80_FR_26019 80 FR 25932 - Corporate Credit Unions

80 FR 25932 - Corporate Credit Unions

NATIONAL CREDIT UNION ADMINISTRATION

Federal Register Volume 80, Issue 87 (May 6, 2015)

Page Range25932-25939
FR Document2015-10546

The NCUA Board (Board) is amending its regulations governing corporate credit unions (Corporates) and the scope of their activities. The amendments clarify the mechanics of a number of regulatory provisions and make several non-substantive, technical corrections.

Federal Register, Volume 80 Issue 87 (Wednesday, May 6, 2015)
[Federal Register Volume 80, Number 87 (Wednesday, May 6, 2015)]
[Rules and Regulations]
[Pages 25932-25939]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2015-10546]



[[Page 25932]]

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NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 704

RIN 3133-AE43


Corporate Credit Unions

AGENCY: National Credit Union Administration (NCUA).

ACTION: Final rule.

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SUMMARY: The NCUA Board (Board) is amending its regulations governing 
corporate credit unions (Corporates) and the scope of their activities. 
The amendments clarify the mechanics of a number of regulatory 
provisions and make several non-substantive, technical corrections.

DATES: This final rule is effective June 5, 2015.

FOR FURTHER INFORMATION CONTACT: John Sozanski, Supervision Analyst, 
Office of National Examinations and Supervision, 1775 Duke Street, 
Alexandria, Virginia 22314-3428 or telephone (703) 518-6640; or Justin 
M. Anderson, Senior Staff Attorney, Office of General Counsel, 1775 
Duke Street, Alexandria, Virginia 22314-3428 or telephone (703) 518-
6540.

SUPPLEMENTARY INFORMATION: 

Table of Contents

I. Background
II. Summary of Comments and Final Amendments
III. Regulatory Procedures

I. Background

    In 2010, in response to the preceding financial crisis, the Board 
comprehensively revised NCUA's regulations governing Corporates and 
their activities.\1\ The Board also amended those regulations twice 
more in 2011.\2\ In November 2014, the Board issued a proposed rule 
(Proposal) to further amend the Corporate regulations by clarifying or 
modifying several provisions and making several non-substantive, 
technical corrections.\3\ The Proposal not only clarified and 
streamlined the Corporate regulations, but it also enhanced their 
readability and provided a degree of regulatory relief to Corporates. 
This final rule adopts all of the amendments in the Proposal, with one 
change.
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    \1\ 12 CFR part 704; 75 FR 64786 (Oct. 20, 2010).
    \2\ 76 FR 23861 (Apr. 29, 2011); 76 FR 79531 (Dec. 22, 2011). 
The Board also made technical changes to the regulations in 2011 and 
2013. 76 FR 16235 (Mar. 23, 2011); 78 FR 77563 (Dec. 24, 2013).
    \3\ 79 FR 65353 (Nov. 4, 2014).
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II. Summary of Comments and Final Amendments

    In response to the Proposal, NCUA received 20 comments, nine from 
Corporates, 10 from trade associations and state credit union leagues, 
and one from a natural person credit union. All of the commenters 
generally supported the clarifications and technical changes. As 
discussed more fully below, however, most commenters suggested 
additional changes beyond the scope of the Proposal or commented on 
provisions of the current Corporate regulations that were not addressed 
in the Proposal. The Board adopts the Proposal as issued with only one 
modification.

