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12 CFR Ch. VII (1–1–19 Edition)
must be absolute, with no netting (i.e., offsetting a pay-fixed transaction with a receive-fixed transaction). The gross notional
for derivatives transactions with amortizing
notional amounts is the current contracted
notional amount, in accordance with the amortization schedule.
(ii) For futures, the gross notional is the
underlying contract size as designated by the
Chicago Mercantile Exchange (CME) product
specifications (e.g., a five-year Treasury note
futures contract will use $100,000 for each
contract purchased or sold and reported here
on a gross basis for limit purposes.)
(2) Step #2—Convert each gross notional by its
derivative adjustment factor to produce an adjusted gross notional. The derivative adjustment factor approximates the price sensitivity for each of the product groups in order
to weight the notional amount by sensitivity
before weighting for maturity.
(i) For cap and floor options, the derivative
adjustment factor is 33 percent. For example,
an interest rate cap with a $1 million notional amount has an adjusted gross notional
of $330,000 ($1,000,000 × 0.33 + $330,000).
(ii) For interest rate swaps and Treasury
futures, the derivative adjustment factor is
100 percent. For example, an interest rate
swap with a $1 million notional amount has
an adjusted gross notional of $1,000,000
($1,000,000 × 1.00 = $1,000,000).
(iii) The total adjusted notional for all derivatives positions is the sum of (i) and (ii)
above.
(3) Step #3—Produce the weighted average remaining time to maturity (WARM) for all derivatives positions. (i) For interest rate caps,
interest rate floors, and interest rate swaps,
the remaining maturity is the time left be-
tween the reporting date and the contracted
maturity date, expressed in years (round up
to two decimals);
(ii) For Treasury futures, the remaining
maturity is the underlying deliverable
Treasury note’s maximum maturity (e.g., a
five-year Treasury note future has a fiveyear remaining maturity); and
(iii) Determine the WARM using the adjusted gross notional, as set forth in subsection (2) of this section, and the remaining
time to maturity as defined for each product
group above in paragraphs (b)(3)(i) and (ii) of
this appendix.
(4) Step #4—Produce the WARMN by converting the WARM to a percentage and then
multiplying the percentage by the total adjusted
gross notional. (i) Divide the WARM, as calculated in paragraph (b)(3) of this appendix,
by ten to convert it to a percentage (e.g., 7.75
WARMN is translated to 77.5 percent); and
(ii) Multiply the WARM converted to a percentage, as described in paragraph (c)(4)(i) of
this appendix, by total adjusted gross notional, described in paragraph (c)(2) of this
appendix.
(5) Compare WARMN calculation to the
WARNM limit for compliance. The total in step
four (4) must be less than the limit in paragraph (a)(1)(ii) or (a)(2)(ii) of this appendix,
as applicable.
(6) Example calculations for compliance with
this subpart: WARMN. The table below provides an illustrative example of the WARMN
limit calculations for a sample Federal credit union that has entry level authority. The
sample Federal credit union has a net worth
of $100 million and total assets of $1 billion;
its notional limit authority is $65 million (65
percent of net worth).
TABLE 4—EXAMPLE WARMN LIMIT CALCULATION
Options
Gross Notional (Step #1) ......................................
Adjustment Factor .................................................
Adjusted Notional (Step #2) ..................................
Weighted Average Remaining Maturity (WARM)
(Step #3) ............................................................
1 (77.4%
$100,000,000
33%
$33,000,000
Futures
Total
$50,000,000
100%
$50,000,000
$5,000,000
100%
$5,000,000
8.50
5.00
7.74
Weighted Average Remaining Maturity Notional (WARMN) (Step #4):
Notional Limit Authority (65% of net
worth)
Under/(Over) Notional Limit Authority
1 $68,100,000
7.00
Scope.
Definitions.
Corporate credit union capital.
Prompt corrective action
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$88,000,000
$65,000,000
($3,100,000)
704.5 Investments.
704.6 Credit risk management.
704.7 Lending.
704.8 Asset and liability management.
704.9 Liquidity management.
704.10 Investment action plan.
704.11 Corporate Credit Union Service Organizations (Corporate CUSOs).
704.12 Permissible services.
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$155,000,000
of Step #3.)
PART 704—CORPORATE CREDIT
UNIONS
Sec.
704.1
704.2
704.3
704.4
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PC31
National Credit Union Administration
§ 704.2
704.13 Board responsibilities.
704.14 Representation.
704.15 Audit and reporting requirements.
704.16 Contracts/written agreements.
704.17 State-chartered
corporate
credit
unions.
704.18 Fidelity bond coverage.
704.19 Disclosure of executive compensation.
704.21 Enterprise risk management.
704.22 Membership fees.
A
TO
PART
704—CAPITAL
APPENDIX
PRIORITIZATION AND MODEL FORMS
APPENDIX B TO PART 704—EXPANDED AUTHORITIES AND REQUIREMENTS
APPENDIX C TO PART 704—RISK-BASED CAPITAL CREDIT RISK-WEIGHT CATEGORIES
AUTHORITY: 12 U.S.C. 1766(a), 1781, 1789.
SOURCE: 62 FR 12938, Mar. 19, 1997, unless
otherwise noted.
§ 704.1
Scope.
(a) This part establishes special rules
for all federally insured corporate credit unions. Non federally insured corporate credit unions must agree, by
written contract, to both adhere to the
requirements of this part and submit
to examinations, as determined by
NCUA, as a condition of receiving
shares or deposits from federally insured credit unions. This part grants
certain additional authorities to federal corporate credit unions. Except to
the extent that they are inconsistent
with this part, other provisions of
NCUA’s Rules and Regulations (12 CFR
chapter VII) and the Federal Credit
Union Act apply to federally chartered
corporate credit unions and federally
insured state-chartered corporate credit unions to the same extent that they
apply to other federally chartered and
federally insured state-chartered credit
unions, respectively.
(b) The Board has the authority to
issue orders which vary from this part.
This authority is provided under Section 120(a) of the Federal Credit Union
Act, 12 U.S.C. 1766(a). Requests by
state-chartered corporate credit unions
for waivers to this part and for expansions of authority under appendix B of
this part must be approved by the state
regulator before being submitted to
NCUA.
§ 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.
Applicable state regulator means the
prudential state regulator of a state
chartered corporate credit union.
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 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. 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.
CLF-related bridge loan means interim
financing, extending up to ten business
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§ 704.2
12 CFR Ch. VII (1–1–19 Edition)
days, that a corporate credit union provides for a natural person credit union
from the time the CLF approves a loan
to the natural person credit union
until the CLF funds the loan. To repay
a CLF-related bridge loan, the borrowing natural person credit union assigns the proceeds of the CLF advance
to the corporate credit union making
the CLF-related bridge loan for the duration of the bridge loan.
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 asset-backed
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.
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.
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.
Critical accounting policies means
those policies that are most important
to the portrayal of a corporate credit
union’s financial condition and results
and that require management’s most
difficult, subjective, or complex judgments, often as a result of the need to
make estimates about the effect of
matters that are inherently uncertain.
Daily average net assets means the average of net assets calculated for each
day during the period.
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.
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.
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National Credit Union Administration
§ 704.2
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.
Enterprise risk management means the
process of addressing risk on an entitywide basis. The purpose of this process
is not to eliminate risk but, rather, to
provide the knowledge the board of directors and management need to effectively measure, monitor, and control
risk and to then plan appropriate strategies to achieve the entity’s business
objectives with a reasonable amount of
risk taking.
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.
