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contains regulatory documents having general

applicability and legal effect, most of which

are keyed to and codified in the Code of

Federal Regulations, which is published under

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Rules and Regulations Federal Register

66295 

Vol. 75, No. 208 

Thursday, October 28, 2010 

NATIONAL CREDIT UNION 

ADMINISTRATION 

12 CFR Parts 701, 723, and 742 

RIN 3133–AD68 

Fixed Assets, Member Business 

Loans, and Regulatory Flexibility 

Program 

AGENCY: National Credit Union 

Administration (NCUA). 

ACTION: Final rule. 

SUMMARY: NCUA is revising certain 

provisions of its Regulatory Flexibility 

Program (RegFlex) to enhance safety and 

soundness for credit unions. Those 

provisions pertain to fixed assets, 

member business loans (MBL), stress 

testing of investments, and discretionary 

control of investments. Some of these 

revisions will require conforming 

amendments to NCUA’s fixed assets and 

MBL rules. 

DATES: The rule is effective November 

29, 2010. 

FOR FURTHER INFORMATION CONTACT: 

Frank Kressman, Senior Staff Attorney, 

Office of General Counsel, 1775 Duke 

Street, Alexandria, Virginia 22314 or 

telephone (703) 518–6540. 

SUPPLEMENTARY INFORMATION: 

A. Background—Regulatory Flexibility 

Program 

The RegFlex Program exempts from 

certain regulatory restrictions and grants 

additional powers to those federal credit 

unions (FCUs) that have demonstrated 

sustained superior performance as 

measured by CAMEL ratings and net 

worth classifications. 12 CFR 742.1. An 

FCU may qualify for RegFlex treatment 

automatically or by application to the 

appropriate regional director. 12 CFR 

742.2. Specifically, an FCU 

automatically qualifies when it has 

received a composite CAMEL rating of 

‘‘1’’ or ‘‘2’’ for the two preceding 

examinations and has maintained a net 

worth classification of ‘‘well capitalized’’ 

under Part 702 of NCUA’s rules for six 

consecutive preceding quarters or, if 

subject to a risk-based net worth 

(RBNW) requirement under Part 702, 

has remained ‘‘well capitalized’’ for six 

consecutive preceding quarters after 

applying the applicable RBNW 

requirement. An FCU that does not 

automatically qualify may apply for a 

RegFlex designation with the 

appropriate regional director. 12 CFR 

742.2(a) and (b). An FCU’s RegFlex 

authority can be lost or revoked. 12 CFR 

742.3. 

The NCUA Board established RegFlex 

in 2002. 66 FR 58656 (November 23, 

2001). Since then, NCUA has amended 

RegFlex a number of times to increase 

available relief for FCUs from a variety 

of regulatory restrictions or lessen the 

criteria required for obtaining RegFlex 

status. 71 FR 4039 (January 25, 2006); 72 

FR 30247 (May 31, 2007); 74 FR 13083 

(March 26, 2009). 

B. March 2010 Proposal 

1. Overview 

The current RegFlex rule provides 

RegFlex credit unions with regulatory 

relief in the following ten areas: (1) 

Charitable contributions; (2) 

nonmember deposits; (3) fixed assets; 

(4) MBLs; (5) discretionary control of 

investments; (6) stress testing of 

investments; (7) zero-coupon securities; 

(8) borrowing repurchase transactions; 

(9) commercial mortgage related 

securities; and (10) purchase of 

obligations from a federally insured 

credit union. In March 2010, the NCUA 

Board proposed amendments to the 

fixed assets, MBL, stress testing of 

investments, and discretionary control 

of investments provisions of the RegFlex 

rule and requested comment on those 

amendments. 75 FR 14372 (March 25, 

2010). The following sections discuss 

those proposed amendments in greater 

detail. 

2. Fixed Assets 

The Federal Credit Union Act 

authorizes FCUs to purchase, hold, and 

dispose of property necessary or 

incidental to their operations. 12 U.S.C. 

1757(4). Generally, the fixed asset rule 

provides limits on fixed asset 

investments, establishes occupancy and 

other requirements for acquired and 

abandoned premises, and prohibits 

certain transactions. 12 CFR 701.36. 

