(a) Authority. Subparts A and B of this part and subpart L of part 747 of this chapter are issued by the National Credit Union Administration (NCUA) pursuant to sections 120 and 216 of the Federal Credit Union Act (FCUA), 12 U.S.C. 1776 and 1790d (section 1790d), as revised by section 301 of the Credit Union Membership Access Act, Public Law 105-219, 112 Stat. 913 (1998).
(b) Purpose. The express purpose of prompt corrective action under section 1790d is to resolve the problems of federally insured credit unions at the least possible long-term loss to the National Credit Union Share Insurance Fund. Subparts A and B of this part carry out the purpose of prompt corrective action by establishing a framework of minimum capital requirements, and mandatory and discretionary supervisory actions applicable according to a credit union's capital classification, designed primarily to restore and improve the capital adequacy of federally insured credit unions.
(c) Scope. Subparts A and B of this part implement the provisions of section 1790d as they apply to federally insured credit unions, whether federally- or state-chartered; to such credit unions defined as “new” pursuant to section 1790d(b)(2); and to such credit unions defined as “complex” pursuant to section 1790d(d). Certain of these provisions also apply to officers and directors of federally insured credit unions. Subpart C applies capital planning and stress testing to credit unions with $10 billion or more in total assets. This part does not apply to corporate credit unions. Unless otherwise provided, procedures for issuing, reviewing and enforcing orders and directives issued under this part are set forth in subpart L of part 747 of this chapter.
(d) Other supervisory authority. Neither section 1790d nor this part in any way limits the authority of the NCUA Board or appropriate state official under any other provision of law to take additional supervisory actions to address unsafe or unsound practices or conditions, or violations of applicable law or regulations. Action taken under this part may be taken independently of, in conjunction with, or in addition to any other enforcement action available to the NCUA Board or appropriate state official, including issuance of cease and desist orders, orders of prohibition, suspension and removal, or assessment of civil money penalties, or any other actions authorized by law.
§702.2 Definitions.
Unless otherwise provided in this part, the terms used in this part have the same meanings as set forth in FCUA sections 101 and 216, 12 U.S.C. 1752, 1790d. The following definitions apply to this part:
Allowances for loan and lease losses (ALLL) means valuation allowances that have been established through a charge against earnings to cover estimated credit losses on loans, lease financing receivables or other extensions of credit as determined in accordance with GAAP.
Amortized cost means the purchase price of a security adjusted for amortizations of premium or accretion of discount if the security was purchased at other than par or face value.
Appropriate state official means the state commission, board or other supervisory authority that chartered the affected credit union.
Call Report means the Call Report required to be filed by all credit unions under §741.6(a)(2) of this chapter.
Carrying value means the value of the asset or liability on the statement of financial condition of the credit union, determined in accordance with GAAP.
Central counterparty (CCP) means a counterparty (for example, a clearing house) that facilitates trades between counterparties in one or more financial markets by either guaranteeing trades or novating contracts.
Charitable donation account means an account that satisfies all of the conditions in §721.3(b)(2)(i), (b)(2)(ii), and (b)(2)(v) of this chapter.
Commercial loan means any loan, line of credit, or letter of credit (including any unfunded commitments) for commercial, industrial, and professional purposes, but not for investment or personal expenditure purposes. Commercial loan excludes loans to CUSOs, first- or junior-lien residential real estate loans, and consumer loans.
Commitment means any legally binding arrangement that obligates the credit union to extend credit, purchase or sell assets, enter into a borrowing agreement, or enter into a financial transaction.
Consumer loan means a loan for household, family, or other personal expenditures, including any loans that, at origination, are wholly or substantially secured by vehicles generally manufactured for personal, family, or household use regardless of the purpose of the loan. Consumer loan excludes commercial loans, loans to CUSOs, first- and junior-lien residential real estate loans, and loans for the purchase of one or more vehicles to be part of a fleet of vehicles.
Contractual compensating balance means the funds a commercial loan borrower must maintain on deposit at the lender credit union as security for the loan in accordance with the loan agreement, subject to a proper account hold and on deposit as of the measurement date.
Credit conversion factor (CCF) means the percentage used to assign a credit exposure equivalent amount for selected off-balance sheet accounts.
Credit union means a federally insured, natural person credit union, whether federally- or state-chartered.
Current means, with respect to any loan, that the loan is less than 90 days past due, not placed on non-accrual status, and not restructured.
CUSO means a credit union service organization as defined in part 712 and 741 of this chapter.
Custodian means a financial institution that has legal custody of collateral as part of a qualifying master netting agreement, clearing agreement, or other financial agreement.
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. Depository institution includes 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, and all privately insured state chartered credit unions.
Derivatives Clearing Organization (DCO) means the same as defined by the Commodity Futures Trading Commission in 17 CFR 1.3(d).
Derivative contract means a financial contract whose value is derived from the values of one or more underlying assets, reference rates, or indices of asset values or reference rates. Derivative contracts include interest rate derivative contracts, exchange rate derivative contracts, equity derivative contracts, commodity derivative contracts, and credit derivative contracts. Derivative contracts also include unsettled securities, commodities, and foreign exchange transactions with a contractual settlement or delivery lag that is longer than the lesser of the market standard for the particular instrument or five business days.
Equity investment means investments in equity securities and any other ownership interests, including, for example, investments in partnerships and limited liability companies.
Equity investment in CUSOs means the unimpaired value of the credit union's equity investments in a CUSO as recorded on the statement of financial condition in accordance with GAAP.
Exchange means a central financial clearing market where end users can enter into derivative transactions.
Excluded goodwill means the outstanding balance, maintained in accordance with GAAP, of any goodwill originating from a supervisory merger or combination that was completed on or before December 28, 2015. This term and definition expire on January 1, 2029.
Excluded other intangible assets means the outstanding balance, maintained in accordance with GAAP, of any other intangible assets such as core deposit intangible, member relationship intangible, or trade name intangible originating from a supervisory merger or combination that was completed on or before December 28, 2015. This term and definition expire on January 1, 2029.
Exposure amount means:
(1) The amortized cost for investments classified as held-to-maturity and available-for-sale, and the fair value for trading securities.
(2) The outstanding balance for Federal Reserve Bank Stock, Central Liquidity Facility Stock, Federal Home Loan Bank Stock, nonperpetual capital and perpetual contributed capital at corporate credit unions, and equity investments in CUSOs.
(3) The carrying value for non-CUSO equity investments, and investment funds.
(4) The carrying value for the credit union's holdings of general account permanent insurance, and separate account insurance.
(5) The amount calculated under §702.105 of this part for derivative contracts.
Fair value has the same meaning as provided in GAAP.
Financial collateral means collateral approved by both the credit union and the counterparty as part of the collateral agreement in recognition of credit risk mitigation for derivative contracts.
First-lien residential real estate loan means a loan or line of credit primarily secured by a first-lien on a one-to-four family residential property where:
(1) The credit union made a reasonable and good faith determination at or before consummation of the loan that the member will have a reasonable ability to repay the loan according to its terms; and
(2) In transactions where the credit union holds the first-lien and junior lien(s), and no other party holds an intervening lien, for purposes of this part the combined balance will be treated as a single first-lien residential real estate loan.
GAAP means generally accepted accounting principles in the United States as set forth in the Financial Accounting Standards Board's (FASB) Accounting Standards Codification (ASC).
General account permanent insurance means an account into which all premiums, except those designated for separate accounts are deposited, including premiums for life insurance and fixed annuities and the fixed portfolio of variable annuities, whereby the general assets of the insurance company support the policy.
General obligation means a bond or similar obligation that is backed by the full faith and credit of a public sector entity.
Goodwill means an intangible asset, maintained in accordance with GAAP, representing the future economic benefits arising from other assets acquired in a business combination (e.g., merger) that are not individually identified and separately recognized. Goodwill does not include excluded goodwill.
Government guarantee means a guarantee provided by the U.S. Government, FDIC, NCUA or other U.S. Government agency, or a public sector entity.
Government-sponsored enterprise (GSE) means an entity established or chartered by the U.S. Government to serve public purposes specified by the U.S. Congress, but whose debt obligations are not explicitly guaranteed by the full faith and credit of the U.S. Government.
Guarantee means a financial guarantee, letter of credit, insurance, or similar financial instrument that allows one party to transfer the credit risk of one or more specific exposures to another party.
Identified losses means those items that have been determined by an evaluation made by NCUA, or in the case of a state chartered credit union the appropriate state official, as measured on the date of examination in accordance with GAAP, to be chargeable against income, equity or valuation allowances such as the allowances for loan and lease losses. Examples of identified losses would be assets classified as losses, off-balance sheet items classified as losses, any provision expenses that are necessary to replenish valuation allowances to an adequate level, liabilities not shown on the books, estimated losses in contingent liabilities, and differences in accounts that represent shortages.
Industrial development bond means a security issued under the auspices of a state or other political subdivision for the benefit of a private party or enterprise where that party or enterprise, rather than the government entity, is obligated to pay the principal and interest on the obligation.
Intangible assets mean assets, maintained in accordance with GAAP, other than financial assets, that lack physical substance.
Investment fund means an investment with a pool of underlying investment assets. Investment fund includes an investment company that is registered under section 8 of the Investment Company Act of 1940, and collective investment funds or common trust investments that are unregistered investment products that pool fiduciary client assets to invest in a diversified pool of investments.
Junior-lien residential real estate loan means a loan or line of credit secured by a subordinate lien on a one-to-four family residential property.
Loan secured by real estate means a loan that, at origination, is secured wholly or substantially by a lien(s) on real property for which the lien(s) is central to the extension of the credit. A lien is “central” to the extension of credit if the borrowers would not have been extended credit in the same amount or on terms as favorable without the liens on real property. For a loan to be “secured wholly or substantially by a lien(s) on real property,” the estimated value of the real estate collateral at origination (after deducting any more senior liens held by others) must be greater than 50 percent of the principal amount of the loan at origination.
Loan to a CUSO means the outstanding balance of any loan from a credit union to a CUSO as recorded on the statement of financial condition in accordance with GAAP.
Loans transferred with limited recourse means the total principal balance outstanding of loans transferred, including participations, for which the transfer qualified for true sale accounting treatment under GAAP, and for which the transferor credit union retained some limited recourse (i.e., insufficient recourse to preclude true sale accounting treatment). Loans transferred with limited recourse excludes transfers that qualify for true sale accounting treatment but contain only routine representation and warranty clauses that are standard for sales on the secondary market, provided the credit union is in compliance with all other related requirements, such as capital requirements.
Mortgage-backed security (MBS) means a security backed by first- or junior-lien mortgages secured by real estate upon which is located a dwelling, mixed residential and commercial structure, residential manufactured home, or commercial structure.