Examination of internal control means
an engagement of an independent public accountant to report directly on internal control or on management’s assertions about internal control. An examination of internal control over financial reporting includes controls
over the preparation of financial statements in accordance with accounting
principles generally accepted in the
United States of America (GAAP) and
NCUA regulatory reporting requirements.
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, as defined by
GAAP.
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.
Financial statements means the presentation of a corporate credit union’s
financial data, including accompanying
notes, derived from accounting records
of the credit union, and intended to
disclose the credit union’s economic resources or obligations at a point in
time, or the changes therein for a period of time, in conformity with GAAP.
Each of the following is considered to
be a financial statement: a balance
sheet or statement of financial condition; statement of income or statement
of operations; statement of undivided
earnings; statement of cash flows;
statement of changes in members’ equity; statement of revenue and expenses; and statement of cash receipts
and disbursements.
Financial statement audit means an
audit of the financial statements of a
corporate credit union performed in accordance with generally accepted auditing standards by an independent
person who is licensed by the appropriate State or jurisdiction. The objective of a financial statement audit is to
express an opinion as to whether those
financial statements of the credit
union present fairly, in all material respects, the financial position and the
results of its operations and its cash
flows in conformity with GAAP.
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.
Generally accepted auditing standards
(GAAS) means the standards approved
and adopted by the American Institute
of Certified Public Accountants which
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§ 704.2
12 CFR Ch. VII (1–1–19 Edition)
apply when an independent, licensed
certified public accountant audits private company financial statements in
the United States of America. Auditing
standards differ from auditing procedures in that procedures address acts
to be performed, whereas standards
measure the quality of the performance
of those acts and the objectives to be
achieved by use of the procedures undertaken. In addition, auditing standards address the auditor’s professional
qualifications as well as the judgment
exercised in performing the audit and
in preparing the report of the audit.
Immediate family member means a
spouse or other family member living
in the same household.
Independent public accountant (IPA)
means a person who is licensed by, or
otherwise authorized by, the appropriate State or jurisdiction to practice
public accounting. An IPA must be
able to exercise fairness toward credit
union officials, members, creditors and
others who may rely upon the report of
a supervisory committee audit and to
demonstrate the impartiality necessary to produce dependable findings.
As used in this part, IPA is synonymous with the terms ‘‘auditor’’ and
‘‘accountant.’’ The term IPA does not
include a licensed person working in
his or her capacity as an employee of
an unlicensed entity and issuing an
audit opinion in the unlicensed entity’s
name, e.g., a licensed league auditor or
licensed retired examiner working for a
non-licensed entity.
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.
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 ac-
tivities; 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.
Internal control framework means criteria such as that established in Internal
Control—Integrated
Framework,
issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), or comparable, reasonable, and U.S.-recognized criteria.
Internal control over financial reporting
means a process effected by those
charged with governance, management,
and other personnel, designed to provide reasonable assurance regarding
the preparation of reliable financial
statements in accordance with accounting principles generally accepted
in the United States of America. A corporate credit union’s internal control
over financial reporting includes those
policies and procedures that:
(1) Pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of
the entity;
(2) Provide reasonable assurance that
transactions are recorded as necessary
to permit preparation of financial
statements in accordance with accounting principles generally accepted
in the United States of America, and
that receipts and expenditures of the
entity are being made only in accordance with authorizations of management and those charged with governance; and
(3) Provide reasonable assurance regarding prevention, or timely detection
and correction, of unauthorized acquisition, use, or disposition of the entity’s assets that could have a material
effect on the financial statements.
Investment grade means the issuer of
the security has an adequate capacity
to meet the financial commitments
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PC31
National Credit Union Administration
§ 704.2
under the security for the projected life
of the asset or exposure, even under adverse economic conditions. An issuer
has an adequate capacity to meet financial commitments if the risk of default by the obligor is low and the full
and timely repayment of principal and
interest on the security is expected. A
corporate credit union may consider
any or all of the following factors, to
the extent appropriate, with respect to
the credit risk of a security: Credit
spreads; securities-related research; internal or external credit risk assessments; default statistics; inclusion on
an index; priorities and enhancements;
price, yield, and/or volume; and asset
class-specific factors. This list of factors is not meant to be exhaustive or
mutually exclusive.
Leverage ratio means the ratio of Tier
1 capital to moving daily average net
assets.
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.
Minimal amount of credit risk means
the amount of credit risk when the
issuer of a security has a very strong
capacity to meet all financial commitments under the security for the projected life of the asset or exposure,
even under adverse economic conditions. An issuer has a very strong capacity to meet all financial commitments if the risk of default by the obligor is very low, and the full and timely
repayment of principal and interest on
the security is expected. A corporate
credit union may consider any or all of
the following factors, to the extent appropriate, with respect to the credit
risk of a security: Credit spreads; securities-related research; internal or external credit risk assessments; default
statistics; inclusion on an index; priorities and enhancements; price, yield,
and/or volume; asset class-specific factors. This list of factors is not meant
to be exhaustive or mutually exclusive.
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.
NCUA means NCUA Board (Board),
unless the particular action has been
delegated by the Board.
Net assets means total assets less Central Liquidity Facility (CLF) stock
subscriptions,
CLF-related
bridge
loans, 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 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
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§ 704.2
12 CFR Ch. VII (1–1–19 Edition)
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 CLF stock subscriptions, CLF-related bridge loans,
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 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) 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 assetbacked 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 undivided
earnings, regular reserve, reserve for
contingencies, supplemental reserves,
reserve for losses, GAAP equity acquired in a merger, and other appropriations from undivided earnings as
designated by management or the
NCUA.
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PC31
National Credit Union Administration
§ 704.2
Retained earnings ratio means the corporate credit union’s retained earnings
divided by its moving daily average net
assets.
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 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 section 107(7) of the Act.
Stripped
mortgage-backed
security
means a security that represents either
the principal-only or interest-only por-
tion 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.
Supervisory committee means, for federally
chartered
corporate
credit
unions, the supervisory committee as
defined in Section 111(b) of the Federal
Credit Union Act, 12 U.S.C. 1761(b). For
state
chartered
corporate
credit
unions, the term supervisory committee refers to the audit committee,
or similar committee, designated by
state statute or regulation.
Tier 1 capital means the sum of items
in paragraphs (1) and (2) of this definition from which items in paragraphs (3)
through (6) are deducted:
(1) Retained earnings;
(2) Perpetual contributed capital;
(3) Deduct the amount of the corporate credit union’s intangible assets
that exceed one half percent of its moving daily average net assets (however,
the NCUA may direct the corporate
credit union to add back some of these
assets on the NCUA’s own initiative, or
the NCUA’s approval of petition from
the applicable state regulator or application from the corporate credit
union);
(4) Deduct investments, both equity
and debt, in unconsolidated CUSOs;
(5) Deduct an amount equal to any
PCC or NCA that the corporate credit
union maintains at another corporate
credit union;
(6) Deduct any amount of PCC received from federally insured credit
unions that causes PCC minus retained
earnings, all divided by moving daily
average net assets, to exceed two percent when a corporate credit union’s
retained earnings ratio is less than two
and a half percent.
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:
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§ 704.3
12 CFR Ch. VII (1–1–19 Edition)
(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;
(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 assets means the sum of all a
corporate credit union’s assets as calculated under GAAP.
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.
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 di-
viding 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.
