[Federal Register Volume 79, Number 213 (Tuesday, November 4, 2014)]
[Proposed Rules]
[Pages 65353-65360]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-25743]


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NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 704

RIN 3133-AE43


Corporate Credit Unions

AGENCY: National Credit Union Administration (NCUA).

ACTION: Proposed rule.

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SUMMARY: The NCUA Board (Board) is issuing proposed amendments to its 
regulations governing corporate credit unions (Corporates) and the 
scope of their activities. The proposed amendments clarify the 
mechanics of a number of substantive regulatory provisions and also 
make several non-substantive, technical corrections to various 
provisions.

DATES: Comments must be received on or before January 5, 2015.

ADDRESSES: You may submit comments by any of the following methods, but 
please send comments by one method only:
    <bullet> Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
    <bullet> NCUA Web site: http://www.ncua.gov/RegulationsOpinionsLaws/proposed_regs/proposed_regs.html. Follow the 
instructions for submitting comments.
    <bullet> Email: Address to <a href="/cdn-cgi/l/email-protection#55273032363a3838303b2126153b3620347b323a23"><span class="__cf_email__" data-cfemail="02706765616d6f6f676c7671426c6177632c656d74">[email protected]</span></a>. Include ``[Your 
name]--Comments on Proposed Rule--Corporate Credit Unions'' in the 
email subject line.
    <bullet> Fax: (703) 518-6319. Use the subject line described above 
for email.
    <bullet> Mail: Address to Gerard Poliquin, Secretary of the Board, 
National Credit Union Administration, 1775 Duke Street, Alexandria, 
Virginia 22314-3428.
    <bullet> Hand Delivery/Courier: Same as mail address.

FOR FURTHER INFORMATION CONTACT: David Shetler, Deputy Director, Office 
of National Examinations and Supervision, at the above address or 
telephone (703) 518-6640; or Frank Kressman, Associate General Counsel, 
Office of General Counsel, at the above address or telephone (703) 518-
6540.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background
II. Proposed Amendments
III. Regulatory Procedures

I. Background

    In 2010, the Board comprehensively revised the regulations 
governing Corporates and their activities.\1\ The Board also amended 
those regulations twice more in 2011.\2\ The Board has since identified 
the need to update the Corporate regulations by streamlining and 
clarifying certain provisions and incorporating a number of technical 
amendments to enhance readability. The amendments also provide a 
measure of regulatory relief to the Corporates.
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    \1\ 12 CFR part 704; 75 FR 64786 (Oct. 20, 2010).
    \2\ 76 FR 23861 (Apr. 29, 2011); 76 FR 79531 (Dec. 22, 2011). 
The Board also made technical changes to the regulations in 2011 and 
2013. 76 FR 16235 (Mar. 23, 2011); 78 FR 77563 (Dec. 24, 2013).
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II. Proposed Amendments

1. Section 704.2--Definitions

    The current rule defines a number of terms that contain the word 
``capital'' or otherwise relate to ``capital.'' Some of these terms are 
duplicative and unnecessary. Accordingly, the Board proposes to delete 
several of these terms and also redefine a number of other terms to 
minimize confusion and enhance the effectiveness of the regulation. The 
proposal deletes the distinct definitions of ``adjusted core capital'' 
and ``core capital'' and incorporates them into the definition of 
``Tier 1 capital.'' The proposal also deletes the term ``capital'' when 
used as a specific measure, and replaces it with the term ``total 
capital.'' Finally, the proposal deletes the definition of 
``supplementary capital'' and incorporates it into the definition of 
``Tier 2 capital.''
    The proposal also deletes the definitions of the terms ``asset-
backed commercial paper program,'' ``credit enhancing interest-only 
strip,'' and ``eligible ABCP facility,'' all of which are used in 
Appendix C to part 704. Corporates generally do not engage in the kinds 
of activities described by these terms. By deleting these definitions, 
the Board emphasizes that these activities are not consistent with the 
regular business activities of Corporates.
    The proposal also modifies a number of definitions to provide 
greater clarity or to make them consistent with other NCUA regulations. 
These include the definitions of ``available to cover losses that 
exceed retained earnings,'' ``derivatives,'' ``equity investment,'' 
``equity security,'' ``fair value,'' ``internal control,'' and 
``retained earnings.'' Lastly, the current rule contains two 
definitions for ``leverage ratio,'' one for use before October 21, 
2013, and one for use on or after that date. The proposal deletes the 
pre-October 21, 2013, definition and modifies the latter definition to 
reflect the proposed substitution of ``Tier 1 capital'' for ``adjusted 
core capital.''

