Organization and Operations of Federal Credit Unions

AGENCY:

National Credit Union Administration (NCUA).

ACTION:

Final rule.

SUMMARY:

NCUA is amending its rule pertaining to secondary capital accounts for low-income designated credit unions to conform it to the recently issued prompt corrective action rule (PCA). Under PCA, NCUA has discretionary authority, under certain circumstances, to prohibit a credit union from paying principal, dividends or interest on the credit union's secondary capital accounts established after August 7, 2000.

DATES:

This rule is effective August 7, 2000.

ADDRESSES:

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

FOR FURTHER INFORMATION CONTACT:

Frank S. Kressman, Staff Attorney, Division of Operations, Office of General Counsel, at the above address or telephone: (703) 518-6540.

SUPPLEMENTARY INFORMATION:

Federal credit unions that serve predominantly low-income members may be designated by NCUA as low-income credit unions (LICUs). LICUs play an important role in providing financial services to low-income individuals and communities for whom these services are often unavailable. LICUs often find it difficult, however, to accumulate capital due to the limited resources of their members. To enhance LICUs' ability to build capital, § 701.34 of NCUA's regulations permits LICUs to offer uninsured secondary capital accounts to nonnatural person members and nonmembers. 12 CFR § 701.34.

Section 701.34 provides that funds in the secondary capital account must be available to cover operating losses realized by the credit union that exceed its net available reserves and undivided earnings. It also provides that, to the extent secondary capital account funds are used to cover operating losses, the credit union cannot replenish those funds under any circumstances.

In 1998, Congress amended the Federal Credit Union Act to establish minimum capital standards for federally-insured credit unions. NCUA was required to adopt, by regulation, a PCA system to restore the capital level of credit unions that become inadequately capitalized. The NCUA Board has established, among other things, a comprehensive framework of mandatory and discretionary supervisory actions indexed to defined net worth categories. 65 FR 8559 (February 18, 2000).

Within that framework, PCA distinguishes “new” credit unions, those that have been in operation less than 10 years and have $10 million or less in assets, from other credit unions. 12 U.S.C. 1790d(o)(4). New credit unions are subject to an alternative system of PCA with net worth categories that differ from those applicable to other credit unions. 12 U.S.C. 1790d(b)(2)(A).

A credit union, other than a new credit union, that has a net worth ratio of less than 2% is categorized as “critically undercapitalized”. Section 702.204(b)(11) of the PCA rules permits NCUA to take discretionary action against critically undercapitalized credit unions. Specifically, it provides that:

Beginning 60 days after the effective date of classification of a credit union as “critically undercapitalized,” [NCUA has the discretion to] prohibit payments of principal, dividends or interest on the credit union's uninsured secondary capital accounts established after August 7, 2000, except that unpaid dividends or interest shall continue to accrue under the terms of the account to the extent permitted by law * * *.

12 CFR 702.204(b)(11).

New credit unions with net worth ratios of less than 6% are categorized as “moderately capitalized” (3.5%-5.99%), “marginally capitalized” (2%-3.49%), “minimally capitalized” (0%-1.99%) or “uncapitalized” (less than 0%). 12 CFR 702.302(c). Sections 702.304(b) and 702.305(b) of the PCA rules permit NCUA to take discretionary actions against new credit unions that fall within these categories. Specifically, each provides that:

[T]he NCUA Board may, by directive, take one or more of the actions prescribed in § 702.204(b) [of the PCA rules, including the prohibition of payments on secondary capital accounts] if the credit union's net worth ratio has not increased consistent with its then-present business plan, or the credit union has failed to undertake any mandatory supervisory action prescribed in paragraph (a) of this section.

12 CFR 702.304(b) and 702.305(b).

The below amendments conform the secondary capital rules to the PCA rules.

Final Rule

The NCUA Board has issued this as a final rule effective August 7, 2000. There is a strong public interest in having secondary capital rules in place that are consistent with and conform to the provisions of PCA. As part of the PCA rulemaking process, notice of and an opportunity to comment on the below amendments to the secondary capital rule were given in compliance with the Administrative Procedure Act (5 U.S.C. 551) (APA). 63 FR 57938 (October 29, 1998); 64 FR 27090 (May 18, 1999); 64 FR 44663 (August 17, 1999); 65 FR 8559 (February 18, 2000). Comments pertaining to these amendments were incorporated into PCA. Additionally, these conforming amendments are being published far in advance of the 30 days required by Section 553(d) of the APA (5 U.S.C. 553(d)) as neither PCA nor the conforming amendments are effective until August 7, 2000. Accordingly, for good cause, the Board finds that, with respect to the conforming amendments, NCUA has complied with the notice and public procedure requirements of the APA. The Board also finds that additional notice and public procedure would be duplicative and excessive and, therefore, under 5 U.S.C. 553(b)(3)(B), are impracticable, unnecessary, and contrary to the public interest.

Regulatory Procedures

Regulatory Flexibility Act

The Regulatory Flexibility Act requires NCUA to prepare an analysis to describe any significant economic impact agency rulemaking may have on a substantial number of small credit unions. For purposes of this analysis, credit unions under $1 million in assets are considered small credit unions. As of June 30, 1999, there were 1,690 small credit unions with a total of $807.3 million in assets, having an average size of $0.5 million. Small credit unions make up 15.6% of all credit unions, but only 0.2% of all credit union assets.

It is anticipated that this final rule will effect relatively few small credit unions. It will apply only to those credit unions that establish secondary capital accounts after August 7, 2000 that then become classified as critically undercapitalized or otherwise trigger potential discretionary action under PCA. Even then, corrective action will only be taken where NCUA chooses to exercise its discretion to do so. NCUA has determined that this rule will not have a significant economic impact on a substantial number of small credit unions.

Paperwork Reduction Act

NCUA has determined that these amendments to § 701.34 do 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 regulatory 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 rule will apply to all federally-insured credit unions offering secondary capital accounts pursuant to § 701.34, but it will not have substantial direct effects on the states, on the relationship between the national government and the states, or on the distribution of power and responsibilities among the various levels of government. NCUA has determined that this rule does not constitute a policy that has federalism implications for purposes of the executive order.

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, Pub. L. 105-277, 112 Stat. 2681 (1998).

Small Business Regulatory Enforcement Fairness Act

The Small Business Regulatory Enforcement Fairness Act of 1996 (Pub. L. 104-121) provides generally for congressional review of agency rules. A reporting requirement is triggered in instances where NCUA issues a final rule as defined by Section 551 of the APA. 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 in 12 CFR Part 701

• Credit unions
• Reporting and recordkeeping requirements

For the reasons set forth above, 12 CFR part 701 is amended 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. Section 701.34 is amended by adding paragraphs (b)(12) and (b)(13) to read as follows:

3. The Appendix to § 701.34 is amended by adding a paragraph to immediately precede the signature line to read as follows:

Appendix to § 701.34 [Amended]

• The NCUA may prohibit payments of principal, dividends or interest on ____ (name of credit union) uninsured secondary capital accounts established after August 7, 2000, if ____ (name of credit union) has been in operation less than 10 years and has $10 million or less in assets and the provisions of § 701.34(b)(13) of NCUA's regulations are met, or, if ____ (name of credit union) has been in operation for 10 years or more or has more than $10 million in assets and the provisions of § 701.34(b)(12) of NCUA's regulations are met.