Credit unions: Revisions and adjustments,

[Federal Register: June 4, 2002 (Volume 67, Number 107)]

[Proposed Rules]

[Page 38431-38445]

From the Federal Register Online via GPO Access [wais.access.gpo.gov]

[DOCID:fr04jn02-23]

NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Parts 702, 741 and 747

Prompt Corrective Action

AGENCY: National Credit Union Administration (NCUA).

ACTION: Proposed rule.

SUMMARY: In 2000, the National Credit Union Administration (NCUA) adopted a comprehensive system of prompt corrective action consisting of minimum capital standards for federally-insured credit unions and corresponding remedies for restoring net worth. After six quarters of implementation experience, NCUA requests public comment on proposed revisions and adjustments intended to improve and simplify the system of prompt corrective action.

DATES: Comments must be received on or before August 5, 2002.

ADDRESSES: Direct comments to Becky Baker, Secretary of the Board. Mail or hand-deliver comments to: National Credit Union Administration, 1775 Duke Street, Alexandria, Virginia 22314-3428. You are encouraged to fax comments to (703) 518-6319 or e-mail comments to regcomments@ncua.gov

[[Page 38432]]

instead of hand-delivering them. Whichever method you choose, please send comments by one method only.

FOR FURTHER INFORMATION CONTACT: Technical: Herbert S. Yolles, Deputy Director, Office of Examination and Insurance, at the above address or by telephone (703) 518-6360. Legal: Steven W. Widerman, Trial Attorney, Office of General Counsel, at the above address or by telephone (703) 518-6557.

SUPPLEMENTARY INFORMATION:

  1. Background

    1. Existing Part 702

    2. Where Credit Unions Stand Today

    3. Request for Comments B. Section-by-Section Analysis of Proposed Revisions

    4. Section 702.2--Definitions

    5. Section 702.101--Measure and effective date of net worth classification

    6. Section 702.107--Alternative component for loans sold with recourse

    7. Section 702.108--Risk mitigation credit

    8. Section 702.201--PCA for ``Adequately Capitalized'' credit unions.

    9. Section 702.204--PCA for ``Critically Undercapitalized'' credit unions

    10. Section 702.205--Consultation with State officials on proposed PCA.

    11. Section 702.206--Net worth restoration plans

    12. Section 702.303--PCA for ``Adequately Capitalized'' new credit unions

    13. Section 702.304--PCA for ``Moderately Capitalized,'' ``Marginally Capitalized'' and ``Minimally Capitalized'' new credit unions

    14. Section 702.305--PCA for ``Uncapitalized'' new credit unions

    15. Section 702.306--Revised business plans for new credit unions

    16. Section 702.401--Charges to the regular reserve

    17. Section 702.403--Payment of dividends

    18. Section 741.3--Adequacy of reserves

    19. Section 747.2005--Enforcement of orders

    The following acronyms are used throughout:

    CUMAA Credit Union Membership Access Act DSA Discretionary Supervisory Action MBL Member Business Loan MSA Mandatory Supervisory Action NWRP Net Worth Restoration Plan OCA Other Corrective Action PCA Prompt Corrective Action RBNW Risk-Based Net Worth RBP Revised Business Plan RMC Risk Mitigation Credit ROA Return on assets

    Throughout the Supplementary Information section, citations to part 702 refer to the current version of 12 CFR 702 et seq. (2002) and are abbreviated to the section number only.

  2. Background

    1. Existing Part 702

      In 1998, the Credit Union Membership Access Act (``CUMAA''), Pub. L. No. 105-219, 112 Stat. 913 (1998), amended the Federal Credit Union Act (``the Act'') to require NCUA to adopt by regulation a system of minimum capital standards for federally-insured ``natural person'' credit unions. 12 U.S.C. 1790d et seq. This system, known as ``prompt corrective action'' (``PCA''), is indexed to five statutory net worth categories.

