s capital. 

The proposed rule established new 

prohibitions for investments in 

collateralized debt obligations (CDOs) 

and net interest margin (NIM) securities. 

The proposal also required that a 

corporate examine the NRSRO rating 

from every NRSRO that publicly rates a 

particular investment and only employ 

the lowest of those ratings and required 

that at least 90 percent of a corporate’s 

investments be rated by at least two 

NRSROs. The proposal eliminated Part 

II expanded authority, thus making 

‘‘A¥’’ the lowest possible rating for an 

NRSRO-rated investment purchased by 

a corporate with expanded investment 

authority. To qualify for Parts I and II 

(i.e., the current Parts I and III) 

expanded investment authority, the 

proposal required a corporate achieve 

and maintain higher capital levels, that 

is, a minimum six percent capital ratio. 

The proposal generally reduced the 

single obligor limits from 50 percent of 

capital to 25 percent of capital, with 

slightly higher limits for investments in 

mutual funds and repurchase 

agreements. The proposal also imposed 

specific concentration limits by 

investment sector. Sectors included 

residential mortgage backed securities 

(RMBS), commercial mortgage backed 

securities (CMBS), student loan asset 

backed securities (ABS), automobile 

loan/lease asset backed securities, credit 

card asset backed securities, other asset 

backed securities, corporate debt 

obligations, municipal securities, and 

money market mutual funds, and an ‘‘all 

others’’ category to account for the 

development of new investment types. 

The proposed sector limits were, 

generally, (1) the lower of 500 percent 

of capital/25 percent of assets, or (2) the 

lower of 1000 percent of capital/50 

percent of assets (for the less risky 

sectors). 

The proposal excluded certain assets 

entirely from both the single obligor 

concentration limit in § 704.6(b) and the 

sector concentration limits in § 704.6(c). 

The excluded assets include fixed 

assets, loans, investments in CUSOs, 

investments issued by the United States 

or its agencies or its government 

sponsored enterprises, and investments 

fully guaranteed or insured as to 

principal and interest by the United 

States or its agencies. Investments in 

other federally-insured credit unions, 

deposits in other depository 

institutions, and investment repurchase 

agreements would also be excluded 

from the sector concentration limits but 

not the single obligor concentration 

limit. Investments in CUSOs, while 

excluded from both the § 704.6 

concentration limits, would still be 

subject to the investment limits in the 

corporate CUSO rule, § 704.11(b). 

The proposal limited subordinated 

positions in a structured security to the 

lesser of 100 percent of capital/5 percent 

of assets in any given sector class and 

the lesser of 400 percent of capital/20 

percent of assets in the aggregate. 

The proposal generally limited a 

corporate’s Part III (renumbered from 

Part IV) derivatives activity to 

derivatives used for the purposes of 

reducing the corporate’s overall risk. 

Summary of Significant Investment, 

Credit Risk, and ALM Revisions From 

the Proposed to the Final Rule 

Based on comments received and 

further review, the NCUA Board 

adopted most of the proposed 


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8Assuming the corporate was operating under 

Base level investment authority. 

provisions but also made some 

significant changes. The most 

significant changes in the final rule 

were the removal of the two ALM 

provisions designed to limit cash flow 

mismatches between assets and 

liabilities. In place of these tests, the 

final rule substitutes an alternative 

weighted average life extension test on 

the corporate’s investments along with 

specific prohibitions on private label 

RMBS and subordinated securities. 

The effect of these changes is to create 

the following, final set of investment, 

credit risk, and ALM hurdles through 

which a corporate must run any 

contemplated investment purchase: 

• NRSRO ratings screen. The final 

rule uses NRSRO ratings as a screening 

tool. The final NRSRO screen is tougher 

than the current rule provides. For 

example, to get by the ratings screen the 

corporate has to look at all available 

NRSRO ratings (not just one rating), and 

the corporate has to take the lowest of 

all the ratings (i.e., it can’t cherry pick 

ratings). This ratings screen is 

exclusionary, not inclusionary. Even if a 

security gets by the ratings screen, there 

are still six additional hurdles (listed 

below) each security must pass before 

the corporate can buy the security. 

• Prohibition of certain highly 

complex and leveraged securities. 

NCUA is adding to the list of outright 

prohibited securities in part 704 that are 

overly complex and/or leveraged. So a 

corporate cannot buy the security if it is: 

Æ A Collateralized debt obligation 

(CDO), or 

Æ A Net Interest Margin security 

(NIM), or 

Æ A Private label RMBS, or 

Æ A security subordinated to any 

other securities in the issuance. 

• Single obligor limit. The final rule 

tightens the existing limit from 50% of 

capital to 25% of capital. So if the 

corporate wanted to buy, say, a highly 

rated student loan asset backed security 

(ABS) issued by ‘‘Mainstreet Bank,’’ but 

the corporate has already reached the 

25% of capital limit in investments 

issued by the same Mainstreet Bank 

trust, the corporate can’t buy that 

additional ABS within the same trust. 

• Sector concentration limits. 

Assuming the corporate still wants to 

buy that Mainstreet Bank ABS, and it 

has not reached its single obligor limit 

with Mainstreet Bank, the corporate 

must then apply the sector limits for 

these ABS. If the purchase of the 

Mainstreet Bank ABS would put the 

corporate over the private label student 

loan ABS sector limit (generally, the 

lower of 500% of capital or 25% of 

assets), the corporate can’t buy the ABS. 

• Portfolio WAL not to exceed two 

years. If the corporate got the Mainstreet 

Bank ABS past all those hurdles above, 

there are still more hurdles to overcome. 

The corporate cannot buy the ABS if it 

would put the weighted average life 

(WAL) of the corporate’s loan and 

investment portfolio over two years in 

length. 

• Portfolio WAL (assuming 

prepayment slowdown of 50%) not to 

exceed 2.25 years. The corporate must 

then test the Mainstreet Bank ABS for 

extension risk. The corporate cannot 

buy the ABS if it would put the 

weighted average life of the corporate’s 

loan and investment portfolio, assuming 

the portfolio prepayment speeds slow 

by 50%, out over 2.25 years in length. 

• Interest rate risk shock test. This 

IRR test is in the current rule, and the 

final rule does not change this test. 

Assuming that the Mainstreet Bank ABS 

is floating rate, and its liabilities reset 

rates in similar fashion, it would likely 

not be affected at all by this particular 

test. But if its liabilities did not reprice 

similarly to the ABS (e.g., the floating 

rate ABS was funded by fixed rate 

liabilities), its addition to the portfolio 

could not cause the corporate’s NEV to 

decline by more than 15 percent when 

the portfolio as a whole is shocked by 

300 BP.8

These final revisions provide for a 

simpler rule that still accomplishes 

NCUA’s goal of reducing or eliminating 

various risks while allowing for 

sufficient potential for growth in a 

corporate’s RE. 

Investment Action Plans for Prohibited 

Investments 

Most of the new investment 

prohibitions and other credit and ALM 

requirements go into effect 90 days after 

publication of the final rule. Some 

corporates may hold investments that 

are in violation of one or more of these 

new prohibitions, and these investments 

will be subject to the investment action 

plan provisions of § 704.10. For 

example, if a corporate holds a 

subordinated security prohibited by the 

revised paragraph 704.5(h)(8), and 

determines not to sell that security, it 

must, within 30 calendar days of the 

effective date of the 704.5(h)(8) 

prohibition prepare and submit to the 

OCCU Director an investment action 

plan. 12 CFR 704.10(a). If the plan is not 

approved by the OCCU Director, the 

corporate must comply with the 

‘‘Director’s directed course of action.’’ 

12 CFR 704.10(c). 

E. Liquidity 

Summary of Current Rule 

The current rule generally requires a 

corporate evaluate its liquidity needs 

and plan for appropriate liquidity. It 

also provides that a corporate credit 

union may borrow up to the greater of 

10 times capital or 50 percent of capital 

and shares (excluding shares created by 

the use of member reverse repurchase 

agreements). 

Summary of Significant Revisions 

The proposal restricted a corporate’s 

borrowing to the lower of 10 times 

capital or 50 percent of capital and 

shares (excluding shares created by the 

use of member reverse repurchase 

agreements). The proposal also added a 

sublimit for secured borrowings. The 

final rule adopts the proposal without 

changes. 

F. Corporate Governance Provisions 

Summary of Current Rule 

The current Part 704 places 

limitations on board representation, 

including limits on the number of trade 

organization representatives. The 

current rule does not, however, place 

any experience or knowledge 

requirements on individual corporate 

directors; limit the representation of 

corporate managers and officials on the 

boards of other corporates; provide for 

term limits; require any disclosure of 

senior executive compensation to the 

members of a corporate; or place any 

limits on ‘‘golden parachute’’ severance 

packages for corporate senior 

executives. 

Summary of Significant Governance 

Revisions 

The final revisions require that all 

corporate board members hold either a 

CEO, CFO, or COO position at their 

member credit union or other member 

entity. The final rule will, for clarity, 

add the positions of Manager and 

Treasurer, as these are often the 

equivalent of CEO or CFO at smaller 

credit unions. The revisions also require 

that a majority of a corporate’s board 

members be representatives of NPCU 

members. The proposal also included a 

six year term limit on board service, but 

this mandatory term limit has been 

removed from the final rule. 

The final revisions require that each 

corporate annually prepare, and provide 

to its members, a document that 

discloses the compensation of certain 

employees. For corporates with 41 or 

more employees, the disclosure must 

include the top five compensated 

employees. For corporate with 31 to 40 

employees, the disclosure must include 


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the top four compensated employees. 

For corporates with 30 or fewer 

employees, the disclosure must include 

the top three compensated employees. 

With respect to any corporate merger, 

the final revisions require a merging 

federally-chartered corporate 

affirmatively disclose to both NCUA and 

its members any material, mergerrelated increase in compensation (i.e., 

an increase of more than 15 percent of 

annual compensation or $10,000, 

whichever is greater) for any senior 

executive or director. A state-chartered 

corporate must also make the mergerrelated disclosure, but only to NCUA 

unless state law requires otherwise. 

The final revisions prohibit golden 

parachutes, that is, payments made to 

an institution affiliated party (IAP) that 

are contingent on the termination of that 

person’s employment and received 

when the corporate making the payment 

is either troubled, undercapitalized, or 

insolvent. The revisions also generally 

prohibit a corporate, regardless of its 

financial condition, from paying or 

reimbursing an IAP’s legal and other 

professional expenses incurred in 

administrative or civil proceedings 

instituted by NCUA or a state regulatory 

authority where the IAP is ultimately 

found liable. 

G. Corporate CUSOs 

Summary of Current Rule 

The current corporate CUSO 

provisions do not specify the particular 

services that corporate CUSOs may 

offer, but does provide that the CUSO 

must ‘‘primarily serve credit unions’’ 

and ‘‘restrict its services to those related 

to the normal course of business of 

credit unions.’’ The current rule requires 

the CUSO agree to allow the corporate’s 

auditor, the corporate’s board, and also 

NCUA access to the CUSO’s ‘‘books, 

records, and any other pertinent 

documentation.’’ 

Summary of Significant CUSO 

Revisions 

The final revisions will retain the 

existing 704.11 requirements, and 

further require that a corporate CUSO 

may only engage in categories of 

services preapproved by NCUA. 

Brokerage services and investment 

advisory services will be preapproved in 

the rule, and NCUA will approve 

additional categories of services on an 

ad hoc basis. Once approved, however, 

NCUA may only remove a category of 

service through a rulemaking. The final 

rule provides extra time for a CUSO to 

seek NCUA approval of a service 

category, and extra time for a corporate 

to extricate itself from a CUSO that is 

engaged in activities not preapproved by 

NCUA. 

The final revisions further require a 

CUSO agree to permit the corporate and 

NCUA to access the books, records, 

personnel, equipment, and facilities of 

the CUSO. 

H. Delay of Effective Dates 

None of these final revisions will take 

effect until 90 days following 

publication of this final rulemaking in 

the Federal Register. This delay in the 

effective dates will generally provide 

the corporates, and their NPCU 

members, some time to analyze and 

adapt to the final rule and to observe 

how NCUA is moving forward on 

resolution of the legacy asset problem. 

Some provisions of this final rule, 

including the capital and PCA 

provisions, will have delays in their 

effective dates that are much longer than 

90 days. Those delays will be discussed 

below. 

III. Section-by-Section Analysis 

This section, which provides a 

section-by-section analysis of the final 

revisions, generally follows the 

organization of part 704, that is, starting 

with the proposed capital (§ 704.3) and 

PCA (§ 704.4) amendments, then 

investments (§ 704.5) and credit risk 

(§ 704.6), then asset and liability 

management (§ 704.8), then corporate 

board representation (§ 704.14), and 

then the new sections relating to 

disclosure of executive and director 

compensation (§ 704.19) and golden 

parachutes and indemnification 

(§ 704.20). 

Many of the final revisions require 

new definitions that appear in § 704.2, 

and the discussion of these definitions 

generally appears with the discussion of 

the associated substantive change to the 

corporate rule. This rulemaking revises 

Appendices A and B, and adds a new 

Appendix C. Since Appendix B relates 

to investment authority, the revisions to 

that appendix are discussed as part of 

the discussion of § 704.5. Since 

Appendices A and C (on model forms 

and the risk-weighting of assets, 

respectively) relate to corporate capital, 

the changes to these appendices are 

discussed immediately following the 

discussion of § 704.3. The new subpart 

L to part 747 provides the due process 

associated with the new PCA provisions 

in § 704.4, and so is discussed following 

the § 704.4 discussion. 

The revisions to capital terminology 

in part 704 also necessitate conforming 

amendments to parts 702, 703, and 709, 

as discussed below. 

A. Part 702 Prompt Corrective Action 

Part 702 sets forth PCA for NPCUs. 

The proposal contained a conforming 

amendment to paragraph 702.105(d) 

changing references to paid-in capital 

and membership capital to perpetual 

capital and nonperpetual capital 

accounts, respectively. The final 

702.105(d) is adopted as proposed. 

B. Part 703 Investments and Deposit 

Activities 

Part 703 sets forth the permissible 

investment and deposit activities 

generally applicable to federal credit 

unions. The proposal contained a 

conforming amendment to paragraph 

703.14(b) changing references to paid-in 

capital and membership capital to 

perpetual capital and nonperpetual 

capital accounts, respectively. The final 

703.14(b) is adopted as proposed. 

C. Part 704 Corporate Credit Unions 

Section 704.2 Definitions 

New and modified definitions in 

§ 704.2 are discussed below in the 

section where the defined word or 

phrase appears. 

Section 704.3 Capital 

Section 704.3 establishes the capital 

requirements for corporates. The final 

704.3 contains six paragraphs (a) 

through (f). Paragraph (a) covers the 

basic capital requirements. Paragraph 

(b) contains the requirements for 

nonperpetual capital accounts (NCAs) 

and paragraph (c) contains the 

requirements for perpetual contributed 

capital (PCC). Paragraph (d) contains the 

requirements and procedures for 

establishing different minimum capital 

requirements for a particular corporate. 

Paragraph (e) contains certain other 

reservations of authority to the NCUA 

Board. Paragraph (f) explains the 

treatment of certain former capital 

accounts under the old corporate rule 

(i.e., membership capital accounts) that 

are not converted to the new forms of 

capital (i.e., either NCAs or PCCs). 

As discussed previously, this new 

704.3 capital section will not become 

effective until October 20, 2011, and 

some elements of this section, and 

associated definitions, have 

applicability dates that are delayed 

beyond October 20, 2011. 

704.3(a) Capital Requirements 

The proposed 704.3(a), along with 

associated definitions in 704.2, 

established a new leverage ratio, new 

Tier 1 risk based capital ratio (T1RBC 

ratio), and a new total risk based capital 

ratio (Total RBC ratio). The proposal 

established minimum of 4 percent for 


emcdonald on DSK2BSOYB1PROD with RULES2
Federal Register / Vol. 75, No. 202 / Wednesday, October 20, 2010 / Rules and Regulations 64795 

9 International Convergence of Capital 

Measurement and Capital Standards (July 1988, 

updated to April 1998), Section I(c), paragraph 

24(ii) (emphasis added). See also 12 CFR part 3, 

Appendix A, § 2(c)(7)(i) (Office of the Comptroller 

of the Currency deductions from capital), and 12 

CFR part 208, Appendix A, § II.B.(ii) (Federal 

Reserve Board deductions from capital). 

the leverage ratio, 4 percent for the 

T1RBC ratio, and 8 percent for the Total 

RBC ratio. The proposal required a 

corporate develop goals, objectives, and 

strategies to ensure adequacy of capital. 

The proposal required that a corporate 

attempt to build RE to a level of 0.45 

percent of its moving daily average net 

assets (DANA) within 36 months of 

publication of the final rule, and submit 

a RE accumulation plan (REAP) to 

NCUA if it fails to do so. 

The final rule generally adopts 

704.3(a), and the associated definitions, 

as proposed. Some commenters, 

however, sought clarification about 

certain provisions, as discussed below. 

704.3(a)(1)(i) and 704.2 Definitions of 

Leverage Ratio 

A few commenters expressed 

confusion about the effective date of the 

new leverage ratio, and whether that 

date was actually 12 months following 

publication of the final rule, or 36 

months as stated in the preamble. In 

fact, the permanent leverage ratio will 

become effective 36 months after 

publication, but the rule does contain an 

interim leverage ratio to bridge the gap 

between the general effective date of the 

capital provision (i.e., 12 months after 

publication) and the permanent leverage 

ratio. 

The proposal, between 12 months and 

36 months following publication of the 

final rule, requires a minimum 4 percent 

interim leverage ratio, which was 

defined as the adjusted total capital 

divided by moving DANA. The 

proposed definition of ‘‘total capital’’ 

included RE, PCC, and NCAs, while the 

proposed definition of ‘‘adjusted total 

capital’’ then excluded all NCAs in 

excess of the amount of PCCs. This 

result would have limited the use of 

NCAs to only 200 BP toward the 400 BP 

necessary to achieve the minimum 

leverage ratio. 

Two corporate commenters suggested 

that corporates be allowed to use NCAs, 

without limit to satisfy their interim 

leverage ratio (that is, until the 36 

month point). One stated that the 

current calculation of interim leverage 

ratio will result in NCAs not being an 

effective capital tool. This commenter 

believes that under the proposal as 

drafted corporates will immediately 

solicit PCC following publication of the 

final rule so as to be in compliance with 

the interim leverage ratio at the 12 

month mark. This commenter suggests, 

instead, that NCUA redefine the 

numerator of leverage ratio from 

‘‘adjusted total capital’’ to ‘‘total capital,’’ 

thus allowing for unrestricted use of 

NCAs in the numerator until at least the 

third anniversary of publication of the 

final rule. This commenter states this 

will give NPCUs additional time to 

decide whether they want to stay in the 

corporate system and invest 

permanently in the corporates through 

PCCs, and will also improve the 

corporate’s ability to grow RE in the first 

three years, as NCAs are less expensive 

than PCCs. 

The Board agrees with these 

commenters. Accordingly, in the final 

rule the numerator of the interim 

leverage ratio includes all elements of 

capital and permits the use of any one 

element without limitation. Hence, a 

corporate could use just NCAs, if it 

desires, to satisfy the 4 percent interim 

leverage ratio requirement. Thirty six 

months after publication of the final 

rule, the proposal defined, and this final 

rule adopts, the permanent leverage 

ratio to be defined as adjusted core 

capital divided by moving DANA. Core 

capital, in turn, is limited to Tier 1 

capital (i.e., RE and PCCs). Accordingly, 

NCAs will not count at all toward the 

permanent leverage ratio when it 

becomes effective after 36 months. The 

final rule also adds clarifying statements 

at the end of each of the two definitions, 

that is ‘‘[T]his is the interim leverage 

ratio,’’ and ‘‘[T]his is the permanent 

leverage ratio,’’ so that those who read 

the definitions will understand that 

these are two distinct definitions. 

704.2 Definition of ‘‘Core Capital’’ 

The proposal defines core capital as 

the sum of the corporate credit union’s 

RE, paid-in capital, and the RE of any 

acquired credit union, or of an 

integrated set of activities and assets, 

calculated at the point of acquisition, if 

the acquisition was a mutual 

combination. Upon the first anniversary 

of the publication of the final rule, the 

new Basel I capital provisions and ratios 

become effective. On that date, the 

proposal adjusts the definition of core 

capital to make a nomenclature change 

(i.e., replace PIC with PCC) and to add 

to capital the minority interests in the 

equity accounts of CUSOs that are fully 

consolidated with the corporate. 

704.2 Definition of ‘‘Adjusted Core 

Capital’’ 

The permanent leverage ratio and the 

Tier 1 risk based capital ratio use 

adjusted core capital as the numerator. 

The proposal defined adjusted core 

capital as core capital modified by six 

different deductions. 

The proposed deductions required 

when adjusting core capital include the 

amount of the corporate’s investments 

in consolidated CUSOs. Some 

commenters objected to this deduction, 

arguing that such a deduction varies 

from the Basel I standards. The Board 

agrees that this proposed deduction, as 

worded in the proposed, did not 

accurately reflect the Basel I standard. 

The deduction should be for 

investments in CUSOs that are not 

consolidated with the corporate, as 

described in the Basel I Accord: 

It has been concluded that the following 

deductions should be made from the capital 

base for the purpose of calculating the riskweighted capital ratio. The deductions will 

consist of: * * * investments in subsidiaries 

engaged in banking and financial activities 

which are not consolidated in national 

systems. The normal practice will be to 

consolidate subsidiaries for the purpose of 

assessing the capital adequacy of banking 

groups. Where this is not done, deduction is 

essential to prevent the multiple use of the 

same capital resources in different parts of 

the group. The deduction for such 

investments will be made against the total 

capital base. The assets representing the 

investments in subsidiary companies whose 

capital had been deducted from that of the 

parent would not be included in total assets 

for the purposes of computing the ratio.9

The Board has amended the final 

definition of adjusted total capital to 

required deduction of investments in 

unconsolidated CUSOs. 

The proposed definition of adjusted 

core capital also requires that corporates 

should deduct from their own capital 

any capital they have contributed to 

other corporates. Specifically, the 

proposal stated: 

If the corporate credit union, on or after 

(the first anniversary of the final rule), 

contributes new capital or renews an existing 

capital contribution to another corporate 

credit union, deduct an amount equal to the 

aggregate of such new or renewed capital 

* * *. 

Some NPCU commenters specifically 

agreed with this deduction, noting that 

cross-corporate capitalization can inflate 

capital levels and exposes NPCU 

members of the contributor corporate to 

the problems of another corporate. 

One commenter asked for clarification 

about the meaning of ‘‘renew an existing 

capital contribution.’’ The only capital 

placed in another corporate that is 

exempt from this required deduction is 

existing PIC that is converted directly to 

PCC on the first anniversary of the 

publication of the final rule or 

unconverted MCAs that are amortizing 

under the provisions of paragraph 

704.3(f). All other PCC, and all NCAs, 


emcdonald on DSK2BSOYB1PROD with RULES2
64796 Federal Register / Vol. 75, No. 202 / Wednesday, October 20, 2010 / Rules and Regulations 

10See, e.g.,12 CFR part 208, Appendix A, 

§ II.A.2.(e) (Federal Reserve supplementary capital 

elements). 

must be deducted. The Board has 

amended the final version of the rule 

text to clarify that if the corporate credit 

union contributes any PCC, or maintains 

any NCAs, at another corporate credit 

union, it may deduct an amount equal 

to that PCC or NCA. 

Another commenter said NCUA 

should consider an exception for de 

minimus member capital contributions 

between corporates. The Board 

considered this last comment, but does 

not believe a de minimus exception is 

necessary. 

One commenter objected to this 

proposed deduction, stating that it 

seemed to indicate that NCUA would 

consider any capital deposits made by 

NPCUs into corporates to have a 100 

percent risk weighting, if and when 

NPCUs might fall under a risk-weighted 

capital system, and this would further 

hinder corporate recapitalization. The 

Board does not believe that NPCU’s 

should equate capitalization by NPCUs 

of retail corporates with crosscapitalization of corporates for purposes 

of PCA. 

One commenter stated that the 

definition of core capital should include 

NCAs. The Board disagrees. Adding 

NCAs to the definition of core capital 

would undermine the permanent nature 

of core capital and the associated capital 

protection provided by the minimum 

leverage ratio. 

704.2 Definition of ‘‘Supplementary 

Capital’’ 

The proposed definition of 

supplementary capital included NCAs, a 

portion of the corporates allowance for 

loan and lease losses, and a portion of 

the unrealized gains on available for 

sale equity securities with readily 

determinable fair values. The term, 

which is synonymous with Tier 2 

capital, is used in the numerator of the 

total risk based capital ratio. One 

commenter suggested that all of the 

unrealized gains on equity securities 

should count as supplementary capital. 

The Board disagrees, as this approach 

would be inconsistent with the Basel I 

regulations of the other banking 

regulators.10 The Board also notes that 

corporates are not likely to have much 

in the way of equity securities, as they 

are generally impermissible investments 

for corporates. 

704.2 Definition of ‘‘Fair Value’’ 

The final rule also refines the 

definition of fair value to be consistent 

with Financial Accounting Standard 

157. 

704.2 Definition and Use of ‘‘Moving 

Monthly Average Net Risk-Weighted 

Assets’’ 

The proposal defined the 

denominator of both new risk based 

capital ratios as ‘‘Moving Daily Average 

Net Risk-Weighted Assets’’ (MDANRA). 

Some commenters questioned the 

burden of daily risk weighting to 

produce the MDANRA figure. The 

Board agrees that a daily calculation is 

not necessary and could be quite 

burdensome for some corporates. 

Accordingly, the final rule replaces the 

denominator of both risk based capital 

ratios with a new moving monthly 

average net risk-weighted assets 

(MMANRA), defined to mean the 

average of the net risk-weighted assets 

for the month being measured and the 

previous eleven (11) months. The 

definition also requires that MMANRA 

measurements be taken on the last day 

of each month. 

704.2 Definition of ‘‘Retained 

Earnings’’ 

The final rule amends the definition 

of retained earnings to create a cross 

reference to GAAP: ‘‘Retained earnings 

means retained earnings as defined 

under Generally Accepted Accounting 

Principles (GAAP).’’ 

704.3(a)(3) RE Accumulation Target 

and REAP 

Some commenters incorrectly 

characterized the proposal as 

establishing a ‘‘requirement’’ for 45 BP of 

RE after three years, and questioned the 

feasibility of reaching that target under 

the proposed ALM and investment 

restrictions (discussed elsewhere). In 

fact, the proposal does not require 45 BP 

after three years, but, rather, calls for the 

submission of a RE accumulation plan 

(REAP) if the 45 BP target is not met. 

Many commenters, including both 

NPCUs and corporates, thought that the 

multi-step RE phase-in (i.e., target of 45 

BP after three years, and a requirement 

for 100 BP after six years, and then 200 

BP after ten) was too difficult for 

corporates to achieve. Commenters 

thought this was too difficult because of 

the current interest rate environment; 

the fact that most corporate income 

comes from investments, and not loans; 

and the limitations imposed by the 

proposed ALM and investment 

requirements (discussed elsewhere). 

One of these commenters stated this RE 

timetable was likely to encourage 

aggressive strategies to accumulate RE 

or cause a corporate ‘‘to solicit high cost 

capital,’’ and that corporates ‘‘must not 

be unnecessarily forced into a survival 

mode while rebuilding capital.’’ Many of 

these same commenters suggested that 

these milestones be changed from three, 

six, and ten years to four, eight, and 

twelve years, respectively. One of these 

commenters asked that these milestones 

be changed to five, seven, and twelve 

years, respectively. One corporate 

commenter, however, did state its belief 

that these RE targets and requirements 

were achievable. 

The Board disagrees with those 

commenters who believe the proposed 

time line is not achievable. The 

proposed timeline, which the Board has 

adopted in the final, provides the 

necessary balance between permitting a 

well-run corporate time to solicit capital 

and grow retained earnings, while 

ensuring that there is pressure on the 

corporate to achieve adequate capital 

levels. 

Of the commenters who specifically 

thought requiring 100 BP of RE by year 

six was too aggressive, one asked that 

NCUA make public its third-party 

review of this requirement, along with 

the assumptions used during the review. 

As discussed above, NCUA has made 

public the Kamakura report, and has 

made changes in response to portions of 

the report. Overall, NCUA believes these 

changes will make it easier for a 

corporate to achieve the necessary RE 

growth, as discussed in more detail 

below. 

One commenter stated that the 

proposal should require a state 

chartered corporate submit any REAP to 

both NCUA and the relevant state 

regulator, and that NCUA consult with 

the state regulator on the evaluations of 

the REAP. The NCUA Board agrees that 

it should consult with the relevant state 

regulator in these circumstances, and 

has amended the final regulation 

accordingly. 

Except as described above, the Board 

adopts the final paragraph 704.3(a), and 

associated capital definitions in § 704.2, 

as proposed. 

704.3(b) Requirements for 

Nonperpetual Capital Accounts (NCAs) 

The proposal replaced membership 

capital accounts (MCAs) with 

nonperpetual capital accounts (NCAs). 

NCAs must be either term or notice 

accounts, with a minimum maturity or 

notice period of five years. Under the 

proposal, adjustable balance NCAs were 

not permitted. 

Two commenters stated that five-year 

notice is more appropriate than threeyear notice, since ‘‘this three year time 

period is short in relation to the term of 

some corporate assets.’’ These 

commenters, however, believe that all 


emcdonald on DSK2BSOYB1PROD with RULES2
Federal Register / Vol. 75, No. 202 / Wednesday, October 20, 2010 / Rules and Regulations 64797 

11See, e.g., 15 U.S.C. 77b(a)(1), 15 U.S.C. 

77c(a)(10). 

12See 15 U.S.C. 77c(a)(5), and Securities and 

Exchange Commission (SEC) Release No. 33–6758, 

Regulation D Revisions, 53 FR 7866, note 10 (March 

3, 1988). 

13See 15 U.S.C. 78j(b). 

14And PCCs must be ‘‘available to cover losses 

that exceed retained earnings.’’ 12 CFR 704.2. 

15The final revisions to the corporate rule contain 

two different versions of the definitions section 

(§ 704.2): A temporary version that goes into effect 

with the bulk of the revisions 90 days after 

Continued 

contributed capital should be five-year 

notice and that there is no need for 

perpetual contributed capital. The 

Board believes it is important to have 

some element of perpetual capital in 

corporates. This is consistent with Basel 

I and with the fact that, going forward, 

corporates cannot expect any future 

extraordinary government intervention. 

One NPCU stated that NCUA should 

continue to permit accounts that adjust 

with credit union balance sheets. This 

commenter stated that such adjustable 

accounts are ‘‘necessary for the system 

and in times of tight liquidity allows 

credit unions to have flexibility.’’ The 

Board disagrees. Capital must have a 

sense of permanence. Capital accounts 

that adjust based on measures that can 

be manipulated by the member lack this 

permanence. 

One commenter asked that, with 

regard to the new NCAs, the word 

‘‘original’’ be placed in front of the 

phrase ‘‘minimum term.’’ The Board 

agrees and has made this clarification. 

Two commenters recommended that, 

for ‘‘nonmaturity’’ or ‘‘notice’’ NCAs, the 

withdrawal notice be changed from five 

years to three years if the NCAs have 

been in existence at the corporate for at 

least two years. The Board believes this 

change would be confusing to 

implement, would undermine the 

stability of NCAs, and would be 

inconsistent with the Basel standards. 

Accordingly, the Board is not adopting 

this recommendation. 

A few commenters objected to the 

proposed change from three years to five 

and said MCA maturity should stay at 

three years; and one billion dollar NPCU 

stated that the proposed extension to 

five years could cause some credit 

unions to leave the corporate network. 

A few NPCUs stated that if NCUA 

wanted NPCUs to recapitalize 

corporates, it would shorten the term of 

MCAs instead of lengthening the term, 

and one of these NPCUs suggested a 

term of one to two years. The Board 

believes that the importance of having 

solid, perpetual capital, consistent with 

the international Basel I standards, 

outweighs these concerns. 

Another commenter stated that credit 

unions will need the flexibility to 

withdraw or change to another 

corporate credit union that meets their 

needs without having to wait three to 

five years to withdraw a capital deposit. 

The Board disagrees. Capital by its very 

nature must be stable and not subject to 

easy withdrawal. As discussed above, 

potential creditors and vendors of a 

corporate will not do business with the 

corporate absent a strong capital regime 

that is available to absorb losses ahead 

of these third parties. 

704.3(b)(6), (c)(5) Permitting the 

Transfer of Contributed Capital 

Accounts (NCA and PCC) to Third 

Parties 

The proposal would permit members 

to freely transfer their NCAs 

(704.3(b)(6)) and PCCs (704.3(c)(5)) to 

third parties, regardless of membership 

status. 

One NPCU commenter stated that free 

transferability of capital was good, as it 

helped enforce market discipline. A few 

commenters, however, stated that there 

should be limits on the ability of a 

member to unilaterally sell or transfer 

their contributed capital to any other 

member or a nonmember. These 

commenters believe that a corporate 

credit union’s board must be 

empowered to preapprove any proposed 

transfer of capital funds (other than in 

a merger or liquidation). One of these 

commenters would restrict transfers to 

other entities in the field of 

membership, and another commenter 

stated that: 

It does not appear that the corporate credit 

union would have any ability to control the 

transfer of or the ultimate ownership of its 

capital shares. This lack of control could lead 

to the required registration of capital shares 

as public securities. Such a registration could 

be required despite the wishes of the 

corporate and the majority of its members. 

Registration would dramatically increase the 

cost and complexity of operating a corporate. 

In addition, the free transfer of capital shares 

could allow manipulation including enabling 

natural person credit unions to cut their 

capital exposure to a corporate by selling 

shares rather than by putting them on notice. 

Alternatively, a prospective member credit 

union could buy shares rather than 

contributing capital directly to a corporate. 

This regulation would hamper the objective 

of building committed corporate capital. 

The Board agrees that there should be 

additional limits on the transferability 

of NCAs and PCCs to mitigate the 

possibility of securities laws violations. 

PCC and NCAs are generally subject to 

the securities laws because they meet 

the general definition of ‘‘security.’’11

Securities issued by corporate credit 

unions are exempt from registration 

under the Securities Act of 1933 (SA),12

and since it is unlikely that either 

members or corporates would engage in 

activities involving PCC or NCAs that 

would trigger the application of broker/ 

dealer provisions of the Securities and 

Exchange Act of 1934 (SEA), the risk of 

securities law violations is minimal. 

Still, the anti-fraud provisions of SEA 

§ 10(b) and SEC Rule 10b-5 would apply 

to any transfer, so that members should 

not withhold, or misstate, any available 

financial information about the 

corporates when making such a transfer 

and should also ensure that the 

potential transferees have some 

sophistication.13

Accordingly, the final rule requires a 

corporate member wishing to transfer 

PCC or NCAs to a non-credit union third 

party must ensure the potential 

transferee obtains appropriate financial 

information about the corporate. To 

ensure the proper flow of information, 

the rule provides that the member must 

notify the corporate at least 14 days 

before consummating the transaction, 

and the corporate must then provide 

both the member and the potential 

transferee all financial information 

about the corporate available to the 

members or the public, including any 

call report data submitted by the 

corporate to NCUA but not yet posted 

by NCUA. 

The final rule also limits such transfer 

to nonnatural persons. This serves a 

consumer protection function and is 

also consistent with NCUA’s rules on 

the sale of secondary capital at low 

income credit unions. 

704.2 Definition of ‘‘Aavailable To 

Cover Losses That Exceed Retained 

Earnings’’ 

NCAs must be ‘‘available to cover 

losses that exceed retained earnings and 

perpetual contributed capital.’’14 The 

quoted phrase is defined in proposed 

704.2, and the definition provided that 

‘‘[t]o the extent that contributed capital 

funds are used to cover losses, the 

corporate credit union must not restore 

or replenish the affected capital 

accounts under any circumstances.’’ 

Some commenters believe that this is a 

new requirement. In fact, it is not a new 

requirement, but simply a clarification 

of an existing requirement. The proposal 

also provided that contributed capital 

that is used to cover losses in a fiscal 

year previous to the year of liquidation 

has no claim against the liquidation 

estate. To avoid the ambiguity 

associated with different possible fiscal 

years, the final rule replaces ‘‘fiscal year’’ 

with ‘‘calendar year.’’ The entire final 

definitions now read as set forth in the 

regulatory text of this rule.15


emcdonald on DSK2BSOYB1PROD with RULES2
64798 Federal Register / Vol. 75, No. 202 / Wednesday, October 20, 2010 / Rules and Regulations 

publication in the Federal Register, and a 

permanent version that goes into effect one year 

after publication on the effective date of the capital 

and PCA provisions. The definition of Available to 

cover losses that exceed retained earnings set forth 

following amendatory instruction 7 of this rule is 

the permanent version of the definition. The 

temporary version following amendatory 

instruction 6 of this rule refers to PIC and MCAs, 

not PCC and NCAs. 

Except as discussed above, the Board 

adopts the final paragraph 704.3(b), and 

associated definitions in § 704.2, as 

proposed. 

704.3(c) Requirements for Perpetual 

Contributed Capital (PCC) 

The proposal renamed paid in capital 

(PIC) as perpetual contributed capital 

(PCC). Generally, the proposed terms 

and conditions for PCC tracked those of 

the existing PIC, with the following 

exceptions. 

The existing rule permits a corporate 

to call PIC if the corporate would meet 

its minimum levels of capital and NEV 

ratios after redemption; the proposal 

requires NCUA’s prior approval for any 

such redemption. The proposal permits 

the free transferability of PCC to certain 

nonmember third parties, under the 

same conditions as NCAs may be 

transferred (as discussed above). The 

proposal also eliminated the existing 

prohibition on conditioning 

membership, services, or prices for 

services on a member’s ownership of 

PIC (now to be renamed PCC). 

704.3(c)(3) Callability of PCC 

Many commenters objected to the 

704.3(c)(3) proposal that NCUA must 

preapprove a corporate’s determination 

to call, or redeem, PCC. Some of these 

commenters believe NCUA preapproval 

is overreaching and unnecessary in light 

of other provisions in the proposed 

regulation. Some of these commenters 

stated that the corporate should be free 

to permit redemption of PCC, without 

NCUA preapproval, so long as the 

corporate would continue to meet its 

minimum capital requirements. Two 

commenters stated that this prohibition 

might discourage members from 

contributing PCC. One stated that over 

time RE will replace much of the PCC, 

and that should reduce NCUA’s 

concerns with PCC redemption. 

PCC will fulfill a central role in 

corporate capital structures for many 

years to come. The Board wishes to 

ensure that, before a corporate lets any 

PCC go through redemption, the 

corporate truly does meet its minimum 

capital and NEV levels, and is likely to 

maintain those levels into the 

foreseeable future. Accordingly, the 

final rule retains the proposed 

requirement for NCUA preapproval of 

any PCC redemption. 

704.3(c)(6) Conditioning Membership, 

Services, and Prices of Services on 

Purchase of PCC 

Many commenters recommended that 

NCUA not eliminate the current 

prohibition on a corporate conditioning 

membership, services, or prices for 

service on a credit union’s ownership of 

PIC (PCC going forward). One of these 

commenters stated that granting the 

corporates the ability to condition 

payment services or other services on 

‘‘membership’’ could force only those 

NPCUs who have no other alternative to 

place more capital at risk and out of 

their control. Another NPCU commenter 

stated that it learned from the Capital 

Corporate collapse in the 1990s and has 

avoided buying capital shares, and does 

not want to be forced to contribute 

capital going forward. 

Many other commenters, however, 

including many NPCU commenters, 

supported the full elimination of this 

prohibition. Most of these commenters 

believe this sort of decision on requiring 

capital contributions is appropriately 

left to the board and management of the 

corporate credit union. One commenter 

stated that lifting this prohibition was 

necessary to protect against free riders, 

noting that because of this prohibition 

the current distribution of losses among 

members of corporate was unfair. 

A few NPCU commenters even 

thought a corporate should require 

member capital to receive services. 

Some of these commenters thought that 

the requirement should be linked to the 

amount of the NPCU’s deposits at the 

corporate, and others to an NPCU’s asset 

size, and some stated that larger NPCUs 

should not be permitted to subscribe to 

lesser amounts of capital as a percentage 

of asset size. 

In the Board’s view, corporates are 

designed to service NPCUs, and NPCUs 

own the corporates and the associated 

risks and rewards of such ownership. If 

NPCUs believe that corporates provide 

some valuable or essential service, then 

NPCUs will need to capitalize the 

corporates. Accordingly, the Board 

believes it is appropriate that a 

corporate be given the option of 

conditioning its membership, services, 

or the prices for services, on the 

purchase of PCC. This authority helps 

the corporate protect itself from free 

riders, that is, those NPCUs and other 

entities that want the benefits of the 

corporate without taking on any risks. 

The Board does not believe that NCUA 

should, by rule, require some minimum 

amount of capital contribution, but does 

believe that the corporate’s board 

should have the authority to do so. 

Several commenters stated, however, 

that if this prohibition is eliminated, the 

regulation should make clear that 

corporates cannot change their policies 

so as to threaten immediate termination 

of essential services absent immediate 

PCC contributions. Many of these 

commenters suggested that an NPCU 

that refuses to meet a new demand for 

contributed capital be given at least 12 

months to find another service provider. 

The Board appreciates the concern of 

these commenters. Corporate members 

should be given adequate time to look 

for alternatives should they find any 

particular, proposed conditions on 

membership, services, or the prices for 

services too onerous. The Board 

believes, however, that six months to 

find an alternative service provider 

should be appropriate. Accordingly, the 

final paragraph 704.3(c)(6) provides that 

a corporate must give a member at least 

six months written notice of (i) the 

requirement to purchase PCC, including 

specific amounts; and (ii) the effects of 

a failure to purchase the requisite PCC 

on the pricing of services or on the 

member’s access to membership or 

services. 

One NPCU commenter stated that if 

corporates are permitted to require 

capital contributions as a condition of 

membership or services, the NCUSIF 

should insure the capital contribution. 

Another NPCU commenter stated that 

capital should be ‘‘portable,’’ meaning 

that if an NPCU wishes to move to 

another corporate because they may not 

be satisfied with the services being 

offered, then the NPCU should be free 

to shift its existing capital to the new 

corporate without any conditions or 

time constraints. Again, these 

commenters misunderstand the 

fundamental nature of capital. Capital is 

a buffer to ensure that creditors and 

vendors of a corporate will not be first 

in line to absorb operating losses. If 

NCUA insured the capital, that would 

be transferring the risk from the 

member-owner to the entire universe of 

insured credit unions, and that is not 

appropriate. Further, if NCUA permitted 

capital to be ‘‘portable,’’ it would 

undermine this primary role of capital 

as assuring potential creditors and 

vendors of the corporate of the 

continued availability of that capital to 

absorb operating losses. 

704.2 Definition of Tier 2 Capital 

Includes Certain PCC 

Paragraphs (5) and (6) of the proposed 

definition of adjusted core capital 

excludes certain PCC that exceeds 

certain levels of RE. The purposes of 


emcdonald on DSK2BSOYB1PROD with RULES2
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these exclusions is to force corporates to 

build up their RE for inclusion in 

adjusted core capital and inclusion in 

the corresponding leverage ratio and 

Tier 1 risk based capital ratios. The 

effect of these provisions, however, was 

to also exclude the excess PCC from all 

capital calculations, including Tier 2 

capital ratios. 

Some commenters stated that all PCC 

should continue to count as capital. 

They ask that some other method be 

used to encourage RE growth but, if not, 

then in the alternative that excess PCC 

should continue to count as at least Tier 

2 capital (i.e., and count toward the total 

RBC ratio). These commenters 

understood that the proposal intends to 

push corporates toward building RE 

growth, but they argue that any existing 

excess PCC still protects the corporate 

from losses. Two commenters stated 

that to the extent PCC does not count as 

capital it should be returned to the 

members. 

The Board agrees that excess PCC 

should continue to count as Tier 2 

capital. Accordingly, in the final rule 

the Board amends the definition of Tier 

2 capital to include ‘‘any perpetual 

capital deducted from adjusted core 

capital.’’ 

704.2 Definition of Equity Investments 

The proposal uses the term equity 

investments as a deduction for purposes 

of calculating adjusted core capital, and 

defines the term in 704.2 to include 

only investments in real property and 

equity securities. One commenter 

pointed out that equity investments can 

also take the form of investments in 

partnerships or limited liability 

companies. Accordingly, the final rule 

adds those investments to the 

definition. 

Accordingly, and except as described 

above, the Board adopts the final 

paragraph 704.3(c), and associated 

definitions in § 704.2, as proposed. 

704.3(d) Individual Minimum Capital 

Requirements 

Proposed paragraph 704.3(d) gave 

NCUA the authority to require higher 

minimum capital requirements of 

individual corporate credit unions. The 

proposal provided the corporate with 

notice and an opportunity to respond in 

writing before imposition of the new 

capital requirements. 

Many commenters opposed this 

paragraph as giving too much 

discretionary power to NCUA and 

NCUA examiners. Some of these 

commenters mistakenly believe that the 

proposal delegates this authority to the 

OCCU Director or some other 

‘‘individual.’’ In fact, the proposal 

provides this authority to the ‘‘NCUA,’’ 

meaning the ‘‘NCUA Board’’ (unless 

further delegated by the Board). The 

Board believes that this provision gives 

the Board powers it needs to ensure the 

health of the corporate system and the 

credit union system as a whole. The 

Board does agree that some additional 

due process may be appropriate, as 

discussed below. 

704.3(d)(4) Standards for 

Determination of New Minimum Capital 

Requirement 

Some commenters objected to the 

language in proposed 704.3(d)(3) stating 

that ‘‘levels for an individual corporate 

cannot be determined solely through the 

application of a rigid mathematical 

formula or wholly objective criteria. The 

decision is necessarily based in part on 

subjective judgment grounded in agency 

experience.’’ These commenters thought 

this language was too subjective, and 

that it departed from the models of the 

other banking regulators that NCUA was 

purporting to follow. In fact, this 

statement is true. Further, the same 

language does appear in the regulations 

of the other banking regulators. See, e.g., 

12 CFR 3.11 (OCC Regulation). 

Accordingly, the final rule retains this 

language. 

704.3(d)(4) Procedures for Imposing 

New Minimum Capital Requirement 

The proposal does provide the 

corporate due process, that is, notice 

and an opportunity to respond in 

writing. The proposal generally 

provides that a corporate will have 30 

days to respond to the notice, but that 

NCUA may shorten this period for good 

cause, and two commenters stated that 

the corporate should have at least a 

minimum time of 15 days to respond. 

One of these commenters stated that 

such powers should be exercised only 

by the NCUA Board, and not be 

delegable. Another commenter stated 

that, for state chartered corporates, the 

regulation should require the NCUA 

Board obtain the concurrence of the 

state regulator before exercising this 

authority. 

The Board agrees that additional due 

process may be warranted in some 

cases. Accordingly, the final rule 

includes a new paragraph 704.3(d)(4)(vi) 

that permits a corporate to request an 

informal hearing. The corporate must 

make the request in writing, and NCUA 

must receive the request no later than 10 

days following the initial notice of 

NCUA’s intent to establish a different 

minimum capital requirement. Upon 

receipt of the request for hearing, NCUA 

will conduct an informal hearing and 

render a decision using the procedures 

described in paragraphs (d), (e), and (f) 

of Section 747.3003. 

Some of these commenters also 

objected to the statement that the NCUA 

decision on this matter represents ‘‘final 

agency action.’’ However, this statement 

is true as there is no administrative 

appeal from NCUA’s decision in this 

matter. Accordingly, the final rule 

retains this language. 

Except as described above, the Board 

adopts the final 704.3(d) as proposed. 

704.3(e) Reservation of Authority 

The proposed paragraph 704.3(e) 

provided for various reservations of 

authority to NCUA. 

Proposed paragraph 704.3(e)(2) gave 

NCUA the authority to require a 

corporate to use period end assets, 

instead of moving DANA, for purposes 

of calculating capital ratios. One 

corporate commenter objected to this 

proposed authority, stating that monthend assets can be more than 10 percent 

higher than DANA for the month. This 

commenter suggested NCUA adopt an 

objective standard for the use of this 

authority, such as where month-end 

assets are at least 125 percent of DANA 

for three consecutive months. Another 

commenter stated that corporates 

should be given the option of using 

average or period end assets, as NPCUs 

are permitted to do under the PCA 

regime. The Board disagrees, and 

refuses to put such limits on its 

authority to require the use of periodend assets in appropriate cases. 

Proposed paragraph 704.3(e)(3) gave 

NCUA authority to discount a particular 

asset or capital component of a 

particular corporate from the 

computation of capital. Some 

commenters opposed this as giving too 

much power to NCUA, the OCCU 

Director, and NCUA examiners. One 

commenter stated that no corporate 

should be treated differently from others 

just because of the examiner. The 

provision, however, only empowers the 

NCUA Board, not the OCCU Director or 

NCUA examiners (unless the Board 

delegates its authority). 

A few commenters correctly noted 

that the proposal does not provide for 

any particular due process before NCUA 

acts. Another commenter believes that 

there should be some stated time for the 

corporate to correct the deficiency that 

gave rise to the unsatisfactory rating. 

The Board agrees that there should be 

some due process associated with its 

reservations of authority under 

paragraph 704.3(e), and the final rule 

adds a new paragraph 704.3(e)(5) setting 

forth such due process. Before taking 

any action under paragraph (e), NCUA 

will provide the corporate with written 


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16This amortization method reduces the amount 

that counts towards capital to zero when one year 

is remaining on the notice period or term. This 

amortization method also assumes that the 

adjustment is determined based on a relatively 

permanent measure, such as the member’s assets, 

and not on some impermanent measure, such as the 

member shares at the corporate. 

notice of the intended action and the 

reasons for such action. The corporate 

will have seven days to provide NCUA 

with a written response, and NCUA will 

consider the response before taking the 

action. Upon the timely request of the 

corporate credit union, and for good 

cause, NCUA may extend the seven-day 

response period. 

704.3(f) Former Capital Accounts 

Many commenters suggested that 

three-year MCAs that are not converted 

to five-year NCAs be permitted to count 

as capital, and some stated that they 

should count on a two-year declining 

basis. These commenters argued that 

MCAs were available for some loss 

protection until such time as they were 

converted or returned and so should 

count in some way toward the 

corporate’s capital requirements. One 

commenter asked whether NCUA would 

permit the corporate to return to its 

members three-year MCAs that were not 

converted to five-year NCAs. 

The Board agrees that some corporate 

members may refuse to convert their 

existing three-year MCAs to the new 

five-year NCA or to perpetual PCC prior 

to the effective date of the new capital 

rules (i.e., the first anniversary of the 

publication of the final rule in the 

Federal Register). The Board also agrees 

that the entire balance of these accounts 

is available to absorb losses until the 

account is closed, and that these 

unconverted MCAs should count, at 

least partially, as Tier 2 capital. 

Accordingly, the final rule adds a new 

paragraph 704.3(f) that provides, 

effective on the first anniversary of 

publication of the final rule, 

unconverted MCAs will be treated as 

follows: 

• For ‘‘adjustable balance’’ MCAs, the 

corporate will immediately put those 

accounts on notice of withdrawal (if 

they are not already on notice). The 

corporate will continue to adjust the 

balances of the MCA account in 

accordance with the original terms of 

the account until the entire notice 

period has run and then return the 

remaining balance, less any losses, to 

the member. Until the expiration of the 

notice period, the entire adjusted 

balance will be available to cover losses 

that exceed RE and certain contributed 

capital. The corporate may count the 

unconverted MCAs as Tier 2 capital on 

an amortizing basis, using the 

amortization method described in 

proposed 704.3(b)(3).16 Corporates will 

also be required, on the first anniversary 

of the publication of the final rule, to 

provide members who hold 

unconverted MCAs a one-time 

disclosure about the status of their MCA 

accounts. 

• For three-year term MCAs, the 

corporate will return the MCAs at the 

expiration of the three-year term. Again, 

until the expiration of three-year term, 

the entire account balance will be 

available to cover losses that exceed RE 

and certain other contributed capital. 

The corporate may count the 

unconverted MCAs as Tier 2 capital on 

an amortizing basis, using the 

amortization method described in 

proposed 704.3(b)(3). Corporates will 

also be required, on the first anniversary 

of the publication of the final rule, to 

provide members who hold 

unconverted MCAs a one-time 

disclosure about the status of their MCA 

accounts. 

Part 704, Appendix A—Capital 

Prioritization and Model Forms 

The current Appendix A to part 704, 

entitled Model Forms, contains forms 

that members provide the corporate on 

an annual basis acknowledging the 

terms and conditions of the members’ 

PIC and MCA accounts. The proposal 

renamed Appendix A as Capital 

Prioritization and Model Forms. 

The proposed Appendix A had two 

parts. Part I, which is new, provided the 

corporate’s board of directors an option 

to give entities that contribute new 

capital to the corporate priority—in 

terms of availability to absorb losses and 

payout in liquidation—over existing 

capital contributions. New capital in 

this context was defined as any capital 

contributed more than 60 days 

following the publication of the final 

rule. The purpose of this provision is to 

provide a tool to the corporate for 

facilitating capital growth. Part II 

contained amended model disclosure 

forms that cover MCAs, PIC, NCAs, and 

PCCs. The forms included variable 

disclosures depending on whether the 

corporate exercises the option described 

in Part I. 

NCUA received very few comments 

on Appendix A, but the final rule does 

include two minor changes from the 

proposed. 

Consistent with the proposed 

clarifying amendments to § 709.5, 

Model Form A in Appendix A of the 

proposal included disclosure language 

that depleted capital has no claim 

against the liquidation estate for claims 

filed beyond the fiscal year of depletion. 

For clarity and to reduce the potential 

ambiguity associated with ‘‘fiscal year,’’ 

the final rule substitutes ‘‘calendar year’’ 

for ‘‘fiscal year.’’ The final rule also 

contains a similar revision to the payout 

priority paragraphs 709.5(b)(7) (for 

NCAs) and (b)(9) (for PCC holders). 

Also, since the effective date of the 

final rule will generally be ninety days 

following the date of publication, the 

final rule modifies the definition of new 

contributed capital for purposes of Part 

I, changing if from capital contributed 

more than 60 days following publication 

to capital contributed more than 90 days 

following publication. 

Accordingly, and other than as 

described above, the final rule adopts 

Appendix A as proposed. 

Part 704, Appendix B relates closely 

to the investment (§ 704.5), credit risk 

(§ 704.6) and asset-liability (§ 704.8) 

provisions of the corporate rule, and is 

discussed below in connection with 

those provisions. 

Part 704, Appendix C—Risk Weighting 

of Assets for Risk Based Capital 

Calculations 

The current corporate rule has no risk 

weighted capital ratios or provisions. 

The proposal included two new 

minimum capital ratios defined in terms 

of risk-weighted assets and activities. 

Proposed Appendix C contained the 

detailed instructions for assigning risk 

weights, including: 

• Assets that appear on the 

corporate’s balance sheet will, generally, 

be risk-weighted at zero percent, 20 

percent, 50 percent, or 100 percent, with 

less risky assets (e.g., treasury bills) 

given lower percentages, and more risky 

assets (e.g., loans) given higher 

percentages. 

• Activities that involve risk but that 

may not appear on a corporate’s balance 

sheet (e.g., an interest rate swap, or a 

guaranteed line of credit not yet drawn 

upon) are assigned a conversion factor 

and then risk weighted as if the 

underlying assets were, in fact, on the 

corporate’s balance sheet. Recourse 

obligations (e.g., a recourse obligation 

on a transferred loan) and direct credit 

substitutes (e.g., a mortgage backed 

security that is subordinated to other 

securities in the same issuance) are 

generally treated as if the entire amount 

of the supported asset is on the credit 

union’s balance sheet. Residual interests 

(e.g., retained, subordinated interests in 

a loan or loan participation transfer, or 

a retained credit enhancing interest-only 

strip) have different, more severe risk 

weighting calculations. 


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17Other forms of collateral, or risk-weighting 

percentages, may be used for risk-weighting if the 

derivatives counterparty is a qualified securities 

firm. See Appendix C, Sections II(a)(1)(viii) and 

II(a)(2)(viii). 

• A corporate may employ a ratingsbased risk weighting option for certain 

investments, (i.e., a recourse obligation, 

a direct credit substitute, a residual 

interest, or an asset- or mortgage-backed 

security extended in connection with a 

securitization) that have NRSRO ratings. 

When there is more than one available 

NRSRO rating, the corporate must use 

the lowest rating. 

Appendix C, Paragraph I(a) Scope 

The final rule amends paragraph 

I(a)(4) to emphasize that this Appendix 

does not provide authority for 

corporates to invest in or purchase any 

particular type of asset or to engage in 

any particular type of activity. In other 

words, a corporate credit must have 

other identifiable authority for any 

investment it makes or activity it 

engages in. So, for example, this 

Appendix describes risk weightings for 

subordinated securities, even though the 

final § 704.5 prohibits corporates from 

investing in subordinated securities and 

so a corporate credit union cannot 

invest in subordinated securities. This 

risk-weighting provision is retained 

because it is possible that a corporate 

could come into possession of a security 

that is impermissible for direct 

investment (e.g., through enforcement of 

a lien on a defaulted loan), or that such 

securities that are impermissible now 

might become permissible in the future, 

and Appendix C will not have to be 

amended to deal with those situations. 