[75 FR 64829, Oct. 20, 2010, as amended at 76
FR 23867, Apr. 29, 2011; 76 FR 79533, Dec. 22,
2011; 77 FR 74110, Dec. 13, 2012; 78 FR 32544,
May 31, 2013; 80 FR 25936, May 6, 2015; 80 FR
57284, Sept. 23, 2015; 82 FR 55499, Nov. 22, 2017]
§ 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
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PC31
National Credit Union Administration
§ 704.3
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 merg-
er, 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 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.
(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
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PC31
§ 704.3
12 CFR Ch. VII (1–1–19 Edition)
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 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.
(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 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 proce-
dures 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 offbalance 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
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PC31
National Credit Union Administration
§ 704.3
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
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PC31
§ 704.3
12 CFR Ch. VII (1–1–19 Edition)
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
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 statechartered 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 Tier 1
capital and Tier 2 capital in paragraph
(d) of this section, 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
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PC31
National Credit Union Administration
§ 704.4
from the computation of Tier 1 capital,
Tier 2 capital, 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 riskweight, 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 off-balance
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 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.
[75 FR 64829, Oct. 20, 2010, as amended at 80
FR 25937, May 6, 2015]
§ 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
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§ 704.4
12 CFR Ch. VII (1–1–19 Edition)
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
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PC31
National Credit Union Administration
§ 704.4
(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.
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
less-than-satisfactory CAMEL rating
(i.e., three or lower) for any rating category (other than in a rating category
specifically addressing capital adequacy) 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
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PC31
§ 704.4
12 CFR Ch. VII (1–1–19 Edition)
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
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PC31
National Credit Union Administration
§ 704.4
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 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 pro-
posed 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.
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PC31
§ 704.4
12 CFR Ch. VII (1–1–19 Edition)
(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, interest-rate 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.
(B) Restricting any ongoing or future
transactions with affiliates.
(C) Restricting interest rates paid.
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National Credit Union Administration
§ 704.4
(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
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§ 704.5
12 CFR Ch. VII (1–1–19 Edition)
(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.
[75 FR 64836, Oct. 20, 2010, as amended at 78
FR 77565, Dec. 26, 2013]
§ 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
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PC31
National Credit Union Administration
§ 704.5
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 BookEntry 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;
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§ 704.6
12 CFR Ch. VII (1–1–19 Edition)
(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
asset-backed 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 interestonly 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
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 other requirements of
this part.
[75 FR 64839, Oct. 20, 2010, as amended at 80
FR 25937, May 6, 2015]
§ 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
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National Credit Union Administration
§ 704.6
(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 (but not exempting,
for purposes of paragraph (d) of this
section, 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 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 section 11 of this part.
(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 assetbacked 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 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, 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,
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§ 704.7
12 CFR Ch. VII (1–1–19 Edition)
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.
(f) Credit ratings. (1) Before purchasing an investment, a corporate
credit union must conduct and document an analysis that reasonably concludes the investment has no more
than a minimal amount of credit risk.
(2) A corporate credit union must
identify and monitor any changes in
credit quality of the investment and
retain appropriate supporting documentation as long as the corporate
owns the investment.
(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, and internal
and external analyst evaluations sufficient to support each approved credit
limit.
(h) Requirements for investment action
plans. An investment is subject to the
requirements of § 704.10 of this part if:
(1) Appropriate monitoring of the investment would reasonably lead to the
conclusion that the investment presents more than a minimal amount of
credit risk; or
(2) The investment is part of an asset
class or group of investments that exceeds the issuer, sector, or subsector
concentration limits of this section.
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 nonconforming. 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 more than 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 of this part.
[75 FR 64841, Oct. 20, 2010, as amended at 75
FR 71528, Nov. 24, 2010; 76 FR 79533, Dec. 22,
2011; 77 FR 74110, Dec. 13, 2012; 80 FR 25937,
May 6, 2015]
§ 704.7 Lending.
(a) Policies. A corporate credit union
must operate according to a lending
policy which addresses, at a minimum:
(1) Loan types and limits;
(2) Required documentation and collateral; and
(3) Analysis and monitoring standards.
(b) General. Each loan or line of credit limit will be determined after analyzing the financial and operational
soundness of the borrower and the ability of the borrower to repay the loan.
(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 CLF-related bridge loans and pass-
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PC31
National Credit Union Administration
§ 704.8
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
§ 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.
(d) Loans to nonmembers—(1) Credit
unions. A loan to a nonmember credit
union, other than through a loan participation with another corporate credit union or a CLF-related bridge loan,
is only permissible if the loan is for an
overdraft related to the providing of
correspondent services pursuant to
§ 704.12. Generally, such a loan will
have a maturity of one business day.
(2) Corporate CUSOs. Any loan or line
of credit must comply with § 704.11.
(e) Member business loan rule. Loans,
lines of credit and letters of credit to:
(1) Member credit unions are exempt
from part 723 of this chapter;
(2) Corporate CUSOs are not subject
to part 723 of this chapter.
(3) Other members not excluded
under § 723.1(b) of this chapter must
comply with part 723 of this chapter
unless the loan or line of credit is fully
guaranteed by a credit union or fully
secured by U.S. Treasury or agency securities. Those guaranteed and secured
loans must comply with the aggregate
limits of § 723.16 but are exempt from
the other requirements of part 723.
(f) Participation loans with other corporate credit unions. A corporate credit
union is permitted to participate in a
loan with another corporate credit
union provided the corporate retains
an interest of at least 5 percent of the
face amount of the loan and a master
participation loan agreement is in
place before the purchase or the sale of
a participation. A participating corporate credit union must exercise the
same due diligence as if it were the
originating corporate credit union.
(g) Prepayment penalties. If provided
for in the loan contract, a corporate
credit union is authorized to assess
prepayment penalties on loans.
[62 FR 12938, Mar. 19, 1997, as amended at 64
FR 57365, Oct. 25, 1999; 67 FR 65655, Oct. 25,
2002; 68 FR 56550, Oct. 1, 2003; 75 FR 34621,
June 18, 2010; 80 FR 25938, May 6, 2015; 80 FR
57284, Sept. 23, 2015]
§ 704.8 Asset
ment.
and
liability
(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
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PC31
§ 704.8
12 CFR Ch. VII (1–1–19 Edition)
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 financial assets,
consisting of cash, investments, and
loans, but excluding derivative contracts and equity investments, may
not exceed 2 years. A corporate credit
union must test its financial 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 financial assets, consisting of cash, investments,
and loans, but 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 financial 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 2.25 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
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PC31
National Credit Union Administration
§ 704.9
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) 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.
(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.
[75 FR 64842, Oct. 20, 2010, as amended at 76
FR 79533, Dec. 22, 2011; 80 FR 25938, May 6,
2015]
§ 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 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 180 days. Only a corporate credit
union with Tier 1 capital in excess of
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§ 704.10
12 CFR Ch. VII (1–1–19 Edition)
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.
[75 FR 64843, Oct. 20, 2010, as amended at 80
FR 25938, May 6, 2015]
§ 704.10 Investment action plan.
(a) Any corporate credit union in possession of an investment, including a
derivative, that fails to meet a requirement of this part must, within 30 calendar days of the failure, report the
failed investment to its board of directors, supervisory committee and the
Director of the Office of National Examinations and Supervision (ONES). If
the corporate credit union does not sell
the failed investment, and the investment continues to fail to meet a requirement of this part, the corporate
credit union must, within 30 calendar
days of the failure, provide to the
ONES Director a written action plan
that addresses:
(1) The investment’s characteristics
and risks;
(2) The process to obtain and adequately evaluate the investment’s market pricing, cash flows, and risk;
(3) How the investment fits into the
credit union’s asset and liability management strategy;
(4) The impact that either holding or
selling the investment will have on the
corporate credit union’s earnings, liquidity, and capital in different interest rate environments; and
(5) The likelihood that the investment may again pass the requirements
of this part.
