12 Cfr 701.34

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National Credit Union Administration

§ 701.34

(4) Notwithstanding paragraphs (c)(1)
through (3) of this section, a federal
credit union may not indemnify a dual
employee for duties performed for any
employer other than the federal credit
union. For purposes of this subsection,
a dual employee is a federal credit
union employee who also performs
work functions for another entity as
part of a sharing arrangement between
the federal credit union and the other
entity.
(5) Notwithstanding paragraphs (c)(1)
through (3) of this section, a Federal
credit union may not indemnify an official or employee for personal liability
related to any decision made by that
individual on a matter significantly affecting the fundamental rights and interests of the Federal credit union’s
members where the decision giving rise
to the claim for indemnification is determined by a court to have constituted gross negligence, recklessness,
or willful misconduct. Matters affecting the fundamental rights and interests of Federal credit union members
include charter and share insurance
conversions and terminations.
(6) A Federal credit union may, before final disposition of a proceeding
referred to in paragraph (c)(5) of this
section, advance funds to pay for or reimburse the expenses, including legal
fees, reasonably incurred in connection
with the proceeding by an official or
employee who is a party to the proceeding because that individual is or
was an official or employee of the credit union if:
(i) The disinterested members of the
credit union’s board of directors (or in
the event there are fewer than two disinterested directors, the supervisory
committee), in good faith, determine in
writing after due investigation and
consideration that the official or employee acted in good faith and in a
manner he or she reasonably believed
to be in the best interests of the credit
union’s members;
(ii) The disinterested members of the
credit union’s board of directors (or the
supervisory committee, as the case
may be), in good faith, determine in
writing after due investigation and
consideration that the payment or reimbursement of the expenses will not

materially adversely affect the credit
union’s safety and soundness; and
(iii) The official or employee provides:
(A) A written affirmation of the individual’s reasonable good faith belief
that the relevant standard of conduct
described in § 701.4(b) of this chapter
has been met by the individual; and
(B) A written undertaking to repay
the credit union for any funds advanced or reimbursed, to the extent
not covered by payments from insurance, if the official or employee is not
entitled to indemnification under paragraph (c)(5) of this section.
(7) To the extent a Federal credit
union has elected to follow State law
or the Model Business Corporation Act
in accordance with paragraph (c)(2) of
this section, the credit union must substitute the phrase ‘‘in the best interests of the members’’ for any language
indicating that fiduciary duties are
owed to persons or entities other than
the members of the credit union, including, but not limited to, language
such as ‘‘in the best interests of the
credit union’’ or ‘‘in the best interests
of the corporation.’’
[53 FR 29642, Aug. 8, 1988, as amended at 57
FR 54503, Nov. 19, 1992; 66 FR 65629, Dec. 20,
2001; 72 FR 30246, May 31, 2007; 75 FR 81386,
Dec. 28, 2010]

§ 701.34 Designation of low income status; Acceptance of secondary capital accounts by low-income designated credit unions.
(a) Designation of low-income status.
(1) Based on data obtained through examinations, NCUA will notify a federal
credit union that it qualifies for designation as a low-income credit union
if a majority of its membership qualifies as low-income members. A federal
credit union that wishes to receive the
designation must notify NCUA in writing within 90 days of receipt of any
NCUA notifications.
(2) Low-income members are those
members whose family income is 80%
or less than the median family income
for the metropolitan area where they
live or national metropolitan area,
whichever is greater, or those members
who earn 80% or less than the total median earnings for individuals for the
metropolitan area where they live or

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§ 701.34

12 CFR Ch. VII (1–1–18 Edition)

national metropolitan area, whichever
is greater. NCUA will use the statewide
or national, non-metropolitan area median family income instead of the metropolitan area or national metropolitan area median family income for
members living outside a metropolitan
area. Member earnings will be estimated based on data reported by the
U.S. Census Bureau for the geographic
area where the member lives. The term
‘‘low-income members’’ also includes
those members enrolled as students in
a college, university, high school, or
vocational school.
(3) Federal credit unions that do not
receive notification that they qualify
for a low-income credit union designation but believe they qualify may submit information to NCUA to demonstrate they qualify for a low-income
credit union designation. For example,
federal credit unions may provide actual member income from loan applications or surveys to demonstrate a majority of their membership is low-income members. Actual member income
data must be compared to a like category of statistical data, for example,
actual individual member income may
only be compared to total median earnings for individuals for the metropolitan area where they live or national
metropolitan area, whichever is greater. A Federal credit union may rely on
a sample of membership income data
drawn from loan files or a member survey provided the Federal credit union
can demonstrate the sample is a statistically valid, random sample by submitting with its data a narrative describing its sampling technique and
evidence supporting the validity of the
analysis, including the actual data set
used in the analysis. The random sample must be representative of the membership, must be sufficient in both
number and scope on which to base
conclusions, and must have a minimum
confidence level of 95% and a confidence interval of 5%. A Federal credit
union must draw the sample either entirely from loan files or entirely from
the survey, and must not combine a
loan file review with a survey. NCUA
will provide a response to the Federal
credit union within 60 days of its submission.