Mortgage partnership finance program means a Federal Home Loan Bank program through which loans are originated by a depository institution that are purchased or funded by the Federal Home Loan Banks, where the depository institution receives fees for managing the credit risk of the loans. The credit risk must be shared between the depository institution and the Federal Home Loan Banks.
Mortgage servicing assets mean those assets, maintained in accordance with GAAP, resulting from contracts to service loans secured by real estate (that have been securitized or owned by others) for which the benefits of servicing are expected to more than adequately compensate the servicer for performing the servicing.
NCUSIF means the National Credit Union Share Insurance Fund as defined by 12 U.S.C. 1783.
Net worth means:
(1) The retained earnings balance of the credit union at quarter-end as determined under GAAP, subject to paragraph (3) of this definition.
(2) For a low income-designated credit union, net worth also includes secondary capital accounts that are uninsured and subordinate to all other claims, including claims of creditors, shareholders, and the NCUSIF.
(3) For a credit union that acquires another credit union in a mutual combination, net worth also includes the retained earnings of the acquired credit union, or of an integrated set of activities and assets, less any bargain purchase gain recognized in either case to the extent the difference between the two is greater than zero. The acquired retained earnings must be determined at the point of acquisition under GAAP. A mutual combination, including a supervisory combination, is a transaction in which a 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.
(4) The term “net worth” also includes loans to and accounts in an insured credit union, established pursuant to section 208 of the Act [12 U.S.C. 1788], provided such loans and accounts:
(i) Have a remaining maturity of more than 5 years;
(ii) Are subordinate to all other claims including those of shareholders, creditors, and the NCUSIF;
(iii) Are not pledged as security on a loan to, or other obligation of, any party;
(iv) Are not insured by the NCUSIF;
(v) Have non-cumulative dividends;
(vi) Are transferable; and
(vii) Are available to cover operating losses realized by the insured credit union that exceed its available retained earnings.
Net worth ratio means the ratio of the net worth of the credit union to the total assets of the credit union rounded to two decimal places.
New credit union has the same meaning as in §702.201.
Nonperpetual capital has the same meaning as in §704.2 of this chapter.
Off-balance sheet exposure means:
(1) For loans transferred under the Federal Home Loan Bank mortgage partnership finance program, the outstanding loan balance as of the reporting date, net of any related valuation allowance.
(2) For all other loans transferred with limited recourse or other seller-provided credit enhancements and that qualify for true sales accounting, the maximum contractual amount the credit union is exposed to according to the agreement, net of any related valuation allowance.
(3) For unfunded commitments, the remaining unfunded portion of the contractual agreement.
Off-balance sheet items means items such as commitments, contingent items, guarantees, certain repo-style transactions, financial standby letters of credit, and forward agreements that are not included on the statement of financial condition, but are normally reported in the financial statement footnotes.
On-balance sheet means a credit union's assets, liabilities, and equity, as disclosed on the statement of financial condition at a specific point in time.
Other intangible assets means intangible assets, other than servicing assets and goodwill, maintained in accordance with GAAP. Other intangible assets does not include excluded other intangible assets.
Over-the-counter (OTC) interest rate derivative contract means a derivative contract that is not cleared on an exchange.
Part 703 compliant investment fund means an investment fund that is restricted to holding only investments that are permissible under §703.14(c) of this chapter.
Perpetual contributed capital has the same meaning as in §704.2 of this chapter.
Public sector entity (PSE) means a state, local authority, or other governmental subdivision of the United States below the sovereign level.
Qualifying master netting agreement means a written, legally enforceable agreement, provided that:
(1) The agreement creates a single legal obligation for all individual transactions covered by the agreement upon an event of default, including upon an event of conservatorship, receivership, insolvency, liquidation, or similar proceeding, of the counterparty;
(2) The agreement provides the credit union the right to accelerate, terminate, and close out on a net basis all transactions under the agreement and to liquidate or set off collateral promptly upon an event of default, including upon an event of conservatorship, receivership, insolvency, liquidation, or similar proceeding, of the counterparty, provided that, in any such case, any exercise of rights under the agreement will not be stayed or avoided under applicable law in the relevant jurisdictions, other than in receivership, conservatorship, resolution under the Federal Deposit Insurance Act, Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act, or under any similar insolvency law applicable to GSEs;
(3) The agreement does not contain a walkaway clause (that is, a provision that permits a non-defaulting counterparty to make a lower payment than it otherwise would make under the agreement, or no payment at all, to a defaulter or the estate of a defaulter, even if the defaulter or the estate is a net creditor under the agreement); and
(4) In order to recognize an agreement as a qualifying master netting agreement for purposes of this part, a credit union must conduct sufficient legal review, at origination and in response to any changes in applicable law, to conclude with a well-founded basis (and maintain sufficient written documentation of that legal review) that:
(i) The agreement meets the requirements of paragraph (2) of this definition; and
(ii) In the event of a legal challenge (including one resulting from default or from conservatorship, receivership, insolvency, liquidation, or similar proceeding), the relevant court and administrative authorities would find the agreement to be legal, valid, binding, and enforceable under the law of relevant jurisdictions.
Recourse means a credit union's retention, in form or in substance, of any credit risk directly or indirectly associated with an asset it has transferred that exceeds a pro rata share of that credit union's claim on the asset and disclosed in accordance with GAAP. If a credit union has no claim on an asset it has transferred, then the retention of any credit risk is recourse. A recourse obligation typically arises when a 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 the credit union provides credit enhancement beyond any contractual obligation to support assets it has transferred.
Residential mortgage-backed security means a mortgage-backed security backed by loans secured by a first-lien on residential property.
Residential property means a house, condominium unit, cooperative unit, manufactured home, or the construction thereof, and unimproved land zoned for one-to-four family residential use. Residential property excludes boats or motor homes, even if used as a primary residence, or timeshare property.
Restructured means, with respect to any loan, a restructuring of the loan in which a credit union, for economic or legal reasons related to a borrower's financial difficulties, grants a concession to the borrower that it would not otherwise consider. Restructured excludes loans modified or restructured solely pursuant to the U.S. Treasury's Home Affordable Mortgage Program.
Revenue obligation means a bond or similar obligation that is an obligation of a PSE, but which the PSE is committed to repay with revenues from the specific project financed rather than general tax funds.
Risk-based capital ratio means the percentage, rounded to two decimal places, of the risk-based capital ratio numerator to risk-weighted assets, as calculated in accordance with §702.104(a).
Risk-weighted assets means the total risk-weighted assets as calculated in accordance with §702.104(c).
Secured consumer loan means a consumer loan associated with collateral or other item of value to protect against loss where the creditor has a perfected security interest in the collateral or other item of value.
Senior executive officer means a senior executive officer as defined by §701.14(b)(2) of this chapter.
Separate account insurance means an account into which a policyholder's cash surrender value is supported by assets segregated from the general assets of the carrier.
Shares means deposits, shares, share certificates, share drafts, or any other depository account authorized by federal or state law.
Share-secured loan means a loan fully secured by shares, and does not include the imposition of a statutory lien under §701.39 of this chapter.
STRIPS means a separately traded registered interest and principal security.
Structured product means an investment that is linked, via return or loss allocation, to another investment or reference pool.
Subordinated means, with respect to an investment, that the investment has a junior claim on the underlying collateral or assets to other investments in the same issuance. An investment that does not have a junior claim to other investments in the same issuance on the underlying collateral or assets is non-subordinated. A Security that is junior only to money market eligible securities in the same issuance is also non-subordinated.
Supervisory merger or combination means a transaction that involved the following:
(1) An assisted merger or purchase and assumption where funds from the NCUSIF were provided to the continuing credit union;
(2) A merger or purchase and assumption classified by NCUA as an “emergency merger” where the acquired credit union is either insolvent or “in danger of insolvency” as defined under appendix B to Part 701 of this chapter; or
(3) A merger or purchase and assumption that included NCUA's or the appropriate state official's identification and selection of the continuing credit union.
Swap dealer has the meaning as defined by the Commodity Futures Trading Commission in 17 CFT 1.3(ggg).
Total assets means a credit union's total assets as measured1 by either:
1For each quarter, a credit union must elect one of the measures of total assets listed in paragraph (2) of this definition to apply for all purposes under this part except §§702.103 through 702.106 (risk-based capital requirement).
(1) Average quarterly balance. The credit union's total assets measured by the average of quarter-end balances of the current and three preceding calendar quarters;
(2) Average monthly balance. The credit union's total assets measured by the average of month-end balances over the three calendar months of the applicable calendar quarter;
(3) Average daily balance. The credit union's total assets measured by the average daily balance over the applicable calendar quarter; or
(4) Quarter-end balance. The credit union's total assets measured by the quarter-end balance of the applicable calendar quarter as reported on the credit union's Call Report.
Tranche means one of a number of related securities offered as part of the same transaction. Tranche includes a structured product if it has a loss allocation based off of an investment or reference pool.
Unsecured consumer loan means a consumer loan not secured by collateral.
U.S. Government agency means an instrumentality of the U.S. Government whose obligations are fully and explicitly guaranteed as to the timely payment of principal and interest by the full faith and credit of the U.S. Government. U.S. Government agency includes NCUA.
Subpart A—Prompt Corrective Action
§702.101 Capital measures, capital adequacy, effective date of classification, and notice to NCUA.
(a) Capital measures. For purposes of this part, a credit union must determine its capital classification at the end of each calendar quarter using the following measures:
(1) The net worth ratio; and
(2) If determined to be applicable under §702.103, the risk-based capital ratio.
(b) Capital adequacy.
(1) Notwithstanding the minimum requirements in this part, a credit union defined as complex must maintain capital commensurate with the level and nature of all risks to which the institution is exposed.
(2) A credit union defined as complex must have a process for assessing its overall capital adequacy in relation to its risk profile and a comprehensive written strategy for maintaining an appropriate level of capital.
(c) Effective date of capital classification. For purposes of this part, the effective date of a federally insured credit union's capital classification shall be the most recent to occur of:
(1) Quarter-end effective date. The last day of the calendar month following the end of the calendar quarter;
(2) Corrected capital classification. The date the credit union received subsequent written notice from NCUA or, if state-chartered, from the appropriate state official, of a decline in capital classification due to correction of an error or misstatement in the credit union's most recent Call Report; or
(3) Reclassification to lower category. The date the credit union received written notice from NCUA or, if state-chartered, the appropriate state official, of reclassification on safety and soundness grounds as provided under §§702.102(b) or 702. 202(d).
(d) Notice to NCUA by filing Call Report.
(1) Other than by filing a Call Report, a federally insured credit union need not notify the NCUA Board of a change in its capital measures that places the credit union in a lower capital category;
(2) Failure to timely file a Call Report as required under this section in no way alters the effective date of a change in capital classification under paragraph (b) of this section, or the affected credit union's corresponding legal obligations under this part.
§702.102 Capital classification.