(b) The ONES Director may require,
for safety and soundness reasons, a
shorter time period for plan development than that set forth in paragraph
(a) of this section.
(c) If the plan described in paragraph
(a) of this section is not approved by
the ONES Director, the credit union
must adhere to the ONES Director’s directed course of action.
[62 FR 12938, Mar. 19, 1997, as amended at 67
FR 65656, 65659, Oct. 25, 2002; 78 FR 32544, May
31, 2013]
§ 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 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.
(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
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National Credit Union Administration
§ 704.12
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 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) 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) 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 provide the reports as required by § 712.3(d)(4) and (5) of this
chapter;
(5) 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;
(6) Will allow the auditor, board of directors, and NCUA complete access to
the CUSO’s personnel, facilities, equipment, books, records, and any other
documentation that the auditor, directors, or NCUA deem pertinent;
(7) Will inform the corporate, at least
quarterly, of all the compensation paid
by the CUSO to its employees who are
also employees of the corporate credit
union; and
(8) 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.
[75 FR 64843, Oct. 20, 2010, as amended at 76
FR 23868, Apr. 29, 2011; 80 FR 25938, May 6,
2015]
§ 704.12
Permissible services.
(a) Preapproved services. A corporate
credit union may provide to members
the preapproved services set out in this
section. NCUA may at any time, based
upon supervisory, legal, or safety and
soundness reasons, limit or prohibit
any preapproved service. The specific
activities
listed
within
each
preapproved category are provided as
illustrations of activities permissible
under the particular category, not as
an exclusive or exhaustive list.
(1) Correspondent services agreement. A
corporate credit union may only provide financial services to nonmembers
through a correspondent services
agreement. A correspondent services
agreement is an agreement between
two corporate credit unions, whereby
one of the corporate credit unions
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§ 704.13
12 CFR Ch. VII (1–1–19 Edition)
agrees to provide services to the other
corporate credit union or its members.
(2) Credit and investment services.
Credit and investment services are advisory and consulting activities that
assist the member in lending or investment management. These services may
include loan reviews, investment portfolio reviews and investment advisory
services.
(3) Electronic financial services. Electronic financial services are any services, products, functions, or activities
that a corporate credit union is otherwise authorized to perform, provide or
deliver to its members but performed
through electronic means. Electronic
services may include automated teller
machines, online transaction processing through a website, website
hosting services, account aggregation
services, and internet access services
to perform or deliver products or services to members.
(4) Excess capacity. Excess capacity is
the excess use or capacity remaining in
facilities, equipment or services that: a
corporate credit union properly invested in or established, in good faith,
with the intent of serving its members;
and it reasonably anticipates will be
taken up by the future expansion of
services to its members. A corporate
credit union may sell or lease the excess capacity in facilities, equipment
or services, such as office space, employees and data processing.
(5) Liquidity and asset and liability
management. Liquidity and asset and liability management services are any
services, functions or activities that
assist the member in liquidity and balance sheet management. These services
may include liquidity planning and
balance sheet modeling and analysis.
(6) Operational services. Operational
services are services established to deliver financial products and services
that enhance member service and promote safe and sound operations. Operational services may include tax payment, electronic fund transfers and
providing coin and currency service.
(7) Payment systems. Payment systems are any methods used to facilitate the movement of funds for transactional purposes. Payment systems
may include Automated Clearing
House, wire transfer, item processing
and settlement services.
(8) Trustee or custodial services. Trustee services are services in which the
corporate credit union is authorized to
act under a written trust agreement to
the extent permitted under part 724 of
this chapter. Custodial and safekeeping
services are services a corporate credit
union performs on behalf of its member
to act as custodian or safekeeper of investments.
(b) Procedure for adding services that
are not preapproved. To provide a service to its members that is not
preapproved by NCUA:
(1) A federal corporate credit union
must request approval from NCUA. The
request must include a full explanation
and complete documentation of the
service and how the service relates to a
corporate credit union’s authority to
provide services to its members. The
request must be submitted jointly to
the Director of the Office of National
Examinations and Supervision and the
Secretary of the Board. The request
will be treated as a petition to amend
§ 704.12 and NCUA will request public
comment or otherwise act on the petition within a reasonable period of time.
Before engaging in the formal approval
process, a corporate credit union
should seek an advisory opinion from
NCUA’s Office of General Counsel as to
whether a proposed service is already
covered by one of the authorized categories without filing a petition to
amend the regulation; and
(2) A state-chartered corporate credit
union must submit a request for a
waiver that complies with § 704.1(b) to
the Director of the Office of National
Examinations and Supervision.
(c) Prohibition. A corporate credit
union is prohibited from purchasing
loan servicing rights.
[67 FR 65656, Oct. 25, 2002, as amended at 78
FR 32544, May 31, 2013]
§ 704.13
Board responsibilities.
(a) General. A corporate credit
union’s board of directors must approve comprehensive written strategic
plans and policies, review them annually, and provide them upon request to
the auditors, supervisory committee,
and NCUA.
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PC31
National Credit Union Administration
§ 704.14
(b) Policies. A corporate credit
union’s policies must be commensurate
with the scope and complexity of the
corporate credit union.
(c) Other requirements. The board of
directors of a corporate credit union
must ensure:
(1) Senior managers have an in-depth,
working knowledge of their direct
areas of responsibility and are capable
of identifying, hiring, and retaining
qualified staff;
(2) Qualified personnel are employed
or under contract for all line support
and audit areas, and designated backup personnel or resources with adequate cross-training are in place;
(3) GAAP is followed, except where
law or regulation has provided for a departure from GAAP;
(4) Accurate balance sheets, income
statements, and internal risk assessments (e.g., risk management measures
of liquidity, market, and credit risk associated with current activities) are
produced timely in accordance with
§§ 704.6, 704.8, and 704.9;
(5) Systems are audited periodically
in accordance with industry-established standards;
(6) Financial performance is evaluated to ensure that the objectives of
the corporate credit union and the responsibilities of management are met;
(7) Planning addresses the retention
of external consultants, as appropriate,
to review the adequacy of technical,
human, and financial resources dedicated to support major risk areas; and
(8) For each item before the board,
the meeting minutes list the names of
directors and their votes, as well as the
names of any directors who did not
vote, except that if the minutes include
a complete list of directors attending
the meeting, the vote tally need only
list the names of directors who voted
against the item or who abstained.
[62 FR 12938, Mar. 19, 1997, as amended at 67
FR 65654, Oct. 25, 2002. Redesignated at 75 FR
64836, Oct. 20, 2010; 76 FR 23868, Apr. 29, 2011]
§ 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) 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;
(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) 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.
(b) Credit union trade association. As
used in this section, a credit union
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§ 704.15
12 CFR Ch. VII (1–1–19 Edition)
trade association includes but is not
limited to, state credit union leagues
and league service corporations and national credit union trade associations.
(c) Representatives of organizational
members. (1) An organizational member
of a corporate credit union is a member
that is not a natural person. An organizational member may appoint one of
its members or officials as a representative to the corporate credit union.
The representative shall be empowered
to attend membership meetings, to
vote, and to stand for election on behalf of the member. No individual may
serve as the representative of more
than one organizational member in the
same corporate credit union.
(2) Any vacancy on the board of a
corporate credit union caused by a representative being unable to complete
his or her term shall be filled by the
board of the corporate credit union according to its bylaws governing the
filling of board vacancies.