(4) If NCUA determines a low-income
designated Federal credit union no
longer meets the criteria for the designation, NCUA will notify the Federal
credit union in writing, and the Federal credit union must, within five
years, meet the criteria for the designation or come into compliance with
the regulatory requirements applicable
to Federal credit unions that do not
have a low-income designation. The
designation will remain in effect during the five-year period. If a Federal
credit union does not requalify and has
secondary capital or nonmember deposit accounts with a maturity beyond
the five-year period, NCUA may extend
the time for a Federal credit union to
come into compliance with regulatory
requirements to allow the Federal
credit union to satisfy the terms of any
account agreements. A Federal credit
union may request NCUA to reconsider
a determination that it no longer
meets the criteria for the designation
and/or file an appeal with the NCUA
Board in accordance with the procedures set forth in subpart B to part 746
of this chapter.
(5) Any credit union with a low-income credit union designation on January 1, 2009 will have five years from
that date to meet the criteria for lowincome designation under paragraph
(a)(1) of this section, unless NCUA determines a longer time is required to
allow the low-income credit union to
satisfy the terms of a secondary capital
or nonmember deposit account agreement.
(6) Definitions. The following definitions apply to this section:
Median family income and total median
earnings for individuals are income statistics reported by the U.S. Census Bureau. The applicable income data can
be
obtained
via
the
American
FactFinder on the Census Bureau’s
webpage at http://factfinder.census.gov/
home/saff/main.html?llang=en.
Metropolitan area means an area designated by the Office of Management
and Budget pursuant to 31 U.S.C.
1104(d), 44 U.S.C. 3504(c), and Executive
Order 10253, 16 FR 5605 (June 13, 1951)
(as amended).
(b) Acceptance of secondary capital accounts by low-income designated credit
unions. A federal credit union having a

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National Credit Union Administration

§ 701.34

designation of low-income status pursuant to paragraph (a) of this section
may accept secondary capital accounts
from nonnatural person members and
nonnatural person nonmembers subject
to the following conditions:
(1) Secondary capital plan. Before accepting secondary capital, a low-income credit union (‘‘LICU’’) shall
adopt, and forward to NCUA for approval, a written ‘‘Secondary Capital
Plan’’ that, at a minimum:
(i) States the maximum aggregate
amount of uninsured secondary capital
the LICU plans to accept;
(ii) Identifies the purpose for which
the aggregate secondary capital will be
used, and how it will be repaid;
(iii) Explains how the LICU will provide for liquidity to repay secondary
capital upon maturity of the accounts;
(iv) Demonstrates that the planned
uses of secondary capital conform to
the LICU’s strategic plan, business
plan and budget; and
(v) Includes supporting pro forma financial statements, including any offbalance sheet items, covering a minimum of the next two years.
(2) Decision on plan. If a LICU is not
notified within 45 days of receipt of a
Secondary Capital Plan that the plan
is approved or disapproved, the LICU
may proceed to accept secondary capital accounts pursuant to the plan.
(3) Nonshare account. The secondary
capital account must be established as
an uninsured secondary capital account or other form of non-share account.
(4) Minimum maturity. The maturity
of the secondary capital account must
be a minimum of five years.
(5) Uninsured account. The secondary
capital account will not be insured by
the National Credit Union Share Insurance Fund or any governmental or private entity.
(6) Subordination of claim. The secondary capital account investor’s
claim against the LICU must be subordinate to all other claims including
those of shareholders, creditors and the
National Credit Union Share Insurance
Fund.
(7) Availability to cover losses. Funds
deposited into a secondary capital account, including interest accrued and
paid into the secondary capital ac-