(a) Capital categories. Except for credit unions defined as “new” under subpart B of this part, a credit union shall be deemed to be classified (Table 1 of this section)—
(1) Well capitalized if:
(i) Net worth ratio. The credit union has a net worth ratio of 7.0 percent or greater; and
(ii) Risk-based capital ratio. The credit union, if complex, has a risk-based capital ratio of 10 percent or greater.
(2) Adequately capitalized if:
(i) Net worth ratio. The credit union has a net worth ratio of 6.0 percent or greater; and
(ii) Risk-based capital ratio. The credit union, if complex, has a risk-based capital ratio of 8.0 percent or greater; and
(iii) Does not meet the definition of a well capitalized credit union.
(3) Undercapitalized if:
(i) Net worth ratio. The credit union has a net worth ratio of 4.0 percent or more but less than 6.0 percent; or
(ii) Risk-based capital ratio. The credit union, if complex, has a risk-based capital ratio of less than 8.0 percent.
(4) Significantly undercapitalized if:
(i) The credit union has a net worth ratio of 2.0 percent or more but less than 4.0 percent; or
(ii) The credit union has a net worth ratio of 4.0 percent or more but less than 5.0 percent, and either—
(A) Fails to submit an acceptable net worth restoration plan within the time prescribed in §702.110;
(B) Materially fails to implement a net worth restoration plan approved by the NCUA Board; or
(C) Receives notice that a submitted net worth restoration plan has not been approved.
(5) Critically undercapitalized if it has a net worth ratio of less than 2.0 percent.
Table 1 to § 702.102_Capital Categories
----------------------------------------------------------------------------------------------------------------
Risk-based capital
A credit union's capital ratio also And subject to following
classification is . . . Net worth ratio applicable if condition(s) . . .
complex
----------------------------------------------------------------------------------------------------------------
Well Capitalized................. 7% or greater....... And 10.0% or greater
Adequately Capitalized........... 6% or greater....... And 8% or greater....... And does not meet the
criteria to be
classified as well
capitalized.
Undercapitalized................. 4% to 5.99%......... Or Less than 8%........
Significantly Undercapitalized... 2% to 3.99%......... ...... N/A................. Or if ``undercapitalized
at <5% net worth and
(a) fails to timely
submit, (b) fails to
materially implement, or
(c) receives notice of
the rejection of a net
worth restoration plan.
Critically Undercapitalized...... Less than 2%........ ...... N/A .........................
----------------------------------------------------------------------------------------------------------------
(b) Reclassification based on supervisory criteria other than net worth. The NCUA Board may reclassify a well capitalized credit union as adequately capitalized and may require an adequately capitalized or undercapitalized credit union to comply with certain mandatory or discretionary supervisory actions as if it were classified in the next lower capital category (each of such actions hereinafter referred to generally as “reclassification”) in the following circumstances:
(1) Unsafe or unsound condition. The NCUA Board has determined, after providing the credit union with notice and opportunity for hearing pursuant to §747.2003 of this chapter, that the credit union is in an unsafe or unsound condition; or
(2) Unsafe or unsound practice. The NCUA Board has determined, after providing the credit union with notice and opportunity for hearing pursuant to §747.2003 of this chapter, that the credit union has not corrected a material unsafe or unsound practice of which it was, or should have been, aware.
(c) Non-delegation. The NCUA Board may not delegate its authority to reclassify a credit union under paragraph (b) of this section.
(d) Consultation with state officials. The NCUA Board shall consult and seek to work cooperatively with the appropriate state official before reclassifying a federally insured state-chartered credit union under paragraph (b) of this section, and shall promptly notify the appropriate state official of its decision to reclassify.
§702.103 Applicability of the risk-based capital ratio measure.
For purposes of §702.102, a credit union is defined as “complex” and the risk-based capital ratio measure is applicable only if the credit union's quarter-end total assets exceed one hundred million dollars ($100,000,000), as reflected in its most recent Call Report.
§702.104 Risk-based capital ratio.
A complex credit union must calculate its risk-based capital ratio in accordance with this section.
(a) Calculation of the risk-based capital ratio. To determine its risk-based capital ratio, a complex credit union must calculate the percentage, rounded to two decimal places, of its risk-based capital ratio numerator as described in paragraph (b) of this section, to its total risk-weighted assets as described in paragraph (c) of this section.
(b) Risk-based capital ratio numerator. The risk-based capital ratio numerator is the sum of the specific capital elements in paragraph (b)(1) of this section, minus the regulatory adjustments in paragraph (b)(2) of this section.
(1) Capital elements of the risk-based capital ratio numerator. The capital elements of the risk-based capital numerator are:
(i) Undivided earnings;
(ii) Appropriation for non-conforming investments;
(iii) Other reserves;
(iv) Equity acquired in merger;
(v) Net income
(vi) ALLL, maintained in accordance with GAAP;
(vii) Secondary capital accounts included in net worth (as defined in §702.2); and
(viii) Section 208 assistance included in net worth (as defined in §702.2).
(2) Risk-based capital ratio numerator deductions. The elements deducted from the sum of the capital elements of the risk-based capital ratio numerator are:
(i) NCUSIF Capitalization Deposit;
(ii) Goodwill;
(iii) Other intangible assets; and
(iv) Identified losses not reflected in the risk-based capital ratio numerator.
(c) Risk-weighted assets.
(1) General. Risk-weighted assets includes risk- weighted on-balance sheet assets as described in paragraphs (c)(2) and (3) of this section, plus the risk-weighted off-balance sheet assets in paragraph (c)(4) of this section, plus the risk-weighted derivatives in paragraph (c)(5) of this section, less the risk-based capital ratio numerator deductions in paragraph (b)(2) of this section. If a particular asset, derivative contract, or off balance sheet item has features or characteristics that suggest it could potentially fit into more than one risk weight category, then a credit union shall assign the asset, derivative contract, or off balance sheet item to the risk weight category that most accurately and appropriately reflects its associated credit risk.
(2) Risk weights for on-balance sheet assets. The risk categories and weights for assets of a complex credit union are as follows:
(i) Category 1—zero percent risk weight. A credit union must assign a zero percent risk weight to:
(A) The balance of:
(1) Cash, currency and coin, including vault, automatic teller machine, and teller cash.
(2) share-secured loans, where the shares securing the loan are on deposit with the credit union.
(B) The exposure amount of:
(1) An obligation of the U.S. Government, its central bank, or a U.S. Government agency that is directly and unconditionally guaranteed, excluding detached security coupons, ex-coupon securities, and interest-only mortgage-backed-security STRIPS.
(2) Federal Reserve Bank stock and Central Liquidity Facility stock.
(C) Insured balances due from FDIC-insured depositories or federally insured credit unions.
(ii) Category 2—20 percent risk weight. A credit union must assign a 20 percent risk weight to:
(A) The uninsured balances due from FDIC-insured depositories, federally insured credit unions, and all balances due from privately-insured credit unions.
(B) The exposure amount of:
(1) A non-subordinated obligation of the U.S. Government, its central bank, or a U.S. Government agency that is conditionally guaranteed, excluding interest-only mortgage-backed-security STRIPS.
(2) A non-subordinated obligation of a GSE other than an equity exposure or preferred stock, excluding interest-only GSE mortgage-backed-security STRIPS.
(3) Securities issued by PSEs that represent general obligation securities.
(4) Part 703 compliant investment funds that are restricted to holding only investments that qualify for a zero or 20 percent risk-weight under this section.
(5) Federal Home Loan Bank stock.
(C) The balances due from Federal Home Loan Banks.
(D) The balance of share-secured loans, where the shares securing the loan are on deposit with another depository institution.
(E) The portions of outstanding loans with a government guarantee.
(F) The portions of commercial loans secured with contractual compensating balances.
(iii) Category 3—50 percent risk weight. A credit union must assign a 50 percent risk weight to:
(A) The outstanding balance (net of government guarantees), including loans held for sale, of current first-lien residential real estate loans less than or equal to 35 percent of assets.
(B) The exposure amount of:
(1) Securities issued by PSEs in the U.S. that represent non-subordinated revenue obligation securities.
(2) Other non-subordinated, non-U.S. Government agency or non-GSE guaranteed, residential mortgage-backed security, excluding interest-only mortgage-backed security STRIPS.
(iv) Category 4—75 percent risk weight. A credit union must assign a 75 percent risk weight to the outstanding balance (net of government guarantees), including loans held for sale, of:
(A) Current first-lien residential real estate loans greater than 35 percent of assets.
(B) Current secured consumer loans.
(v) Category 5—100 percent risk weight. A credit union must assign a 100 percent risk weight to:
(A) The outstanding balance (net of government guarantees), including loans held for sale, of:
(1) First-lien residential real estate loans that are not current.
(2) Current junior-lien residential real estate loans less than or equal to 20 percent of assets.
(3) Current unsecured consumer loans.
(4) Current commercial loans, less contractual compensating balances that comprise less than 50 percent of assets.
(5) Loans to CUSOs.
(B) The exposure amount of:
(1) Industrial development bonds.
(2) Interest-only mortgage-backed security STRIPS.
(3) Part 703 compliant investment funds, with the option to use the look-through approaches in paragraph (c)(3)(iii)(B) of this section.
(4) Corporate debentures and commercial paper.
(5) Nonperpetual capital at corporate credit unions.
(6) General account permanent insurance.
(7) GSE equity exposure or preferred stock.
(8) Non-subordinated tranches of any investment, with the option to use the gross-up approach in paragraph (c)(3)(iii)(A) of this section.
(C) All other assets listed on the statement of financial condition not specifically assigned a different risk weight under this subpart.
(vi) Category 6—150 percent risk weight. A credit union must assign a 150 percent risk weight to:
(A) The outstanding balance, net of government guarantees and including loans held for sale, of:
(1) Current junior-lien residential real estate loans that comprise more than 20 percent of assets.
(2) Junior-lien residential real estate loans that are not current.
(3) Consumer loans that are not current.
(4) Current commercial loans (net of contractual compensating balances), which comprise more than 50 percent of assets.
(5) Commercial loans (net of contractual compensating balances), which are not current.
(B) The exposure amount of:
(1) Perpetual contributed capital at corporate credit unions.
(2) Equity investments in CUSOs.
(vii) Category 7—250 percent risk weight. A credit union must assign a 250 percent risk weight to the carrying value of mortgage servicing assets.
(viii) Category 8—300 percent risk weight. A credit union must assign a 300 percent risk weight to the exposure amount of:
(A) Publicly traded equity investments, other than a CUSO investment.
(B) Investment funds that do not meet the requirements under §703.14(c) of this chapter, with the option to use the look-through approaches in paragraph (c)(3)(iii)(B) of this section.
(C) Separate account insurance, with the option to use the look-through approaches in paragraph (c)(3)(iii)(B) of this section.
(ix) Category 9—400 percent risk weight. A credit union must assign a 400 percent risk weight to the exposure amount of non-publicly traded equity investments, other than equity investments in CUSOs.