(d) Recusal provision. (1) No director,
committee member, officer, or employee of a corporate credit union shall
in any manner, directly or indirectly,
participate in the deliberation upon or
the determination of any question affecting his or her pecuniary interest or
the pecuniary interest of any entity
(other than the corporate credit union)
in which he or she is interested, except
if the matter involves general policy
applicable to all members, such as setting dividend or loan rates or fees for
services.
(2) An individual is ‘‘interested’’ in
an entity if he or she:
(i) Serves as a director, officer, or
employee of the entity;
(ii) Has a business, ownership, or deposit relationship with the entity; or
(iii) Has a business, financial, or familial relationship with an individual
whom he or she knows has a pecuniary
interest in the entity.
(3) In the event of the disqualification of any directors, by operation of
paragraph (c)(1) of this section, the remaining qualified directors present at
the meeting, if constituting a quorum
with the disqualified directors, may exercise, by majority vote, all the powers
of the board with respect to the matter
under consideration. Where all of the
directors are disqualified, the matter
must be decided by the members of the
corporate credit union.
(4) In the event of the disqualification of any committee member by operation of paragraph (c)(1) of this section, the remaining qualified committee members, if constituting a
quorum with the disqualified committee members, may exercise, by majority vote, all the powers of the committee with respect to the matter
under consideration. Where all of the
committee members are disqualified,
the matter shall be decided by the
board of directors.
(e) Administration. (1) A corporate
credit union shall be under the direction and control of its board of directors. While the board may delegate the
performance of administrative duties,
the board is not relieved of its responsibility for their performance. The
board may employ a chief executive officer who shall have such authority and
such powers as delegated by the board
to conduct business from day to day.
Such chief executive officer must answer solely to the board of the corporate credit union, and may not be an
employee of a credit union trade association.
(2) The provisions of § 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.’’
[62 FR 12938, Mar. 19, 1997, as amended at 67
FR 65657, Oct. 25, 2002; 75 FR 64844, Oct. 20,
2010; 80 FR 25938, May 6, 2015]
§ 704.15 Audit and reporting requirements.
(a) Annual reporting requirements—(1)
Audited financial statements. A corporate credit union must prepare annual financial statements in accordance with generally accepted accounting principles (GAAP), which must be
audited by an independent public accountant in accordance with generally
accepted auditing standards. The annual financial statements and regulatory reports must reflect all material
correcting adjustments necessary to
conform with GAAP that were identified by the corporate credit union’s
independent public accountant.
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National Credit Union Administration
§ 704.15
(2) Management report. Each corporate
credit union must prepare, as of the
end of the previous calendar year, an
annual management report that contains the following:
(i) A statement of management’s responsibilities for preparing the corporate credit union’s annual financial
statements, for establishing and maintaining an adequate internal control
structure and procedures for financial
reporting, and for complying with laws
and regulations relating to safety and
soundness in the following areas: affiliate transactions, legal lending limits,
loans to insiders, restrictions on capital and share dividends, and regulatory reporting that meets full and
fair disclosure;
(ii) An assessment by management of
the corporate credit union’s compliance with such laws and regulations
during the past calendar year. The assessment must state management’s
conclusion as to whether the corporate
credit union has complied with the designated safety and soundness laws and
regulations during the calendar year
and disclose any noncompliance with
the laws and regulations; and
(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:
(A) A statement identifying the internal control framework used by management to evaluate the effectiveness
of the corporate credit union’s internal
control over financial reporting;
(B) A statement that the assessment
included controls over the preparation
of regulatory financial statements in
accordance with regulatory reporting
instructions including identification of
such regulatory reporting instructions;
and
(C) A statement expressing management’s conclusion as to whether the
corporate credit union’s internal control over financial reporting is effective as of the end of the previous calendar year. Management must disclose
all material weaknesses in internal
control over financial reporting, if any,
that it has identified that have not
been remediated prior to the calendar
year-end. Management may not con-
clude that the corporate credit union’s
internal control over financial reporting is effective if there are one or more
material weaknesses.
(3) Management report signatures. The
chief executive officer and either the
chief accounting officer or chief financial officer of the corporate credit
union must sign the management report.
(b) Independent public accountant—(1)
Annual audit of financial statements.
Each corporate credit union must engage an independent public accountant
to audit and report on its annual financial statements in accordance with
generally accepted auditing standards.
The scope of the audit engagement
must be sufficient to permit such accountant to determine and report
whether the financial statements are
presented fairly and in accordance with
GAAP. A corporate credit union must
provide its independent public accountant with a copy of its most recent Call
Report and NCUA examination report.
It must also provide its independent
public accountant with copies of any
notice that its capital category is
being changed or reclassified and any
correspondence from NCUA regarding
compliance with this section.
(2) Internal control over financial reporting. 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. The attestation and
report must be made in accordance
with generally accepted standards for
attestation engagements. The accountant’s report must not be dated prior to
the date of the management report and
management’s assessment of the effectiveness of internal control over financial reporting. Notwithstanding the requirements set forth in applicable professional standards, the accountant’s
report must include the following:
(i) A statement identifying the internal control framework used by the
independent public accountant, which
must be the same as the internal control framework used by management,
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PC31
§ 704.15
12 CFR Ch. VII (1–1–19 Edition)
to evaluate the effectiveness of the corporate credit union’s internal control
over financial reporting;
(ii) A statement that the independent
public accountant’s evaluation included controls over the preparation of
regulatory financial statements in accordance with regulatory reporting instructions including identification of
such regulatory reporting instructions;
and
(iii) A statement expressing the independent public accountant’s conclusion
as to whether the corporate credit
union’s internal control over financial
reporting is effective as of the end of
the previous calendar year. The report
must disclose all material weaknesses
in internal control over financial reporting that the independent public accountant has identified that have not
been remediated prior to the calendar
year-end. The independent public accountant may not conclude that the
corporate credit union’s internal control over financial reporting is effective if there are one or more material
weaknesses.
(3) Notice by accountant of termination
of services. An independent public accountant performing an audit under
this part who ceases to be the accountant for a corporate credit union must
notify NCUA in writing of such termination within 15 days after the occurrence of such event and set forth in
reasonable detail the reasons for such
termination.
(4) Communications with supervisory
committee. In addition to the requirements for communications with audit
committees set forth in applicable professional standards, the independent
public accountant must report the following on a timely basis to the supervisory committee:
(i) All critical accounting policies
and practices to be used by the corporate credit union;
(ii) All alternative accounting treatments within GAAP for policies and
practices related to material items
that the independent public accountant
has discussed with management, including the ramifications of the use of
such alternative disclosures and treatments, and the treatment preferred by
the independent public accountant; and
(iii) Other written communications
the independent public accountant has
provided to management, such as a
management letter or schedule of
unadjusted differences.
(5) Retention of working papers. The
independent public accountant must
retain the working papers related to
the audit of the corporate credit
union’s financial statements and, if applicable, the evaluation of the corporate credit union’s internal control
over financial reporting for seven years
from the report release date, unless a
longer period of time is required by
law.
(6) Independence. The independent
public accountant must comply with
the independence standards and interpretations of the American Institute of
Certified Public Accountants (AICPA).
(7) Peer reviews and inspection reports.
(i) Prior to commencing any services
for a corporate credit union under this
section, the independent public accountant must have received a peer review, or be enrolled in a peer review
program, that meets acceptable guidelines. Acceptable peer reviews include
peer reviews performed in accordance
with the AICPA’s Peer Review Standards and inspections conducted by the
Public Company Accounting Oversight
Board (PCAOB).