count, must be available to cover operating losses realized by the LICU that
exceed its net available reserves (exclusive of secondary capital and allowance
accounts for loan and lease losses), and
to the extent funds are so used, the
LICU must not restore or replenish the
account under any circumstances. The
LICU may, in lieu of paying interest
into the secondary capital account, pay
accrued interest directly to the investor or into a separate account from
which the secondary capital investor
may make withdrawals. Losses must be
distributed pro-rata among all secondary capital accounts held by the
LICU at the time the losses are realized. In instances where a LICU accepted secondary capital from the United
States Government or any of its subdivisions under the Community Development Capital Initiative of 2010
(‘‘CDCI secondary capital’’) and matching funds were required under the Initiative and are on deposit in the form
of secondary capital at the time a loss
is realized, a LICU must apply either of
the following pro-rata loss distribution
procedures to its secondary capital accounts with respect to the loss:
(i) If not inconsistent with any agreements governing other secondary capital on deposit at the time a loss is realized, the CDCI secondary capital may
be excluded from the calculation of the
pro-rata loss distribution until all of
its matching secondary capital has
been depleted, thereby causing the
CDCI secondary capital to be held as
senior to all other secondary capital
until its matching secondary capital is
exhausted. The CDCI secondary capital
should be included in the calculation of
the pro-rata loss distribution and is
available to cover the loss only after
all of its matching secondary capital
has been depleted.
(ii) Regardless of any agreements applicable to other secondary capital, the
CDCI secondary capital and its matching secondary capital may be considered a single account for purposes of
determining a pro-rata share of the
loss and the amount determined as the
pro-rata share for the combined account must first be applied to the
matching secondary capital account,
thereby causing the CDCI secondary
capital to be held as senior to its

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§ 701.34

12 CFR Ch. VII (1–1–18 Edition)

matching secondary capital. The CDCI
secondary capital is available to cover
the loss only after all of its matching
secondary capital has been depleted.
(8) Security. The secondary capital account may not be pledged or provided
by the account investor as security on
a loan or other obligation with the
LICU or any other party.
(9) Merger or dissolution. In the event
of merger or other voluntary dissolution of the LICU, other than merger
into another LICU, the secondary capital accounts will be closed and paid
out to the account investor to the extent they are not needed to cover
losses at the time of merger or dissolution.
(10) Contract agreement. A secondary
capital account contract agreement
must be executed by an authorized representative of the account investor and
of the LICU reflecting the terms and
conditions mandated by this section
and any other terms and conditions not
inconsistent with this section.
(11) Disclosure and acknowledgement.
An authorized representative of the
LICU and of the secondary capital account investor each must execute a
‘‘Disclosure and Acknowledgment’’ as
set forth in the appendix to this section at the time of entering into the
account agreement. The LICU must retain an original of the account agreement and the ‘‘Disclosure and Acknowledgment’’ for the term of the
agreement, and a copy must be provided to the account investor.
(12) Prompt corrective action. As provided in §§ 702.204(b)(11), 702.304(b) and
702.305(b) of this chapter, the NCUA
Board may prohibit a LICU classified
‘‘critically undercapitalized’’ or, if
‘‘new,’’ as ‘‘moderately capitalized’’,
‘‘marginally capitalized’’, ‘‘minimally
capitalized’’ or ‘‘uncapitalized’’, as the
case may be, from paying principal,
dividends or interest on its uninsured
secondary capital accounts established
after August 7, 2000, except that unpaid
dividends or interest will continue to
accrue under the terms of the account
to the extent permitted by law.
(c) Accounting treatment; Recognition
of net worth value of accounts—(1) Equity
account. A LICU that issues secondary
capital accounts pursuant to paragraph
(b) of this section must record the

funds on its balance sheet in an equity
account entitled ‘‘uninsured secondary
capital account.’’
(2) Schedule for recognizing net
worth value. The LICU’s reflection of
the net worth value of the accounts in
its financial statement may never exceed the full balance of the secondary
capital on deposit after any early redemptions and losses. For accounts
with remaining maturities of less than
five years, the LICU must reflect the
net worth value of the accounts in its
financial statement in accordance with
the lesser of:
(i) The remaining balance of the accounts after any redemptions and
losses; or
(ii) The amounts calculated based on
the following schedule:
Net worth
value of
original
balance
(percent)

Remaining maturity

Four to less than five years ...............................
Three to less than four years ............................
Two to less than three years .............................
One to less than two years ...............................
Less than one year ............................................