(x) Category 10—1,250 percent risk weight. A credit union must assign a 1,250 percent risk weight to the exposure amount of any subordinated tranche of any investment, with the option to use the gross-up approach in paragraph (c)(3)(iii)(A) of this section.
(3) Alternative risk weights for certain on-balance sheet assets—
(i) Non-significant equity exposures.—
(A) General. Notwithstanding the risk weights assigned in paragraph (c)(2) of this section, a credit union must assign a 100 percent risk weight to non-significant equity exposures.
(B) Determination of non-significant equity exposures. A credit union has non-significant equity exposures if the aggregate amount of its equity exposures does not exceed 10 percent of the sum of the credit union's capital elements of the risk-based capital ratio numerator (as defined under paragraph (b)(1) of this section).
(C) Determination of the aggregate amount of equity exposures. When determining the aggregate amount of its equity exposures, a credit union must include the total amounts (as recorded on the statement of financial condition in accordance with GAAP) of the following:
(1) Equity investments in CUSOs,
(2) Perpetual contributed capital at corporate credit unions,
(3) Nonperpetual capital at corporate credit unions, and
(4) Equity investments subject to a risk weight in excess of 100 percent.
(ii) Charitable donation accounts. Notwithstanding the risk weights assigned in paragraph (c)(2) of this section, a credit union may assign a 100 percent risk weight to a charitable donation account.
(iii) Alternative approaches. Notwithstanding the risk weights assigned in paragraph (c)(2) of this section, a credit union may determine the risk weight of investment funds, and non-subordinated or subordinated tranches of any investment as follows:
(A) Gross-up approach. A credit union may use the gross-up approach under appendix A of this part to determine the risk weight of the carrying value of non-subordinated or subordinated tranches of any investment.
(B) Look-through approaches. A credit union may use one of the look-through approaches under appendix A of this part to determine the risk weight of the exposure amount of any investment funds, the holdings of separate account insurance, or both.
(4) Risk weights for off-balance sheet activities. The risk weighted amounts for all off-balance sheet items are determined by multiplying the off-balance sheet exposure amount by the appropriate CCF and the assigned risk weight as follows:
(i) For the outstanding balance of loans transferred to a Federal Home Loan Bank under the mortgage partnership finance program, a 20 percent CCF and a 50 percent risk weight.
(ii) For other loans transferred with limited recourse, a 100 percent CCF applied to the off-balance sheet exposure and:
(A) For commercial loans, a 100 percent risk weight.
(B) For first-lien residential real estate loans, a 50 percent risk weight.
(C) For junior-lien residential real estate loans, a 100 percent risk weight.
(D) For all secured consumer loans, a 75 percent risk weight.
(E) For all unsecured consumer loans, a 100 percent risk weight.
(iii) For unfunded commitments:
(A) For commercial loans, a 50 percent CCF with a 100 percent risk weight.
(B) For first-lien residential real estate loans, a 10 percent CCF with a 50 percent risk weight.
(C) For junior-lien residential real estate loans, a 10 percent CCF with a 100 percent risk weight.
(D) For all secured consumer loans, a 10 percent CCF with a 75 percent risk weight.
(E) For all unsecured consumer loans, a 10 percent CCF with a 100 percent risk weight.
(5) Derivative contracts. A complex credit union must assign a risk-weighted amount to any derivative contracts as determined under §702.105.
§702.105 Derivative contracts.
(a) OTC interest rate derivative contracts—
(1) Exposure amount—
(i) Single OTC interest rate derivative contract. Except as modified by paragraph (a)(2) of this section, the exposure amount for a single OTC interest rate derivative contract that is not subject to a qualifying master netting agreement is equal to the sum of the credit union's current credit exposure and potential future credit exposure (PFE) on the OTC interest rate derivative contract.
(A) Current credit exposure. The current credit exposure for a single OTC interest rate derivative contract is the greater of the fair value of the OTC interest rate derivative contract or zero.
(B) PFE.
(1) The PFE for a single OTC interest rate derivative contract, including an OTC interest rate derivative contract with a negative fair value, is calculated by multiplying the notional principal amount of the OTC interest rate derivative contract by the appropriate conversion factor in Table 1 of this section.
(2) A credit union must use an OTC interest rate derivative contract's effective notional principal amount (that is, the apparent or stated notional principal amount multiplied by any multiplier in the OTC interest rate derivative contract) rather than the apparent or stated notional principal amount in calculating PFE.
Table 1 to § 702.105_Conversion Factor Matrix for Interest Rate
Derivative Contracts \2\
------------------------------------------------------------------------
Conversion
Remaining maturity factor
------------------------------------------------------------------------
One year or less........................................... 0.00
Greater than one year and less than or equal to five years. 0.005
Greater than five years.................................... 0.015
------------------------------------------------------------------------
(ii) Multiple OTC interest rate derivative contracts subject to a qualifying master netting agreement. Except as modified by paragraph (a)(2) of this section, the exposure amount for multiple OTC interest rate derivative contracts subject to a qualifying master netting agreement is equal to the sum of the net current credit exposure and the adjusted sum of the PFE amounts for all OTC interest rate derivative contracts subject to the qualifying master netting agreement.
2Non-interest rate derivative contracts are addressed in paragraph (d) of this section.
(A) Net current credit exposure. The net current credit exposure is the greater of the net sum of all positive and negative fair value of the individual OTC interest rate derivative contracts subject to the qualifying master netting agreement or zero.
(B) Adjusted sum of the PFE amounts (Anet). The adjusted sum of the PFE amounts is calculated as Anet = (0.4 × Agross) + (0.6 × NGR × Agross), where:
(1) Agross equals the gross PFE (that is, the sum of the PFE amounts as determined under paragraph (a)(1)(i)(B) of this section for each individual derivative contract subject to the qualifying master netting agreement); and
(2) Net-to-gross Ratio (NGR) equals the ratio of the net current credit exposure to the gross current credit exposure. In calculating the NGR, the gross current credit exposure equals the sum of the positive current credit exposures (as determined under paragraph (a)(1)(i) of this section) of all individual derivative contracts subject to the qualifying master netting agreement.
(2) Recognition of credit risk mitigation of collateralized OTC derivative contracts. A credit union may recognize credit risk mitigation benefits of financial collateral that secures an OTC derivative contract or multiple OTC derivative contracts subject to a qualifying master netting agreement (netting set) by following the requirements of paragraph (c) of this section.
(b) Cleared transactions for interest rate derivatives.
(1) General requirements—A credit union must use the methodologies described in paragraph (b) of this section to calculate risk-weighted assets for a cleared transaction.
(2) Risk-weighted assets for cleared transactions.
(i) To determine the risk weighted asset amount for a cleared transaction, a credit union must multiply the trade exposure amount for the cleared transaction, calculated in accordance with paragraph (b)(3) of this section, by the risk weight appropriate for the cleared transaction, determined in accordance with paragraph (b)(4) of this section.
(ii) A credit union's total risk-weighted assets for cleared transactions is the sum of the risk-weighted asset amounts for all its cleared transactions.
(3) Trade exposure amount. For a cleared transaction the trade exposure amount equals:
(i) The exposure amount for the derivative contract or netting set of derivative contracts, calculated using the methodology used to calculate exposure amount for OTC interest rate derivative contracts under paragraph (a) of this section; plus
(ii) The fair value of the collateral posted by the credit union and held by the, clearing member, or custodian.
(4) Cleared transaction risk weights. A credit union must apply a risk weight of:
(i) Two percent if the collateral posted by the credit union to the DCO or clearing member is subject to an arrangement that prevents any losses to the credit union due to the joint default or a concurrent insolvency, liquidation, or receivership proceeding of the clearing member and any other clearing member clients of the clearing member; and the clearing member credit union has conducted sufficient legal review to conclude with a well-founded basis (and maintains sufficient written documentation of that legal review) that in the event of a legal challenge (including one resulting from an event of default or from liquidation, insolvency, or receivership proceedings) the relevant court and administrative authorities would find the arrangements to be legal, valid, binding and enforceable under the law of the relevant jurisdictions; or
(ii) Four percent if the requirements of paragraph (b)(4)(i) are not met.
(5) Recognition of credit risk mitigation of collateralized OTC derivative contracts. A credit union may recognize the credit risk mitigation benefits of financial collateral that secures a cleared derivative contract by following the requirements of paragraph (c) of this section.
(c) Recognition of credit risk mitigation of collateralized interest rate derivative contracts.
(1) A credit union may recognize the credit risk mitigation benefits of financial collateral that secures an OTC interest rate derivative contract or multiple interest rate derivative contracts subject to a qualifying master netting agreement (netting set) or clearing arrangement by using the simple approach in paragraph (c)(3) of this section.
(2) As an alternative to the simple approach, a credit union may recognize the credit risk mitigation benefits of financial collateral that secures such a contract or netting set if the financial collateral is marked-to-fair value on a daily basis and subject to a daily margin maintenance requirement by applying a risk weight to the exposure as if it were uncollateralized and adjusting the exposure amount calculated under paragraph (a) or (b) of this section using the collateral approach in paragraph (c)(3) of this section. The credit union must substitute the exposure amount calculated under paragraphs (b) or (c) of this section in the equation in paragraph (c)(3) of this section.
(3) Collateralized transactions—
(i) General. A credit union may use the approach in paragraph (c)(3)(ii) of this section to recognize the risk-mitigating effects of financial collateral.
(ii) Simple collateralized derivatives approach. To qualify for the simple approach, the financial collateral must meet the following requirements:
(A) The collateral must be subject to a collateral agreement for at least the life of the exposure;
(B) The collateral must be revalued at least every six months; and
(C) The collateral and the exposure must be denominated in the same currency.
(iii) Risk weight substitution.
(A) A credit union may apply a risk weight to the portion of an exposure that is secured by the fair value of financial collateral (that meets the requirements for the simple collateralized approach of this section) based on the risk weight assigned to the collateral as established under §702.104(c).
(B) A credit union must apply a risk weight to the unsecured portion of the exposure based on the risk weight applicable to the exposure under this subpart.
(iv) Exceptions to the 20 percent risk weight floor and other requirements. Notwithstanding the simple collateralized derivatives approach in paragraph (c)(3)(ii) of this section:
(A) A credit union may assign a zero percent risk weight to an exposure to a derivatives contract that is marked-to-market on a daily basis and subject to a daily margin maintenance requirement, to the extent the contract is collateralized by cash on deposit.
(B) A credit union may assign a 10 percent risk weight to an exposure to a derivatives contract that is marked-to-market daily and subject to a daily margin maintenance requirement, to the extent that the contract is collateralized by an exposure that qualifies for a zero percent risk weight under §702.104(c)(2)(i).
(v) A credit union may assign a zero percent risk weight to the collateralized portion of an exposure where:
(A) The financial collateral is cash on deposit; or
(B) The financial collateral is an exposure that qualifies for a zero percent risk weight under §702.104(c)(2)(i), and the credit union has discounted the fair value of the collateral by 20 percent.