      In February 2000, the NCUA Board adopted part 702 and subpart L of part 747, establishing a comprehensive system of PCA. 65 FR 8560 (Feb. 18, 2000). Subpart A of part 702 consists of standards for calculating a credit union's net worth and classifying it among the five statutory net worth categories. 12 CFR 702.101-108. Subpart B combines mandatory and discretionary supervisory actions indexed to the five categories, as well as PCA-based conservatorship and liquidation. Secs. 702.201- 206. Subpart C consists of a system of PCA for ``new'' credit unions. Secs. 702.301-307. Subpart D prescribes reserve accounts, requirements for full and fair disclosure of financial condition, and prerequisites for paying dividends consistent with the earnings retention requirement in subpart B. Secs. 702.401-403. In addition to these substantive provisions, subpart L of part 747 established an independent review process allowing affected credit unions and officials to challenge PCA decisions. 12 CFR 747.2001 et seq. (2000).

      In July 2000, the NCUA Board integrated a risk-based net worth (``RBNW'') component into part 702, as CUMAA mandated. 65 FR 44950 (July 20, 2000). The RBNW requirement applies to non-``new'' credit unions, Sec. 702.102(a)(1)-(2), that satisfy minimum RBNW and asset size requirements, Sec. 702.103, and whose portfolios of assets and liabilities carry above average risk exposure. Sec. 702.104. A credit union whose net worth ratio does not meet its RBNW requirement under any of three methods (standard calculation, alternative components, risk mitigation credit) is classified to the ``undercapitalized'' net worth category. 12 U.S.C. 1790d(c)(1)(C)(ii); Sec. 702.102(a)(3).

      Part 702 and subpart L of part 747 were effective August 7, 2000, and first applied to activity in the fourth quarter of 2000 as reflected in the Call Report for that period. The RBNW component of part 702 was effective January 1, 2001, and first applied (for quarterly Call Report filers) to activity in the first quarter of 2001 as reflected in the Call Report for that period.\1\

      \1\ Part 702 has since been amended twice--once to incorporate limited technical corrections, 65 FR 55439 (Sept. 14, 2000), and once to delete sections made obsolete (Secs. 702.101(c)(2)-(3) and 702.103(b)) by the recently adopted uniform quarterly schedule for filing Call Reports regardless of asset size. 67 FR 12459 (March 19, 2002).

      At the conclusion of the initial PCA rulemaking process, the NCUA Board directed the ``PCA Oversight Task Force'' (a working group consisting of NCUA staff and State regulators) to review at least a full year of PCA implementation and recommend necessary modifications. 65 FR at 44964. The proposed revisions presented below for comment are a product of that review.

    2. Where Credit Unions Stand Today

      1. Net worth classification

        As of December 31, 2001, federally-insured credit unions are classified as follows within the PCA net worth categories:

        Table A.--Net Worth Classification of Non-``New'' FICUs

        of Net worth category

        Net worth ratio

        non-``new'' Percent of all non- FICUs

        ``new'' FICUs

        ``Well Capitalized''................ 7% or greater

        9634 96.96% ``Adequately Capitalized''.......... 6% to 6.99%

        210 2.11% ``Undercapitalized''................ 4% to 5.99%

        53 0.53% ``Significantly Undercapitalized''.. 2% to 3.99%

        23 0.24% ``Critically Undercapitalized''..... Less than 2%

        15 0.15%

        [[Page 38433]]

        Table B.--Net Worth Classification of ``New'' FICUs

        of ``New'' net worth category

        Net worth ratio

        ``new'' Percent of all ``new'' FICUs

        FICUs

        ``Well Capitalized''................ 7% or greater

        0 0 ``Adequately Capitalized''.......... 6% to 6.99%

        6 12.50% ``Moderately Capitalized''.......... 3.5% to 5.99%

        19 39.58% ``Marginally Capitalized''.......... 2% to 3.49%

        8 16.67% ``Minimally Capitalized''........... 0% to 1.99%

        10 20.83% ``Uncapitalized''................... Less than 0%

        5 10.42%

      2. RBNW requirement

        As of December 31, 2001, 399 federally-insured credit unions--4 percent of the total--were required to meet an RBNW requirement. Of these, 393 met the requirement using the ``standard calculation.'' Sec. 702.106. The six that failed under the ``standard calculation'' met their RBNW requirement using the ``alternative components.'' Sec. 702.107. To date, no credit union has completely failed its RBNW requirement, and no credit union has applied for a ``Risk Mitigation Credit.'' Sec. 702.108.