1. Section 704.2--Definitions

    In the definitions section, the Board deleted several terms it 
determined were duplicative and redefined a number of other terms to 
minimize confusion and enhance the effectiveness of the Corporate 
regulations. The Board removed the definitions of ``adjusted core 
capital'' and ``core capital'' and incorporated them into the 
definition of ``Tier 1 capital.'' The Board also deleted the term 
``capital'' when that term was used as a specific measure, and replaced 
it with the term ``total capital.'' The Board removed the definition of 
``supplementary capital'' and incorporated it into the definition of 
``Tier 2 capital.'' The Board also eliminated the definitions of 
certain terms in Appendix C to part 704, which are no longer relevant 
to Corporates. Finally, the Board modified a number of additional 
definitions to provide greater clarity or to make them consistent with 
other NCUA regulations.
    In response to these proposed changes, NCUA received one comment 
that supported the proposed definition of retained earnings, stating 
that the change would make it easier for the continuing credit union in 
a merger situation to count retained earnings carried on the books of 
the merging credit union. In addition, there were a number of comments 
on definitions in the Corporate regulations that were outside the scope 
of the Proposal. Specifically, 16 commenters objected to the 
requirement that perpetual contributed capital (PCC) be discounted over 
time from what may be counted as Tier 1 capital. This requirement, 
which is in the current rule, was not the subject of any proposed 
amendment. Commenters, however, stated that PCC is consistent with the 
definition of ``Tier 1 capital'' or ``core capital'' as used by banking 
regulators, the Securities and Exchange Commission, and the U.S. 
Treasury, and thus questioned the rationale of requiring certain 
amounts to be excluded from the calculation of Tier 1 Capital, as 
discussed below. Some commenters suggested that the mandatory phase-out 
of PCC would have the effect of altering a Corporate's Tier 1 Capital 
after the specified dates, even though nothing substantive had changed 
in the structure of the PCC account because of its nature as permanent 
capital. Another commenter suggested that the rule be changed to 
provide for a more explicit retained earnings requirement.
    With respect to the comments on PCC and a more explicit retained 
earnings requirement, the Board notes that these are outside the scope 
of the Proposal. However, the Board notes that it was NCUA's intent, 
with the adoption of the final Corporate regulations in 2010, to ensure 
that the Corporates would never again present the sort of systemic risk 
to the entire credit union system that the Corporates did in that time 
period and which required NCUA to take extraordinary regulatory action.
    An aspect of the 2010 Corporate regulations was to incent 
Corporates to build greater reserves of retained earnings to absorb 
potential losses. Retained earnings are considered to be the most 
superior form of capital carried by a Corporate, as retained earnings 
absorb losses without causing a corresponding loss to another party, 
such as a natural person credit union that purchased contributed 
capital from that Corporate. As referenced in the comment letters, part 
704 contains provisions, effective in 2016, that limit the amount of 
contributed capital, including PCC, which may be counted toward a 
Corporate's regulatory capital. NCUA intended this provision to 
encourage a Corporate to build its retained earnings. By increasing 
retained earnings, a Corporate could count more contributed capital as 
regulatory capital.
    As noted by commenters, PCC has elements that are consistent with 
Tier 1 capital. However, one distinguishing element of PCC is that it 
is almost entirely sourced from member credit unions. Accordingly, 
losses that deplete PCC would summarily impair investments made by 
credit union members and their corresponding capital. This downstream 
effect poses increased risk to the National Credit Union Share 
Insurance Fund that capital sourced from external sources would not. 
Should Corporates successfully raise meaningful amounts of capital from 
external sources, the Board may consider easing the

[[Page 25933]]

restrictions on contributed capital in a future rulemaking.
    The Board is finalizing the proposed amendments to the definitions 
section and Appendix C to part 704 without change.

2. Section 704.3--Corporate credit union capital

    The Proposal included amendments to Sec.  704.3(b)(5) and (c)(3) 
regarding corporate capital. The proposed amendments clarified that 
upon redeeming or calling nonperpetual capital accounts or PCC 
instruments, a Corporate must continue to meet its minimum required 
capital and net economic value ratios. These clarifications made the 
provisions consistent with each other and with the terms and conditions 
of contributed capital included in the Model Forms in Appendix A to 
part 704. The Proposal also deleted Sec.  704.3(f)(4), as that 
provision refers to a regulatory requirement that Corporates were to 
have complied with before December 20, 2011.
    NCUA received only one comment on this section. That commenter 
requested that the rule be modified to provide enhanced guidance to 
Corporates on how to handle the redemption of PCC. The Board notes that 
this comment is outside the scope of the Proposal. Further, the Board 
does not believe it is appropriate to consider issuing a proposed rule 
to address this comment at this time. However, if Corporates continue 
to satisfactorily rebuild retained earnings that were depleted during 
the credit crisis of 2007, then NCUA may consider revisiting this issue 
in the future.
    The Board is finalizing the proposed amendments to this section as 
proposed.