Fixed assets are defined in 701.36(e) as 

premises, furniture, fixtures, and 

equipment and includes any office, 

branch office, suboffice, service center, 

parking lot, facility, real estate where a 

credit union transacts or will transact 

business, office furnishings, office 

machines, computer hardware and 

software, automated terminals, and 

heating and cooling equipment. Section 

701.36 prohibits an FCU with $1 million 

or more in assets from investing in fixed 

assets, the aggregate of which exceeds 

five percent of the FCU’s shares and 

retained earnings, although upon an 

FCU’s application, a regional director 

may set a higher limit. 12 CFR 

701.36(a)(1) and (2). 

The RegFlex rule exempts RegFlex 

credit unions from the referenced five 

percent limit. 12 CFR 701.36(a)(1). In 

the proposal, NCUA stated it believed 

that investing in higher levels of nonearning assets can materially affect a 

credit union’s earnings ability and, 

therefore, its viability. NCUA proposed 

to rescind this exemption for RegFlex 

credit unions. NCUA offered call report 

data to show that there is a higher 

percentage of earnings problems among 

credit unions with more than five 

percent of shares and retained earnings 

invested in fixed assets and that the 

percentage of earnings problems 

increases as the level of fixed assets 

increases. NCUA also included several 

examples to illustrate the kinds of fixed 

asset-related financial problems some 

credit unions have experienced. 

3. MBLs 

The MBL rule requires a credit union 

making a business loan to obtain the 

personal liability and guarantee of the 

borrower’s principals as part of the 

rule’s collateral and security 

requirements. 12 CFR 723.7(b). Under 

the current rules, RegFlex credit unions 

are exempt from that requirement but 

may choose to require the principals’ 

guarantee as part of their own 

underwriting standards and best 

practices. Id. 

NCUA proposed to rescind this 

exemption for RegFlex credit unions. 

NCUA stated that it believed obtaining 

the principals’ personal guarantee is a 

prudent underwriting practice that 

greatly enhances the likelihood of loan 

repayment and should be required of all 

credit unions. NCUA also stated that a 


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credit union that fails to do so subjects 

itself to increased risk, particularly in 

economic times when MBL 

delinquencies and MBL charge-offs are 

increasing. NCUA noted that credit 

unions would continue to have the 

option of seeking a waiver of the 

guarantee requirement under 723.10(e). 

4. Stress Testing of Investments 

NCUA’s investment rule requires an 

FCU to monitor the securities it holds. 

12 CFR 703.12. Specifically, at least 

monthly, an FCU must prepare a written 

report setting out the fair value and 

dollar change since the prior month-end 

for each security held with summary 

information for its entire portfolio. 12 

CFR 703.12(a). Similarly, at least 

quarterly, an FCU must prepare a 

written report setting out the sum of the 

fair values of all fixed and variable rate 

securities whose features include: 

(1) Embedded options; (2) remaining 

maturities greater than three years; or 

(3) coupon formulas that are related to 

more than one index or are inversely 

related to, or multiples of, an index. 12 

CFR 703.12(b). If the sum in the 

quarterly report is greater than the 

FCU’s net worth, then the report must 

estimate the potential impact, in 

percentage and dollar terms, of an 

immediate and sustained parallel shift 

in market interest rates of plus and 

minus 300 basis points on: (1) The fair 

value of each security in the FCU’s 

portfolio; (2) the fair value of the FCU’s 

portfolio as a whole; and (3) the FCU’s 

net worth. 12 CFR 703.12(c). This 

calculation is known as ‘‘stress testing’’ 

the securities. Under the current rules, 

RegFlex credit unions are exempt from 

the requirement to stress test their 

securities. 

NCUA noted in the proposal that 

because of low investment yields due to 

the current economic environment, 

many credit unions are incurring 

additional risk by investing in long-term 

instruments to increase yield and 

improve earnings. NCUA believes many 

credit unions are purchasing investment 

products they do not fully understand 

and are incurring significant interest 

rate and liquidity risk. 

NCUA offered call report data to 

illustrate the degree to which credit 

unions are investing in products with 

longer maturities further out on the 

yield curve. Although this may help 

achieve greater yield in the short term, 

an increase in market rates could result 

in a significant decrease in product 

value and cause liquidity problems. 

NCUA stated that credit unions need to 

stress test their investments so they 

have a clearer understanding of their 

risk profile, can better manage risk, and 

as a matter of safety and soundness and 

responsible business practices. 

Accordingly, the Board proposed to 

rescind the RegFlex exemption in this 

context. 