(ii) Within 15 days of receiving notification that the AICPA has accepted a
peer review or the PCAOB has issued
an inspection report, or before commencing any audit under this section,
whichever is earlier, the independent
public accountant must file a copy of
the most recent peer review report and
the public portion of the most recent
PCAOB inspection report, if any, accompanied by any letters of comments,
response, and acceptance, with NCUA if
the report has not already been filed.
(iii) Within 15 days of the PCAOB
making public a previously nonpublic
portion of an inspection report, the
independent public accountant must
file a copy of the previously nonpublic
portion of the inspection report with
NCUA.
(c) Filing and notice requirements—(1)
Annual Report. Each corporate credit
union must, no later than 180 days
after the end of the calendar year, file
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National Credit Union Administration
§ 704.15
an Annual Report with NCUA consisting of the following documents:
(i) The audited comparative annual
financial statements;
(ii) The independent public accountant’s report on the audited financial
statements;
(iii) The management report; and
(iv) The independent public accountant’s attestation report on management’s assessment concerning the corporate credit union’s internal control
structure and procedures for financial
reporting.
(2) Public availability. The annual report in paragraph (c)(1) of this section
will be made available by NCUA for
public inspection.
(3) Independent public accountant’s letters and reports. Each corporate credit
union must file with NCUA a copy of
any management letter or other report
issued by its independent public accountant with respect to such corporate credit union and the services
provided by such accountant pursuant
to this part (except for the independent
public accountant’s reports that are included in the Annual Report) within 15
days after receipt by the corporate
credit union. Such reports include, but
are not limited to:
(i) Any written communication regarding matters that are required to be
communicated to the supervisory committee (for example, critical accounting policies, alternative accounting
treatments discussed with management, and any schedule of unadjusted
differences); and
(ii) Any written communication of
significant deficiencies and material
weaknesses in internal control required
by the AICPA’s auditing standards.
(4) Notice of engagement or change of
accountants. Each corporate credit
union that engages an independent
public accountant, or that loses an
independent public accountant through
dismissal or resignation, must notify
NCUA within 15 days after the engagement, dismissal, or resignation. The
corporate credit union must include
with the notice a reasonably detailed
statement of the reasons for any dismissal or resignation. The corporate
credit union must also provide a copy
of the notice to the independent public
accountant at the same time the notice
is filed with NCUA.
(5) Notification of late filing. A corporate credit union that is unable to
timely file any part of its Annual Report or any other report or notice required by this paragraph (c) must submit a written notice of late filing to
NCUA. The notice must disclose the
corporate credit union’s inability to
timely file all or specified portions of
its Annual Report or other report or
notice and the reasons therefore in reasonable detail. The late filing notice
must also state the date by which the
report or notice will be filed. The written notice must be filed with NCUA before the deadline for filing the Annual
Report or any other report or notice, as
appropriate. NCUA may take appropriate enforcement action for failure to
timely file any report, or notice of late
filing, required by this section.
(6) Report to Members. A corporate
credit union must submit a preliminary Annual Report to the membership
at the next calendar year’s annual
meeting.
(d) Supervisory committee—(1) Composition. Each corporate credit union must
establish a supervisory committee, all
of whose members must be independent. A committee member is independent if:
(i) Neither the committee member,
nor any immediate family member of
the committee member, is supervised
by, or has any material business or
professional relationship with, the
chief executive officer (CEO) of the corporate credit union, or anyone directly
or indirectly supervised by the CEO,
and
(ii) Neither the committee member,
nor any immediate family member of
the committee member, has had any of
the relationships described in paragraph (d)(1)(i) for at least the past
three years.
(2) Duties. In addition to any duties
specified under the corporate credit
union’s bylaws and these regulations,
the duties of the credit union’s supervisory committee include the appointment, compensation, and oversight of
the independent public accountant who
performs services required under this
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PC31
§ 704.16
12 CFR Ch. VII (1–1–19 Edition)
section and reviewing with management and the independent public accountant the basis for all the reports
prepared and issued under this section.
The supervisory committee must submit the audited comparative annual financial statements and the independent public accountant’s report on
those statements to the corporate credit union’s board of directors.
(3) Independent public accountant engagement letters. (i) In performing its
duties with respect to the appointment
of the corporate credit union’s independent public accountant, the supervisory committee must ensure that engagement letters and/or any related
agreements with the independent public accountant for services to be performed under this section:
(A) Obligate the independent public
accountant to comply with the requirements of paragraph (b) of this section
(including, but not limited to, the notice of termination of services, communications with the supervisory committee, and notifications of peer reviews and inspection reports); and
(B) Do not contain any limitation of
liability provisions that:
(1) Indemnify the independent public
accountant against claims made by
third parties;
(2) Hold harmless or release the independent public accountant from liability for claims or potential claims that
might be asserted by the client corporate credit union, other than claims
for punitive damages; or
(3) Limit the remedies available to
the client corporate credit union.
(ii) Engagement letters may include
alternative dispute resolution agreements and jury trial waiver provisions
provided that the letters do not incorporate any limitation of liability provisions
set
forth
in
paragraph
(d)(3)(i)(B) of this section.
(4) Outside counsel. The supervisory
committee of any corporate credit
union must, when deemed necessary by
the committee, have access to its own
outside counsel.
(e) Internal audit. A corporate credit
union with average daily assets in excess of $400 million for the preceding
calendar year, or as ordered by NCUA,
must employ or contract, on a full- or
part-time basis, the services of an in-
ternal auditor. The internal auditor’s
responsibilities will, at a minimum,
comply with the Standards and Professional Practices of Internal Auditing,
as established by the Institute of Internal Auditors. The internal auditor will
report directly to the chair of the corporate credit union’s supervisory committee, who may delegate supervision
of the internal auditor’s daily activities to the chief executive officer of the
corporate credit union. The internal
auditor’s reports, findings, and recommendations will be in writing and
presented to the supervisory committee no less than quarterly, and will
be provided upon request to the IPA
and NCUA.
[76 FR 23868, Apr. 29, 2011, as amended at 80
FR 25939, May 6, 2015]
§ 704.16
Contracts/written agreements.
Services, facilities, personnel, or
equipment shared with any party shall
be supported by a written contract,
with the duties and responsibilities of
each party specified and the allocation
of service fee/expenses fully supported
and documented.
§ 704.17 State-chartered
credit unions.
(a) This part does not expand the
powers and authorities of any statechartered corporate credit union, beyond those powers and authorities provided under the laws of the state in
which it was chartered.
(b) A state-chartered corporate credit
union that is not insured by the
NCUSIF, but that receives funds from
federally insured credit unions, is considered
an
‘‘institution-affiliated
party’’ within the meaning of Section
206(r) of the Federal Credit Union Act,
12 U.S.C. 1786(r).
(c) NCUA will notify, consult with,
and provide explanation to the appropriate state supervisory authority before taking administrative action
against a state-chartered corporate
credit union.
§ 704.18
Fidelity bond coverage.
(a) Scope. This section provides the fidelity bond requirements for employees and officials in corporate credit
unions.
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National Credit Union Administration
§ 704.19
(b) Review of coverage. The board of
directors of each corporate credit
union shall, at least annually, carefully review the bond coverage in force
to determine its adequacy in relation
to risk exposure and to the minimum
requirements in this section.
(c) Minimum coverage; approved forms.