Appendix C, Paragraph II(a) Risk 

Weighting of On-Balance Sheet Assets 

A few commenters sought clarity on 

the risk weighting for ABS and MBS. 

Asset backed securities are risk 

weighted in the ‘‘all others’’ risk 

weighting category (i.e., 100 percent risk 

weighting) unless rated using the ratings 

based approach. For private label MBS 

that are backed by non-qualifying 

mortgage loans, or a combination of 

non-qualifying and qualifying mortgage 

loans, these MBS are also risk-weighted 

at 100 percent, again unless rated using 

the ratings based approach. Only MBS 

backed entirely by qualifying mortgages 

may use the 50 percent risk weighting 

permitted by paragraph II(a)(3)(iii). 

Appendix C, Paragraph II(b) RiskWeighting of Off-Balance Sheet Items 

Paragraph II(b)(6) Off-Balance Sheet 

Derivative Contracts; Interest Rate and 

Foreign Exchange Rate Contracts (Group 

F).— 

One commenter stated that NCUA 

should consider excluding off-balance 

sheet items from the risk-based assets 

calculation. This commenter stated that 

an alternative may be to allow a 

corporate to establish a distinct capital 

pool for off-balance sheet items to 

prevent any confusion about the items 

having the same risk as on-balance sheet 

assets of the corporate. The Board 

believes the rule as proposed is clear 

enough on the treatment of on-balance 

sheet and off-balance sheet items. 

One commenter noted that the 

proposal assigns derivative risk weights 

for interest rate swaps and foreign 

currency swaps, but not for other types 

of derivatives, and corporates may, if 

authorized by NCUA under the 

Expanded Authorities, engage in other 

forms of derivative transactions. The 

commenter sought clarification of this 

issue. The Board agrees that clarification 

is necessary, and so the final rule 

includes an ‘‘all others’’ catch-all 

category of derivative risk weighting. As 

with interest rate swaps and foreign 

currency swaps, the credit equivalent 

amount for these other derivatives is 

generally determined by summing the 

current credit exposure and the 

potential future credit exposure. 

Appendix C, Paragraph II(b)(6)(ii). The 

current credit exposure is calculated the 

same way for all derivatives, including 

other derivatives. Appendix C, 

Paragraph II(b)(6)(ii)(A). The potential 

future credit exposure is determined by 

multiplying the notional principal times 

a credit conversion factor. Appendix C, 

Paragraph II(b)(6)(ii)(B). The size of this 

credit conversion factor depends on the 

remaining maturity of the derivative. 

For the catch-all derivatives category, 

the conversion factors in the final rule 

are ten percent (remaining maturity of 

one year or less), 12 percent (remaining 

maturity of over one year but less than 

five years), and 15 percent (remaining 

maturity over five years). This treatment 

of these other derivatives is similar to 

that used by the Federal Reserve and the 

other banking regulators. See 12 CFR 

part 208, Appendix A, Paragraph 

III.E.2.e. (Capital Regulation of the 

Board of Governors of the Federal 

Reserve). 

After the credit equivalent amount is 

determined for any derivative, including 

the catch-all category, a risk weighting 

is applied to the credit equivalent 

amount depending on the nature of the 

counterparty. Appendix C, Paragraph 

II(b)(6)(iv)(A). The maximum risk 

weight, however, for the credit 

equivalent amount of any derivative 

contract is 50 percent. 

One commenter sought clarification 

on the effects of collateral posted by 

derivative counterparties on the risk 

weighting of those derivatives. 

Appendix C only recognizes certain 

forms of collateral for the purposes of 

risk-weighting: cash, treasuries, U.S. 

Government agency securities, 

securities issued by the central 

governments of OECD countries, and 

securities issued by multilateral lending 

institutions or regional development 

banks in which the United States is a 

member.17 The portion of the 

derivative’s credit equivalent amount 

equal to the fair market value of this 

collateral is generally risk-weighted at 

20 percent. See Appendix C, Paragraphs 

II(a)(2)(ii), (vii), (xiii), and (xv). 

Another commenter asked whether 

derivatives used for hedging the credit 

risk of other assets in the corporate’s 

portfolio would have a reduced, or zero, 

risk weighting. The answer is no. 

Whether or not a derivative is used for 

hedging is not relevant to its risk 

weighting for purposes of these Basel I 

capital ratio calculations. 

Appendix C, Paragraph II(c) Risk 

Weighting of Recourse Obligations, 

Direct Credit Substitutes, and Certain 

Other Positions 

Paragraph II(c)(3) Ratings Based 

Approach (RBA) 

One commenter asked for clarification 

on the discretion of corporates to choose 

between a ratings-based, and nonratings based, approach to risk 

weighting for those investments that 

carry an NRSRO rating and could be 

risk-weighted using the RBA. The 

proposed rule language could be 

interpreted as permitting corporates the 

freedom to choose their ratings 

approach if both the general risk 

weighting and RBA risk weighting 

might apply, and, perhaps, to apply 

differing approaches to differing 

securities on the same call report. To 

ensure consistency, the Board has added 

a new paragraph II(c)(3)(iii) to the final 

rule to require a corporate that uses RBA 

risk weighting for one or more securities 

on a particular call report use the RBA 

approach for all eligible securities on 

that call report. This requirement is 

consistent with how the other banking 

regulators have addressed this issue, at 

least informally. See, e.g., 73 FR 43993 

(July 29, 2008) (‘‘Regardless of the 

method a banking organization chooses 

[on a call report], it would have to use 

that approach consistently for all 

corporate exposures.’’). The Board also 

notes that, currently, RBA is not 

permissible under Basel I for corporate 

debt obligations, even short-term debt 


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18 In the proposal, the RBA is only permitted for 

a position that is a ‘‘recourse obligation, direct 

credit substitute, residual interest, or asset- or 

mortgage-backed security * * * .’’ 

19 [Reserved] 

20State regulators will likely have similar 

controls over their interactions with their state 

chartered corporates. 

obligations.18 Without the RBA option, 

corporate debt will generally be risk 

weighted at 100 percent. The Board has 

determined a lower risk weight may be 

appropriate for highly-rated, short term 

corporate debt (i.e., an original or 

remaining final maturity of 120 days or 

less), as proposed by the other banking 

agencies in their Basel II regulations.19

Short term rating category Risk-weight 

percentage 

Highest Investment Grade ........ 20 

Second-Highest Investment 

Grade .................................... 50 

Third-Highest Investment 

Grade .................................... 100 

Below investment grade ........... 150 

No applicable external ratings .. 100 

Accordingly, paragraph 

II(c)(3)(ii)(A)(1) is amended in the final 

rule to permit corporates the optional 

use of the RBA for short term corporate 

debt. 

Section 704.4 Prompt Corrective 

Action (PCA) 

The proposed PCA provisions are 

similar to those currently applicable to 

banks. Under the proposal, each 

corporate would be assigned to one of 

five capital categories: well-capitalized, 

adequately capitalized, 

undercapitalized, significantly 

undercapitalized, and critically 

undercapitalized. The potential 

consequences of failing to meet capital 

standards include restrictions on 

activities, restrictions on investments 

and asset growth, restrictions on the 

payment of dividends, restrictions on 

executive compensation, requirements 

to elect new directors or dismiss 

management, and possible 

conservatorship. The proposed due 

process for credit unions and their 

employees associated with the new PCA 

provisions was set out in a new subpart 

to part 747 of NCUA’s rules. 

Many commenters thought generally 

that the imposition of PCA standards for 

corporates was a good idea and long 

overdue. A few commenters stated that 

the PCA powers given to NCUA under 

the proposal were appropriate, because 

as long as the possibility exists for 

reckless behavior at corporate credit 

unions, the agency needs the power to 

intervene. One NPCU commenter said 

that it at first thought the proposal gave 

NCUA too much power and was 

overreaching, but then upon further 

reflection changed its mind given what 

has happened and NCUA’s central role 

to oversee the corporate system. One 

corporate commenter specifically stated 

that the minimum four percent (leverage 

and Tier 1 risk based capital ratios) and 

eight percent (total risk based capital 

ratio) were appropriate for adequate 

PCA capitalization. 

Many commenters, however, thought 

that the proposed PCA provisions gave 

NCUA too much discretionary power 

and room for arbitrary decisions. Some 

commenters saw a general need for 

more clarity and certainty in the due 

process and appellate rights associated 

with PCA actions. The Board has 

addressed these concerns with some 

changes to the final rule as discussed 

below. 

704.4(a) Purpose 

This proposed paragraph set forth the 

purpose of prompt corrective action. 

One sentence, related to the 

coordination with the state authorities 

for state-chartered corporates on 

discretionary supervisory activities, was 

amended and moved in the final rule to 

paragraph 704.4(f). The amendment is 

discussed below. 

704.4(b) Scope 

This proposed paragraph sets forth 

the scope of the PCA section. 

704.4(b)(2) Prohibition on Advertising 

of PCA Category Without Prior NCUA 

Approval 

The proposal required that no 

corporate may state in any 

advertisement or promotional material 

its PCA category unless NCUA 

specifically permits such statement or 

the law requires it. Many NPCU 

commenters stated that corporates 

should be required to disclose their 

capital category as the proposed 

prohibition denies transparency to the 

corporate’s member/owners and makes 

it difficult for them to do their due 

diligence. 

The Board is sympathetic to the 

concerns of the commenters. The 

members of a corporate need some 

transparency on the corporate’s 

activities. The members are ultimately 

responsible for what the corporate does 

or does not do, and the members usually 

have both capital and uninsured shares 

at risk in the corporate. NCUA 

understands this, and will be taking 

additional actions in the future, such as 

improved call reporting requirements, to 

increase such transparency, at least with 

regard to the balance sheet. In fact, 

likely 99 percent of the time, a member 

will be able to determine a corporate’s 

PCA status from the call report since 

NCUA will be requiring that a corporate 

report its capital levels, including its 

Leverage, T1RBC, and Total RBC ratios, 

on the call report. If members need 

additional financial information beyond 

the call report, they can request the 

corporate provide them the information 

voluntarily, or even involuntarily in 

response to a member petition filed 

under the member inspection process. 

12 CFR 701.3. And, of course, the 

members have the ultimate power over 

their corporate board, since the 

members elect—and can refuse to 

reelect—board directors who are not 

responsive to the members. 

NCUA wants to clarify one aspect of 

the members’ rights to financial 

information from their corporates. Exam 

reports, and other documents prepared 

by NCUA, or prepared specifically by 

the corporate at NCUA’s request or in 

response to an NCUA request, belong to 

NCUA and not to the corporate.20 The 

corporate will not be able to release this 

information to anyone, including the 

corporate’s members, without obtaining 

NCUA’s prior approval. 

One commenter agreed with the 

proposed prohibition on publicizing 

PCA category, but thought it needed to 

be clarified since certain PCA terms, 

such as ‘‘adequately capitalized’’ and 

‘‘well capitalized,’’ are common 

expressions and could be used 

unintentionally. The Board understands 

that such phrases might be used 

unintentionally, but believes it 

important that corporates strive as much 

as possible not to discuss their capital 

adequacy in the public media. 

704.4(c) Notice of Capital Category 

The proposal set forth the effective 

date of a PCA capital category, and 

when the corporate must give notice to 

NCUA of a change in capital category, 

and vice versa. 

704.4(c)(2)(ii) Notice of Capital 

Category 

This paragraph provides for NCUA 

notice to the corporate of a change in 

capital category. One NPCU commenter 

complained that this provision appears 

to give NCUA the authority to 

subjectively reclassify a corporate 

capital classification based on 

administrative review, and the 

commenter objected to this. The Board 

notes that this provision does not give 

NCUA substantive authority to change a 

PCA category. Such authority arises 

from other provisions, such as 

704.3(d)(2) and 704.4(d)(3). These 


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21The proposal, however, does not require NCUA 

enforce a PCA downgrade because of a low CRIS 

rating—it only empowers the NCUA Board to take 

such action. 

provisions each have their own 

associated due process. 

704.4(d) Capital Measures and Capital 

Category Definitions 

The proposal set forth the various 

PCA capital categories and the 

minimum capital ratios for each 

category. 

704.4(d)(3) Authority of NCUA, After 

Due Process, To Downgrade a Corporate 

One PCA Capital Category for an Unsafe 

or Unsound Condition or Practice 

Some commenters opposed the 

proposed downgrade authority in 

704.4(d)(3) as giving too much power to 

NCUA examiners and the OCCU 

Director. In fact, under the proposal this 

authority would reside in the NCUA 

Board (subject to delegation), not the 

OCCU Director or examiners. 

One commenter who opposed this 

provision stated that probably within 

the past five years every corporate 

would have been downgraded because it 

had at least one Corporate Risk 

Information System (CRIS) rating of 

three or lower.21 Another NPCU 

commenter expressed concern that 

NCUA might use this power to 

downgrade a corporate to force an 

involuntary merger, resulting in a 

transfer of the NPCU member, and his 

capital accounts, to another corporate 

which the NPCU may not want to 

support. Two commenters stated that 

the rule needed to provide a corporate 

with the opportunity, and time, to 

correct the deficiencies leading to the 

adverse CRIS rating before a PCA 

downgrade. Two of these commenters 

noted that during the exam process 

corporates are given a time frame to 

correct deficiencies. 

The Board believes the discretionary 

authority vested in it by proposed 

704.4(d)(3) to downgrade a corporate is 

appropriate. The Board notes that it 

would not normally authorize a 

downgrade of a corporate based solely 

on a negative CRIS rating until the 

corporate had had a reasonable 

opportunity to correct the deficiencies 

underlying the CRIS rating. 

The Board also notes that it is highly 

likely that there will be some corporate 

combinations in the coming years. 

While most of these mergers would be 

voluntary, some might be involuntary. 

NPCUs should take this fact into 

account when deciding which corporate 

they will use for services and how much 

capital they are willing to contribute to 

that corporate. 

704.4(d)(4) Modification of Minimum 

PCA Percentages 

Proposed 704.4(d)(4) permits the 

NCUA, for good cause, to modify any of 

the minimum PCA percentages for a 

particular corporate as provided for in 

704.3(d). A few commenters objected to 

this provision because they thought this 

proposal transfers power from the 

NCUA Board to the OCCU Director. 

Again, this authority is simply a cross 

reference to the authority in 704.3(d). 

There is no delegation to the OCCU 

Director, and 704.3(d) provides the 

affected corporate with due process. 

704.4(e) Capital Restoration Plans 

The proposal described when a 

corporate must file a plan with the 

NCUA, the contents of the plan, the 

consequences for failure to file a plan, 

and NCUA’s processing and approval of 

the plan. 

704.4(e)(5) Disapproval of Capital Plan 

Proposed 704.4(e)(5) provides that if 

an undercapitalized corporate does not 

submit a capital restoration plan 

acceptable to NCUA the corporate will 

be downgraded to significantly 

undercapitalized. 

Two commenters protested that this 

allows the Director of the OCCU to treat 

a corporate that is undercapitalized the 

same as if it was significantly 

undercapitalized, and allows the 

Director to do so for an undue length of 

time. The Board disagrees. The PCA 

provisions encourage a corporate to file 

a timely and realistic capital restoration 

plan. If a corporate fails to do that, the 

Board must have the authority to take 

appropriate action to protect the 

corporate, its members, and the 

NCUSIF. In addition, the proposal 

makes no delegation to the OCCU 

Director. 

704.4(f) Mandatory and Discretionary 

Supervisory Actions 

This proposed paragraph sets forth 

various mandatory and discretionary 

PCA actions depending on a corporate’s 

PCA category. One commenter thought 

that the PCA supervisory actions that 

come into play depending on the 

corporate’s PCA capital categories, and 

which are variously labeled within the 

proposal as mandatory or discretionary 

at the given capital category, should 

never be mandatory. Instead, they 

should all be discretionary with NCUA. 

The Board disagrees. The Board wants 

corporates to know, with certainty, that 

certain PCA effects will happen if a 

corporate falls into a particular PCA 

category. 

A few commenters asked that, for 

discretionary PCA actions against state 

chartered corporates, if NCUA 

determines such an action is 

appropriate, NCUA give the appropriate 

state supervisory authority (SSA) an 

opportunity to take the action separately 

from, or jointly with, NCUA. As pointed 

out by the commenters, this approach is 

consistent with NCUA’s PCA rules for 

NPCUs located in paragraph 702.205(c) 

of part 702. Accordingly, the final rule 

amends paragraph 704.4(f)(2) to permit 

the appropriate SSA an opportunity to 

take discretionary PCA actions 

independently from, or jointly with, 

NCUA. 

704.4(g) Directives to Take Prompt 

Corrective Action 

The proposed paragraph requires 

advance notice of pending directives to 

significantly and critically 

undercapitalized corporates. There were 

no significant comments on this 

paragraph. 

704.4(h) Procedures for Reclassifying a 

Corporate Credit Union Based on 

Criteria Other Than Capital 

The proposed paragraph requires 

advance notice of intent to reclassify 

and makes reference to the associated 

due process provision. There were no 

significant comments on this paragraph. 

704.4(i) Order to Dismiss a Director or 

Senior Executive Officer 

The proposed paragraph provides that 

affected individuals are entitled to a 

copy of the order or directive provided 

to the corporate, along with notice of the 

right to seek reinstatement. The 

paragraph also makes reference to the 

associated due process. There were no 

significant comments on this paragraph. 

704.4(j) Enforcement of Directives 

The proposal cross references 

§ 747.3005 as the source of the process 

for enforcing PCA directives. There 

were no comments on this paragraph. 

704.4(k) Remedial Actions Towards 

Undercapitalized, Significantly 

Undercapitalized, and Critically 

Undercapitalized Corporate Credit 

Unions 

The proposal prescribes certain 

remedial actions for corporates in these 

PCA categories. 

704.4(k)(1) Prohibition on 

Undercapitalized Credit Union Paying 

Dividends on Capital Accounts 

Proposed 704.4(k)(1) prohibited a 

corporate credit union from making any 

capital distribution, including payment 

of dividends on perpetual and 

nonperpetual capital accounts, if, after 


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making the distribution, the credit 

union would be undercapitalized. 

A few commenters supported this 

prohibition. Many commenters, 

however, were opposed to this 

prohibition, generally saying that this 

undermined the attractiveness of capital 

accounts and would discourage 

recapitalization of the corporate credit 

union system, and that the decision on 

payment of dividends should be left to 

the corporate’s board of directors. One 

commenter stated that this prohibition 

could perpetuate the undercapitalized 

condition. Several of these commenters 

stated that this prohibition should be 

limited to significantly or critically 

undercapitalized corporates. Several 

others said that this prohibition should 

be tied to some sort of minimum RE 

ratio, not the fact that the corporate may 

be undercapitalized. 

The Board disagrees with the 

commenters that oppose the 

prohibition. When a corporate is 

undercapitalized, the payment of 

dividends on existing capital depletes 

the corporate’s RE and worsens the 

corporate’s capital position, increasing 

the odds of the corporate’s failure. The 

Board disagrees with those commenters 

that believe that a corporate must be 

significantly undercapitalized before it 

is in true capital trouble. The 

undercapitalized PCA category 

indicates serious capital problems that 

the corporate must address, and 

anything that undermines capital 

retention and growth in the 

undercapitalized PCA category must be 

controlled. The Board notes that this 

prohibition on the payment of 

dividends at undercapitalized 

corporates is also consistent with the 

Basel capital regulations of the other 

banking regulators. 

The Board does believe that the 

NCUA’s authority to waive the 

prohibition as stated in the proposal is 

unnecessary (due to 704.1(b)), and 

perhaps even harmful, as this internal 

waiver language suggests that the NCUA 

might grant such dividend waivers as a 

matter of routine. Accordingly, the final 

rule eliminates the NCUA waiver 

authority from the text of 704.4(k)(1). 

704.4(k)(2)(v) Discretionary Safeguards 

This proposed paragraph stated that 

NCUA may, with respect to any 

undercapitalized corporate credit union, 

take one or more of the actions 

described in paragraph (k)(3)(ii) (e.g., for 

significantly undercapitalized 

corporates) if the NCUA determined 

those actions are necessary to carry out 

the purpose of the PCA section. 

Many commenters thought this 

proposed paragraph went too far. 

Several of these commenters 

mischaracterized this authority as 

residing with the OCCU Director when, 

in fact, under the proposal this authority 

would reside in the NCUA Board 

(subject to delegation). Some 

commenters stated that under this 

provision, the NCUA could fire any 

employee and or remove any board at 

any existing corporate today, and will 

be able to do so for years to come as 

long as the corporates remain 

undercapitalized. One commenter 

called this provision outrageous, and 

two others questioned its 

constitutionality. Another commenter 

said these powers should be reserved 

only for corporates categorized as either 

significantly or critically 

undercapitalized. 

The Board agrees with this last 

commenter, and has eliminated this 

proposed paragraph from the final rule. 

704.4(k)(6)(ii)(C) Restricting the 

Activities of Critically Undercapitalized 

Corporates 

Proposed paragraph 704.4(k)(6)(ii)(C) 

prohibits a critically undercapitalized 

corporate from amending its charter or 

bylaws without the prior approval of the 

NCUA, except as necessary to carry out 

any other requirement of law, 

regulation, or order. 

A few commenters stated that this 

usurped the authority of state regulators 

over state charters. The Board disagrees. 

A corporate that is critically 

undercapitalized represents a significant 

risk to the NCUSIF. Accordingly, the 

NCUA must have control over any 

significant activities that corporate 

might undertake, including, but not 

limited to, charter changes that affect 

the control or governance of the 

corporate. 

Proposed paragraph 704.4(k)(6)(ii)(F) 

prohibited a corporate from paying 

interest on new or renewed liabilities at 

a rate that would increase the corporate 

credit union’s weighted average cost of 

funds to a level significantly exceeding 

the prevailing rates of interest on 

insured deposits in the corporate credit 

union’s normal market areas. One 

commenter stated that corporates under 

PCA should not be restricted to 

dividend rates in the region the 

institution is located since some 

corporates have national fields of 

membership. 

The Board notes that most corporates, 

even with national FOMs, have a 

concentration of members within a 

particular area of the country. In the 

case of a corporate which has no such 

identifiable concentration, the market 

area of the corporate would be the entire 

nation. Accordingly, the Board sees no 

need to amend the paragraph as 

proposed. 

704.8(j)(2)(ii) Proposed PCA 

Downgrade for Failure To Correct NEV 

Test Failures 

The proposed paragraph 704.8(j)(2) in 

the asset liability section, would require 

PCA category downgrades for failure to 

correct NEV test failures. One 

commenter recommended that PCA 

compliance and regulatory remedies be 

eliminated for the NEV type testing, 

stating that there was no precedent for 

the application of PCA beyond the three 

‘‘routine capital measures.’’ The Board 

strongly disagrees. Corporates must 

comply with the corporate rule’s NEV 

requirements. And, if a corporate fails to 

comply, NCUA must have the 

supervisory tools to deal with such 

noncompliance. The PCA downgrade 

provisions in 704.8(j)(2)(ii) provide the 

NCUA with the necessary tools. 

One commenter suggested that there 

should be a phase-in period for the new 

PCA requirements, but this commenter 

did not indicate whether the desired 

phase-in was over and above the 12 

months currently envisioned under the 

proposal. The final rule retains the oneyear phase-in of the PCA provisions as 

proposed. 

Except as discussed above, the Board 

adopts the final § 704.4 as proposed. 

The proposal also included a new 

subpart M to Part 747, setting forth the 

procedures and due process available in 

connection with the PCA provisions of 

§ 704.4. The proposal adopts subpart M 

as proposed. 

704.5 Investments 

704.5(a) Through 704.5(g) 

The proposal did not contain any 

amendments to these seven paragraphs, 

and they remain as in the current rule. 

704.5(h) Prohibitions 

The proposed paragraph 704.5(h) 

added prohibitions on corporate credit 

unions investing in collateralized debt 

obligations (CDOs) and net interest 

margin securities (NIMs). 

Many commenters supported the 

prohibition on CDOs and NIMs, and the 

final rule retains these prohibitions. 

Many commenters also stated a desire 

for additional restrictions on corporate 

investments. These additional 

restrictions ranged from limiting 

corporate credit unions to investing 

only in government securities to 

additional prohibitions on securities, 

including residential mortgage-backed 

securities (RMBS) and subordinated 

securities that caused the credit union 

industry so much of a loss. NCUA hired 


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22 Kamakura Report, p. 10. 

Kamakura Corporation (Kamakura) to 

assist in analyzing the proposed rule, 

and Kamakura also recommended 

prohibiting investments in subordinated 

securities and placing further limits on 

private label RMBS.22

The Board agrees with these 

commenters and, accordingly, has 

added a new paragraph (h)(7) to the 

final rule to prohibit corporates from 

investing in private label RMBS. Private 

label RMBS are not guaranteed by the 

United States Government, its agencies, 

or its sponsored enterprises. The RMBS’ 

underlying assets, residential mortgage 

loans, are also more sensitive to macroeconomic factors than other investments 

available to corporate credit unions. In 

fact, of the current combined losses at 

Western Corporate Federal Credit Union 

(WesCorp) and U.S. Central Federal 

Credit Union (U.S. Central), over 95 

percent were related to private label 

RMBS. NPCUs also invest directly in 

residential mortgages, and by 

prohibiting corporates from purchasing 

private label RMBS, the pro-cyclical 

nature of corporate and NPCU balance 

sheets is also diminished. Given the 

lack of a guarantee, the sensitivity of 

mortgages to macro-economic factors, 

the concentration of mortgages on the 

balance sheets of natural person credit 

unions, and the recent history of 

corporate investments, the NCUA Board 

believes a prohibition on private label 

RMBS is warranted. 

704.2 Definition of Private Label 

Security 

The final rule defines private label 

security as ‘‘a security that is not issued 

or guaranteed by the U.S. government, 

its agencies, or its governmentsponsored enterprises (GSEs).’’ 

704.2 Definition of Residential 

Mortgage-Backed Security 

One commenter noted that while the 

proposed rule defined the terms 

‘‘residential property’’ and ‘‘residential 

mortgage backed security,’’ the proposed 

definition of RMBS did not include the 

use of the phrase ‘‘residential property.’’ 

The Board agrees that, for precision, the 

RMBS definition should refer to 

‘‘residential property,’’ and the final rule 

now defines RMBS as ‘‘a mortgagebacked security collateralized primarily 

by mortgage loans on residential 

properties.’’ Also, as a point of 

clarification, this 704.2 definition of 

RMBS includes not only securities 

primarily backed by first lien residential 

mortgages, but also securities primarily 

backed by other-than-first-lien 

residential mortgages, such as home 

equity loans. 

704.5(h)(8) Prohibiting Subordinated 

Securities 

The Board has also added a new 

paragraph 704.5(h)(8) to the final rule 

prohibiting investment in subordinated 

securities. Subordinated securities 

present greater credit risk, liquidity risk, 

and price volatility than more senior 

securities. Losses on subordinated 

securities may at times reach 100 

percent of principal, even when a more 

senior security in the same issuance 

may only lose pennies on the dollar. In 

fact, over 48 percent of the current 

combined losses incurred by WesCorp 

and U.S. Central are attributable to 

subordinated securities, mostly 

subordinated RMBS. 

704.2 Definition of Subordinated 

Security 

The proposal defined subordinated 

security in § 704.2 as ‘‘[a] security that 

has a junior claim on the underlying 

collateral or assets to other securities in 

the same issuance. If a security is junior 

only to money market fund eligible 

securities in the same issuance, the 

former security is not subordinated for 

purposes of this definition.’’ The final 

rule retains this definition, but adds the 

words ‘‘at the time of purchase’’ because 

a subordinated security can lose its 

subordination as the more senior 

tranches are paid down. The final rule 

also moves the existing prohibition on 

purchasing stripped MBS from 

paragraph (h)(7) to (h)(9). 

The relationship between the other 

investment, credit risk, and ALM 

prohibitions, and these two 704.5(h) 

prohibitions on private label RMBS and 

subordinated securities, is discussed in 

more detail below. 

Accordingly, and except as described 

above, the Board adopts the final 

§ 704.5, and associated definitions, as 

proposed. 

704.6 Credit Risk Management 

The proposed § 704.6 included tighter 

single obligor limits and new sector 

concentration limits. The proposal also 

required that all corporate investments, 

other than in another corporate or 

CUSO, have a minimum credit rating 

from all publicly available NRSROs of 

no lower than AA¥ for long-term 

ratings and A–1 for short-term ratings. 

Additionally, 90 percent of corporate 

investments must have at least two 

NRSRO ratings. 

Several commenters thought the 

proposed tightening of the existing 

single obligor limits, and establishing of 

new sector limits, was a positive 

change, and some asked for even tighter 

restrictions. On the other hand, several 

commenters thought the proposed limits 

were too tight and may increase risk and 

limit the corporates’ ability to manage 

their businesses and balance sheets 

efficiently. The Board agrees that some 

of the proposed limits should be 

tightened and others relaxed, as 

discussed below. 

704.6(a) Policies 

The proposal did not contain any 

amendments to this paragraph. 

704.6(b) Exemptions 

The proposed paragraph 704.6(b) 

exempted certain assets from both the 

sector concentration limits and the 

single obligor concentration limit, 

including fixed assets, loans, 

investments in CUSOs, investments 

issued by the United States or its 

agencies or its government sponsored 

enterprises, and investments fully 

guaranteed or insured as to principal 

and interest by the United States or its 

agencies. 

Several commenters believed 

settlement funds should also be exempt. 

These commenters were concerned that 

the tight single obligor limit would force 

corporates to find many additional 

settlement counterparties given the 

proposed tighter limit of 25 percent of 

capital per obligor. The commenters 

were particularly concerned about 

seasonal patterns that cause settlement 

activity to fluctuate throughout the year 

and could potentially cause violations 

of the single obligor limits. 

The Board agrees with these concerns, 

and has added settlement funds in 

federally insured depository institutions 

to the list of exempt investments in the 

final 704.6(b). The Board has also added 

a definition of settlement funds to the 

final § 704.2 to read as set forth in the 

regulatory text of this rule. 

Corporates must take care to properly 

classify settlement funds and not 

include non-settlement short-term 

investments in this category. Generally, 

the characteristics of settlement funds 

are: (1) Funds are used for immediatevalue transactions (transactions that 

must be paid for immediately to be 

processed or have a particular value at 

the time of processing); (2) Funds are 

used to settle transactions from 

institutions such as clearing houses, 

banks, payment processors, and other 

credit unions; and (3) Funds are used 

for same-day settlement accounts, or in 

the case of automated clearing house 

transactions within a few days. The 

amount of money a corporate classifies 

as ‘‘settlement funds’’ at a third party for 

purposes of exclusion from the 704.6 


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23 Kamakura Report, p. 10. 

single obligor limit should also be no 

more than the third party requires under 

the terms of its settlement policies. 

The proposed 704.6(b) had a complete 

exemption for agency MBS, but the 

Board has instead determined not to 

exempt such MBS. Rather, the Board 

intends to permit investment in MBS, 

including agency MBS, subject to 

concentration limits described below. 

Accordingly, the final rule amends the 

704.6(b) exemption for ‘‘investments 

that are issued or fully guaranteed as to 

principal and interest by the U.S. 

government or its agencies or its 

sponsored enterprises’’ by adding the 

words ‘‘other than mortgage backedsecurities’’ at the end. Also, the 

reference to subordinated securities is 

eliminated from the final rule since 

such securities will be prohibited. 

704.6(c) Issuer Concentration Limits 

The proposed 704.6(c) tightens the 

single obligor limits to 25 percent of 

capital, subject to certain enumerated 

exceptions. 

In addition to the enumerated 

exceptions, many commenters felt shortterm investments, such as federal funds, 

should have either a relaxed single 

obligor limit, or be exempt from the 

single obligor limit, due to the lower 

risk associated with these transactions. 

The Board agrees. Investments of shorter 

maturity present less credit risk, all else 

being equal. Still, it is not appropriate 

to exempt these short term investments 

from some limit, as these obligations 

(including federal funds) do have some 

credit risk. Accordingly, the Board adds 

a new paragraph (c)(2)(i) to the final rule 

limiting investments in one obligor to 

50 percent of capital where the 

remaining maturity of all obligations 

with that obligor are less than 30 days. 

In general, the obligor in a 

securitization situation will be the 

Qualified Special Purpose Entity (QSPE) 

trust that issues the securities. Some 

commenters were concerned that there 

were very few potential obligors in the 

credit card ABS sector, particularly 

given the prevalence of ‘‘master’’ QSPE 

trusts, and so the single obligor 

limitation could keep corporates from 

making any significant investments in 

the credit card ABS sector. Accordingly, 

the final rule adds a new paragraph 

704.6(c)(2)(ii) to the final rule relaxing 

the single obligor limitation for credit 

card master trusts to 50 percent of 

capital. The Board observes that credit 

card ABS, both as a sector and as 

individual securities, have withstood 

both systemic and issuer shocks since 

these ABS were first issued. Given the 

sector’s relative safety and the limited 

number of potential counterparties, 

NCUA believes a 50 percent obligor 

limitation for these master trusts is 

appropriate. 

704.2 Definition of Obligor 

The final rule amends this definition 

to clarify that, for purposes of securities 

issued out of a trust, such as a Qualified 

Special Purpose Entity (QSPE) trust, the 

trust itself is the obligor. 

704.6(d) Sector Concentration Limits 

NCUA proposed, as part of its sector 

concentration limits, that private label 

RMBS be limited to the lower of 500 

percent of capital or 50 percent of 

assets. Some commenters, and 

Kamakura, were concerned that these 

limits were not tight enough. Kamakura 

recommended tighter limits for both 

commercial mortgage-backed securities 

(CMBS) and private label RMBS and a 

combined limit for the MBS sectors due 

to the higher correlation of mortgages to 

macro-economic factors.23 Kamakura 

recommended a sector limit of 15 

percent of the portfolio each for both 

CMBS and private label RMBS, and a 

combined sector limit of 25 percent of 

the portfolio. As discussed earlier, the 

final rule prohibits private label 

residential MBS. The Board also agrees 

a tighter limit for the CMBS sector is 

appropriate. Additionally, the Board 

believes an overall restriction on the 

amount of MBS, including agency MBS, 

is appropriate due to the additive nature 

of the corporates’ concentration 

exposure when considered along with 

NPCU mortgage exposure. 

Accordingly, the Board amended the 

final paragraph (d)(1)(i) to limit all MBS, 

inclusive of commercial mortgagebacked securities, to the lower of 1000 

percent of capital or 50 percent of 

assets. Additionally, the final rule 

revises paragraph (d)(1)(ii) to tighten the 

limit on CMBS to the lower of 300 

percent of capital or 15 percent of 

assets. 

Paragraphs (d)(1) and (d)(2) establish 

sector concentration limits for specified 

investment types, and paragraph (d)(3) 

establishes a general, aggregate limit of 

100 percent of capital or 5 percent of 

assets for any other investment type not 

described in (d)(1) or (d)(2). Some 

commenters were concerned that 

investments in federal funds might be 

included in the (d)(3) limit since fed 

funds were not specifically enumerated 

in the other sectors and were not 

generally exempt under 704.6(b). The 

Board recognizes that corporate credit 

unions need flexibility to engage in 

short-term investments and agrees that 

federal funds transactions with federally 

insured depository institutions should 

be explicitly excluded from the sector 

concentration limits in a manner similar 

to deposits in those institutions. 

Accordingly, the final rule amends 

paragraph (d)(4) to explicitly exclude 

federal funds investments in other 

federally insured depository institutions 

from sector concentration limits. 

704.6(e) Corporate Debt Obligation 

Subsector Limits 

The proposed paragraph 704.6(e) set 

out concentration limits for 

subordinated securities. Since the final 

704.5(h) outright prohibits subordinated 

securities, the proposed text is no longer 

necessary and has been deleted from the 

final rule and replaced with a different 

provision, as discussed below. 

The proposed 704.6(d)(1)(viii) limited 

corporate debt obligations to the lower 

of 1000 percent of capital or 50 percent 

of assets. Some commenters, including 

some trade associations, thought these 

limits were not restrictive enough. Some 

of these commenters recommended that 

NCUA further restrict concentrations in 

corporate debt by industry. The NCUA 

Board agrees. The final rule replaces the 

proposed 704.6(e) with a new 704.6(e) 

establishing subsector limits for 

corporate debt obligations. The final 

rule limits corporate debt to the lower 

of 200 percent of capital or 10 percent 

of assets for each of the 20 North 

American Industry Classification 

System (NAICS) industry sectors. The 

20 NAICS sectors are listed in the 

following table: 

Code Industry classification Code Industry classification 

11 .................. Agriculture, Forestry, Fishing and Hunting ................... 53 Real Estate and Rental and Leasing. 

21 .................. Mining, Quarrying, and Oil and Gas Extraction ............ 54 Professional, Scientific, and Technical Services. 

22 .................. Utilities ........................................................................... 55 Management of Companies and Enterprises. 

23 .................. Construction .................................................................. 56 Administrative and Support and Waste Management 

and Remediation Services. 


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24 Kamakura report, pp. 8–10. 

Code Industry classification Code Industry classification 

31–33 ............ Manufacturing ............................................................... 61 Educational Services. 

42 .................. Wholesale Trade ........................................................... 62 Health Care and Social Assistance. 

44–45 ............ Retail Trade .................................................................. 71 Arts, Entertainment, and Recreation. 

48–49 ............ Transportation and Warehousing ................................. 72 Accommodation and Food Services. 

51 .................. Information .................................................................... 81 Other Services (except Public Administration). 

52 .................. Finance and Insurance ................................................. 92 Public Administration. 

These subsector limits will ensure 

more diversification in corporate debt 

obligations and reduce correlation risk 

due to excessive concentrations in any 

single subsector, particularly the finance 

subsector. 

704.6(f) Credit Ratings 

As discussed above, the proposed 

paragraph 704.6(f) required that 

corporates consult all publicly available 

NRSRO ratings and use those ratings to 

screen potential investments. 

Several commenters and Kamakura 

expressed concerns regarding reliance 

on credit ratings provided by NRSROs. 

Kamakura recommended corporates not 

look to NRSRO ratings and instead 

implement a macro economic analysis 

approach to evaluating credit risk and 

conduct their own internal analysis on 

the probability of default of any given 

securities.24 The current 704.6(a), which 

NCUA did not amend in this 

rulemaking, requires that a corporate 

adopt a credit risk policy and evaluate 

the credit risk of individual securities. 

Still, the Board disagrees with the idea 

that NRSRO ratings have no value and 

that they should be entirely ignored 

when conducting credit analysis on a 

particular security. NRSRO ratings are 

useful tools when used, as in the 

proposed 704.6(f), only to exclude, not 

include, securities as potential corporate 

investments. Corporates must do 

additional credit analysis on each 

security that passes the initial NRSRO 

ratings screen, and each security that 

passes the NRSRO screen must comply 

with each and every one of the other 

investment, credit risk, and ALM 

provisions of this final rule. 

704.6(g) Reporting and Documentation 

The proposal did not contain any 

amendments to this paragraph. 

Accordingly, and except as described 

above, the Board adopts the final § 704.6 

as proposed. 

704.8 Asset and Liability Management 

(ALM) 

The proposed § 704.8 contained 

several new ALM provisions, including 

a modification to the provision on early 

withdrawal penalties, two cash flow 

mismatches limits, a new 2-year limit 

on the WAL of a corporate’s assets, and 

a requirement to measure net interest 

income. Some commenters were in 

favor of the revisions in the proposed 

rule. Many commenters, however, 

objected to different provisions within 

the proposed rule, generally 

complaining about the complexity and 

efficacy of the multi-level testing in 

proposed paragraphs 704.8(e), (f), and 

(g). As discussed below, the Board has 

made several changes from the proposed 

§ 704.8 to the final. 

704.8(a) Policies 

Proposed paragraph 704.8(a)(6) 

contained a conforming change to 

reference the two proposed cash flow 

mismatch sensitivity tests. Because, as 

discussed below, these tests are not 

adopted in the final rule, the 

conforming amendment has been 

removed from paragraph (a)(6). 

704.8(b) Asset and Liability 

Management Committee (ALCO) 

The proposal did not contain any 

amendments to this paragraph. 

704.8(c) Penalty for Early Withdrawals 

The proposal limited a corporate’s 

ability to pay a market-based 

redemption price to no more than its 

book value, thus eliminating the 

corporate’s ability to pay a premium on 

early withdrawals. Hundreds of 

commenters objected to this prohibition, 

arguing that the proposed prohibition 

on premiums would make corporates 

less competitive with their certificates, 

and thus reduce corporate liquidity on 

the front-end. The NCUA Board agrees 

now that prohibiting a premium is not 

likely to protect the corporate’s 

liquidity, and could interfere with the 

corporate’s competiveness, and so the 

Board determined not to adopt the final 

704.8(c) as proposed. Instead, paragraph 

704.8(c) will remain as in the current 

rule. Some comments also indicated 

that all corporates are not applying the 

current rule correctly. For example, the 

Board noted a corporate may base its 

market-based penalty on the asset 

values the certificate is matched against, 

and so the redemption value would 

decline as the value of the underlying 

assets decline. This methodology 

violates the current regulation’s 

requirement that penalties be based on 

the cost of replacing the lost funds. 

The following example illustrates the 

application of the rule in a premium 

situation. 

Assume a corporate is offering 2-year 

certificates at a 2-percent coupon, and 

1-year certificates at a 1.5-percent 

coupon, and that the corporate then 

issues a 2-year certificate to ‘‘NPCU A.’’ 

One year later, assume NPCU A wishes 

to redeem the certificate and that 

interest rates have dropped, so that the 

corporate is now issuing 1-year 

certificates at 1 percent. That would 

make the replacement cost of the 

original certificate approximately 100 

basis points (BP) (assuming the 

corporate can immediately issue a new 

certificate), but the dividend rate on the 

original certificate is more than that, at 

200 BP. So the net savings for the 

corporate because of the early 

redemption is 100 BP. NCUA would 

then expect the corporate, at a 

minimum, to redeem this certificate at 

a premium of nearly 100 BP, but 

subtract some penalty spread to account 

for the uncertainty, and expense, in 

actually issuing a replacement 

certificate. Using this methodology and 

a penalty spread of, say, 25 BP, the 2- 

year certificate will be redeemed at an 

approximate price of 100.75. The 

market-based penalty, then, would 

technically be 25 BP, which reduced the 

100 BP premium to 75 BP. 

704.8(d) Interest Rate Sensitivity 

Analysis 

The proposal did not contain any 

specific amendments to this paragraph. 

However, the final rule clarifies that for 

interest rate risk (IRR) tests conducted 

‘‘at least quarterly,’’ at least one of the 

tests must be conducted on the last day 

of the calendar quarter. Traditionally, 

the last day of the quarter has been used 

by the corporates, and this clarification 

ensures consistency in measurement 

periods. Additionally, if ‘‘at least 

monthly’’ testing is required because 

NEV ratio falls below three percent, the 

last day of the month must also be one 

of the testing dates. 


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25Providing investments on a principal basis will 

be even less of a priority in the corporate business 

model going forward. 

26Though a corporate is still bound by the IRR 

NEV constraints in paragraph 704.8(d). 

(Proposed) 704.8(e) Cash Flow 

Mismatch Sensitivity Analysis 

See discussion in next paragraph. 

(Proposed) 704.8(f) Cash Flow 

Mismatch Sensitivity Analysis With 50 

Percent Slowdown in Prepayment 

Speeds 

The proposal established new limits 

on cash flow mismatch sensitivity tests. 

Although the proposed tests were 

structured in terms of the effect on NEV 

of an immediate 300 basis point 

increase in the yield demanded by 

investors, the effect of the proposal was 

to ensure that the gap between the 

average life of a corporate’s assets and 

its liabilities would remain within a few 

months and so not present extensive 

liquidity and market risk to the 

corporate. 

Many commenters thought the two 

proposed cash flow mismatch 

sensitivity tests were too restrictive. 

Other commenters thought these tests 

were too complicated. Some 

commenters did not understand the 

tests were measuring the risk associated 

with cash flow mismatches, and these 

commenters discussed spread widening 

based on historical averages for such 

widening. Kamakura recommended 

eliminating the paragraph (e) and (f) 

stress tests, stating that these tests pose 

a potential burden on corporate credit 

unions, greatly reduce the number of 

securities available for investment, and 

do not appear to identify securities with 

differences in credit performance 

meaningfully related to the performance 

of securities throughout the credit crisis. 

The Board generally concurs with 

these commenters and Kamakura, and 

the two proposed cash flow mismatch 

tests have been removed from the final 

rule. The elimination of the these two 

tests will allow corporates to have a 

larger mismatch between asset and 

liability cash flows, which increases 

earnings potential but also increases 

credit and liquidity risk. To mitigate 

this increased risk, the NCUA Board has 

retained the proposed 2-year WAL on 

assets and added an asset WAL 

extension test as discussed below. 

(Proposed) 704.8(g), (Final) 704.8(e)

Net interest income modeling 

In addition to this NEV testing, the 

proposal required every corporate 

conduct net interest income (NII) 

modeling. The Board did not receive 

any significant comments on this 

provision, other than ones stating that 

corporates already did this modeling as 

a matter of policy. The final rule 

amends the timing of the modeling to 

read ‘‘be performed at least quarterly, 

including once on the last day of the 

calendar quarter.’’ As discussed above, 

this change ensures consistency in the 

modeling results. This paragraph is also 

renumbered as paragraph 704.8(e) in the 

final. 

(Proposed) 704.8(h) (Final) 704.8(f)

Weighted Average Asset Life 

The proposal prohibited the weighted 

average life (WAL) of a corporate’s loans 

and investment portfolio, excluding 

derivatives and equity investments (e.g., 

investments with indefinite maturities 

such as PIC and CUSO investments), 

from exceeding two years. 

The primary purpose of this 

restriction in the proposal was to ensure 

that a corporate did not artificially 

inflate the WAL of its liabilities so as to 

get around the asset—liability cash flow 

mismatch limits. Many commenters 

objected to the 2-year asset WAL 

restriction. 

Some of these commenters were 

concerned that the 2-year WAL 

restriction would prevent corporates 

from providing long term liquidity loans 

to NPCUs. Loans over two years in 

maturity are not generally liquidity 

loans—they are loans used for term 

balance sheet funding to match off 

against longer-term loans or to fund 

portfolio growth. Since a corporate’s 

primary role in lending is as a liquidity 

provider of short-term loans, NPCUs 

cannot rely on corporates to provide 

term lending in significant amounts. 

NPCUs have other viable options for 

longer-term funding such as the Federal 

Home Loan Bank system, which 

provides both fixed rate and variable 

rate lending. 

With the elimination of the cash flow 

mismatch tests in proposed paragraphs 

704.8(e) and 704.8(f), the NCUA Board 

believes it is very important to retain the 

proposed 2-year WAL restriction on the 

investment portfolio. This 2-year limit 

forces corporates to accommodate to the 

fact that corporates are, first and 

foremost, providers of payment systems, 

which, in turn, requires some matching 

of the investment portfolio to the short 

term payment liabilities to ensure 

liquidity for the payments system. 

Providing liquidity to NPCUs, 

particularly long-term liquidity, is of 

secondary importance to this payment 

systems function.25 Still, the 2-year 

WAL restriction is a portfolio-wide 

restriction, and the WAL restriction will 

allow corporates to make limited 

amounts of term loans exceeding two 

years in maturity if those loans are 

matched by other corporate assets of 

less than two year maturities. 

Some of the commenters thought the 

2-year asset WAL would prevent a 

corporate from being able to earn 

sufficient spread to build retained 

earnings in a timely manner. As 

discussed in more detail below in 

connection with some hypothetical 

corporate portfolios, the Board does not 

believe this is true. In fact, as suggested 

in the Kamakura report, the proposed 

cash flow mismatch tests were in most 

cases the determining factor in limiting 

a corporate’s ability to populate its 

investment portfolio with ABS and MBS 

that generated higher yields for the 

corporate. Under the proposed 704.8(e) 

cash flow mismatch test, and assuming 

a 4 percent NEV, a corporate’s asset 

WAL could not exceed its liability WAL 

by more than about 3 months without 

violating proposed 704.8(e). That meant 

that if the WAL of the corporate’s 

liabilities was about 8 months—which 

is about the current average for 

corporates—then the corporate’s asset 

WAL could only be about 11 months. 

Since the final rule will not contain the 

proposed cash flow mismatch tests, this 

corporate can take its asset WAL all the 

way out from 11 months to 2 years, 

generating more earning power 

(assuming an upward sloping yield 

curve). NCUA expects the WAL of a 

corporates’ liabilities to remain 

relatively short going forward as they 

focus on the payment systems function. 

Accordingly, the elimination of the cash 

flow mismatch tests will have an even 

greater positive impact on corporates’ 

ability to maintain longer assets and 

generate earnings from such assets.26

The proposal required that a corporate 

assume, when calculating the WAL, that 

no issuer options will be exercised. For 

example, the corporate cannot assume 

that an issuer will execute a clean-up 

call. The final rule also requires that the 

corporate not assume that any market 

options will be exercised. This 

requirement addresses the failure of 

auction rate securities. During the credit 

crisis, auction rate securities, initially 

considered by some to have a maturity 

of approximately one month, extended 

out in some cases to 15 or 20 years 

when the auction failed. 

The final rule also provides that if the 

WAL of a corporate credit union’s 

investment portfolio exceeds two years 

on the testing date, this WAL must be 

measured more frequently. In that case 

the measurement must be taken at least 

monthly, including once on the last day 


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of the month, until the WAL is once 

again below two years. 

With the elimination of the cash flow 

mismatch tests in paragraphs 704.8(e) 

and 704.8(f), the proposed WAL limit 

has been renumbered in the final rule 

from 704.8(h) to 704.8(f). 

704.2 Definition of Weighted Average 

Life 

The current § 704.2 definition of 

weighted average life uses a calculation 

based on the average time for a return 

of a dollar of principal. Although 

stripped MBS are generally 

impermissible for corporates, it is 

possible that a corporate might hold 

some sort of stripped interest only (IO) 

security that has no principal return. 

Accordingly, the Board amends the final 

definition of weighted average life to 

include for IO securities a calculation 

based on the average time to the 

expected receipt of a dollar of interest. 

(Final) 704.8(g) Weighted Average Life 

With 50 Percent Slowdown in 

Prepayment Speeds 

As discussed above, the Board’s 

decision to forgo the proposed cash flow 

sensitivity tests increases the 

importance of the proposed 2-year asset 

WAL in protecting the payment systems 

from excessive risk. In addition to the 

2-year WAL restriction, and to protect 

against extension risk, the Board has 

added a new paragraph 704.8(g) to the 

final rule limiting asset WAL extension 

to 2.25 years assuming a 50 percent 

slowdown in prepayment speeds, 

regardless of asset type. 

In the past, many market participants 

believed that lower interest rates would 

create faster prepayment speeds in 

residential MBS. During the recent 

credit crisis, however, prepayment 

speeds slowed substantially in many 

RMBS, even with lower interest rates. In 

some cases, a prepayment slowdown 

can produce radical increases in the 

WAL of a security (e.g., in excess of one 

thousand percent), particularly in 

support tranches. Accordingly, this new 

50 percent slowdown test limits the 

extension risk, and the related credit 

and liquidity risk, that a corporate can 

accept into its portfolio. This new 

704.8(g) WAL test with prepayment 

slowdown is similar to the proposed 

704.8(f) cash flow mismatch sensitivity 

test with prepayment slowdown that the 

Board is not adopting, except that this 

new 704.8(g) is simpler to calculate and 

not as restrictive as the proposed 

704.8(f). 

704.8(h) Government Issued and 

Guaranteed Securities 

Many commenters thought securities 

that are issued or fully guaranteed as to 

principal and interest by the U.S. 

government or its agencies or its 

sponsored enterprises should be exempt 

from the cash flow mismatch and 2-year 

WAL restrictions. The most common 

argument was the absence of credit risk 

in these securities. 

The Board is sympathetic to this 

concern, and so the final rule allows the 

WAL of securities that are issued by, or 

fully guaranteed as to principal and 

interest by, the U.S. government or its 

agencies or its sponsored enterprises to 

be multiplied by a factor of 0.50 when 

determining the WAL of a corporate’s 

entire portfolio. So, for example, a 

4-year WAL agency security will be 

treated as if it has a 2-year WAL for 

purposes of the WAL calculations in 

paragraph 704.8(f) and (g). The Board 

also considered exempting government 

securities from both the asset WAL tests, 

but concluded that such an exemption 

was not appropriate because these 

securities do have some market 

volatility. 

The Board determined to use the 0.50 

factor because it provides corporate 

credit unions with a material measure of 

relief from the WAL calculation without 

creating undue market risk. Small 

factors, such as 0.25, would not provide 

a significant benefit to the corporates, 

while larger factors, such as 0.75, raised 

concerns over market risk and the 

potential negative effects on NEV. 

During the global credit crisis, even 

agency RMBS spreads widened 

significantly between October 2008 and 

November 2008. During this period, 

spreads between the Bloomberg generic 

5-year Fannie Mae Benchmark and the 

swap curve widened by 111 BP, 

introducing significant market risk on 

these securities. Other Bloomberg 

generic indices also widened 

significantly, with the longer term 

benchmarks widening even more. The 

Board believes the 0.50 factor provides 

the best balance between WAL relief 

and ensuring that corporate NEV 

positions are protected. 

704.8(i) Effective and Spread 

Durations 

The proposed paragraph 704.8(i) 

required a corporate measure at least 

once a quarter, the effective duration 

and spread durations of each of its 

assets and liabilities, where the values 

of these are affected by changes in 

interest rates or credit spreads. There 

was no significant comment on this 

provision. The Board determined to 

clarify the timing of the tests by 

inserting the phrase ‘‘including once on 

the last day of the calendar quarter.’’ 

Otherwise, this paragraph was finalized 

as proposed. 

704.8(j) Regulatory Violations 

The proposed paragraph 704.8(j) 

required that a corporate take action to 

report, and cure, violations of § 704.8. 

The proposal also stated that if the 

corporate could not timely cure the 

violation, the corporate would suffer a 

PCA downgrade. 

One commenter thought it 

inappropriate to tie the failure of ALM 

tests to PCA downgrades. The Board 

disagrees. A corporate must maintain its 

NEV levels, and protect those NEV 

levels from credit, extension, and 

liquidity risk. A PCA downgrade, and 

the associated PCA provisions in 

§ 704.4, give the Board the necessary 

tools to deal with a corporate’s failure 

to meet important regulatory 

requirements. 

704.8(k) Overall Limit on Business 

Generated From Individual Credit 

Unions 

The proposed paragraph 704.8(k) 

prohibited a corporate from accepting 

from a member or nonmember credit 

union or other entity any investment, 

including shares, loans, PCC, or NCAs 

if, following that investment, the 

aggregate of all investments from that 

member or entity in the corporate would 

exceed 10 percent of the corporate 

credit union’s moving daily average net 

assets. 

Hundreds of commenters opposed 

this limit on business from individual 

entities. Some commenters believed, for 

example, that this restriction would 

prevent a corporate from certain 

borrowings, such as liquidity 

borrowings from sources like the 

Federal Home Loan Banks. This was not 

the Board’s intent. Accordingly, the 

final 704.8(k) applies the limit only to 

member and nonmember credit unions. 

The Board has also increased the limit 

in the final rule from 10 percent of a 

corporate credit union’s moving daily 

average net assets to 15 percent. This 

increase in the limit is appropriate 

because of seasonal factors that affect 

the amounts of settlement funds a NPCU 

may have with a corporate. The Board 

believes, however, that increasing the 

limit beyond 15 percent is not 

appropriate and could lead to excessive 

concentrations of risk with one or two 

members. The final 704.8(k) will not 

become effective for 30 months 

following the date the final rule is 

published in the Federal Register. 


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Accordingly, and except as described 

above, the Board adopts the final 

§ 704.8, and associated definitions, as 

proposed. 

704.9 Liquidity Management 

704.9(a) General 

The proposed paragraph (a)(3) 

required a corporate maintain sufficient 

sources of cash and cash equivalents to 

support its payment system obligations. 

There was no significant comment on 

this proposal, and it is adopted into the 

final rule. 

704.9(b) Borrowing Limits 

The proposed paragraph 704.9(b) 

replaced the current borrowing limits of 

up to the greater of 10 times capital or 

50 percent of shares (excluding shares 

created by the use of member reverse 

repurchase agreements) and capital, 

with a limit of the lower of 10 times 

capital or 50 percent of capital and 

shares on aggregate borrowing. The 

proposal also added a new sublimit on 

secured borrowing, as discussed below. 