5. Discretionary Control of Investments 

NCUA’s investment rule requires an 

FCU to retain discretionary control over 

its purchase and sale of investments 

although, under the rule, an FCU will 

not be deemed to have delegated 

discretionary control to an investment 

adviser if the FCU reviews all 

recommendations from the investment 

adviser and authorizes a recommended 

purchase or sale transaction before its 

execution. 12 CFR 703.5(a). An 

exception to this general rule is that an 

FCU may delegate discretionary control 

over the purchase and sale of its 

investments to a person outside the FCU 

if the person is an investment advisor 

registered with the Securities and 

Exchange Commission and if the 

amount delegated is limited to up to 100 

percent of the FCU’s net worth at the 

time of delegation. 12 CFR 703.5(b). If 

an FCU exercises this limited authority, 

it must adjust the amount of funds held 

under discretionary control to comply 

with the 100 percent of net worth cap 

at least annually. Id. 

Under the current rule, a RegFlex 

credit union is exempt from the 

discretionary control requirements in 

703.5 that pertain to the 100 percent of 

net worth limitation. In the proposal, 

NCUA noted that it was becoming 

increasingly concerned about the safety 

and soundness of credit unions and 

their investments considering the recent 

investment climate and reports of 

fraudulent practices in the investment 

banking industry. Accordingly, the 

Board proposed to rescind the RegFlex 

exemption pertaining to discretionary 

control of investments. 

C. Summary of Comments and 

Discussion 

1. General 

NCUA received 50 comments on the 

proposal: 30 from credit unions, 14 from 

credit union trade associations, 1 from 

a bank trade association, and 5 from 

other interested parties. Two 

commenters supported the proposal in 

its entirety. The vast majority of 

commenters opposed some aspect of the 

proposal and some supported some 

aspect of the proposal. 

In broad terms, there was a consensus 

among commenters’ opinion that the 

data and examples NCUA cited to 

support rescinding the four RegFlex 

exemptions were insufficient and 

highlighted a few extreme cases that do 

not represent a systemic problem in the 

credit union industry. Similarly, 

commenters generally agreed that the 

purpose of RegFlex is still important 

and should be preserved and noted that 

NCUA has the authority to revoke 

RegFlex status for underperforming 

credit unions. 

2. MBL 

The majority of those commenters 

who discussed the MBL aspect of the 

proposal opposed it. Most said that it 

would create a significant competitive 

disadvantage for credit unions where 

competing lenders may not have such a 

requirement. Most also stated that the 

personal guarantee requirement could 

result in credit unions losing their 

highest quality borrowers to competitors 

that do not require a guarantee. 

Some noted that, even though the 

personal guarantee exemption is 

currently in place, most credit unions 

still obtain the guarantee on the bulk of 

their MBLs. They noted that the 

exemption should remain in place for 

those instances where it makes sense 

not to require a guarantee, such as when 

the borrower poses minimal credit risk, 

the underwriting is strong, or where 

other factors such as high collateral 

value is more important than a 

guarantee. Some commenters also noted 

that NCUA should not restrict a credit 

union’s ability to make MBLs at a time 

when making small business loans is a 

national priority. Finally, many 

commenters stated that the process for 

obtaining a waiver from this 

requirement is too slow and 

cumbersome to deal with this issue. 

NCUA has thoroughly considered 

these comments and appreciates the 

concerns the commenters have 

expressed. For the reasons discussed in 

the proposal as summarized above, 

NCUA still believes it is prudent to 

require all credit unions to comply with 

the personal guarantee requirement. 

NCUA recognizes that in the 

competitive MBL marketplace credit 

unions need to be free of unnecessary 

restrictions that hamper their ability to 

serve their members’ business loan 

needs. NCUA does not believe this is an 

unnecessary restriction. Additionally, 

NCUA acknowledges that the current 

waiver process, in some circumstances, 

is too slow to accommodate the 

practical timing needs of processing 

MBLs. NCUA is committed to making 

the waiver process more user friendly in 

this context and will look into ways of 

doing so. However, NCUA believes it is 

in the interest of safety and soundness 

to rescind this exemption and reminds 

credit unions they will continue to have 


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Federal Register / Vol. 75, No. 208 / Thursday, October 28, 2010 / Rules and Regulations 66297 

the option of seeking a waiver of the 

guarantee requirement under 723.10(e). 