2. Section 704.3--Corporate Credit Union Capital

    The proposal amends Sec. Sec.  704.3(b)(5) and 704.3(c)(3), 
regarding Corporate capital, to clarify that upon redeeming or calling 
nonperpetual capital accounts or perpetual contributed capital 
instruments, a Corporate must continue to meet its minimum required 
capital

[[Page 65354]]

and net economic value ratios. These clarifications make the provisions 
consistent with each other and with the terms and conditions of 
contributed capital included in the Model Forms in Appendix A to part 
704. The proposal also deletes Sec.  704.3(f)(4), as that provision 
refers to a regulatory requirement that Corporates were to have 
complied with prior to December 20, 2011.

3. Section 704.5--Investments

    The proposal amends Sec.  704.5(j) regarding grandfathering certain 
Corporate investments. The proposal clarifies that, while a Corporate 
may continue to hold an investment that was permissible at the time of 
purchase but later became impermissible because of a regulatory change, 
the investment is still subject to all other sections of part 704 that 
apply to investments, including those pertaining to credit risk 
management, asset and liability management, liquidity management, and 
investment action plans.

4. Section 704.6--Credit Risk Management

    Section 704.6 establishes issuer and sector concentration limits to 
control the credit risk of Corporate investment activities, but does 
not specify how to value investments when calculating aggregate 
amounts. In response to requests for clarification, the proposal states 
that the appropriate measure is the value of relevant investments 
recorded on the books of the Corporate. This measure includes the value 
of the investment after accreting or amortizing the investment purchase 
premium or discount, as applicable.

5. Section 704.7--Lending

    Section 704.7(c) currently restricts a Corporate's unsecured member 
lending to 50 percent of capital and its secured member lending to 100 
percent of capital. First, the proposal amends the provision by basing 
the lending limit on the Corporate's total capital, consistent with the 
definitional changes discussed above. Second, in response to requests 
by Corporates for greater flexibility, the proposal amends the 
provision to allow a higher level of secured lending. The rule 
continues to limit unsecured lending to 50 percent of total capital, 
but permits secured lending up to the full 150 percent of total capital 
limit. Under the proposal, each Corporate may determine its preferred 
composition of secured versus unsecured lending.

6. Section 704.8--Asset and Liability Management

    Section 704.8 establishes requirements to identify, measure, 
monitor, and control risk in the management of assets and liabilities. 
These include interest rate sensitivity analyses, net interest income 
modeling, and limiting the weighted average life of assets. Section 
704.8(j) imposes reporting and other requirements on Corporates that 
experience a decline in net economic value (NEV) or other NEV-related 
measures beyond certain thresholds. The proposal clarifies that if a 
Corporate does experience such NEV-related breaches, but is able to 
adjust its balance sheet to meet required regulatory limits within 10 
days, then the Corporate will not be considered to be in violation of 
the regulation. NCUA recognizes that, through the normal course of 
business, a Corporate may temporarily experience an NEV-related breach. 
Often, a Corporate can resolve the breach within a timely manner, which 
is why the current rule permits the Corporate to resolve any breach 
within 10 days prior to further regulatory action being taken. The 
proposed rule clarifies that only if a Corporate cannot resolve the 
breach in a timely manner would there be a cause for regulatory concern 
and, as such, be considered a regulatory violation.

7. Section 704.9--Liquidity Management

    Section 704.9(b) currently restricts a Corporate's borrowing to the 
lower of 10 times capital or 50 percent of capital and shares. First, 
the proposal amends the provision by changing the limit to 10 percent 
of total capital, consistent with the definitional changes discussed 
above. Second, recognizing that tying the borrowing limit to a 
percentage of shares may, in the event of a share outflow, limit a 
Corporate's ability to borrow at a critical time, the proposal removes 
the restriction of 50 percent of capital and shares. Finally, the 
proposal increases the secured borrowing maturity limit from 30 to 120 
days to accommodate seasonality in the borrowing patterns of member 
credit unions. NCUA believes that this extension will not materially 
increase risk and will allow Corporates to better serve their members.

8. Section 704.11--Corporate Credit Union Service Organizations (CUSOs)

    Section 704.11(e) addresses permissible Corporate CUSO activities 
and includes implementing dates that were prospective when the Board 
adopted the provision in 2010. Those dates have passed, and the 
proposal simplifies the provision by removing them.
    Section 704.11(g) provides that before making an investment in or 
loan to a Corporate CUSO, a Corporate must obtain written agreement 
from the Corporate CUSO that the Corporate CUSO will meet certain 
requirements. These include following generally accepted accounting 
principles, providing financial statements to the Corporate, and 
obtaining an annual CPA audit. The proposal also adds the requirement 
that a Corporate CUSO provide to NCUA and, if applicable, the 
appropriate state supervisory authority (SSA) the kinds of 
informational reports required to be produced and submitted by natural 
person CUSOs pursuant to a recent revision to NCUA's general CUSO 
rule.\3\ This additional information will enhance NCUA's ability to 
monitor a Corporate's CUSO-related activities consistent with the 
monitoring adopted for natural person credit unions' CUSOs.
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    \3\ 12 CFR 712.3(d)(4) and (5); 78 FR 72537 (Dec. 3, 2013).
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9. Section 704.14--Representation