(4) Collateral haircut approach.
(i) A credit union may recognize the credit risk mitigation benefits of financial collateral that secures a collateralized derivative contract by using the standard supervisory haircuts in paragraph (c)(3) of this section.
(ii) The collateral haircut approach applies to both OTC and cleared interest rate derivatives contracts discussed in this section.
(iii) A credit union must determine the exposure amount for a collateralized derivative contracts by setting the exposure amount equal to the max {0,[(exposure amount − value of collateral) + (sum of current fair value of collateral instruments * market price volatility haircut of the collateral instruments)]}, where:
(A) The value of the exposure equals the exposure amount for OTC interest rate derivative contracts (or netting set) calculated under paragraphs (a)(1)(i) and (ii) of this section.
(B) The value of the exposure equals the exposure amount for cleared interest rate derivative contracts (or netting set) calculated under paragraph (b)(3) of this section.
(C) The value of the collateral is the sum of cash and all instruments under the transaction (or netting set).
(D) The sum of current fair value of collateral instruments as of the measurement date.
(E) A credit union must use the standard supervisory haircuts for market price volatility in Table 2 to this section.
Table 2 to § 702.105_Standard Supervisory Market Price Volatility
Haircuts
[Based on a 10 business-day holding period]
------------------------------------------------------------------------
Haircut (in percent)
assigned based on:
---------------------
Residual maturity Collateral risk
weight (in percent)
---------------------
Zero 20 or 50
------------------------------------------------------------------------
Less than or equal to 1 year...................... 0.5 1.0
Greater than 1 year and less than or equal to 5 2.0 3.0
years............................................
Greater than 5 years.............................. 4.0 6.0
---------------------
Cash collateral held.............................. Zero
Other exposure types.............................. 25.0
------------------------------------------------------------------------
(d) All other derivative contracts and transactions. Credit unions must follow the requirements of the applicable provisions of 12 CFR part 324, when assigning risk weights to exposure amounts for derivatives contracts not addressed in paragraphs (a) or (b) of this section.
§702.106 Prompt corrective action for adequately capitalized credit unions.
(a) Earnings retention. Beginning on the effective date of classification as adequately capitalized or lower, a federally insured credit union must increase the dollar amount of its net worth quarterly either in the current quarter, or on average over the current and three preceding quarters, by an amount equivalent to at least 1/10th percent (0.1%) of its total assets (or more by choice), until it is well capitalized.
(b) Decrease in retention. Upon written application received no later than 14 days before the quarter end, the NCUA Board, on a case-by-case basis, may permit a credit union to increase the dollar amount of its net worth by an amount that is less than the amount required under paragraph (a) of this section, to the extent the NCUA Board determines that such lesser amount:
(1) Is necessary to avoid a significant redemption of shares; and
(2) Would further the purpose of this part.
(c) Decrease by FISCU. The NCUA Board shall consult and seek to work cooperatively with the appropriate state official before permitting a federally insured state-chartered credit union to decrease its earnings retention under paragraph (b) of this section.
(d) Periodic review. A decision under paragraph (b) of this section to permit a credit union to decrease its earnings retention is subject to quarterly review and revocation except when the credit union is operating under an approved net worth restoration plan that provides for decreasing its earnings retention as provided under paragraph (b) of this section.
§702.107 Prompt corrective action for undercapitalized credit unions.
(a) Mandatory supervisory actions by credit union. A credit union which is undercapitalized must—
(1) Earnings retention. Increase net worth in accordance with §702.106;
(2) Submit net worth restoration plan. Submit a net worth restoration plan pursuant to §702.111, provided however, that a credit union in this category having a net worth ratio of less than five percent (5%) which fails to timely submit such a plan, or which materially fails to implement an approved plan, is classified significantly undercapitalized pursuant to §702.102(a)(4)(i);
(3) Restrict increase in assets. Beginning the effective date of classification as undercapitalized or lower, not permit the credit union's assets to increase beyond its total assets for the preceding quarter unless—
(i) Plan approved. The NCUA Board has approved a net worth restoration plan which provides for an increase in total assets and—
(A) The assets of the credit union are increasing consistent with the approved plan; and
(B) The credit union is implementing steps to increase the net worth ratio consistent with the approved plan;
(ii) Plan not approved. The NCUA Board has not approved a net worth restoration plan and total assets of the credit union are increasing because of increases since quarter-end in balances of:
(A) Total accounts receivable and accrued income on loans and investments; or
(B) Total cash and cash equivalents; or
(C) Total loans outstanding, not to exceed the sum of total assets plus the quarter-end balance of unused commitments to lend and unused lines of credit provided however that a credit union which increases a balance as permitted under paragraphs (a)(3)(ii)(A), (B) or (C) of this section cannot offer rates on shares in excess of prevailing rates on shares in its relevant market area, and cannot open new branches;
(4) Restrict member business loans. Beginning the effective date of classification as undercapitalized or lower, not increase the total dollar amount of member business loans (defined as loans outstanding and unused commitments to lend) as of the preceding quarter-end unless it is granted an exception under 12 U.S.C. 1757a(b).
(b) Second tier discretionary supervisory actions by NCUA. Subject to the applicable procedures for issuing, reviewing and enforcing directives set forth in subpart L of part 747 of this chapter, the NCUA Board may, by directive, take one or more of the following actions with respect to an undercapitalized credit union having a net worth ratio of less than five percent (5%), or a director, officer or employee of such a credit union, if it determines that those actions are necessary to carry out the purpose of this part:
(1) Requiring prior approval for acquisitions, branching, new lines of business. Prohibit a credit union from, directly or indirectly, acquiring any interest in any business entity or financial institution, establishing or acquiring any additional branch office, or engaging in any new line of business, unless the NCUA Board has approved the credit union's net worth restoration plan, the credit union is implementing its plan, and the NCUA Board determines that the proposed action is consistent with and will further the objectives of that plan;
(2) Restricting transactions with and ownership of a CUSO. Restrict the credit union's transactions with a CUSO, or require the credit union to reduce or divest its ownership interest in a CUSO;
(3) Restricting dividends paid. Restrict the dividend rates the credit union pays on shares to the prevailing rates paid on comparable accounts and maturities in the relevant market area, as determined by the NCUA Board, except that dividend rates already declared on shares acquired before imposing a restriction under this paragraph may not be retroactively restricted;
(4) Prohibiting or reducing asset growth. Prohibit any growth in the credit union's assets or in a category of assets, or require the credit union to reduce its assets or a category of assets;
(5) Alter, reduce or terminate activity. Require the credit union or its CUSO to alter, reduce, or terminate any activity which poses excessive risk to the credit union;
(6) Prohibiting nonmember deposits. Prohibit the credit union from accepting all or certain nonmember deposits;
(7) Dismissing director or senior executive officer. Require the credit union to dismiss from office any director or senior executive officer, provided however, that a dismissal under this clause shall not be construed to be a formal administrative action for removal under 12 U.S.C. 1786(g);
(8) Employing qualified senior executive officer. Require the credit union to employ qualified senior executive officers (who, if the NCUA Board so specifies, shall be subject to its approval); and
(9) Other action to carry out prompt corrective action. Restrict or require such other action by the credit union as the NCUA Board determines will carry out the purpose of this part better than any of the actions prescribed in paragraphs (b)(1) through (8) of this section.
(c) First tier application of discretionary supervisory actions. An undercapitalized credit union having a net worth ratio of five percent (5%) or more, or which is classified undercapitalized by reason of failing to maintain a risk-based capital ratio equal to or greater than 8 percent under §702.104, is subject to the discretionary supervisory actions in paragraph (b) of this section if it fails to comply with any mandatory supervisory action in paragraph (a) of this section or fails to timely implement an approved net worth restoration plan under §702.111, including meeting its prescribed steps to increase its net worth ratio.
§702.108 Prompt corrective action for significantly undercapitalized credit unions.
(a) Mandatory supervisory actions by credit union. A credit union which is significantly undercapitalized must—
(1) Earnings retention. Increase net worth in accordance with §702.106;
(2) Submit net worth restoration plan. Submit a net worth restoration plan pursuant to §702.111;
(3) Restrict increase in assets. Not permit the credit union's total assets to increase except as provided in §702.107(a)(3); and
(4) Restrict member business loans. Not increase the total dollar amount of member business loans (defined as loans outstanding and unused commitments to lend) as provided in §702.107(a)(4).
(b) Discretionary supervisory actions by NCUA. Subject to the applicable procedures for issuing, reviewing and enforcing directives set forth in subpart L of part 747 of this chapter, the NCUA Board may, by directive, take one or more of the following actions with respect to any significantly undercapitalized credit union, or a director, officer or employee of such credit union, if it determines that those actions are necessary to carry out the purpose of this part:
(1) Requiring prior approval for acquisitions, branching, new lines of business. Prohibit a credit union from, directly or indirectly, acquiring any interest in any business entity or financial institution, establishing or acquiring any additional branch office, or engaging in any new line of business, except as provided in §702.107(b)(1);
(2) Restricting transactions with and ownership of CUSO. Restrict the credit union's transactions with a CUSO, or require the credit union to divest or reduce its ownership interest in a CUSO;
(3) Restricting dividends paid. Restrict the dividend rates that the credit union pays on shares as provided in §702.107(b)(3);
(4) Prohibiting or reducing asset growth. Prohibit any growth in the credit union's assets or in a category of assets, or require the credit union to reduce assets or a category of assets;
(5) Alter, reduce or terminate activity. Require the credit union or its CUSO(s) to alter, reduce, or terminate any activity which poses excessive risk to the credit union;
(6) Prohibiting nonmember deposits. Prohibit the credit union from accepting all or certain nonmember deposits;
(7) New election of directors. Order a new election of the credit union's board of directors;
(8) Dismissing director or senior executive officer. Require the credit union to dismiss from office any director or senior executive officer, provided however, that a dismissal under this clause shall not be construed to be a formal administrative action for removal under 12 U.S.C. 1786(g);
(9) Employing qualified senior executive officer. Require the credit union to employ qualified senior executive officers (who, if the NCUA Board so specifies, shall be subject to its approval);
(10) Restricting senior executive officers' compensation. Except with the prior written approval of the NCUA Board, limit compensation to any senior executive officer to that officer's average rate of compensation (excluding bonuses and profit sharing) during the four (4) calendar quarters preceding the effective date of classification of the credit union as significantly undercapitalized, and prohibit payment of a bonus or profit share to such officer;
(11) Other actions to carry out prompt corrective action. Restrict or require such other action by the credit union as the NCUA Board determines will carry out the purpose of this part better than any of the actions prescribed in paragraphs (b)(1) through (10) of this section; and
(12) Requiring merger. Require the credit union to merge with another financial institution if one or more grounds exist for placing the credit union into conservatorship pursuant to 12 U.S.C. 1786(h)(1)(F), or into liquidation pursuant to 12 U.S.C. 1787(a)(3)(A)(i).