    3. Request for Comments

      Through this notice, NCUA invites public comment on a series of proposed revisions to part 702 prompted by six quarters of experience implementing PCA. To facilitate consideration of the public's views, we ask commenters to organize and identify their comments by corresponding part 702 section number and/or topic and to include general comments, if any, in a separate section at the end. Also, for purposes of this rulemaking, please confine your comments to the NCUA regulations that implement PCA--part 702 and subpart L of part 747.

      In addressing the proposed revisions, we urge commenters to recognize that, while given substantial discretion in certain areas of PCA, NCUA lacks the authority to override or expand by regulation the requirements, limitations and definitions that CUMAA expressly prescribed. See 12 U.S.C. 1790d(n) (forbidding action ``in derogation'' of what CUMAA prescribes). For example, NCUA lacks the statutory authority to expand CUMAA's express, limited definition of ``net worth'' for PCA purposes. 12 U.S.C. 1790d(o)(2)(A). This rulemaking will not address comments advocating modifications to part 702 that exceed the scope of NCUA's statutory authority.

      To ensure that the system of PCA for federally-insured credit unions is ``workable, fair and effective in light of the cooperative character of credit unions,'' S. Rep. No. 193, 105th Cong., 2d Sess. 14 (1998), the NCUA Board welcomes broad public input addressing the revisions proposed below.

  3. Section-by-Section Analysis of Proposed Revisions

    PART 702--PROMPT CORRECTIVE ACTION

    1. Section 702.2--Definitions

      1. Dividend. Subpart D of part 702 sets various restrictions and requirements regarding the payment of dividends to members. Secs. 702.403, 702.401(d), 702.402(d)(5). However, that subpart overlooks the fact that many State-chartered credit unions pay interest on shares rather than dividends. To correct this oversight, the proposed rule adds to Sec. 702.2 a new subsection (e) defining a ``dividend'' as ``a distribution of earnings by a federally-insured credit union and a payment of interest on a deposit by a State- chartered credit union.''

      2. Senior executive officer. The authority to dismiss a director or senior executive officer is a discretionary supervisory action (``DSA'') available when a credit union is classified ``undercapitalized'' or lower. Secs. 702.202(b)(8), 702.203(b)(8), 702.204(b)(8). See also 12 CFR 747.2004(a) (review of dismissal of senior executive officer). The authority to order the hiring of a ``qualified senior executive officer,'' Secs. 702.204(b)(9), and to limit the compensation paid to a senior executive officer, Sec. 702.204(b)(10), are both DSAs available when a credit union is classified ``critically undercapitalized.'' However, none of these provisions defines who is a ``senior executive officer.'' To correct this oversight, the proposed rule adds a new subsection (j) to Sec. 702.2, incorporating by reference the definition of a ``senior executive officer'' in 12 CFR 701.14(b)(2). That section defines a ``senior executive officer'' as ``a credit union's chief executive officer * * *, any assistant chief executive officer (e.g., any assistant president, any assistant vice president or any assistant treasurer/manager) and the chief financial officer.''

      3. Total assets. Among the methods available to measure a credit union's total assets for PCA purposes is ``[t]he average of quarter-end balances of the four most recent calendar quarters.'' Sec. 702.2(l)(1)(i). In practice, this has been a source of confusion to credit unions; some think ``the four most recent calendar quarters'' refers to the four consecutive quarters preceding the then-current quarter, while others think it means the then-current quarter plus the preceding three consecutive quarters. To end this confusion, the proposed rule redefines the ``average quarterly balance'' as the average of quarter-end balances of ``the four most recent calendar quarters.''