    Section 704.14(a)(2) provides that an individual must hold a 
specified management position in a member credit union to be eligible 
to seek election to the board of directors of a Corporate. A question 
has arisen as to whether the individual must hold that position at the 
member credit union at the time his or her Corporate board service 
begins. The proposal amends this provision to clarify that an 
individual may run for a seat on the board of a Corporate only if he or 
she will continue to hold one of the required member management 
positions at the time he or she will serve on the Corporate board. The 
proposal also simplifies and corrects Sec.  704.14 by removing expired 
implementing dates and replacing the term ``Regional Director'' with 
the term ``ONES Director.''

10. Section 704.15--Audit and Reporting Requirements

    Section 704.15 establishes auditing and reporting requirements for 
Corporates. When adopted in 2011, the provision contained implementing 
dates that have since passed. The proposal makes technical changes to 
the provision by eliminating those dates and correcting a typographical 
error.

11. Section 704.18--Fidelity Bond Coverage

    Section 704.18 establishes fidelity bond requirements for Corporate

[[Page 65355]]

employees and officials, with maximum deductibles based on a 
Corporate's capital. The proposal changes the measure from core capital 
to total capital, consistent with the definitional changes discussed 
above. NCUA believes this change will have an immaterial effect on 
maximum deductible levels.

12. Section 704.21--Enterprise Risk Management

    Section 704.21 requires a Corporate to develop and follow an 
enterprise risk management policy, establish an enterprise risk 
management committee, and include an independent risk management expert 
on the committee. Paragraph (c) of this section lists the minimum 
qualifications for the independent expert, including specific 
educational and background requirements. NCUA recognizes the minimum 
qualifications may be overly prescriptive and subject to differences in 
interpretation. The critical factors are an individual's independence 
and experience that is commensurate with the Corporate's operations and 
complexity. Accordingly, the proposal removes the minimum requirements 
for the independent risk management expert. The Board believes this 
will make it easier for corporates to attract and hire qualified 
individuals for the position.

13. Appendix A to Part 704--Capital Prioritization and Model Forms

    Appendix A to part 704 includes Model Forms A-H for use by 
Corporates when accepting contributed capital from members. Model Forms 
A, B, E, and F were designed for use before October 20, 2011, and the 
proposed rule removes those expired forms and redesignates the 
remaining forms as A-D. The proposal also removes a sentence from the 
introductory note to current Model Form G, redesignated as Model Form 
C, to clarify that in some instances previously issued ``paid-in 
capital'' may not be considered perpetual contributed capital.

14. Appendix B to Part 704--Expanded Authorities and Requirements

    Appendix B to part 704 describes expanded authorities available to 
Corporates and the procedures for obtaining such authorities. 
Consistent with the earlier discussion regarding the simplification of 
terms relating to capital, the proposal substitutes ``leverage ratio'' 
for ``capital ratio'' and ``total capital'' for ``capital.''

15. Appendix C to Part 704--Risk-Based Capital Credit Risk-Weight 
Categories

    Appendix C to 704 explains how a Corporate must compute its risk-
weighted assets for the purpose of determining its capital ratios. 
Several of the assets and activities discussed such as ``asset-backed 
commercial paper program,'' ``credit enhancing interest-only strip,'' 
and ``eligible ABCP facility'' are not consistent with the regular 
business activities of Corporates. To reduce confusion, the proposal 
removes references to those assets and activities.

III. Regulatory Procedures

1. Regulatory Flexibility Act

    The Regulatory Flexibility Act requires NCUA to prepare an analysis 
of any significant economic impact a regulation may have on a 
substantial number of small entities (primarily those under $50 million 
in assets).\4\ This proposed rule only affects Corporates, all of which 
have more than $50 million in assets. Furthermore, the proposed rule 
consists primarily of technical and clarifying amendments. Accordingly, 
NCUA certifies the rule will not have a significant economic impact on 
a substantial number of small credit unions.
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    \4\ 5 U.S.C. 603(a); 12 U.S.C. 1787(c)(1).
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2. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (PRA) applies to rulemakings in 
which an agency by rule creates a new paperwork burden or increases an 
existing burden.\5\ For purposes of the PRA, a paperwork burden may 
take the form of a reporting or recordkeeping requirement, both 
referred to as information collections. Under the proposed rule, a 
Corporate with an investment in or loan to a Corporate CUSO will need 
to revise the current agreement it has with the Corporate CUSO to 
provide that the Corporate CUSO will prepare and submit basic or 
expanded reports directly to NCUA and the appropriate SSA.
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    \5\ 44 U.S.C. 3507(d); 5 CFR part 1320.
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    Currently, there are 14 Corporates and approximately 16 Corporate 
CUSOs, 13 of which provide the complex or high-risk services that 
require expanded reporting. The information collection burdens imposed, 
on an annual basis, are analyzed below.
    Changing the written agreement relating to reports to NCUA.
    Frequency of response: One-time.
    Initial hour burden: 4.