704.9(b)(1) Secured Borrowings 

The proposal permitted a corporate to 

borrow on a secured basis, but, 

generally, only for liquidity purposes 

and only with a maximum maturity of 

30 days. A corporate may also borrow 

on a secured basis for non-liquidity 

purposes, but only if the corporate is 

well-capitalized and only in an amount 

equal to the corporate’s excess capital. 

Several commenters felt current 

borrowing limits were sufficient while 

others felt their corporates should have 

no borrowing limits. These latter 

commenters argued the risks associated 

with borrowing would be captured by 

asset liability management modeling. 

Dozens of commenters also felt the 30 

day limit on secured borrowings 

established by § 704.9(b)(1) was too 

restrictive and would reduce a 

corporate’s ability to offer lending 

products and interest rate swaps to 

natural person credit unions. Many 

commenters stated any negative 

ramifications of borrowing in excess of 

30 days would be constrained by other 

aspects of the proposed rule. Many 

commenters felt § 704.9(b)(1) should be 

eliminated all together. 

The Board believes the proposed 

borrowing limits are prudent and 

sufficient to allow corporate credit 

unions to manage liquidity needs and to 

safeguard their payment systems. The 

Board also still believes that corporates 

should be limited in their ability to 

borrow on a secured basis for other than 

liquidity purposes. As demonstrated by 

recent events, secured borrowing can 

create additional risks for the corporate 

and the NCUSIF. Secured lenders 

require collateral to be valued at market 

and they impose an additional haircut 

(margin) to ensure the borrowing is fully 

and continuously collateralized. Market 

shocks can create short-term market 

values that are significantly below longterm intrinsic values and which can 

magnify potential losses if the creditor 

seized the collateral and sold it as 

permitted by the lending agreements. 

Accordingly, the final rule retains 

restrictions on secured borrowing for 

non-liquidity purposes and retains the 

30 day maximum term for secured 

borrowings made for liquidity purposes. 

These restrictions will not preclude a 

corporate from renewing liquidityrelated borrowings on a rolling basis. 

These limits on aggregate borrowing and 

secured borrowing should help mitigate 

the consequences of future adverse 

market events for the corporates and the 

NCUSIF. 

As with most of these final revisions, 

the effective date of the paragraph 

704.9(b) revisions will be January 18, 

2011. NCUA expects that corporates 

will not enter into any new borrowings 

before that date that will put them out 

of compliance with 704.9(b) on that 

date. Also, to the extent that a corporate 

has one or more borrowings on that date 

that are not in compliance with the 

requirements of 704.9(b), NCUA will 

expect the corporate to move 

aggressively to pay off those borrowings 

or to replace them with borrowings that 

comply with 704.9(b). 

Accordingly, and except as described 

above, the Board adopts the final § 704.9 

as proposed. 

Appendix B to Part 704—Expanded 

Authorities and Requirements 

The proposed rule revised the 

qualification criteria, and elements of, 

the Base-plus and Part I authority, and 

eliminated the current Part II authority, 

in Appendix B. 

General 

The final Appendix B includes 

language requiring state chartered 

corporates seeking expanded authority 

first obtain the approval of their SSAs 

before submitting an application to 

NCUA. This requirement is consistent 

with 12 CFR 704.1(b). 

Base Plus 

The final Base-Plus section removes 

the references to the proposed cash flow 

sensitivity tests in § 704.8(e)(1) and 

§ 704.8(f)(1) since these two proposed 

tests do not appear in the final rule. 

Language has also been added to clarify 

that for monthly NEV testing, the last 

day of the month must also be one of the 

testing dates. 

Part I 

To qualify for Part I authority, the 

proposal added a requirement that a 

corporate achieve and maintain a 

leverage ratio of at least 6 percent, 

meaning that its Tier 1 capital, divided 

by its moving DANA, must equal or 

exceed 6 percent. The proposal also 

limited the aggregate amount of 

investments purchased under Part I 

authorities to the lower of 500 percent 

of capital or 25 percent of a corporate 

credit union’s assets. NCUA did not 

receive any significant comment on 

these proposals, and they are retained in 

the final Part I. The final Part I removes 

the references to the proposed cash flow 

sensitivity tests in § 704.8(e)(1) and 

§ 704.8(f)(1) since these two proposed 

tests do not appear in the final rule. 

Part II 

The proposal removed the current 

Part II, which generally permitted 

investments down to BBB, and 

renumbered the existing Part III, on 

foreign investments, as Part II. 

NCUA did not receive any significant 

comment on the removal of the current 

Part II, and it is removed and replaced 

in the final rule with the Part on foreign 

investments. 

The proposed Part II on foreign 

investments established credit exposure 

limits for any single foreign obligor not 

to exceed 50 percent of capital. The 

NCUA Board intended this limit to be 

consistent with the single obligor limits 

established by the proposed and final 

§ 704.6(c). Accordingly, the final 

paragraph (a)(4) of Part II is amended to 

limit exposure to a single foreign obligor 

to the greater of 25 percent of capital or 

$5 million. 

Part III 

The proposal renumbered the current 

Part IV, which permits limited 

investments in derivative transactions, 

to Part III. 

Paragraph (a) Permissible Purposes for 

Derivatives 

The proposal modified the current 

authority in paragraph (a) to ensure that 

corporates do not use derivatives to take 

on additional risk. Proposed paragraph 

(a) permits the use of derivatives only to 

create structured products, mitigate 

interest rate and credit risk on its own 

balance sheet, or to hedge the balance 

sheet of its members. NCUA received no 

significant comment on this proposal, 

and the final paragraph (a) is adopted as 

proposed. 


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Paragraph (b) Credit Ratings of 

Derivatives Counterparties 

The proposed paragraph (b)(1)(i) 

limited corporates to derivative 

counterparties rated no lower than the 

minimum permissible rating for 

comparable permissible term 

investments. Some commenters were 

concerned with the lack of AA- rated 

counterparties for corporates without 

Part I Expanded Authority. These 

commenters argued this AA- rating 

restriction would keep corporates from 

finding an adequate number of 

qualifying derivative counterparties. 

Some commenters also cited the netting 

and collateral posting required in 

derivative transactions, noting these 

requirements mitigate the credit risk of 

a derivative transaction in comparison 

to a similarly rated investment 

transaction. 

The Board concurs there are few 

potential derivatives counterparties 

rated AA- or higher. In fact, there are 

many more potential derivatives 

counterparties rated A or A-, and a 

corporate that wants to engage in 

derivatives activity needs access to 

counterparties rated A or A-. The Board 

believes the credit quality of derivative 

counterparties is not as important as the 

credit quality of investment issuers. The 

nature of derivative transactions the 

corporates generally make (e.g., interest 

rate swaps) make them less risky than 

traditional investments, given the 

relatively low exposure levels and the 

mitigation of credit risk associated with 

bilateral netting agreements and 

collateral requirements. 

Accordingly, the final paragraphs 

(b)(1)(i) and (ii) permit corporates that 

qualify for Part III derivatives authority 

to engage in derivatives transactions 

with domestic counterparties rated no 

lower than A-, and, if the corporate has 

Part II Expanded Authorities, with 

foreign counterparties rated no lower 

than permissible under that Part II. The 

final paragraph (b)(1)(iv) also requires 

the corporate comply with the 

Investment Action Plan provisions of 

§ 704.10 if any rating relied upon to 

meet the requirements of paragraphs 

(b)(1)(i) or (ii) is downgraded below the 

minimum rating requirements. 

In addition, the Board notes that 

OCCU publishes separately from Part 

704 the specific criteria to qualify for 

any particular expanded authority. 

NCUA will publish the parameters for 

Part III qualification, which parameters 

will include compliance with industry 

best practices on bilateral netting of 

derivatives and the posting of collateral. 

Part IV 

The proposal renumbered the current 

Part V authority on participation 

lending as Part IV. The final rule reflects 

this renumbering. 

Accordingly, and except as described 

above, the Board adopts the final 

Appendix B as proposed. 

Section 704.11 Corporate Credit 

Union Service Organizations (CUSOs) 

704.11(e) Permissible Activities 

The current 704.11(e), entitled 

prohibited activities, prohibits a CUSO 

from acquiring control, directly or 

indirectly, of another depository 

financial institution or to invest in 

shares, stocks, or obligations of an 

insurance company, trade association, 

liquidity facility, or similar 

organization. 

The proposal would move the current 

prohibition language in 704.11(e) to 

proposed paragraph 704.11(g)(4) and 

replace the current 704.11(e) with a new 

paragraph entitled permissible activities. 

The new proposed 704.11(e) would 

require that a corporate CUSO agree to 

limit its activities to brokerage activities, 

investment advisory services, or other 

categories of activities (including but 

not limited to service activities) as 

approved in writing by the NCUA and 

published on the NCUA Web site. 

Several commenters generally agreed 

with the proposed regulation of CUSO 

activities and enhancement of CUSO 

transparency. Some of these 

commenters are concerned about the 

migration of activities from corporates 

to CUSOs and increased corporate 

exposure to CUSO risks. 

Many commenters, however, objected 

to the proposal that NCUA preapprove 

and publish a listing of approved 

corporate CUSO activities. Some 

objected to such NCUA preapproval 

generally, while others felt that 

publishing the list separate and apart 

from the rule created too much 

ambiguity in the rule and would inhibit 

proper corporate planning. Those 

commenters that objected categorically 

to NCUA preapproval felt such a 

preapproval requirement would 

discourage corporate ownership of 

CUSOs, and that such ownership was 

important because corporates bring a 

level of expertise to CUSO management 

that NPCUs may not bring. One of these 

commenters stated that NCUA should 

continue the approach of delineating 

those activities that are prohibited, not 

those that are approved. Another 

commenter believes that NCUA should 

not place limits on corporate CUSOs at 

this time because the most recent 

corporate crisis was an investment issue 

not related to CUSOs. 

The Board believes that NCUA must 

have some oversight over corporate 

CUSOs. These CUSOs affect not only 

the health of the corporates, but also the 

health of the credit union system as a 

whole, because many corporate CUSOs 

serve NPCUs directly. The Board is 

concerned that some activities might 

migrate from corporates to CUSOs as a 

result of this rulemaking, and NCUA 

needs to understand and preapprove the 

activities of these CUSOs and have 

access to these CUSOs. In addition, the 

Board reiterates that it is not regulating 

just in reaction to the immediate past 

crisis, but also attempting to anticipate 

future problems and construct a 

regulatory scheme that will help NCUA 

deal with those problems when they 

arise. 

One commenter wanted to know why 

NCUA had only identified two activities 

(brokerage and investment advisory 

services) as preapproved in the rule text, 

and stated that only one of its four 

existing CUSOs would prequalify under 

these approved activities. This 

commenter stated that another activity, 

‘‘item processing,’’ which was very 

important to its members, had been 

moved from the corporate to a CUSO to 

separate the ‘‘operational risk’’ from the 

corporate, and this commenter wanted a 

lengthier list of preapproved activities 

in the rule, including item processing. 

Two commenters suggested NCUA 

should expand the list of preapproved 

activities in the regulation to include 

item processing, shared data processing, 

and ‘‘shared services.’’ This commenter 

and others also stated that the rule 

should outline the process and criteria 

for approving each new category and 

explain the criteria. Other commenters 

asked that the approved list include 

business lending services, ALM 

services, card services, and the 

programs for the purchase of CDs from 

other depository institutions. One 

commenter stated that data processing 

should be preapproved. A few 

commenters stated that the corporate 

rule should include the same list of 

preapproved CUSO activities as 

currently exists for federal credit union 

CUSOs in part 712 of NCUA’s rules. 

One said that, at a minimum, NCUA 

should incorporate into part 704 all the 

activities described in 712.5(a), (b), (e), 

(g), and (k). 

The Board preapproved brokerage and 

investment advisor services because the 

Board believes providing those services 

are very appropriate corporate CUSO 

activities. The Board does not believe 

that all the preapproved categories of 

activities in § 712.5 for natural person 


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federal credit union CUSOs are 

necessarily appropriate for corporate 

CUSOs, and so declines to incorporate 

§ 712.5 language into 704.11(e). In fact, 

at this time, the Board will not be 

adding additional preapproved 

activities into the rule text of 704.11(e). 

Corporate CUSOs may submit 

descriptions of the activities they 

currently perform, or desire to perform, 

to NCUA beginning immediately on 

publication of this rule, and NCUA will 

begin the review and approval process 

for those activities. The Board wants to 

examine each activity, whether new to 

corporate CUSOs or a preexisting 

activity. 

One commenter suggested that a 

corporate submit a business case when 

seeking approval for a service rather 

than limit, upfront, the kinds of 

activities permissible. This commenter 

noted that the credit union system 

needs to have the flexibility to grasp 

opportunities as they arise. Some 

commenters objected to the informal 

nature of the NCUA approval process 

and wanted additional definitions and 

information in the rule text. 

In fact, the Board’s intent with the 

proposed, informal approval process is 

to streamline that process and to ensure 

that appropriate activities are approved 

as quickly as possible. Once NCUA has 

approved and published an activity 

category, any corporate CUSO may 

engage in that activity without further 

approval. The Board intends this 

process to be flexible enough to 

accommodate opportunities as they 

arise, without creating too much risk to 

the credit union system. On the other 

hand, the Board understands that 

corporates and their CUSOs need 

certainty, and some sort of permanence 

to the category or approved activities. 

The Board does not want corporates or 

their CUSOs to be concerned that NCUA 

might use the informal process to 

remove or radically alter a category of 

approved activities after NCUA’s 

publication of that approval. 

Accordingly, the final rule adds a new 

paragraph (e)(3) that provides NCUA 

will not remove a particular activity 

from the approved list, or make 

substantial changes to the content or 

description of that approved activity, 

except through the formal rulemaking 

process. 

One commenter was concerned about 

potential service disruptions as existing 

CUSOs go about obtaining NCUA 

approval. Some commenters stated that 

corporates would need a transition 

period following publication of the final 

rule to determine if their current 

corporates were engaged in activities 

acceptable to NCUA, with one 

suggesting 180 days. Another 

commenter thought NCUA should 

publish a list of approved activities in 

advance of the final rule, and another 

stated that there should be a ‘‘fast track’’ 

approval process for existing CUSOs. 

One commenter suggested that there 

should also be a 12-month period for a 

corporate to divest from impermissible 

CUSOs. 

The Board is sympathetic to these 

concerns about the transition to the 

preapproval system. Accordingly, the 

requirement in the final rule that NCUA 

preapprove CUSO activities will not 

become applicable until April 18, 2011, 

so as to provide time for application to 

NCUA and NCUA review. Further, the 

final rule will permit a corporate an 

additional 12 months to extricate itself 

from an impermissible CUSO, if the 

corporate can demonstrate that, on the 

date of publication of the final rule, (1) 

the CUSO was actively engaged in the 

activity, and (2) the activity met all the 

requirements of § 704.11 as that rule 

existed prior to effective date of final 

rule. 

A few commenters stated that, for 

state chartered corporates, the states 

should determine what CUSO activities 

were appropriate. One commenter 

stated that NCUA should retain only the 

authority to ‘‘restrict an activity that is 

determined to present an undue 

material risk to the insurance fund.’’ 

It is the intent of the Board that NCUA 

will review corporate CUSO activities 

for their potential impact on the 

insurance fund. Unfortunately, the 

Board cannot know in advance every 

sort of activity that a CUSO might wish 

to engage in that might have a negative 

impact on the NCUSIF. Accordingly, the 

proposed preapproval process is 

necessary. This is particularly true given 

that corporate CUSO activities present 

greater systemic risk to the credit union 

system, and the NCUSIF, than natural 

person credit union CUSO activities. 

Many commenters wanted to know if 

existing CUSOs, and existing activities, 

would be exempt from the approval 

process (i.e., grandfathered). Several 

commenters stated that previously 

approved corporate CUSOs and CUSO 

activities should be added to NCUA’s 

approved list of CUSO activities in the 

proposed rule text; two commenters 

stated that NCUA is ‘‘aware’’ of current 

CUSO activities, and so should 

preapprove those current CUSO 

activities in the regulation. Another 

NPCU stated that a corporate should 

simply notify NCUA of what CUSOs it 

had and what they were doing and 

should not have to seek any NCUA 

approval, and that NCUA could obtain 

all the information it needs about the 

CUSO from ‘‘public’’ sources. 

The Board will not be grandfathering 

preexisting CUSO activities. NCUA has 

not previously approved any existing 

CUSO activities, and is not necessarily 

fully aware of all activities that 

corporate CUSOS currently undertake or 

intend to undertake. Many CUSOs are 

privately held, and public sources 

provide insufficient information about 

what these CUSOs are doing. 

704.11(g) Written Agreement With 

CUSO 

704.11(g)(5) Agreement to Provide 

NCUA Expanded Access 

The proposal also amends NCUA’s 

CUSO access authority, currently 

limited to the CUSO’s ‘‘books, records, 

and any other pertinent 

documentation,’’ to include access as 

well to a CUSO’s ‘‘personnel, facilities, 

and equipment.’’ 

Several commenters objected to the 

proposed expansion of NCUA access to 

a corporate CUSO, most believing it was 

overly intrusive and disruptive. Some of 

these commenters who disliked the 

proposed NCUA access did 

acknowledge that corporates might 

shunt nonperforming assets or 

problematic activities off to CUSOs, or 

that some particular corporate CUSO 

activities might pose particular risk to 

corporates or NPCUs, and these 

commenters generally thought that 

perhaps NCUA should be able to obtain 

access to corporate CUSOs, but only for 

‘‘material’’ risks. One of these 

commenters stated that ‘‘for example, 

CMBS and SimpliCD may pose the 

threat of material losses in contrast to a 

corporate’s minority interest in MDC or 

CUDL.’’ None of these commenters, 

however, specified how, or by whom, 

such materiality would be determined. 

As these commenters acknowledge, 

the NCUA is concerned about the 

potential migration of activities and risk 

from the corporates to their CUSOs. If 

the NCUA believes it needs access to a 

particular CUSO, it cannot be placed in 

the position of arguing with the 

corporate, or the CUSO, about whether 

the perceived risk is ‘‘material.’’ 

Accordingly, the Board declines to 

adopt that standard for CUSO access. 

Some commenters expressed concern 

that the expanded NCUA access 

envisioned for corporate CUSOs might 

cause third party service providers to 

decline credit union investment for fear 

of being categorized as a CUSO. In 

response, the Board notes that service 

providers cannot generally accept direct 

credit union investment without 

becoming CUSOs, but that the CUSOs of 


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natural person federal credit unions are 

permitted to invest in non-CUSO service 

providers under certain circumstances. 

See 12 CFR 712.5(r). If a corporate wants 

to invest a minimal amount in a third 

party service provider, but insulate the 

service provider from NCUA access and 

oversight, the corporate can request 

approval from NCUA to add such an 

investment activity above as an 

approved corporate CUSO activity. 

Before approving such a CUSO 

investment activity, however, the 

corporate or its CUSO would have to 

explain the arrangement, including the 

extent of the proposed investment by 

the CUSO in the service provider and 

why NCUA access to the particular 

service provider is not necessary to 

ensure protection of the NCUSIF. 

Some commenters thought NCUA did 

not have the expertise to examine CUSO 

activities, or that regulation by state 

regulators, or that NCUA access to 

CUSOs through NPCU FCU owners, 

would be sufficient. In fact, NCUA 

doubts that it would ever become the 

primary regulator of a CUSO, or would 

conduct routine exams of any particular 

CUSO. The intent of the provision is to 

ensure that NCUA can get quick and 

complete access to a CUSO should the 

need arise. 

Some commenters believe that access 

by NCUA would only be appropriate 

where the corporate has a ‘‘controlling 

interest,’’ as opposed to a minority 

interest. The Board disagrees. Three or 

four corporates, or corporates and other 

credit unions, could form a CUSO 

where no one credit union had a 

controlling interest, and this CUSO 

could present the same risk to the credit 

union system as a CUSO that is 

controlled by one corporate. 

One corporate commenter stated that 

the proposal ‘‘appears to give the NCUA 

expanded authority over a CUSO simply 

by virtue of a corporate credit union 

holding stock in a CUSO.’’ This 

commenter did not see why a corporate 

CUSO should receive different NCUA 

supervision than a natural person credit 

union CUSO. This commenter does not 

understand that NCUA has long 

required, for both natural person FCU 

CUSOs and corporate CUSOs, that the 

CUSOs permit NCUA access to their 

books, records, and documentation. See, 

e.g., 12 CFR 712.3(a)(3). Given the 

expanded rule that corporate CUSOs are 

likely to play in the future of the credit 

union system, the proposal ensures that 

NCUA has access commensurate with 

the systemic risk that corporate CUSOs 

may present. 

Accordingly, and except as described 

above, the Board adopts the final 

§ 704.11 as proposed. 

Section 704.14 Representation 

Proposed Revisions 

The proposal required that all 

corporate board members hold either a 

CEO, CFO, or COO position at their 

member credit union or other member 

entity. The proposal also required that 

a majority of a corporate’s board 

members be representatives of natural 

person credit union members and that 

individual board members, and the 

organizations they represent, be limited 

to no more than six consecutive years of 

board service. In addition, the proposal 

prohibited any person from sitting on 

the boards of two or more corporates at 

the same time, and would preclude a 

single organizational member from 

having more than one individual 

representative on the board of any given 

corporate. Some aspects of the proposal, 

such as the requirement that a majority 

of the corporate board be representatives 

of natural person credit unions, would 

be phased in over time. The provisions 

governing term limits would have taken 

effect at the time of the next election to 

the board, so that no currently sitting 

director would have to resign before his 

current term expired, regardless of the 

length of time he had been on the board. 

General Comments on the Proposal 

Some commenters asserted that 

NCUA’s efforts to impose limits or 

standards in the area of board 

membership were excessive and beyond 

the scope of what was appropriate for 

the regulator. Many stated that attempts 

to regulate in this area usurped the 

rights of the membership to make their 

own decisions concerning their 

representatives and were inconsistent 

with the democratic principles that are 

fundamental to credit unions. 

The NCUA has long been in the 

business of setting standards for credit 

union governance. The Federal Credit 

Union Act, for example, provides the 

Board with specific authority to 

promulgate standard FCU bylaws, as 

well as general authority to regulate 

both federal credit unions and federally 

insured credit unions, and to protect the 

NCUSIF. See, e.g., 12 U.S.C. 1758. 

Corporate credit unions play a 

fundamental role in the credit union 

system, creating both significant 

systemic benefits and significant 

systemic risks, and the make-up of the 

board of directors has a significant 

impact on the risk to the NCUSIF. 

Accordingly, NCUA has, for many years, 

established governance parameters for 

corporates. While members retain the 

right to elect directors, for example, the 

NCUA has previously imposed 

governance requirements, such as 

standard federal corporate bylaws and 

rules pertaining to conflicts of interest 

and overlapping relationships between 

directors and trade associations that 

apply to all corporates. The proposed 

and final governance provisions are 

consistent, in form and content, with 

these principles. 

Some commenters questioned 

whether the proposed limits and 

restrictions would have made any 

difference in avoiding the losses that 

corporates sustained during the recent 

market dislocation. Whether or not 

these new provisions might have 

affected the size or scope of the losses 

is not determinable. Still, the Board 

reiterates its belief that improving and 

strengthening corporate governance will 

help corporate credit unions to survive 

whatever market conditions they must 

face in the years ahead. 

Another commenter, representing the 

views of state regulators, asserted that 

issues such as director qualifications 

and term limits for state chartered 

entities rightfully come under the 

province of state law, as administered 

by state regulators, and that NCUA has 

no business regulating for all corporates 

in these areas. In response, the Board 

reiterates that part 704 has historically 

been applicable to all corporates, 

including state chartered corporates, 

because of their systemic risk to the 

credit union system and the NCUSIF. 

The final rule contains several 

requirements and references to 

collaboration between NCUA and the 

relevant state regulator when working 

with state chartered corporates, and the 

Board intends the tradition of 

collaboration will continue. 

Some commenters expressed concern 

that NCUA may elect to impose some or 

all of the proposed governance 

requirements on directors of natural 

person credit unions. The Board did 

issue a proposed rule in July, 2010, that 

would extend the golden parachute and 

indemnification provisions originally 

proposed for corporates to all insured 

credit unions. 75 FR 47236 (Aug. 5, 

2010). The Board does not, however, 

presently anticipate that any of the other 

governance provisions in this rule, as 

proposed or finalized, will also be 

extended to natural person credit 

unions. 

A discussion of the specific 

governance revisions adopted in the 

final rule follows. 

704.14(a) Board Representation 

704.14(a)(2) Boards Limited to CEOs, 

CFOs, or COOs 

The proposed 704.14(a)(2) 

prospectively limited those who could 


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64814 Federal Register / Vol. 75, No. 202 / Wednesday, October 20, 2010 / Rules and Regulations 

seek reelection to sitting CEOs, CFOs, or 

COOs. 

A large number of commenters 

opposed the requirement that service on 

the board of a corporate be limited to 

individuals currently holding the 

position of CEO, CFO, or COO of a 

member institution. Several commenters 

noted that many credit unions are run 

by individuals holding the title of 

manager or treasurer, and that the rule 

should be changed to accommodate 

such circumstances. Many commenters 

criticized this provision as being, 

simultaneously, overly restrictive and 

ineffective. These commenters stated 

that there may be many individuals 

with the willingness, capacity, and 

expertise sufficient to enable them to be 

very effective members of the board, but 

who may not hold one of these three 

titles. These commenters believe that 

accountants, attorneys, and capital 

market specialists, for example, may all 

have the type of background that could 

be of value to a corporate credit union. 

Some commenters also supported 

extending the qualifications to retirees. 

Commenters also noted that just having 

one of the three enumerated titles is no 

assurance that an individual will exhibit 

the requisite competence or 

commitment required to be a successful 

member of the board. Many commenters 

questioned whether any evidence exists 

to support the view that any of the 

problems currently afflicting the 

corporate sector can be attributed to 

boards being comprised of individuals 

lacking these titles; many also suggested 

that the imposition of this requirement 

would have done nothing to avert the 

problems that were encountered. 

Several noted, for example, that there 

was no shortage of persons holding 

these titles on the boards of the two 

corporates currently in the 

conservatorship of the NCUA. 

Many commenters complained that, 

by imposing this restriction, the agency 

would be overstepping the boundary of 

appropriate regulatory oversight and 

treading on territory that is more 

properly left to the membership. These 

commenters believe that the democratic 

principles that have always 

characterized the member-owned, 

member-controlled credit union 

movement require that members be 

allowed to make their own decisions 

about whom to elect to the board. Many 

of these commenters suggested that a 

more appropriate approach for NCUA to 

take in this respect would be to impose 

a requirement that nominating 

committees establish guidelines 

concerning education and experience 

criteria that must be met by candidates 

for board positions. Alternatively, many 

commenters proposed that NCUA 

approach this issue by requiring 

corporates to implement mandatory 

training and continuing education 

programs for all directors, possibly 

through a new bylaw provision 

establishing such a requirement. Some 

suggested that NCUA simply impose an 

experience requirement, such as five 

years working in the credit union sector, 

as a prerequisite to eligibility to serve on 

a corporate board; one suggested 

imposing a minimum age for service on 

the board. Another commenter 

suggested imposing a requirement that 

directors may only come from member 

credit unions with a specified minimum 

level of investment in the corporate. 

Several commenters also urged NCUA 

to require corporates to adopt best 

practices for boards to follow in this 

context, including provisions dealing 

with attendance, training, self 

assessment and review. 

A few commenters, typically 

representing smaller credit unions, 

believed that one probable outcome of 

this rule would be that smaller credit 

unions, which typically have relatively 

few employees, could be effectively 

excluded from representation on boards. 

In some cases, for example, the CEO (or 

Treasurer/Manager) may be one of only 

two or three full time employees. The 

credit union may be unable to spare the 

individual or allow him or her to devote 

the type of time commitments required 

of board membership. Consequently, 

according to these commenters, many 

such credit unions may go without 

representation at their corporate. 

Other comments on director 

qualifications included the suggestion 

that NCUA allow directors of corporates 

to be paid for their service on the board. 

Several commenters also suggested that 

NCUA should allow up to 20 percent of 

the board to consist of outside directors, 

specifically to include individuals with 

capital market knowledge and 

experience, provided that NCUA also 

establish and impose appropriate 

safeguards to protect against conflicts of 

interest involving such individuals. One 

commenter suggested extending the 

qualification concept to include 

executive officers, by imposing a 

knowledge or experience requirement 

before individuals may take a position 

with responsibility for finance, 

investment, credit risk and enterprise 

risk areas of the corporate’s business. 

The Board acknowledges that, in the 

case of some natural person credit 

unions, the person fulfilling the role of 

chief executive actually holds the title 

of Treasurer/Manager. This title, which 

is perhaps more common among smaller 

credit unions, has traditionally been 

used as a more descriptive term for what 

the chief executive actually does on a 

day to day basis. In any event, the Board 

recognizes that the same rationale that 

deems a CEO as qualified to serve on the 

board of a corporate should apply 

equally to the case of persons holding 

the Treasurer/Manager title. 

Accordingly, the final rule has been 

expanded to include this position in the 

category of persons qualified to fulfill 

the role of corporate credit union 

director. 

The Board has elected not to make 

additional changes to the proposed rule. 

Although the Board recognizes that 

some individuals who are not employed 

in one of the identified, qualifying 

positions may actually have the ability 

to serve on a corporate board, the Board 

nevertheless believes the listed 

positions (as noted above, expanded to 

include Treasurer/Managers) provide a 

good proxy for the most qualified, 

experienced and capable individuals in 

the credit union industry. These are, in 

other words, the very persons whose 

knowledge, skills and abilities are 

necessary to guide and direct corporates 

through to the next stage of their 

business. 

The Board notes, in this respect, that 

corporate boards are free to retain the 

services of subject matter experts as 

consultants or advisors to the board, to 

the extent that such expertise in a 

particular field, such as capital markets 

or real estate, should be viewed as 

necessary. Corporates are also free to 

propose non-standard bylaw provisions 

that would require, for example, that 

incumbent directors must receive 

periodic training from qualified sources 

on issues of importance to the 

corporate’s operations and business 

model, including such aspects as capital 

markets and investments, asset-liability 

management, accounting and regulatory 

compliance. As the Board noted in the 

preamble to the proposed rule, citing 

Corporate Credit Union Guidance Letter 

2005–02, directors must have 

considerable knowledge and devote 

sufficient time to have an adequate 

understanding of a corporate’s 

operations. If anything, these principles 

have greater urgency in 2010 than they 

had in 2005 when that Guidance Letter 

was first issued. The Board also rejects 

the notion of allocating some portion of 

director slots to outside directors, as this 

would be inconsistent with the 

democratic principles that have always 

been fundamental to the credit union 

industry. 

704.14(a)(3) Term Limits 

The proposed paragraph 704.14(a)(3) 

provided generally that no corporate 


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board members could seek election if, at 

the end of the term to which elected that 

board member would have served more 

than six consecutive years. 

The issue of a mandatory 6-year term 

limit for board members attracted, by 

far, the most comment within the sphere 

of comments directed toward the 

governance aspects of the proposal, with 

hundreds of commenters opposed to the 

proposed term limit. Many commenters 

opposed the notion of term limits 

altogether, arguing that members should 

not be constrained in their ability to 

select individuals of their own choosing 

to serve on the board. These 

commenters argued that NCUA would 

be exceeding its proper role by 

establishing an arbitrary barrier that 

would undermine freedom of choice of 

the membership. Virtually all of the 

persons who commented on the term 

limit proposal asserted that a 6-year 

period is too short. These commenters 

argued that a 6-year period would create 

significant disruption in the 

management and operation of 

corporates, at a time when significant 

challenges to their survival are 

foreseeable and when the full attention 

and concentration of the board will 

most be required. Many commenters 

expressed concern that the effect of the 

term limit provisions would be to 

severely disrupt the institutional 

knowledge available to the board. 

Several pointed out that six years is less 

than the duration of the typical business 

cycle. One commenter predicted that 

the turnover caused by the proposed 

term limit would create ‘‘havoc;’’ and 

many others cautioned against the 

likelihood of unintended consequences 

should the provision become final. 

Some of these commenters may have 

misread the proposal, as it would not 

require any currently sitting director to 

resign his or her seat. Instead, it would 

apply to those seeking re-election. Most 

corporate boards should have staggered 

terms, such that only a percentage of the 

entire board is up for re-election each 

year. Nevertheless, the Board 

acknowledges the concern identified by 

some commenters who indicated that, at 

least initially, the average remaining 

tenure for current board members would 

probably be about three years under the 

proposal. 

Some commenters argued that 

corporate boards are substantially 

different from NPCU boards and that a 

dramatically greater learning curve 

exists before a director can typically 

acquire the level of knowledge and 

expertise he or she needs to make a 

meaningful contribution to the work of 

the board. These commenters believe 

that a 6-year term limit would require 

experienced directors to exit the board 

just at the time they had become 

productive, leaving the corporate 

dangerously exposed to the oversight 

and management of an inexperienced 

board. 

Other points argued by commenters in 

opposition to the 6-year term limit 

included that management officials of 

the corporate would become more 

vulnerable to pressure to implement 

short-sighted policies or programs to 

meet the direction of board members 

who will not be with the corporate longterm. Another point raised by several 

commenters representing or served by 

corporates in small or rural states is that 

the universe of candidates available for 

service on the board is relatively small, 

and that the turnover required by a 6- 

year term limit would create a hardship 

for those corporates to recruit and retain 

capable directors. Some commenters 

called for the grandfathering of service 

by existing board members completed 

before the final effective date of the rule; 

a few asserted that the rule should not 

be applied to cover the term of service 

of an individual appointed to fill an 

unexpired term, lest such individual be 

precluded from seeking two elected 

terms, which the rule would ostensibly 

permit. 

Commenters opposed to the 6-year 

limit suggested a wide range of 

alternatives. Most commenters 

suggested that, if required at all, the 

term limit should be extended to 9 or 12 

years, to allow for the development of 

appropriate experience on the board and 

to dampen the impact of sudden, 

massive turnover; some commenters 

proposed a 10-year or 15-year term 

limit, and one even advocated for 20 

years. Another suggested allowing the 

lesser of four consecutive terms or nine 

years, while another suggested 

abandonment of term limits for directors 

but imposing a specific limit on the time 

a board member may hold a particular 

board office, such as chairman, etc. 

The Board is persuaded by the 

arguments made by commenters to the 

effect that the imposition by rule of 

mandatory term limits for directors is 

inconsistent with the democratic 

principles on which credit unions are 

founded. Accordingly, the final rule 

deletes the proposed paragraph 

704.14(a), with its associated mandatory 

term limit, and renumbers the 

remaining subparagraphs of 704.14(a). 

The Board notes that individual 

corporates may as a matter of policy 

determine that some sort of limitation 

on consecutive service by directors is 

appropriate. In such cases, the corporate 

is free to propose a non-standard bylaw 

imposing reasonable term limits. The 

corporate could also, for example, 

impose an internal requirement that 

board offices, such as board chairman, 

be rotated among directors in 

accordance with a prescribed schedule. 

704.14(a)(4) Individual Service on 

More Than One Corporate Board 

The proposed paragraph 704.14(a)(4) 

prohibited any individual from being 

elected or appointed to serve on the 

board if, after such election or 

appointment, the individual would be a 

director at more than one corporate 

credit union. The NCUA did not receive 

any significant comment on this 

proposal, and there is no change to it in 

the final (other than renumbering to 

(a)(3)). 

704.14(a)(5) Multiple Member 

Representatives on Corporate Board 

The proposed paragraph 704.14(a)(5) 

prohibited any individual from being 

elected or appointed to serve on a 

corporate board if, after such election or 

appointment, any member of the 

corporate credit union would have more 

than one representative on the board of 

the corporate. The NCUA did not 

receive any significant comment on this 

proposal, and there is no change to it in 

the final rule (other than renumbering to 

(a)(4)). 

704.14(a)(10) Majority of Directors 

Must Be NPCU Representatives 

The proposed paragraph 704.14(a)(10) 

required that at least a majority of 

directors of every corporate credit 

union, including the chair of the board, 

must serve on the board as 

representatives of natural person credit 

union members. This requirement 

would be effective 36 months after 

publication of the final rule in the 

Federal Register. The commenters 

addressing this proposal were generally 

supportive, and there is no change to it 

in the final (other than renumbering to 

(a)(9)). 

Accordingly, and except as discussed 

above, the Board adopts the final 

§ 704.14 as proposed. 

(Current) Section 704.19 Wholesale 

Corporate Credit Unions 

The proposal would eliminate the 

current § 704.19, which grants 

wholesale corporate credit unions a 

lesser RE reserve requirement than the 

requirement generally applicable to 

retail corporates. 

No commenters objected to the 

elimination of this provision, and the 

final rule eliminates it. 


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64816 Federal Register / Vol. 75, No. 202 / Wednesday, October 20, 2010 / Rules and Regulations 

(Proposed and Final) Section 704.19

Disclosure of Executive and Director 

Compensation 

The proposal would have required 

that each corporate prepare, on an 

annual basis, a document that discloses 

the compensation, in dollars, of each 

senior executive officer and director. 

Compensation is broadly defined, and 

includes benefits, deferred payments, 

informal arrangements, and payments 

made to acquaintances and relatives. 

Any member of the corporate could 

obtain a copy of the disclosure upon 

request, and the corporate would also be 

required to distribute the information to 

its members at least once a year, in the 

annual report or by some other means 

of its choosing. The proposal would 

have permitted the corporate to include 

with the disclosure additional 

information if necessary to put the 

disclosure in context. With respect to 

any corporate merger, a merging 

federally-chartered corporate would be 

required to affirmatively disclose to 

both NCUA and its members any 

material, merger-related increase in 

compensation (i.e., an increase of more 

than 15 percent of annualized 

compensation or $10,000, whichever is 

greater) for any senior executive or 

director. The proposal would have also 

required a state-chartered corporate to 

make the merger-related disclosure, but 

only to NCUA unless state law requires 

otherwise. 

General Comments 

Many commenters expressed concern 

with this aspect of the proposal. 

Several expressed opposition based 

on privacy, arguing that an executive’s 

compensation is no one’s business 

except his or her own. Others took the 

view that the proposed disclosure 

requirements were punitive in nature 

and would not, had they been in place, 

have had any significant impact on 

helping corporates weather the recent 

market dislocation and economic crisis. 

The Board disagrees that the 

disclosure requirements are in any way 

punitive or violative of legitimate 

privacy expectations. The rule is 

designed to assure that corporate credit 

union members are aware of the level of 

compensation paid to senior 

management officials. As the Board 

noted in the preamble to the proposed 

rule: 

The member-owners of a corporate credit 

union have a strong financial interest in the 

corporate. The typical corporate member has 

large investments in the corporate and much 

of this investment is at risk, either in the 

form of paid-in capital, membership capital, 

or uninsured shares. The corporate member 

has a powerful interest in ensuring this atrisk investment is properly managed and 

protected. That interest extends both to 

ensuring the corporate provides proper 

financial incentives to its managers to do a 

good job and also that the corporate is 

properly expending its funds—information 

categories that both include senior 

management compensation. 

74 FR 65210, 65252 (December 9, 2009). 

The Board believes the members’ 

interest in this information outweighs 

any privacy interests the senior 

managers may have in the information. 

The Board also believes these interests 

exist whether or not such information 

would have mitigated the corporate 

losses sustained during the last two 

years. 

Many commenters predict that the 

disclosures will make recruitment and 

retention of qualified senior executives 

much more difficult, as potential 

candidates will opt for other positions 

not subject to potential disclosure. The 

Board disagrees, as discussed further 

below. Other commenters argued that 

adequate methods currently exist for 

members to gain access to compensation 

information, while several asserted that 

compensation information should only 

be accessible to the NCUA, which ought 

to use its own regulatory powers and 

oversight to assure that arrangements 

are not unreasonable. Some commenters 

asserted that information should be 

made available only on an aggregate 

basis, or should only be made available 

to members on request, rather than 

disseminated. 

The Board is of the view that 

disclosure on an aggregate basis would 

not provide the level of warranted 

transparency. Further, the Board does 

not believe NCUA’s role should be the 

arbiter of appropriate compensation in 

lieu of the members. 

A few commenters evidently misread 

the disclosure requirement and 

complained that the disclosure should 

not be made to members of the public 

or to the media, which in fact the 

proposal does not require. Other 

commenters called for the rule to allow 

corporates to present the compensation 

information in their own preferred 

format, with contextual information, 

which is also permissible under the 

current proposal. One commenter asked 

for a definition of the term 

‘‘compensation’’ for purposes of the 

required disclosure. The proposed rule, 

however, does contain a detailed 

definition of ‘‘compensation’’ in § 704.2. 

704.19(a) Annual Disclosure 

The proposal required that corporates 

must annually prepare and maintain a 

disclosure of the compensation, in 

dollar terms, of each senior executive 

officer and director. 

Several commenters made the point 

that, as currently defined, the term 

‘‘senior executive officer’’ would extend 

to individuals who may hold a title, 

such as vice president, but who are not 

truly senior level executives with 

program level or operational authority 

or responsibility. Commenters suggested 

that these are not the types of employees 

who ought to be subject to the 

disclosure requirements. Many 

commenters suggested that NCUA 

adjust the rule to limit it to the truly 

senior level executives, for example by 

limiting the disclosure obligation to the 

CEO and the executives who report 

directly to the CEO, or by limiting the 

disclosure to include only the top five 

officials in terms of compensation. 

Another suggestion was to simply 

establish a compensation threshold and 

extend the disclosure obligation to all 

earners receiving income above the 

threshold. Several suggested that NCUA 

follow the SEC rules on identifying 

which are the truly senior level officials 

for purposes of this disclosure 

obligation. Others suggested that NCUA 

should simply adopt and follow the 

approach applicable to those state 

chartered corporates that must file the 

IRS Form 990 compensation 

disclosures. 

The Board agrees that the proposal 

was very broad. In many corporates, 

individuals may hold the title of vice 

president but not necessarily have 

program level or operational authority. 

Mandatory disclosure of compensation 

paid to such individuals would extend 

the concept of transparency beyond 

what the Board considers to be a 

reasonable level. Accordingly, the Board 

has modified the final paragraph 

704.19(a) so that disclosure is required 

only of compensation paid to 

approximately the top ten percent of 

employees with, generally, a minimum 

of three employees who must disclose 

and a maximum of five. Specifically: 

• Final paragraph (a)(1) requires 

corporates with 41 or more employees 

must disclose compensation paid to the 

top 5 most highly paid individuals. 

• Final paragraph (a)(2) requires 

corporates with between 30 and 41 full 

time employees must disclose the 

compensation paid to the 4 most highly 

compensated employees. 

• Final paragraph (a)(3) requires 

corporates with 30 or fewer full time 

employees must disclose compensation 

paid to the 3 most highly paid 

individuals. 

In addition, final paragraph (a)(4) 

requires that compensation paid to the 

corporate’s chief executive officer must 


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27The final rule also requires a corporate get to 

200 BP in 10 years. We expect that a corporate that 

can get to 100 BP in 6 years has a reasonable chance 

to get to 200 BP in 10, particularly since the RE 

itself will start generating earnings. Also, the 

following modeling assumes a clean sheet balance 

sheet, that is, that the corporate is able to sell those 

assets on its existing balance sheet that cause it to 

violate the final corporate rule or that carry the 

possibility of significant future credit losses. The 

Board realizes that some corporates may be unable 

to entirely clean their balance sheet of such legacy 

assets. As discussed above in the Legacy assets 

section, NCUA might grant these corporates waivers 

of some corporate rule requirements, including a 

waiver of the maximum allowable time to build the 

retained earnings required by this regulation. Any 

waiver involving the required retained earnings 

growth rate, however, will tied to the documented 

amount of losses flowing from legacy assets 

identified in an approved action plan. 12 CFR 

704.1(b). 

also be disclosed, if the chief executive 

officer is not already included among 

the most highly compensated employees 

described in subparagraphs (a)(1) 

through (a)(3). 

The Board also determined to remove 

the reference to directors from 

paragraph 704.19(a), as it is highly 

unlikely that a director, in his or her 

capacity as director, would be among 

the most highly compensated 

individuals at the corporate. 

The Board believes this revised 

compensation disclosure provision 

strikes a reasonable compromise 

between the right of the corporate’s 

members to know the level of 

compensation paid to its senior staff and 

the expectation of privacy that mid and 

junior level executives have concerning 

their personal affairs. Also, as discussed 

in the preamble to the proposed rule, 

the Board has concluded that the 

disclosures in the IRS Form 990 are an 

insufficient substitute for those required 

in this final rule. 

The Board did not receive any other 

significant comment on the proposed 

provisions of § 704.19. Accordingly, and 

except as described above, the Board 

adopts the final § 704.19 as proposed. 

Section 704.20 Limitations on Golden 

Parachute and Indemnification 

Payments 

The proposal would have prohibited 

golden parachutes, that is, payments 

made to an institution affiliated party 

(IAP) that are contingent on the 

termination of that person’s 

employment and received when the 

corporate making the payment is either 

troubled, undercapitalized, or insolvent. 

The proposal would have also generally 

prohibited a corporate, regardless of its 

financial condition, from paying or 

reimbursing an IAP’s legal and other 

professional expenses incurred in 

administrative or civil proceedings 

instituted by NCUA or a state regulatory 

authority where the IAP is ultimately 

found liable. For federal corporates, the 

proposed indemnification limits would 

be in addition to the requirements of 

§ 701.33. 

General Comments 

Most commenters that expressed 

concern about the proposal believed it 

might inhibit the ability of a corporate 

to recruit and retain qualified 

individuals willing to serve as board 

directors. Several commenters stated 

that, unlike their counterparts in the 

banking sector, these individuals serve 

without pay, on a voluntary basis. Some 

commenters expressed concern that 

many such individuals will be 

unwilling to serve as board members if 

they believe their own personal net 

worth is at risk and their corporate is 

unable to offer them protection against 

potentially unlimited personal claims. 

The Board does not agree with these 

commenters. First, although most 

individuals who serve on the boards of 

corporates are technically 

uncompensated volunteers, they are, in 

fact, for the most part employees of 

NPCU members who are tagged to serve 

at the corporate by their NPCU and who 

do so as part of their responsibilities to 

the NPCU. So if the NPCU asks them to 

serve, they will. Second, the 

indemnification limitations in the 

proposal apply only to administrative 

enforcement actions brought by the 

NCUA or another appropriate regulator. 

Such actions, which often take the form 

of either a removal action or an attempt 

to prohibit an individual from serving 

on behalf of an insured depository 

institution in the future, do not typically 

threaten the targeted individual with 

‘‘unlimited’’ personal liability. In 

addition, the Board notes that paragraph 

704.20(a)(9) does allow for the purchase 

of director and officer liability insurance 

to protect the director. Finally, 

paragraph 704.20(e) of the proposal 

permits a corporate, if it makes a good 

faith determination that the affected 

director was acting in a manner he or 

she believed to be in the best interests 

of the institution, to make reasonable 

indemnification payments subject to the 

director’s written agreement to 

reimburse the corporate should the 

director ultimately be found liable. As a 

technical clarification, the final rule 

replaces the word ‘‘institution’’ with the 

word ‘‘membership’’ in paragraph 

704.20(e)(1)(i). See 75 FR 15574, 15575 

(March 29, 2010) and 71 FR 77150, 

77155 (Dec. 22, 2006). Accordingly, and 

except as described above, the Board 

adopts the final § 704.20 as proposed. 

D. Part 709—Involuntary Liquidation of 

Federal Credit Unions and Adjudication 

of Creditor Claims Involving Federally 

Insured Credit Unions In Liquidation 

The proposed rule revised the payout 

priority of 709.5(b)(7) to reference the 

capital priority option set forth in 

Appendix A. The final rule further 

amends the payout priority to clarify 

that no claim is available for capital 

accounts or instruments depleted in a 

year prior to the date of liquidation. 

This is consistent with the final 

amendments to Model Form A in 

Appendix A, which include disclosure 

language that depleted capital has no 

claim against the liquidation estate for 

claims filed beyond the fiscal year of 

depletion. For clarity, and to reduce the 

potential ambiguity associated with 

‘‘fiscal year,’’ the final rule also 

substitutes ‘‘calendar year’’ for ‘‘fiscal 

year.’’ The final rule contains a similar 

amendment to § 709.5(b)(9). 

Part 747—Administrative Actions, 

Adjudicative Hearings, Rules of Practice 

and Procedure, and Investigations 

Subpart M—Issuance, Review and 

Enforcement of Orders Imposing Prompt 

Corrective Action on Corporate Credit 

Unions 

The proposal would add a new 

subpart M to part 747, setting forth the 

procedures and due process available in 

connection with the PCA provisions of 

proposed § 704.4. 

The Board received very little 

comment on proposed subpart M, and 

the final rule adopts subpart M as 

proposed. 

IV. Analysis of the Final Investment, 

Credit Risk, and ALM Provisions 

The final rule requires that corporates 

strive to achieve 100 BP of retained 

earnings (RE) in the first six years. Of 

course, some corporates already have 

some amount of RE, and so achieving 

this 100 BP after six years may not be 

a challenge for them. For those that 

currently have little or no RE, they must 

earn about 17 BP a year on average to 

meet the 6-year mark. This section 

illustrates how a corporate might 

structure its investment portfolio to 

satisfy the RE growth requirements 

while complying with the new 

investment, credit risk, and ALM 

provisions in the final rule.27 The intent 

of this section is to demonstrate that 

there are multiple possible approaches 

to portfolio construction available to 

corporates under the rule. NCUA does 

not promulgate or endorse a preferred 

asset allocation or structure. 

Several public commenters wrote 

about the ability of a corporate to 

achieve the necessary RE growth under 

the restrictions of the rule, and some of 


emcdonald on DSK2BSOYB1PROD with RULES2
64818 Federal Register / Vol. 75, No. 202 / Wednesday, October 20, 2010 / Rules and Regulations 

28Both the Southwest and Magnus comment 

letters were dated February 17, 2010. These public 

comment letters, as with all public comment letters 

on proposed NCUA regulations, are available on 

NCUA’s Web site at http://www.ncua.gov. 

Additionally, the Magnus comment letter first 

appeared on the blog http:// 

www.unrealizedlosses.blogspot.com and was likely 

drafted by the author of that blog. 

29The ACCU analysis was provided to NCUA in 

an email from then ACCU Executive Director Brad 

Miller to Director, OCCU, Scott Hunt, Subject: 

ACCU Part 704 Analysis, dated February 22, 2010. 

For an example of a public comment letter that 

employs this particular ACCU portfolio, see the 

public comment letter from the California and 

Nevada Credit Union Leagues, dated February 17, 

2010. 

30This balance sheet differs from the one 

described by NCUA in the proposed rule. Changes 

in the final rule, such as the prohibition on private 

label RMBS, would affect that earlier hypothetical 

balance sheet. 

31The final rule permits the actual WAL of 

Treasuries, Agency RMBS, and Agency GSEs to be 

reduced by a factor of 0.5 for purposes of the two 

WAL calculations. Accordingly, this 4-year WAL 

will be reduced to 2.0 years, and on the extension 

test, the 7-year WAL will be reduced to 3.5 years. 

32 Given today’s low rate environment, NEV 

volatility should not be significant even with the 

existence of interest rate caps. 

these commenters provided sample 

corporate investment portfolios. NCUA 

identified 12 different public comment 

letters with ‘‘model’’ investment 

portfolios, that is, investment portfolios 

recommended by the commenters as 

appropriate for corporates going 

forward. Among these 12 comment 

letters there were 3 unique, model 

portfolios. One unique portfolio was 

submitted by Southwest Corporate FCU 

and another by Magnus Enterprises.28 A 

third portfolio was submitted by 10 

different commenters. This latter 

portfolio was originally provided to 

NCUA by the Association of Corporate 

Credit Unions (ACCU).29

To analyze the efficacy of this final 

rule, this section first constructs a 

hypothetical corporate balance sheet 

that satisfies the restrictions of the final 

rule, and then demonstrates that this 

portfolio generates the necessary 17 BP 

of earnings growth per year. This 

section then includes a second 

hypothetical balance sheet, with a 

different asset allocation, that also 

generates sufficient RE. The section then 

examines the complete model balance 

sheets submitted by Southwest FCU, 

Magnus, and the ACCU. Each of these 

balance sheets uses a different asset 

allocation from both the NCUA 

hypothetical balance sheets and the 

other two model balance sheets. The 

analysis shows that each of these three 

unique balance sheets either does—or 

can easily be modified to—comply with 

the requirements of the final rule, and 

that each of these portfolios can 

generate more than enough RE inside 

the given balance sheet to meet the 17 

BP annual RE growth requirement. 

A. Hypothetical Balance Sheet #1 

NCUA constructed a balance sheet 

with the following asset allocation, 

liability allocation, WAL, capital, and 

spread characteristics: 30

HYPOTHETICAL BALANCE SHEET #1 

Sector 

Percent of 

balance sheet 

(percent) 

Spread to LIBOR 

(basis points) 

WAL 

(years) 

WAL in 50% prepayment slowdown 

(years) 

Assets 

FFELP Student Loans ..................................................... 10 33 3 3 .8 

ABS—Autos ..................................................................... 5 15 2 2 .5 

ABS—Credit Cards .......................................................... 10 25 3 3 

Bonds—Corporate ........................................................... 20 82 3 .5 3 .5 

Agency RMBS ................................................................. 15 45 31 4 7 

Overnight Investments ..................................................... 40 0 0 0 

Total .......................................................................... 100 29 .7 1 .7 2 .03 

Equity and Liabilities 

Overnight Shares ............................................................. 36 ¥10 ................................ ................................

Term Certificates ............................................................. 60 0 ................................ ................................

Member Capital ............................................................... 4 0 ................................ ................................

Total .......................................................................... 100 ¥3 .6 ................................ ................................

Net Interest Income (basis points) ........................... ................................ 33 .3 ................................

Model Balance Sheet Compliance With 

the Final Corporate Rule 

NCUA constructed the asset 

allocation so that it would comply with 

the restrictions of the final rule. 

Specifically: 

• All NRSRO ratings are AA or better. 

• There are no private label RMBS. 

• Sector limits are observed. 

• The structured securities are 

primarily floating rate, so the IRR NEV 

test of 704.8(d) is satisfied.32

• The portfolio has a WAL of 1.7 

years, which is under the 2.0 year limit 

in 704.8(f). The final rule permits the 

actual WAL of Treasuries, Agency 

RMBS, and Agency GSEs to be reduced 

by a factor of 0.5 for purposes of the two 

WAL calculations. Accordingly, this 

agency RMBS WAL will be reduced to 

2.0 years. 

• Under the prepayment slowdown 

scenario, the WAL extends only to 2.03 

years, well within the 2.25 year limit 

required by 704.8(g). Corporate bonds 

do not prepay, so the extension test does 

not affect them; and the agency RMBS 

WAL of 7.0 years will be reduced, when 

multiplied by the 0.5 factor, to 3.5 years. 

More information about the assets, 

liabilities, and capital used in the 

balance sheet follows. 

Assets Used in the Balance Sheet 

NCUA has allocated investments 

across five distinct asset classes that are 

permissible corporate investments. For 

diversification purposes, no asset sector, 

other than overnight investments, 

exceeds 20 percent of the portfolio 

(although the final rule permits greater 

concentration in several of these 

sectors). NCUA determined that 40 

percent of the current average corporate 


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33For example, a Fannie Mae sequential pay 

floating rate CMO, CUSIP 31398RV51, with a 6.5 

percent cap. 

34Examples of particular securities follow. 

ABS—Auto. 

Example 1. CUSIP 34529LAD6, Issuer Ford Credit 

Auto Owner Trust, WAL 2Yr, 1st Settle Date 4/28/ 

10, Coupon 1.32%, Maturity 8/14/10. On its 

settlement date 4/28/10, the price was 99.50 and the 

yield 1.5720. LIBOR 1Yr 1.2% (estimated). Spread 

over LIBOR: 37 BP Example 2. CUSIP 06052MAB1, 

Issuer Bank of America Auto Trust, WAL 1Yr, 1st 

Settle Date 6/24/10, Coupon 0.91%, Maturity 8/15/ 

10. On its settlement date 6/24/10, the price was 

98.50 and the yield was 2.4574, LIBOR 1Yr 1.2 

(estimated). Spread over LIBOR: 125 BP 

ABS—Credit Card. 

Example 1. CUSIP 02582JFT2, Issuer American 

Express, WAL 2.9Yr, 1st Settle Date 6/9/09, Coupon 

1.69094%, Maturity 5/15/14. On its settlement date 

6/9/09, the price was 100 and the yield was 1.6415. 