      Another of the methods available to measure a credit union's total assets is the ``quarter end balance of the calendar quarter as reported in the credit union's Call Report, and for semi-annual filers as calculated for the quarters ending March 31 and September 30.'' Sec. 702.2(l)(1)(iv). The proposed rule deletes the exception for the two quarters in which Call Reports are not filedbecause semiannual Call Reporting has been abolished by the recently adopted uniform quarterly schedule for filing Call Reports regardless of asset size. 67 FR 12457 (March 19, 2002).

    2. Section 702.101--Measures and Effective Date of Net Worth Classification

      On the effective date of a credit union's net worth classification, it must begin to comply with the mandatory supervisory actions (``MSAs''), if any, applicable to its net worth category, e.g., Sec. 702.202(a). The effective date also triggers part 702's timetables for whatever further action is required in the case of a ``critically undercapitalized'' credit union. Secs. 702.204(c)(1), 702.204(c)(3), 702.206(a)(1). Relying on the quarter-end calculation of net worth, the effective date of classification in nearly all cases is the ``quarter- end effective date''--``the last day of the calendar month following the end of the calendar quarter.'' Sec. 702.101(b)(1). However, Sec. 702.101(b)(2) presently allows for an

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      interim effective date between quarter-ends when ``the credit union's net worth ratio is recalculated by or as a result of its most recent final report of examination.''

      An interim effective date has occasionally replaced the quarter-end effective date when an NCUA examination is conducted after the quarter- end effective date and it discloses not only that the credit union erred in calculating its net worth ratio, but that the corrected ratio puts it in a different net worth category. Classification to the proper net worth category is not retroactive to the prior quarter-end effective date. Rather, the date the credit union receives the final examination report becomes the new effective date of classification to the proper net worth category, triggering the corresponding MSAs.\2\

      \2\ A corrected net worth ratio that reduces a credit union to a lower worth category typically has the greatest impact when a ``well capitalized'' or ``adequately capitalized'' credit union declines to ``undercapitalzied'' or lower (and must submit an NWRP for the first time) and when a credit union declines to ``critically undercapitalized'' from a higher net worth category (and becomes subject to mandatory liquidation of net worth fails to improve). In comparison, when an already ``undercapitalized'' credit union declines to ``significantly undercapitalized,'' the MSAs are the same in both categories and only the range of availabale DSAs expands.

      Section 702.101(b)(2) has been difficult to implement for several reasons. First, it lacks standards that limit recalculation of net worth to instances of error or misstatement, and that preclude recalculation based simply on changed data or conditions occurring since the last Call Report (which changes will be reflected in the next quarter's Call Report). Second, experience shows that an error or misstatement in calculating net worth may emerge from a supervision contact other than an examination, yet notice to the credit union to correct its net worth ratio must await the ``most recent report of final examination.'' Third, postponing notice of the corrected net worth ratio until receipt of the final report of examination may deprive the credit union of the opportunity to take corrective action sooner. To rectify these flaws, subsection (b)(2) is revised to define the ``corrected net worth category'' as ``the date the credit union receives subsequent written notice * * * of a decline in net worth category due to correction of an error or misstatement in the credit union's most recent Call Report.''

    3. Section 702.107--Alternative Component for Loans Sold With Recourse

      Among the eight risk portfolios used to calculate an applicable RBNW requirement is the portfolio of ``loans sold with recourse,'' generally consisting of the outstanding balance of loans sold or swapped with full or partial recourse. Sec. 702.104(f). In the ``standard calculation'' of the RBNW requirement, the entire balance of the ``loans sold with recourse'' risk portfolio is assigned a single, uniform risk-weighting of 6 percent, Sec. 702.106(f), regardless whether it includes loans sold with only partial recourse against the seller. There is no ``alternative component'' for adjusting the risk- weighting of this portfolio to reflect the limited credit risk associated with loans sold with partial recourse.\3\

      \3\ Currently, the RBNW requirement can be reduced to reflect partial recourse only when a credit union that initially fails its RBNW requirement applies for and receives a ``risk mitigatin credit'' based upon proof of mitigation of credit risk. Sec. 702.108(a)(1); 65 FR at 44963.