(3) Financial statement. The LICU
must reflect the full amount of the secondary capital on deposit in a footnote
to its financial statement.
(d) Redemption of secondary capital.
With the written approval of NCUA,
secondary capital that is not recognized as net worth under paragraph
(c)(2) of this section (‘‘discounted secondary capital’’ recategorized as subordinated debt) may be redeemed according to the remaining maturity schedule
in paragraph (d)(3) of this section.
(1) Request to redeem secondary capital.
A request for approval to redeem discounted secondary capital may be submitted in writing at any time, must
specify the increment(s) to be redeemed and the schedule for redeeming
all any part of each eligible increment,
and must demonstrate to the satisfaction of NCUA that:
(i) The LICU will have a post-redemption net worth classification of ‘‘adequately capitalized’’ under part 702 of
this chapter;
(ii) The discounted secondary capital
has been on deposit at least two years;

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National Credit Union Administration

§ 701.34

(iii) The discounted secondary capital will not be needed to cover losses
prior to final maturity of the account;
(iv) The LICU’s books and records are
current and reconciled;
(v) The proposed redemption will not
jeopardize other current sources of
funding, if any, to the LICU; and
(vi) The request to redeem is authorized by resolution of the LICU’s board
of directors.
(2) Decision on request. A request to
redeem discounted secondary capital
may be granted in whole or in part. If
a LICU is not notified within 45 days of
receipt of a request for approval to redeem secondary capital that its request
is either granted or denied, the LICU
may proceed to redeem secondary capital accounts as proposed.
(3) Schedule for redeeming secondary
capital.
Redemption
limit as percent of original balance

Remaining maturity

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Four to less than five years ...............................
Three to less than four years ............................
Two to less than three years .............................
One to less than two years ...............................

20
40
60
80

(4) Early redemption exception. Subject
to the written approval of NCUA obtained pursuant to the requirements of
paragraphs (d)(1) and (2) of this section,
a LICU can redeem all or part of secondary capital accepted from the
United States Government or any of its
subdivisions at any time after the secondary capital has been on deposit for
two years. If the secondary capital was
accepted under conditions that required matching secondary capital
from a source other than the Federal
Government, the matching secondary
capital may also be redeemed in the
manner set forth in the preceding sentence. For purposes of obtaining
NCUA’s approval, all secondary capital
a LICU accepts from the United States
Government or any of its subdivisions,
as well as its matching secondary capital, if any, is eligible for early redemption regardless of whether any part of
the secondary capital has been discounted pursuant to paragraph (c)(2) of
this section.

APPENDIX TO § 701.34
A LICU that is authorized to accept uninsured secondary capital accounts and each
investor in such an account shall execute
and date the following ‘‘Disclosure and Acknowledgment’’ form, a signed original of
which must be retained by the credit union:
DISCLOSURE AND ACKNOWLEDGMENT
[Name of CU] and [Name of investor] hereby acknowledge and agree that [Name of investor] has committed [amount of funds] to
a secondary capital account with [name of
credit union] under the following terms and
conditions:
1. Term. The funds committed to the secondary capital account are committed for a
period of ll years.
2. Redemption prior to maturity. Subject to
the conditions set forth in 12 CFR 701.34, the
funds committed to the secondary capital
account are redeemable prior to maturity
only at the option of the LICU and only with
the prior approval of NCUA.
3. Uninsured, non-share account. The secondary capital account is not a share account and the funds committed to the secondary capital account are not insured by
the National Credit Union Share Insurance
Fund or any other governmental or private
entity.
4. Prepayment risk. Redemption of U.S.C.
prior to the account’s original maturity date
may expose the account investor to the risk
of being unable to reinvest the repaid funds
at the same rate of interest for the balance
of the period remaining until the original
maturity date. The investor acknowledges
that it understands and assumes responsibility for prepayment risk associated with
the [name of credit union]’s redemption of
the investor’s U.S.C. account prior to the
original maturity date.
5. Availability to cover losses. The funds committed to the secondary capital account and
any interest paid into the account may be
used by [name of credit union] to cover any
and all operating losses that exceed the credit union’s net worth exclusive of allowance
accounts for loan losses, and in the event the
funds are so used, (name of credit union) will
under no circumstances restore or replenish
those funds to [name of institutional investor]. Dividends are not considered operating
losses and are not eligible to be paid out of
secondary capital.
6. Accrued interest. By initialing below,
[name of credit union] and [name of institutional investor] agree that accrued interest
will be:
llPaid into and become part of the secondary capital account;
llPaid directly to the investor;
llPaid into a separate account from which
the investor may make withdrawals; or