(c) Discretionary conservatorship or liquidation if no prospect of becoming adequately capitalized. Notwithstanding any other actions required or permitted to be taken under this section, when a credit union becomes significantly undercapitalized (including by reclassification under §702.102(b)), the NCUA Board may place the credit union into conservatorship pursuant to 12 U.S.C. 1786(h)(1)(F), or into liquidation pursuant to 12 U.S.C. 1787(a)(3)(A)(i), provided that the credit union has no reasonable prospect of becoming adequately capitalized.
§702.109 Prompt corrective action for critically undercapitalized credit unions.
(a) Mandatory supervisory actions by credit union. A credit union which is critically undercapitalized must—
(1) Earnings retention. Increase net worth in accordance with §702.106;
(2) Submit net worth restoration plan. Submit a net worth restoration plan pursuant to §702.111;
(3) Restrict increase in assets. Not permit the credit union's total assets to increase except as provided in §702.107(a)(3); and
(4) Restrict member business loans. Not increase the total dollar amount of member business loans (defined as loans outstanding and unused commitments to lend) as provided in §702.107(a)(4).
(b) Discretionary supervisory actions by NCUA. Subject to the applicable procedures for issuing, reviewing and enforcing directives set forth in subpart L of part 747 of this chapter, the NCUA Board may, by directive, take one or more of the following actions with respect to any critically undercapitalized credit union, or a director, officer or employee of such credit union, if it determines that those actions are necessary to carry out the purpose of this part:
(1) Requiring prior approval for acquisitions, branching, new lines of business. Prohibit a credit union from, directly or indirectly, acquiring any interest in any business entity or financial institution, establishing or acquiring any additional branch office, or engaging in any new line of business, except as provided by §702.107(b)(1);
(2) Restricting transactions with and ownership of CUSO. Restrict the credit union's transactions with a CUSO, or require the credit union to divest or reduce its ownership interest in a CUSO;
(3) Restricting dividends paid. Restrict the dividend rates that the credit union pays on shares as provided in §702.107(b)(3);
(4) Prohibiting or reducing asset growth. Prohibit any growth in the credit union's assets or in a category of assets, or require the credit union to reduce assets or a category of assets;
(5) Alter, reduce or terminate activity. Require the credit union or its CUSO(s) to alter, reduce, or terminate any activity which poses excessive risk to the credit union;
(6) Prohibiting nonmember deposits. Prohibit the credit union from accepting all or certain nonmember deposits;
(7) New election of directors. Order a new election of the credit union's board of directors;
(8) Dismissing director or senior executive officer. Require the credit union to dismiss from office any director or senior executive officer, provided however, that a dismissal under this clause shall not be construed to be a formal administrative action for removal under 12 U.S.C. 1786(g);
(9) Employing qualified senior executive officer. Require the credit union to employ qualified senior executive officers (who, if the NCUA Board so specifies, shall be subject to its approval);
(10) Restricting senior executive officers' compensation. Reduce or, with the prior written approval of the NCUA Board, limit compensation to any senior executive officer to that officer's average rate of compensation (excluding bonuses and profit sharing) during the four (4) calendar quarters preceding the effective date of classification of the credit union as critically undercapitalized, and prohibit payment of a bonus or profit share to such officer;
(11) Restrictions on payments on uninsured secondary capital. Beginning 60 days after the effective date of classification of a credit union as critically undercapitalized, prohibit payments of principal, dividends or interest on the credit union's uninsured secondary capital accounts established after August 7, 2000, except that unpaid dividends or interest shall continue to accrue under the terms of the account to the extent permitted by law;
(12) Requiring prior approval. Require a critically undercapitalized credit union to obtain the NCUA Board's prior written approval before doing any of the following:
(i) Entering into any material transaction not within the scope of an approved net worth restoration plan (or approved revised business plan under subpart C of this part);
(ii) Extending credit for transactions deemed highly leveraged by the NCUA Board or, if state-chartered, by the appropriate state official;
(iii) Amending the credit union's charter or bylaws, except to the extent necessary to comply with any law, regulation, or order;
(iv) Making any material change in accounting methods; and
(v) Paying dividends or interest on new share accounts at a rate exceeding the prevailing rates of interest on insured deposits in its relevant market area;
(13) Other action to carry out prompt corrective action. Restrict or require such other action by the credit union as the NCUA Board determines will carry out the purpose of this part better than any of the actions prescribed in paragraphs (b)(1) through (12) of this section; and
(14) Requiring merger. Require the credit union to merge with another financial institution if one or more grounds exist for placing the credit union into conservatorship pursuant to 12 U.S.C. 1786(h)(1)(F), or into liquidation pursuant to 12 U.S.C. 1787(a)(3)(A)(i).
(c) Mandatory conservatorship, liquidation or action in lieu thereof —
(1) Action within 90 days. Notwithstanding any other actions required or permitted to be taken under this section (and regardless of a credit union's prospect of becoming adequately capitalized), the NCUA Board must, within 90 calendar days after the effective date of classification of a credit union as critically undercapitalized—
(i) Conservatorship. Place the credit union into conservatorship pursuant to 12 U.S.C. 1786(h)(1)(G); or
(ii) Liquidation. Liquidate the credit union pursuant to 12 U.S.C. 1787(a)(3)(A)(ii); or
(iii) Other corrective action. Take other corrective action, in lieu of conservatorship or liquidation, to better achieve the purpose of this part, provided that the NCUA Board documents why such action in lieu of conservatorship or liquidation would do so, provided however, that other corrective action may consist, in whole or in part, of complying with the quarterly timetable of steps and meeting the quarterly net worth targets prescribed in an approved net worth restoration plan.
(2) Renewal of other corrective action. A determination by the NCUA Board to take other corrective action in lieu of conservatorship or liquidation under paragraph (c)(1)(iii) of this section shall expire after an effective period ending no later than 180 calendar days after the determination is made, and the credit union shall be immediately placed into conservatorship or liquidation under paragraphs (c)(1)(i) and (ii) of this section, unless the NCUA Board makes a new determination under paragraph (c)(1)(iii) of this section before the end of the effective period of the prior determination;
(3) Mandatory liquidation after 18 months —
(i) Generally. Notwithstanding paragraphs (c)(1) and (2) of this section, the NCUA Board must place a credit union into liquidation if it remains critically undercapitalized for a full calendar quarter, on a monthly average basis, following a period of 18 months from the effective date the credit union was first classified critically undercapitalized.
(ii) Exception. Notwithstanding paragraph (c)(3)(i) of this section, the NCUA Board may continue to take other corrective action in lieu of liquidation if it certifies that the credit union—
(A) Has been in substantial compliance with an approved net worth restoration plan requiring consistent improvement in net worth since the date the net worth restoration plan was approved;
(B) Has positive net income or has an upward trend in earnings that the NCUA Board projects as sustainable; and
(C) Is viable and not expected to fail.
(iii) Review of exception. The NCUA Board shall, at least quarterly, review the certification of an exception to liquidation under paragraph (c)(3)(ii) of this section and shall either—
(A) Recertify the credit union if it continues to satisfy the criteria of paragraph (c)(3)(ii) of this section; or
(B) Promptly place the credit union into liquidation, pursuant to 12 U.S.C. 1787(a)(3)(A)(ii), if it fails to satisfy the criteria of paragraph (c)(3)(ii) of this section.
(4) Nondelegation. The NCUA Board may not delegate its authority under paragraph (c) of this section, unless the credit union has less than $5,000,000 in total assets. A credit union shall have a right of direct appeal to the NCUA Board of any decision made by delegated authority under this section within ten (10) calendar days of the date of that decision.
(d) Mandatory liquidation of insolvent federal credit union. In lieu of paragraph (c) of this section, a critically undercapitalized federal credit union that has a net worth ratio of less than zero percent (0%) may be placed into liquidation on grounds of insolvency pursuant to 12 U.S.C. 1787(a)(1)(A).
§702.110 Consultation with state officials on proposed prompt corrective action.
(a) Consultation on proposed conservatorship or liquidation. Before placing a federally insured state-chartered credit union into conservatorship (pursuant to 12 U.S.C. 1786(h)(1)(F) or (G)) or liquidation (pursuant to 12 U.S.C. 1787(a)(3)) as permitted or required under subparts A or B of this part to facilitate prompt corrective action—
(1) The NCUA Board shall seek the views of the appropriate state official (as defined in §702.2), and give him or her an opportunity to take the proposed action;
(2) The NCUA Board shall, upon timely request of the appropriate state official, promptly provide him or her with a written statement of the reasons for the proposed conservatorship or liquidation, and reasonable time to respond to that statement; and
(3) If the appropriate state official makes a timely written response that disagrees with the proposed conservatorship or liquidation and gives reasons for that disagreement, the NCUA Board shall not place the credit union into conservatorship or liquidation unless it first considers the views of the appropriate state official and determines that—
(i) The NCUSIF faces a significant risk of loss if the credit union is not placed into conservatorship or liquidation; and
(ii) Conservatorship or liquidation is necessary either to reduce the risk of loss, or to reduce the expected loss, to the NCUSIF with respect to the credit union.
(b) Nondelegation. The NCUA Board may not delegate any determination under paragraph (a)(3) of this section.
(c) Consultation on proposed discretionary action. The NCUA Board shall consult and seek to work cooperatively with the appropriate state official before taking any discretionary supervisory action under §§702.107(b), 702.108(b), 702.109(b), 702.204(b) and 702.205(b) with respect to a federally insured state-chartered credit union; shall provide prompt notice of its decision to the appropriate state official; and shall allow the appropriate state official to take the proposed action independently or jointly with NCUA.
§702.111 Net worth restoration plans (NWRP).
(a) Schedule for filing—
(1) Generally. A credit union shall file a written net worth restoration plan (NWRP) with the appropriate Regional Director and, if state-chartered, the appropriate state official, within 45 calendar days of the effective date of classification as either undercapitalized, significantly undercapitalized or critically undercapitalized, unless the NCUA Board notifies the credit union in writing that its NWRP is to be filed within a different period.
(2) Exception. An otherwise adequately capitalized credit union that is reclassified undercapitalized on safety and soundness grounds under §702.102(b) is not required to submit a NWRP solely due to the reclassification, unless the NCUA Board notifies the credit union that it must submit an NWRP.
(3) Filing of additional plan. Notwithstanding paragraph (a)(1) of this section, a credit union that has already submitted and is operating under a NWRP approved under this section is not required to submit an additional NWRP due to a change in net worth category (including by reclassification under §702.102(b)), unless the NCUA Board notifies the credit union that it must submit a new NWRP. A credit union that is notified to submit a new or revised NWRP shall file the NWRP in writing with the appropriate Regional Director within 30 calendar days of receiving such notice, unless the NCUA Board notifies the credit union in writing that the NWRP is to be filed within a different period.