USD SWAP 3Year 1.30 (estimated). Spread over 

LIBOR: 34 BP 

Example 2. CUSIP 36159JCC3, Issuer GE Capital, 

WAL 3Yr, 1st Settle Date 6/24/10, Coupon 2.21%, 

Maturity 6/15/13. On its settlement date 6/24/10, 

price 99.22, yield 2.4950, USD SWAP 3Yr 1.30 

(estimated). Spread Over LIBOR: 120 BP 

ABS—Student Loan 

Example 1. ISIN USU82908AA93, Issuer SLM 

Student Loan Trust, WAL 0.9yr, 1st Settle Date 

7/22/10, Coupon 2.25%, Maturity 7/22/11. On its 

settlement date 7/22/10, price 100.10, yield 2.1540, 

LIBOR 1Y 1.20 (estimated). Spread over LIBOR: 95 

BP 

Example 2. CUSIP 78445MAA8, Issuer SLM 

Student Loan Trust, WAL 3.4Yr, 1st Settle Date 

3/11/10, Coupon 3.2%, Maturity 3/11/2014. On its 

settlement date 3/11/10, price 99.85, yield 3.2692, 

USD SWAP 3Yr 1.30 (estimated). Spread over 

LIBOR: 196 BP. 

All these securities are rated AA- or higher. 

credit union portfolio has maturities of 

less than 180 days, and NCUA used this 

for the overnight allocation percentage. 

Forty percent is also the median 

percentage allocation in the public 

commenter models. 

The model uses current spreads over 

LIBOR, determined as of early August, 

2010, for each asset class. NCUA used 

two primary sources of data for its 

spread numbers. The first source was 

Bank of America//Merrill Lynch’s, US 

Securitization Research, Securitization 

Weekly, dated August 6, 2010. The 

second source was Wells Fargo 

Securities’ Libor/Swap spreads for July 

30, 2010. These sources were 

supplemented with actual market 

observations for a number of agency 

RMBS.33 NCUA believes that these 

spread numbers represent typical 

spreads, although NCUA did find some 

particular CUSIPs of the same asset 

type, credit quality, and WAL that had 

better spreads.34

The FFELP student loan ABS spread 

data assumes a generic AAA-rated bond 

with a 3-year WAL. The auto ABS 

spread data assumes a generic AAArated bond backed by prime automobile 

loans with a 2-year WAL. Auto ABS 

backed by subprime automobile loans 

are also available in the market at wider 

spreads but these were not included in 

the portfolio. The credit card ABS 

spread data is for a generic AAA-rated 

bond with a 3-year WAL. The corporate 

bond portion of the portfolio assumes an 

equal allocation of generic AA-rated 

2-year bonds paying 67 BP over LIBOR 

and generic AA-rated 5-year bonds 

paying 97 BP over LIBOR. 

The WAL and WAL extension 

calculations above reflect the 0.5 

reduction factor for the agency RMBS. 

The WAL life of the portfolio without 

the application of this factor would be 

1.95 years and the WAL assuming a 50 

percent slowdown in prepayments 

would be 2.40. This illustrates the 

benefit to the corporates of permitting 

longer WALs for U.S. Government and 

Agency securities. 

Liabilities Used in the Balance Sheet 

The overnight share allocation of 36 

percent is based on the lowest observed 

month-end level of corporate overnight 

shares during the past 10 years. The 

average percentage of overnight shares 

for the five years leading up to the 

implementation of the corporate share 

guarantee was higher, ranging from 42 

to 49 percent. The 36 percent figure is 

also comparable to the median of 42.5 

percent in the models submitted by 

commenters. Many corporate credit 

unions use the federal funds effective 

rate for setting dividend rates on their 

overnight accounts; and NCUA used 

this benchmark to set the overnight rate 

at LIBOR—10. 

The certificate allocation of 60 

percent constitutes the remaining 

liabilities after setting overnight shares 

at 36 percent and contributed capital at 

4 percent. The hypothetical balance 

sheet assumes certificates pay LIBOR 

flat, which is a reasonable spread over 

agency securities with similar maturities 

and is consistent with the assumptions 

in the models submitted by Southwest 

and the ACCU. 

Contributed Capital Used in the Balance 

Sheet 

The balance sheet model assumes 

contributed capital is priced at LIBOR 

flat. Some, but not all, commenter 

models priced contributed capital at 

spreads as high as 150 BP or 200 BP 

over LIBOR. Most capital instruments 

pay dividends based on the financial 

condition and performance of the 

underlying organization rather than a 

strict formula, and the same should be 

true for corporate credit unions. 

Accordingly, NCUA believes that 

members should accept a lower 

dividend payment on their PCC and 

NCAs until such time as their corporate 

is able to accumulate sufficient earnings 

to satisfy the RE requirements of the 

final rule. 

There are various ways that a 

corporate could structure its PCC and 

NCA dividend provisions to facilitate a 

corporate’s RE goals. One way would be 

for a corporate to offer capital 

instruments with a spread of 100 to 200 

BP above LIBOR, but which also clearly 

notes that in any given year, should the 

corporate fall short of a particular 

earnings growth goal, the actual 

dividend paid may be reduced as low as 

zero (on a noncumulative basis) to make 

up for the earnings shortfall. To the 

extent that a member receives a reduced 

dividend in a given year, the member 

should consider this reduction as a form 

of fee for services received. 

Model Balance Sheet’s Ability To 

Generate Earnings 

There are three major components to 

the determination of whether a 

corporate can generate earnings and the 

amount of such earnings. One 

component is net interest income (NII), 

which is generally calculated by taking 

the difference between the interest 

generated by the corporate’s loans and 

investments and subtracting off the cost 

of the corporate’s liabilities. The other 

two components are the total noninterest income (TNII)(which is 

primarily fee income) and the operating 

expenses (OE). A corporate’s earnings, 

or net operating income, is then 

calculated using the following equation: 

Net Operating Income (Earnings) = NII 

+ TNII—OE 

Although the income on a corporate’s 

investment feeds into the NII and not 

into either the TNII or the OE, 

assumptions about the latter two terms 

are important in estimating the 

corporate’s ultimate ability to generate 

earnings. Accordingly, before looking at 

a corporate’s asset allocation and the NII 

it can produce, a discussion of TNII and 

OE is in order. For purposes of this 

document we define the difference 

between TNII and OE as net operating 

expenses (NOE), because it will 

generally be a negative number. Then: 

Earnings = NII + NOE. 

For the most recent 12 months ending 

in June, 2010, the average corporate 

TNII was 25 BP, and the average OE was 

40 BP. NOE, then, was a negative 15 BP 

and, for the corporate to generate the 

necessary 17 BP in earnings, it must 

strive to generate 32 BP in NII. 

NCUA believes that approximating 

NOE at negative 15 BP is a good starting 

point for any analysis. The expected 

earnings of this hypothetical balance 

sheet are demonstrated here: 


emcdonald on DSK2BSOYB1PROD with RULES2
64820 Federal Register / Vol. 75, No. 202 / Wednesday, October 20, 2010 / Rules and Regulations 

35Southwest FCU comment letter, p. 24. 36After applying the 0.5 reduction factor to the 

Agency RMBS permitted by paragraph 704.8(h). 

The factor is also applied to the prepayment 

slowdown WAL. 

Hypothetical Balance Sheet #1 (Basis 

points) 

Net Interest Income (NII) (from 

model) ....................................... 33.3 

TNII ............................................... 25 

OE ................................................. 40 

NOE .............................................. (15) 

Net Income From Operations 

(Earnings) .............................. 18.3 

Accordingly, the asset allocation in 

hypothetical balance sheet #1 should 

produce about 18.3 BP of earnings 

growth a year, more than the necessary 

17 BP of annual earnings necessary to 

meet the 6-year RE target. 

Methods To Improve Earnings 

The Board believes that there are 

ways that any corporate, including the 

model corporate earning 18.3 BP a year 

above, can improve its RE growth. For 

example: 

• A corporate might improve its NII 

by improved share pricing. Corporates 

have some measure of control of their 

dividend pricing structure, and they 

need to account for asset yields when 

making decisions on funding strategies. 

• The current positively shaped yield 

curve should improve earnings as 

securities roll down the yield curve. 

• After a corporate has built some 

retained earnings it can, if necessary, 

improve its RE ratio by shrinking its 

assets. 

NCUA also believes that corporates 

have some pricing power over the fees 

they charge their members, and higher 

fees result in higher TNII. In addition, 

corporates can become more efficient, 

reducing their OE. Higher TNII and 

lower OE result in an improved NOE. 

Currently, the average corporate NOE is 

about negative 15 BP, but NCUA 

believes that well-run corporates can 

reduce this NOE number over time— 

making it easier to generate the 

necessary NII to support earnings 

growth at 17 BP annually. 

Historical corporate trends indicate 

that corporate NOE is, in fact, declining: 

2005 2006 2007 2008 2009 2010* 

TNII .................................................................................. 0.26 0.25 0.21 0.22 0.26 0.24 

OE .................................................................................... 0.48 0.46 0.41 0.45 0.43 0.38 

NOE ................................................................................. ¥0.22 ¥0.21 ¥0.19 ¥0.23 ¥0.17 ¥0.14 

* Annualized. 

As the above chart illustrates, 

corporates have seen continued 

improvement in NOE (from ¥0.22 to 

¥0.14) over the past five years. The 

only exception to this trend was in 

2008. In that year, the improvement in 

NOE reversed temporarily, most likely 

due to a one-time spike of 5 BP in 

employee compensation and benefits. 

Absent that one time expense, NOE 

would have been negative 18 BP, right 

in line with the historical trend. 

NCUA recognizes that the TNII, OE, 

and NOE information quoted above is 

average information and not necessarily 

reflective of any particular corporate 

and its business model. The Board 

notes, for example, that for purposes of 

analyzing its forward-looking model 

portfolio, Southwest Corporate FCU 

used TNII of 37.3 BP and OE of 45.3 BP, 

both significantly higher than the 

current corporate averages.35 Yet 

Southwest’s NOE—the difference 

between its TNII and OE—was only 

negative 12 BP. This is right in line with 

the improving corporate trends 

demonstrated above. 

B. Hypothetical Balance Sheet #2 

There are other balance sheets that 

differ from Balance Sheet #1 that should 

generate sufficient earnings going 

forward. For example, by reducing the 

allocation to corporate bonds, and 

increasing the allocation to Agency 

RMBS and adding some commercial 

mortgage backed securities (CMBS), a 

corporate might hold a balance sheet 

like this: 

HYPOTHETICAL BALANCE SHEET #2 

Sector Percent of balance sheet 

Spread to LIBOR 

(basis points) WAL (years) 

WAL in 50% prepayment slowdown 

(years) 

Assets 

FFELP Student Loans ....................................................... 5 33 3 3 .8 

ABS—Autos ....................................................................... 7 15 2 2 .5 

ABS—Credit Cards ............................................................ 8 25 3 3 

Bonds—Corporate ............................................................. 12 82 3 .5 3 .5 

Agency RMBS ................................................................... 18 45 4 7 

CMBS ................................................................................. 10 130 5 5 

Overnight Invest ................................................................. 40 0 0 0 

Total ............................................................................ 100 35 .64 36 1 .81 2 .155 

Liabilities 

Overnight Shares ............................................................... 36 ¥10 ................................ ................................

Term Certificates ............................................................... 60 0 ................................ ................................

Member Capital ................................................................. 4 0 ................................ ................................

Total ............................................................................ 100 ¥3 .6 ................................ ................................

Net Interest Income (NII) .............................................................................. 39 .24 ................................ ................................


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37NCUA believes that Southwest meant this to be 

WAL, not maturity. In any event, the WAL would 

be less than or equal to the maturity. 

37NCUA believes that Southwest meant this to be 

WAL, not maturity. In any event, the WAL would 

be less than or equal to the maturity. 

38NCUA assumes that the commenter 

constructed this portfolio in compliance with the 

NRSRO limits (AA-) and IRR NEV limits. These 

limits exist in the current corporate rule, and the 

final rule does not change the existing base limits. 

39Southwest was concerned about the proposed 

cash flow mismatch sensitivity tests in the 

proposed rule, and its mismatch of 1.18 years 

would have violated one of those tests—but both of 

those tests have been removed from the final rule. 

HYPOTHETICAL BALANCE SHEET #2—Continued 

Sector Percent of balance sheet 

Spread to LIBOR 

(basis points) WAL (years) 

WAL in 50% prepayment slowdown 

(years) 

TNII ............................................................................................................... 25 ................................ ................................

OE ................................................................................................................. 40 ................................ ................................

NOE .............................................................................................................. (15) ................................ ................................

Net Income From Operations (Earnings) ..................................................... 24 .24 ................................ ................................

Again, NCUA constructed this 

portfolio to be in compliance with the 

final rule, including the rule’s 

requirements for asset credit quality, 

sector limits, the 2-year asset WAL 

limit, and the 2.25-year asset extension 

limit. Again, the spread sources used 

include Bank of America//Merrill 

Lynch’s, US Securitization Research, 

Securitization Weekly, dated August 6, 

2010; and Wells Fargo Securities’ Libor/ 

Swap spreads for July 30, 2010. 

The other general assumptions about 

assets, liabilities, cost of capital, and 

TNII, OE, and NOE are also the same as 

in hypothetical #1. Since this Balance 

Sheet #2 earns more than Balance Sheet 

#1, the corporate could possibly pay its 

capital contributors more on their 

contributed capital. In fact, the 

corporate could pay up to LIBOR +150 

on its contributed capital and still 

generate more than 17 BP of earnings 

each year. 

C. Hypothetical Balance Sheet #3 

(Southwest Corporate Federal Credit 

Union) 

Southwest Corporate Federal Credit 

Union (Southwest) submitted the 

following model balance sheet as part of 

its comment letter: 

HYPOTHETICAL BALANCE SHEET #3—SOUTHWEST MODEL (FROM ANNEX C) 

[All data in this table supplied by Southwest] 

Investments and loans Percent of 

balance sheet Spread to LIBOR Maturity 37

(Years) 

Investments 

Loans ..................................................................................................................... 7 40 2 .0 

ABS—Autos ........................................................................................................... 20 35 2 .0 

ABS—Credit Cards ................................................................................................ 20 38 2 .0 

FFELP Student Loans ........................................................................................... 18 32 2 .0 

Agency ................................................................................................................... 10 10 1 .0 

Overnight ............................................................................................................... 25 ¥12 0 .0 

Total ................................................................................................................ 100 21 .2 1 .40 

Liabilities 

Overnight Shares ................................................................................................... 65 ¥18 0 

Certificates ............................................................................................................. 31 0 0 .7 

Member Capital ..................................................................................................... 4 150 0 .0 

RUDE ..................................................................................................................... 0 ................................ 0 .0 

Total ................................................................................................................ 100 ¥5 .7 0 .22 

Asset/Liability WAL mismatch (years) .............................................................................................. 1 .18 ................................

Net Interest Margin (bps) ................................................................................................................. 26 .9 ................................

Net Fee Income (bps) ...................................................................................................................... 37 .3 ................................

Operating Expenses (bps) ................................................................................................................ 45 .3 ................................

Net Income From Operations (bps) ................................................................................................. 18 .9 ................................

Southwest stated that its model 

balance sheet has about $7 billion in 

assets and is based on Southwest’s 

recommendations and current business 

model. 

Model Balance Sheet Compliance With 

the Final Corporate Rule 

This model appears to comply with 

the investment, credit risk, and ALM 

provisions of the final rule.38

Specifically: 

• The asset allocation complies with 

the sector limits of 704.6(d). 

• The WAL of the assets, at 1.40 

years, is less than the 2.0 year limit in 

704.8(f).39

• The portfolio contains no privatelabel RMBS, which are prohibited under 

the final rule 704.5(h). 

• The portfolio complies with the 

new asset extension test, that is, the new 


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2.25 year limit in 704.8(g) on WAL of 

assets assuming a 50% prepayment 

slowdown. While Southwest did not 

discuss this new extension test— 

because it was not in the proposed 

rule—Southwest’s balance sheet mix 

indicates the portfolio would meet this 

requirement. For example, the most 

likely securities to have any extension 

risk are those with student loans and 

mortgages. If upon prepayment 

slowdown the student loan ABS extends 

to 3 years (market indications are an 

extension to 2.6 years) and the agency 

securities (assuming agency MBS) 

extend to 4 years (a 1.5 year WAL 

security was observed to extend only to 

2.7 years), the WAL of the portfolio is 

still only 1.96 years. Even then, the 

WAL for agency mortgages can be 

reduced by a factor of 0.5 under the 

final rule, 704.5(h). Applying the 0.5 

factor to these securities, the WAL of the 

extended portfolio would drop to only 

1.76 years, again well below the 2.25 

year limit. 

Model Balance Sheet’s Ability To 

Generate Earnings 

As recognized by Southwest in its 

comment letter, this balance sheet 

generates sufficient income to pass the 

retained earnings goals established by 

the new corporate regulation. Projected 

retained earnings are well above 17 BP 

a year. For example, after 3 years, 

Southwest projected the RE growth at 57 

basis points, and after 6 years Southwest 

projected an RE of 113 basis points. 

NCUA notes that this model generates 

sufficient earnings even when capital 

holders are paid at LIBOR +150. 

Earnings would be enhanced if the rate 

of return on capital was reduced, even 

temporarily. 

Effect of Changes in the Spreads Over 

Time 

Southwest expressed some concern 

that spreads, as they existed when it 

wrote to NCUA in February 2010, might 

tighten over time, thus reducing a 

corporate’s ability to generate earnings. 

In Annex D of its letter, Southwest 

analyzed its model balance sheet under 

‘‘historic’’ spread levels and concluded 

that its model asset allocation would not 

produce sufficient earnings at those 

historic levels. 

NCUA agrees that spreads going 

forward will have an impact on a 

corporate’s ability to generate earnings. 

It is impossible, however, to predict the 

future—spreads could tighten, widen, or 

even stay the same for a protracted 

period. And even if spreads change, it 

is uncertain as to the speed of change. 

In fact, no one can say if spreads will 

ever return to ‘‘historical’’ levels, or even 

what exactly those historical levels are. 

For example, Southwest’s letter 

indicates it based its Annex D analysis 

on the past 9 years of historical data, 

and concluded that the spread over 

LIBOR for an Agency MBS was only 6 

BP during this time period. Using a 

longer historical view of the past 20 

years, however, Bloomberg data suggests 

the average 1-year Agency MBS spreads 

were much higher than 6 BP, with an 

average Agency MBS spread over this 

20-year period of about 22 BP and a 

median of about 16 BP. 

Corporates will have to adapt to 

changing spreads, including variances 

within asset classes. As suggested by 

Southwest FCU, its model asset 

allocation would have worked in 

February 2010, and NCUA believes the 

asset allocations in hypotheticals #1 and 

#2 above will work given today’s 

spreads. The Board believes that 

corporates can adapt to changes in 

spreads, and the WAL limits in the final 

rule will provide corporates additional 

flexibility to shift allocations. 

D. Hypothetical Balance Sheet #4— 

Magnus Enterprises Model 

Magnus proposed a different 

investment model that grows RE at a 

successful rate: 

HYPOTHETICAL BALANCE SHEET #4—MAGNUS MODEL

[All data in this table supplied by Magnus] 

Investments and loans Portfolio 

percentage 

LIBOR/EDSF 

spread 

Total WAL 

(years) 

Assets 

Agency Mortgages ................................................................................................. 35 60 4 

ABS—Autos ........................................................................................................... 10 25 0 .6 

ABS—Credit Cards ................................................................................................ 10 30 1 

FFELP Student Loans ........................................................................................... 15 25 0 .5 

Overnight Investments ........................................................................................... 30 ¥5 0 .003 

Total ................................................................................................................ 100 28 .75 1 .6359 

Liabilities 

Overnight Shares ................................................................................................... 30 ¥5 0 .003 

Certificates ............................................................................................................. 70 ¥5 0 .5 

Total ................................................................................................................ 100 ¥5 0 .3509 

Net Interest Income .......................................................................................................................... 33 .75 ................................

Model Balance Sheet Compliance With 

the Final Corporate Rule 

Again, this Magnus Balance Sheet #4 

appears to comply with the investment, 

credit risk, and ALM provisions of the 

final rule. The portfolio contains no 

private label RMBS and complies with 

the final sector limits. The WAL of the 

assets, at 1.63 years, is under the 2-year 

WAL limit. In fact, since the final rule 

permits agency securities to multiply 

their actual WAL by a factor of 0.5 

before applying the 2-year WAL, the 

effective WAL of this portfolio is well 

under 1.63 years. The asset liability 

mismatch of 1.285 years is not relevant, 

as the proposed cash flow mismatch 

tests have been removed from the final 

rule. And NCUA also believes that these 

assets, if prepayments slowed by 50 

percent, would not cause the portfolio 

WAL to exceed 2.25 years, thus 

satisfying the asset extension test of 

704.8(g). 


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Model Balance Sheet’s Ability To 

Generate Earnings 

The Magnus balance sheet generates a 

net interest income of 33.75 BP. 

Magnus’ letter discusses corporate 

operating expenses. The author believes, 

as NCUA does, that corporates can and 

will become more efficient. He asserts 

an operating expense level of 30 BP is 

achievable after cost reductions and 

potential mergers in the coming years. 

For purposes of analyzing the Magnus 

model, however, NCUA used the 

current average, annual ratio of 

corporate operating expenses to daily 

average net assets of 40 BP. 

Magnus believes that corporates have 

control over their cost of capital. 

Specifically, he says that: 

I am not troubled by the lack of cost of 

capital in [NCUA’s proposed rule] margin 

analysis. Any new capital that comes into the 

corporates is going to come from NPCUs and 

they all understand that their capital 

investment isn’t really a traditional 

investment that pays a high annual yield. 

Instead, it’s an investment that may not pay 

dividends for 10 years or more * * *. 

Members who value the cooperative nature of 

their relationship with their corporate should 

be willing to forsake the dividend on PCC 

and NCA in the short run in order for the 

corporate to rebuild retained earnings. 

Magnus letter, p. 4. NCUA agrees with 

this quoted language, particularly the 

last sentence. Accordingly, for purposes 

of analyzing the Magnus model, the 

analysis assumes that capital pays only 

LIBOR flat. 

Magnus’ model does not address net 

fee income. For purposes of analysis, 

NCUA made the same TNII assumptions 

(25 BP) as discussed previously. 

Accordingly, the Magnus investment 

portfolio, with its primary emphasis on 

Agency MBS, would produce an annual 

RE growth of about 19 BP, as follows: 

Analysis of Magnus model (Basis 

points) 

Net Interest Income ...................... 33.75 

TNII ............................................... 25 

OE ................................................. 40 

NOE .............................................. (15) 

Analysis of Magnus model (Basis 

points) 

Net Income From Operations 

(Earnings) .............................. 18.75 

This earnings growth exceeds the 

necessary 17 BP a year. Again, as 

discussed in connection with NCUA’s 

hypothetical #1 above, there are 

multiple potential ways to further 

improve this RE growth. For example, 

the corporate could become more 

efficient, moving toward the 30 BP 

expense level discussed by Magnus; or 

the corporate could use its pricing 

power to increase its fee income or 

reduce its dividends. 

E. Hypothetical Balance Sheet #5— 

ACCU Model 

As mentioned above, a number of 

commenters adopted or referenced a 

model developed by the Association of 

Corporate Credit Unions (ACCU), given 

in the table below: 

HYPOTHETICAL BALANCE SHEET #5—ACCU MODEL

[All data in this table supplied by ACCU] 

Assets Percent of 

balance sheet Spread to LIBOR 

Loans ........................................................................................................................................................... 10 50 

ABS—Autos ................................................................................................................................................. 20 37 

ABS—Credit Cards ...................................................................................................................................... 15 42 

FFELP Student Loans ................................................................................................................................. 5 45 

Structured Agency ....................................................................................................................................... 15 34 

Bank Floaters ............................................................................................................................................... 5 29 

Other Short-term .......................................................................................................................................... 8 12 

CMBS ........................................................................................................................................................... 7 100 

Overnight ..................................................................................................................................................... 15 4 

Total ...................................................................................................................................................... 100 36 

Shares and Equity 

Overnight Shares ......................................................................................................................................... 50 0 

Certificates ................................................................................................................................................... 46 0 

Member Capital ........................................................................................................................................... 4 200 

Rude ............................................................................................................................................................ 0 0 

Total .................................................................................................................................................. 100 8 

Net Interest Margin (basis points) ........................................................................................................ 28 ..............................

Other Income ........................................................................................................................................ 18 ..............................

Operating Expenses ............................................................................................................................. 32 ..............................

Net Income ........................................................................................................................................... 14 ..............................

The ACCU asset allocation varies 

from both the Southwest and Magnus 

allocations. For example, the ACCU 

model includes wider variation in 

investment classes and, as with 

hypothetical #2 above, introduces some 

CMBS. 

Model Balance Sheet Compliance With 

the Final Corporate Rule 

Again, this balance sheet appears to 

comply with the investment, credit risk, 

and ALM provisions of the final rule. 

For example, the portfolio contains no 

private label RMBS, and it complies 

with the final sector limits. 

ACCU did not provide direct 

information about the WAL of its assets. 

However, it did provide data from 

which the asset WAL can be reverse 

engineered. Specifically, ACCU also 

provided this chart: 

NEV Shocks Maximum 

Rates +300 bp .............................. ¥14.0% 


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64824 Federal Register / Vol. 75, No. 202 / Wednesday, October 20, 2010 / Rules and Regulations 

NEV Shocks Maximum 

Credit +100 bp .............................. ¥30.3% 

+Paydowns ¥50% ....................... ¥32.7% 

If a credit shock of 100 BP produces 

an NEV decline of 30 percent from a 

starting NEV of 4 percent, that equates 

to a difference in the WALs of the assets 

and liabilities of about 1.2 years. Given 

that ACCU’s liabilities are half overnight 

and half certificates, and the certificates 

likely have an aggregate WAL of a year 

or less (as do the certificates in both the 

Southwest and Magnus models), the 

aggregate liability WAL of the ACCU 

model is likely less than 0.8 years, 

which would make ACCU’s asset WAL 

less than 2.0 years, satisfying the WAL 

restriction in the final rule. 

As for the asset extension test, ACCU 

indicates that a 100 BP shock to its 

portfolio, assuming a 50 percent 

prepayment slowdown, produces an 

NEV decline of 32.7 percent. This 

equates to an asset extension of less 

than two months, and so the asset WAL, 

with the slowdown, would be less than 

2.25 years. Accordingly, the ACCU 

model satisfies the extension test of 

704.8(g). 

Model Balance Sheet’s Ability To 

Generate Earnings 

ACCU’s bottom line of 14 BP annually 

is 3 BP short of the annual RE growth 

needed under the final rule. Although 

the ACCU model assumes lower net fee 

income than the Southwest model, in 

the ACCU model this lower fee income 

is offset by a lower operating expense 

estimate. 

There are multiple ways a corporate 

starting with the ACCU model can 

adjust its earnings capacity to achieve 

the 17 BP target. For example, 

• The corporate can improve its 

efficiencies and product pricing, as 

discussed earlier. 

• The corporate could change its 

sector weighting slightly. For example, 

if the corporate shifted 5 percent of its 

portfolio from Auto ABS to CMBS, the 

portfolio return would improve by over 

3 BP annually using ACCU’s spreads. 

• ACCU assumed its cost of capital 

would be 200 BP over LIBOR. Again, 

NCUA believes that NPCUs that desire 

corporate services should be willing to 

provide capital at little or no cost, at 

least temporarily. If the cost of capital 

in ACCU’s model was reduced to LIBOR 

flat, for example, that would increase its 

operating income by 8 BP annually and 

put the corporate well over its 17 BP 

annual earnings target. 

Conclusion 

There are multiple, different asset 

allocations available to corporates under 

the restrictions of the new rule that 

should provide corporates the necessary 

earnings flexibility to meet the new RE 

growth requirements. 

V. Further Revisions to the Corporate 

Rule 

As discussed above, NCUA issued its 

proposed revisions to the corporate rule 

back in November 2009, more than ten 

months ago. Since that time NCUA has 

received significant feedback. NCUA 

received formal feedback in the form of 

815 public comment letters with over 

2,600 pages of comments. NCUA also 

received much informal feedback, for 

example, from the credit union industry 

(through numerous town hall meetings 

and webinars), from other federal 

regulators, and from the Kamakura 

Corporation. 

Much of that feedback has resulted in 

changes from the proposed rule to this 

final rule. Some of the feedback, though, 

went beyond the scope of the proposed 

rulemaking. Ideas—even very good 

ideas—that are beyond the scope of the 

proposed rule are not addressed in this 

final rulemaking. Instead, the NCUA has 

considered some of these ideas and 

plans in the near future to issue another 

proposal with further revisions to the 

corporate rule. The Board believes it 

important, though, as corporates and 

credit unions move now to adapt to this 

final rule, that they also have some 

information about what these pending 

proposals are. 

Specifically, the Board will be 

proposing that: 

1. Corporates be subject to internal 

control reporting requirements similar 

to those required under Section 36 of 

the FDI Act (for banks and thrifts) and 

the Sarbanes-Oxley Act of 2002 (for 

public companies). See 12 U.S.C. 

1831m; Public Law 107–204; and 12 

CFR part 363, Annual Independent 

Audits and Reporting Requirements 

(FDIC rulemaking integrating FDI Act 

Section 36 and certain Sarbanes-Oxley 

requirements). 

2. At any given time, an NPCU would 

be limited to membership in one 

corporate of the NPCU’s choice. An 

NPCU could belong to two corporates 

for a short period of time, but only when 

transitioning between those corporates. 

3. The board of directors of a 

corporate must establish a risk 

management committee. The committee 

will include at least one independent 

risk management expert with sufficient 

experience in identifying, assessing, and 

managing risk exposures. 

4. When the TCCUSF makes an 

assessment on FICUs, NCUA would ask 

all corporate members that are not 

FICUs (‘‘non-FICUs’’) to make a 

voluntary contribution to the TCCUSF. 

Corporates will hold a membership vote 

to determine whether any non-FICU that 

fails to make the requested contribution 

should be expelled from the corporate. 

5. Each vote by a corporate’s boards 

of directors must be recorded in the 

minutes so that the vote of each 

individual director is apparent from the 

minutes. 

6. Corporates would be permitted to 

charge their members reasonable onetime or periodic membership fees. The 

fees must generally be proportional to 

the member’s asset size, and a member 

must be given at least six months notice 

of any new fee, or any material change 

to an existing fee. 

In a sense, this final rulemaking is the 

first step in the remolding of the 

corporate rule, and the six proposals 

above are the second step. As much as 

practicable, NCUA intends to mesh the 

effective dates of these two rulemakings. 

As discussed above, the effective date 

for most of this final rule is January 18, 

2011. Accordingly, the Board plans to 

move this second-step rulemaking along 

by issuing these six proposals at either 

the October 2010 or November 2010 

Board meeting for a 30-day public 

comment period. 

Also, although not involving any 

additional rulemaking, the Board plans 

to: 

1. Consult with other federal financial 

regulators to create a data tracking 

system to enhance NCUA’s ability to 

systemically conduct trend analyses to 

identify recurrent or network-wide 

issues, and 

2. Upgrade NCUA’s current guidance 

on corporate mergers into a formal 

corporate credit union merger manual. 

NCUA intends to implement the data 

tracking system within nine months and 

publish the merger manual within six 

months. 

VI. Regulatory Procedures 

A. Regulatory Flexibility Act 

The Regulatory Flexibility Act 

requires NCUA to prepare an analysis to 

describe any significant economic 

impact a proposed rule may have on a 

substantial number of small credit 

unions (those under ten million dollars 

in assets). This final rule only applies to 

corporates, all but one of which has 

assets well in excess of $10 million. 

Accordingly, the NCUA Board certifies 

that this final rule will not have a 

significant economic impact on a 

substantial number of small credit 


emcdonald on DSK2BSOYB1PROD with RULES2
Federal Register / Vol. 75, No. 202 / Wednesday, October 20, 2010 / Rules and Regulations 64825 

unions, and, therefore, a regulatory 

flexibility analysis is not required. 

B. Paperwork Reduction Act 

The Paperwork Reduction Act of 1995 

(PRA) applies to rulemakings in which 

an agency by rule creates a new 

paperwork burden on regulated entities 

or modifies an existing burden. 44 

U.S.C. 3507(d). For purposes of the 

PRA, a paperwork burden may take the 

form of a either a reporting or a 

recordkeeping requirement, both 

referred to as information collections. 

NCUA identified and described several 

information collection requirements in 

the proposed rule, including new 

requirements in the following broad 

areas: capital and PCA, investments, 

ALM, CUSO procedures, and corporate 

governance requirements. As required 

by the PRA, NCUA submitted a copy of 

the proposed regulation to the Office of 

Management and Budget (OMB) for its 

review and approval. Persons interested 

in submitting comments with respect to 

the information collection aspects of the 

proposed rule were invited to submit 

them to the OMB at the address noted 

in the preamble to the proposed rule. 

While NCUA received a substantial 

number of comments on the proposed 

rule, commenters did not specifically 

address the agency’s estimates of burden 

hours or costs, which estimates were set 

out specifically in the preamble as 

required by PRA. However, as discussed 

more fully in the preamble to this final 

rule, the Board has determined to make 

several changes in the final rule, and 

some of those changes affect the burden 

estimates for some aspects of the 

collection requirements. These changes, 

all of which have the effect of reducing 

the estimated burden, are discussed 

below. 

ALM Requirements 

The Board has determined to 

eliminate entirely the two cash flow 

mismatch tests that had been proposed 

(§§ 704.6(e) and (f) in the proposed 

rule). The final rule will retain as 

proposed the two-year weighted average 

limit and will now require a new, 

additional test with a 2.25 year 

weighted average life limit that assumes 

a 50 percent slowdown in prepayment 

speeds to limit extension risk. The new 

test must be done quarterly and will be 

required of and affect all corporates. As 

with the original proposal, corporates 

will be required to calculate and record 

the effective and spread durations for 

individual assets and liabilities to 

support the test results. 

From an information collection 

standpoint, NCUA estimates that the net 

impact of this change will be a 

reduction by approximately 50 percent 

in the estimated burden hours 

associated with ALM requirements. 

Accordingly, the revised burden 

estimate for compliance with this 

revised requirement would be as 

follows: 

27 corporates × 84 hours per year = 2268 

hours. 

Corporate Governance Requirements 

The final rule changes the provisions 

relating to disclosure of compensation 

by reducing the number of senior 

executives whose compensation must be 

disclosed. Many commenters noted that 

the original proposal could have had the 

effect of requiring disclosure of 

compensation for many individuals, 

such as some persons holding the title 

of vice president, who are not, in fact, 

in positions with program or operational 

level responsibilities. The Board has 

changed the language from the proposal 

to now limit the total number of 

required executives subject to disclosure 

to the top ten percent of most highly 

paid individuals, to a maximum of five. 

For corporates with thirty or fewer 

employees, the top three highly paid 

executives must be disclosed. In all 

cases, the compensation paid to the CEO 

must be included in the disclosure if the 

CEO is not in the most highly paid ten 

percent. While the initial estimate of the 

burden for complying with this aspect 

of the governance provisions was not 

substantial, the Board believes the 

change will reduce the final burden by 

approximately 50 percent. 

Accordingly, the revised burden 

estimate for compliance with this 

revised requirement would be as 

follows: 

27 corporates × 5 hours = 135 hours. 

Summary of Collection Burden 

(Revised) 

With the revisions described above, 

NCUA estimates the total information 

collection burden represented by the 

final rule, calculated on an annual basis, 

as follows: 

Capital restoration plans .................................................................................................................... 20 corporates × 50 hours = 1,000 hours. 

Retained earnings accumulation plans ............................................................................................. 3 corporates × 50 hours = 150 hours 

Notice of intent to redeem contributed capital ................................................................................ 10 corporates × 1 hour = 10 hours. 

Notice of PCA category change ......................................................................................................... 10 corporates × 1 hour = 10 hours. 

Ratings procurement .......................................................................................................................... 27 corporates × 2 hours = 54 hours. 

Investment action plans ..................................................................................................................... 10 corporates × 20 hours = 200 hours. 

ALM testing ......................................................................................................................................... 27 corporates × 84 hours = 2,268 hours. 

CUSO approval requests .................................................................................................................... 12 corporates × 2 hours = 24 hours. 

Compensation disclosures .................................................................................................................. 27 corporates × 5 hours = 135 hours. 

Merger related disclosures ................................................................................................................. 4 corporates × 5 hours = 20 hours. 

Requests to make golden parachute and severance payments ....................................................... 4 corporates × 4 hours = 16 hours. 

Total Additional Burden Hours .................................................................................................. 3,887 hours. 

NCUA does not anticipate that the 

revisions discussed above will have any 

significant impact on the cost estimates 

set out in the proposed rule. 

NCUA has submitted these burden 

revisions to the OMB. NCUA expects 

that OMB will review and approve the 

revisions, and publish its approval, in 

the near future. 

C. 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. 

This final rule applies to all federallyinsured corporates, including state 

charters. Nonfederally insured 

corporates must also agree by contract, 

as a condition of receiving shares or 

deposits from federally-insured credit 

unions, to adhere to the requirements of 

this part and submit to NCUA 

examinations. The executive order 

states that: ‘‘National action limiting the 

policymaking discretion of the states 

shall be taken only where there is 

constitutional and statutory authority 

for the action and the national activity 

is appropriate in light of the presence of 

a problem of national significance.’’ 

NCUA has plenary statutory authority to 

regulate corporate credit unions and 

federally insured credit unions. See 12 


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64826 Federal Register / Vol. 75, No. 202 / Wednesday, October 20, 2010 / Rules and Regulations 

U.S.C. 1766(a) and 12 U.S.C. 1781 et. 

seq. Further, the risk of loss to federallyinsured credit unions and the NCUSIF 

due to corporate activities are concerns 

of national scope. 

The final rule does not impose 

additional costs or burdens on the states 

or have a significant effect on the states’ 

ability to discharge traditional state 

government functions. NCUA has 

determined that the corporate rule as a 

whole, and this rulemaking, may have 

an occasional 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. However, the 

potential risk to the NCUSIF and the 

entire credit union system that would 

result without extending the entire 

corporate rule, including the revisions 

in this rulemaking, to all corporates is 

more significant than any such effects. 

Accordingly, NCUA believes that the 

protection of corporates, the NCUSIF, 

and the entire system of federallyinsured credit unions requires 

application of this final rule to all such 

corporates, and that this application is 

consistent with Executive Order 13132. 

D. The Treasury and General 

Government Appropriations Act, 1999— 

Assessment of Federal Regulations and 

Policies on Families 

The NCUA has determined that this 

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 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. 

List of Subjects 

12 CFR Part 702 

Credit unions, Reporting and 

recordkeeping requirements. 

12 CFR Part 703 

Credit unions, Investments. 

12 CFR Part 704 

Credit unions, Corporate credit 

unions, Reporting and recordkeeping 

requirements. 

12 CFR Part 709 

Credit unions, Liquidations. 

12 CFR Part 747 

Credit unions, Administrative 

practices and procedures. 

By the National Credit Union 

Administration Board on September 24, 

2010. 

Mary F. Rupp, 

Secretary of the Board. 

■ Accordingly, NCUA amends 12 CFR 

parts 702, 703, 704, 709, and 747 as 

follows: 

PART 702—PROMPT CORRECTIVE 

ACTION 

■ 1. The authority citation for part 702 

continues to read as follows: 

Authority: 12 U.S.C. 1766(a), 1790d. 

■ 2. Effective October 20, 2011, revise 

paragraph (d) of § 702.105 to read as 

follows: 

§ 702.105 Weighted—average life of 

investments. 

* * * * * 

(d) Capital in mixed-ownership 

Government corporations and corporate 

credit unions. For capital stock in 

mixed-ownership Government 

corporations, as defined in 31 U.S.C. 

9101(2), and perpetual and 

nonperpetual capital in corporate credit 

unions, as defined in 12 CFR 704.2, the 

weighted-average life is defined as 

greater than one (1) year, but less than 

or equal to three years; 

* * * * * 

PART 703—INVESTMENTS AND 

DEPOSIT ACTIVITIES 

■ 3. The authority citation for part 703 

continues to read as follows: 

Authority: 12 U.S.C. 1757(7), 1757(8), 

1757(15). 

■ 4. Effective October 20, 2011, revise 

paragraph (b) of § 703.14 to read as 

follows: 

§ 703.14 Permissible investments. 

* * * * * 

(b) Corporate credit union shares or 

deposits. A Federal credit union may 

purchase shares or deposits in a 

corporate credit union, except where the 

NCUA Board has notified it that the 

corporate credit union is not operating 

in compliance with part 704 of this 

chapter. A Federal credit union’s 

aggregate amount of perpetual and 

nonperpetual capital, as defined in part 

704 of this chapter, in one corporate 

credit union is limited to two percent of 

the federal credit union’s assets 

measured at the time of investment or 

adjustment. A Federal credit union’s 

aggregate amount of contributed capital 

in all corporate credit unions is limited 

to four percent of assets measured at the 

time of investment or adjustment. 

* * * * * 

PART 704—CORPORATE CREDIT 

UNIONS 

■ 5. Revise the authority citation for part 

704 to read as follows: 

Authority: 12 U.S.C. 1762, 1766(a), 1772a, 

1781, 1789, and 1795e. 

■ 6. Effective January 18, 2011, revise 

§ 704.2 to read as follows: 

§ 704.2 Definitions. 

As used in this part: 

Adjusted trading means any method 

or transaction whereby a corporate 

credit union sells a security to a vendor 

at a price above its current market price 

and simultaneously purchases or 

commits to purchase from the vendor 

another security at a price above its 

current market price. 

Asset-backed security (ABS) means a 

security that is primarily serviced by the 

cashflows of a discrete pool of 

receivables or other financial assets, 

either fixed or revolving, that by their 

terms convert into cash within a finite 

time period plus any rights or other 

assets designed to assure the servicing 

or timely distribution of proceeds to the 

security holders. Mortgage-backed 

securities are a type of asset-backed 

security. 

Available to cover losses that exceed 

retained earnings means that the funds 

are available to cover operating losses 

realized, in accordance with generally 

accepted accounting principles (GAAP), 

by the corporate credit union that 

exceed retained earnings net of equity 

acquired in a combination. Likewise, 

available to cover losses that exceed 

retained earnings and perpetual 

contributed capital (PCC) means that the 

funds are available to cover operating 

losses realized, in accordance with 

GAAP, by the corporate credit union 

that exceed retained earnings net of 

equity acquired in a combination and 

PCC. Any such losses must be 

distributed pro rata at the time the loss 

is realized first among the holders of 

paid-in capital (PIC), and when all PIC 

is exhausted, then pro rata among all 

MCAs, all subject to the optional 

prioritization described in Appendix A 


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of this Part. To the extent that any 

contributed capital funds are used to 

cover losses, the corporate credit union 

must not restore or replenish the 

affected capital accounts under any 

circumstances. In addition, contributed 

capital that is used to cover losses in a 

calendar year previous to the year of 

liquidation has no claim against the 

liquidation estate. 

Capital means the sum of a corporate 

credit union’s retained earnings, paid-in 

capital, and membership capital. For a 

corporate credit union that acquires 

another credit union in a mutual 

combination, capital includes the 

retained earnings of the acquired credit 

union, or of an integrated set of 

activities and assets, at the point of 

acquisition. 

Capital ratio means the corporate 

credit union’s capital divided by its 

moving daily average net assets. 

Collateralized debt obligation (CDO) 

means a debt security collateralized by 

mortgage-backed securities, assetbacked securities, or corporate 

obligations in the form of loans or debt. 

Senior tranches of Re-REMIC’s 

consisting of senior mortgage- and assetbacked securities are excluded from this 

definition. 

Collateralized mortgage obligation 

(CMO) means a multi-class mortgagebacked security. 

Commercial mortgage-backed security 

(CMBS) means a mortgage-backed 

security collateralized primarily by 

multi-family and commercial property 

loans. 

Compensation means all salaries, fees, 

wages, bonuses, severance payments, 

current year contributions to employee 

benefit plans (for example, medical, 

dental, life insurance, and disability), 

current year contributions to deferred 

compensation plans and future 

severance payments, including 

payments in connection with a merger 

or similar combination (whether or not 

funded; whether or not vested; and 

whether or not the deferred 

compensation plan is a qualified plan 

under Section 401(a) of the IRS Code). 

Compensation also includes expense 

accounts and other allowances (for 

example, the value of the personal use 

of housing, automobiles or other assets 

owned by the corporate credit union; 

expense allowances or reimbursements 

that recipients must report as income on 

their separate income tax return; 

payments made under indemnification 

arrangements; and payments made for 

the benefit of friends or relatives). In 

calculating required compensation 

disclosures, reasonable estimates may 

be used if precise cost figures are not 

readily available. 

Contributed capital means either 

paid-in capital or membership capital 

accounts. 

Core capital means the sum of: 

(1) Retained earnings; 

(2) Paid-in capital; and 

(3) The retained earnings of any 

acquired credit union, or of an 

integrated set of activities and assets, 

calculated at the point of acquisition, if 

the acquisition was a mutual 

combination. 

Core capital ratio means the corporate 

credit union’s core capital divided by its 

moving daily average net assets. 

Corporate credit union means an 

organization that: 

(1) Is chartered under Federal or state 

law as a credit union; 

(2) Receives shares from and provides 

loan services to credit unions; 

(3) Is operated primarily for the 

purpose of serving other credit unions; 

(4) Is designated by NCUA as a 

corporate credit union; 

(5) Limits natural person members to 

the minimum required by state or 

federal law to charter and operate the 

credit union; and 

(6) Does not condition the eligibility 

of any credit union to become a member 

on that credit union’s membership in 

any other organization. 

Daily average net assets means the 

average of net assets calculated for each 

day during the period. 

Derivatives means a financial contract 

whose value is derived from the values 

of one or more underlying assets, 

reference rates, or indices of asset values 

or reference rates. Derivative contracts 

include interest rate derivative 

contracts, exchange rate derivative 

contracts, equity derivative contracts, 

commodity derivative contracts, credit 

derivative contracts, and any other 

instrument that poses similar 

counterparty credit risks. 

Dollar roll means the purchase or sale 

of a mortgage-backed security to a 

counterparty with an agreement to resell 

or repurchase a substantially identical 

security at a future date and at a 

specified price. 

Embedded option means a 

characteristic of certain assets and 

liabilities which gives the issuer of the 

instrument the ability to change the 

features such as final maturity, rate, 

principal amount and average life. 

Options include, but are not limited to, 

calls, caps, and prepayment options. 

Equity investments means 

investments in real property, equity 

securities, and any other ownership 

interests, including, for example, 

investments in partnerships and limited 

liability companies. 

Equity security means any security 

representing an ownership interest in an 

enterprise (for example, common, 

preferred, or other capital stock) or the 

right to acquire (for example, warrants 

and call options) or dispose of (for 

example, put options) an ownership 

interest in an enterprise at fixed or 

determinable prices. However, the term 

does not include convertible debt or 

preferred stock that by its terms either 

must be redeemed by the issuing 

enterprise or is redeemable at the option 

of the investor. 

Exchangeable collateralized mortgage 

obligation means a class of a 

collateralized mortgage obligation 

(CMO) that, at the time of purchase, 

represents beneficial ownership 

interests in a combination of two or 

more underlying classes of the same 

CMO structure. The holder of an 

exchangeable CMO may pay a fee and 

take delivery of the underlying classes 

of the CMO. 

Fair value means the price that would 

be received to sell an asset or paid to 

transfer a liability in an orderly 

transaction between market participants 

at the measurement date. If there is a 

principal market for the asset or 

liability, the fair value measurement is 

the price in that market (whether that 

price is directly observable or otherwise 

determined using a valuation 

technique), even if the price in a 

different market is potentially more 

advantageous at the measurement date. 

In the absence of a principal market, the 

fair value measurement occurs in the 

most advantageous market for the asset 

or liability. The fair value of the asset 

or liability shall be determined based on 

the assumptions that market 

participants would use in pricing the 

asset or liability. In developing those 

assumptions, the corporate need not 

identify specific market participants. 

Rather, the corporate should identify 

characteristics that distinguish market 

participants generally, considering 

factors specific to all of the following: 

the asset or liability; the principal (or 

most advantageous) market for the asset 

or liability; and market participants 

with whom the corporate would 

transact in that market. To increase 

consistency and comparability in fair 

value measurements and related 

disclosures, the fair value hierarchy 

prioritizes the inputs to valuation 

techniques used to measure fair value 

into three broad levels. The fair value 

hierarchy gives the highest priority to 

quoted prices (unadjusted) in active 

markets for identical assets or liabilities 

(Level 1) and the lowest priority to 

unobservable inputs (Level 3). Examples 

of valuation techniques include the 

present value of estimated future cash 


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64828 Federal Register / Vol. 75, No. 202 / Wednesday, October 20, 2010 / Rules and Regulations 

flows, option-pricing models, and 

option-adjusted spread models. 

Federal funds transaction means a 

short-term or open-ended unsecured 

transfer of immediately available funds 

by one depository institution to another 

depository institution or entity. 

Foreign bank means an institution 

which is organized under the laws of a 

country other than the United States, is 

engaged in the business of banking, and 

is recognized as a bank by the banking 

supervisory authority of the country in 

which it is organized. 

Immediate family member means a 

spouse or other family member living in 

the same household. 

Limited liquidity investment means a 

private placement or funding agreement. 

Member reverse repurchase 

transaction means an integrated 

transaction in which a corporate credit 

union purchases a security from one of 

its member credit unions under 

agreement by that member credit union 

to repurchase the same security at a 

specified time in the future. The 

corporate credit union then sells that 

same security, on the same day, to a 

third party, under agreement to 

repurchase it on the same date on which 

the corporate credit union is obligated 

to return the security to its member 

credit union. 

Membership capital means funds 

contributed by members that: are 

adjustable balance with a minimum 

withdrawal notice of 3 years or are term 

certificates with a minimum term of 3 

years; are available to cover losses that 

exceed retained earnings and paid-in 

capital; are not insured by the NCUSIF 

or other share or deposit insurers; and 

cannot be pledged against borrowings. 

Mortgage-backed security (MBS) 

means a security backed by first or 

second mortgages secured by real estate 

upon which is located a dwelling, 

mixed residential and commercial 

structure, residential manufactured 

home, or commercial structure. 

Moving daily average net assets 

means the average of daily average net 

assets for the month being measured 

and the previous eleven (11) months. 

Mutual combination means a 

transaction or event in which a 

corporate 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. 

Nationally Recognized Statistical 

Rating Organization (NRSRO) means 

any entity that has applied for, and been 

granted permission to be considered an 

NRSRO by the United States Securities 

and Exchange Commission. 

NCUA means NCUA Board (Board), 

unless the particular action has been 

delegated by the Board. 

Net assets means total assets less 

loans guaranteed by the NCUSIF and 

member reverse repurchase 

transactions. For its own account, a 

corporate credit union’s payables under 

reverse repurchase agreements and 

receivables under repurchase 

agreements may be netted out if the 

GAAP conditions for offsetting are met. 

Net economic value (NEV) means the 

fair value of assets minus the fair value 

of liabilities. All fair value calculations 

must include the value of forward 

settlements and embedded options. 

Paid-in capital, and the unamortized 

portion of membership capital, that is, 

the portion that qualifies as capital for 

purposes of any of the total capital ratio, 

is excluded from liabilities for purposes 

of this calculation. The NEV ratio is 

calculated by dividing NEV by the fair 

value of assets. 

Net interest margin security means a 

security collateralized by residual 

interests in collateralized mortgage 

obligations, residual interests in real 

estate mortgage investment conduits, or 

residual interests in other asset-backed 

securities. 

Obligor means the primary party 

obligated to repay an investment, e.g., 

the issuer of a security, such as a 

Qualified Special Purpose Entity (QSPE) 

trust; the taker of a deposit; or the 

borrower of funds in a federal funds 

transaction. Obligor does not include an 

originator of receivables underlying an 

asset-backed security, the servicer of 

such receivables, or an insurer of an 

investment. 

Official means any director or 

committee member. 

Paid-in capital means accounts or 

other interests of a corporate credit 

union that: are perpetual, noncumulative dividend accounts; are 

available to cover losses that exceed 

retained earnings; are not insured by the 

NCUSIF or other share or deposit 

insurers; and cannot be pledged against 

borrowings. 

Pair-off transaction means a security 

purchase transaction that is closed out 

or sold at, or prior to, the settlement or 

expiration date. 

Private label security means a security 

that is not issued or guaranteed by the 

U.S. government, its agencies, or its 

government-sponsored enterprises 

(GSEs). 

Quoted market price means a recent 

sales price or a price based on current 

bid and asked quotations. 

Repurchase transaction means a 

transaction in which a corporate credit 

union agrees to purchase a security from 

a counterparty and to resell the same or 

any identical security to that 

counterparty at a specified future date 

and at a specified price. 

Residential mortgage-backed security 

(RMBS) means a mortgage-backed 

security collateralized primarily by 

mortgage loans on residential 

properties. 

Residential properties means houses, 

condominiums, cooperative units, and 

manufactured homes. This definition 

does not include boats or motor homes, 

even if used as a primary residence, or 

timeshare properties. 

Residual interest means the 

ownership interest in remainder cash 

flows from a CMO or ABS transaction 

after payments due bondholders and 

trust administrative expenses have been 

satisfied. 

Retained earnings means retained 

earnings as defined under Generally 

Accepted Accounting Principles 

(GAAP). 

Retained earnings ratio means the 

corporate credit union’s retained 

earnings divided by its moving daily 

average net assets. For a corporate credit 

union that acquires another credit union 

in a mutual combination, the numerator 

of the retained earnings ratio also 

includes the retained earnings of the 

acquired credit union, or of an 

integrated set of activities and assets, at 

the point of acquisition. 

Section 107(8) institution means an 

institution described in Section 107(8) 

of the Federal Credit Union Act (12 

U.S.C. 1757(8)). 

Securities lending means lending a 

security to a counterparty, either 

directly or through an agent, and 

accepting collateral in return. 

Senior executive officer mean a chief 

executive officer, any assistant chief 

executive officer (e.g., any assistant 

president, any vice president or any 

assistant treasurer/manager), and the 

chief financial officer (controller). This 

term also includes employees of any 

entity hired to perform the functions 

described above. 

Settlement date means the date 

originally agreed to by a corporate credit 

union and a counterparty for settlement 

of the purchase or sale of a security. 

Short sale means the sale of a security 

not owned by the seller. 

Small business related security means 

a security that is rated in 1 of the 4 

highest rating categories by at least one 

Nationally Recognized Statistical Rating 

Organization (NRSRO), and represents 

an interest in one or more promissory 

notes or leases of personal property 

evidencing the obligation of a small 

business concern and originated by an 

insured depository institution, insured 


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credit union, insurance company, or 

similar institution which is supervised 

and examined by a Federal or State 

authority, or a finance company or 

leasing company. This definition does 

not include Small Business 

Administration securities permissible 

under § 107(7) of the Act. 

State means any one of the several 

states of the United States of America, 

the District of Columbia, Puerto Rico, 

and the territories and possessions of 

the United States. 

Stripped mortgage-backed security 

means a security that represents either 

the principal-only or interest-only 

portion of the cash flows of an 

underlying pool of mortgages. 

Subordinated security means a 

security that, at the time of purchase, 

has a junior claim on the underlying 

collateral or assets to other securities in 

the same issuance. If a security is junior 

only to money market fund eligible 

securities in the same issuance, the 

former security is not subordinated for 

purposes of this definition. 

Total assets means the sum of all a 

corporate credit union’s assets as 

calculated under GAAP. 

Total capital means the sum of a 

corporate credit union’s core capital and 

its membership capital accounts. 

Trade date means the date a corporate 

credit union originally agrees, whether 

orally or in writing, to enter into the 

purchase or sale of a security. 

Trigger means an event in a 

securitization that will redirect cashflows if predefined thresholds are 

breached. Examples of triggers are 

delinquency and cumulative loss 

triggers. 

Weighted average life means the 

weighted-average time to the return of a 

dollar of principal, calculated by 

multiplying each portion of principal 

received by the time at which it is 

expected to be received (based on a 

reasonable and supportable estimate of 

that time) and then summing and 

dividing by the total amount of 

principal. The calculation of weighted 

average life for interest only securities 

means the weighted-average time to the 

return of a dollar of interest, calculated 

by multiplying each portion of interest 

received by the time at which it is 

expected to be received (based on a 

reasonable and supportable estimate of 

that time) and then summing and 

dividing by the total amount of interest 

to be received. 

When-issued trading means the 

buying and selling of securities in the 

period between the announcement of an 

offering and the issuance and payment 

date of the securities. 

■ 7. Effective October 20, 2011, revise 

§ 704.2 to read as follows: 

§ 704.2 Definitions. 

As used in this part: 

Adjusted core capital means core 

capital modified as follows: 

(1) Deduct an amount equal to the 

amount of the corporate credit union’s 

intangible assets that exceed one half 

percent of the corporate credit union’s 

moving daily average net assets, but the 

NCUA, on its own initiative, upon 

petition by the applicable state 

regulator, or upon application from a 

corporate credit union, may direct that 

a particular corporate credit union add 

some or all of these excess intangibles 

back to the credit union’s adjusted core 

capital; 

(2) Deduct investments, both equity 

and debt, in unconsolidated credit 

union service organizations (CUSOs); 

(3) If the corporate credit union, on or 

after October 20, 2011, contributes any 

perpetual contributed capital (PCC), or 

maintains any NCAs, at another 

corporate credit union, deduct an 

amount equal to this PCC or NCA; 

(4) Beginning on October 20, 2016, 

and ending on October 20, 2020, deduct 

any amount of perpetual contributed 

capital (PCC) that causes PCC minus 

retained earnings, all divided by moving 

daily net average assets, to exceed two 

percent; and 

(5) Beginning after October 20, 2020, 

deduct any amount of PCC that causes 

PCC to exceed retained earnings. 