Every corporate credit union will
maintain bond coverage with a company holding a certificate of authority
from the Secretary of the Treasury. All
bond forms, and any riders and endorsements which limit the coverage
provided by approved bond forms, must
receive the prior written approval of
NCUA. Fidelity bonds must provide
coverage for the fraud and dishonesty
of all employees, directors, officers,
and supervisory and credit committee
members. Notwithstanding the foregoing, all bonds must include a provision, in a form approved by NCUA, requiring written notification by surety
to NCUA:
(1) When the bond of a credit union is
terminated in its entirety;
(2) When bond coverage is terminated, by issuance of a written notice,
on an employee, director, officer, supervisory or credit committee member;
or
(3) When a deductible is increased
above permissible limits. Said notification shall be sent to NCUA and shall
include a brief statement of cause for
termination or increase.
(d) Minimum coverage amounts. (1) The
minimum amount of bond coverage
will be computed based on the corporate credit union’s daily average net
assets for the preceding calendar year.
The following table lists the minimum
requirements:
Minimum
bond
(million)
Daily average net assets
Less than $50 million ........................................
$50–$99 million .................................................
$100–$499 million .............................................
$500–$999 million .............................................
$1.0–$1.999 billion ............................................
$2.0–$4.999 billion ............................................
$5.0–$9.999 billion ............................................
$10.0–$24.999 billion ........................................
$25.0 billion plus ................................................
$1.0
2.0
4.0
6.0
8.0
10.0
15.0
20.0
25.0
(2) It is the duty of the board of directors of each corporate credit union
to provide adequate protection to meet
its unique circumstances by obtaining,
when necessary, bond coverage in excess of the minimums in the table in
paragraph (d)(1) of this section.
(e) Deductibles. (1) The maximum
amount of deductibles allowed are
based on the corporate credit union’s
leverage ratio. The following table sets
out the maximum deductibles, except
that in each category the maximum deductible shall be $5 million:
Leverage ratio
Less than 1.0 percent ......
1.0–1.74 percent ..............
1.75–2.24 percent ............
Greater than 2.25 percent
Maximum deductible
7.5 percent of Tier 1 capital.
10.0 percent of Tier 1 capital.
12.0 percent of Tier 1 capital.
15.0 percent of Tier 1 capital.
(2) A deductible may be applied separately to one or more insuring clauses
in a blanket bond. Deductibles in excess of those showing in this section
must have the written approval of
NCUA at least 30 calendar days prior to
the effective date of the deductibles.
(f) Additional coverage. NCUA may require additional coverage for any corporate credit union when, in the opinion of NCUA, current coverage is insufficient. The board of directors of the
corporate credit union must obtain additional coverage within 30 calendar
days after the date of written notice
from NCUA.
[62 FR 12938, Mar. 19, 1997, as amended at 67
FR 65657, Oct. 25, 2002; 76 FR 79533, Dec. 22,
2011; 80 FR 25939, May 6, 2015]
§ 704.19 Disclosure of executive compensation.
(a) Annual disclosure. A corporate
credit union must annually prepare
and maintain a disclosure of the dollar
amount of compensation paid to its
most highly compensated employees,
including compensation from any corporate CUSO in which the corporate
has invested or made a loan, 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,
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§ 704.21
12 CFR Ch. VII (1–1–19 Edition)
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 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.
[75 FR 64844, Oct. 20, 2010, as amended at 76
FR 23871, Apr. 29, 2011; 76 FR 79534, Dec. 22,
2011]
§ 704.21
Enterprise risk management.
(a) A corporate credit union must develop and follow an enterprise risk
management policy.
(b) The board of directors of a corporate credit union must establish an
enterprise risk management committee (ERMC) responsible for reviewing the enterprise-wide risk management practices of the corporate credit
union. The ERMC must report at least
quarterly to the board of directors.
(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.
(d) A risk management expert qualifies as independent if:
(1) The expert reports to the ERMC
and to the corporate credit union’s
board of directors;
(2) Neither the expert, nor any immediate family member of the expert, is
supervised by, or has any material
business or professional relationship
with, the chief executive officer (CEO)
of the corporate credit union, or anyone directly or indirectly supervised by
the CEO; and
(3) Neither the expert, nor any immediate family member of the expert, has
had any of the relationships described
in paragraph (d)(2) of this section for at
least the past three years.
(e) The risk management expert is
not required to be a director of the corporate credit union.
[76 FR 23871, Apr. 29, 2011, as amended at 80
FR 25939, May 6, 2015]
§ 704.22 Membership fees.
(a) A corporate credit union may
charge its members a membership fee.
The fee may be one-time or periodic.
(b) The corporate credit union must
calculate the fee uniformly for all
members as a percentage of each member’s assets, except that the corporate
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Pt. 704, App. A
credit union may reduce the amount of
the fee for members that have contributed capital to the corporate. Any reduction must be proportional to the
amount of the member’s nondepleted
contributed capital.
(c) The corporate credit union must
give its members at least six months
advance notice of any initial or new
fee, including terms and conditions, before invoicing the fee. For a recurring
fee, the corporate credit union must
also give six months notice of any material change to the terms and conditions of the fee.
(d) The corporate credit union may
terminate the membership of any credit union that fails to pay the fee in full
within 60 days of the invoice date.
[76 FR 23871, Apr. 29, 2011]
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 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.
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12 CFR Ch. VII (1–1–19 Edition)
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 B
Terms and Conditions of Nonperpetual
Capital
NOTE: This form is for use on and after October 20, 2011, in the circumstances where
the corporate 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 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.
I further agree to maintain in the credit
union’s files the annual notice of terms and
conditions of the nonperpetual capital account.
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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 C
holders 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.
Terms and Conditions of Perpetual
Contributed Capital
Model Form D
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.
(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 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 share-
Terms and Conditions of Perpetual
Contributed Capital
NOTE: This form is for use on and after October 20, 2011, in the circumstances where
the corporate 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 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.
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12 CFR Ch. VII (1–1–19 Edition)
(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.
[75 FR 64848, Oct. 20, 2010, as amended at 75
FR 71528, Nov. 24, 2010; 76 FR 79534, Dec. 22,
2011; 80 FR 25939, May 6, 2015]
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 re-
ceives 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 self-assessment 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 leverage ratio of at least six percent, may:
(1) Purchase an investment after conducting and documenting an analysis that
reasonably concludes the investment is at
least investment grade;
(2) Engage in short sales of permissible investments to reduce interest rate risk;
(3) Purchase principal only (PO) stripped
mortgage-backed securities to reduce interest rate risk; and
(4) Enter into a dollar roll transaction.
(b) In performing the rate stress tests set
forth in § 704.8(d), the NEV of a corporate
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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 leverage ratio
and a two and a half percent retained earnings ratio, and is specifically approved by
the NCUA; or
(3) 35 percent if the corporate credit union
has an eight percent minimum leverage ratio
and a three percent retained earnings ratio
and is specifically approved by the NCUA.
(c) The maximum aggregate amount in unsecured loans and lines of credit to any one
member credit union, excluding pass-through
and guaranteed loans from the CLF and the
NCUSIF, must not exceed 100 percent of the
corporate credit union’s total capital. The
board of directors must establish the limit,
as a percent of the corporate credit union’s
total 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
total capital or 25 percent of assets.