(4) Failure to timely file plan. When a credit union fails to timely file an NWRP pursuant to this paragraph, the NCUA Board shall promptly notify the credit union that it has failed to file an NWRP and that it has 15 calendar days from receipt of that notice within which to file an NWRP.
(b) Assistance to small credit unions. Upon timely request by a credit union having total assets of less than $10 million (regardless how long it has been in operation), the NCUA Board shall provide assistance in preparing an NWRP required to be filed under paragraph (a) of this section.
(c) Contents of NWRP. An NWRP must—
(1) Specify—
(i) A quarterly timetable of steps the credit union will take to increase its net worth ratio, and risk-based capital ratio if applicable, so that it becomes adequately capitalized by the end of the term of the NWRP, and to remain so for four (4) consecutive calendar quarters;
(ii) The projected amount of net worth increases in each quarter of the term of the NWRP as required under §702.106(a), or as permitted under §702.106(b);
(iii) How the credit union will comply with the mandatory and any discretionary supervisory actions imposed on it by the NCUA Board under this subpart;
(iv) The types and levels of activities in which the credit union will engage; and
(v) If reclassified to a lower category under §702.102(b), the steps the credit union will take to correct the unsafe or unsound practice(s) or condition(s);
(2) Include pro forma financial statements, including any off-balance sheet items, covering a minimum of the next two years; and
(3) Contain such other information as the NCUA Board has required.
(d) Criteria for approval of NWRP. The NCUA Board shall not accept a NWRP plan unless it—
(1) Complies with paragraph (c) of this section;
(2) Is based on realistic assumptions, and is likely to succeed in restoring the credit union's net worth; and
(3) Would not unreasonably increase the credit union's exposure to risk (including credit risk, interest-rate risk, and other types of risk).
(e) Consideration of regulatory capital. To minimize possible long-term losses to the NCUSIF while the credit union takes steps to become adequately capitalized, the NCUA Board shall, in evaluating an NWRP under this section, consider the type and amount of any form of regulatory capital which may become established by NCUA regulation, or authorized by state law and recognized by NCUA, which the credit union holds, but which is not included in its net worth.
(f) Review of NWRP—
(1) Notice of decision. Within 45 calendar days after receiving an NWRP under this part, the NCUA Board shall notify the credit union in writing whether the NWRP has been approved, and shall provide reasons for its decision in the event of disapproval.
(2) Delayed decision. If no decision is made within the time prescribed in paragraph (f)(1) of this section, the NWRP is deemed approved.
(3) Consultation with state officials. In the case of an NWRP submitted by a federally insured state-chartered credit union (whether an original, new, additional, revised or amended NWRP), the NCUA Board shall, when evaluating the NWRP, seek and consider the views of the appropriate state official, and provide prompt notice of its decision to the appropriate state official.
(g) NWRP not approved —
(1) Submission of revised NWRP. If an NWRP is rejected by the NCUA Board, the credit union shall submit a revised NWRP within 30 calendar days of receiving notice of disapproval, unless it is notified in writing by the NCUA Board that the revised NWRP is to be filed within a different period.
(2) Notice of decision on revised NWRP. Within 30 calendar days after receiving a revised NWRP under paragraph (g)(1) of this section, the NCUA Board shall notify the credit union in writing whether the revised NWRP is approved. The Board may extend the time within which notice of its decision shall be provided.
(3) Disapproval of reclassified credit union's NWRP. A credit union which has been classified significantly undercapitalized shall remain so classified pending NCUA Board approval of a new or revised NWRP.
(4) Submission of multiple unapproved NWRPs. The submission of more than two NWRPs that are not approved is considered an unsafe and unsound condition and may subject the credit union to administrative enforcement actions under section 206 of the FCUA, 12 U.S.C. 1786 and 1790d.
(h) Amendment of NWRP. A credit union that is operating under an approved NWRP may, after prior written notice to, and approval by the NCUA Board, amend its NWRP to reflect a change in circumstance. Pending approval of an amended NWRP, the credit union shall implement the NWRP as originally approved.
(i) Publication. An NWRP need not be published to be enforceable because publication would be contrary to the public interest.
(j) Termination of NWRP. For purposes of this part, an NWRP terminates once the credit union is classified as adequately capitalized and remains so for four consecutive quarters. For example, if a credit union with an active NWRP attains the classification as adequately classified on December 31, 2015 this would be quarter one and the fourth consecutive quarter would end September 30, 2016.
§702.112 Reserves.
Each credit union shall establish and maintain such reserves as may be required by the FCUA, by state law, by regulation, or in special cases by the NCUA Board or appropriate state official.
§702.113 Full and fair disclosure of financial condition.
(a) Full and fair disclosure defined. “Full and fair disclosure” is the level of disclosure which a prudent person would provide to a member of a credit union, to NCUA, or, at the discretion of the board of directors, to creditors to fairly inform them of the financial condition and the results of operations of the credit union.
(b) Full and fair disclosure implemented. The financial statements of a credit union shall provide for full and fair disclosure of all assets, liabilities, and members' equity, including such valuation (allowance) accounts as may be necessary to present fairly the financial condition; and all income and expenses necessary to present fairly the statement of income for the reporting period.
(c) Declaration of officials. The Statement of Financial Condition, when presented to members, to creditors or to NCUA, shall contain a dual declaration by the treasurer and the chief executive officer, or in the latter's absence, by any other officer designated by the board of directors of the reporting credit union to make such declaration, that the report and related financial statements are true and correct to the best of their knowledge and belief and present fairly the financial condition and the statement of income for the period covered.
(d) Charges for loan and lease losses. Full and fair disclosure demands that a credit union properly address charges for loan losses as follows:
(1) Charges for loan and lease losses shall be made timely and in accordance with GAAP;
(2) The ALLL must be maintained in accordance with GAAP; and
(3) At a minimum, adjustments to the ALLL shall be made prior to the distribution or posting of any dividend to the accounts of members.
§702.114 Payment of dividends.
(a) Restriction on dividends. Dividends shall be available only from net worth, net of any special reserves established under §702.112, if any.
(b) Payment of dividends and interest refunds. The board of directors must not pay a dividend or interest refund that will cause the credit union's capital classification to fall below adequately capitalized under this subpart unless the appropriate Regional Director and, if state-chartered, the appropriate state official, have given prior written approval (in an NWRP or otherwise). The request for written approval must include the plan for eliminating any negative retained earnings balance.
Subpart B—Alternative Prompt Corrective Action for New Credit Unions
§702.201 Scope and definition.
(a) Scope. This subpart B applies in lieu of subpart A of this part exclusively to credit unions defined in paragraph (b) of this section as “new” pursuant to section 216(b)(2) of the FCUA, 12 U.S.C. 1790d(b)(2).
(b) New credit union defined. A “new” credit union for purposes of this subpart is a credit union that both has been in operation for less than ten (10) years and has total assets of not more than $10 million. Once a credit union reports total assets of more than $10 million on a Call Report, the credit union is no longer new, even if its assets subsequently decline below $10 million.
(c) Effect of spin-offs. A credit union formed as the result of a “spin-off” of a group from the field of membership of an existing credit union is deemed to be in operation since the effective date of the spin-off. A credit union whose total assets decline below $10 million because a group within its field of membership has been spun-off is deemed “new” if it has been in operation less than 10 years.
(d) Actions to evade prompt corrective action. If the NCUA Board determines that a credit union was formed, or was reduced in asset size as a result of a spin-off, or was merged, primarily to qualify as “new” under this subpart, the credit union shall be deemed subject to prompt corrective action under subpart A of this part.
§702.202 Net worth categories for new credit unions.
(a) Net worth measures. For purposes of this part, a new credit union must determine its capital classification quarterly according to its net worth ratio.
(b) Effective date of net worth classification of new credit union. For purposes of subpart B of this part, the effective date of a new credit union's classification within a capital category in paragraph (c) of this section shall be determined as provided in §702.101(c); and written notice of a decline in net worth classification in paragraph (c) of this section shall be given as required by §702.101(c).
(c) Net worth categories. A credit union defined as “new” under this section shall be classified—
(1) Well capitalized if it has a net worth ratio of seven percent (7%) or greater;
(2) Adequately capitalized if it has a net worth ratio of six percent (6%) or more but less than seven percent (7%);
(3) Moderately capitalized if it has a net worth ratio of three and one-half percent (3.5%) or more but less than six percent (6%);
(4) Marginally capitalized if it has a net worth ratio of two percent (2%) or more but less than three and one-half percent (3.5%);
(5) Minimally capitalized if it has a net worth ratio of zero percent (0%) or greater but less than two percent (2%); and
(6) Uncapitalized if it has a net worth ratio of less than zero percent (0%).
Table 1 to § 702.202_Capital Categories for New Credit Unions
------------------------------------------------------------------------
A new credit union's capital
classification is If it's net worth ratio is
------------------------------------------------------------------------
Well Capitalized.......................... 7% or above.
Adequately Capitalized.................... 6 to 7%.
Moderately Capitalized.................... 3.5% to 5.99%.
Marginally Capitalized.................... 2% to 3.49%.
Minimally Capitalized..................... 0% to 1.99%.
Uncapitalized............................. Less than 0%.
------------------------------------------------------------------------
(d) Reclassification based on supervisory criteria other than net worth. Subject to §702.102(b), the NCUA Board may reclassify a well capitalized, adequately capitalized or moderately capitalized new credit union to the next lower capital category (each of such actions is hereinafter referred to generally as “reclassification”) in either of the circumstances prescribed in §702.102(b).
(e) Consultation with state officials. The NCUA Board shall consult and seek to work cooperatively with the appropriate state official before reclassifying a federally insured state-chartered credit union under paragraph (d) of this section, and shall promptly notify the appropriate state official of its decision to reclassify.
§702.203 Prompt corrective action for adequately capitalized new credit unions.
Beginning on the effective date of classification, an adequately capitalized new credit union must increase the dollar amount of its net worth by the amount reflected in its approved initial or revised business plan in accordance with §702.204(a)(2), or in the absence of such a plan, in accordance with §702.106 until it is well capitalized.
§702.204 Prompt corrective action for moderately capitalized, marginally capitalized, or minimally capitalized new credit unions.
(a) Mandatory supervisory actions by new credit union. Beginning on the date of classification as moderately capitalized, marginally capitalized or minimally capitalized (including by reclassification under §702.202(d)), a new credit union must—
(1) Earnings retention. Increase the dollar amount of its net worth by the amount reflected in its approved initial or revised business plan;
(2) Submit revised business plan. Submit a revised business plan within the time provided by §702.206 if the credit union either:
(i) Has not increased its net worth ratio consistent with its then-present approved business plan;
(ii) Has no then-present approved business plan; or
(iii) Has failed to comply with paragraph (a)(3) of this section; and
(3) Restrict member business loans. Not increase the total dollar amount of member business loans (defined as loans outstanding and unused commitments to lend) as of the preceding quarter-end unless it is granted an exception under 12 U.S.C. 1757a(b).