4 hours x 14 = 56 hours

    Initial Corporate CUSO reporting to NCUA and SSA--basic 
information.
    Frequency of response: One-time.
    Initial hour burden: 0.5.

0.5 hours x 16 = 8 hours

    Initial Corporate CUSO reporting to NCUA and SSA--expanded 
information.
    Frequency of response: One-time.
    Initial hour burden: 3.

3 hours x 13 = 39 hours

    Annual Corporate CUSO reporting to NCUA and SSA--expanded 
information.
    Frequency of response: Annual.
    Annual hour burden: 3.

3 hours x 13 = 39 hours

    As required by the PRA, NCUA is submitting a copy of this proposal 
to OMB for its review and approval. Persons interested in submitting 
comments with respect to the information collection aspects of the 
proposed rule should submit them to OMB at the address noted below.
    NCUA considers comments by the public on this proposed collection 
of information in:
    <bullet> evaluating whether the proposed collection of information 
is necessary for the proper performance of the functions of NCUA, 
including whether the information will have a practical use;
    <bullet> evaluating the accuracy of NCUA's estimate of the burden 
of the proposed collection of information, including the validity of 
the methodology and assumptions used;
    <bullet> enhancing the quality, usefulness, and clarity of the 
information to be collected; and
    <bullet> minimizing the burden of collecting information on those 
who are to respond, including through the use of appropriate automated, 
electronic, mechanical, or other technological collection techniques or 
other forms of information technology; e.g., permitting electronic 
submission of responses.

OMB will make a decision concerning the collection of information 
contained in this proposed regulation between 30 and 60 days after 
publication of this document in the Federal Register. Therefore, a 
comment to OMB is best assured of having its full effect if OMB 
receives it within 30 days of publication. This does not affect the 
deadline for the public to comment to NCUA on the substantive aspects 
of this proposed regulation.
    Comments on the proposed information collection requirements should 
be sent to: Office of Information and Regulatory Affairs, OMB, New 
Executive Office Building, Washington, DC 20503; Attention: NCUA Desk 
Officer, with a copy to Amanda Wallace

[[Page 65356]]

at the National Credit Union Administration, 1775 Duke Street, 
Alexandria, Virginia 22314-3428.

3. Executive Order 13132

    Executive Order 13132 encourages independent regulatory agencies to 
consider the impact of their actions on state and local interests. 
NCUA, an independent regulatory agency as defined in 44 U.S.C. 3502(5), 
voluntarily complies with the executive order to adhere to fundamental 
federalism principles. The proposed rule does not have substantial 
direct effects on the states, on the relationship between the national 
government and the states, or on the distribution of power and 
responsibilities among the various levels of government. NCUA has, 
therefore, determined that this proposal does not constitute a policy 
that has federalism implications for purposes of the executive order.

4. Assessment of Federal Regulations and Policies on Families

    NCUA has determined that this proposed 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 in 12 CFR Part 704

    Credit unions, Corporate credit unions, Reporting and recordkeeping 
requirements.

    By the National Credit Union Administration Board on October 23, 
2014.
Gerard Poliquin,
Secretary of the Board.

    For the reasons discussed above, the National Credit Union 
Administration proposes to amend 12 CFR part 704 as follows:

PART 704--CORPORATE CREDIT UNIONS

0
1. The authority citation for part 704 continues to read as follows:

    Authority: 12 U.S.C. 1766(a), 1781, and 1789.

0
2. Amend Sec.  704.2 by:
0
a. Removing the definitions of ``Adjusted core capital'', ``Asset-
backed commercial paper program'', ``Capital'', ``Capital ratio'', 
``Core capital'', ``Core capital ratio'', ``Credit-enhancing interest-
only strip'', ``Eligible ABCP liquidity facility'', the two definitions 
of ``Leverage ratio'', and ``Supplementary capital'';
0
b. Revising the first two sentences of the definition of ``Available to 
cover losses that exceed retained earnings'' and the definitions of 
``Derivatives'', ``Equity investment'', ``Equity security'', ``Fair 
value'', ``Internal control'', ``Net assets'', ``Net risk-weighted 
assets'', ``Retained earnings'', ``Tier 1 capital'', ``Tier 2 
capital'', and ``Total capital''; and
0
c. Adding definitions, in alphabetical order, for ``Leverage ratio'' 
and ``Tier 1 risk-based capital ratio''.
    The revisions and additions read as follows:


Sec.  704.2  Definitions.