3. Fixed Assets 

The majority of those commenters 

who discussed the fixed asset 

component of the proposal opposed 

rescinding the exemption from the 5% 

fixed asset cap. About a third of them 

also noted that it could inhibit 

branching activities and credit union 

growth. Many commenters suggested 

raising the fixed asset cap to a higher 

level, such as 8–10% for all FCUs, or 

establishing a sliding scale where FCUs 

with higher net worth would have a 

higher fixed asset cap. 

Some mentioned that the increasing 

need to purchase computer technology 

necessary to serve their members makes 

the 5% cap challenging. A few 

commenters noted that rescinding the 

exemption could be a hardship on those 

credit unions with long-term growth 

plans that are based, in part, on using 

the exemption. A handful of others 

suggested NCUA grandfather those 

credit unions already exceeding the cap. 

NCUA believes that safety and 

soundness considerations dictate 

rescinding this exemption. Excessive 

investment in fixed assets often leads to 

other financial difficulties for credit 

unions. Also, the nature and timing of 

investing in fixed assets is such that 

credit unions have sufficient time to 

request a waiver from the 5% limitation 

if necessary even for credit unions that 

have begun executing their growth 

strategies. 

Credit unions that have already 

exceeded the 5% limit on the effective 

date of this rule will be grandfathered at 

that limit. If their level of fixed assets 

subsequently trends downward, then so 

will the level at which they are 

grandfathered. Grandfathered credit 

unions are, however, still eligible to 

apply for a waiver to increase their fixed 

asset investments. For example, a credit 

union grandfathered at 8% whose fixed 

assets trend downward to 6.5% will 

have a new grandfathered limit of 6.5%. 

Further, if that same credit union then 

wishes to increase its fixed assets to 9%, 

then it may apply for a waiver to do so. 

Accordingly, the fixed assets exemption 

is rescinded as proposed. 

4. Discretionary Control of Investments 

and Stress Testing of Investments 

A relatively few commenters chose to 

discuss the discretionary control of 

investment authority and stress testing 

of investments components of the 

proposal. Among those that did 

comment, some opposed the proposal 

and others supported it. Accordingly, 

NCUA adopts the proposal to rescind 

these exemptions on safety and 

soundness grounds. 

D. Regulatory Procedures 

Regulatory Flexibility Act 

The Regulatory Flexibility Act 

requires NCUA to prepare an analysis to 

describe any significant economic 

impact a rule may have on a substantial 

number of small entities (primarily 

those under ten million dollars in 

assets). This rule enhances safety and 

soundness without additional regulatory 

burden. Accordingly, this will not have 

a significant economic impact on a 

substantial number of small credit 

unions, and therefore, no regulatory 

flexibility analysis is required. 

Small Business Regulatory Enforcement 

Fairness Act 

The Small Business Regulatory 

Enforcement Fairness Act (SBREFA) of 

1996, Public Law 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 Procedures 

Act. 5 U.S.C. 551. The Office of 

Information and Regulatory Affairs, an 

office within OMB, has reviewed this 

rule and determined that, for purposes 

of SBREFA, this is not a major rule. 

Paperwork Reduction Act 

NCUA has determined that this rule 

will not increase paperwork 

requirements under the Paperwork 

Reduction Act of 1995 and regulations 

of the Office of Management and 

Budget. 

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 would not have a 

substantial direct effect on the states, on 

the relationship between the national 

government and the states, or on the 

distribution of power and 

responsibilities among the various 

levels of government. NCUA has 

determined that this final rule does not 

constitute a policy that has federalism 

implications for purposes of the 

executive order. 

The Treasury and General Government 

Appropriations Act, 1999—Assessment 

of Federal Regulations and Policies on 

Families 

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). 

List of Subjects 

12 CFR Part 701 

Credit unions. 

12 CFR Part 723 

Credit, Credit unions, Reporting and 

recordkeeping requirements. 

12 CFR Part 742 

Credit unions, reporting and 

recordkeeping requirements. 

By the National Credit Union 

Administration Board on October 21, 2010. 

Mary Rupp, 

Secretary of the Board. 