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 made pursuant to
an explicit policy established by the corporate credit union’s board of directors. Before purchasing an investment, the corporate
credit union must conduct and document an
analysis that reasonably concludes the foreign issue or issuer has no more than a minimal amount of credit risk;
(2) For each approved foreign bank line,
the corporate credit union must identify the
specific banking centers and branches to
which it will lend funds;
(3) Obligations of any single foreign obligor
may not exceed 25 percent of total capital or
$5 million, whichever is greater; and
(4) 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 Quality:
All derivative transactions are subject to
the following requirements:
(1) If the intended counterparty is domestic, the counterparty must meet minimum
credit quality standards as established by
the corporate’s board of directors;
(2) If the intended counterparty is foreign,
the corporate must have Part II expanded
authority and the counterparty must meet
minimum credit quality standards as established by the corporate’s board of directors;
(3) The corporate must identify the criteria
relied
upon
to
determine
that
the
counterparty meets the credit quality requirements of this part at the time the
transaction is entered into and monitor
those criteria for as long as the contract remains open; and
(4) The corporate must comply with § 704.10
of this part if the credit quality of the
counterparty deteriorates below the minimum credit quality standards established
by the corporate’s board of directors.
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.
[75 FR 64851, Oct. 20, 2010, as amended at 77
FR 74111, Dec. 13, 2012; 80 FR 25939, May 6,
2015; 82 FR 55500, Nov. 22, 2017]
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
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12 CFR Ch. VII (1–1–19 Edition)
PART I: INTRODUCTION
(a) Scope
(1) This Appendix explains how a corporate
credit union must compute its risk-weighted
assets for purposes of determining its capital
ratios.
(2) Risk-weighted assets equal risk-weighted on-balance sheet assets (computed under
Section II(a) of this Appendix), plus riskweighted 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 Government-sponsored agency and that are payable immediately upon
presentation; broker’s security drafts and
commodity or bill-of-lading 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 offbalance 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 third-party asset. If a
corporate credit union has no claim on the
third-party asset, then the corporate credit
union’s assumption of any 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 credit-enhancing representations and warranties with
respect to the loans serviced. Servicer cash
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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.
Exchange rate contracts means cross-currency 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 off-balance
sheet item or the amortized cost of an onbalance 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:
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(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.
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
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(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.
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
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.
(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 off-balance sheet credit equivalent amounts. The
total of risk-weighted off-balance sheet credit equivalent amounts equals the riskweighted off-balance sheet activities as calculated under Section II(b) of this Appendix
plus the risk-weighted recourse obligations,
risk-weighted 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
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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 asset-or
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 allocate credit risk, generally, between the participants and credit enhancement provided
to the program.
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 on-balance 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 Cor-
poration 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 Government-sponsored agencies;
(viii) Claims on, and claims guaranteed by,
a qualifying securities firm, subject to the
following conditions:
(A) A qualifying securities firm must meet
the minimum credit quality standards as established by the corporate credit union’s
board of directors or have at least one issue
of long-term unsecured debt that is reasonably determined to present no more than a
minimal amount of credit risk, whichever requirement is more stringent. Alternatively,
a qualifying securities firm may rely on the
creditworthiness of its parent consolidated
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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 requirements of paragraph (a) of this section of Appendix C 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 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 public-sector 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
1 These 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.
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12 CFR Ch. VII (1–1–19 Edition)
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;
(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 riskweight, 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 riskweighting 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 risk-weight 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 risk-weighting 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
off-balance 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 credit-equivalent 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.
2 The 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
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Pt. 704, App. C
(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 riskbased 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
(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.
(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
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.
(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) Zero percent credit conversion factor
(Group E). (i) Unused portions of commitments with an original maturity of one year
or less;
(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.
(5) 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-tomarket value of the contract. If the mark-tomarket value is positive, then the current
credit exposure equals that mark-to-market
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.
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12 CFR Ch. VII (1–1–19 Edition)
(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 fac-
tor.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
Interest rate
contracts (percent)
Remaining maturity
One year or less ..................................................................................
Over one year but less than five years ...............................................
Over five years ....................................................................................
Foreign
exchange rate
contracts
(percent)
0.0
0.50
0.50
1.0
5.0
5.0
10.0
12.0
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-to-market 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.
3 For 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.
4 No 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.
5 By netting individual off-balance sheet
derivative contracts for the purpose of calcu-
lating 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.
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The term ‘‘walkaway clause’’ means 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
risk-weight 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 riskweight 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) 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 riskweight categories.
(2) Residual interests. Except as otherwise
permitted under this Section II(c), a corporate credit union must maintain riskbased capital for residual interests as follows:
(i) Other residual interests. A corporate
credit union must maintain risk-based cap-
ital 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.
(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:
(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) Internal ratings-based approach—
(i) Calculation. Corporate credit unions
with advanced risk management and reporting systems may seek NCUA approval to use
credit risk models to calculate risk-weighted
asset amounts for positions described in
paragraphs II (c)(1) and (2) of this section of
the Appendix C. In determining whether to
grant approval, NCUA will consider the financial condition and risk management sophistication of the corporate credit union
and the adequacy of the corporate’s risk
models and supporting management information systems.
(ii) Consistent use of internal ratings-based
approach. A corporate credit union that has
been granted NCUA approval to use an internal ratings-based approach and that has determined to use such an approach must do so
in a consistent manner for all securities so
rated.
(4) 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-
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Pt. 705
12 CFR Ch. VII (1–1–19 Edition)
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.
(5) 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).
[75 FR 64852, Oct. 20, 2010, as amended at 77
FR 74111, Dec. 13, 2012; 80 FR 25939, May 6,
2015]
PART 705—COMMUNITY DEVELOPMENT REVOLVING LOAN FUND
ACCESS FOR CREDIT UNIONS
Sec.
705.1
705.2
705.3
705.4
Authority, purpose, and scope.
Definitions.
Eligibility requirements.
Permissible uses of loan funds.
705.5 Terms and conditions for loans.
705.6 Terms and conditions for technical assistance grants.
705.7 Application and award processes.
705.8 Urgency.
705.9 Reporting and monitoring.
705.10 Appeals.
AUTHORITY: 12 U.S.C. 1756, 1757(5)(D), and
(7)(I), 1766, 1782, 1784, 1785 and 1786.
SOURCE: 76 FR 67587, Nov. 2, 2011, unless
otherwise noted.
§ 705.1
Authority, purpose, and scope.
(a) This part 705 is issued by the National Credit Union Administration
(NCUA) under section 130 of the Federal Credit Union Act, 12 U.S.C. 1772c–
1, which implements the Community
Development Credit Union Revolving
Loan Fund Transfer Act (Pub. L. 99–
609, 100 Stat. 3475 (Nov. 6, 1986)).
(b) This part describes how NCUA
makes money available to credit
unions from its Community Development Revolving Loan Fund (Fund).
NCUA administers the Fund and makes
both loans and technical assistance
grants to credit unions in accordance
with the eligibility criteria and other
qualifications, subject to the terms and
conditions set out in this part. All
loans and technical assistance grants
made under this part are subject to
funds availability and NCUA’s discretion.
(c) NCUA’s policy is to revolve the
loan funds to credit unions as often as
practical in order to achieve maximum
economic impact on as many credit
unions as possible.
(d) The financial awards provided to
credit unions through the Fund will
better enable them to support the communities in which they operate; provide basic financial services to low-income residents of these communities,
and result in more opportunities for
the residents of those communities to
improve their financial circumstances.
(e) The Fund is intended to support
the efforts of credit unions through
loans and technical assistance grants
needed for:
(1) Providing basic financial and related services to residents in their
communities;
(2) Enhancing their capacity to better serve their members and the communities in which they operate; and
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| File Type | application/pdf |
| File Title | CFR-2019-title12-vol7-part704.pdf |
| Author | DWOLFGANG |
| File Modified | 2019-07-01 |
| File Created | 2019-07-01 |