      Since the adoption of part 702, recourse loan activity among credit unions has nearly doubled, and loan programs have emerged that allow a credit union that sells fixed-rate mortgage loans, for example, to contractually limit the extent of the purchaser's recourse to the seller.\4\ This enables credit unions to readily cap their credit risk exposure from the sale of recourse loans. In view of these developments, a single, uniform risk-weighting that assumes maximum credit risk exposure is inequitable.

      \4\ For example, documentation for the loan sale transaction may provide for recourse in the form of a contractually-spaced recourse obligation measured either by a designated dollar amount that is fixed for the life of the loan, or by a designated percentage of the unpaid balance of a pool of loans.

      Therefore, the NCUA Board proposes to add a fourth ``alternative component'' to Sec. 702.107 that would allow variable risk-weighting that corresponds to the actual credit risk exposure of loans sold with a contractual recourse obligation of less than 6 percent. The ``alternative component'' proposed in new Sec. 702.107(d) is the sum of two risk-weighted buckets. The first bucket consists of the amount of loans sold with contractual recourse obligations of six percent or greater and is risk-weighted at a uniform six percent. Sec. 702.107(d)(1). The second bucket consists of the amount of loans sold with contractual recourse obligations of less than six percent and is risk-weighted according to the weighted average recourse percent of its contents, as computed by the credit union.\5\ Sec. 702.107(d)(2); see new Table 5(a) and new Appendixes F and G in rule text below. Like the existing ``alternative components,'' if the ``alternative component'' proposed for loans sold with recourse reduces the RBNW requirement initially determined under the ``standard calculation,'' the credit union could then substitute it for the corresponding ``standard component.'' Sec. 702.106(f).

      \5\ To calculate the ``weighted average recourse percent'' of the bucket of loans sold with recourse aThe credit union must calculate this alternative risk weighting for loans sold with recourse of less than 6%. For an example computation, see worksheet in Appendix G below.

      Appendix G--Worksheet for Alternative Risk Weighting of Loans Sold With Contractual Recourse Obligations of Less Than 6% [Example Calculation in Bold]

      Dollar balance of

      Alternative risk Percent of contractual recourse obligation less than 6% loans sold with Dollars of

      weighting recourse

      recourse

      (percent)

      5.50%..................................................

      5,000,000

      275,000 ................. 5.00%..................................................

      25,000,000

      1,250,000 ................. 4.50%..................................................

      5,000,000

      2,250,000 ................. Sum of above equals....................................

      35,000,000

      1,750,000 ................. Dollar of recourse divided by dollar balance equals ................. .................

      5.00 (expressed as %)......................................

    4. Revise newly designated Appendix H to Subpart A to read as follows:

      Appendix H--Example RBNW Requirement Using Alternative Components [Example Calculation in Bold]

      Standard Alternative Lower of standard Risk portfolio

      component component or alternative (percent) (percent) component (percent)

      (a) Long-term real estate loans..................................

      2.20

      2.85

      2.20 (b) MBLs outstanding.............................................

      0.77

      0.95

      0.77 (c) Investments..................................................

      1.51

      1.37 (f) Loans sold with recourse.....................................

      1.20

      1.03

      1.03 Standard component (d) Low-risk assets..............................................

      0 (e) Average-risk assets..........................................

      1.83 (g) Unused MBL commitments.......................................

      0.15 (h) Allowance....................................................

      (1.02) RBNW requirement*--Compare to Net Worth Ratio....................