■ For the reasons discussed above, 

NCUA amends 12 CFR parts 701, 723, 

and 742 as follows: 

PART 701—ORGANIZATION AND 

OPERATIONS OF FEDERAL CREDIT 

UNIONS 

■ 1. The authority citation for part 701 

continues to read as follows: 

Authority: 12 U.S.C. 1752(5), 1755, 1756, 

1757, 1759, 1761a, 1761b, 1766, 1767, 1782, 

1784, 1787, and 1789. Section 701.6 is also 

authorized by 31 U.S.C. 3717. Section 701.31 

is also authorized by 15 U.S.C. 1601 et seq., 

42 U.S.C. 1861 and 42 U.S.C. 3601–3610. 

Section 701.35 is also authorized by 42 

U.S.C. 4311–4312. 

■ 2. Amend § 701.36 by revising 

paragraphs (d) introductory text and 

(d)(1) to read as follows: 

§ 701.36 FCU ownership of fixed assets. 

* * * * * 

(d) Regulatory Flexibility Program. 

Federal credit unions that meet 

Regulatory Flexibility Program 

standards, as determined pursuant to 

Part 742 of this chapter, are exempt 

from the three-year partial occupancy 

requirement described in paragraph (b) 

of this section when acquiring 

unimproved land for future expansion 

pursuant to the terms of section 

742.4(a)(3) of this chapter. For a Federal 

credit union eligible for the Regulatory 

Flexibility Program that subsequently 

loses eligibility: 

(1) Section 742.3 of this chapter 

provides that NCUA may require the 

credit union to divest any existing fixed 


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66298 Federal Register / Vol. 75, No. 208 / Thursday, October 28, 2010 / Rules and Regulations 

1Part 702 has been amended five times since it 

was originally adopted in 2000: First, to incorporate 

limited technical corrections. 65 FR 55439 (Sept. 

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

by adoption of a uniform quarterly schedule for 

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

Third, to incorporate a series of revisions and 

adjustments to improve and simplify PCA 

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

Fourth, to add a third risk-weighting tier to the 

standard risk-based net worth component for 

member business loans. 68 FR 56537, 56546 (Oct. 

1, 2003). A proposal to modify the criteria for filing 

a net worth restoration plan, 67 FR 7113 (Nov. 29, 

2002), was never adopted. Fifth, to implement a 

statutory amendment allowing the acquirer in a 

merger of credit unions to combine the merging 

credit union’s retained earnings with its own to 

determine the acquirer’s post-merger ‘‘net worth.’’ 

73 FR 72688 (Dec. 1, 2008). 

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

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

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

‘‘Allowance.’’ 12 CFR 702.104. 

3The first offering of this senior debt consists of 

$3.8 billion in fixed- and floating-rate ‘‘NCUA 

Guaranteed Notes 2010–R1.’’ The underlying 

distressed assets of this debt are the residential 

mortgage-backed securities held by the liquidation 

estate of U.S. Central Federal Credit Union. Credit 

unions purchased a significant proportion of the 

first NGN offering. NCUA anticipates a series of 

similar NGN offerings. 

assets for substantive safety and 

soundness reasons; and 

* * * * * 

PART 723—MEMBER BUSINESS 

LOANS 

■ 3. The authority citation for part 723 

continues to read as follows: 

Authority: 12 U.S.C. 1756, 1757, 1757A, 

1766, 1785, 1789. 

§ 723.7 [Amended] 

■ 4. Amend § 723.7 by removing the last 

sentence of paragraph (b). 

PART 742—REGULATORY 

FLEXIBILITY PROGRAM 

■ 5. The authority citation for part 742 

continues to read as follows: 

Authority: 12 U.S.C. 1756, 1766. 

§ 742.4 [Amended] 

■ 6. Amend § 742.4 by removing the 

first sentence of paragraph (a)(3) and 

removing paragraphs (a)(4), (5), and (6) 

and redesignating paragraphs (a)(7), (8), 

and (9) as (a)(4), (5), and (6), 

respectively. 

[FR Doc. 2010–27149 Filed 10–27–10; 8:45 am] 

BILLING CODE 7535–01–P 

NATIONAL CREDIT UNION 

ADMINISTRATION 

12 CFR Part 702 

RIN 3133–AD81 

Prompt Corrective Action; Amended 

Definition of Low-Risk Assets 

AGENCY: National Credit Union 

Administration (NCUA). 

ACTION: Interim final rule with request 

for comments. 