* * * * *
    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 and 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 and equity acquired in a combination and PCC. * * *
* * * * *
    Derivatives means a financial contract which derives its value from 
the value and performance of some other underlying financial instrument 
or variable, such as an index or interest rate.
* * * * *
    Equity investment means an investment in an equity security and 
other ownership interest, including, for example, an investment in a 
partnership or limited liability company.
    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 Federal Home Loan Bank stock, 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.
* * * * *
    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, as defined by GAAP.
* * * * *
    Internal control means the process, established by the corporate 
credit union's board of directors, officers and employees, designed to 
provide reasonable assurance of reliable financial reporting and 
safeguarding of assets against unauthorized acquisition, use, or 
disposition. A credit union's internal control structure generally 
consists of five components: control environment; risk assessment; 
control activities; information and communication; and monitoring. 
Reliable financial reporting refers to preparation of Call Reports as 
well as financial data published and presented to members that meet 
management's financial reporting objectives. Internal control over 
safeguarding of assets against unauthorized acquisition, use, or 
disposition refers to prevention or timely detection of transactions 
involving such unauthorized access, use, or disposition of assets which 
could result in a loss that is material to the financial statements.
* * * * *
    Leverage ratio means the ratio of Tier 1 capital to moving daily 
average net assets.
* * * * *
    Net assets means total assets less Central Liquidity Facility (CLF) 
stock subscriptions, loans guaranteed by the National Credit Union 
Share Insurance Fund (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 in calculating Tier 1 capital are also 
deducted from net assets.
* * * * *
    Net risk-weighted assets means risk-weighted assets less 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 in calculating Tier 
1 capital are also deducted from net risk-weighted assets.
* * * * *
    Retained earnings means undivided earnings, regular reserve, 
reserve for contingencies, supplemental reserves, reserve for losses, 
and other appropriations from undivided earnings as designated by 
management or NCUA.
* * * * *

[[Page 65357]]

    Tier 1 capital means the sum of paragraphs (1) through (4) of this 
definition from which paragraphs (5) through (9) of this definition are 
deducted:
    (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;
    (4) Minority interests in the equity accounts of CUSOs that are 
fully consolidated;
    (5) Deduct the amount of the corporate credit union's intangible 
assets that exceed one half percent of its moving daily average net 
assets (however, NCUA may direct the corporate credit union to add back 
some of these assets on NCUA's own initiative, by petition from the 
applicable state regulator, or upon application from the corporate 
credit union);
    (6) Deduct investments, both equity and debt, in unconsolidated 
CUSOs;
    (7) Deduct an amount equal to any PCC or NCA that the corporate 
credit union maintains at another corporate credit union;
    (8) Beginning on October 20, 2016, and ending on October 20, 2020, 
deduct any amount of PCC that causes PCC minus retained earnings, all 
divided by moving daily net average assets, to exceed two percent; and
    (9) Beginning after October 20, 2020, deduct any amount of PCC that 
causes PCC to exceed retained earnings.
    Tier 1 risk-based capital ratio means the ratio of Tier 1 capital 
to the moving monthly average net risk-weighted assets.
    Tier 2 capital means the sum of paragraphs (1) through (4) of this 
definition:
    (1) Nonperpetual capital accounts, as amortized under Sec.  
704.3(b)(3);
    (2) Allowance for loan and lease losses calculated under GAAP to a 
maximum of 1.25 percent of risk-weighted assets;
    (3) Any PCC deducted from Tier 1 capital; and
    (4) 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. NCUA may disallow such inclusion in the calculation of 
Tier 2 capital if NCUA determines that the securities are not prudently 
valued.
* * * * *
    Total capital means the sum of Tier 1 capital and Tier 2 capital, 
less the corporate credit union's equity investments not otherwise 
deducted when calculating Tier 1 capital.
* * * * *
0
3. Amend Sec.  704.3 by revising paragraphs (b)(5), (c)(3), and 
(e)(3)(i) and removing paragraph (f)(4) to read as follows:


Sec.  704.3  Corporate credit union capital.