      6.33

      *A credit union is ``undercapitalized'' if its net worth ratio is less than its applicable RBNW requirement.

    5. Revise Sec. 702.201 to read as follows:

      Sec. 702.201 Prompt corrective action for ``adequately capitalized'' credit unions.

      (a) Earnings retention. Beginning 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 \1/10\th percent (0.1%) of its total assets, and must quarterly transfer that amount (or more by choice) from undivided earnings to its regular reserve account 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 and quarterly transfer 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

      [[Page 38443]]

      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).

    6. Amend Sec. 702.202 by removing the word ``transfer'' from the heading of paragraph (a)(1) and adding in its place the word ``retention.''

    7. Amend Sec. 702.203 by removing the word ``transfer'' from the heading of paragraph (a)(1) and adding in its place the word ``retention.''

    8. Amend Sec. 702.204 as follows:

      1. Revise the heading of paragraph (a)(1) to read as set forth below;

      2. Revise paragraph (c)(1)(iii) to read as set forth below;

      3. Revise paragraph (c)(4) to read as set forth below; and

      4. Add new paragraph (d) to read as follows:

      Sec. 702.204 Prompt corrective action for ``critically undercapitalized'' credit unions.

      (a) * * *

      (1) Earnings retention. * * * * * * * *

      (c) * * *

      (1) * * *

      (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. * * *

      (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).

    9. Amend Sec. 702.205 by removing from paragraph (c) the citation ``702.201(b)''.

    10. Amend Sec. 702.206 as follows:

      1. Revise paragraph (c)(1)(ii) to read as set forth below;

      2. Revise paragraph (c)(1)(iii) to read as set forth below; and

      3. Add new paragraph (i) to read as follows:

      Sec. 702.206 Net worth restoration plans.

      * * * * *

      (c) * * *

      (1) * * *

      (ii) The projected amount of earnings to be transferred to the regular reserve account in each quarter of the term of the NWRP as required under Sec. 702.201(a), or as permitted under Sec. 702.201(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; * * * * *

      (i) Publication. An NWRP need not be published to be enforceable because publication would be contrary to the public interest.

    11. Amend Sec. 702.302 as follows:

      1. Remove the number ``2'' from the parenthetical ``table 2)'' in the introductory text of paragraph (c) and add in its place the number ``6'';

      2. Revise the table immediately preceding paragraph (d) to read as set forth below; and

      3. Revise paragraph (d) to read as follows:

      Sec. 702.302 Net worth categories for new credit unions.

      * * * * *

      Table 6.--Net Worth Category Classification for ``New'' Credit Unions

      A ``new'' credit union's net worth category is . . .

      if its net worth ratio is . . .

      ``Well Capitalized''................... 7% or above ``Adequately Capitalized''............. 6% to 6.99% ``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 Sec. 702.102(b) and (c), the NCUA Board may reclassify a ``well capitalized,'' ``adequately capitalized'' or ``moderately capitalized'' new credit union to the next lower net worth category (each of such actions is hereinafter referred to generally as ``reclassification'') in either of the circumstances prescribed in Sec. 702.102(b). * * * * *

    12. Revise Sec. 702.303 to read as follows:

      Sec. 702.303 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 Sec. 702.304(a)(2), or in the absence of such a plan, in accordance with Sec. 702.201, and quarterly transfer that amount from undivided earnings to its regular reserve account, until it is ``well capitalized.''

    13. Amend Sec. 702.304 by revising paragraph (a) to read as follows:

      Sec. 702.304 Prompt corrective action for ``moderately capitalized,'' ``marginally capitalized'' and ``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 Sec. 702.302(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 and quarterly transfer that amount from undivided earnings to its regular reserve account;

      (2) Submit revised business plan. Submit a revised business plan within the time provided by Sec. 702.306 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

      [[Page 38444]]

      (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). * * * * *

    14. Amend Sec. 702.305 as follows:

      1. Revise paragraph (a) as set forth below;

      2. Revise paragraph (c)(2) as set forth below; and

      3. Add new paragraph (d) as follows:

      Sec. 702.305 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 Sec. 702.306, 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 Sec. 702.304(a)(3). * * * * *

      (c) * * *

      (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).