Adjusted trading means any method 

or transaction whereby a corporate 

credit union sells a security to a vendor 

at a price above its current market price 

and simultaneously purchases or 

commits to purchase from the vendor 

another security at a price above its 

current market price. 

Applicable state regulator means the 

prudential state regulator of a state 

chartered corporate credit union. 

Asset-backed commercial paper 

program (ABCP program) means a 

program that primarily issues 

commercial paper that has received a 

credit rating from an NRSRO and that is 

backed by assets or other exposures held 

in a bankruptcy-remote special purpose 

entity. The term sponsor of an ABCP 

program means a corporate credit union 

that: 

(1) Establishes an ABCP program; 

(2) Approves the sellers permitted to 

participate in an ABCP program; 

(3) Approves the asset pools to be 

purchased by an ABCP program; or 

(4) Administers the ABCP program by 

monitoring the assets, arranging for debt 

placement, compiling monthly reports, 

or ensuring compliance with the 

program documents and with the 

program’s credit and investment policy. 

Asset-backed security (ABS) means a 

security that is primarily serviced by the 

cashflows of a discrete pool of 

receivables or other financial assets, 

either fixed or revolving, that by their 

terms convert into cash within a finite 

time period plus any rights or other 

assets designed to assure the servicing 

or timely distribution of proceeds to the 

security holders. Mortgage-backed 

securities are a type of asset-backed 

security. 

Available to cover losses that exceed 

retained earnings means that the funds 

are available to cover operating losses 

realized, in accordance with generally 

accepted accounting principles (GAAP), 

by the corporate credit union that 

exceed retained earnings net of equity 

acquired in a combination. Likewise, 

available to cover losses that exceed 

retained earnings and perpetual 

contributed capital (PCC) means that the 

funds are available to cover operating 

losses realized, in accordance with 

GAAP, by the corporate credit union 

that exceed retained earnings net of 

equity acquired in a combination and 

PCC. Any such losses must be 

distributed pro rata at the time the loss 

is realized first among the holders of 

PCC, and when all PCC is exhausted, 

then pro rata among all nonperpetual 

capital accounts (NCAs) and 

unconverted membership capital 

accounts, all subject to the optional 

prioritization described in Appendix A 

of this Part. To the extent that any 

contributed capital funds are used to 

cover losses, the corporate credit union 

must not restore or replenish the 

affected capital accounts under any 

circumstances. In addition, contributed 

capital that is used to cover losses in a 

calendar year previous to the year of 

liquidation has no claim against the 

liquidation estate. 

Capital means the same as total 

capital, defined below. 

Capital ratio means the corporate 

credit union’s capital divided by its 

moving daily average net assets. 

Collateralized debt obligation (CDO) 

means a debt security collateralized by 

mortgage-backed securities, assetbacked securities, or corporate 

obligations in the form of loans or debt. 

Senior tranches of Re-REMIC’s 

consisting of senior mortgage- and assetbacked securities are excluded from this 

definition. 

Collateralized mortgage obligation 

(CMO) means a multi-class mortgagebacked security. 

Commercial mortgage-backed security 

(CMBS) means a mortgage-backed 

security collateralized primarily by 


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64830 Federal Register / Vol. 75, No. 202 / Wednesday, October 20, 2010 / Rules and Regulations 

multi-family and commercial property 

loans. 

Compensation means all salaries, fees, 

wages, bonuses, severance payments, 

current year contributions to employee 

benefit plans (for example, medical, 

dental, life insurance, and disability), 

current year contributions to deferred 

compensation plans and future 

severance payments, including 

payments in connection with a merger 

or similar combination (whether or not 

funded; whether or not vested; and 

whether or not the deferred 

compensation plan is a qualified plan 

under Section 401(a) of the IRS Code). 

Compensation also includes expense 

accounts and other allowances (for 

example, the value of the personal use 

of housing, automobiles or other assets 

owned by the corporate credit union; 

expense allowances or reimbursements 

that recipients must report as income on 

their separate income tax return; 

payments made under indemnification 

arrangements; and payments made for 

the benefit of friends or relatives). In 

calculating required compensation 

disclosures, reasonable estimates may 

be used if precise cost figures are not 

readily available. 

Consolidated Credit Union Service 

Organization (Consolidated CUSO) 

means any corporation, partnership, 

business trust, joint venture, association 

or similar organization in which a 

corporate credit union directly or 

indirectly holds an ownership interest 

(as permitted by § 704.11 of this Part) 

and the assets of which are consolidated 

with those of the corporate credit union 

for purposes of reporting under 

Generally Accepted Accounting 

Principles (GAAP). Generally, 

consolidated CUSOs are majority-owned 

CUSOs. 

Contributed capital means either 

perpetual or nonperpetual capital. 

Core capital means the sum of: 

(1) Retained earnings; 

(2) Perpetual contributed capital; 

(3) The retained earnings of any 

acquired credit union, or of an 

integrated set of activities and assets, 

calculated at the point of acquisition, if 

the acquisition was a mutual 

combination; and 

(4) Minority interests in the equity 

accounts of CUSOs that are fully 

consolidated. However, minority 

interests in consolidated ABCP 

programs sponsored by a corporate 

credit union are excluded from the 

credit unions’ core capital or total 

capital base if the corporate credit union 

excludes the consolidated assets of such 

programs from risk-weighted assets 

pursuant to Appendix C of this Part. 

Core capital ratio means the corporate 

credit union’s core capital divided by its 

moving daily average net assets. 

Corporate credit union means an 

organization that: 

(1) Is chartered under Federal or state 

law as a credit union; 

(2) Receives shares from and provides 

loan services to credit unions; 

(3) Is operated primarily for the 

purpose of serving other credit unions; 

(4) Is designated by NCUA as a 

corporate credit union; 

(5) Limits natural person members to 

the minimum required by state or 

federal law to charter and operate the 

credit union; and 

(6) Does not condition the eligibility 

of any credit union to become a member 

on that credit union’s membership in 

any other organization. 

Credit-enhancing interest-only strip. 

(1) Credit-enhancing interest-only strip 

means an on-balance sheet asset that, in 

form or in substance: 

(i) Represents the contractual right to 

receive some or all of the interest due 

on transferred assets; and 

(ii) Exposes the corporate credit union 

to credit risk directly or indirectly 

associated with the transferred assets 

that exceeds its pro rata share of the 

corporate credit union’s claim on the 

assets whether through subordination 

provisions or other credit enhancement 

techniques. 

(2) NCUA reserves the right to 

identify other cash flows or related 

interests as a credit-enhancing interestonly strip. In determining whether a 

particular interest cash flow functions 

as a credit-enhancing interest-only strip, 

NCUA will consider the economic 

substance of the transaction. 

Daily average net assets means the 

average of net assets calculated for each 

day during the period. 

Daily average net risk-weighted assets 

means the average of net risk-weighted 

assets calculated for each day during the 

period. 

Derivatives means a financial contract 

whose value is derived from the values 

of one or more underlying assets, 

reference rates, or indices of asset values 

or reference rates. Derivative contracts 

include interest rate derivative 

contracts, exchange rate derivative 

contracts, equity derivative contracts, 

commodity derivative contracts, credit 

derivative contracts, and any other 

instrument that poses similar 

counterparty credit risks. 

Dollar roll means the purchase or sale 

of a mortgage-backed security to a 

counterparty with an agreement to resell 

or repurchase a substantially identical 

security at a future date and at a 

specified price. 

Eligible ABCP liquidity facility means 

a legally binding commitment to 

provide liquidity support to assetbacked commercial paper by lending to, 

or purchasing assets from any structure, 

program or conduit in the event that 

funds are required to repay maturing 

asset-backed commercial paper and that 

meets the following criteria: 

(1)(i) At the time of the draw, the 

liquidity facility must be subject to an 

asset quality test that precludes funding 

against assets that are 90 days or more 

past due or in default; and 

(ii) If the assets that the liquidity 

facility is required to fund against are 

assets or exposures that have received a 

credit rating by an NRSRO at the time 

the inception of the facility, the facility 

can be used to fund only those assets or 

exposures that are rated investment 

grade by an NRSRO at the time of 

funding; or 

(2) If the assets that are funded under 

the liquidity facility do not meet the 

criteria described in paragraph (1) of 

this definition, the assets must be 

guaranteed, conditionally or 

unconditionally, by the United States 

Government, its agencies, or the central 

government of an Organization for 

Economic Cooperation and 

Development (OECD) country. 

Embedded option means a 

characteristic of certain assets and 

liabilities which gives the issuer of the 

instrument the ability to change the 

features such as final maturity, rate, 

principal amount and average life. 

Options include, but are not limited to, 

calls, caps, and prepayment options. 

Equity investment means investments 

in real property, equity securities, and 

any other ownership interests, 

including, for example, investments in 

partnerships and limited liability 

companies. 

Equity security means any security 

representing an ownership interest in an 

enterprise (for example, common, 

preferred, or other capital stock) or the 

right to acquire (for example, warrants 

and call options) or dispose of (for 

example, put options) an ownership 

interest in an enterprise at fixed or 

determinable prices. However, the term 

does not include convertible debt or 

preferred stock that by its terms either 

must be redeemed by the issuing 

enterprise or is redeemable at the option 

of the investor. 

Exchangeable collateralized mortgage 

obligation means a class of a 

collateralized mortgage obligation 

(CMO) that, at the time of purchase, 

represents beneficial ownership 

interests in a combination of two or 

more underlying classes of the same 

CMO structure. The holder of an 


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exchangeable CMO may pay a fee and 

take delivery of the underlying classes 

of the CMO. 

Fair value means the price that would 

be received to sell an asset or paid to 

transfer a liability in an orderly 

transaction between market participants 

at the measurement date. If there is a 

principal market for the asset or 

liability, the fair value measurement is 

the price in that market (whether that 

price is directly observable or otherwise 

determined using a valuation 

technique), even if the price in a 

different market is potentially more 

advantageous at the measurement date. 

In the absence of a principal market, the 

fair value measurement occurs in the 

most advantageous market for the asset 

or liability. The fair value of the asset 

or liability shall be determined based on 

the assumptions that market 

participants would use in pricing the 

asset or liability. In developing those 

assumptions, the corporate need not 

identify specific market participants. 

Rather, the corporate should identify 

characteristics that distinguish market 

participants generally, considering 

factors specific to all of the following: 

the asset or liability; the principal (or 

most advantageous) market for the asset 

or liability; and market participants 

with whom the corporate would 

transact in that market. To increase 

consistency and comparability in fair 

value measurements and related 

disclosures, the fair value hierarchy 

prioritizes the inputs to valuation 

techniques used to measure fair value 

into three broad levels. The fair value 

hierarchy gives the highest priority to 

quoted prices (unadjusted) in active 

markets for identical assets or liabilities 

(Level 1) and the lowest priority to 

unobservable inputs (Level 3). Examples 

of valuation techniques include the 

present value of estimated future cash 

flows, option-pricing models, and 

option-adjusted spread models. 

Federal funds transaction means a 

short-term or open-ended unsecured 

transfer of immediately available funds 

by one depository institution to another 

depository institution or entity. 

Foreign bank means an institution 

which is organized under the laws of a 

country other than the United States, is 

engaged in the business of banking, and 

is recognized as a bank by the banking 

supervisory authority of the country in 

which it is organized. 

Immediate family member means a 

spouse or other family member living in 

the same household. 

Intangible assets means assets 

considered to be intangible assets under 

GAAP. These assets include, but are not 

limited to, core deposit premiums, 

purchased credit card relationships, 

favorable leaseholds, and servicing 

assets (mortgage and non-mortgage). 

Interest-only strips receivable are not 

intangible assets under this definition. 

Leverage ratio means, before October 

21, 2013, the ratio of total capital to 

moving daily average net assets. This is 

the interim leverage ratio. 

Leverage ratio means, on or after 

October 21, 2013, the ratio of adjusted 

core capital to moving daily average net 

assets. This is the permanent leverage 

ratio. 

Limited liquidity investment means a 

private placement or funding agreement. 

Member reverse repurchase 

transaction means an integrated 

transaction in which a corporate credit 

union purchases a security from one of 

its member credit unions under 

agreement by that member credit union 

to repurchase the same security at a 

specified time in the future. The 

corporate credit union then sells that 

same security, on the same day, to a 

third party, under agreement to 

repurchase it on the same date on which 

the corporate credit union is obligated 

to return the security to its member 

credit union. 

Mortgage-backed security (MBS) 

means a security backed by first or 

second mortgages secured by real estate 

upon which is located a dwelling, 

mixed residential and commercial 

structure, residential manufactured 

home, or commercial structure. 

Moving daily average net assets 

means the average of daily average net 

assets for the month being measured 

and the previous eleven (11) months. 

Moving monthly average net riskweighted assets means the average of the 

net risk-weighted assets for the month 

being measured and the previous eleven 

(11) months. Measurements must be 

taken on the last day of each month. 

Mutual combination means a 

transaction or event in which a 

corporate 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. 

Nationally Recognized Statistical 

Rating Organization (NRSRO) means 

any entity that has applied for, and been 

granted permission, to be considered an 

NRSRO by the United States Securities 

and Exchange Commission. 

NCUA means NCUA Board (Board), 

unless the particular action has been 

delegated by the Board. 

Net assets means total assets less 

loans guaranteed by the NCUSIF and 

member reverse repurchase 

transactions. For its own account, a 

corporate credit union’s payables under 

reverse repurchase agreements and 

receivables under repurchase 

agreements may be netted out if the 

GAAP conditions for offsetting are met. 

Also, any amounts deducted from core 

capital in calculating adjusted core 

capital are also deducted from net 

assets. 

Net economic value (NEV) means the 

fair value of assets minus the fair value 

of liabilities. All fair value calculations 

must include the value of forward 

settlements and embedded options. 

Perpetual contributed capital, and the 

unamortized portion of nonperpetual 

capital that is, the portion that qualifies 

as capital for purposes of any of the 

minimum capital ratios, is excluded 

from liabilities for purposes of this 

calculation. The NEV ratio is calculated 

by dividing NEV by the fair value of 

assets. 

Net interest margin security means a 

security collateralized by residual 

interests in collateralized mortgage 

obligations, residual interests in real 

estate mortgage investment conduits, or 

residual interests in other asset-backed 

securities. 

Net risk-weighted assets means riskweighted assets less Central Liquidity 

Facility (CLF) stock subscriptions, CLF 

loans guaranteed by the NCUSIF, and 

member reverse repurchase 

transactions. For its own account, a 

corporate credit union’s payables under 

reverse repurchase agreements and 

receivables under repurchase 

agreements may be netted out if the 

GAAP conditions for offsetting are met. 

Also, any amounts deducted from core 

capital in calculating adjusted core 

capital are also deducted from net riskweighted assets. 

Nonperpetual capital means funds 

contributed by members or nonmembers 

that: are term certificates with an 

original minimum term of five years or 

that have an indefinite term (i.e., no 

maturity) with a minimum withdrawal 

notice of five years; are available to 

cover losses that exceed retained 

earnings and perpetual contributed 

capital; are not insured by the NCUSIF 

or other share or deposit insurers; and 

cannot be pledged against borrowings. 

In the event the corporate is liquidated, 

the holders of nonperpetual capital 

accounts (NCAs) will claim equally. 

These claims will be subordinate to all 

other claims (including NCUSIF claims), 

except that any claims by the holders of 

perpetual contributed capital (PCC) will 

be subordinate to the claims of holders 

of NCAs. 

Obligor means the primary party 

obligated to repay an investment, e.g., 

the issuer of a security, such as a 

Qualified Special Purpose Entity (QSPE) 


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trust; the taker of a deposit; or the 

borrower of funds in a federal funds 

transaction. Obligor does not include an 

originator of receivables underlying an 

asset-backed security, the servicer of 

such receivables, or an insurer of an 

investment. 

Official means any director or 

committee member. 

Pair-off transaction means a security 

purchase transaction that is closed out 

or sold at, or prior to, the settlement or 

expiration date. 

Perpetual contributed capital (PCC) 

means accounts or other interests of a 

corporate credit union that: are 

perpetual, non-cumulative dividend 

accounts; are available to cover losses 

that exceed retained earnings; are not 

insured by the NCUSIF or other share or 

deposit insurers; and cannot be pledged 

against borrowings. In the event the 

corporate is liquidated, any claims made 

by the holders of perpetual contributed 

capital will be subordinate to all other 

claims (including NCUSIF claims). 

Private label security means a security 

that is not issued or guaranteed by the 

U.S. government, its agencies, or its 

government-sponsored enterprises 

(GSEs). 

Quoted market price means a recent 

sales price or a price based on current 

bid and asked quotations. 

Repurchase transaction means a 

transaction in which a corporate credit 

union agrees to purchase a security from 

a counterparty and to resell the same or 

any identical security to that 

counterparty at a specified future date 

and at a specified price. 

Residential mortgage-backed security 

(RMBS) means a mortgage-backed 

security collateralized primarily by 

mortgage loans on residential 

properties. 

Residential properties means houses, 

condominiums, cooperative units, and 

manufactured homes. This definition 

does not include boats or motor homes, 

even if used as a primary residence, or 

timeshare properties. 

Residual interest means the 

ownership interest in remainder cash 

flows from a CMO or ABS transaction 

after payments due bondholders and 

trust administrative expenses have been 

satisfied. 

Retained earnings means retained 

earnings as defined under Generally 

Accepted Accounting Principles 

(GAAP). 

Risk-weighted assets means a 

corporate credit union’s risk-weighted 

assets as calculated in accordance with 

Appendix C of this part. 

Section 107(8) institution means an 

institution described in Section 107(8) 

of the Federal Credit Union Act (12 

U.S.C. 1757(8)). 

Securities lending means lending a 

security to a counterparty, either 

directly or through an agent, and 

accepting collateral in return. 

Securitization means the pooling and 

repackaging by a special purpose entity 

of assets or other credit exposures that 

can be sold to investors. Securitization 

includes transactions that create 

stratified credit risk positions whose 

performance is dependent upon an 

underlying pool of credit exposures, 

including loans and commitments. 

Senior executive officer means a chief 

executive officer, any assistant chief 

executive officer (e.g., any assistant 

president, any vice president or any 

assistant treasurer/manager), and the 

chief financial officer (controller). This 

term also includes employees of any 

entity hired to perform the functions 

described above. 

Settlement date means the date 

originally agreed to by a corporate credit 

union and a counterparty for settlement 

of the purchase or sale of a security. 

Short sale means the sale of a security 

not owned by the seller. 

Small business related security means 

a security that is rated in 1 of the 4 

highest rating categories by at least one 

nationally recognized statistical rating 

organization, and represents an interest 

in one or more promissory notes or 

leases of personal property evidencing 

the obligation of a small business 

concern and originated by an insured 

depository institution, insured credit 

union, insurance company, or similar 

institution which is supervised and 

examined by a Federal or State 

authority, or a finance company or 

leasing company. This definition does 

not include Small Business 

Administration securities permissible 

under § 107(7) of the Act. 

State means any one of the several 

states of the United States of America, 

the District of Columbia, Puerto Rico, 

and the territories and possessions of 

the United States. 

Stripped mortgage-backed security 

means a security that represents either 

the principal-only or interest-only 

portion of the cash flows of an 

underlying pool of mortgages. 

Subordinated security means a 

security that, at the time of purchase, 

has a junior claim on the underlying 

collateral or assets to other securities in 

the same issuance. If a security is junior 

only to money market fund eligible 

securities in the same issuance, the 

former security is not subordinated for 

purposes of this definition. 

Supplementary Capital means the 

sum of the following items: 

(1) Nonperpetual capital accounts, as 

amortized under § 704.3(b)(3); 

(2) Allowance for loan and lease 

losses calculated under GAAP to a 

maximum of 1.25 percent of riskweighted assets; and 

(3) Forty-five percent of unrealized 

gains on available-for-sale equity 

securities with readily determinable fair 

values. Unrealized gains are unrealized 

holding gains, net of unrealized holding 

losses, calculated as the amount, if any, 

by which fair value exceeds historical 

cost. The NCUA may disallow such 

inclusion in the calculation of 

supplementary capital if the NCUA 

determines that the securities are not 

prudently valued. 

Tier 1 capital means adjusted core 

capital. Tier 1 risk-based capital ratio 

means the ratio of Tier 1 capital to the 

moving monthly average net riskweighted assets. 

Tier 2 capital means supplementary 

capital plus any perpetual contributed 

capital deducted from adjusted core 

capital. 

Total assets means the sum of all a 

corporate credit union’s assets as 

calculated under GAAP. 

Total capital means the sum of a 

corporate credit union’s adjusted core 

capital and its supplementary capital, 

less the corporate credit union’s equity 

investments not otherwise deducted 

when calculating adjusted core capital. 

Total risk-based capital ratio means 

the ratio of total capital to moving 

monthly average net risk-weighted 

assets. 

Trade date means the date a corporate 

credit union originally agrees, whether 

orally or in writing, to enter into the 

purchase or sale of a security. 

Trigger means an event in a 

securitization that will redirect cashflows if predefined thresholds are 

breached. Examples of triggers are 

delinquency and cumulative loss 

triggers. 

Weighted average life means the 

weighted-average time to the return of a 

dollar of principal, calculated by 

multiplying each portion of principal 

received by the time at which it is 

expected to be received (based on a 

reasonable and supportable estimate of 

that time) and then summing and 

dividing by the total amount of 

principal. The calculation of weighted 

average life for interest only securities 

means the weighted-average time to the 

return of a dollar of interest, calculated 

by multiplying each portion of interest 

received by the time at which it is 

expected to be received (based on a 

reasonable and supportable estimate of 

that time) and then summing and 


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dividing by the total amount of interest 

to be received. 

When-issued trading means the 

buying and selling of securities in the 

period between the announcement of an 

offering and the issuance and payment 

date of the securities. 

■ 8. Effective October 20, 2011, revise 

§ 704.3 to read as follows: 

§ 704.3 Corporate credit union capital. 

(a) Capital requirements. (1) A 

corporate credit union must maintain at 

all times: 

(i) A leverage ratio of 4.0 percent or 

greater; 

(ii) A Tier 1 risk-based capital ratio of 

4.0 percent or greater; and 

(iii) A total risk-based capital ratio of 

8.0 percent or greater. 

(2) To ensure it meets its capital 

requirements, a corporate credit union 

must develop and ensure 

implementation of written short- and 

long-term capital goals, objectives, and 

strategies which provide for the 

building of capital consistent with 

regulatory requirements, the 

maintenance of sufficient capital to 

support the risk exposures that may 

arise from current and projected 

activities, and the periodic review and 

reassessment of the capital position of 

the corporate credit union. 

(3) Beginning with the first call report 

submitted on or after October 21, 2013, 

a corporate credit union must calculate 

and report to NCUA the ratio of its 

retained earnings to its moving daily 

average net assets. If this ratio is less 

than 0.45 percent, the corporate credit 

union must, within 30 days, submit a 

retained earnings accumulation plan to 

the NCUA for NCUA’s approval. The 

plan must contain a detailed 

explanation of how the corporate credit 

union will accumulate earnings 

sufficient to meet all its future 

minimum leverage ratio requirements, 

including specific semiannual 

milestones for accumulating retained 

earnings. In the case of a state-chartered 

corporate credit union, the NCUA will 

consult with the appropriate state 

supervisory authority (SSA) before 

making a determination to approve or 

disapprove the plan, and will provide 

the SSA a copy of the completed plan. 

If the corporate credit union fails to 

submit a plan acceptable to NCUA, or 

fails to comply with any element of a 

plan approved by NCUA, the corporate 

will immediately be classified as 

significantly undercapitalized or, if 

already significantly undercapitalized, 

as critically undercapitalized for 

purposes of prompt corrective actions. 

The corporate credit union will be 

subject to all the associated actions 

under § 704.4. 

(b) Requirements for nonperpetual 

capital accounts (NCAs)—(1) Form. 

NCA funds may be in the form of a term 

certificate or a no-maturity notice 

account. 

(2) Disclosure. The terms and 

conditions of a nonperpetual capital 

account must be disclosed to the 

recorded owner of the account at the 

time the account is opened and at least 

annually thereafter. 

(i) The initial NCA disclosure must be 

signed by either all of the directors of 

the member credit union or, if 

authorized by board resolution, the 

chair and secretary of the board; and 

(ii) The annual disclosure notice must 

be signed by the chair of the corporate 

credit union. The chair must sign a 

statement that certifies that the notice 

has been sent to all entities with NCAs. 

The certification must be maintained in 

the corporate credit union’s files and be 

available for examiner review. 

(3) Five-year remaining maturity. 

When a no-maturity NCA has been 

placed on notice, or a term account has 

a remaining maturity of less than five 

years, the corporate will reduce the 

amount of the account that can be 

considered as nonperpetual capital by a 

constant monthly amortization that 

ensures the capital is fully amortized 

one year before the date of maturity or 

one year before the end of the notice 

period. The full balance of an NCA 

being amortized, not just the remaining 

non-amortized portion, is available to 

absorb losses in excess of the sum of 

retained earnings and perpetual 

contributed capital until the funds are 

released by the corporate credit union at 

the time of maturity or the conclusion 

of the notice period. 

(4) Release. Nonperpetual capital may 

not be released due solely to the merger, 

charter conversion, or liquidation of the 

account holder. In the event of a merger, 

the capital account transfers to the 

continuing entity. In the event of a 

charter conversion, the capital account 

transfers to the new institution. In the 

event of liquidation, the corporate may 

release a member capital account to 

facilitate the payout of shares, but only 

with the prior written approval of the 

NCUA. 

(5) Redemption. A corporate credit 

union may redeem NCAs prior to 

maturity or prior to the end of the notice 

period only with the prior approval of 

the NCUA and, for state chartered 

corporate credit unions, the approval of 

the appropriate state regulator. 

(6) Sale. A member may transfer its 

interest in a nonperpetual capital 

account to another member or to a 

nonmember (other than a natural 

person). At least 14 days before 

consummating such a transfer, the 

member must notify the corporate credit 

union of the pending transfer. The 

corporate credit union must, within 10 

days of such notice, provide the member 

and the potential transferee all financial 

information about the corporate credit 

union that is available to the public or 

that the corporate credit union has 

provided to its members, including any 

call report data submitted by the 

corporate credit union to NCUA but not 

yet posted on NCUA’s Web site. 

(7) Merger. In the event of a merger of 

a corporate credit union, nonperpetual 

capital will transfer to the continuing 

corporate credit union. The minimum 

five-year notice period for withdrawal of 

no-maturity capital remains in effect. 

(c) Requirements for perpetual 

contributed capital (PCC)—(1) 

Disclosure. The terms and conditions of 

any perpetual contributed capital 

instrument must be disclosed to the 

recorded owner of the instrument at the 

time the instrument is created and must 

be signed by either all of the directors 

of the member credit union or, if 

authorized by board resolution, the 

chair and secretary of the board. 

(2) Release. Perpetual contributed 

capital may not be released due solely 

to the merger, charter conversion or 

liquidation of a member credit union. In 

the event of a merger, the perpetual 

contributed capital transfers to the 

continuing credit union. In the event of 

a charter conversion, the perpetual 

contributed capital transfers to the new 

institution. In the event of liquidation, 

the perpetual contributed capital may be 

released to facilitate the payout of 

shares with NCUA’s prior written 

approval. 

(3) Callability. A corporate credit 

union may call perpetual contributed 

capital instruments only with the prior 

approval of the NCUA and, for state 

chartered corporate credit unions, the 

applicable state regulator. Perpetual 

contributed capital accounts are callable 

on a pro-rata basis across an issuance 

class. 

(4) Perpetual contributed capital. A 

corporate credit union may issue 

perpetual contributed capital to both 

members and nonmembers. 

(5) The holder of a PCC instrument 

may transfer its interests in the 

instrument to another member or to a 

nonmember (other than a natural 

person). At least 14 days before 

consummating such a transfer, the 

member must notify the corporate credit 

union of the pending transfer. The 

corporate credit union must, within 10 

days of such notice, provide the member 


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64834 Federal Register / Vol. 75, No. 202 / Wednesday, October 20, 2010 / Rules and Regulations 

and the potential transferee all financial 

information about the corporate credit 

union that is available to the public or 

that the corporate credit union has 

provided to its members, including any 

call report data submitted by the 

corporate credit union to NCUA but not 

yet posted on NCUA’s Web site. 

(6) A corporate credit union is 

permitted to condition membership, 

services, or prices for services on a 

member’s ownership of PCC, provided 

the corporate credit union gives existing 

members at least six months written 

notice of: 

(i) The requirement to purchase PCC, 

including specific amounts; and 

(ii) The effects of a failure to purchase 

the requisite PCC on the pricing of 

services or on the member’s access to 

membership or services. 

(d) Individual minimum capital 

requirements. 

(1) General. The rules and procedures 

specified in this paragraph apply to the 

establishment of an individual 

minimum capital requirement for a 

corporate credit union that varies from 

any of the risk-based capital 

requirement(s) or leverage ratio 

requirements that would otherwise 

apply to the corporate credit union 

under this part. 

(2) Appropriate considerations for 

establishing individual minimum 

capital requirements. Minimum capital 

levels higher than the risk-based capital 

requirements or the leverage ratio 

requirement under this part may be 

appropriate for individual corporate 

credit unions. The NCUA may establish 

increased individual minimum capital 

requirements, including modification of 

the minimum capital requirements 

related to being either significantly and 

critically undercapitalized for purposes 

of § 704.4 of this part, upon a 

determination that the corporate credit 

union’s capital is or may become 

inadequate in view of the credit union’s 

circumstances. For example, higher 

capital levels may be appropriate when 

NCUA determines that: 

(i) A corporate credit union is 

receiving special supervisory attention; 

(ii) A corporate credit union has or is 

expected to have losses resulting in 

capital inadequacy; 

(iii) A corporate credit union has a 

high degree of exposure to interest rate 

risk, prepayment risk, credit risk, 

concentration risk, certain risks arising 

from nontraditional activities or similar 

risks, or a high proportion of off-balance 

sheet risk including standby letters of 

credit; 

(iv) A corporate credit union has poor 

liquidity or cash flow; 

(v) A corporate credit union is 

growing, either internally or through 

acquisitions, at such a rate that 

supervisory problems are presented that 

are not dealt with adequately by other 

NCUA regulations or other guidance; 

(vi) A corporate credit union may be 

adversely affected by the activities or 

condition of its CUSOs or other persons 

or entities with which it has significant 

business relationships, including 

concentrations of credit; 

(vii) A corporate credit union with a 

portfolio reflecting weak credit quality 

or a significant likelihood of financial 

loss, or has loans or securities in 

nonperforming status or on which 

borrowers fail to comply with 

repayment terms; 

(viii) A corporate credit union has 

inadequate underwriting policies, 

standards, or procedures for its loans 

and investments; 

(ix) A corporate credit union has 

failed to properly plan for, or execute, 

necessary retained earnings growth, or 

(ix) A corporate credit union has a 

record of operational losses that exceeds 

the average of other, similarly situated 

corporate credit unions; has 

management deficiencies, including 

failure to adequately monitor and 

control financial and operating risks, 

particularly the risks presented by 

concentrations of credit and 

nontraditional activities; or has a poor 

record of supervisory compliance. 

(3) Standards for determination of 

appropriate individual minimum 

capital requirements. The appropriate 

minimum capital levels for an 

individual corporate credit union 

cannot be determined solely through the 

application of a rigid mathematical 

formula or wholly objective criteria. The 

decision is necessarily based, in part, on 

subjective judgment grounded in agency 

expertise. The factors to be considered 

in NCUA’s determination will vary in 

each case and may include, for example: 

(i) The conditions or circumstances 

leading to the determination that a 

higher minimum capital requirement is 

appropriate or necessary for the 

corporate credit union; 

(ii) The exigency of those 

circumstances or potential problems; 

(iii) The overall condition, 

management strength, and future 

prospects of the corporate credit union 

and, if applicable, its subsidiaries, 

affiliates, and business partners; 

(iv) The corporate credit union’s 

liquidity, capital and other indicators of 

financial stability, particularly as 

compared with those of similarly 

situated corporate credit unions; and 

(v) The policies and practices of the 

corporate credit union’s directors, 

officers, and senior management as well 

as the internal control and internal audit 

systems for implementation of such 

adopted policies and practices. 

(4) Procedures—(i) In the case of a 

state chartered corporate credit union, 

NCUA will consult with the appropriate 

state regulator when considering 

imposing a new minimum capital 

requirement. 

(ii) When the NCUA determines that 

a minimum capital requirement is 

necessary or appropriate for a particular 

corporate credit union, it will notify the 

corporate credit union in writing of its 

proposed individual minimum capital 

requirement; the schedule for 

compliance with the new requirement; 

and the specific causes for determining 

that the higher individual minimum 

capital requirement is necessary or 

appropriate for the corporate credit 

union. The NCUA shall forward the 

notifying letter to the appropriate state 

supervisory authority (SSA) if a statechartered corporate credit union would 

be subject to an individual minimum 

capital requirement. 

(iii) The corporate credit union’s 

response must include any information 

that the credit union wants the NCUA 

to consider in deciding whether to 

establish or to amend an individual 

minimum capital requirement for the 

corporate credit union, what the 

individual capital requirement should 

be, and, if applicable, what compliance 

schedule is appropriate for achieving 

the required capital level. The responses 

of the corporate credit union and SSA 

must be in writing and must be 

delivered to the NCUA within 30 days 

after the date on which the notification 

was received. The NCUA may extend 

the time period for good cause, and the 

time period for response by the insured 

corporate credit union may be shortened 

for good cause: 

(A) When, in the opinion of the 

NCUA, the condition of the corporate 

credit union so requires, and the NCUA 

informs the corporate credit union of 

the shortened response period in the 

notice; 

(B) With the consent of the corporate 

credit union; or 

(C) When the corporate credit union 

already has advised the NCUA that it 

cannot or will not achieve its applicable 

minimum capital requirement. 

(iv) Failure by the corporate credit 

union to respond within 30 days, or 

such other time period as may be 

specified by the NCUA, may constitute 

a waiver of any objections to the 

proposed individual minimum capital 

requirement or to the schedule for 

complying with it, unless the NCUA has 


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provided an extension of the response 

period for good cause. 

(v) After expiration of the response 

period, the NCUA will decide whether 

or not the proposed individual 

minimum capital requirement should be 

established for the corporate credit 

union, or whether that proposed 

requirement should be adopted in 

modified form, based on a review of the 

corporate credit union’s response and 

other relevant information. The NCUA’s 

decision will address comments 

received within the response period 

from the corporate credit union and the 

appropriate state supervisory authority 

(SSA) (if a state-chartered corporate 

credit union is involved) and will state 

the level of capital required, the 

schedule for compliance with this 

requirement, and any specific remedial 

action the corporate credit union could 

take to eliminate the need for continued 

applicability of the individual minimum 

capital requirement. The NCUA will 

provide the corporate credit union and 

the appropriate SSA (if a state-chartered 

corporate credit union is involved) with 

a written decision on the individual 

minimum capital requirement, 

addressing the substantive comments 

made by the corporate credit union and 

setting forth the decision and the basis 

for that decision. Upon receipt of this 

decision by the corporate credit union, 

the individual minimum capital 

requirement becomes effective and 

binding upon the corporate credit 

union. This decision represents final 

agency action. 

(vi) In lieu of the procedures 

established above, a corporate credit 

union may request an informal hearing. 

The corporate credit union must make 

the request for a hearing in writing, and 

NCUA must receive the request no later 

than 10 days following the date of the 

notice described in paragraph (d)(4)(ii) 

of this section. Upon receipt of the 

request for hearing, NCUA will conduct 

an informal hearing and render a 

decision using the procedures described 

in paragraphs (d), (e), and (f) of 

§ 747.3003 of this chapter. 

(5) Failure to comply. Failure to 

satisfy any individual minimum capital 

requirement, or to meet any required 

incremental additions to capital under a 

schedule for compliance with such an 

individual minimum capital 

requirement, will constitute a basis to 

take action as described in § 704.4. 

(6) Change in circumstances. If, after 

a decision is made under paragraph 

(b)(3)(iv) of this section, there is a 

change in the circumstances affecting 

the corporate credit union’s capital 

adequacy or its ability to reach its 

required minimum capital level by the 

specified date, the NCUA may amend 

the individual minimum capital 

requirement or the corporate credit 

union’s schedule for such compliance. 

The NCUA may decline to consider a 

corporate credit union’s request for such 

changes that are not based on a 

significant change in circumstances or 

that are repetitive or frivolous. Pending 

the NCUA’s reexamination of the 

original decision, that original decision 

and any compliance schedule 

established in that decision will 

continue in full force and effect. 

(e) Reservation of authority. 

(1) Transactions for purposes of 

evasion. The NCUA may disregard any 

transaction entered into primarily for 

the purpose of reducing the minimum 

required amount of regulatory capital or 

otherwise evading the requirements of 

this section. 

(2) Period-end versus average figures. 

The NCUA reserves the right to require 

a corporate credit union to compute its 

capital ratios on the basis of period-end 

assets rather than average assets when 

the NCUA determines this requirement 

is appropriate to carry out the purposes 

of this part. 

(3) Reservation of authority. (i) 

Notwithstanding the definitions of core 

and supplementary capital in paragraph 

(d) of this section, the NCUA may find 

that a particular asset or core or 

supplementary capital component has 

characteristics or terms that diminish its 

contribution to a corporate credit 

union’s ability to absorb losses, and the 

NCUA may require the discounting or 

deduction of such asset or component 

from the computation of core, 

supplementary, or total capital. 

(ii) Notwithstanding Appendix C to 

this Part, the NCUA will look to the 

substance of a transaction and may find 

that the assigned risk-weight for any 

asset, or credit equivalent amount or 

credit conversion factor for any offbalance sheet item does not 

appropriately reflect the risks imposed 

on the corporate credit union. The 

NCUA may require the corporate credit 

union to apply another risk-weight, 

credit equivalent amount, or credit 

conversion factor that NCUA deems 

appropriate. 

(iii) If Appendix C to this part does 

not specifically assign a risk-weight, 

credit equivalent amount, or credit 

conversion factor to a particular asset or 

activity of the corporate credit union, 

the NCUA may assign any risk-weight, 

credit equivalent amount, or credit 

conversion factor that it deems 

appropriate. In making this 

determination, NCUA will consider the 

risks associated with the asset or offbalance sheet item as well as other 

relevant factors. 

(4) Where practicable, the NCUA will 

consult with the appropriate state 

regulator before taking any action under 

this paragraph (e) that involves a state 

chartered corporate credit union. 

(5) Before taking any action under this 

paragraph (e), NCUA will provide the 

corporate credit union with written 

notice of the intended action and the 

reasons for such action. The corporate 

credit union will have seven days to 

provide the NCUA with a written 

response, and the NCUA will consider 

the response before taking the action. 

Upon the timely request of the corporate 

credit union, and for good cause, NCUA 

may extend the seven day response 

period. 

(f) Former capital accounts. This 

paragraph addresses membership 

capital accounts (MCAs) that qualified 

as corporate capital prior to October 20, 

2011 but which no longer satisfy the 

definitions of capital because the 

accounts have not been converted by the 

member to nonperpetual capital 

accounts (NCAs) or to perpetual 

contributed capital (PCC). 

(1) For MCAs structured as adjustable 

balance accounts, the corporate will 

immediately place the account on notice 

of withdrawal if the member has not 

already done so. The corporate will 

continue to adjust the balance of the 

MCA account in accordance with the 

original terms of the account until the 

entire notice period has run and then 

return the remaining balance, less any 

losses, to the member. Until the 

expiration of the notice period the entire 

adjusted balance will be available to 

cover losses at the corporate credit 

union that exceed retained earnings and 

PCC (excluding, if a corporate credit 

union exercises the capital prioritization 

option under Part I of Appendix A to 

this Part, any PCC with priority under 

that option). 

(2) For term MCAs, the corporate 

credit union will return the balance of 

the MCA account to the member at the 

expiration of the term. Until the 

expiration of term, the entire account 

balance will be available to cover losses 

that exceed retained earnings and PCC 

(excluding, if a corporate credit union 

exercises the capital prioritization 

option under part I of Appendix A to 

this part, any PCC with priority under 

that option). 

(3) A corporate credit union may 

count a portion of unconverted MCAs as 

Tier 2 capital. Beginning on the date of 

issuance (for term MCAs) or the date of 

notice of withdrawal (for other MCAs), 

the corporate may count the entire 

account balance as Tier 2 capital, but 


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will then reduce the amount of the 

account that can be considered as Tier 

2 capital by a constant monthly 

amortization that ensures the capital is 

fully amortized one year before the date 

of maturity or one year before the end 

of the notice period. For adjustable 

balance account MCAs where the 

adjustment is determined based on 

some impermanent measure, such as 

shares on deposit with the corporate, 

the corporate credit union may not treat 

any part of the account as capital. 

(4) A corporate credit union must, on 

or before December 20, 2011, provide 

any members that hold unconverted 

MCAs a one-time written disclosure 

about the status of their MCA accounts 

as described in this paragraph (f). 

§ 704.4 [Redesignated as § 704.13] 

■ 9. Effective January 18, 2011, 

redesignate § 704.4 as § 704.13. 

■ 10. Effective October 20, 2011, add a 

new § 704.4 to read as follows: 

§ 704.4. Prompt corrective action. 

(a) Purpose. The principal purpose of 

this section is to define, for corporate 

credit unions that are not adequately 

capitalized, the capital measures and 

capital levels that are used for 

determining appropriate supervisory 

actions. This section establishes 

procedures for submission and review 

of capital restoration plans and for 

issuance and review of capital 

directives, orders, and other supervisory 

directives. 

(b) Scope. This section applies to 

corporate credit unions, including 

officers, directors, and employees. 

(1) This section does not limit the 

authority of NCUA in any way to take 

supervisory actions to address unsafe or 

unsound practices, deficient capital 

levels, violations of law, unsafe or 

unsound conditions, or other practices. 

The NCUA may take action under this 

section independently of, in 

conjunction with, or in addition to any 

other enforcement action available to 

the NCUA, including issuance of cease 

and desist orders, approval or denial of 

applications or notices, assessment of 

civil money penalties, or any other 

actions authorized by law. 

(2) Unless permitted by the NCUA or 

otherwise required by law, no corporate 

credit union may state in any 

advertisement or promotional material 

its capital category under this part or 

that the NCUA has assigned the 

corporate credit union to a particular 

category. 

(3) Any group of credit unions 

applying for a new corporate credit 

union charter will submit, as part of the 

charter application, a detailed draft plan 

for soliciting contributed capital and 

building retained earnings. The draft 

plan will include specific levels of 

contributed capital and retained 

earnings and the anticipated timeframes 

for achieving those levels. The Board 

will review the draft plan and modify it 

as necessary. If the Board approves the 

plan, the Board will include any 

necessary waivers of this section or part. 

(c) Notice of capital category. (1) 

Effective date of determination of 

capital category. A corporate credit 

union will be deemed to be within a 

given capital category as of the most 

recent date: 

(i) A 5310 Financial Report is 

required to be filed with the NCUA; 

(ii) A final NCUA report of 

examination is delivered to the 

corporate credit union; or 

(iii) Written notice is provided by the 

NCUA to the corporate credit union that 

its capital category has changed as 

provided in paragraphs (c)(2) or (d)(3) of 

this section. 

(2) Adjustments to reported capital 

levels and category— 

(i) Notice of adjustment by corporate 

credit union. A corporate credit union 

must provide the NCUA with written 

notice that an adjustment to the 

corporate credit union’s capital category 

may have occurred no later than 15 

calendar days following the date that 

any material event has occurred that 

would cause the corporate credit union 

to be placed in a lower capital category 

from the category assigned to the 

corporate credit union for purposes of 

this section on the basis of the corporate 

credit union’s most recent call report or 

report of examination. 

(ii) Determination by the NCUA to 

change capital category. After receiving 

notice pursuant to paragraph (c)(1) of 

this section, or on its own initiative, the 

NCUA will determine whether to 

change the capital category of the 

corporate credit union and will notify 

the corporate credit union of the 

NCUA’s determination. 

(d) Capital measures and capital 

category definitions. (1) Capital 

measures. For purposes of this section, 

the relevant capital measures are: 

(i) The total risk-based capital ratio; 

(ii) The Tier 1 risk-based capital ratio; 

and 

(iii) The leverage ratio. 

(2) Capital categories. For purposes of 

this section, a corporate credit union is: 

(i) Well capitalized if the corporate 

credit union: 

(A) Has a total risk-based capital ratio 

of 10.0 percent or greater; and 

(B) Has a Tier 1 risk-based capital 

ratio of 6.0 percent or greater; and 

(C) Has a leverage ratio of 5.0 percent 

or greater; and 

(D) Is not subject to any written 

agreement, order, capital directive, or 

prompt corrective action directive 

issued by NCUA to meet and maintain 

a specific capital level for any capital 

measure. 

(ii) Adequately capitalized if the 

corporate credit union: 

(A) Has a total risk-based capital ratio 

of 8.0 percent or greater; and 

(B) Has a Tier 1 risk-based capital 

ratio of 4.0 percent or greater; and 

(C) Has: 

(1) A leverage ratio of 4.0 percent or 

greater; and 

(2) Does not meet the definition of a 

well capitalized corporate credit union. 

(iii) Undercapitalized if the corporate 

credit union: 

(A) Has a total risk-based capital ratio 

that is less than 8.0 percent; or 

(B) Has a Tier 1 risk-based capital 

ratio that is less than 4.0 percent; or 

(C) Has a leverage ratio that is less 

than 4.0 percent. 

(iv) Significantly undercapitalized if 

the corporate credit union has: 

(A) A total risk-based capital ratio that 

is less than 6.0 percent; or 

(B) A Tier 1 risk-based capital ratio 

that is less than 3.0 percent; or 

(C) A leverage ratio that is less than 

3.0 percent. 

(v) Critically undercapitalized if the 

corporate credit union has: 

(A) A total risk-based capital ratio that 

is less than 4.0 percent; or 

(B) A Tier 1 risk-based capital ratio 

that is less than 2.0 percent; or 

(C) A leverage ratio that is less than 

2.0 percent. 

(3) Reclassification based on 

supervisory criteria other than capital. 

Notwithstanding the elements of 

paragraph (d)(2) of this section, the 

NCUA may reclassify a well capitalized 

corporate credit union as adequately 

capitalized, and may require an 

adequately capitalized or 

undercapitalized corporate credit union 

to comply with certain mandatory or 

discretionary supervisory actions as if 

the corporate credit union were in the 

next lower capital category, in the 

following circumstances: 

(i) Unsafe or unsound condition. The 

NCUA has determined, after notice and 

opportunity for hearing pursuant to 

paragraph (h)(1) of this section, that the 

corporate credit union is in an unsafe or 

unsound condition; or 

(ii) Unsafe or unsound practice. The 

NCUA has determined, after notice and 

an opportunity for hearing pursuant to 

paragraph (h)(1) of this section, that the 

corporate credit union received a lessthan-satisfactory rating (i.e., three or 

lower) for any rating category (other 

than in a rating category specifically 


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addressing capital adequacy) under the 

Corporate Risk Information System 

(CRIS) rating system and has not 

corrected the conditions that served as 

the basis for the less than satisfactory 

rating. Ratings under this paragraph 

(d)(3)(ii) refer to the most recent ratings 

(as determined either on-site or off-site 

by the most recent examination) of 

which the corporate credit union has 

been notified in writing. 

(4) The NCUA may, for good cause, 

modify any of the percentages in 

paragraph (d)(2) of this section as 

described in § 704.3(d). 

(e) Capital restoration plans. (1) 

Schedule for filing plan— 

(i) In general. A corporate credit 

union must file a written capital 

restoration plan with the NCUA within 

45 days of the date that the corporate 

credit union receives notice or is 

deemed to have notice that the 

corporate credit union is 

undercapitalized, significantly 

undercapitalized, or critically 

undercapitalized, unless the NCUA 

notifies the corporate credit union in 

writing that the plan is to be filed 

within a different period. An adequately 

capitalized corporate credit union that 

has been required pursuant to paragraph 

(d)(3) of this section to comply with 

supervisory actions as if the corporate 

credit union were undercapitalized is 

not required to submit a capital 

restoration plan solely by virtue of the 

reclassification. 

(ii) Additional capital restoration 

plans. Notwithstanding paragraph 

(e)(1)(i) of this section, a corporate 

credit union that has already submitted 

and is operating under a capital 

restoration plan approved under this 

section is not required to submit an 

additional capital restoration plan based 

on a revised calculation of its capital 

measures or a reclassification of the 

institution under paragraph (d)(3) of this 

section unless the NCUA notifies the 

corporate credit union that it must 

submit a new or revised capital plan. A 

corporate credit union that is notified 

that it must submit a new or revised 

capital restoration plan must file the 

plan in writing with the NCUA within 

45 days of receiving such notice, unless 

the NCUA notifies the corporate credit 

union in writing that the plan is to be 

filed within a different period. 

(2) Contents of plan. All financial data 

submitted in connection with a capital 

restoration plan must be prepared in 

accordance with the instructions 

provided on the call report, unless the 

NCUA instructs otherwise. The capital 

restoration plan must include all of the 

information required to be filed under 

paragraph (k)(2)(ii) of this section. A 

corporate credit union required to 

submit a capital restoration plan as the 

result of a reclassification of the 

corporate credit union pursuant to 

paragraph (d)(3) of this section must 

include a description of the steps the 

corporate credit union will take to 

correct the unsafe or unsound condition 

or practice. 

(3) Failure to submit a capital 

restoration plan. A corporate credit 

union that is undercapitalized and that 

fails to submit a written capital 

restoration plan within the period 

provided in this section will, upon the 

expiration of that period, be subject to 

all of the provisions of this section 

applicable to significantly 

undercapitalized credit unions. 

(4) Review of capital restoration 

plans. Within 60 days after receiving a 

capital restoration plan under this 

section, the NCUA will provide written 

notice to the corporate credit union of 

whether it has approved the plan. The 

NCUA may extend this time period. 

(5) Disapproval of capital plan. If the 

NCUA does not approve a capital 

restoration plan, the corporate credit 

union must submit a revised capital 

restoration plan, when directed to do so, 

within the time specified by the NCUA. 

An undercapitalized corporate credit 

union is subject to the provisions 

applicable to significantly 

undercapitalized credit unions until it 

has submitted, and NCUA has 

approved, a capital restoration plan. If 

the NCUA directs that the corporate 

submit a revised plan, it must do so in 

time frame specified by the NCUA. 

(6) Failure to implement a capital 

restoration plan. Any undercapitalized 

corporate credit union that fails in any 

material respect to implement a capital 

restoration plan will be subject to all of 

the provisions of this section applicable 

to significantly undercapitalized 

institutions. 

(7) Amendment of capital plan. A 

corporate credit union that has filed an 

approved capital restoration plan may, 

after prior written notice to and 

approval by the NCUA, amend the plan 

to reflect a change in circumstance. 

Until such time as NCUA has approved 

a proposed amendment, the corporate 

credit union must implement the capital 

restoration plan as approved prior to the 

proposed amendment. 

(f) Mandatory and discretionary 

supervisory actions. (1) Mandatory 

supervisory actions.— 

(i) Provisions applicable to all 

corporate credit unions. All corporate 

credit unions are subject to the 

restrictions contained in paragraph 

(k)(1) of this section on capital 

distributions. 

(ii) Provisions applicable to 

undercapitalized, significantly 

undercapitalized, and critically 

undercapitalized corporate credit 

unions. Immediately upon receiving 

notice or being deemed to have notice, 

as provided in paragraph (c) or (e) of 

this section, that the corporate credit 

union is undercapitalized, significantly 

undercapitalized, or critically 

undercapitalized, the corporate credit 

union will be subject to the following 

provisions of paragraph (k) of this 

section: 

(A) Restricting capital distributions 

(paragraph (k)(1)); 

(B) NCUA monitoring of the condition 

of the corporate credit union (paragraph 

(k)(2)(i)); 

(C) Requiring submission of a capital 

restoration plan (paragraph (k)(2)(ii)); 

(D) Restricting the growth of the 

corporate credit union’s assets 

(paragraph (k)(2)(iii)); and 

(E) Requiring prior approval of certain 

expansion proposals (paragraph 

(k)(2)(iv)). 

(iii) Additional provisions applicable 

to significantly undercapitalized, and 

critically undercapitalized corporate 

credit unions. In addition to the 

mandatory requirements described in 

paragraph (f)(1) of this section, 

immediately upon receiving notice or 

being deemed to have notice that the 

corporate credit union is significantly 

undercapitalized, or critically 

undercapitalized, or that the corporate 

credit union is subject to the provisions 

applicable to corporate credit unions 

that are significantly undercapitalized 

because the credit union failed to 

submit or implement in any material 

respect an acceptable capital restoration 

plan, the corporate credit union will 

become subject to the provisions of 

paragraph (k)(3)(iii) of this section that 

restrict compensation paid to senior 

executive officers of the institution. 

(iv) Additional provisions applicable 

to critically undercapitalized corporate 

credit unions. In addition to the 

provisions described in paragraphs 

(f)(1)(ii) and (f)(1)(iii) of this section, 

immediately upon receiving notice or 

being deemed to have notice that the 

corporate credit union is critically 

undercapitalized, the corporate credit 

union will become subject to these 

additional provisions of paragraph (k) of 

this section: 

(A) Restricting the activities of the 

corporate credit union ((k)(5)(i)); and 

(B) Restricting payments on 

subordinated debt of the corporate 

credit union ((k)(5)(ii)). 

(2) Discretionary supervisory actions. 

(i) All PCA actions listed in paragraph 

(k) of this section that are not discussed 


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64838 Federal Register / Vol. 75, No. 202 / Wednesday, October 20, 2010 / Rules and Regulations 

in paragraph (f)(1) of this section are 

discretionary. 

(ii) All discretionary actions available 

to NCUA in the case of an 

undercapitalized corporate credit union 

are available to NCUA in the case of a 

significantly undercapitalized credit 

union. All discretionary actions 

available to NCUA in the case of an 

undercapitalized corporate credit union 

or a significantly undercapitalized 

corporate credit union are available to 

NCUA in the case of a critically 

undercapitalized corporate credit union. 

(iii) In taking any discretionary PCA 

actions with a corporate credit union 

that is deemed to be undercapitalized, 

significantly undercapitalized or 

critically undercapitalized, or has been 

reclassified as undercapitalized, or 

significantly undercapitalized; or an 

action in connection with an officer or 

director of such corporate credit union; 

the NCUA will follow the procedures 

for issuing directives under paragraphs 

(g) and (i) of this section. 

(iv) NCUA will consult and seek to 

work cooperatively with the appropriate 

state supervisory authority (SSA) before 

taking any discretionary supervisory 

action with respect to a state-chartered 

corporate credit union; will provide 

notice of its decision to the SSA; and 

will allow the appropriate SSA an 

opportunity to take the proposed action 

independently or jointly with NCUA. 

(g) Directives to take prompt 

corrective action. The NCUA will 

provide an undercapitalized, 

significantly undercapitalized, or 

critically undercapitalized corporate 

credit union prior written notice of the 

NCUA’s intention to issue a directive 

requiring such corporate credit union to 

take actions or to follow proscriptions 

described in this part. Section 747.3002 

of this chapter prescribes the notice 

content and associated process. 

(h) Procedures for reclassifying a 

corporate credit union based on criteria 

other than capital. When the NCUA 

intends to reclassify a corporate credit 

union or subject it to the supervisory 

actions applicable to the next lower 

capitalization category based on an 

unsafe or unsound condition or 

practice, the NCUA will provide the 

credit union with prior written notice of 

such intent. Section 747.3003 of this 

chapter prescribes the notice content 

and associated process. 

(i) Order to dismiss a Director or 

senior executive officer. When the 

NCUA issues and serves a directive on 

a corporate credit union requiring it to 

dismiss from office any director or 

senior executive officer under 

paragraphs (k)(3) of this section, the 

NCUA will also serve upon the person 

the corporate credit union is directed to 

dismiss (Respondent) a copy of the 

directive (or the relevant portions, 

where appropriate) and notice of the 

Respondent’s right to seek 

reinstatement. Section 747.3004 of this 

chapter prescribes the content of the 

notice of right to seek reinstatement and 

the associated process. 

(j) Enforcement of directives. Section 

747.3005 of this chapter prescribes the 

process for enforcement of directives. 

(k) Remedial actions towards 

undercapitalized, significantly 

undercapitalized, and critically 

undercapitalized corporate credit 

unions. (1) Provision applicable to all 

corporate credit unions. A corporate 

credit union is prohibited from making 

any capital distribution, including 

payment of dividends on perpetual and 

nonperpetual capital accounts, if, after 

making the distribution, the credit 

union would be undercapitalized. 