* * * * *
    (b) * * *
    (5) Redemption. A corporate credit union may redeem NCAs prior to 
maturity or prior to the end of the notice period only if it meets its 
minimum required capital and net economic value ratios after the funds 
are redeemed and only with the prior approval of NCUA and, for state 
chartered corporate credit unions, the applicable state regulator.
* * * * *
    (c) * * *
    (3) Callability. A corporate credit union may call PCC instruments 
only if it meets its minimum required capital and net economic value 
ratios after the funds are called and only with the prior approval of 
the NCUA and, for state chartered corporate credit unions, the 
applicable state regulator. PCC accounts are callable on a pro-rata 
basis across an issuance class.
* * * * *
    (e) * * *
    (3) * * * (i) Notwithstanding the definitions of Tier 1 capital and 
Tier 2 capital in Sec.  704.2, NCUA may find that a particular asset or 
Tier 1 capital or Tier 2 capital component has characteristics or terms 
that diminish its contribution to a corporate credit union's ability to 
absorb losses, and NCUA may require the discounting or deduction of 
such asset or component from the computation of Tier 1 capital, Tier 2 
capital, or total capital.
* * * * *
0
4. Amend Sec.  704.5 by revising paragraph (j) to read as follows:


Sec.  704.5  Investments.

* * * * *
    (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 
other requirements of this part.
0
5. Amend Sec.  704.6 by revising paragraphs (c), (d), and (e) to read 
as follows:


Sec.  704.6  Credit risk management.

* * * * *
    (c) Issuer concentration limits--(1) General rule. The aggregate 
value recorded on the books of the corporate credit union of all 
investments in any single obligor is limited to 25 percent of total 
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 total capital;
    (ii) Investments in credit card master trust asset-backed 
securities are limited to 50 percent of total capital in any single 
obligor;
    (iii) Aggregate investments in repurchase and securities lending 
agreements with any one counterparty are limited to 200 percent of 
total capital;
    (iv) Investments in non-money market registered investment 
companies are limited to 50 percent of total capital in any single 
obligor;
    (v) Investments in money market registered investment companies are 
limited to 100 percent of total capital in any single obligor; and
    (vi) Investments in corporate CUSOs are subject to the limitations 
of Sec.  704.11.
    (d) Sector concentration limits. (1) A corporate credit union must 
establish sector limits based on the value recorded on the books of the 
corporate credit union that do not exceed the following maximums:
    (i) Mortgage-backed securities (inclusive of commercial mortgage-
backed securities)--the lower of 1000 percent of total capital or 50 
percent of assets;
    (ii) Commercial mortgage-backed securities--the lower of 300 
percent of total capital or 15 percent of assets;
    (iii) Federal Family Education Loan Program student loan asset-
backed securities--the lower of 1000 percent of total capital or 50 
percent of assets;
    (iv) Private student loan asset-backed securities--the lower of 500 
percent of total capital or 25 percent of assets;
    (v) Auto loan/lease asset-backed securities--the lower of 500 
percent of total capital or 25 percent of assets;
    (vi) Credit card asset-backed securities--the lower of 500 percent 
of total capital or 25 percent of assets;
    (vii) Other asset-backed securities not listed in paragraphs 
(d)(1)(ii) through (vi) of this section--the lower of 500 percent of 
total capital or 25 percent of assets;
    (viii) Corporate debt obligations--the lower of 1000 percent of 
total capital or 50 percent of assets; and
    (ix) Municipal securities--the lower of 1000 percent of total 
capital or 50 percent of assets.
    (2) Registered investment companies--A corporate credit union must 
limit its investment in registered

[[Page 65358]]

investment companies to the lower of 1000 percent of total 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 must limit its aggregate holdings in 
any investments not described in paragraphs (d)(1) or (2) of this 
section to the lower of 100 percent of total 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), (2), and (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 total capital 
or 10 percent of assets in any single North American Industry 
Classification System (NAICS) industry sector based on the value 
recorded on the books of the corporate credit union. If a corporation 
in which a corporate credit union is interested in investing 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 credit 
union change the classification.
* * * * *
0
6. Amend Sec.  704.7 by revising paragraph (c) to read as follows:


Sec.  704.7  Lending.

* * * * *
    (c) Loans to members--(1) Credit unions. (i) The maximum aggregate 
amount in unsecured loans and lines of credit from a corporate credit 
union to any one member credit union, excluding pass-through and 
guaranteed loans from the CLF and the NCUSIF, must not exceed 50 
percent of the corporate credit union's total capital.
    (ii) The maximum aggregate amount in secured loans (excluding those 
secured by shares or marketable securities and member reverse 
repurchase transactions) and unsecured loans (excluding pass-through 
and guaranteed loans from the CLF and the NCUSIF) and lines of credit 
from a corporate credit union to any one member credit union must not 
exceed 150 percent of the corporate credit union's total capital.
    (2) Corporate CUSOs. Any loan or line of credit from a corporate 
credit union to a corporate CUSO must comply with Sec.  704.11.
    (3) Other members. The maximum aggregate amount of loans and lines 
of credit from a corporate credit union to any other one member must 
not exceed 15 percent of the corporate credit union's total capital 
plus pledged shares.
* * * * *
0
7. Amend Sec.  704.8 by revising paragraph (j) to read as follows:


Sec.  704.8  Asset and liability management.