SUMMARY: NCUA is issuing this Interim 

Final Rule to amend the definition of 

‘‘low-risk assets’’ for regulatory capital 

purposes. Assets in this category receive 

a risk-weighting of zero, reflecting the 

absence of credit risk. The amendment 

will expand the definition of ‘‘low-risk 

assets’’ to include debt instruments on 

which the payment of principal and 

interest is unconditionally guaranteed 

by NCUA as an agency of the Executive 

Branch of the United States. 

DATES: This rule is effective October 28, 

2010. Comments must be received on or 

before November 29, 2010. 

ADDRESSES: You may submit comments 

by any of the following methods (Please 

send comments by one method only): 

• Federal eRulemaking Portal: http:// 

www.regulations.gov. Follow the 

instructions for submitting comments. 

• NCUA Web Site: http:// 

www.ncua.gov/Resources/ 

RegulationsOpinionsLaws/ 

ProposedRegulations.aspx. Follow the 

instructions for submitting comments. 

• E-mail: Address to 

regcomments@ncua.gov. Include ‘‘[Your 

name] Comments on Risk Portfolio 

Defined’’ in the e-mail subject line. 

• Fax: (703) 518–6319. Use the 

subject line described above for e-mail. 

• Mail: Address to Mary Rupp, 

Secretary of the Board, National Credit 

Union Administration, 1775 Duke 

Street, Alexandria, Virginia 22314– 

3428. 

• Hand Delivery/Courier: Same as 

mail address. 

FOR FURTHER INFORMATION CONTACT: 

Steven W. Widerman, Trial Attorney, at 

the above address, or telephone: (703) 

518–6557. 

SUPPLEMENTARY INFORMATION: 

Public Inspection of Comments: All 

public comments are available on the 

agency’s Web site at: http:// 

www.ncua.gov/Resources/ 

RegulationsOpinionsLaws/ 

RegulationComments.aspx as 

submitted, except as may not be 

possible for technical reasons. Public 

comments will not be edited to remove 

any identifying or contact information. 

Paper copies of comments may be 

inspected in NCUA’s law library at 1775 

Duke Street, Alexandria, Virginia 22314, 

by appointment weekdays between 

9 a.m. and 3 p.m. To make an 

appointment, call (703) 518–6546 or 

send an e-mail to OGCMail@ncua.gov. 

A. Background 

1. Prompt Corrective Action. In 1998, 

the Credit Union Membership Access 

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

mandated a system of regulatory capital 

standards for natural person credit 

unions entitled ‘‘Prompt Corrective 

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

PCA imposes minimum capital 

standards and corresponding remedies 

to improve a credit union’s net worth. 

Id. The NCUA Board implemented a 

comprehensive system of PCA primarily 

under Part 702.1 12 CFR 702 et seq. 

Under PCA, a natural person credit 

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

classification among five statutory net 

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

CFR 702.102. A credit union’s minimum 

required ‘‘net worth ratio’’ is based upon 

a risk-weighting applied to each of eight 

different portfolios of credit union 

assets.2 Id. § 702.104. As a credit union’s 

‘‘net worth ratio’’ declines, so does its 

classification among the five net worth 

categories, thus subjecting it to an 

expanding range of mandatory and 

discretionary supervisory actions. 12 

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

702.204(a)–(b). 

2. Corporate System Resolution. In 

response to the unprecedented 

disruption in the nation’s credit markets 

over the last two years, NCUA and other 

federal banking regulators have taken a 

series of steps to preserve the nation’s 

confidence in financial institutions. 

Through its Corporate Stabilization 

Program, NCUA has taken specific 

actions to stabilize the corporate credit 

union (‘‘CCU’’) system and to address 

problems associated with the impact of 

the economic downturn on CCUs. Chief 

among these problems is the substantial 

devaluation of the mortgage-backed and 

asset-backed securities (‘‘the distressed 

assets’’) held in the investment 

portfolios of CCUs. In several cases, the 

realization of losses on these distressed 

assets has driven the CCU into 

insolvency, requiring NCUA to place the 

CCU into liquidation. 

To monetize the distressed assets held 

by the liquidated CCUs, NCUA has 

embarked on a Corporate System 

Resolution Program primarily to sell 

those distressed assets to a trust 

established by NCUA. The trust will 

then resecuritize the distressed assets in 

the form of senior debt instruments 

denominated ‘‘NCUA Guaranteed Notes’’ 

(‘‘NGNs’’) that will be offered to public 

investors, including financial 

institutions.3 The trust will pass 

through to the NGN-holders the 

monthly cash flows produced by the 


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