(2) Provisions applicable to 

undercapitalized corporate credit 

unions. 

(i) Monitoring required. The NCUA 

will— 

(A) Closely monitor the condition of 

any undercapitalized corporate credit 

union; 

(B) Closely monitor compliance with 

capital restoration plans, restrictions, 

and requirements imposed under this 

section; and 

(C) Periodically review the plan, 

restrictions, and requirements 

applicable to any undercapitalized 

corporate credit union to determine 

whether the plan, restrictions, and 

requirements are achieving the purpose 

of this section. 

(ii) Capital restoration plan required. 

(A) Any undercapitalized corporate 

credit union must submit an acceptable 

capital restoration plan to the NCUA. 

(B) The capital restoration plan will— 

(1) Specify— 

(i) The steps the corporate credit 

union will take to become adequately 

capitalized; 

(ii) The levels of capital to be attained 

during each year in which the plan will 

be in effect; 

(iii) How the corporate credit union 

will comply with the restrictions or 

requirements then in effect under this 

section; and 

(iv) The types and levels of activities 

in which the corporate credit union will 

engage; and 

(2) Contain such other information as 

the NCUA may require. 

(C) The NCUA will not accept a 

capital restoration plan unless the 

NCUA determines that the plan— 

(1) Complies with paragraph 

(k)(2)(ii)(B) of this section; 

(2) Is based on realistic assumptions, 

and is likely to succeed in restoring the 

corporate credit union’s capital; and 

(3) Would not appreciably increase 

the risk (including credit risk, interestrate risk, and other types of risk) to 

which the corporate credit union is 

exposed. 

(iii) Asset growth restricted. An 

undercapitalized corporate credit union 

must not permit its daily average net 

assets during any calendar month to 

exceed its moving daily average net 

assets unless— 

(A) The NCUA has accepted the 

corporate credit union’s capital 

restoration plan; and 

(B) Any increase in total assets is 

consistent with the plan. 

(iv) Prior approval required for 

acquisitions, branching, and new lines 

of business. An undercapitalized 

corporate credit union must not, 

directly or indirectly, acquire any 

interest in any entity, establish or 

acquire any additional branch office, or 

engage in any new line of business 

unless the NCUA has accepted the 

corporate credit union’s capital 

restoration plan, the corporate credit 

union is implementing the plan, and the 

NCUA determines that the proposed 

action is consistent with and will 

further the achievement of the plan. 

(3) Provisions applicable to 

significantly undercapitalized corporate 

credit unions and undercapitalized 

corporate credit unions that fail to 

submit and implement capital 

restoration plans. 

(i) In general. This paragraph applies 

with respect to any corporate credit 

union that— 

(A) Is significantly undercapitalized; 

or 

(B) Is undercapitalized and— 

(1) Fails to submit an acceptable 

capital restoration plan within the time 

allowed by the NCUA under paragraph 

(e)(1) of this section; or 

(2) Fails in any material respect to 

implement a plan accepted by the 

NCUA. 

(ii) Specific actions authorized. The 

NCUA may take one or more of the 

following actions: 

(A) Requiring recapitalization. 

(1) Requiring the corporate credit 

union to seek and obtain additional 

contributed capital. 

(2) Requiring the corporate credit 

union to increase its rate of earnings 

retention. 

(3) Requiring the corporate credit 

union to combine, in whole or part, 

with another insured depository 

institution, if one or more grounds exist 

under this section or the Federal Credit 

Union Act for appointing a conservator 

or liquidating agent. 


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Federal Register / Vol. 75, No. 202 / Wednesday, October 20, 2010 / Rules and Regulations 64839 

(B) Restricting any ongoing or future 

transactions with affiliates. 

(C) Restricting interest rates paid. 

(1) In general. Restricting the rates of 

dividends and interest that the 

corporate credit union pays on shares 

and deposits to the prevailing rates on 

shares and deposits of comparable 

amounts and maturities in the region 

where the institution is located, as 

determined by the NCUA. 

(2) Retroactive restrictions prohibited. 

Paragraph (k)(3)(ii)(c) of this section 

does not authorize the NCUA to restrict 

interest rates paid on time deposits or 

shares made before (and not renewed or 

renegotiated after) the date the NCUA 

announced this restriction. 

(D) Restricting asset growth. 

Restricting the corporate credit union’s 

asset growth more stringently than in 

paragraph (k)(2)(iii) of this section, or 

requiring the corporate credit union to 

reduce its total assets. 

(E) Restricting activities. Requiring 

the corporate credit union or any of its 

CUSOs to alter, reduce, or terminate any 

activity that the NCUA determines 

poses excessive risk to the corporate 

credit union. 

(F) Improving management. Doing one 

or more of the following: 

(1) New election of directors. 

Ordering a new election for the 

corporate credit union’s board of 

directors. 

(2) Dismissing directors or senior 

executive officers. Requiring the 

corporate credit union to dismiss from 

office any director or senior executive 

officer who had held office for more 

than 180 days immediately before the 

corporate credit union became 

undercapitalized. 

(3) Employing qualified senior 

executive officers. Requiring the 

corporate credit union to employ 

qualified senior executive officers (who, 

if the NCUA so specifies, will be subject 

to approval by the NCUA). 

(G) Requiring divestiture. Requiring 

the corporate credit union to divest 

itself of or liquidate any interest in any 

entity if the NCUA determines that the 

entity is in danger of becoming 

insolvent or otherwise poses a 

significant risk to the corporate credit 

union; 

(H) Conserve or liquidate the 

corporate credit union if NCUA 

determines the credit union has no 

reasonable prospect of becoming 

adequately capitalized; and 

(I) Requiring other action. Requiring 

the corporate credit union to take any 

other action that the NCUA determines 

will better carry out the purpose of this 

section than any of the actions 

described in this paragraph. 

(iii) Senior executive officers’ 

compensation restricted. 

(A) In general. The corporate credit 

union is prohibited from doing any of 

the following without the prior written 

approval of the NCUA: 

(1) Pay any bonus or profit-sharing to 

any senior executive officer. 

(2) Provide compensation to any 

senior executive officer at a rate 

exceeding that officer’s average rate of 

compensation (excluding bonuses and 

profit-sharing) during the 12 calendar 

months preceding the calendar month 

in which the corporate credit union 

became undercapitalized. 

(B) Failing to submit plan. The NCUA 

will not grant approval with respect to 

a corporate credit union that has failed 

to submit an acceptable capital 

restoration plan. 

(iv) Discretion to impose certain 

additional restrictions. The NCUA may 

impose one or more of the restrictions 

prescribed by regulation under 

paragraph (k)(5) of this section if the 

NCUA determines that those restrictions 

are necessary to carry out the purpose 

of this section. 

(4) More stringent treatment based on 

other supervisory criteria. 

(i) In general. If the NCUA 

determines, after notice and an 

opportunity for hearing as described in 

subpart M of part 747 of this chapter, 

that a corporate credit union is in an 

unsafe or unsound condition or deems 

the corporate credit union to be 

engaging in an unsafe or unsound 

practice, the NCUA may— 

(A) If the corporate credit union is 

well capitalized, reclassify the corporate 

credit union as adequately capitalized; 

(B) If the corporate credit union is 

adequately capitalized (but not well 

capitalized), require the corporate credit 

union to comply with one or more 

provisions of paragraphs (k)(1) and 

(k)(2) of this section, as if the corporate 

credit union were undercapitalized; or 

(C) If the corporate credit union is 

undercapitalized, take any one or more 

actions authorized under paragraph 

(k)(3)(ii) of this section as if the 

corporate credit union were 

significantly undercapitalized. 

(ii) Contents of plan. Any plan 

required under paragraph (k)(4)(i) of this 

section will specify the steps that the 

corporate credit union will take to 

correct the unsafe or unsound condition 

or practice. Capital restoration plans, 

however, will not be required under 

paragraph (k)(4)(i)(B) of this section. 

(5) Provisions applicable to critically 

undercapitalized corporate credit 

unions. 

(i) Activities restricted. Any critically 

undercapitalized corporate credit union 

must comply with restrictions 

prescribed by the NCUA under 

paragraph (k)(6) of this section. 

(ii) Payments on contributed capital 

and subordinated debt prohibited. A 

critically undercapitalized corporate 

credit union must not, beginning no 

later than 60 days after becoming 

critically undercapitalized, make any 

payment of dividends on contributed 

capital or any payment of principal or 

interest on the corporate credit union’s 

subordinated debt unless the NCUA 

determines that an exception would 

further the purpose of this section. 

Interest, although not payable, may 

continue to accrue under the terms of 

any subordinated debt to the extent 

otherwise permitted by law. Dividends 

on contributed capital do not, however, 

continue to accrue. 

(iii) Conservatorship, liquidation, or 

other action. The NCUA may, at any 

time, conserve or liquidate any critically 

undercapitalized corporate credit union 

or require the credit union to combine, 

in whole or part, with another 

institution. NCUA will consider, not 

later than 90 days after a corporate 

credit union becomes critically 

undercapitalized, whether NCUA 

should liquidate, conserve, or combine 

the institution. 

(6) Restricting activities of critically 

undercapitalized corporate credit 

unions. To carry out the purpose of this 

section, the NCUA will, by order— 

(i) Restrict the activities of any 

critically undercapitalized corporate 

credit union; and 

(ii) At a minimum, prohibit any such 

corporate credit union from doing any 

of the following without the NCUA’s 

prior written approval: 

(A) Entering into any material 

transaction other than in the usual 

course of business, including any 

investment, expansion, acquisition, sale 

of assets, or other similar action. 

(B) Extending credit for any 

transaction NCUA determines to be 

highly leveraged. 

(C) Amending the corporate credit 

union’s charter or bylaws, except to the 

extent necessary to carry out any other 

requirement of any law, regulation, or 

order. 

(D) Making any material change in 

accounting methods. 

(E) Paying compensation or bonuses 

NCUA determines to be excessive. 

(F) Paying interest on new or renewed 

liabilities at a rate that would increase 

the corporate credit union’s weighted 

average cost of funds to a level 

significantly exceeding the prevailing 

rates of interest on insured deposits in 

the corporate credit union’s normal 

market areas. 


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64840 Federal Register / Vol. 75, No. 202 / Wednesday, October 20, 2010 / Rules and Regulations 

■ 11. Revise § 704.5 to read as follows: 

§ 704.5. Investments. 

(a) Policies. A corporate credit union 

must operate according to an investment 

policy that is consistent with its other 

risk management policies, including, 

but not limited to, those related to credit 

risk management, asset and liability 

management, and liquidity 

management. The policy must address, 

at a minimum: 

(1) Appropriate tests and criteria for 

evaluating investments and investment 

transactions before purchase; and 

(2) Reasonable and supportable 

concentration limits for limited 

liquidity investments in relation to 

capital. 

(b) General. All investments must be 

U.S. dollar-denominated and subject to 

the credit policy restrictions set forth in 

§ 704.6. 

(c) Authorized activities. A corporate 

credit union may invest in: 

(1) Securities, deposits, and 

obligations set forth in Sections 107(7), 

107(8), and 107(15) of the Federal Credit 

Union Act, 12 U.S.C. 1757(7), 1757(8), 

and 1757(15), except as provided in this 

section; 

(2) Deposits in, the sale of federal 

funds to, and debt obligations of 

corporate credit unions, Section 107(8) 

institutions, and state banks, trust 

companies, and mutual savings banks 

not domiciled in the state in which the 

corporate credit union does business; 

(3) Corporate CUSOs, as defined in 

and subject to the limitations of 

§ 704.11; 

(4) Marketable debt obligations of 

corporations chartered in the United 

States. This authority does not apply to 

debt obligations that are convertible into 

the stock of the corporation; and 

(5) Domestically-issued asset-backed 

securities. 

(d) Repurchase agreements. A 

corporate credit union may enter into a 

repurchase agreement provided that: 

(1) The corporate credit union, 

directly or through its agent, receives 

written confirmation of the transaction, 

and either takes physical possession or 

control of the repurchase securities or is 

recorded as owner of the repurchase 

securities through the Federal Reserve 

Book-Entry Securities Transfer System; 

(2) The repurchase securities are legal 

investments for that corporate credit 

union; 

(3) The corporate credit union, 

directly or through its agent, receives 

daily assessment of the market value of 

the repurchase securities and maintains 

adequate margin that reflects a risk 

assessment of the repurchase securities 

and the term of the transaction; and 

(4) The corporate credit union has 

entered into signed contracts with all 

approved counterparties and agents, and 

ensures compliance with the contracts. 

Such contracts must address any 

supplemental terms and conditions 

necessary to meet the specific 

requirements of this part. Third party 

arrangements must be supported by triparty contracts in which the repurchase 

securities are priced and reported daily 

and the tri-party agent ensures 

compliance; and 

(e) Securities Lending. A corporate 

credit union may enter into a securities 

lending transaction provided that: 

(1) The corporate credit union, 

directly or through its agent, receives 

written confirmation of the loan, obtains 

a first priority security interest in the 

collateral by taking physical possession 

or control of the collateral, or is 

recorded as owner of the collateral 

through the Federal Reserve Book-Entry 

Securities Transfer System; 

(2) The collateral is a legal investment 

for that corporate credit union; 

(3) The corporate credit union, 

directly or through its agent, receives 

daily assessment of the market value of 

collateral and maintains adequate 

margin that reflects a risk assessment of 

the collateral and terms of the loan; and 

(4) The corporate credit union has 

entered into signed contracts with all 

agents and, directly or through its agent, 

has executed a written loan and security 

agreement with the borrower. The 

corporate or its agent ensures 

compliance with the agreements. 

(f) Investment companies. A corporate 

credit union may invest in an 

investment company registered with the 

Securities and Exchange Commission 

under the Investment Company Act of 

1940 (15 U.S.C. 80a), or a collective 

investment fund maintained by a 

national bank under 12 CFR 9.18 or a 

mutual savings bank under 12 CFR 

550.260, provided that the company or 

fund prospectus restricts the investment 

portfolio to investments and investment 

transactions that are permissible for that 

corporate credit union. 

(g) Investment settlement. A corporate 

credit union may only contract for the 

purchase or sale of an investment if the 

transaction is settled on a delivery 

versus payment basis within 60 days for 

mortgage-backed securities, within 30 

days for new issues (other than 

mortgage-backed securities), and within 

three days for all other securities. 

(h) Prohibitions. A corporate credit 

union is prohibited from: 

(1) Purchasing or selling derivatives, 

except for embedded options not 

required under GAAP to be accounted 

for separately from the host contract or 

forward sales commitments on loans to 

be purchased by the corporate credit 

union; 

(2) Engaging in trading securities 

unless accounted for on a trade date 

basis; 

(3) Engaging in adjusted trading or 

short sales; 

(4) Purchasing mortgage servicing 

rights, small business related securities, 

residual interests in collateralized 

mortgage obligations, residual interests 

in real estate mortgage investment 

conduits, or residual interests in assetbacked securities; 

(5) Purchasing net interest margin 

securities; 

(6) Purchasing collateralized debt 

obligations; 

(7) Purchasing private label 

residential mortgage-backed securities; 

(8) Purchasing subordinated 

securities; and 

(9) Purchasing stripped mortgagebacked securities (SMBS), or securities 

that represent interests in SMBS, except 

as described in subparagraphs (i) and 

(iii) below. 

(i) A corporate credit union may 

invest in exchangeable collateralized 

mortgage obligations (exchangeable 

CMOs) representing beneficial 

ownership interests in one or more 

interest-only classes of a CMO (IO 

CMOs) or principal-only classes of a 

CMO (PO CMOs), but only if: 

(A) At the time of purchase, the ratio 

of the market price to the remaining 

principal balance is between .8 and 1.2, 

meaning that the discount or premium 

of the market price to par must be less 

than 20 points; 

(B) The offering circular or other 

official information available at the time 

of purchase indicates that the notional 

principal on each underlying IO CMO 

should decline at the same rate as the 

principal on one or more of the 

underlying non-IO CMOs, and that the 

principal on each underlying PO CMO 

should decline at the same rate as the 

principal, or notional principal, on one 

or more of the underlying non-PO 

CMOs; and 

(C) The credit union investment staff 

has the expertise dealing with 

exchangeable CMOs to apply the 

conditions in paragraphs (h)(5)(i)(A) and 

(B) of this section. 

(ii) A corporate credit union that 

invests in an exchangeable CMO may 

exercise the exchange option only if all 

of the underlying CMOs are permissible 

investments for that credit union. 

(iii) A corporate credit union may 

accept an exchangeable CMO 

representing beneficial ownership 

interests in one or more IO CMOs or PO 

CMOs as an asset associated with an 


emcdonald on DSK2BSOYB1PROD with RULES2
Federal Register / Vol. 75, No. 202 / Wednesday, October 20, 2010 / Rules and Regulations 64841 

investment repurchase transaction or as 

collateral in a securities lending 

transaction. When the exchangeable 

CMO is associated with one of these two 

transactions, it need not conform to the 

conditions in paragraphs (h)(5)(i)(A) or 

(B) of this section. 

(i) Conflicts of interest. A corporate 

credit union’s officials, employees, and 

immediate family members of such 

individuals, may not receive pecuniary 

consideration in connection with the 

making of an investment or deposit by 

the corporate credit union. Employee 

compensation is exempt from this 

prohibition. All transactions not 

specifically prohibited by this paragraph 

must be conducted at arm’s length and 

in the interest of the corporate credit 

union. 

(j) Grandfathering. A corporate credit 

union’s authority to hold an investment 

is governed by the regulation in effect at 

the time of purchase. However, all 

grandfathered investments are subject to 

the requirements of §§ 704.8 and 704.9. 

■ 12. Revise § 704.6 to read as follows: 

§ 704.6. Credit risk management. 

(a) Policies. A corporate credit union 

must operate according to a credit risk 

management policy that is 

commensurate with the investment risks 

and activities it undertakes. The policy 

must address at a minimum: 

(1) The approval process associated 

with credit limits; 

(2) Due diligence analysis 

requirements; 

(3) Maximum credit limits with each 

obligor and transaction counterparty, set 

as a percentage of capital. In addition to 

addressing deposits and securities, 

limits with transaction counterparties 

must address aggregate exposures of all 

transactions including, but not limited 

to, repurchase agreements, securities 

lending, and forward settlement of 

purchases or sales of investments; and 

(4) Concentrations of credit risk (e.g., 

originator of receivables, servicer of 

receivables, insurer, industry type, 

sector type, geographic, collateral type, 

and tranche priority). 

(b) Exemption. The limitations and 

requirements of this section do not 

apply to certain assets, whether or not 

considered investments under this part, 

including fixed assets, individual loans 

and loan participation interests, 

investments in CUSOs, investments that 

are issued or fully guaranteed as to 

principal and interest by the U.S. 

government or its agencies or its 

sponsored enterprises (other than 

mortgage backed-securities), 

investments that are fully insured or 

guaranteed (including accumulated 

dividends and interest) by the NCUSIF 

or the Federal Deposit Insurance 

Corporation, and settlement funds in 

federally insured depository 

institutions. 

(c) Issuer concentration limits—(1) 

General rule. The aggregate of all 

investments in any single obligor is 

limited to 25 percent of capital or $5 

million, whichever is greater. 

(2) Exceptions. 

(i) Investments in one obligor where 

the remaining maturity of all obligations 

is less than 30 days are limited to 50 

percent of capital; 

(ii) Investments in credit card master 

trust asset-backed securities are limited 

to 50 percent of capital in any single 

obligor; 

(iii) Aggregate investments in 

repurchase and securities lending 

agreements with any one counterparty 

are limited to 200 percent of capital; 

(iv) Investments in non-money market 

registered investment companies are 

limited to of 50 percent of capital in any 

single obligor; 

(v) Investments in money market 

registered investment companies are 

limited to 100 percent of capital in any 

single obligor; and 

(vi) Investments in corporate CUSOs 

are subject to the limitations of § 704.11. 

(3) For purposes of measurement, 

each new credit transaction must be 

evaluated in terms of the corporate 

credit union’s capital at the time of the 

transaction. An investment that fails a 

requirement of this section because of a 

subsequent reduction in capital will be 

deemed non-conforming. A corporate 

credit union is required to exercise 

reasonable efforts to bring 

nonconforming investments into 

conformity within 90 calendar days. 

Investments that remain nonconforming 

for 90 calendar days will be deemed to 

fail a requirement of this section and the 

corporate credit union will have to 

comply with § 704.10. 

(d) Sector concentration limits. (1) A 

corporate credit union must establish 

sector limits that do not exceed the 

following maximums: 

(i) Mortgage-backed securities 

(Inclusive of commercial mortgagebacked securities)—the lower of 1000 

percent of capital or 50 percent of 

assets; 

(ii) Commercial mortgage-backed 

securities—the lower of 300 percent of 

capital or 15 percent of assets; 

(iii) FFELP student loan asset-backed 

securities—the lower of 1000 percent of 

capital or 50 percent of assets; 

(iv) Private student loan asset-backed 

securities—the lower of 500 percent of 

capital or 25 percent of assets; 

(v) Auto loan/lease asset-backed 

securities—the lower of 500 percent of 

capital or 25 percent of assets; 

(vi) Credit card asset-backed 

securities—the lower of 500 percent of 

capital or 25 percent of assets; 

(vii) Other asset-backed securities not 

listed in paragraphs (ii) through (vi)— 

the lower of 500 percent of capital or 25 

percent of assets; 

(viii) Corporate debt obligations—the 

lower of 1000 percent of capital or 50 

percent of assets; and 

(ix) Municipal securities—the lower 

of 1000 percent of capital or 50 percent 

of assets. 

(2) Registered investment 

companies—A corporate credit union 

must limit its investment in registered 

investment companies to the lower of 

1000 percent of capital or 50 percent of 

assets. In addition to applying the limit 

in this paragraph (d)(2), a corporate 

credit union must also include the 

underlying assets in each registered 

investment company in the relevant 

sectors described in paragraph (d)(1) of 

this section when calculating those 

sector limits. 

(3) A corporate credit union will limit 

its aggregate holdings in any 

investments not described in paragraphs 

(d)(1) or (d)(2) of this section to the 

lower of 100 percent of capital or 5 

percent of assets. The NCUA may 

approve a higher percentage in 

appropriate cases. 

(4) Investments in other federally 

insured credit unions, deposits and 

federal funds investments in other 

federally insured depository 

institutions, and investment repurchase 

agreements are excluded from the 

concentration limits in paragraphs 

(d)(1), (d)(2), and (d)(3) of this section. 

(e) Corporate debt obligation 

subsector limits. In addition to the 

limitations in paragraph (d)(1)(viii) of 

this section, a corporate credit union 

must not exceed the lower of 200 

percent of capital or 10 percent of assets 

in any single North American Industry 

Classification System (NAICS) industry 

sector. If the corporation does not have 

a readily ascertainable NAICS 

classification, a corporate credit union 

will use its reasonable judgment in 

assigning such a classification. NCUA 

may direct, however, that the corporate 

change the classification. 

(f) Credit ratings.—(1) All 

investments, other than in another 

depository institution, must have an 

applicable credit rating from at least one 

NRSRO. At a minimum, 90 percent of 

all such investments, by book value, 

must have a rating by at least two 

NRSROs. Corporate credit unions may 


emcdonald on DSK2BSOYB1PROD with RULES2
64842 Federal Register / Vol. 75, No. 202 / Wednesday, October 20, 2010 / Rules and Regulations 

use either public or nonpublic NRSRO 

ratings to satisfy this requirement. 

(2) At the time of purchase, 

investments with long-term ratings must 

be rated no lower than AA– (or 

equivalent) by every NRSRO that 

provides a publicly available long-term 

rating on that investment, and 

investments with short-term ratings 

must be rated no lower than A–1 (or 

equivalent) by every NRSRO that 

provides a publicly available short-term 

rating on that investment. If the 

corporate credit union obtains a 

nonpublic NRSRO rating, that rating 

must also be no lower than AA–, or A– 

1, for long-term and short-term ratings, 

respectively. 

(3) All rating(s) relied upon to meet 

the requirements of this part must be 

identified at the time of purchase and 

must be monitored for as long as the 

corporate owns the investment. 

Corporate credit unions must identify 

and monitor any new post-purchase 

NRSRO ratings on investments they 

hold. 

(4) Investments are subject to the 

requirements of § 704.10 if: 

(i) An NRSRO that rates the 

investment downgrades that rating, after 

purchase, below the minimum rating 

requirements of this part; or 

(ii) The investment is part of an asset 

class or group of investments that 

exceeds the sector or obligor 

concentration limits of this section. 

(g) Reporting and documentation. (1) 

At least annually, a written evaluation 

of each credit limit with each obligor or 

transaction counterparty must be 

prepared and formally approved by the 

board or an appropriate committee. At 

least monthly, the board or an 

appropriate committee must receive an 

investment watch list of existing and/or 

potential credit problems and summary 

credit exposure reports, which 

demonstrate compliance with the 

corporate credit union’s risk 

management policies. 

(2) At a minimum, the corporate 

credit union must maintain: 

(i) A justification for each approved 

credit limit; 

(ii) Disclosure documents, if any, for 

all instruments held in portfolio. 

Documents for an instrument that has 

been sold must be retained until 

completion of the next NCUA 

examination; and 

(iii) The latest available financial 

reports, industry analyses, internal and 

external analyst evaluations, and rating 

agency information sufficient to support 

each approved credit limit. 

■ 13. Revise § 704.8 to read as follows: 

§ 704.8. Asset and liability management. 

(a) Policies. A corporate credit union 

must operate according to a written 

asset and liability management policy 

which addresses, at a minimum: 

(1) The purpose and objectives of the 

corporate credit union’s asset and 

liability activities; 

(2) The maximum allowable 

percentage decline in net economic 

value (NEV), compared to base case 

NEV; 

(3) The minimum allowable NEV 

ratio; 

(4) Policy limits and specific test 

parameters for the NEV sensitivity 

analysis requirements set forth in 

paragraphs (d), (e), and (f) of this 

section; 

(5) The modeling of indexes that serve 

as references in financial instrument 

coupon formulas; and 

(6) The tests that will be used, prior 

to purchase, to estimate the impact of 

investments on the percentage decline 

in NEV compared to base case NEV. The 

most recent NEV analysis, as 

determined under paragraph (d)(1)(i) of 

this section may be used as a basis of 

estimation. 

(b) Asset and liability management 

committee (ALCO). A corporate credit 

union’s ALCO must have at least one 

member who is also a member of the 

board of directors. The ALCO must 

review asset and liability management 

reports on at least a monthly basis. 

These reports must address compliance 

with Federal Credit Union Act, NCUA 

Rules and Regulations (12 CFR chapter 

VII), and all related risk management 

policies. 

(c) Penalty for early withdrawals. A 

corporate credit union that permits early 

certificate/share withdrawals must 

assess market-based penalties sufficient 

to cover the estimated replacement cost 

of the certificate redeemed. This means 

the minimum penalty must be 

reasonably related to the rate that the 

corporate credit union would be 

required to offer to attract funds for a 

similar term with similar characteristics. 

(d) Interest rate sensitivity analysis. 

(1) A corporate credit union must: 

(i) Evaluate the risk in its balance 

sheet by measuring, at least quarterly, 

including once on the last day of the 

calendar quarter, the impact of an 

instantaneous, permanent, and parallel 

shock in the yield curve of plus and 

minus 100, 200, and 300 BP on its NEV 

and NEV ratio. If the base case NEV 

ratio falls below 3 percent at the last 

testing date, these tests must be 

calculated at least monthly, including 

once on the last day of the month, until 

the base case NEV ratio again exceeds 3 

percent; 

(ii) Limit its risk exposure to levels 

that do not result in a base case NEV 

ratio or any NEV ratio resulting from the 

tests set forth in paragraph (d)(1)(i) of 

this section below 2 percent; and 

(iii) Limit its risk exposures to levels 

that do not result in a decline in NEV 

of more than 15 percent. 

(2) A corporate credit union must 

assess annually if it should conduct 

periodic additional tests to address 

market factors that may materially 

impact that corporate credit union’s 

NEV. These factors should include, but 

are not limited to, the following: 

(i) Changes in the shape of the 

Treasury yield curve; 

(ii) Adjustments to prepayment 

projections used for amortizing 

securities to consider the impact of 

significantly faster/slower prepayment 

speeds; and 

(iii) Adjustments to volatility 

assumptions to consider the impact that 

changing volatilities have on embedded 

option values. 

(e) Net interest income modeling. A 

corporate credit union must perform net 

interest income (NII) modeling to 

project earnings in multiple interest rate 

environments for a period of no less 

than 2 years. NII modeling must, at 

minimum, be performed at least 

quarterly, including once on the last day 

of the calendar quarter. 

(f) Weighted average asset life. The 

weighted average life (WAL) of a 

corporate credit union’s loan and 

investment portfolio, excluding 

derivative contracts and equity 

investments, may not exceed 2 years. A 

corporate credit union must test its 

assets at least quarterly, including once 

on the last day of the calendar quarter, 

for compliance with this WAL 

limitation. When calculating its WAL, a 

corporate credit union must assume that 

no issuer or market options will be 

exercised. If the WAL of a corporate 

credit union’s assets exceeds 2 years on 

the testing date, this test must be 

calculated at least monthly, including 

once on the last day of the month, until 

the WAL is below 2 years. 

(g) Weighted average asset life with 50 

percent slowdown in prepayment 

speeds. The weighted average life 

(WAL) of a corporate credit union’s loan 

and investment portfolio, excluding 

derivative contracts and equity 

investments, may not exceed 2.25 years 

when prepayment speeds are reduced 

by 50 percent. A corporate credit union 

must test its investments at least 

quarterly, including once on the last day 

of the calendar quarter, for compliance 

with this WAL limitation. When 

calculating its WAL, a corporate credit 

union must assume that no issuer or 


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market options will be exercised. If the 

WAL of a corporate credit union’s assets 

exceeds 2.25 years, this test must be 

calculated at least monthly, including 

once on the last day of the month, until 

the WAL with the 50 slowdown in 

prepayment speeds is below 2.25 years. 

(h) Government issued or guaranteed 

securities. The WAL of investments that 

are issued or fully guaranteed as to 

principal and interest by the U.S. 

government, its agencies or sponsored 

enterprises, including investments that 

are fully insured or guaranteed 

(including accumulated dividends and 

interest) by the NCUSIF or the Federal 

Deposit Insurance Corporation, will be 

multiplied by a factor of 0.50 for 

purposes of the WAL tests of paragraphs 

(f) and (g) of this section. 

(i) Effective and spread durations. A 

corporate credit union must measure at 

least once a quarter, including once on 

the last day of the calendar quarter, the 

effective duration and spread durations 

of each of its assets and liabilities, 

where the values of these are affected by 

changes in interest rates or credit 

spreads. 

(j) Regulatory violations. (1)(i) If a 

corporate credit union’s decline in NEV, 

base case NEV ratio or any NEV ratio 

resulting from the test set forth in 

paragraph (d) of this section violates the 

limits established in that paragraph, or 

the corporate credit union is unable to 

satisfy the tests in paragraphs (f) or (g) 

of this section; and 

(ii) The corporate cannot adjust its 

balance sheet so as to satisfy the 

requirements of paragraphs (d), (f), or (g) 

of this section within 10 calendar days 

after detecting the violation, then: 

(iii) The operating management of the 

corporate credit union must 

immediately report this information to 

its board of directors, supervisory 

committee, and the NCUA. 

(2) If any violation described in 

paragraph (j)(1)(i) persists for 30 or more 

calendar days, the corporate credit 

union: 

(i) Must immediately submit a 

detailed, written action plan to the 

NCUA that sets forth the time needed 

and means by which it intends to 

correct the violation and, if the NCUA 

determines that the plan is 

unacceptable, the corporate credit union 

must immediately restructure its 

balance sheet to bring the exposure back 

within compliance or adhere to an 

alternative course of action determined 

by the NCUA; and 

(ii) If presently categorized as 

adequately capitalized or well 

capitalized for PCA purposes, 

immediately be recategorized as 

undercapitalized until the violation is 

corrected, and 

(iii) If presently less than adequately 

capitalized, immediately be 

downgraded one additional capital 

category. 

(k) Overall limit on business 

generated from individual credit unions. 

On or after April 22, 2013, a corporate 

credit union is prohibited from 

accepting from any member, or any 

nonmember credit union, any 

investment, including shares, loans, 

PCC, or NCAs if, following that 

investment, the aggregate of all 

investments from that entity in the 

corporate would exceed 15 percent of 

the corporate credit union’s moving 

daily average net assets. 

■ 14. Revise § 704.9 to read as follows: 

§ 704.9. Liquidity management. 

(a) General. In the management of 

liquidity, a corporate credit union must: 

(1) Evaluate the potential liquidity 

needs of its membership in a variety of 

economic scenarios; 

(2) Regularly monitor and 

demonstrate accessibility to sources of 

internal and external liquidity; 

(3) Keep a sufficient amount of cash 

and cash equivalents on hand to support 

its payment system obligations; 

(4) Demonstrate that the accounting 

classification of investment securities is 

consistent with its ability to meet 

potential liquidity demands; and 

(5) Develop a contingency funding 

plan that addresses alternative funding 

strategies in successively deteriorating 

liquidity scenarios. The plan must: 

(i) List all sources of liquidity, by 

category and amount, that are available 

to service an immediate outflow of 

funds in various liquidity scenarios; 

(ii) Analyze the impact that potential 

changes in fair value will have on the 

disposition of assets in a variety of 

interest rate scenarios; and 

(iii) Be reviewed by the board or an 

appropriate committee no less 

frequently than annually or as market or 

business conditions dictate. 

(b) Borrowing limits. A corporate 

credit union may borrow up to the 

lower of 10 times capital or 50 percent 

of capital and shares (excluding shares 

created by the use of member reverse 

repurchase agreements). 

(1) Secured borrowings. A corporate 

credit union may borrow on a secured 

basis for liquidity purposes, but the 

maturity of the borrowing may not 

exceed 30 days. Only a credit union 

with core capital in excess of five 

percent of its moving DANA may 

borrow on a secured basis for 

nonliquidity purposes, and the 

outstanding amount of secured 

borrowing for nonliquidity purposes 

may not exceed an amount equal to the 

difference between core capital and five 

percent of moving DANA. 

(2) Exclusions. CLF borrowings and 

borrowed funds created by the use of 

member reverse repurchase agreements 

are excluded from this limit. 

■ 15. Revise § 704.11 to read as follows: 

§ 704.11 Corporate Credit Union Service 

Organizations (Corporate CUSOs). 

(a) A corporate CUSO is an entity that: 

(1) Is at least partly owned by a 

corporate credit union; 

(2) Primarily serves credit unions; 

(3) Restricts its services to those 

related to the normal course of business 

of credit unions as specified in 

paragraph (e) of this section; and 

(4) Is structured as a corporation, 

limited liability company, or limited 

partnership under state law. 

(b) Investment and loan limitations. 

(1) The aggregate of all investments in 

member and non-member corporate 

CUSOs must not exceed 15 percent of a 

corporate credit union’s capital. 

(2) The aggregate of all investments in 

and loans to member and nonmember 

corporate CUSOs must not exceed 30 

percent of a corporate credit union’s 

capital. A corporate credit union may 

lend to member and nonmember 

corporate CUSOs an additional 15 

percent of capital if the loan is 

collateralized by assets in which the 

corporate has a perfected security 

interest under state law. 

(3) If the limitations in paragraphs 

(b)(1) and (b)(2) of this section are 

reached or exceeded because of the 

profitability of the CUSO and the related 

GAAP valuation of the investment 

under the equity method without an 

additional cash outlay by the corporate, 

divestiture is not required. A corporate 

credit union may continue to invest up 

to the regulatory limit without regard to 

the increase in the GAAP valuation 

resulting from the corporate CUSO’s 

profitability. 

(c) Due diligence. A corporate credit 

union must comply with the due 

diligence requirements of §§ 723.5 and 

723.6(f) through (j) of this chapter for all 

loans to corporate CUSOs. This 

requirement does not apply to loans 

excluded under § 723.1(b). 

(d) Separate entity. (1) A corporate 

CUSO must be operated as an entity 

separate from a corporate credit union. 

(2) A corporate credit union investing 

in or lending to a corporate CUSO must 

obtain a written legal opinion that 

concludes the corporate CUSO is 

organized and operated in a manner that 

the corporate credit union will not 

reasonably be held liable for the 


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obligations of the corporate CUSO. This 

opinion must address factors that have 

led courts to ‘‘pierce the corporate veil,’’ 

such as inadequate capitalization, lack 

of corporate identity, common boards of 

directors and employees, control of one 

entity over another, and lack of separate 

books and records. 

(e). Permissible activities. (1) 

Beginning on April 18, 2011, a corporate 

CUSO must agree to limit its activities 

to: 

(i) Brokerage services, 

(ii) Investment advisory services, and 

(iii) Other categories of activities as 

approved in writing by NCUA and 

published on NCUA’s Web site. 

(2) A corporate credit union must 

divest from any CUSO that is engaged 

in activities not approved by NCUA 

under paragraph (e)(1) of this section. A 

corporate credit union may take until 

October 20, 2011 to divest itself from a 

CUSO engaging in one or more 

unapproved activities, but only if the 

CUSO was engaging in those activities 

before October 20, 2010 and the 

corporate credit union can establish that 

those activities satisfied the 

requirements of this section as it existed 

before October 20, 2010. 

(3) Once NCUA has approved an 

activity and published that activity on 

its Web site as provided for in paragraph 

(e)(1)(iii) of this section, NCUA will not 

remove that particular activity the 

approved list, or make substantial 

changes to the content or description of 

that approved activity, except through 

the formal rulemaking process. 

(f) An official of a corporate credit 

union which has invested in or loaned 

to a corporate CUSO may not receive, 

either directly or indirectly, any salary, 

commission, investment income, or 

other income, compensation, or 

consideration from the corporate CUSO. 

This prohibition also extends to 

immediate family members of officials. 

(g) Prior to making an investment in 

or loan to a corporate CUSO, a corporate 

credit union must obtain a written 

agreement that the CUSO: 

(1) Will follow GAAP; 

(2) Will provide financial statements 

to the corporate credit union at least 

quarterly; 

(3) Will obtain an annual CPA 

opinion audit and provide a copy to the 

corporate credit union. A wholly owned 

or majority owned CUSO is not required 

to obtain a separate annual audit if it is 

included in the corporate credit union’s 

annual consolidated audit; 

(4) Will not acquire control, directly 

or indirectly, of another depository 

financial institution or to invest in 

shares, stocks, or obligations of an 

insurance company, trade association, 

liquidity facility, or similar 

organization; 

(5) Will allow the auditor, board of 

directors, and NCUA complete access to 

its personnel, facilities, equipment, 

books, records, and any other 

documentation that the auditor, 

directors, or NCUA deem pertinent; and 

(6) Will comply with all the 

requirements of this section. 

(h) Corporate credit union authority to 

invest in or loan to a CUSO is limited 

to that provided in this section. A 

corporate credit union is not authorized 

to invest in or loan to a CUSO under 

part 712 of this chapter. 

■ 16. Revise paragraph (a) of § 704.14 to 

read as follows: 

§ 704.14. Representation. 

(a) Board representation. The board 

will be determined as stipulated in its 

bylaws governing election procedures, 

provided that: 

(1) At least a majority of directors, 

including the chair of the board, must 

serve on the board as representatives of 

member credit unions; 

(2) On or after February 17, 2011, only 

individuals who currently hold the 

position of chief executive officer, chief 

financial officer, chief operating officer, 

or treasurer/manager at a member may 

seek election or re-election to the board; 

(3) No individual may be elected or 

appointed to serve on the board if, after 

such election or appointment, the 

individual would be a director at more 

than one corporate credit union; 

(4) No individual may be elected or 

appointed to serve on the board if, after 

such election or appointment, any 

member of the corporate credit union 

would have more than one 

representative on the board of the 

corporate; 

(5) The chair of the board may not 

serve simultaneously as an officer, 

director, or employee of a credit union 

trade association; 

(6) A majority of directors may not 

serve simultaneously as officers, 

directors, or employees of the same 

credit union trade association or its 

affiliates (not including chapters or 

other subunits of a state trade 

association); 

(7) For purposes of meeting the 

requirements of paragraphs (a)(5) and 

(a)(6) of this section, an individual may 

not serve as a director or chair of the 

board if that individual holds a 

subordinate employment relationship to 

another employee who serves as an 

officer, director, or employee of a credit 

union trade association; 

(8) In the case of a corporate credit 

union whose membership is composed 

of more than 25 percent non credit 

unions, the majority of directors serving 

as representatives of member credit 

unions, including the chair, must be 

elected only by member credit unions, 

and 

(9) After October 21, 2013, at least a 

majority of directors of every corporate 

credit union, including the chair of the 

board, must serve on the board as 

representatives of natural person credit 

union members. 

* * * * * 

■ 17. Revise § 704.19 to read as follows: 

§ 704.19 Disclosure of executive and 

director compensation. 

(a) Annual disclosure. Corporate 

credit unions must annually prepare 

and maintain a disclosure of the 

compensation, in dollar terms, paid to 

its most highly compensated employees, 

in accordance with the following 

schedule: 

(1) For corporate credit unions with 

forty-one or more full time employees, 

disclosure is required of the 

compensation paid to the five most 

highly compensated employees; 

(2) For corporate credit unions with 

between thirty and forty-one full time 

employees, disclosure is required of the 

compensation paid to the four most 

highly compensated employees; 

(3) For corporate credit unions with 

thirty or fewer full time employees, 

disclosure is required of the 

compensation paid to the three most 

highly compensated employees; and 

(4) In all cases, compensation paid to 

the corporate credit union’s chief 

executive officer must also be disclosed, 

if the chief executive officer is not 

already included among the most highly 

compensated employees described in 

paragraphs (a)(1) through (a)(3) of this 

section. 

(b) Availability of disclosure. Any 

member may obtain a copy of the most 

current disclosure, and all disclosures 

for the previous three years, on request 

made in person or in writing. The 

corporate credit union must provide the 

disclosure(s), at no cost to the member, 

within five business days of receiving 

the request. In addition, the corporate 

must distribute the most current 

disclosure to all its members at least 

once a year, either in the annual report 

or in some other manner of the 

corporate’s choosing. 

(c) Supplemental information. In 

providing the disclosure required by 

this section, a corporate credit union 

may also provide supplementary 

information to put the disclosure in 

context, for example, salary surveys, a 

discussion of compensation in relation 

to other credit union expenses, or 

compensation information from 


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Federal Register / Vol. 75, No. 202 / Wednesday, October 20, 2010 / Rules and Regulations 64845 

similarly sized credit unions or 

financial institutions. 

(d) Special rule for mergers. With 

respect to any merger involving a 

corporate credit union that would result 

in a material increase in compensation, 

i.e., an increase of more than 15 percent 

or $10,000, whichever is greater, for any 

senior executive officer or director of 

the merging corporate, the corporate 

must: 

(1) Describe the compensation 

arrangement in the merger plan 

documents submitted to NCUA for 

approval of the merger, pursuant to 

§ 708b of this part; and 

(2) In the case of any federally 

chartered corporate credit union, 

describe the compensation arrangement 

in the materials provided to the 

membership of the merging credit union 

before the member vote on approving 

the merger. 

■ 18. Add a new § 704.20 to read as 

follows: 

§ 704.20. Limitations on golden parachute 

and indemnification payments. 

(a) Definitions. The following 

definitions apply for this section: 

(1) Board means the National Credit 

Union Administration Board. 

(2) Benefit plan means any plan, 

contract, agreement or other 

arrangement which is an ‘‘employee 

welfare benefit plan’’ as that term is 

defined in section 3(1) of the Employee 

Retirement Income Security Act of 1974, 

as amended (29 U.S.C. 1002(1)), or other 

usual and customary plans such as 

dependent care, tuition reimbursement, 

group legal services or cafeteria plans; 

provided however, that such term does 

not include any plan intended to be 

subject to paragraphs (a)(4)(iv)(C) and 

(E) of this section. 

(3) Bona fide deferred compensation 

plan or arrangement means any plan, 

contract, agreement or other 

arrangement whereby: 

(i) An institution-affiliated party (IAP) 

voluntarily elects to defer all or a 

portion of the reasonable compensation, 

wages or fees paid for services rendered 

which otherwise would have been paid 

to the IAP at the time the services were 

rendered (including a plan that provides 

for the crediting of a reasonable 

investment return on such elective 

deferrals) and the corporate credit union 

either: 

(A) Recognizes compensation expense 

and accrues a liability for the benefit 

payments according to Generally 

Accepted Accounting Principles 

(GAAP); or 

(B) Segregates or otherwise sets aside 

assets in a trust which may only be used 

to pay plan and other benefits, except 

that the assets of such trust may be 

available to satisfy claims of the 

institution’s or holding company’s 

creditors in the case of insolvency; or 

(ii) A corporate credit union 

establishes a nonqualified deferred 

compensation or supplemental 

retirement plan, other than an elective 

deferral plan described in paragraph 

(a)(3)(i) of this section: 

(A) Primarily for the purpose of 

providing benefits for certain IAPs in 

excess of the limitations on 

contributions and benefits imposed by 

Sections 415, 401(a)(17), 402(g) or any 

other applicable provision of the 

Internal Revenue Code of 1986 (26 USC 

415, 401(a)(17), 402(g)); or 

(B) Primarily for the purpose of 

providing supplemental retirement 

benefits or other deferred compensation 

for a select group of directors, 

management or highly compensated 

employees (excluding severance 

payments described in paragraph 

(4)(ii)(E) of this section and permissible 

golden parachute payments described in 

§ 704.20(d); and 

(iii) In the case of any nonqualified 

deferred compensation or supplemental 

retirement plans as described in 

paragraphs (a)(3)(i) and (ii) of this 

section, the following requirements will 

apply: 

(A) The plan was in effect at least one 

year prior to any of the events described 

in paragraph (a)(4)(ii) of this section; 

(B) Any payment made pursuant to 

such plan is made in accordance with 

the terms of the plan as in effect no later 

than one year prior to any of the events 

described in paragraph (a)(4)(ii) of this 

section and in accordance with any 

amendments to such plan during such 

one year period that do not increase the 

benefits payable thereunder; 

(C) The IAP has a vested right, as 

defined under the applicable plan 

document, at the time of termination of 

employment to payments under such 

plan; 

(D) Benefits under such plan are 

accrued each period only for current or 

prior service rendered to the employer 

(except that an allowance may be made 

for service with a predecessor 

employer); 

(E) Any payment made pursuant to 

such plan is not based on any 

discretionary acceleration of vesting or 

accrual of benefits which occurs at any 

time later than one year prior to any of 

the events described in paragraph 

(a)(4)(ii) of this section; 

(F) The corporate credit union has 

previously recognized compensation 

expense and accrued a liability for the 

benefit payments according to GAAP or 

segregated or otherwise set aside assets 

in a trust which may only be used to 

pay plan benefits, except that the assets 

of such trust may be available to satisfy 

claims of the corporate credit union’s 

creditors in the case of insolvency; and 

(G) Payments pursuant to such plans 

must not be in excess of the accrued 

liability computed in accordance with 

GAAP. 

(4) Golden parachute payment means 

any payment (or any agreement to make 

any payment) in the nature of 

compensation by any corporate credit 

union for the benefit of any current or 

former IAP pursuant to an obligation of 

such corporate credit union that: 

(i) Is contingent on, or by its terms is 

payable on or after, the termination of 

such IAP’s primary employment or 

affiliation with the corporate credit 

union; and 

(ii) Is received on or after, or is made 

in contemplation of, any of the 

following events: 

(A) The insolvency (or similar event) 

of the corporate that is making the 

payment; or 

(B) The appointment of any 

conservator or liquidating agent for such 

corporate credit union; or 

(C) A determination by the Board or 

the appropriate state supervisory 

authority (in the case of a statechartered corporate credit union) 

respectively, that the corporate credit 

union is in a troubled condition; or 

(D) The corporate credit union is 

undercapitalized, as defined in § 704.4; 

or 

(E) The corporate credit union is 

subject to a proceeding to terminate or 

suspend its share account insurance; 

and 

(iii) Is payable to an IAP whose 

employment by or affiliation with the 

corporate is terminated at a time when 

the corporate credit union by which the 

IAP is employed or with which the IAP 

is affiliated satisfies any of the 

conditions enumerated in paragraphs 

(a)(4)(ii)(A) through (E) of this section, 

or in contemplation of any of these 

conditions. 

(iv) Exceptions. The term golden 

parachute payment does not include: 

(A) Any payment made pursuant to a 

pension or retirement plan which is 

qualified (or is intended within a 

reasonable period of time to be 

qualified) under Section 401 of the 

Internal Revenue Code of 1986 (26 

U.S.C. 401); or 

(B) Any payment made pursuant to a 

benefit plan as that term is defined in 

paragraph (a)(2) of this section; or 

(C) Any payment made pursuant to a 

bona fide deferred compensation plan or 

arrangement as defined in paragraph 

(a)(3) of this section; or 


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(D) Any payment made by reason of 

death or by reason of termination 

caused by the disability of an IAP; or 

(E) Any payment made pursuant to a 

nondiscriminatory severance pay plan 

or arrangement which provides for 

payment of severance benefits to all 

eligible employees upon involuntary 

termination other than for cause, 

voluntary resignation, or early 

retirement; provided, however, that no 

employee will receive any such 

payment which exceeds the base 

compensation paid to such employee 

during the twelve months (or such 

longer period or greater benefit as the 

Board will consent to) immediately 

preceding termination of employment, 

resignation or early retirement, and such 

severance pay plan or arrangement must 

not have been adopted or modified to 

increase the amount or scope of 

severance benefits at a time when the 

corporate credit union was in a 

condition specified in paragraph 

(a)(4)(ii) of this section or in 

contemplation of such a condition 

without the prior written consent of the 

Board; or 

(F) Any severance or similar payment 

which is required to be made pursuant 

to a state statute which is applicable to 

all employers within the appropriate 

jurisdiction (with the exception of 

employers that may be exempt due to 

their small number of employees or 

other similar criteria); or 

(G) Any other payment which the 

Board determines to be permissible in 

accordance with § 704.20(d). 

(5) Institution-affiliated party (IAP) 

means any individual meeting the 

criteria specified in section 206(r) of the 

Act (12 U.S.C. 1786(r)). 

(6) Liability or legal expense means: 

(i) Any legal or other professional fees 

and expenses incurred in connection 

with any claim, proceeding, or action; 

(ii) The amount of, and any cost 

incurred in connection with, any 

settlement of any claim, proceeding, or 

action; and 

(iii) The amount of, and any cost 

incurred in connection with, any 

judgment or penalty imposed with 

respect to any claim, proceeding, or 

action. 

(7) Nondiscriminatory means that the 

plan, contract or arrangement in 

question applies to all employees of a 

corporate credit union who meet 

reasonable and customary eligibility 

requirements applicable to all 

employees, such as minimum length of 

service requirements. A 

nondiscriminatory plan, contract or 

arrangement may provide different 

benefits based only on objective criteria 

such as salary, total compensation, 

length of service, job grade or 

classification, which are applied on a 

proportionate basis (with a variance in 

severance benefits relating to any 

criterion of plus or minus ten percent) 

to groups of employees consisting of not 

less than the lesser of 33 percent of 

employees or 1,000 employees. 

(8) Payment means: 

(i) Any direct or indirect transfer of 

any funds or any asset; 

(ii) Any forgiveness of any debt or 

other obligation; 

(iii) The conferring of any benefit, 

including but not limited to stock 

options and stock appreciation rights; or 

(iv) Any segregation of any funds or 

assets, the establishment or funding of 

any trust or the purchase of or 

arrangement for any letter of credit or 

other instrument, for the purpose of 

making, or pursuant to any agreement to 

make, any payment on or after the date 

on which such funds or assets are 

segregated, or at the time of or after such 

trust is established or letter of credit or 

other instrument is made available, 

without regard to whether the obligation 

to make such payment is contingent on: 

(A) The determination, after such 

date, of the liability for the payment of 

such amount; or 

(B) The liquidation, after such date, of 

the amount of such payment. 

(9) Prohibited indemnification 

payment means any payment (or any 

agreement or arrangement to make any 

payment) by any corporate credit union 

for the benefit of any person who is or 

was an IAP of such corporate credit 

union, to pay or reimburse such person 

for any civil money penalty, judgment 

or other liability or legal expense 

resulting from any administrative or 

civil action instituted by the Board or 

any appropriate state regulatory 

authority that results in a final order or 

settlement pursuant to which such 

person: 

(i) Is assessed a civil money penalty; 

(ii) Is removed from office or 

prohibited from participating in the 

conduct of the affairs of the corporate 

credit union; or 

(iii) Is required to cease and desist 

from or take any affirmative action 

described in Section 206 of the Act with 

respect to such corporate credit union. 

(iv) Exceptions. The term prohibited 

indemnification payment does not 

include any reasonable payment by a 

corporate credit union that: 

(A) Is used to purchase any 

commercial insurance policy or fidelity 

bond, provided that such insurance 

policy or bond must not be used to pay 

or reimburse an IAP for the cost of any 

judgment or civil money penalty 

assessed against such person in an 

administrative proceeding or civil 

action commenced by NCUA or the 

appropriate state supervisory authority 

(in the case of a state chartered 

corporate), but may pay any legal or 

professional expenses incurred in 

connection with such proceeding or 

action or the amount of any restitution 

to the corporate credit union or its 

liquidating agent; or 

(B) Represents partial indemnification 

for legal or professional expenses 

specifically attributable to particular 

charges for which there has been a 

formal and final adjudication or finding 

in connection with a settlement that the 

IAP has not violated certain laws or 

regulations or has not engaged in certain 

unsafe or unsound practices or breaches 

of fiduciary duty, unless the 

administrative action or civil 

proceeding has resulted in a final 

prohibition order against the IAP. 

(10) Troubled Condition means that 

the corporate credit union: 

(i) Has been assigned: 

(A) A 4 or 5 Corporate Risk 

Information System (CRIS) rating by 

NCUA in either the Financial Risk or 

Risk Management composites, in the 

case of a federal corporate credit union, 

or 

(B) An equivalent 4 or 5 CRIS rating 

in either the Financial Risk or Risk 

Management composites by the state 

supervisory authority (SSA) in the case 

of a federally insured, state-chartered 

corporate credit union in a state that has 

adopted the CRIS system, or an 

equivalent 4 or 5 CAMEL composite 

rating by the SSA in the case of a 

federally insured, state-chartered 

corporate credit union in a state that 

uses the CAMEL system, or 

(C) A 4 or 5 CRIS rating in either the 

Financial Risk or Risk Management 

composites by NCUA based on core 

work papers received from the SSA in 

the case of a federally insured, statechartered credit union in a state that 

does not use either the CRIS or CAMEL 

system. In this case, the SSA will be 

notified in writing by the Director of the 

Office of Corporate Credit Unions that 

the corporate credit union has been 

designated by NCUA as a troubled 

institution; or 

(ii) Has been granted assistance as 

outlined under Sections 208 or 216 of 

the Federal Credit Union Act. 

(b) Golden parachute payments 

prohibited. No corporate credit union 

will make or agree to make any golden 

parachute payment, except as otherwise 

provided in this section. 

(c) Prohibited indemnification 

payments. No corporate credit union 

will make or agree to make any 


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Federal Register / Vol. 75, No. 202 / Wednesday, October 20, 2010 / Rules and Regulations 64847 

prohibited indemnification payment, 

except as provided in this section. 

(d) Permissible golden parachute 

payments. (1) A corporate credit union 

may agree to make or may make a 

golden parachute payment if and to the 

extent that: 

(i) Such an agreement is made in 

order to hire a person to become an IAP 

either at a time when the corporate 

credit union satisfies or in an effort to 

prevent it from imminently satisfying 

any of the criteria set forth in paragraph 

(a)(4)(ii) of this section, and the Board, 

consents in writing to the amount and 

terms of the golden parachute payment. 

Such consent by the Board must not 

improve the IAP’s position in the event 

of the insolvency of the corporate credit 

union since such consent can neither 

bind a liquidating agent nor affect the 

provability of claims in liquidation. In 

the event that the institution is placed 

into conservatorship or liquidation, the 

conservator or the liquidating agent, as 

the case may be, will not be obligated 

to pay the promised golden parachute 

and the IAP will not be accorded 

preferential treatment on the basis of 

such prior approval; or 

(ii) Such a payment is made pursuant 

to an agreement which provides for a 

reasonable severance payment, not to 

exceed twelve months salary, to an IAP 

in the event of a merger with another 

corporate credit union; provided, 

however, that a corporate credit union 

must obtain the consent of the Board, 

before making such a payment and this 

paragraph (d)(1)(iii) does not apply to 

any merger between corporates that 

results from an assisted transaction as 

described in Section 208 of the Act (12 

U.S.C. 1788) or the corporate credit 

union being placed into conservatorship 

or liquidation; or 

(iii) The Board, with the written 

concurrence of the appropriate state 

supervisory authority (in the case of a 

state-chartered corporate), determines 

that such a payment or agreement is 

permissible. 