* * * * *
    (j) Limit breaches. (1)(i) If a corporate credit union's decline in 
NEV, base case NEV ratio, or any NEV ratio calculated under paragraph 
(d) of this section exceeds established or permitted limits, or the 
corporate is unable to satisfy the tests in paragraphs (f) or (g) of 
this section, the operating management of the corporate must 
immediately report this information to its board of directors and ALCO; 
and
    (ii) If the corporate credit union cannot adjust its balance sheet 
to meet the requirements of paragraphs (d), (f), or (g) of this section 
within 10 calendar days after detection by the corporate, the corporate 
must notify in writing the Director of the Office of National 
Examinations and Supervision.
    (2) If any breach described in paragraph (j)(1) of this section 
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 
come into compliance 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 prompt corrective action purposes, and the breach was 
of paragraph (d) of this section, the corporate credit union will 
immediately be recategorized as undercapitalized until coming into 
compliance, and
    (iii) If presently categorized as less than adequately capitalized 
for prompt corrective action purposes, and the breach was of paragraph 
(d) of this section, the corporate credit union will immediately be 
downgraded one additional capital category.
* * * * *
0
8. Amend Sec.  704.9 by revising paragraph (b) to read as follows:


Sec.  704.9  Liquidity management.

* * * * *
    (b) Borrowing limits. A corporate credit union may borrow up to 10 
times its total capital.
    (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 120 days. Only a corporate credit union with Tier 1 
capital in excess of five percent of its moving daily average net 
assets (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 the 
corporate credit union's Tier 1 capital and five percent of its moving 
DANA.
    (2) Exclusions. CLF borrowings and borrowed funds created by the 
use of member reverse repurchase agreements are excluded from the limit 
in paragraph (b)(1) of this section.
0
9. Amend Sec.  704.11 by:
0
a. Revising paragraphs (b)(1) and (2) and (e)(1) introductory text;
0
b. Removing paragraph (e)(2);
0
c. Redesignating paragraph (e)(3) as paragraph (e)(2);
0
d. Redesignating paragraphs (g)(4) through (7) as paragraphs (g)(5) 
through (8), respectively; and
0
e. Adding new paragraph (g)(4).
    The revisions and addition read as follows:


Sec.  704.11  Corporate Credit Union Service Organizations (Corporate 
CUSOs).

* * * * *
    (b) Investment and loan limitations. (1) The aggregate of all 
investments in member and non-member corporate CUSOs that a corporate 
credit union may make must not exceed 15 percent of a corporate credit 
union's total capital.
    (2) The aggregate of all investments in and loans to member and 
nonmember corporate CUSOs a corporate credit union may make must not 
exceed 30 percent of a corporate credit union's total capital. A 
corporate credit union may lend to member and nonmember corporate CUSOs 
an additional 15 percent of total capital if the loan is collateralized 
by assets in which the corporate has a perfected security interest 
under state law.
* * * * *

[[Page 65359]]

    (e) Permissible activities. (1) A corporate CUSO must agree to 
limit its activities to:
* * * * *
    (g) * * *
    (4) Will provide the reports as required by Sec.  712.3(d)(4) and 
(5) of this chapter;
* * * * *
0
10. Amend Sec.  704.14 by revising paragraphs (a)(2), (a)(9), and 
(e)(2) to read as follows:


Sec.  704.14  Representation.

    (a) * * *
    (2) Only an individual who currently holds the position of chief 
executive officer, chief financial officer, chief operating officer, or 
treasurer/manager at a member credit union, and will hold that position 
at the time he or she is seated on the corporate credit union board if 
elected, may seek election or re-election to the corporate credit union 
board;
* * * * *
    (9) At least a majority of directors of every corporate credit 
union, including the chair of the board, must serve on the corporate 
board as representatives of natural person credit union members.
* * * * *
    (e) * * *
    (2) The provisions of Sec.  701.14 of this chapter apply to 
corporate credit unions, except that where ``Regional Director'' is 
used, read ``Director of the Office of National Examinations and 
Supervision.''
0
11. Amend Sec.  704.15 by revising paragraph (a)(2)(iii) introductory 
text, the first sentence of paragraph (b)(2), and the first sentence of 
paragraph (d)(1) to read as follows:


Sec.  704.15  Audit and reporting requirements.