3. Section 704.5--Investments

    The Proposal included an amendment to Sec.  704.5(j) regarding 
grandfathering certain Corporate investments. This amendment clarified 
that, while a Corporate may continue to hold an investment that was 
permissible at the time of purchase but later became impermissible 
because of a regulatory change, the investment is still subject to all 
other sections of part 704 that apply to investments, including those 
pertaining to credit risk management, asset and liability management, 
liquidity management, and investment action plans.
    NCUA received no comments on this section and is adopting the 
amendment as proposed.

4. Section 704.6--Credit risk management

    The Proposal provided clarification on how to value investments 
when calculating whether a Corporate is in compliance with various 
sector and issuer limits. NCUA received one comment on this section, 
which suggested that the Board should amend the rule to provide an 
exception to the single issuer limit for auto and equipment dealer 
floor plan asset-backed securities so that such securities would 
receive treatment similar to credit card master trust asset-backed 
securities. This comment is outside the scope of the Proposal, and the 
Board does not believe such an exception is warranted as auto and 
equipment asset-backed security issuances are widely available. The 
Board is adopting the amendments to this section as proposed.

5. Section 704.7--Lending

    Section 704.7(c) currently restricts a Corporate's unsecured member 
lending to 50 percent of capital and its secured member lending to 100 
percent of capital. The Proposal provided greater flexibility to 
Corporates by permitting them to lend on a secured basis up to 150 
percent of their total capital to any individual credit union borrower. 
No commenters opposed this change, but eight commenters recommended 
that NCUA include an additional exclusion from the lending limit for a 
bridge loan made to a natural person member credit union in connection 
with that credit union receiving approval for a loan from the Central 
Liquidity Facility (CLF). All of the commenters who commented on this 
aspect of the Proposal supported a ten-day maturity limit on these 
bridge loans.
    The Board agrees with these commenters and intends to provide an 
exclusion from the lending limit for bridge loans related to CLF loans. 
As this issue was not included in the Proposal, the Board, in 
compliance with the Administrative Procedure Act, will issue a 
subsequent notice of proposed rulemaking to effect this change.

6. Section 704.8--Asset and liability management

    Current Sec.  704.8 establishes requirements to identify, measure, 
monitor, and control risk in the management of assets and liabilities. 
These requirements include interest rate sensitivity analyses, net 
interest income modeling, and limiting the weighted average life of 
assets. Current Sec.  704.8(j) also imposes reporting and other 
requirements on Corporates that experience a decline in net economic 
value (NEV) or other NEV-related measures beyond certain thresholds. 
The Proposal included an amendment to clarify that if a Corporate 
experiences such NEV-related breaches, but is able to adjust its 
balance sheet to meet required regulatory limits within 10 days, then 
the Corporate will not be considered to be in violation of the 
regulation. The Proposal clarified that a regulatory violation would 
exist only if a Corporate could not timely resolve a breach.
    NCUA received several comments on this section. One commenter 
suggested that Corporates should be given more than 10 days to complete 
an adjustment to its balance sheet to satisfy the requirements of Sec.  
704.8(d), (f), and (g). This commenter suggested a 60-day grace period 
and an opportunity to re-test at the expiration of the grace period.
    The Board recognizes that, through the normal course of business, a 
Corporate may temporarily experience an NEV-related breach. Often, a 
Corporate can resolve the breach within a timely manner, which is why 
the current regulation permits a Corporate to resolve any breach within 
10 days prior to further regulatory action being taken. The Board is 
concerned that lengthening the grace period could allow a Corporate to 
circumvent the purpose of the regulation, which is to address breaches 
that are not resolved in a timely manner. The Board, therefore, 
continues to believe the proposed 10-day grace period is appropriate.
    In addition, four commenters suggested that the rule be expanded to 
provide for treatment of government securities, including agency 
securities, as cash equivalent for purposes of assigning weighted 
average life (WAL) values, resulting in such securities receiving a 
zero WAL valuation. The Board recognizes that government-guaranteed 
securities present a different risk profile than other investments that 
Corporates are permitted to purchase. However, these securities can 
pose risks to a Corporate. Specifically, government-issued or 
government-guaranteed securities may have longer-dated maturities that 
do not match a Corporate's funding structure. In addition, they are 
subject to prepayment, extension, and interest rate risks. Given those 
risks, the Board does not believe that government-issued or government-
guaranteed securities merit a cash equivalent designation for purposes 
of assigning WAL values. It is also important to note that government-
guaranteed securities (when compared to non-government-issued or non-
government-guaranteed securities) are allowed a preferential factoring 
for