(2) A corporate credit union making a 

request pursuant to paragraphs (d)(1)(i) 

through (iii) of this section must 

demonstrate that it does not possess and 

is not aware of any information, 

evidence, documents or other materials 

which would indicate that there is a 

reasonable basis to believe, at the time 

such payment is proposed to be made, 

that: 

(i) The IAP has committed any 

fraudulent act or omission, breach of 

trust or fiduciary duty, or insider abuse 

with regard to the corporate credit 

union that has had or is likely to have 

a material adverse effect on the 

corporate credit union; 

(ii) The IAP is substantially 

responsible for the insolvency of, the 

appointment of a conservator or 

liquidating agent for, or the troubled 

condition, as defined by § 701.14(b)(4), 

of the corporate credit union; 

(iii) The IAP has materially violated 

any applicable federal or state banking 

law or regulation that has had or is 

likely to have a material effect on the 

corporate credit union; and 

(iv) The IAP has violated or conspired 

to violate Section 215, 656, 657, 1005, 

1006, 1007, 1014, 1032, or 1344 of Title 

18 of the United States Code, or Section 

1341 or 1343 of such title affecting a 

federally insured financial institution as 

defined in Title 18 of the United States 

Code. 

(3) In making a determination under 

paragraphs (d)(1)(i) through (iii) of this 

section, the Board may consider: 

(i) Whether, and to what degree, the 

IAP was in a position of managerial or 

fiduciary responsibility; 

(ii) The length of time the IAP was 

affiliated with the corporate credit 

union, and the degree to which the 

proposed payment represents a 

reasonable payment for services 

rendered over the period of 

employment; and 

(iii) Any other factors or 

circumstances which would indicate 

that the proposed payment would be 

contrary to the intent of Section 206(t) 

of the Act or this part. 

(e) Permissible indemnification 

payments. (1) A corporate credit union 

may make or agree to make reasonable 

indemnification payments to an IAP 

with respect to an administrative 

proceeding or civil action initiated by 

NCUA or a state regulatory authority if: 

(i) The corporate credit union’s board 

of directors, in good faith, determines in 

writing after due investigation and 

consideration that the institutionaffiliated party acted in good faith and 

in a manner he/she believed to be in the 

best interests of the membership; 

(ii) The corporate credit union’s board 

of directors, in good faith, determines in 

writing after due investigation and 

consideration that the payment of such 

expenses will not materially adversely 

affect the institution’s or holding 

company’s safety and soundness; 

(iii) The indemnification payments do 

not constitute prohibited 

indemnification payments as that term 

is defined in § 704.20(c); and 

(iv) The IAP agrees in writing to 

reimburse the corporate credit union, to 

the extent not covered by payments 

from insurance or bonds purchased 

pursuant to § 704.20(a)(9)(iv)(A), for that 

portion of the advanced indemnification 

payments which subsequently become 

prohibited indemnification payments, 

as defined in § 704.20(a)(9). 

(2) An IAP seeking indemnification 

payments must not participate in any 

way in the board’s discussion and 

approval of such payments; provided, 

however, that such IAP may present his/ 

her request to the board and respond to 

any inquiries from the board concerning 

his/her involvement in the 

circumstances giving rise to the 

administrative proceeding or civil 

action. 

(3) In the event that a majority of the 

members of the board of directors are 

named as respondents in an 

administrative proceeding or civil 

action and request indemnification, the 

remaining members of the board may 

authorize independent legal counsel to 

review the indemnification request and 

provide the remaining members of the 

board with a written opinion of counsel 

as to whether the conditions delineated 

in paragraph (e)(1) of this section have 

been met. If independent legal counsel 

opines that said conditions have been 

met, the remaining members of the 

board of directors may rely on such 

opinion in authorizing the requested 

indemnification. 

(4) In the event that all of the 

members of the board of directors are 

named as respondents in an 

administrative proceeding or civil 

action and request indemnification, the 

board will authorize independent legal 

counsel to review the indemnification 

request and provide the board with a 

written opinion of counsel as to whether 

the conditions delineated in paragraph 

(e)(1) of this section have been met. If 

independent legal counsel opines that 

said conditions have been met, the 

board of directors may rely on such 

opinion in authorizing the requested 

indemnification. 

(f) Filing instructions. Requests to 

make excess nondiscriminatory 

severance plan payments pursuant to 

§ 704.20(a)(4)(iv)(E) and golden 

parachute payments permitted by 

§ 704.20(d) must be submitted in writing 

to the Board. The request must be in 

letter form and must contain all relevant 

factual information as well as the 

reasons why such approval should be 

granted. 

(g) Applicability in the event of 

liquidation or conservatorship. The 

provisions of this part, or any consent 

or approval granted under the 

provisions of this part by the Board, will 

not in any way bind any liquidating 

agent or conservator for a failed 

corporate credit union and will not in 

any way obligate the liquidating agent 

or conservator to pay any claim or 

obligation pursuant to any golden 


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64848 Federal Register / Vol. 75, No. 202 / Wednesday, October 20, 2010 / Rules and Regulations 

parachute, severance, indemnification 

or other agreement. Claims for employee 

welfare benefits or other benefits that 

are contingent, even if otherwise vested, 

when a liquidating agent or conservator 

is appointed for any corporate credit 

union, including any contingency for 

termination of employment, are not 

provable claims or actual, direct 

compensatory damage claims against 

such liquidating agent or conservator. 

Nothing in this part may be construed 

to permit the payment of salary or any 

liability or legal expense of any IAP 

contrary to 12 U.S.C. 1786(t)(3). 

■ 19. Revise Appendix A to part 704 to 

read as follows: 

Appendix A to Part 704—Capital 

Prioritization and Model Forms 

Part I—Optional Capital Prioritization 

Notwithstanding any other provision in 

this chapter, a corporate credit union, at its 

option, may determine that capital 

contributed to the corporate on or after 

January 18, 2011 will have priority, for 

purposes of availability to absorb losses and 

payout in liquidation, over capital 

contributed to the corporate before that date. 

The board of directors at a corporate credit 

union that desires to make this determination 

must: 

(a) On or before January 18, 2011, adopt a 

resolution implementing its determination. 

(b) Inform the credit union’s members and 

NCUA, in writing and as soon as practicable 

after adoption of the resolution, of the 

contents of the board resolution. 

(c) Ensure the credit union uses the 

appropriate initial and periodic Model Form 

disclosures in Part II below. 

Part II—Model Forms 

Part II contains model forms intended for 

use by corporate credit unions to aid in 

compliance with the capital disclosure 

requirements of § 704.3 and Part I of this 

Appendix. 

Model Form A 

Terms and Conditions of Membership Capital 

Account 

Note: This form is for use before October 

20, 2011 in the circumstances where the 

credit union has determined NOT to give 

newly issued capital priority over older 

capital as described in Part I of this 

Appendix. 

(1) A membership capital account is not 

subject to share insurance coverage by the 

NCUSIF or other deposit insurer. 

(2) A membership capital account is not 

releasable due solely to the merger, charter 

conversion or liquidation of the member 

credit union. In the event of a merger, the 

membership capital account transfers to the 

continuing credit union. In the event of a 

charter conversion, the membership capital 

account transfers to the new institution. In 

the event of liquidation, the membership 

capital account may be released to facilitate 

the payout of shares with the prior written 

approval of NCUA. 

(3) A member credit union may withdraw 

membership capital with three years’ notice. 

(4) Membership capital cannot be used to 

pledge borrowings. 

(5) Membership capital is available to 

cover losses that exceed retained earnings 

and paid-in capital. 

(6) Where the corporate credit union is 

liquidated, membership capital accounts are 

payable only after satisfaction of all liabilities 

of the liquidation estate including uninsured 

obligations to shareholders and the NCUSIF. 

(7) Where the corporate credit union is 

merged into another corporate credit union, 

the membership capital account will transfer 

to the continuing corporate credit union. The 

three-year notice period for withdrawal of the 

membership capital account will remain in 

effect. 

(8) If an adjusted balance account—: The 

membership capital balance will be 

adjusted—(1 or 2)—time(s) annually in 

relation to the member credit union’s— 

(assets or other measure)— as of—(date(s))—. 

If a term certificate—: The membership 

capital account is a term certificate that will 

mature on—(date)—. 

I have read the above terms and conditions 

and I understand them. 

I further agree to maintain in the credit 

union’s files the annual notice of terms and 

conditions of the membership capital 

account. 

The notice form must be signed by either 

all of the directors of the member credit 

union or, if authorized by board resolution, 

the chair and secretary of the board of the 

credit union. 

The annual disclosure notice form must be 

signed by the chair of the corporate credit 

union. The chair must then sign a statement 

that certifies that the notice has been sent to 

member credit unions with membership 

capital accounts. The certification must be 

maintained in the corporate credit union’s 

files and be available for examiner review. 

Model Form B 

Terms and Conditions of Membership Capital 

Account 

Note: This form is for use before October 

20, 2011 in the circumstances where the 

credit union has determined THAT IT WILL 

give newly issued capital priority over older 

capital as described in Part I of this 

Appendix. 

(1) A membership capital account is not 

subject to share insurance coverage by the 

NCUSIF or other deposit insurer. 

(2) A membership capital account is not 

releasable due solely to the merger, charter 

conversion or liquidation of the member 

credit union. In the event of a merger, the 

membership capital account transfers to the 

continuing credit union. In the event of a 

charter conversion, the membership capital 

account transfers to the new institution. In 

the event of liquidation, the membership 

capital account may be released to facilitate 

the payout of shares with the prior written 

approval of NCUA. 

(3) A member credit union may withdraw 

membership capital with three years’ notice. 

(4) Membership capital cannot be used to 

pledge borrowings. 

(5)(a) Membership capital that is issued on 

or after January 18, 2011, is available to cover 

losses that exceed retained earnings, 

contributed capital issued before January 18, 

2011, and perpetual capital issued on or after 

January 18, 2011. Any such losses will be 

distributed pro rata, at the time the loss is 

realized, among membership capital account 

holders with accounts issued on or after 

January 18, 2011. To the extent that NCA 

funds are used to cover losses, the corporate 

credit union is prohibited from restoring or 

replenishing the affected accounts under any 

circumstances. 

(b) Membership capital that is issued 

before January 18, 2011 is available to cover 

losses that exceed retained earnings and 

perpetual capital issued before January 18, 

2011. Any such losses will be distributed pro 

rata, at the time the loss is realized, among 

membership capital account holders with 

accounts issued before January 18, 2011. To 

the extent that NCA funds are used to cover 

losses, the corporate credit union is 

prohibited from restoring or replenishing the 

affected accounts under any circumstances. 

(c) Attached to this disclosure is a 

statement that describes the amount of NCA 

the credit union has with the corporate credit 

union in each of the categories described in 

paragraphs (5)(a) and (5)(b) above. 

(6) If the corporate credit union is 

liquidated: 

(a) Membership capital accounts issued on 

or after January 18, 2011 are payable only 

after satisfaction of all liabilities of the 

liquidation estate including uninsured 

obligations to shareholders and the NCUSIF, 

but not including contributed capital 

accounts issued before January 18, 2011 and 

perpetual capital accounts issued on or after 

January 18, 2011. However, membership 

capital that is used to cover losses in a 

calendar year previous to the year of 

liquidation has no claim against the 

liquidation estate. 

(b) Membership capital accounts issued 

before January 18, 2011, are payable only 

after satisfaction of all liabilities of the 

liquidation estate including uninsured 

obligations to shareholders and the NCUSIF, 

but not including perpetual capital accounts 

issued before January 18, 2011. However, 

membership capital that is used to cover 

losses in a calendar year previous to the year 

of liquidation has no claim against the 

liquidation estate. 

(7) Where the corporate credit union is 

merged into another corporate credit union, 

the membership capital account will transfer 

to the continuing corporate credit union. The 

three-year notice period for withdrawal of the 

membership capital account will remain in 

effect. 

(8) If an adjusted balance account—: 

The membership capital balance will 

be adjusted—(1 or 2)—time(s) annually 

in relation to the member credit union’s— 

(assets or other measure)—as of 

—(date(s))—. If a term certificate—: The 

membership capital account is a term 

certificate that will mature on—(date)—. 

I have read the above terms and conditions 

and I understand them. 

I further agree to maintain in the credit 

union’s files the annual notice of terms and 


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Federal Register / Vol. 75, No. 202 / Wednesday, October 20, 2010 / Rules and Regulations 64849 

conditions of the membership capital 

account. 

The notice form must be signed by either 

all of the directors of the member credit 

union or, if authorized by board resolution, 

the chair and secretary of the board of the 

credit union. 

The annual disclosure notice form must be 

signed by the chair of the corporate credit 

union. The chair must then sign a statement 

that certifies that the notice has been sent to 

member credit unions with membership 

capital accounts. The certification must be 

maintained in the corporate credit union’s 

files and be available for examiner review. 

Model Form C 

Terms and Conditions of Nonperpetual 

Capital 

Note: This form is for use on and after 

October 20, 2011 in the circumstances where 

the credit union has determined NOT to give 

newly issued capital priority over older 

capital as described in Part I of this 

Appendix. Also, corporate credit unions 

should ensure that existing membership 

capital accounts that do not meet the 

qualifying conditions for nonperpetual 

capital are modified so as to meet those 

conditions. 

Terms and Conditions of Nonperpetual 

Capital Account 

(1) A nonperpetual capital account is not 

subject to share insurance coverage by the 

NCUSIF or other deposit insurer. 

(2) A nonperpetual capital account is not 

releasable due solely to the merger, charter 

conversion or liquidation of the member 

credit union. In the event of a merger, the 

nonperpetual capital account transfers to the 

continuing credit union. In the event of a 

charter conversion, the nonperpetual capital 

account transfers to the new institution. In 

the event of liquidation, the nonperpetual 

capital account may be released to facilitate 

the payout of shares with the prior written 

approval of NCUA. 

(3) If the nonperpetual capital account is a 

notice account, a member credit union may 

withdraw the nonperpetual capital with a 

minimum of five years’ notice. If the 

nonperpetual capital account is a term 

instrument it may be redeemed only at 

maturity. The corporate credit union may not 

redeem any account prior to the expiration of 

the notice period, or maturity, without the 

prior written approval of the NCUA. 

(4) Nonperpetual capital cannot be used to 

pledge borrowings. 

(5) Nonperpetual capital is available to 

cover losses that exceed retained earnings 

and perpetual contributed capital. Any such 

losses will be distributed pro rata among 

nonperpetual capital account holders at the 

time the loss is realized. To the extent that 

NCA funds are used to cover losses, the 

corporate credit union is prohibited from 

restoring or replenishing the affected 

accounts under any circumstances. 

(6) Where the corporate credit union is 

liquidated, nonperpetual capital accounts are 

payable only after satisfaction of all liabilities 

of the liquidation estate including uninsured 

obligations to shareholders and the NCUSIF. 

However, nonperpetual capital that is used to 

cover losses in a calendar year previous to 

the year of liquidation has no claim against 

the liquidation estate. 

(7) Where the corporate credit union is 

merged into another corporate credit union, 

the nonperpetual capital account will 

transfer to the continuing corporate credit 

union. For notice accounts, the five-year 

notice period for withdrawal of the 

nonperpetual capital account will remain in 

effect. For term accounts, the original term 

will remain in effect. 

(8) If a term certificate—: The nonperpetual 

capital account is a term certificate that will 

mature on—(date)—(insert date with a 

minimum five-year original maturity). 

I have read the above terms and conditions 

and I understand them. 

I further agree to maintain in the credit 

union’s files the annual notice of terms and 

conditions of the nonperpetual capital 

account. 

The notice form must be signed by either 

all of the directors of the member credit 

union or, if authorized by board resolution, 

the chair and secretary of the board of the 

credit union. 

The annual disclosure notice form must be 

signed by the chair of the corporate credit 

union. The chair must then sign a statement 

that certifies that the notice has been sent to 

member credit unions with nonperpetual 

capital accounts. The certification must be 

maintained in the corporate credit union’s 

files and be available for examiner review. 

Model Form D 

Terms and Conditions of Nonperpetual 

Capital 

Note: This form is for use before October 

20, 2011 in the circumstances where the 

credit union has determined THAT IT WILL 

give newly issued capital priority over older 

capital as described in Part I of this 

Appendix. Also, corporate credit unions 

should ensure that existing membership 

capital accounts that do not meet the 

qualifying conditions for nonperpetual 

capital are modified so as to meet those 

conditions. 

Terms and Conditions of Nonperpetual 

Capital Account 

(1) A nonperpetual capital account is not 

subject to share insurance coverage by the 

NCUSIF or other deposit insurer. 

(2) A nonperpetual capital account is not 

releasable due solely to the merger, charter 

conversion or liquidation of the member 

credit union. In the event of a merger, the 

nonperpetual capital account transfers to the 

continuing credit union. In the event of a 

charter conversion, the nonperpetual capital 

account transfers to the new institution. In 

the event of liquidation, the nonperpetual 

capital account may be released to facilitate 

the payout of shares with the prior written 

approval of NCUA. 

(3) If the nonperpetual capital account is a 

notice account, a member credit union may 

withdraw the nonperpetual capital with a 

minimum of five years’ notice. If the 

nonperpetual capital account is a term 

instrument it may be redeemed only at 

maturity. The corporate credit union may not 

redeem any account prior to the expiration of 

the notice period, or maturity, without the 

prior written approval of the NCUA. 

(4) Nonperpetual capital cannot be used to 

pledge borrowings. 

(5)(a) Nonperpetual capital that is issued 

on or after January 18, 2011 is available to 

cover losses that exceed retained earnings, all 

contributed capital issued before January 18, 

2011, and perpetual capital issued on or after 

January 18, 2011. Any such losses will be 

distributed pro rata, at the time the loss is 

realized, among nonperpetual capital account 

holders with accounts issued on or after 

January 18, 2011. To the extent that NCA 

funds are used to cover losses, the corporate 

credit union is prohibited from restoring or 

replenishing the affected accounts under any 

circumstances. 

(b) Nonperpetual capital that is issued 

before January 18, 2011, is available to cover 

losses that exceed retained earnings and 

perpetual capital issued before January 18, 

2011. Any such losses will be distributed pro 

rata, at the time the loss is realized, among 

nonperpetual capital account holders with 

accounts issued before January 18, 2011. To 

the extent that NCA funds are used to cover 

losses, the corporate credit union is 

prohibited from restoring or replenishing the 

affected accounts under any circumstances. 

(c) Attached to this disclosure is a 

statement that describes the amount of NCA 

the credit union has with the corporate credit 

union in each of the categories described in 

paragraphs (5)(a) and (5)(b) above. 

(6) If the corporate credit union is 

liquidated: 

(a) Nonperpetual capital accounts issued 

on or after January 18, 2011 are payable only 

after satisfaction of all liabilities of the 

liquidation estate including uninsured 

obligations to shareholders and the NCUSIF, 

but not including contributed capital 

accounts issued before January 18, 2011 or 

perpetual capital accounts issued on or after 

January 18, 2011. However, nonperpetual 

capital that is used to cover losses in a 

calendar year previous to the year of 

liquidation has no claim against the 

liquidation estate. 

(b) Nonperpetual capital accounts issued 

before January 18, 2011 are payable only after 

satisfaction of all liabilities of the liquidation 

estate including uninsured obligations to 

shareholders and the NCUSIF, but not 

including perpetual capital accounts issued 

before January 18, 2011. However, 

nonperpetual capital that is used to cover 

losses in a calendar year previous to the year 

of liquidation has no claim against the 

liquidation estate. 

(7) Where the corporate credit union is 

merged into another corporate credit union, 

the nonperpetual capital account will 

transfer to the continuing corporate credit 

union. For notice accounts, the five-year 

notice period for withdrawal of the 

nonperpetual capital account will remain in 

effect. For term accounts, the original term 

will remain in effect. 

(8) If a term certificate—: The nonperpetual 

capital account is a term certificate that will 

mature on—(date)—(insert date with a 

minimum five-year original maturity). 

I have read the above terms and conditions 

and I understand them. 


emcdonald on DSK2BSOYB1PROD with RULES2
64850 Federal Register / Vol. 75, No. 202 / Wednesday, October 20, 2010 / Rules and Regulations 

I further agree to maintain in the credit 

union’s files the annual notice of terms and 

conditions of the nonperpetual capital 

account. 

The notice form must be signed by either 

all of the directors of the member credit 

union or, if authorized by board resolution, 

the chair and secretary of the board of the 

credit union. 

The annual disclosure notice form must be 

signed by the chair of the corporate credit 

union. The chair must then sign a statement 

that certifies that the notice has been sent to 

member credit unions with nonperpetual 

capital accounts. The certification must be 

maintained in the corporate credit union’s 

files and be available for examiner review. 

Model Form E 

Terms and Conditions of Paid-In Capital 

Note: This form is for use before October 

20, 2011 in the circumstances where the 

credit union has determined NOT to give 

newly issued capital priority over older 

capital as described in Part I of this 

Appendix. 

Terms and Conditions of Paid-In Capital 

(1) A paid-in capital account is not subject 

to share insurance coverage by the NCUSIF 

or other deposit insurer. 

(2) A paid-in capital account is not 

releasable due solely to the merger, charter 

conversion or liquidation of the member 

credit union. In the event of a merger, the 

paid-in capital account transfers to the 

continuing credit union. In the event of a 

charter conversion, the paid-in capital 

account transfers to the new institution. In 

the event of liquidation, the paid-in capital 

account may be released to facilitate the 

payout of shares with the prior written 

approval of NCUA. 

(3) The funds are callable only at the 

option of the corporate credit union and only 

if the corporate credit union meets its 

minimum required capital and NEV ratios 

after the funds are called. The corporate must 

also obtain NCUA’s approval before the 

corporate calls any paid-in capital. 

(4) Paid-in capital cannot be used to pledge 

borrowings. 

(5) Paid-in capital is available to cover 

losses that exceed retained earnings. 

(6) Where the corporate credit union is 

liquidated, paid-in capital accounts are 

payable only after satisfaction of all liabilities 

of the liquidation estate including uninsured 

obligations to shareholders and the NCUSIF, 

and membership capital holders. 

(7) Where the corporate credit union is 

merged into another corporate credit union, 

the paid-in capital account will transfer to 

the continuing corporate credit union. 

(8) Paid-in capital is perpetual maturity 

and noncumulative dividend. 

I have read the above terms and conditions 

and I understand them. I further agree to 

maintain in the credit union’s files the 

annual notice of terms and conditions of the 

paid-in capital instrument. 

The notice form must be signed by either 

all of the directors of the credit union or, if 

authorized by board resolution, the chair and 

secretary of the board of the credit union. 

Model Form F 

Terms and Conditions of Paid-In Capital 

Note: This form is for use before October 

20, 2011 in the circumstances where the 

credit union has determined THAT IT WILL 

give newly issued capital priority over older 

capital as described in Part I of this 

Appendix. 

Terms and Conditions of Paid-In Capital 

(1) A paid-in capital account is not subject 

to share insurance coverage by the NCUSIF 

or other deposit insurer. 

(2) A paid-in capital account is not 

releasable due solely to the merger, charter 

conversion or liquidation of the member 

credit union. In the event of a merger, the 

paid-in capital account transfers to the 

continuing credit union. In the event of a 

charter conversion, the paid-in capital 

account transfers to the new institution. In 

the event of liquidation, the paid-in capital 

account may be released to facilitate the 

payout of shares with the prior written 

approval of NCUA. 

(3) The funds are callable only at the 

option of the corporate credit union and only 

if the corporate credit union meets its 

minimum required capital and NEV ratios 

after the funds are called. The corporate must 

also obtain NCUA’s approval before the 

corporate calls any paid-in capital. 

(4) Paid-in capital cannot be used to pledge 

borrowings. 

(5) Availability to cover losses. 

(a) Paid-in capital issued before January 18, 

2011 is available to cover losses that exceed 

retained earnings. Any such losses must be 

distributed pro rata, at the time the loss is 

realized, among holders of paid-in capital 

issued before January 18, 2011. To the extent 

that paid-in capital funds are used to cover 

losses, the corporate credit union is 

prohibited from restoring or replenishing the 

affected accounts under any circumstances. 

(b) Paid-in capital issued on or after 

January 18, 2011 is available to cover losses 

that exceed retained earnings and any 

contributed capital issued before January 18, 

2011. Any such losses must be distributed 

pro rata, at the time the loss is realized, 

among holders of paid-in capital issued on or 

after January 18, 2011. To the extent that 

paid-in capital funds are used to cover losses, 

the corporate credit union is prohibited from 

restoring or replenishing the affected 

accounts under any circumstances. 

(c) Attached to this disclosure is a 

statement that describes the amount of 

perpetual capital the credit union has with 

the corporate credit union in each of the 

categories described in paragraphs (5)(a) and 

(5)(b) above. 

(6) Where the corporate credit union is 

liquidated: 

(a) Paid-in capital accounts issued on or 

after January 18, 2011 are payable only after 

satisfaction of all liabilities of the liquidation 

estate including uninsured obligations to 

shareholders and the NCUSIF, but not 

including contributed capital accounts issued 

before January 18, 2011. However, paid-in 

capital that is used to cover losses in a 

calendar year previous to the year of 

liquidation has no claim against the 

liquidation estate. 

(b) Paid-in capital accounts issued before 

January 18, 2011 are payable only after 

satisfaction of all liabilities of the liquidation 

estate including uninsured obligations to 

shareholders and the NCUSIF, nonperpetual 

accounts issued before January 18, 2011 and 

contributed capital accounts issued on or 

after January 18, 2011. However, paid-in 

capital that is used to cover losses in a 

calendar year previous to the year of 

liquidation has no claim against the 

liquidation estate. 

(7) Where the corporate credit union is 

merged into another corporate credit union, 

the paid-in capital account will transfer to 

the continuing corporate credit union. 

(8) Paid-in capital is perpetual maturity 

and noncumulative dividend. 

I have read the above terms and conditions 

and I understand them. I further agree to 

maintain in the credit union’s files the 

annual notice of terms and conditions of the 

paid-in capital instrument. 

The notice form must be signed by either 

all of the directors of the credit union or, if 

authorized by board resolution, the chair and 

secretary of the board of the credit union. 

Model Form G 

Terms and Conditions of Perpetual 

Contributed Capital 

Note: This form is for use on and after 

October 20, 2011 in the circumstances where 

the credit union has determined NOT to give 

newly issued capital priority over older 

capital as described in Part I of this 

Appendix. Also, capital previously issued 

under the nomenclature ‘‘paid-in capital’’ is 

considered perpetual contributed capital. 

(1) A perpetual contributed capital account 

is not subject to share insurance coverage by 

the NCUSIF or other deposit insurer. 

(2) A perpetual contributed capital account 

is not releasable due solely to the merger, 

charter conversion or liquidation of the 

member credit union. In the event of a 

merger, the perpetual contributed capital 

account transfers to the continuing credit 

union. In the event of a charter conversion, 

the perpetual contributed capital account 

transfers to the new institution. In the event 

of liquidation, the perpetual contributed 

capital account may be released to facilitate 

the payout of shares with the prior written 

approval of NCUA. 

(3) The funds are callable only at the 

option of the corporate credit union and only 

if the corporate credit union meets its 

minimum required capital and NEV ratios 

after the funds are called. The corporate must 

also obtain the prior, written approval of the 

NCUA before releasing any perpetual 

contributed capital funds. 

(4) Perpetual contributed capital cannot be 

used to pledge borrowings. 

(5) Perpetual contributed capital is 

perpetual maturity and noncumulative 

dividend. 

(6) Perpetual contributed capital is 

available to cover losses that exceed retained 

earnings. Any such losses must be 

distributed pro rata among perpetual 

contributed capital holders at the time the 

loss is realized. To the extent that perpetual 

contributed capital funds are used to cover 

losses, the corporate credit union is 


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prohibited from restoring or replenishing the 

affected accounts under any circumstances. 

(7) Where the corporate credit union is 

liquidated, perpetual contributed capital 

accounts are payable only after satisfaction of 

all liabilities of the liquidation estate 

including uninsured obligations to 

shareholders and the NCUSIF, and 

nonperpetual capital holders. However, 

perpetual contributed capital that is used to 

cover losses in a calendar year previous to 

the year of liquidation has no claim against 

the liquidation estate. 

I have read the above terms and conditions 

and I understand them. I further agree to 

maintain in the credit union’s files the 

annual notice of terms and conditions of the 

perpetual contributed capital instrument. 

The notice form must be signed by either 

all of the directors of the credit union or, if 

authorized by board resolution, the chair and 

secretary of the board of the credit union. 

Model Form H 

Terms and Conditions of Perpetual 

Contributed Capital 

Note: This form is for use before October 

20, 2011 in the circumstances where the 

credit union has determined THAT IT WILL 

give newly issued capital priority over older 

capital as described in Part I of this 

Appendix. Also, capital previously issued 

under the nomenclature ‘‘paid-in capital’’ is 

considered perpetual contributed capital. 

(1) A perpetual contributed capital account 

is not subject to share insurance coverage by 

the NCUSIF or other deposit insurer. 

(2) A perpetual contributed capital account 

is not releasable due solely to the merger, 

charter conversion or liquidation of the 

member credit union. In the event of a 

merger, the perpetual contributed capital 

account transfers to the continuing credit 

union. In the event of a charter conversion, 

the perpetual contributed capital account 

transfers to the new institution. In the event 

of liquidation, the perpetual contributed 

capital account may be released to facilitate 

the payout of shares with the prior written 

approval of NCUA. 

(3) The funds are callable only at the 

option of the corporate credit union and only 

if the corporate credit union meets its 

minimum required capital and NEV ratios 

after the funds are called. The corporate must 

also obtain the prior, written approval of the 

NCUA before releasing any perpetual 

contributed capital funds. 

(4) Perpetual contributed capital cannot be 

used to pledge borrowings. 

(5) Perpetual contributed capital is 

perpetual maturity and noncumulative 

dividend. 

(6) Availability to cover losses. 

(a) Perpetual contributed capital issued 

before January 18, 2011 is available to cover 

losses that exceed retained earnings. Any 

such losses must be distributed pro rata, at 

the time the loss is realized, among holders 

of perpetual contributed capital issued before 

January 18, 2011. To the extent that perpetual 

contributed capital funds are used to cover 

losses, the corporate credit union is 

prohibited from restoring or replenishing the 

affected accounts under any circumstances. 

(b) Perpetual contributed capital issued on 

or after January 18, 2011 is available to cover 

losses that exceed retained earnings and any 

contributed capital issued before January 18, 

2011. Any such losses must be distributed 

pro rata, at the time the loss is realized, 

among holders of perpetual contributed 

capital issued on or after January 18, 2011. 

To the extent that perpetual contributed 

capital funds are used to cover losses, the 

corporate credit union is prohibited from 

restoring or replenishing the affected 

accounts under any circumstances. 

(c) Attached to this disclosure is a 

statement that describes the amount of 

perpetual capital the credit union has with 

the corporate credit union in each of the 

categories described in paragraphs (6)(a) and 

(6)(b) above. 

(7) Where the corporate credit union is 

liquidated: 

(a) Perpetual contributed capital accounts 

issued on or after January 18, 2011 are 

payable only after satisfaction of all liabilities 

of the liquidation estate including uninsured 

obligations to shareholders and the NCUSIF, 

but not including contributed capital 

accounts issued before January 18, 2011. 

However, perpetual contributed capital that 

is used to cover losses in a calendar year 

previous to the year of liquidation has no 

claim against the liquidation estate. 

(b) Perpetual contributed capital accounts 

issued before January 18, 2011 are payable 

only after satisfaction of all liabilities of the 

liquidation estate including uninsured 

obligations to shareholders and the NCUSIF, 

nonperpetual capital accounts issued before 

January 18, 2011, and all contributed capital 

accounts issued on or after January 18, 2011. 

However, perpetual contributed capital that 

is used to cover losses in a calendar year 

previous to the year of liquidation has no 

claim against the liquidation estate. 

I have read the above terms and conditions 

and I understand them. I further agree to 

maintain in the credit union’s files the 

annual notice of terms and conditions of the 

perpetual contributed capital instrument. 

The notice form must be signed by either 

all of the directors of the credit union or, if 

authorized by board resolution, the chair and 

secretary of the board of the credit union. 

■ 21. Revise Appendix B to Part 704 to 

read as follows: 

Appendix B to Part 704—Expanded 

Authorities and Requirements 

A corporate credit union may obtain all or 

part of the expanded authorities contained in 

this Appendix if it meets the applicable 

requirements of Part 704 and Appendix B, 

fulfills additional management, 

infrastructure, and asset and liability 

requirements, and receives NCUA’s written 

approval. Additional guidance is set forth in 

the NCUA publication Guidelines for 

Submission of Requests for Expanded 

Authority. 

A corporate credit union seeking expanded 

authorities must submit to NCUA a selfassessment plan supporting its request. A 

corporate credit union may adopt expanded 

authorities when NCUA has provided final 

approval. If NCUA denies a request for 

expanded authorities, it will advise the 

corporate credit union of the reason(s) for the 

denial and what it must do to resubmit its 

request. NCUA may revoke these expanded 

authorities at any time if an analysis 

indicates a significant deficiency. NCUA will 

notify the corporate credit union in writing 

of the identified deficiency. A corporate 

credit union may request, in writing, 

reinstatement of the revoked authorities by 

providing a self-assessment plan detailing 

how it has corrected the deficiency. 

A state chartered corporate credit union 

may not exercise any expanded authority that 

exceeds the powers and authorities provided 

for under its state laws. Accordingly, requests 

by state chartered corporate credit unions for 

expansions under this part must be approved 

by the state regulator before being submitted 

to NCUA. 

Minimum Requirement 

In order to participate in any of the 

authorities set forth in Base-Plus, Part I, Part 

II, Part III, or Part IV of this Appendix, a 

corporate credit union must evaluate 

monthly, including once on the last day of 

the month, the changes in NEV, NEV ratio, 

NII, WAL, and duration as required by 

paragraphs (d)(1)(i), (e), (f), (g), and (i) of 

§ 704.8. 

Base-Plus 

A corporate that has met the requirements 

for this Base-plus authority may, in 

performing the rate stress tests set forth in 

704.8(d)(1)(i), allow its NEV to decline as 

much as 20 percent. 

Part I 

(a) A corporate credit union that has met 

all the requirements established by NCUA for 

this Part I, including a minimum capital ratio 

of at least six percent, may: 

(1) Purchase investments with long-term 

ratings no lower than A¥ (or equivalent); 

(2) Purchase investments with short-term 

ratings no lower than A¥2 (or equivalent), 

provided that the issuer has a long-term 

rating no lower than A¥ (or equivalent) or 

the investment is a domestically-issued assetbacked security; 

(3) Engage in short sales of permissible 

investments to reduce interest rate risk; 

(4) Purchase principal only (PO) stripped 

mortgage-backed securities to reduce interest 

rate risk; and 

(5) Enter into a dollar roll transaction. 

(b) In performing the rate stress tests set 

forth in § 704.8(d), the NEV of a corporate 

credit union that has met the requirements of 

this Part I may decline as much as: 

(1) 20 percent; 

(2) 28 percent if the corporate credit union 

has a seven percent minimum capital ratio 

and is specifically approved by NCUA; or 

(3) 35 percent if the corporate credit union 

has an eight percent minimum capital ratio 

and is specifically approved by NCUA. 

(c) The maximum aggregate amount in 

unsecured loans and lines of credit to any 

one member credit union, excluding passthrough and guaranteed loans from the CLF 

and the NCUSIF, must not exceed 100 

percent of the corporate credit union’s 

capital. The board of directors must establish 

the limit, as a percent of the corporate credit 


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64852 Federal Register / Vol. 75, No. 202 / Wednesday, October 20, 2010 / Rules and Regulations 

union’s capital plus pledged shares, for 

secured loans and lines of credit. 

(d) The aggregate total of investments 

purchased under the authority of Part I (a)(1) 

and Part I (a)(2) may not exceed the lower of 

500 percent of the corporate credit union’s 

capital or 25 percent of assets. 

(e) On or after October 20, 2011, corporate 

credit unions will substitute ‘‘leverage ratio’’ 

for ‘‘capital ratio’’ wherever it appears in Part 

I. 

Part II 

(a) A corporate credit union that has met 

the requirements of Part I of this Appendix 

and the additional requirements established 

by NCUA for Part II may invest in: 

(1) Debt obligations of a foreign country; 

(2) Deposits and debt obligations of foreign 

banks or obligations guaranteed by these 

banks; 

(3) Marketable debt obligations of foreign 

corporations. This authority does not apply 

to debt obligations that are convertible into 

the stock of the corporation; and 

(4) Foreign issued asset-backed securities. 

(b) All foreign investments are subject to 

the following requirements: 

(1) Investments must be rated no lower 

than the minimum permissible domestic 

rating under the corporate credit union’s Part 

I authority; 

(2) A sovereign issuer, and/or the country 

in which an obligor is organized, must have 

a long-term foreign currency (non-local 

currency) debt rating no lower than AA¥ (or 

equivalent); 

(3) For each approved foreign bank line, 

the corporate credit union must identify the 

specific banking centers and branches to 

which it will lend funds; 

(4) Obligations of any single foreign obligor 

may not exceed 25 percent of capital or $5 

million, whichever is greater; and 

(5) Obligations in any single foreign 

country may not exceed 250 percent of 

capital. 

Part III 

(a) A corporate credit union that has met 

the requirements established by NCUA for 

this Part III may enter into derivative 

transactions specifically approved by NCUA 

to: 

(1) Create structured products; 

(2) Mitigate interest rate risk and credit risk 

on its own balance sheet; and 

(3) Hedge the balance sheets of its 

members. 

(b) Credit Ratings: 

(1) All derivative transactions are subject to 

the following requirements: 

(i) If the intended counterparty is domestic, 

the counterparty rating must be no lower 

than A¥ (or equivalent) by every NRSRO 

that provides a publicly available long-term 

rating on the counterparty; 

(ii) If the intended counterparty is foreign, 

the corporate must have Part II expanded 

authority and the counterparty rating must be 

no lower than the minimum permissible 

rating for a comparable term investment 

under Part II Authority; 

(iii) The corporate must identify the 

rating(s) relied upon to meet the 

requirements of this part at the time the 

transaction is entered into and monitor those 

ratings for as long as the contract remains 

open; and 

(iv) The corporate credit unions must 

comply with § 704.10 of this part if any rating 

relied upon to meet the requirements of 

paragraphs (b)(1)(i) or (ii) of this part is 

downgraded below the minimum rating 

requirements. 

(2) Exceptions. Credit ratings are not 

required for derivative transactions with: 

(i) Domestically chartered credit unions; 

(ii) U.S. government sponsored enterprises; 

or 

(iii) Counterparties where the transaction is 

fully guaranteed by an entity with a 

minimum permissible rating for comparable 

term investments. 

Part IV 

A corporate credit union that has met all 

the requirements established by NCUA for 

this Part IV may participate in loans with 

member natural person credit unions as 

approved by the NCUA and subject to the 

following: 

(a) The maximum aggregate amount of 

participation loans with any one member 

credit union must not exceed 25 percent of 

capital; and 

(b) The maximum aggregate amount of 

participation loans with all member credit 

unions will be determined on a case-by-case 

basis by the NCUA. 

■ 22. Add a new Appendix C to Part 704 

to read as follows: 

Appendix C to Part 704—Risk-Based 

Capital Credit Risk-Weight Categories 

Table of Contents 

I. Introduction 

(a) Scope 

(b) Definitions 

II. Risk-Weightings 

(a) On-balance sheet assets 

(b) Off-balance sheet activities 

(c) Recourse obligations, direct credit 

substitutes, and certain other positions 

(d) Collateral 

Part I: Introduction 

(a) Scope 

(1) This Appendix explains how a 

corporate credit union must compute its riskweighted assets for purposes of determining 

its capital ratios. 

(2) Risk-weighted assets equal riskweighted on-balance sheet assets (computed 

under Section II(a) of this Appendix), plus 

risk-weighted off-balance sheet activities 

(computed under Section II(b) of this 

Appendix), plus risk-weighted recourse 

obligations, direct credit substitutes, and 

certain other positions (computed under 

Section II(c) of this Appendix). 

(3) Assets not included (i.e., deducted from 

capital) for purposes of calculating capital 

under part 704 are not included in 

calculating risk-weighted assets. 

(4) Although this Appendix describes riskweightings for various assets and activities, 

this Appendix does not provide authority for 

corporate credit unions to invest in or 

purchase any particular type of asset or to 

engage in any particular type of activity. A 

corporate credit union must have other 

identifiable authority for any investment it 

makes or activity it engages in. So, for 

example, this Appendix describes risk 

weightings for subordinated securities. 

Section 704.5, however, prohibits corporate 

credit unions from investing in subordinated 

securities, and so a corporate credit union 

cannot invest in subordinated securities. 

(b) Definitions 

The following definitions apply to this 

Appendix. Additional definitions, applicable 

to this entire Part, are located in § 704.2 of 

this Part. 

Cash items in the process of collection 

means checks or drafts in the process of 

collection that are drawn on another 

depository institution, including a central 

bank, and that are payable immediately upon 

presentation; U.S. Government checks that 

are drawn on the United States Treasury or 

any other U.S. Government or Governmentsponsored agency and that are payable 

immediately upon presentation; broker’s 

security drafts and commodity or bill-oflading drafts payable immediately upon 

presentation; and unposted debits. 

Commitment means any arrangement that 

obligates a corporate credit union to: 

(1) Purchase loans or securities; 

(2) Extend credit in the form of loans or 

leases, participations in loans or leases, 

overdraft facilities, revolving credit facilities, 

home equity lines of credit, eligible ABCP 

liquidity facilities, or similar transactions. 

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. In the 

United States, this definition encompasses 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. 

Bank holding companies and savings and 

loan holding companies are excluded from 

this definition. For the purposes of assigning 

risk-weights, the differentiation between 

OECD depository institutions and non-OECD 

depository institutions is based on the 

country of incorporation. Claims on branches 

and agencies of foreign banks located in the 

United States are to be categorized on the 

basis of the parent bank’s country of 

incorporation. 

Direct credit substitute means an 

arrangement in which a corporate credit 

union assumes, in form or in substance, 

credit risk associated with an on-balance 

sheet or off-balance sheet asset or exposure 

that was not previously owned by the 

corporate credit union (third-party asset) and 

the risk assumed by the corporate credit 

union exceeds the pro rata share of the 

corporate credit union’s interest in the thirdparty asset. If a corporate credit union has no 

claim on the third-party asset, then the 

corporate credit union’s assumption of any 


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Federal Register / Vol. 75, No. 202 / Wednesday, October 20, 2010 / Rules and Regulations 64853 

credit risk is a direct credit substitute. Direct 

credit substitutes include: 

(1) Financial standby letters of credit that 

support financial claims on a third party that 

exceed a corporate credit union’s pro rata 

share in the financial claim; 

(2) Guarantees, surety arrangements, credit 

derivatives, and similar instruments backing 

financial claims that exceed a corporate 

credit union’s pro rata share in the financial 

claim; 

(3) Purchased subordinated interests that 

absorb more than their pro rata share of 

losses from the underlying assets, including 

any tranche of asset-backed securities that is 

not the most senior tranche; 

(4) Credit derivative contracts under which 

the corporate credit union assumes more 

than its pro rata share of credit risk on a 

third-party asset or exposure; 

(5) Loans or lines of credit that provide 

credit enhancement for the financial 

obligations of a third party; 

(6) Purchased loan servicing assets if the 

servicer is responsible for credit losses or if 

the servicer makes or assumes creditenhancing representations and warranties 

with respect to the loans serviced. Servicer 

cash advances as defined in this section are 

not direct credit substitutes; 

(7) Clean-up calls on third-party assets. 

However, clean-up calls that are 10 percent 

or less of the original pool balance and that 

are exercisable at the option of the corporate 

credit union are not direct credit substitutes; 

and 

(8) Liquidity facilities that provide support 

to asset-backed commercial paper (other than 

eligible ABCP liquidity facilities). 

Exchange rate contracts means crosscurrency interest rate swaps; forward foreign 

exchange rate contracts; currency options 

purchased; and any similar instrument that, 

in the opinion of the NCUA, may give rise 

to similar risks. 

Face amount means the notational 

principal, or face value, amount of an offbalance sheet item or the amortized cost of 

an on-balance sheet asset. 

Financial asset means cash or other 

monetary instrument, evidence of debt, 

evidence of an ownership interest in an 

entity, or a contract that conveys a right to 

receive or exchange cash or another financial 

instrument from another party. 

Financial standby letter of credit means a 

letter of credit or similar arrangement that 

represents an irrevocable obligation to a 

third-party beneficiary: 

(1) To repay money borrowed by, or 

advanced to, or for the account of, a second 

party (the account party); or 

(2) To make payment on behalf of the 

account party, in the event that the account 

party fails to fulfill its obligation to the 

beneficiary. 

OECD-based country means a member of 

that grouping of countries that are full 

members of the Organization for Economic 

Cooperation and Development (OECD) plus 

countries that have concluded special 

lending arrangements with the International 

Monetary Fund (IMF) associated with the 

IMF’s General Arrangements To Borrow. This 

term excludes any country that has 

rescheduled its external sovereign debt 

within the previous five years. A 

rescheduling of external sovereign debt 

generally would include any renegotiation of 

terms arising from a country’s inability or 

unwillingness to meet its external debt 

service obligations, but generally would not 

include renegotiations of debt in the normal 

course of business, such as a renegotiation to 

allow the borrower to take advantage of a 

decline in interest rates or other change in 

market conditions. 

Original maturity means, with respect to a 

commitment, the earliest date after a 

commitment is made on which the 

commitment is scheduled to expire (i.e., it 

will reach its stated maturity and cease to be 

binding on either party), provided that either: 

(1) The commitment is not subject to 

extension or renewal and will actually expire 

on its stated expiration date; or 

(2) If the commitment is subject to 

extension or renewal beyond its stated 

expiration date, the stated expiration date 

will be deemed the original maturity only if 

the extension or renewal must be based upon 

terms and conditions independently 

negotiated in good faith with the member at 

the time of the extension or renewal and 

upon a new, bona fide credit analysis 

utilizing current information on financial 

condition and trends. 

Performance-based standby letter of credit 

means any letter of credit, or similar 

arrangement, however named or described, 

which represents an irrevocable obligation to 

the beneficiary on the part of the issuer to 

make payment on account of any default by 

a third party in the performance of a 

nonfinancial or commercial obligation. Such 

letters of credit include arrangements backing 

subcontractors’ and suppliers’ performance, 

labor and materials contracts, and 

construction bids. 

Prorated assets means the total assets (as 

determined in the most recently available 

GAAP report but in no event more than one 

year old) of a consolidated CUSO multiplied 

by the corporate credit union’s percentage of 

ownership of that consolidated CUSO. 

Qualifying mortgage loan means a loan 

that: 

(1) Is fully secured by a first lien on a oneto four-family residential property; 

(2) Is underwritten in accordance with 

prudent underwriting standards, including 

standards relating the ratio of the loan 

amount to the value of the property (LTV 

ratio), as presented in the Interagency 

Guidelines for Real Estate Lending Policies, 

57 FR 62890 (December 31, 1992). A 

nonqualifying mortgage loan that is paid 

down to an appropriate LTV ratio (calculated 

using value at origination, appraisal obtained 

within the prior six months, or updated value 

using an automated valuation model) may 

become a qualifying loan if it meets all other 

requirements of this definition; 

(3) Maintains an appropriate LTV ratio 

based on the amortized principal balance of 

the loan; and 

(4) Is performing and is not more than 90 

days past due. 

If a corporate credit union holds the first 

and junior lien(s) on a residential property 

and no other party holds an intervening lien, 

the transaction is treated as a single loan 

secured by a first lien for the purposes of 

determining the LTV ratio and the 

appropriate risk-weight under Appendix C. 

Also, a loan to an individual borrower for the 

construction of the borrower’s home may be 

included as a qualifying mortgage loan. 

Qualifying multifamily mortgage loan. (1) 

Qualifying multifamily mortgage loan means 

a loan secured by a first lien on multifamily 

residential properties consisting of 5 or more 

dwelling units, provided that: 

(i) The amortization of principal and 

interest occurs over a period of not more than 

30 years; 

(ii) The original minimum maturity for 

repayment of principal on the loan is not less 

than seven years; 

(iii) When considering the loan for 

placement in a lower risk-weight category, all 

principal and interest payments have been 

made on a timely basis in accordance with 

its terms for the preceding year; 

(iv) The loan is performing and not 90 days 

or more past due; 

(v) The loan is made in accordance with 

prudent underwriting standards; and 

(vi) If the interest rate on the loan does not 

change over the term of the loan, the current 

loan balance amount does not exceed 80 

percent of the value of the property securing 

the loan, and for the property’s most recent 

calendar year, the ratio of annual net 

operating income generated by the property 

(before payment of any debt service on the 

loan) to annual debt service on the loan is not 

less than 120 percent, or in the case of 

cooperative or other not-for-profit housing 

projects, the property generates sufficient 

cash flows to provide comparable protection 

to the institution; or 

(vii) If the interest rate on the loan changes 

over the term of the loan, the current loan 

balance amount does not exceed 75 percent 

of the value of the property securing the loan, 

and for the property’s most recent calendar 

year, the ratio of annual net operating income 

generated by the property (before payment of 

any debt service on the loan) to annual debt 

service on the loan is not less than 115 

percent, or in the case of cooperative or other 

not-for-profit housing projects, the property 

generates sufficient cash flows to provide 

comparable protection to the institution. 

(2) For purposes of paragraphs (1)(vi) and 

(1)(vii) of this definition, the term value of 

the property means, at origination of a loan 

to purchase a multifamily property, the lower 

of the purchase price or the amount of the 

initial appraisal, or if appropriate, the initial 

evaluation. In cases not involving purchase 

of a multifamily loan, the value of the 

property is determined by the most current 

appraisal, or if appropriate, the most current 

evaluation. In cases where a borrower 

refinances a loan on an existing property, as 

an alternative to paragraphs (1)(iii), (1)(vi), 

and (1)(vii) of this definition: 

(i) All principal and interest payments on 

the loan being refinanced have been made on 

a timely basis in accordance with the terms 

of that loan for the preceding year; and 

(ii) The net income on the property for the 

preceding year would support timely 

principal and interest payments on the new 

loan in accordance with the applicable debt 

service requirement. 


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64854 Federal Register / Vol. 75, No. 202 / Wednesday, October 20, 2010 / Rules and Regulations 

Qualifying residential construction loan, 

also referred to as a residential bridge loan, 

means a loan made in accordance with sound 

lending principles satisfying the following 

criteria: 

(1) The builder must have substantial 

project equity in the home construction 

project; 

(2) The residence being constructed must 

be a 1–4 family residence sold to a home 

purchaser; 

(3) The lending entity must obtain 

sufficient documentation from a permanent 

lender (which may be the construction 

lender) demonstrating that the home buyer 

intends to purchase the residence and has the 

ability to obtain a permanent qualifying 

mortgage loan sufficient to purchase the 

residence; 

(4) The home purchaser must have made 

a substantial earnest money deposit; 

(5) The construction loan must not exceed 

80 percent of the sales price of the residence; 

(6) The construction loan must be secured 

by a first lien on the lot, residence under 

construction, and other improvements; 

(7) The lending credit union must retain 

sufficient undisbursed loan funds throughout 

the construction period to ensure project 

completion; 

(8) The builder must incur a significant 

percentage of direct costs (i.e., the actual 

costs of land, labor, and material) before any 

drawdown on the loan; 

(9) If at any time during the life of the 

construction loan any of the criteria of this 

rule are no longer satisfied, the corporate 

must immediately recategorize the loan at a 

100 percent risk-weight and must accurately 

report the loan in the corporate’s next 

quarterly call report; 

(10) The home purchaser must intend that 

the home will be owner-occupied; 

(11) The home purchaser(s) must be an 

individual(s), not a partnership, joint 

venture, trust corporation, or any other entity 

(including an entity acting as a sole 

proprietorship) that is purchasing the 

home(s) for speculative purposes; and 

(12) The loan must be performing and not 

more than 90 days past due. 

The NCUA retains the discretion to 

determine that any loans not meeting sound 

lending principles must be placed in a higher 

risk-weight category. The NCUA also reserves 

the discretion to modify these criteria on a 

case-by-case basis provided that any such 

modifications are not inconsistent with the 

safety and soundness objectives of this 

definition. 

Qualifying securities firm means: 

(1) A securities firm incorporated in the 

United States that is a broker-dealer that is 

registered with the Securities and Exchange 

Commission (SEC) and that complies with 

the SEC’s net capital regulations (17 CFR 

240.15c3(1)); and 

(2) A securities firm incorporated in any 

other OECD-based country, if the corporate 

credit union is able to demonstrate that the 

securities firm is subject to consolidated 

supervision and regulation (covering its 

subsidiaries, but not necessarily its parent 

organizations) comparable to that imposed on 

depository institutions in OECD countries. 

Such regulation must include risk-based 

capital requirements comparable to those 

imposed on depository institutions under the 

Accord on International Convergence of 

Capital Measurement and Capital Standards 

(1988, as amended in 1998). 

Recourse means a corporate credit union’s 

retention, in form or in substance, of any 

credit risk directly or indirectly associated 

with an asset it has sold (in accordance with 

Generally Accepted Accounting Principles) 

that exceeds a pro rata share of that corporate 

credit union’s claim on the asset. If a 

corporate credit union has no claim on an 

asset it has sold, then the retention of any 

credit risk is recourse. A recourse obligation 

typically arises when a corporate 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 a 

corporate credit union provides credit 

enhancement beyond any contractual 

obligation to support assets it has sold. 

Recourse obligations include: 

(1) Credit-enhancing representations and 

warranties made on transferred assets; 

(2) Loan servicing assets retained pursuant 

to an agreement under which the corporate 

credit union will be responsible for losses 

associated with the loans serviced. Servicer 

cash advances as defined in this section are 

not recourse obligations; 

(3) Retained subordinated interests that 

absorb more than their pro rata share of 

losses from the underlying assets; 

(4) Assets sold under an agreement to 

repurchase, if the assets are not already 

included on the balance sheet; 

(5) Loan strips sold without contractual 

recourse where the maturity of the 

transferred portion of the loan is shorter than 

the maturity of the commitment under which 

the loan is drawn; 

(6) Credit derivatives that absorb more than 

the corporate credit union’s pro rata share of 

losses from the transferred assets; 

(7) Clean-up calls on assets the corporate 

credit union has sold. However, clean-up 

calls that are 10 percent or less of the original 

pool balance and that are exercisable at the 

option of the corporate credit union are not 

recourse arrangements; and 

(8) Liquidity facilities that provide support 

to asset-backed commercial paper (other than 

eligible ABCP liquidity facilities). 

Replacement cost means, with respect to 

interest rate and exchange-rate contracts, the 

loss that would be incurred in the event of 

a counterparty default, as measured by the 

net cost of replacing the contract at the 

current market value. If default would result 

in a theoretical profit, the replacement value 

is considered to be zero. This mark-to-market 

process must incorporate changes in both 

interest rates and counterparty credit quality. 

Residential properties means houses, 

condominiums, cooperative units, and 

manufactured homes. This definition does 

not include boats or motor homes, even if 

used as a primary residence, or timeshare 

properties. 

Residual interest. (1) Residual interest 

means any on-balance sheet asset that: 

(i) Represents an interest (including a 

beneficial interest) created by a transfer that 

qualifies as a sale (in accordance with 

Generally Accepted Accounting Principles) 

of financial assets, whether through a 

securitization or otherwise; and 

(ii) Exposes a corporate credit union to 

credit risk directly or indirectly associated 

with the transferred asset that exceeds a pro 

rata share of that corporate credit union’s 

claim on the asset, whether through 

subordination provisions or other credit 

enhancement techniques. 

(2) Residual interests generally include 

credit-enhancing interest-only strips, spread 

accounts, cash collateral accounts, retained 

subordinated interests (and other forms of 

overcollateralization), and similar assets that 

function as a credit enhancement. Residual 

interests further include those exposures 

that, in substance, cause the corporate credit 

union to retain the credit risk of an asset or 

exposure that had qualified as a residual 

interest before it was sold. Residual interests 

generally do not include assets purchased 

from a third party, but a credit-enhancing 

interest-only strip that is acquired in any 

asset transfer is a residual interest. 

(3) Corporate credit unions will use this 

definition of the term ‘‘residual interests,’’ 

and not the definition in § 704.2, for 

purposes of applying this Appendix. 

Risk participation means a participation in 

which the originating party remains liable to 

the beneficiary for the full amount of an 

obligation (e.g., a direct credit substitute), 

notwithstanding that another party has 

acquired a participation in that obligation. 

Risk-weighted assets means the sum total 

of risk-weighted on-balance sheet assets, as 

calculated under Section II(a) of this 

Appendix, and the total of risk-weighted offbalance sheet credit equivalent amounts. The 

total of risk-weighted off-balance sheet credit 

equivalent amounts equals the risk-weighted 

off-balance sheet activities as calculated 

under Section II(b) of this Appendix plus the 

risk-weighted recourse obligations, riskweighted direct credit substitutes, and 

certain other risk-weighted positions as 

calculated under Section II(c) of this 

Appendix. 