    (a) * * *
    (2) * * *
    (iii) An assessment by management of the effectiveness of the 
corporate credit union's internal control structure and procedures as 
of the end of the past calendar year that must include the following:
* * * * *
    (b) * * *
    (2) * * * The independent public accountant who audits the 
corporate credit union's financial statements must examine, attest to, 
and report separately on the assertion of management concerning the 
effectiveness of the corporate credit union's internal control 
structure and procedures for financial reporting. * * *
* * * * *
    (d) * * *
    (1) * * * Each corporate credit union must establish a supervisory 
committee, all of whose members must be independent. * * *
* * * * *


Sec.  704.18  [Amended]

0
12. Amend Sec.  704.18 in paragraph (e)(1) by:
0
a. Removing the words ``core capital ratio'' wherever they appear and 
adding in their place ``leverage ratio'';
0
b. Removing the words ``Core capital ratio'' and adding in their place 
``Leverage ratio''; and
0
c. Removing the words ``core capital'' wherever they appear without 
being followed by the word ``ratio'' and adding in their place ``Tier 1 
capital''.
0
13. Amend Sec.  704.21 by revising paragraph (c) to read as follows:


Sec.  704.21  Enterprise risk management.

* * * * *
    (c) The ERMC must include at least one independent risk management 
expert. The risk management expert must have at least five years of 
experience in identifying, assessing, and managing risk exposures. This 
experience must be commensurate with the size of the corporate credit 
union and the complexity of its operations. The board of directors may 
hire the independent risk management expert to work full-time or part-
time for the ERMC or as a consultant for the ERMC.
* * * * *

Appendix A to Part 704--[Amended]

0
14. Amend Appendix A to part 704 by:
0
a. Removing Model Forms A, B, E, and F and redesignating Model Forms C, 
D, G, and H as Model Forms A, B, C, and D, respectively; and
0
b. Removing the second sentence of the note in newly redesignated Model 
Form C.

Appendix B to Part 704--[Amended]

0
15. Amend Appendix B to part 704 by:
0
a. Removing the words ``capital ratio'' wherever they appear and adding 
in their place ``leverage ratio'';
0
b. Removing the word ``capital'' wherever it appears without being 
followed by the word ``ratio'' and adding in its place ``total 
capital''; and
0
c. Removing paragraph (e) from part 1.
0
16. Amend Appendix C to part 704 by:
0
a. In part I(b):
0
(i) Revising paragraph (8) of the definition of ``Direct credit 
substitute'';
0
(ii) Revising paragraph (8) of the definition of ``Recourse''; and
0
(iii) Revising paragraph (2) of the definition of ``Residual 
interests'';
0
b. In part II(a), revising paragraph (4)(xiii);
0
c. In part II(b):
0
(i) Revising the heading of part II(b);
0
(ii) Removing paragraphs (1)(iv) and (4);
0
(iii) Redesignating paragraphs (5) and (6) as paragraphs (4) and (5), 
respectively;
0
(iv) Revising newly redesignated paragraph (4)(i); and
0
(v) Removing newly redesignated paragraph (5)(v)(C).
0
d. In part II(c):
0
(i) Removing paragraph (2)(i);
0
(ii) Redesignating paragraphs (2)(ii) and (iii) as paragraphs (2)(i) 
and (ii), respectively; and
0
(iii) Revising newly redesignated paragraph (2)(i) and the introductory 
paragraph of newly redesignated paragraph (2)(ii).
    The revisions read as follows:

Appendix C to Part 704--Risk-Based Capital Credit Risk-Weight 
Categories

* * * * *
    Part I: Introduction
* * * * *
    (b) Definitions
* * * * *
    Direct credit substitute * * *
    (8) Liquidity facilities that provide support to asset-backed 
commercial paper.
* * * * *
    Recourse * * *
    (8) Liquidity facilities that provide support to asset-backed 
commercial paper.
* * * * *
    Residual interest * * *
    (2) Residual interests generally include 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.
* * * * *
    Part II: Risk-Weightings
    (a) On-Balance Sheet Assets
* * * * *
    (4) * * *
    (xiii) Interest-only strips receivable;
* * * * *
    (b) Off-Balance Sheet Activities
* * * * *
    (4) * * * (i) Unused portions of commitments with an original 
maturity of one year or less;
* * * * *
    (c) Recourse Obligations, Direct Credit Substitutes, and Certain 
Other Positions
* * * * *
    (2)(i) Other residual interests. A corporate credit union must 
maintain risk-based capital for a residual interest 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.

[[Page 65360]]

    (ii) Residual interests and other recourse obligations. Where a 
corporate credit union holds a residual interest 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:
* * * * *

[FR Doc. 2014-25743 Filed 11-3-14; 8:45 am]
BILLING CODE 7535-01-P


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