(b) Discretionary supervisory actions by NCUA. Subject to the applicable procedures set forth in subpart L of part 747 of this chapter for issuing, reviewing and enforcing directives, the NCUA Board may, by directive, take one or more of the actions prescribed in §702.109(b) if the credit union's net worth ratio has not increased consistent with its then-present business plan, or the credit union has failed to undertake any mandatory supervisory action prescribed in paragraph (a) of this section.
(c) Discretionary conservatorship or liquidation. Notwithstanding any other actions required or permitted to be taken under this section, the NCUA Board may place a new credit union which is moderately capitalized, marginally capitalized or minimally capitalized (including by reclassification under §702.202(d)) into conservatorship pursuant to 12 U.S.C. 1786(h)(1)(F), or into liquidation pursuant to 12 U.S.C. 1787(a)(3)(A)(i), provided that the credit union has no reasonable prospect of becoming adequately capitalized.
§702.205 Prompt corrective action for uncapitalized new credit unions.
(a) Mandatory supervisory actions by new credit union. Beginning on the effective date of classification as uncapitalized, a new credit union must—
(1) Earnings retention. Increase the dollar amount of its net worth by the amount reflected in the credit union's approved initial or revised business plan;
(2) Submit revised business plan. Submit a revised business plan within the time provided by §702.206, providing for alternative means of funding the credit union's earnings deficit, if the credit union either:
(i) Has not increased its net worth ratio consistent with its then-present approved business plan;
(ii) Has no then-present approved business plan; or
(iii) Has failed to comply with paragraph (a)(3) of this section; and
(3) Restrict member business loans. Not increase the total dollar amount of member business loans as provided in §702.204(a)(3).
(b) Discretionary supervisory actions by NCUA. Subject to the procedures set forth in subpart L of part 747 of this chapter for issuing, reviewing and enforcing directives, the NCUA Board may, by directive, take one or more of the actions prescribed in §702.109(b) if the credit union's net worth ratio has not increased consistent with its then-present business plan, or the credit union has failed to undertake any mandatory supervisory action prescribed in paragraph (a) of this section.
(c) Mandatory liquidation or conservatorship. Notwithstanding any other actions required or permitted to be taken under this section, the NCUA Board—
(1) Plan not submitted. May place into liquidation pursuant to 12 U.S.C. 1787(a)(3)(A)(ii), or conservatorship pursuant to 12 U.S.C. 1786(h)(1)(F), an uncapitalized new credit union which fails to submit a revised business plan within the time provided under paragraph (a)(2) of this section; or
(2) Plan rejected, approved, implemented. Except as provided in paragraph (c)(3) of this section, must place into liquidation pursuant to 12 U.S.C. 1787(a)(3)(A)(ii), or conservatorship pursuant to 12 U.S.C. 1786(h)(1)(F), an uncapitalized new credit union that remains uncapitalized one hundred twenty (120) calendar days after the later of:
(i) The effective date of classification as uncapitalized; or
(ii) The last day of the calendar month following expiration of the time period provided in the credit union's initial business plan (approved at the time its charter was granted) to remain uncapitalized, regardless whether a revised business plan was rejected, approved or implemented.
(3) Exception. The NCUA Board may decline to place a new credit union into liquidation or conservatorship as provided in paragraph (c)(2) of this section if the credit union documents to the NCUA Board why it is viable and has a reasonable prospect of becoming adequately capitalized.
(d) Mandatory liquidation of uncapitalized federal credit union. In lieu of paragraph (c) of this section, an uncapitalized federal credit union may be placed into liquidation on grounds of insolvency pursuant to 12 U.S.C. 1787(a)(1)(A).
§702.206 Revised business plans (RBP) for new credit unions.
(a) Schedule for filing—
(1) Generally. Except as provided in paragraph (a)(2) of this section, a new credit union classified moderately capitalized or lower must file a written revised business plan (RBP) with the appropriate Regional Director and, if state-chartered, with the appropriate state official, within 30 calendar days of either:
(i) The last of the calendar month following the end of the calendar quarter that the credit union's net worth ratio has not increased consistent with the-present approved business plan;
(ii) The effective date of classification as less than adequately capitalized if the credit union has no then-present approved business plan; or
(iii) The effective date of classification as less than adequately capitalized if the credit union has increased the total amount of member business loans in violation of §702.204(a)(3).
(2) Exception. The NCUA Board may notify the credit union in writing that its RBP is to be filed within a different period or that it is not necessary to file an RBP.
(3) Failure to timely file plan. When a new credit union fails to file an RBP as provided under paragraphs (a)(1) or (a)(2) of this section, the NCUA Board shall promptly notify the credit union that it has failed to file an RBP and that it has 15 calendar days from receipt of that notice within which to do so.
(b) Contents of revised business plan. A new credit union's RBP must, at a minimum—
(1) Address changes, since the new credit union's current business plan was approved, in any of the business plan elements required for charter approval under chapter 1, section IV.D. of appendix B to part 701 of this chapter, or for state-chartered credit unions under applicable state law;
(2) Establish a timetable of quarterly targets for net worth during each year in which the RBP is in effect so that the credit union becomes adequately capitalized by the time it no longer qualifies as “new” per §702.201;
(3) Specify the projected amount of earnings of net worth increases as provided under §702.204(a)(1) or 702.205(a)(1);
(4) Explain how the new credit union will comply with the mandatory and discretionary supervisory actions imposed on it by the NCUA Board under this subpart;
(5) Specify the types and levels of activities in which the new credit union will engage;
(6) In the case of a new credit union reclassified to a lower category under §702.202(d), specify the steps the credit union will take to correct the unsafe or unsound condition or practice; and
(7) Include such other information as the NCUA Board may require.
(c) Criteria for approval. The NCUA Board shall not approve a new credit union's RBP unless it—
(1) Addresses the items enumerated in paragraph (b) of this section;
(2) Is based on realistic assumptions, and is likely to succeed in building the credit union's net worth; and
(3) Would not unreasonably increase the credit union's exposure to risk (including credit risk, interest-rate risk, and other types of risk).
(d) Consideration of regulatory capital. To minimize possible long-term losses to the NCUSIF while the credit union takes steps to become adequately capitalized, the NCUA Board shall, in evaluating an RBP under this section, consider the type and amount of any form of regulatory capital which may become established by NCUA regulation, or authorized by state law and recognized by NCUA, which the credit union holds, but which is not included in its net worth.
(e) Review of revised business plan—
(1) Notice of decision. Within 30 calendar days after receiving an RBP under this section, the NCUA Board shall notify the credit union in writing whether its RBP is approved, and shall provide reasons for its decision in the event of disapproval. The NCUA Board may extend the time within which notice of its decision shall be provided.
(2) Delayed decision. If no decision is made within the time prescribed in paragraph (e)(1) of this section, the RBP is deemed approved.
(3) Consultation with state officials. When evaluating an RBP submitted by a federally insured state-chartered new credit union (whether an original, new or additional RBP), the NCUA Board shall seek and consider the views of the appropriate state official, and provide prompt notice of its decision to the appropriate state official.
(f) Plan not approved—
(1) Submission of new revised plan. If an RBP is rejected by the NCUA Board, the new credit union shall submit a new RBP within 30 calendar days of receiving notice of disapproval of its initial RBP, unless it is notified in writing by the NCUA Board that the new RBP is to be filed within a different period.
(2) Notice of decision on revised plan. Within 30 calendar days after receiving an RBP under paragraph (f)(1) of this section, the NCUA Board shall notify the credit union in writing whether the new RBP is approved. The Board may extend the time within which notice of its decision shall be provided.
(3) Submission of multiple unapproved RBPs. The submission of more than two RBPs that are not approved is considered an unsafe and unsound condition and may subject the credit union to administrative enforcement action pursuant to section 206 of the FCUA, 12 U.S.C. 1786 and 1790d.
(g) Amendment of plan. A credit union that has filed an approved RBP may, after prior written notice to and approval by the NCUA Board, amend it to reflect a change in circumstance. Pending approval of an amended RBP, the new credit union shall implement its existing RBP as originally approved.
(h) Publication. An RBP need not be published to be enforceable because publication would be contrary to the public interest.
§702.207 Incentives for new credit unions.
(a) Assistance in revising business plans. Upon timely request by a credit union having total assets of less than $10 million (regardless how long it has been in operation), the NCUA Board shall provide assistance in preparing a revised business plan required to be filed under §702.206.
(b) Assistance. Management training and other assistance to new credit unions will be provided in accordance with policies approved by the NCUA Board.
(c) Small credit union program. A new credit union is eligible to join and receive comprehensive benefits and assistance under NCUA's Small Credit Union Program.
§702.208 Reserves.
Each new credit union shall establish and maintain such reserves as may be required by the FCUA, by state law, by regulation, or in special cases by the NCUA Board or appropriate state official.
§702.209 Full and fair disclosure of financial condition.
(a) Full and fair disclosure defined. “Full and fair disclosure” is the level of disclosure which a prudent person would provide to a member of a new credit union, to NCUA, or, at the discretion of the board of directors, to creditors to fairly inform them of the financial condition and the results of operations of the credit union.
(b) Full and fair disclosure implemented. The financial statements of a new credit union shall provide for full and fair disclosure of all assets, liabilities, and members' equity, including such valuation (allowance) accounts as may be necessary to present fairly the financial condition; and all income and expenses necessary to present fairly the statement of income for the reporting period.
(c) Declaration of officials. The Statement of Financial Condition, when presented to members, to creditors or to NCUA, shall contain a dual declaration by the treasurer and the chief executive officer, or in the latter's absence, by any other officer designated by the board of directors of the reporting credit union to make such declaration, that the report and related financial statements are true and correct to the best of their knowledge and belief and present fairly the financial condition and the statement of income for the period covered.
(d) Charges for loan and lease losses. Full and fair disclosure demands that a new credit union properly address charges for loan losses as follows:
(1) Charges for loan and lease losses shall be made timely in accordance with generally accepted accounting principles (GAAP);
(2) The ALLL must be maintained in accordance with GAAP; and
(3) At a minimum, adjustments to the ALLL shall be made prior to the distribution or posting of any dividend to the accounts of members.
§702.210 Payment of dividends.
(a) Restriction on dividends. Dividends shall be available only from net worth, net of any special reserves established under §702.208, if any.
(b) Payment of dividends and interest refunds. The board of directors may not pay a dividend or interest refund that will cause the credit union's capital classification to fall below adequately capitalized under subpart A of this part unless the appropriate regional director and, if state-chartered, the appropriate state official, have given prior written approval (in an RBP or otherwise). The request for written approval must include the plan for eliminating any negative retained earnings balance.
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