Servicer cash advance means funds that a 

residential mortgage servicer advances to 

ensure an uninterrupted flow of payments, 

including advances made to cover 

foreclosure costs or other expenses to 

facilitate the timely collection of the loan. A 

servicer cash advance is not a recourse 

obligation or a direct credit substitute if: 

(1) The servicer is entitled to full 

reimbursement and this right is not 

subordinated to other claims on the cash 

flows from the underlying asset pool; or 

(2) For any one loan, the servicer’s 

obligation to make nonreimbursable 

advances is contractually limited to an 

insignificant amount of the outstanding 

principal amount on that loan. 

Structured financing program means a 

program where receivable interests and assetor mortgage-backed securities issued by 

multiple participants are purchased by a 

special purpose entity that repackages those 

exposures into securities that can be sold to 

investors. Structured financing programs 


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Federal Register / Vol. 75, No. 202 / Wednesday, October 20, 2010 / Rules and Regulations 64855 

1These institutions include, but are not limited 

to, the International Bank for Reconstruction and 

Development (World Bank), the Inter-American 

Development Bank, the Asian Development Bank, 

the African Development Bank, the European 

Investments Bank, the International Monetary Fund 

and the Bank for International Settlements. 

allocate credit risk, generally, between the 

participants and credit enhancement 

provided to the program. 

Traded position means a position retained, 

assumed, or issued in connection with a 

securitization that is rated by a NRSRO, 

where there is a reasonable expectation that, 

in the near future, the rating will be relied 

upon by: 

(1) Unaffiliated investors to purchase the 

security; or 

(2) An unaffiliated third party to enter into 

a transaction involving the position, such as 

a purchase, loan, or repurchase agreement. 

Unconditionally cancelable means, with 

respect to a commitment-type lending 

arrangement, that the corporate credit union 

may, at any time, with or without cause, 

refuse to advance funds or extend credit 

under the facility. 

United States Government or its agencies 

means an instrumentality of the U.S. 

Government whose debt obligations are fully 

and explicitly guaranteed as to the timely 

payment of principal and interest by the full 

faith and credit of the United States 

Government. 

United States Government-sponsored 

agency or corporation means an agency or 

corporation originally established or 

chartered to serve public purposes specified 

by the United States Congress but whose 

obligations are not explicitly guaranteed by 

the full faith and credit of the United States 

Government. 

Part II: Risk-Weightings 

(a) On-Balance Sheet Assets 

Except as provided in Section II(b) of this 

Appendix, risk-weighted on-balance sheet 

assets are computed by multiplying the onbalance sheet asset amounts times the 

appropriate risk-weight categories. The riskweight categories are: 

(1) Zero percent Risk-Weight (Category 1). 

(i) Cash, including domestic and foreign 

currency owned and held in all offices of a 

corporate credit union or in transit. Any 

foreign currency held by a corporate credit 

union must be converted into U.S. dollar 

equivalents; 

(ii) Securities issued by and other direct 

claims on the U.S. Government or its 

agencies (to the extent such securities or 

claims are unconditionally backed by the full 

faith and credit of the United States 

Government) or the central government of an 

OECD country; 

(iii) Notes and obligations issued or 

guaranteed by the Federal Deposit Insurance 

Corporation or the National Credit Union 

Share Insurance Fund and backed by the full 

faith and credit of the United States 

Government; 

(iv) Deposit reserves at, claims on, and 

balances due from Federal Reserve Banks; 

(v) The book value of paid-in Federal 

Reserve Bank stock; 

(vi) That portion of assets directly and 

unconditionally guaranteed by the United 

States Government or its agencies, or the 

central government of an OECD country. 

(viii) Claims on, and claims guaranteed by, 

a qualifying securities firm that are 

collateralized by cash on deposit in the 

corporate credit union or by securities issued 

or guaranteed by the United States 

Government or its agencies, or the central 

government of an OECD country. To be 

eligible for this risk-weight, the corporate 

credit union must maintain a positive margin 

of collateral on the claim on a daily basis, 

taking into account any change in a corporate 

credit union’s exposure to the obligor or 

counterparty under the claim in relation to 

the market value of the collateral held in 

support of the claim. 

(2) 20 percent Risk-Weight (Category 2). 

(i) Cash items in the process of collection; 

(ii) That portion of assets conditionally 

guaranteed by the United States Government 

or its agencies, or the central government of 

an OECD country; 

(iii) That portion of assets collateralized by 

the current market value of securities issued 

or guaranteed by the United States 

government or its agencies, or the central 

government of an OECD country; 

(iv) Securities (not including equity 

securities) issued by and other claims on the 

U.S. Government or its agencies which are 

not backed by the full faith and credit of the 

United States Government; 

(v) Securities (not including equity 

securities) issued by, or other direct claims 

on, United States Government-sponsored 

agencies; 

(vi) That portion of assets guaranteed by 

United States Government-sponsored 

agencies; 

(vii) That portion of assets collateralized by 

the current market value of securities issued 

or guaranteed by United States Governmentsponsored agencies; 

(viii) Claims on, and claims guaranteed by, 

a qualifying securities firm, subject to the 

following conditions: 

(A) A qualifying securities firm must have 

a long-term issuer credit rating, or a rating on 

at least one issue of long-term unsecured 

debt, from a NRSRO. The rating must be in 

one of the three highest investment grade 

categories used by the NRSRO. If two or more 

NRSROs assign ratings to the qualifying 

securities firm, the corporate credit union 

must use the lowest rating to determine 

whether the rating requirement of this 

paragraph is met. A qualifying securities firm 

may rely on the rating of its parent 

consolidated company, if the parent 

consolidated company guarantees the claim. 

(B) A collateralized claim on a qualifying 

securities firm does not have to comply with 

the rating requirements under paragraph (a) 

if the claim arises under a contract that: 

(1) Is a reverse repurchase/repurchase 

agreement or securities lending/borrowing 

transaction executed using standard industry 

documentation; 

(2) Is collateralized by debt or equity 

securities that are liquid and readily 

marketable; 

(3) Is marked-to-market daily; 

(4) Is subject to a daily margin maintenance 

requirement under the standard industry 

documentation; and 

(5) Can be liquidated, terminated or 

accelerated immediately in bankruptcy or 

similar proceeding, and the security or 

collateral agreement will not be stayed or 

avoided under applicable law of the relevant 

jurisdiction. For example, a claim is exempt 

from the automatic stay in bankruptcy in the 

United States if it arises under a securities 

contract or a repurchase agreement subject to 

Section 555 or 559 of the Bankruptcy Code 

(11 U.S.C. 555 or 559), a qualified financial 

contract under Section 207(c)(8) of the 

Federal Credit Union Act (12 U.S.C. 

1787(c)(8)) or Section 11(e)(8) of the Federal 

Deposit Insurance Act (12 U.S.C. 1821(e)(8)), 

or a netting contract between or among 

financial institutions under Sections 401–407 

of the Federal Deposit Insurance Corporation 

Improvement Act of 1991 (12 U.S.C. 4401– 

4407), or Regulation EE (12 CFR part 231). 

(C) If the securities firm uses the claim to 

satisfy its applicable capital requirements, 

the claim is not eligible for a risk-weight 

under this paragraph II(a)(2)(viii); 

(ix) Claims representing general obligations 

of any public-sector entity in an OECD 

country, and that portion of any claims 

guaranteed by any such public-sector entity; 

(x) Balances due from and all claims on 

domestic depository institutions. This 

includes demand deposits and other 

transaction accounts, savings deposits and 

time certificates of deposit, federal funds 

sold, loans to other depository institutions, 

including overdrafts and term federal funds, 

holdings of the corporate credit union’s own 

discounted acceptances for which the 

account party is a depository institution, 

holdings of bankers acceptances of other 

institutions and securities issued by 

depository institutions, except those that 

qualify as capital; 

(xi) The book value of paid-in Federal 

Home Loan Bank stock; 

(xii) Deposit reserves at, claims on and 

balances due from the Federal Home Loan 

Banks; 

(xiii) Assets collateralized by cash held in 

a segregated deposit account by the reporting 

corporate credit union; 

(xiv) Claims on, or guaranteed by, official 

multilateral lending institutions or regional 

development institutions in which the 

United States Government is a shareholder or 

contributing member; 1

(xv) That portion of assets collateralized by 

the current market value of securities issued 

by official multilateral lending institutions or 

regional development institutions in which 

the United States Government is a 

shareholder or contributing member. 

(xvi) All claims on depository institutions 

incorporated in an OECD country, and all 

assets backed by the full faith and credit of 

depository institutions incorporated in an 

OECD country. This includes the credit 

equivalent amount of participations in 

commitments and standby letters of credit 

sold to other depository institutions 

incorporated in an OECD country, but only 

if the originating bank remains liable to the 

member or beneficiary for the full amount of 

the commitment or standby letter of credit. 

Also included in this category are the credit 

equivalent amounts of risk participations in 


emcdonald on DSK2BSOYB1PROD with RULES2
64856 Federal Register / Vol. 75, No. 202 / Wednesday, October 20, 2010 / Rules and Regulations 

2The sufficiency of collateral and guarantees for 

off-balance sheet items is determined by the market 

value of the collateral or the amount of the 

guarantee in relation to the face amount of the item, 

except for derivative contracts, for which this 

determination is generally made in relation to the 

credit equivalent amount. Collateral and guarantees 

are subject to the same provisions noted under 

paragraph II(d) of this Appendix C. 

bankers’ acceptances conveyed to other 

depository institutions incorporated in an 

OECD country. However, bank-issued 

securities that qualify as capital of the issuing 

bank are not included in this risk category; 

(xvii) Claims on, or guaranteed by 

depository institutions other than the central 

bank, incorporated in a non-OECD country, 

with a remaining maturity of one year or less; 

(xviii) That portion of local currency 

claims conditionally guaranteed by central 

governments of non-OECD countries, to the 

extent the corporate credit union has local 

currency liabilities in that country. 

(3) 50 percent Risk-Weight (Category 3). 

(i) Revenue bonds issued by any publicsector entity in an OECD country for which 

the underlying obligor is a public-sector 

entity, but which are repayable solely from 

the revenues generated from the project 

financed through the issuance of the 

obligations; 

(ii) Qualifying mortgage loans and 

qualifying multifamily mortgage loans; 

(iii) Privately-issued mortgage-backed 

securities (i.e., those that do not carry the 

guarantee of the U.S. Government, a U.S. 

government agency, or a U.S. government 

sponsored enterprise) representing an 

interest in qualifying mortgage loans or 

qualifying multifamily mortgage loans. If the 

security is backed by qualifying multifamily 

mortgage loans, the corporate credit union 

must receive timely payments of principal 

and interest in accordance with the terms of 

the security. Payments will generally be 

considered timely if they are not 30 days past 

due; and 

(iv) Qualifying residential construction 

loans. 

(4) 100 percent Risk-Weight (Category 4). 

All assets not specified above or deducted 

from calculations of capital pursuant to 

§ 704.2 and § 704.3 of this part, including, 

but not limited to: 

(i) Consumer loans; 

(ii) Commercial loans; 

(iii) Home equity loans; 

(iv) Non-qualifying mortgage loans; 

(v) Non-qualifying multifamily mortgage 

loans; 

(vi) Residential construction loans; 

(vii) Land loans; 

(viii) Nonresidential construction loans; 

(ix) Obligations issued by any state or any 

political subdivision thereof for the benefit of 

a private party or enterprise where that party 

or enterprise, rather than the issuing state or 

political subdivision, is responsible for the 

timely payment of principal and interest on 

the obligations, e.g., industrial development 

bonds; 

(x) Debt securities not specifically riskweighted in another category; 

(xi) Investments in fixed assets and 

premises; 

(xii) Servicing assets; 

(xiii) Interest-only strips receivable, other 

than credit-enhancing interest-only strips; 

(xiv) Equity investments; 

(xv) The prorated assets of subsidiaries 

(except for the assets of consolidated CUSOs) 

to the extent such assets are included in 

adjusted total assets; 

(xvi) All repossessed assets or assets that 

are more than 90 days past due; and 

(xvii) Intangible assets not specifically 

weighted in some other category. 

(5) Indirect ownership interests in pools of 

assets. Assets representing an indirect 

holding of a pool of assets, e.g., mutual 

funds, are assigned to risk-weight categories 

under this section based upon the risk-weight 

that would be assigned to the assets in the 

portfolio of the pool. An investment in shares 

of a mutual fund whose portfolio consists 

primarily of various securities or money 

market instruments that, if held separately, 

would be assigned to different risk-weight 

categories, generally is assigned to the riskweight category appropriate to the highest 

risk-weighted asset that the fund is permitted 

to hold in accordance with the investment 

objectives set forth in its prospectus. The 

corporate credit union may, at its option, 

assign the investment on a pro rata basis to 

different risk-weight categories according to 

the investment limits in its prospectus. In no 

case will an investment in shares in any such 

fund be assigned to a total risk-weight less 

than 20 percent. If the corporate credit union 

chooses to assign investments on a pro rata 

basis, and the sum of the investment limits 

of assets in the fund’s prospectus exceeds 

100 percent, the corporate credit union must 

assign the highest pro rata amounts of its 

total investment to the higher risk categories. 

If, in order to maintain a necessary degree of 

short-term liquidity, a fund is permitted to 

hold an insignificant amount of its assets in 

short-term, highly liquid securities of 

superior credit quality that do not qualify for 

a preferential risk-weight, such securities 

will generally be disregarded in determining 

the risk-weight category into which the 

corporate credit union’s holding in the 

overall fund should be assigned. The prudent 

use of hedging instruments by a mutual fund 

to reduce the risk of its assets will not 

increase the risk-weighting of the mutual 

fund investment. For example, the use of 

hedging instruments by a mutual fund to 

reduce the interest rate risk of its government 

bond portfolio will not increase the riskweight of that fund above the 20 percent 

category. Nonetheless, if the fund engages in 

any activities that appear speculative in 

nature or has any other characteristics that 

are inconsistent with the preferential riskweighting assigned to the fund’s assets, 

holdings in the fund will be assigned to the 

100 percent risk-weight category. 

(6) Derivatives. Certain transactions or 

activities, such as derivatives transactions, 

may appear on a corporate’s balance sheet 

but are not specifically described in the 

Section II(a) on-balance sheet risk-weight 

categories. These items will be assigned riskweights as described in Section II(b) or II(c) 

below. 

(b) Off-Balance Sheet Items 

Except as provided in Section II(c) of this 

Appendix, risk-weighted off-balance sheet 

items are determined by the following twostep process. First, the face amount of the offbalance sheet item must be multiplied by the 

appropriate credit conversion factor listed in 

this Section II(b). This calculation translates 

the face amount of an off-balance sheet 

exposure into an on-balance sheet creditequivalent amount. Second, the creditequivalent amount must be assigned to the 

appropriate risk-weight category using the 

criteria regarding obligors, guarantors, and 

collateral listed in Section II(a) of this 

Appendix.2 The following are the credit 

conversion factors and the off-balance sheet 

items to which they apply. 

(1) 100 percent credit conversion factor 

(Group A). 

(i) Risk participations purchased in 

bankers’ acceptances; 

(ii) Forward agreements and other 

contingent obligations with a certain draw 

down, e.g., legally binding agreements to 

purchase assets at a specified future date. On 

the date a corporate credit union enters into 

a forward agreement or similar obligation, it 

should convert the principal amount of the 

assets to be purchased at 100 percent as of 

that date and then assign this amount to the 

risk-weight category appropriate to the 

obligor or guarantor of the item, or the nature 

of the collateral; 

(iii) Indemnification of members whose 

securities the corporate credit union has lent 

as agent. If the member is not indemnified 

against loss by the corporate credit union, the 

transaction is excluded from the risk-based 

capital calculation. When a corporate credit 

union lends its own securities, the 

transaction is treated as a loan. When a 

corporate credit union lends its own 

securities or is acting as agent, agrees to 

indemnify a member, the transaction is 

assigned to the risk-weight appropriate to the 

obligor or collateral that is delivered to the 

lending or indemnifying institution or to an 

independent custodian acting on their behalf; 

and 

(iv) Unused portions of ABCP liquidity 

facilities that do not meet the definition of an 

eligible ABCP liquidity facility. The resulting 

credit equivalent amount is assigned to the 

risk category appropriate to the assets to be 

funded by the liquidity facility based on the 

assets or the obligor, after considering any 

collateral or guarantees, or external credit 

ratings under paragraph II(c)(3) of this 

Appendix, if applicable. 

(2) 50 percent credit conversion factor 

(Group B). 

(i) Transaction-related contingencies, 

including, among other things, performance 

bonds and performance-based standby letters 

of credit related to a particular transaction; 

(ii) Unused portions of commitments 

(including home equity lines of credit and 

eligible ABCP liquidity facilities) with an 

original maturity exceeding one year except 

those listed in paragraph II(b)(5) of this 

Appendix. For eligible ABCP liquidity 

facilities, the resulting credit equivalent 

amount is assigned to the risk category 

appropriate to the assets to be funded by the 

liquidity facility based on the assets or the 

obligor, after considering any collateral or 

guarantees, or external credit ratings under 


emcdonald on DSK2BSOYB1PROD with RULES2
Federal Register / Vol. 75, No. 202 / Wednesday, October 20, 2010 / Rules and Regulations 64857 

3For purposes of calculating potential future 

credit exposure for foreign exchange contracts and 

other similar contracts, in which notional principal 

is equivalent to cash flows, total notional principal 

is defined as the net receipts to each party falling 

due on each value date in each currency. 

4No potential future credit exposure is calculated 

for single currency interest rate swaps in which 

payments are made based upon two floating rate 

indices, so-called floating/floating or basis swaps; 

the credit equivalent amount is measured solely on 

the basis of the current credit exposure. 

5By netting individual off-balance sheet 

derivative contracts for the purpose of calculating 

its credit equivalent amount, a corporate credit 

union represents that documentation adequate to 

support the netting of an off-balance sheet 

derivative contract is in the corporate credit union’s 

files and available for inspection by the NCUA. 

Upon determination by the NCUA that a corporate 

credit union’s files are inadequate or that a bilateral 

netting contract may not be legally enforceable 

under any one of the bodies of law described in 

paragraphs II(b)(5)(ii) of this Appendix, the 

underlying individual off-balance sheet derivative 

contracts may not be netted for the purposes of this 

section. 

paragraph II(c)(3) of this Appendix, if 

applicable; and 

(iii) Revolving underwriting facilities, note 

issuance facilities, and similar arrangements 

pursuant to which the corporate credit 

union’s CUSO or member can issue shortterm debt obligations in its own name, but for 

which the corporate credit union has a 

legally binding commitment to either: 

(A) Purchase the obligations the member is 

unable to sell by a stated date; or 

(B) Advance funds to its member, if the 

obligations cannot be sold. 

(3) 20 percent credit conversion factor 

(Group C). Trade-related contingencies, i.e., 

short-term, self-liquidating instruments used 

to finance the movement of goods and 

collateralized by the underlying shipment. A 

commercial letter of credit is an example of 

such an instrument. 

(4) 10 percent credit conversion factor 

(Group D). Unused portions of eligible ABCP 

liquidity facilities with an original maturity 

of one year or less. The resulting credit 

equivalent amount is assigned to the risk 

category appropriate to the assets to be 

funded by the liquidity facility based on the 

assets or the obligor, after considering any 

collateral or guarantees, or external credit 

ratings under paragraph II(c)(3) of this 

Appendix, if applicable; 

(5) Zero percent credit conversion factor 

(Group E). (i) Unused portions of 

commitments with an original maturity of 

one year or less, except for eligible ABCP 

liquidity facilities; 

(ii) Unused commitments with an original 

maturity greater than one year, if they are 

unconditionally cancelable at any time at the 

option of the corporate credit union and the 

corporate credit union has the contractual 

right to make, and in fact does make, either: 

(A) A separate credit decision based upon 

the borrower’s current financial condition 

before each drawing under the lending 

facility; or 

(B) An annual (or more frequent) credit 

review based upon the borrower’s current 

financial condition to determine whether or 

not the lending facility should be continued; 

and 

(iii) The unused portion of retail credit 

card lines or other related plans that are 

unconditionally cancelable by the corporate 

credit union in accordance with applicable 

law. 

(6) Off-balance sheet derivative contracts; 

interest rate and foreign exchange rate 

contracts (Group F). 

(i) Calculation of credit equivalent 

amounts. The credit equivalent amount of an 

off-balance sheet derivative contract that is 

not subject to a qualifying bilateral netting 

contract in accordance with paragraph 

II(b)(6)(ii) of this Appendix is equal to the 

sum of the current credit exposure, i.e., the 

replacement cost of the contract, and the 

potential future credit exposure of the 

contract. The calculation of credit equivalent 

amounts is measured in U.S. dollars, 

regardless of the currency or currencies 

specified in the contract. 

(A) Current credit exposure. The current 

credit exposure of an off-balance sheet 

derivative contract is determined by the 

mark-to-market value of the contract. If the 

mark-to-market value is positive, then the 

current credit exposure equals that mark-tomarket value. If the mark-to-market value is 

zero or negative, then the current exposure is 

zero. In determining its current credit 

exposure for multiple off-balance sheet 

derivative contracts executed with a single 

counterparty, a corporate credit union may 

net positive and negative mark-to-market 

values of off-balance sheet derivative 

contracts if subject to a bilateral netting 

contract as provided in paragraph II(b)(6)(ii) 

of this Appendix. 

(B) Potential future credit exposure. The 

potential future credit exposure of an offbalance sheet derivative contract, including a 

contract with a negative mark-to-market 

value, is estimated by multiplying the 

notional principal by a credit conversion 

factor.3 Corporate credit unions, subject to 

examiner review, should use the effective 

rather than the apparent or stated notional 

amount in this calculation. The conversion 

factors are: 4

Remaining maturity Interest rate 

contracts (percent) 

Foreign 

exchange rate 

contracts 

(percent) 

Other derivative 

contracts 

(percent) 

One year or less ............................................................................................................ 0 .0 1.0 10.0 

Over one year but less than five years ......................................................................... 0 .50 5.0 12.0 

Over five years .............................................................................................................. 0 .50 5.0 15.0 

(ii) Off-balance sheet derivative contracts 

subject to bilateral netting contracts. In 

determining its current credit exposure for 

multiple off-balance sheet derivative 

contracts executed with a single 

counterparty, a corporate credit union may 

net off-balance sheet derivative contracts 

subject to a bilateral netting contract by 

offsetting positive and negative mark-tomarket values, provided that: 

(A) The bilateral netting contract is in 

writing; 

(B) The bilateral netting contract creates a 

single legal obligation for all individual offbalance sheet derivative contracts covered by 

the bilateral netting contract. In effect, the 

bilateral netting contract provides that the 

corporate credit union has a single claim or 

obligation either to receive or pay only the 

net amount of the sum of the positive and 

negative mark-to-market values on the 

individual off-balance sheet derivative 

contracts covered by the bilateral netting 

contract. The single legal obligation for the 

net amount is operative in the event that a 

counterparty, or a counterparty to whom the 

bilateral netting contract has been validly 

assigned, fails to perform due to any of the 

following events: Default, insolvency, 

bankruptcy, or other similar circumstances; 

(C) The corporate credit union obtains a 

written and reasoned legal opinion(s) 

representing, with a high degree of certainty, 

that in the event of a legal challenge, 

including one resulting from default, 

insolvency, bankruptcy or similar 

circumstances, the relevant court and 

administrative authorities would find the 

corporate credit union’s exposure to be the 

net amount under: 

(1) The law of the jurisdiction in which the 

counterparty is chartered or the equivalent 

location in the case of noncorporate entities, 

and if a branch of the counterparty is 

involved, then also under the law of the 

jurisdiction in which the branch is located; 

(2) The law that governs the individual offbalance sheet derivative contracts covered by 

the bilateral netting contract; and 

(3) The law that governs the bilateral 

netting contract; 

(D) The corporate credit union establishes 

and maintains procedures to monitor 

possible changes in relevant law and to 

ensure that the bilateral netting contract 

continues to satisfy the requirements of this 

section; and 

(E) The corporate credit union maintains in 

its files documentation adequate to support 

the netting of an off-balance sheet derivative 

contract.5

(iii) Walkaway clause. A bilateral netting 

contract that contains a walkaway clause is 

not eligible for netting for purposes of 

calculating the current credit exposure 

amount. The term ‘‘walkaway clause’’ means 


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a provision in a bilateral netting contract that 

permits a nondefaulting counterparty to 

make a lower payment than it would make 

otherwise under the bilateral netting 

contract, or no payment at all, to a defaulter 

or the estate of a defaulter, even if the 

defaulter or the estate of the defaulter is a net 

creditor under the bilateral netting contract. 

(iv) Risk-weighting. Once the corporate 

credit union determines the credit equivalent 

amount for an off-balance sheet derivative 

contract, that amount is assigned to the riskweight category appropriate to the 

counterparty, or, if relevant, to the nature of 

any collateral or guarantee. Collateral held 

against a netting contract is not recognized 

for capital purposes unless it is legally 

available for all contracts included in the 

netting contract. However, the maximum 

risk-weight for the credit equivalent amount 

of such off-balance sheet derivative contracts 

is 50 percent. 

(v) Exceptions. The following off-balance 

sheet derivative contracts are not subject to 

the above calculation, and therefore, are not 

part of the denominator of a corporate credit 

union’s risk-based capital ratio: 

(A) A foreign exchange rate contract with 

an original maturity of 14 calendar days or 

less; and 

(B) Any interest rate or foreign exchange 

rate contract that is traded on an exchange 

requiring the daily payment of any variations 

in the market value of the contract. 

(C) Asset-backed commercial paper 

programs. 

(1) A corporate credit union that qualifies 

as a primary beneficiary and must 

consolidate an ABCP program that is a 

variable interest entity under Generally 

Accepted Accounting Principles may exclude 

the consolidated ABCP program assets from 

risk-weighted assets if the corporate credit 

union is the sponsor of the ABCP program. 

(2) If a corporate credit union excludes 

such consolidated ABCP program assets from 

risk-weighted assets, the corporate credit 

union must assess the appropriate risk-based 

capital requirement against any exposures of 

the corporate credit union arising in 

connection with such ABCP programs, 

including direct credit substitutes, recourse 

obligations, residual interests, liquidity 

facilities, and loans, in accordance with 

Sections II(a), II(b), and II(c) of this 

Appendix. 

(3) If a corporate credit union has multiple 

overlapping exposures (such as a programwide credit enhancement and a liquidity 

facility) to an ABCP program that is not 

consolidated for risk-based capital purposes, 

the corporate credit union is not required to 

hold duplicative risk-based capital under this 

part against the overlapping position. 

Instead, the corporate credit union should 

apply to the overlapping position the 

applicable risk-based capital treatment that 

results in the highest capital charge. 

(c) Recourse Obligations, Direct Credit 

Substitutes, and Certain Other Positions 

(1) In general. Except as otherwise 

permitted in this Section II(c), to determine 

the risk-weighted asset amount for a recourse 

obligation or a direct credit substitute (but 

not a residual interest): 

(i) Multiply the full amount of the creditenhanced assets for which the corporate 

credit union directly or indirectly retains or 

assumes credit risk by a 100 percent 

conversion factor (For a direct credit 

substitute that is an on-balance sheet asset 

(e.g., a purchased subordinated security), a 

corporate credit union must use the amount 

of the direct credit substitute and the full 

amount of the asset it supports, i.e., all the 

more senior positions in the structure); and 

(ii) Assign this credit equivalent amount to 

the risk-weight category appropriate to the 

obligor in the underlying transaction, after 

considering any associated guarantees or 

collateral. Section II(a) lists the risk-weight 

categories. 

(2) Residual interests. Except as otherwise 

permitted under this Section II(c), a corporate 

credit union must maintain risk-based capital 

for residual interests as follows: 

(i) Credit-enhancing interest-only strips. A 

corporate credit union must maintain riskbased capital for a credit-enhancing interestonly strip equal to the remaining amount of 

the strip even if the amount of risk-based 

capital that must be maintained exceeds the 

full risk-based capital requirement for the 

assets transferred. 

(ii) Other residual interests. A corporate 

credit union must maintain risk-based capital 

for a residual interest (excluding a creditenhancing interest-only strip) equal to the 

face amount of the residual interest, even if 

the amount of risk-based capital that must be 

maintained exceeds the full risk-based 

capital requirement for the assets transferred. 

(iii) Residual interests and other recourse 

obligations. Where a corporate credit union 

holds a residual interest (including a creditenhancing interest-only strip) and another 

recourse obligation in connection with the 

same transfer of assets, the corporate credit 

union must maintain risk-based capital equal 

to the greater of: 

(A) The risk-based capital requirement for 

the residual interest as calculated under 

Section II(c)(2)(i) through (ii) of this 

Appendix; or 

(B) The full risk-based capital requirement 

for the assets transferred, subject to the lowlevel recourse rules under Section II(c)(5) of 

this Appendix. 

(3) Ratings-based approach—(i) 

Calculation. A corporate credit union may 

calculate the risk-weighted asset amount for 

an eligible position described in Section 

II(c)(3)(ii) of this section by multiplying the 

face amount of the position by the 

appropriate risk-weight determined in 

accordance with Table A or B of this section. 

TABLE A 

Long term rating category Risk-weight 

(in percent) 

Highest or second highest investment grade ................. 20 

Third highest investment 

grade ................................. 50 

Lowest investment grade ..... 100 

One category below investment grade ........................ 200 

TABLE B 

Short term rating category Risk-weight 

(in percent) 

Highest investment grade ..... 20 

Second highest investment 

grade ................................. 50 

Lowest investment grade ..... 100 

(ii) Eligibility. 

(A) Traded positions. A position is eligible 

for the treatment described in paragraph 

II(c)(3)(i) of this Appendix if: 

(1) The position is a corporate debt 

obligation with a remaining maturity of 120 

days or less, a recourse obligation, a direct 

credit substitute, a residual interest, or an 

asset- or mortgage-backed security and is not 

a credit-enhancing interest-only strip; 

(2) The position is a traded position; and 

(3) The NRSRO has rated a long term 

position as one grade below investment grade 

or better or a short term position as 

investment grade. If two or more NRSROs 

assign ratings to a traded position, the 

corporate credit union must use the lowest 

rating to determine the appropriate riskweight category under paragraph (3)(i). 

(B) Non-traded positions. A position that is 

not traded is eligible for the treatment 

described in paragraph(3)(i) if: 

(1) The position is a recourse obligation, a 

direct credit substitute, a residual interest, or 

an asset- or mortgage-backed security 

extended in connection with a securitization 

and is not a credit-enhancing interest-only 

strip; 

(2) More than one NRSRO rate the position; 

(3) All of the NRSROs that rate the position 

rate it as no lower than one grade below 

investment grade (for long term position) or 

no lower than investment grade (for short 

term investments). If the NRSROs assign 

different ratings to the position, the corporate 

credit union must use the lowest rating to 

determine the appropriate risk-weight 

category under paragraph (3)(i); 

(4) The NRSROs base their ratings on the 

same criteria that they use to rate securities 

that are traded positions; and 

(5) The ratings are publicly available. 

(C) Unrated senior positions. If a recourse 

obligation, direct credit substitute, residual 

interest, or asset- or mortgage-backed security 

is not rated by an NRSRO, but is senior or 

preferred in all features to a traded position 

(including collateralization and maturity), 

the corporate credit union may risk-weight 

the face amount of the senior position under 

paragraph (3)(i) of this section, based on the 

rating of the traded position, subject to 

supervisory guidance. The corporate credit 

union must satisfy NCUA that this treatment 

is appropriate. This paragraph (3)(i)(c) 

applies only if the traded position provides 

substantive credit support to the unrated 

position until the unrated position matures. 

(iii) Consistent use of Ratings Based 

Approach. A corporate credit union that 

determines to use the ratings based approach 

must do so in a consistent manner. For 

example, if the corporate credit union 

employs the ratings based approach on at 

least one security or position on a given call 

report, the credit union must use the ratings 


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based approach on that call report for every 

security and position that is eligible for the 

ratings based approach. 

(4) Certain positions that are not rated by 

NRSROs. (i) Calculation. A corporate credit 

union may calculate the risk-weighted asset 

amount for eligible position described in 

paragraph II(c)(4)(ii) of this section based on 

the corporate credit union’s determination of 

the credit rating of the position. To riskweight the asset, the corporate credit union 

must multiply the face amount of the 

position by the appropriate risk-weight 

determined in accordance with Table C of 

this section. 

TABLE C 

Rating category Risk-weight 

(in percent) 

Investment grade .................. 100 

One category below investment grade ........................ 200 

(ii) Eligibility. A position extended in 

connection with a securitization is eligible 

for the treatment described in paragraph 

II(c)(4)(i) of this section if it is not rated by 

an NRSRO, is not a residual interest, and 

meets the one of the three alternative 

standards described in paragraphs (A), (B), or 

(C) below: 

(A) Position rated internally. A direct 

credit substitute, but not a purchased creditenhancing interest-only strip, is eligible for 

the treatment described under paragraph 

II(c)(4)(i) of this Appendix, if the position is 

assumed in connection with an asset-backed 

commercial paper program sponsored by the 

corporate credit union. Before it may rely on 

an internal credit risk rating system, the 

corporate must demonstrate to NCUA’s 

satisfaction that the system is adequate. 

Acceptable internal credit risk rating systems 

typically: 

(1) Are an integral part of the corporate 

credit union’s risk management system that 

explicitly incorporates the full range of risks 

arising from the corporate credit union’s 

participation in securitization activities; 

(2) Link internal credit ratings to 

measurable outcomes, such as the probability 

that the position will experience any loss, the 

expected loss on the position in the event of 

default, and the degree of variance in losses 

in the event of default on that position; 

(3) Separately consider the risk associated 

with the underlying loans or borrowers, and 

the risk associated with the structure of the 

particular securitization transaction; 

(4) Identify gradations of risk among ‘‘pass’’ 

assets and other risk positions; 

(5) Use clear, explicit criteria to classify 

assets into each internal rating grade, 

including subjective factors; 

(6) Employ independent credit risk 

management or loan review personnel to 

assign or review the credit risk ratings; 

(7) Include an internal audit procedure to 

periodically verify that internal risk ratings 

are assigned in accordance with the corporate 

credit union’s established criteria; 

(8) Monitor the performance of the 

assigned internal credit risk ratings over time 

to determine the appropriateness of the 

initial credit risk rating assignment, and 

adjust individual credit risk ratings or the 

overall internal credit risk rating system, as 

needed; and 

(9) Make credit risk rating assumptions that 

are consistent with, or more conservative 

than, the credit risk rating assumptions and 

methodologies of NRSROs. 

(B) Program ratings. 

(1) A recourse obligation or direct credit 

substitute, but not a residual interest, is 

eligible for the treatment described in 

paragraph II(c)(4)(i) of this Appendix, if the 

position is retained or assumed in connection 

with a structured finance program and an 

NRSRO has reviewed the terms of the 

program and stated a rating for positions 

associated with the program. If the program 

has options for different combinations of 

assets, standards, internal or external credit 

enhancements and other relevant factors, and 

the NRSRO specifies ranges of rating 

categories to them, the corporate credit union 

may apply the rating category applicable to 

the option that corresponds to the corporate 

credit union’s position. 

(2) To rely on a program rating, the 

corporate credit union must demonstrate to 

NCUA’s satisfaction that that the credit risk 

rating assigned to the program meets the 

same standards generally used by NRSROs 

for rating traded positions. The corporate 

credit union must also demonstrate to 

NCUA’s satisfaction that the criteria 

underlying the assignments for the program 

are satisfied by the particular position. 

(3) If a corporate credit union participates 

in a securitization sponsored by another 

party, NCUA may authorize the corporate 

credit union to use this approach based on 

a program rating obtained by the sponsor of 

the program. 

(C) Computer program. A recourse 

obligation or direct credit substitute, but not 

a residual interest, is eligible for the 

treatment described in paragraph II(c)(4)(i) of 

this Appendix, if the position is extended in 

connection with a structured financing 

program and the corporate credit union uses 

an acceptable credit assessment computer 

program to determine the rating of the 

position. An NRSRO must have developed 

the computer program and the corporate 

credit union must demonstrate to NCUA’s 

satisfaction that the ratings under the 

program correspond credibly and reliably 

with the rating of traded positions. 

(5) Limitations on risk-based capital 

requirements— 

(i) Low-level exposure rule. If the 

maximum contractual exposure to loss 

retained or assumed by a corporate credit 

union is less than the effective risk-based 

capital requirement, as determined in 

accordance with this Section II(c), for the 

assets supported by the corporate credit 

union’s position, the risk-based capital 

requirement is limited to the corporate credit 

union’s contractual exposure less any 

recourse liability account established in 

accordance with Generally Accepted 

Accounting Principles. This limitation does 

not apply when a corporate credit union 

provides credit enhancement beyond any 

contractual obligation to support assets it has 

sold. 

(ii) Mortgage-related securities or 

participation certificates retained in a 

mortgage loan swap. If a corporate credit 

union holds a mortgage-related security or a 

participation certificate as a result of a 

mortgage loan swap with recourse, it must 

hold risk-based capital to support the 

recourse obligation and that percentage of the 

mortgage-related security or participation 

certificate that is not covered by the recourse 

obligation. The total amount of risk-based 

capital required for the security (or 

certificate) and the recourse obligation is 

limited to the risk-based capital requirement 

for the underlying loans, calculated as if the 

corporate credit union continued to hold 

these loans as an on-balance sheet asset. 

(iii) Related on-balance sheet assets. If an 

asset is included in the calculation of the 

risk-based capital requirement under this 

Section II(c) and also appears as an asset on 

the corporate credit union’s balance sheet, 

the corporate credit union must risk-weight 

the asset only under this Section II(c), except 

in the case of loan servicing assets and 

similar arrangements with embedded 

recourse obligations or direct credit 

substitutes. In that case, the corporate credit 

union must separately risk-weight the onbalance sheet servicing asset and the related 

recourse obligations and direct credit 

substitutes under this section, and 

incorporate these amounts into the risk-based 

capital calculation. 

(6) Obligations of CUSOs. All recourse 

obligations and direct credit substitutes 

retained or assumed by a corporate credit 

union on the obligations of CUSOs in which 

the corporate credit union has an equity 

investment are risk-weighted in accordance 

with this Section II(c), unless the corporate 

credit union’s equity investment is deducted 

from the credit union’s capital and assets 

under § 704.2 and § 704.3. 

(d) Collateral. The only forms of collateral 

that are recognized for risk-weighting 

purposes are cash on deposit in the corporate 

credit union; Treasuries, U.S. Government 

agency securities, and U.S. Governmentsponsored enterprise securities; and 

securities issued by multilateral lending 

institutions or regional development banks. 

Claims secured by cash on deposit are 

assigned to the zero percent risk-weight 

category (to the extent of the cash amount). 

Claims secured by securities are assigned to 

the twenty percent risk-weight category (to 

the extent of the fair market value of the 

securities). 

PART 709—INVOLUNTARY 

LIQUIDATION OF FEDERAL CREDIT 

UNIONS AND ADJUDICATION OF 

CREDITOR CLAIMS INVOLVING 

FEDERALLY INSURED CREDIT 

UNIONS IN LIQUIDATION. 

■ 23. The authority citation for part 709 

continues to read as follows: 

Authority: 12 U.S.C. 1757, 1766, 1767, 

1786(h), 1787, 1788, 1789, 1789a. 

■ 24. Revise paragraphs (b)(7) and (b)(9) 

of § 709.5 to read as follows: 


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§ 709.5 Payout priorities in involuntary 

liquidation. 

* * * * * 

(b) * * * 

(7) in a case involving liquidation of 

a corporate credit union, holders of 

then-outstanding membership capital 

accounts and nonperpetual capital 

accounts or instruments to the extent 

not depleted in a calendar year prior to 

the date of liquidation and also subject 

to the capital priority option described 

in Appendix A of part 704 of this 

chapter; 

* * * * * 

(9) in a case involving liquidation of 

a corporate credit union, holders of 

then-outstanding paid in capital or 

perpetual contributed capital 

instruments to the extent not depleted 

in a calendar year prior to the date of 

liquidation and also subject to the 

capital priority option described in 

Appendix A of Part 704 of this chapter; 

* * * * * 

PART 747—ADMINISTRATIVE 

ACTIONS, ADJUDICATIVE HEARINGS, 

RULES OF PRACTICE AND 

PROCEDURE, AND INVESTIGATIONS. 

■ 25. The authority citation for part 747 

continues to read as follows: 

Authority: 12 U.S.C. 1766, 1782, 1784, 

1786, 1787; 42 U.S.C. 4012a; Pub. L. 101– 

410; Pub. L. 104–134. 

■ 26. Effective October 20, 2011, add a 

new subpart M to part 747 to read as 

follows: 

Subpart M—Issuance, Review and 

Enforcement of Orders Imposing Prompt 

Corrective Action on Corporate Credit 

Unions 

Sec. 

747.3001. Scope. 

747.3002. Review of orders imposing 

discretionary supervisory action. 

747.3003. Review of order reclassifying a 

corporate credit union on safety and 

soundness criteria. 

747.3004. Review of order to dismiss a 

director or senior executive officer. 

747.3005. Enforcement of directives. 

747.3006. Conservatorship or liquidation of 

critically undercapitalized corporate 

credit union. 

Subpart M—Issuance, Review and 

Enforcement of Orders Imposing 

Prompt Corrective Action on Corporate 

Credit Unions 

§ 747.3001 Scope. 

(a) Independent review process. The 

rules and procedures set forth in this 

subpart apply to corporate credit unions 

which are subject to discretionary 

supervisory actions under § 704.4 of this 

chapter and to reclassification under 

§ 704.4(d)(3) of this chapter to facilitate 

prompt corrective action, and to senior 

executive officers and directors of such 

corporate credit unions who are 

dismissed pursuant to a discretionary 

supervisory action imposed under 

§ 704.4 of this chapter. Section 747.3002 

of this subpart provides an independent 

appellate process to challenge such 

decisions. 

(b) Notice to State officials. With 

respect to a State-chartered corporate 

credit union under §§ 747.3002, 

747.3003 and 747.3004 of this subpart, 

any notices, directives and decisions on 

appeal served upon a corporate credit 

union, or a dismissed director or officer 

thereof, by the NCUA will also be 

served upon the appropriate State 

official. Responses, requests for a 

hearing and to present witnesses, 

requests to modify or rescind a 

discretionary supervisory action and 

requests for reinstatement served upon 

the NCUA by a corporate credit union, 

or any dismissed director or officer of a 

corporate credit union, will also be 

served upon the appropriate State 

official. 

§ 747.3002 Review of orders imposing 

discretionary supervisory action. 

(a) Notice of intent to issue 

directive.—(1) Generally. Whenever the 

NCUA intends to issue a directive 

imposing a discretionary supervisory 

action under §§ 704.4(k)(2)(v) and 

704.4(k)(3) of this chapter on a corporate 

credit union classified 

‘‘undercapitalized’’ or lower, the NCUA 

will give the corporate credit union 

prior notice of the proposed action and 

an opportunity to respond. 

(2) Immediate issuance of directive 

without notice. The NCUA may issue a 

directive to take effect immediately 

under paragraph (a)(1) of this section 

without notice to the corporate credit 

union if the NCUA finds it necessary in 

order to carry out the purposes of 

§ 704.4 of this chapter. A corporate 

credit union that is subject to a directive 

which takes effect immediately may 

appeal the directive in writing to the 

NCUA Board (Board). Such an appeal 

must be received by the Board within 14 

calendar days after the directive was 

issued, unless the Board permits a 

longer period. Unless ordered by the 

NCUA, the directive will remain in 

effect pending a decision on the appeal. 

The Board will consider any such 

appeal, if timely filed, within 60 

calendar days of receiving it. 

(b) Contents of notice. The NCUA’s 

notice to a corporate credit union of its 

intention to issue a directive imposing 

a discretionary supervisory action will 

state: 

(1) The corporate credit union’s 

capital measures and capital category 

classification; 

(2) The specific restrictions or 

requirements that the Board intends to 

impose, and the reasons therefore; 

(3) The proposed date when the 

discretionary supervisory action would 

take effect and the proposed date for 

completing the required action or 

terminating the action; and 

(4) That a corporate credit union must 

file a written response to a notice within 

14 calendar days from the date of the 

notice, or within such shorter period as 

the Board determines is appropriate in 

light of the financial condition of the 

corporate credit union or other relevant 

circumstances. 

(c) Contents of response to notice. A 

corporate credit union’s response to a 

notice under paragraph (b) of this 

section must: 

(1) Explain why it contends that the 

proposed discretionary supervisory 

action is not an appropriate exercise of 

discretion under this section; 

(2) Request the Board to modify or to 

not issue the proposed directive; and 

(3) Include other relevant information, 

mitigating circumstances, 

documentation, or other evidence in 

support of the corporate credit union’s 

position regarding the proposed 

directive. 

(d) NCUA Board consideration of 

response. The Board, or an independent 

person designated by the Board to act on 

the Board’s behalf, after considering a 

response under paragraph (c) of this 

section, may: 

(1) Issue the directive as originally 

proposed or as modified; 

(2) Determine not to issue the 

directive and to so notify the corporate 

credit union; or 

(3) Seek additional information or 

clarification from the corporate credit 

union or any other relevant source. 

(e) Failure to file response. A 

corporate credit union which fails to file 

a written response to a notice of the 

Board’s intention to issue a directive 

imposing a discretionary supervisory 

action, within the specified time period, 

will be deemed to have waived the 

opportunity to respond, and to have 

consented to the issuance of the 

directive. 

(f) Request to modify or rescind 

directive. A corporate credit union that 

is subject to an existing directive 

imposing a discretionary supervisory 

action may request in writing that the 

Board reconsider the terms of the 

directive, or rescind or modify it, due to 

changed circumstances. Unless 

otherwise ordered by the Board, the 

directive will remain in effect while 


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Federal Register / Vol. 75, No. 202 / Wednesday, October 20, 2010 / Rules and Regulations 64861 

such request is pending. A request 

under this paragraph which remains 

pending 60 days following receipt by 

the Board is deemed granted. 

§ 747.3003 Review of order reclassifying a 

corporate credit union on safety and 

soundness criteria. 

(a) Notice of proposed reclassification 

based on unsafe or unsound condition 

or practice. When the Board proposes to 

reclassify a corporate credit union or 

subject it to the supervisory actions 

applicable to the next lower 

capitalization category pursuant to 

§ 704.4(d)(3) of this chapter (such action 

hereinafter referred to as 

‘‘reclassification’’), the Board will issue 

and serve on the corporate credit union 

reasonable prior notice of the proposed 

reclassification. 

(b) Contents of notice. A notice of 

intention to reclassify a corporate credit 

union based on unsafe or unsound 

condition or practice will state: 

(1) The corporate credit union’s 

current capital ratios and the capital 

category to which the corporate credit 

union would be reclassified; 

(2) The unsafe or unsound practice(s) 

and/or condition(s) justifying reasons 

for reclassification of the corporate 

credit union; 

(3) The date by which the corporate 

credit union must file a written 

response to the notice (including a 

request for a hearing), which date will 

be no less than 14 calendar days from 

the date of service of the notice unless 

the Board determines that a shorter 

period is appropriate in light of the 

financial condition of the corporate 

credit union or other relevant 

circumstances; and 

(4) That a corporate credit union 

which fails to — 

(i) File a written response to the 

notice of reclassification, within the 

specified time period, will be deemed to 

have waived the opportunity to 

respond, and to have consented to 

reclassification; 

(ii) Request a hearing will be deemed 

to have waived any right to a hearing; 

and 

(iii) Request the opportunity to 

present witness testimony will be 

deemed to have waived any right to 

present such testimony. 

(c) Contents of response to notice. A 

corporate credit union’s response to a 

notice under paragraph (b) of this 

section must: 

(1) Explain why it contends that the 

corporate credit union should not be 

reclassified; 

(2) Include any relevant information, 

mitigating circumstances, 

documentation, or other evidence in 

support of the corporate credit union’s 

position; 

(3) If desired, request an informal 

hearing before the Board under this 

section; and 

(4) If a hearing is requested, identify 

any witness whose testimony the 

corporate credit union wishes to present 

and the general nature of each witness’s 

expected testimony. 

(d) Order to hold informal hearing. 

Upon timely receipt of a written 

response that includes a request for a 

hearing, the Board will issue an order 

commencing an informal hearing no 

later than 30 days after receipt of the 

request, unless the corporate credit 

union requests a later date. The hearing 

will be held in Alexandria, Virginia, or 

at such other place as may be designated 

by the Board, before a presiding officer 

designated by the Board to conduct the 

hearing and to recommend a decision. 

(e) Procedures for informal hearing.— 

(1) The corporate credit union may 

appear at the hearing through a 

representative or through counsel. The 

corporate credit union will have the 

right to introduce relevant documents 

and to present oral argument at the 

hearing. The corporate credit union may 

introduce witness testimony only if 

expressly authorized by the Board or the 

presiding officer. Neither the provisions 

of the Administrative Procedure Act (5 

U.S.C. 554–557) governing 

adjudications required by statute to be 

determined on the record nor the 

Uniform Rules of Practice and 

Procedure (12 CFR part 747) will apply 

to an informal hearing under this 

section unless the Board orders 

otherwise. 

(2) The informal hearing will be 

recorded, and a transcript will be 

furnished to the corporate credit union 

upon request and payment of the cost 

thereof. Witnesses need not be sworn, 

unless specifically requested by a party 

or by the presiding officer. The 

presiding officer may ask questions of 

any witness. 

(3) The presiding officer may order 

that the hearing be continued for a 

reasonable period following completion 

of witness testimony or oral argument to 

allow additional written submissions to 

the hearing record. 

(4) Within 20 calendar days following 

the closing of the hearing and the 

record, the presiding officer will make 

a recommendation to the Board on the 

proposed reclassification. 

(f) Time for final decision. Not later 

than 60 calendar days after the date the 

record is closed, or the date of receipt 

of the corporate credit union’s response 

in a case where no hearing was 

requested, the Board will decide 

whether to reclassify the corporate 

credit union, and will notify the 

corporate credit union of its decision. 

The decision of the Board will be final. 

(g) Request to rescind reclassification. 

Any corporate credit union that has 

been reclassified under this section may 

file a written request to the Board to 

reconsider or rescind the 

reclassification, or to modify, rescind or 

remove any directives issued as a result 

of the reclassification. Unless otherwise 

ordered by the Board, the corporate 

credit union will remain reclassified, 

and subject to any directives issued as 

a result, while such request is pending. 

§ 747.3004 Review of order to dismiss a 

director or senior executive officer. 

(a) Service of directive to dismiss and 

notice. When the Board issues and 

serves a directive on a corporate credit 

union requiring it to dismiss from office 

any director or senior executive officer 

under §§ 704.4(g) and 704.4(k)(3) of this 

chapter, the Board will also serve upon 

the person the corporate credit union is 

directed to dismiss (Respondent) a copy 

of the directive (or the relevant portions, 

where appropriate) and notice of the 

Respondent’s right to seek 

reinstatement. 

(b) Contents of notice of right to seek 

reinstatement. A notice of a 

Respondent’s right to seek reinstatement 

will state: 

(1) That a request for reinstatement 

(including a request for a hearing) must 

be filed with the Board within 14 

calendar days after the Respondent 

receives the directive and notice under 

paragraph (a) of this section, unless the 

Board grants the Respondent’s request 

for further time; 

(2) The reasons for dismissal of the 

Respondent; and 

(3) That the Respondent’s failure to— 

(i) Request reinstatement will be 

deemed a waiver of any right to seek 

reinstatement; 

(ii) Request a hearing will be deemed 

a waiver of any right to a hearing; and 

(iii) Request the opportunity to 

present witness testimony will be 

deemed a waiver of the right to present 

such testimony. 

(c) Contents of request for 

reinstatement. A request for 

reinstatement in response to a notice 

under paragraph (b) of this section must: 

(1) Explain why the Respondent 

should be reinstated; 

(2) Include any relevant information, 

mitigating circumstances, 

documentation, or other evidence in 

support of the Respondent’s position; 

(3) If desired, request an informal 

hearing before the Board under this 

section; and 


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64862 Federal Register / Vol. 75, No. 202 / Wednesday, October 20, 2010 / Rules and Regulations 

(4) If a hearing is requested, identify 

any witness whose testimony the 

Respondent wishes to present and the 

general nature of each witness’s 

expected testimony. 

(d) Order to hold informal hearing. 

Upon receipt of a timely written request 

from a Respondent for an informal 

hearing on the portion of a directive 

requiring a corporate credit union to 

dismiss from office any director or 

senior executive officer, the Board will 

issue an order directing an informal 

hearing to commence no later than 30 

days after receipt of the request, unless 

the Respondent requests a later date. 

The hearing will be held in Alexandria, 

Virginia, or at such other place as may 

be designated by the Board, before a 

presiding officer designated by the 

Board to conduct the hearing and 

recommend a decision. 

(e) Procedures for informal hearing.— 

(1) A Respondent may appear at the 

hearing personally or through counsel. 

A Respondent will have the right to 

introduce relevant documents and to 

present oral argument at the hearing. A 

Respondent may introduce witness 

testimony only if expressly authorized 

by the Board or by the presiding officer. 

Neither the provisions of the 

Administrative Procedure Act (5 U.S.C. 

554–557) governing adjudications 

required by statute to be determined on 

the record nor the Uniform Rules of 

Practice and Procedure (12 CFR part 

747) apply to an informal hearing under 

this section unless the Board orders 

otherwise. 

(2) The informal hearing will be 

recorded, and a transcript will be 

furnished to the Respondent upon 

request and payment of the cost thereof. 

Witnesses need not be sworn, unless 

specifically requested by a party or the 

presiding officer. The presiding officer 

may ask questions of any witness. 

(3) The presiding officer may order 

that the hearing be continued for a 

reasonable period following completion 

of witness testimony or oral argument to 

allow additional written submissions to 

the hearing record. 

(4) A Respondent will bear the burden 

of demonstrating that his or her 

continued employment by or service 

with the corporate credit union would 

materially strengthen the corporate 

credit union’s ability to — 

(i) Become ‘‘adequately capitalized,’’ 

to the extent that the directive was 

issued as a result of the corporate credit 

union’s capital classification category or 

its failure to submit or implement a 

capital restoration plan; and 

(ii) Correct the unsafe or unsound 

condition or unsafe or unsound 

practice, to the extent that the directive 

was issued as a result of reclassification 

of the corporate credit union pursuant 

to § 704.4(d)(3) of this chapter. 

(5) Within 20 calendar days following 

the date of closing of the hearing and 

the record, the presiding officer will 

make a recommendation to the Board 

concerning the Respondent’s request for 

reinstatement with the corporate credit 

union. 

(f) Time for final decision. Not later 

than 60 calendar days after the date the 

record is closed, or the date of the 

response in a case where no hearing was 

requested, the Board will grant or deny 

the request for reinstatement and will 

notify the Respondent of its decision. If 

the Board denies the request for 

reinstatement, it will set forth in the 

notification the reasons for its decision. 

The decision of the Board will be final. 

(g) Effective date. Unless otherwise 

ordered by the Board, the Respondent’s 

dismissal will take and remain in effect 

pending a final decision on the request 

for reinstatement. 

§ 747.3005 Enforcement of directives. 

(a) Judicial remedies. Whenever a 

corporate credit union fails to comply 

with a directive imposing a 

discretionary supervisory action, or 

enforcing a mandatory supervisory 

action under § 704.4 of this chapter, the 

Board may seek enforcement of the 

directive in the appropriate United 

States District Court pursuant to 12 

U.S.C. 1786(k)(1). 

(b) Administrative remedies—(1) 

Failure to comply with directive. 

Pursuant to 12 U.S.C. 1786(k)(2)(A), the 

Board may assess a civil money penalty 

against any corporate credit union that 

violates or otherwise fails to comply 

with any final directive issued under 

§ 704.4 of this chapter, or against any 

institution-affiliated party of a corporate 

credit union (per 12 U.S.C. 1786(r)) who 

participates in such violation or 

noncompliance. 

(2) Failure to implement plan. 

Pursuant to 12 U.S.C. 1786(k)(2)(A), the 

Board may assess a civil money penalty 

against a corporate credit union which 

fails to implement a capital restoration 

plan under § 704.4(e) of this chapter, 

regardless whether the plan was 

published. 

(c) Other enforcement action. In 

addition to the actions described in 

paragraphs (a) and (b) of this section, 

the Board may seek enforcement of the 

directives issued under Section 704.4 of 

this chapter through any other judicial 

or administrative proceeding authorized 

by law. 

§ 747.3006 Conservatorship or liquidation 

of critically undercapitalized corporate 

credit union. 

Notwithstanding any other provision 

of this title, the NCUA may, without any 

administrative due process, 

immediately place into conservatorship 

or liquidation any corporate credit 

union that has been categorized as 

critically undercapitalized. 

[FR Doc. 2010–24616 Filed 10–19–10; 8:45 am] 

BILLING CODE 7535–01–P 


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