    15. Amend Sec. 702.306 as follows:

      1. Revise paragraph (a) to read as set forth below;

      2. Revise paragraph (b)(2) to read as set forth below; and

      3. Add new paragraph (h) to read as follows:

      Sec. 702.306 Revised business plans 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 its 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 Sec. 702.304(a)(3).

      (2) Exception. The NCUA Board may notify the credit union in writing that its RBP is to be filedwithin 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) * * *

      (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 Sec. 702.310(b); * * * * *

      (h) Publication. An RBP need not be published to be enforceable because publication would be contrary to the public interest.

    16. Amend Sec. 702.401 by revising paragraph (c) to read as follows:

      Sec. 702.401 Reserves.

      * * * * *

      (c) Charges to regular reserve after depleting undivided earnings. The board of directors of a federally-insured credit union may authorize losses to be charged to the regular reserve after first depleting the balance of the undivided earnings account and other reserves, provided that the authorization states the amount and provides an explanation of the need for the charge, and either--

      (1) The charge will not cause the credit union's net worth classification to fall below ``adequately capitalized'' under subparts B or C of this part; or

      (2) If the charge will cause the net worth classification to fall below ``adequately capitalized,'' the appropriate Regional Director and, if State-chartered, the appropriate State official, have given written approval (in an NWRP or otherwise) for the charge. * * * * *

    17. Amend Sec. 702.403 by revising paragraph (b) to read as follows:

      Sec. 702.403 Payment of dividends.

      * * * * *

      (b) Payment of dividends if undivided earnings depleted. The board of directors of a ``well capitalized'' federally-insured credit union that has depleted the balance of its undivided earnings account may authorize a transfer of funds from the credit union's regular reserve account to undivided earnings to pay dividends, provided that either--

      (1) The payment of dividends will not cause the credit union's net worth classification to fall below ``adequately capitalized'' under subpart B or C of this part; or

      (2) If the payment of dividends will cause the net worth classification to fall below ``adequately capitalized,'' the appropriate Regional Director and, if State-chartered, the appropriate State official, have given prior written approval (in an NWRP or otherwise) to pay a dividend.

      PART 741--REQUIREMENTS FOR INSURANCE

    18. The authority citation for part 741 continues to read as follows:

      [[Page 38445]]

      Authority: 12 U.S.C. 1757, 1766, 1781-1790, and 1790d. Section 741.4 is also authorized by 31 U.S.C. 3717.

    19. Amend Sec. 741.3 as follows:

      1. Remove from the heading of paragraph (a) the words ``Adequacy of''.

      2. Remove paragraph (a)(2); and

      3. Redesignate current paragraph (a)(3) as paragraph (a)(2).

      PART 747--ADMINISTRATIVE ACTIONS, ADJUDICATIVE HEARINGS, RULES OF PRACTICE AND PROCEDURE, AND INVESTIGATIONS

    20. The authority citation for part 747 continues to read as follows:

      Authority: 12 U.S.C. 1766, 1786, 1784, 1787, 1790d and 4806(a); and 42 U.S.C. 4012a.

    21. Amend Sec. 747.2005 of subpart L by revising paragraph (b)(2) to read as follows:

      Sec. 747.2005 Enforcement of orders.

      * * * * *

      (b) * * *

      (2) Failure to implement plan. Pursuant to 12 U.S.C. 1786(k)(2)(A), the NCUA Board may assess a civil money penalty against a credit union which fails to implement a net worth restoration plan under subpart B of part 702 of this chapter or a revised business plan under subpart C of part 702, regardless whether the plan was published. * * * * *

      [FR Doc. 02-13931Filed6-3-02; 8:45 am]

      BILLING CODE 7535-01-P

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