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§ 701.35

12 CFR Ch. VII (1–1–18 Edition)

llAny combination of the above provided
the details are specified and agreed to in
writing.
7. Subordination of claims. In the event of
liquidation of [name of credit union], the
funds committed to the secondary capital
account will be subordinate to all other
claims on the assets of the credit union, including claims of member shareholders,
creditors and the National Credit Union
Share Insurance Fund.
8. Prompt Corrective Action. Under certain
net worth classifications (see 12 CFR
702.204(b)(11), 702.304(b) and 702.305(b), as the
case may be), the NCUA Board may prohibit
[name of credit union] from paying principal,
dividends or interest on its uninsured secondary capital accounts established after
August 7, 2000, except that unpaid dividends
or interest will continue to accrue under the
terms of the account to the extent permitted
by law.
ACKNOWLEDGED AND AGREED TO this
ll day of [month and year] by:
llllllllllllllllllllllll
[name of investor’s official]
[title of official]
[name of investor]
[address and phone number of investor]
[investor’s tax identification number]
llllllllllllllllllllllll
[name of credit union official]
[title of official]

dends on such accounts as provided in
section 117 of the Act (12 U.S.C. 1763).
(b) A Federal credit union shall accurately represent the terms and conditions of its share, share draft, and
share certificate accounts in all advertising, disclosures, or agreements,
whether written or oral
(c) A Federal credit union may, consistent with this section, parts 707 and
740 of this subchapter, other federal
law, and its contractual obligations,
determine the types of fees or charges
and other matters affecting the opening, maintaining and closing of a share,
share draft or share certificate account. State laws regulating such activities are not applicable to federal
credit unions.
(d) For purposes of this section,
‘‘state law’’ means the constitution,
statutes, regulations, and judicial decisions of any state, the District of Columbia, the several territories and possessions of the United States, and the
Commonwealth of Puerto Rico.

[61 FR 3790, Feb. 2, 1996, as amended at 61 FR
50695, 50697, Sept. 27, 1996; 64 FR 72270, Dec.
27, 1999; 65 FR 21131, Apr. 20, 2000; 71 FR 4238,
Jan. 26, 2006; 73 FR 71912, Nov. 26, 2008; 75 FR
7342, Feb. 19, 2010; 75 FR 47172, Aug. 5, 2010; 75
FR 57843, Sept. 23, 2010; 76 FR 36979, June 24,
2011; 76 FR 80227, Dec. 23, 2011; 78 FR 4032,
Jan. 18, 2013; 82 FR 50291, Oct. 30, 2017]

§ 701.36 Federal credit union occupancy and disposal of acquired and
abandoned premises.
(a) Scope. Section 107(4) of the Federal Credit Union Act (12 U.S.C. 1757(4))
authorizes a federal credit union to
purchase, hold, and dispose of property
necessary or incidental to its operations. This section interprets and implements that provision by establishing occupancy and disposal requirements for acquired and abandoned
premises, and by prohibiting certain
transactions. This section applies only
to federal credit unions.
(b) Definitions. For purposes of this
section:
Abandoned premises means premises
previously used to transact credit
union business but no longer used for
that purpose. It also means premises
originally acquired to transact future
credit union business but no longer intended for that purpose.
Immediate family member means a
spouse or other family member living
in the same household.
Partially occupy means occupation
and use, on a full-time basis, of at least

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EFFECTIVE DATE NOTE: At 80 FR 66706, Oct.
29, 2015, § 701.34 was amended by: 1. in paragraph
(b)(12),
removing
the
words
‘‘§§ 702.204(b)(11), 702.304(b) and 702.305(b)’’ and
adding in their place the words ‘‘part 702’’; 2.
in paragraph (d)(1)(i), removing the words
‘‘net worth’’ and adding in their place the
word ‘‘capital’’; and 3. in the appendix to
§ 701.34, amending the paragraph beginning
‘‘8. Prompt Corrective Action’’ by removing
the words ‘‘net worth classifications (see 12
CFR 702.204(b)(11), 702.304(b) and 702.305(b), as
the case may be)’’ and adding in their place
the words ‘‘capital classifications (see 12 CFR
part 702)’’, effective Jan. 1, 2019.

§ 701.35 Share, share draft, and share
certificate accounts.
(a) Federal credit unions may offer
share, share draft, and share certificate
accounts in accordance with section
107(6) of the Act (12 U.S.C. 1757(6)) and
the board of directors may declare divi-

[47 FR 17979, Apr. 27, 1982, as amended at 50
FR 4637, Feb. 1, 1985; 59 FR 50445, Sept. 27,
1993]

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