[[Page 25934]]

purposes of calculating WAL tests pursuant to Sec.  704.8.
    Four commenters also suggested that NCUA should anticipate that 
certain government-sponsored enterprises will increasingly require that 
investors in their mortgage-backed securities agree to certain credit-
risk sharing features. These commenters suggested that NCUA should 
amend its regulations to specifically allow Corporates to acquire these 
types of investments. This issue is outside the scope of the Proposal, 
but the Board will continue to consider these comments for future 
rulemakings.

7. Section 704.9--Liquidity management

    Section 704.9(b) currently restricts a Corporate's general 
borrowing limit to the lower of 10 times capital or 50 percent of 
capital and shares. The Proposal included several changes to this 
section. First, the Proposal changed the limit to 10 times total 
capital, consistent with the definitional changes discussed above. 
Second, the Proposal removed the restriction of 50 percent of capital 
and shares. Finally, the Proposal increased the secured borrowing 
maturity limit from 30 days to 120 days to accommodate seasonality in 
the borrowing patterns of member credit unions.
    Fifteen commenters requested that the borrowing maturity limit be 
increased beyond 120 days. Most of the commenters addressing this topic 
advocated an extension of one to two years. In addition, one commenter 
advocated the elimination of any specific maturity limit. Another 
commenter sought to tie the maturity limit to the use of highly liquid 
collateral. Finally, several commenters argued for a system that would 
allow a Corporate to request a waiver from the borrowing limits.
    The Board has considered all of these comments and has determined 
to extend the maturity limit to 180 days. The Board believes this 
additional extension will not materially increase risk, yet will 
provide the corporate greater flexibility in accommodating the 
fluctuation of its share base attributed to seasonal changes in member 
credit union liquidity demands. For example, credit unions incur 
routine deposit and withdrawal patterns associated with payrolls and 
consumer spending that can occur on an intra-month or multi-month 
basis. This seasonality of behavior has a direct impact on credit union 
funds held on deposit with the corporate. The Board believes the 
extension of the maturity limit will allow corporate credit unions to 
better serve the unique attributes of their members.
    One commenter recommended that the Board remove the current 
limitation on the amount of secured borrowings permitted for non-
liquidity purposes, and to simply allow such borrowings as long as all 
capital ratios continue to exceed the levels required to remain well 
capitalized. The Board believes that Corporates should be limited in 
their ability to borrow on a secured basis for other than liquidity 
purposes. The borrowing limitation is intended to preclude leveraging 
for investment purposes, which can introduce greater risk when markets 
encounter disruption. Secured lenders require collateral to be valued 
at market, and they impose an additional margin to ensure the borrowing 
is fully and continuously collateralized. Market shocks can create 
short-term market values that are significantly below long-term 
intrinsic values, which can magnify potential losses if the creditor 
seizes the collateral and sells it as permitted by the lending 
agreements. The Board is adopting the amendments as proposed, except as 
noted above.

8. Section 704.11--Corporate credit union service organizations 
(Corporate CUSOs)

    The Proposal included several amendments to this section of the 
regulations. First, the Proposal eliminated dates included in Sec.  
704.11(e) that have since passed and are no longer relevant. Second, 
the Proposal added a requirement to Sec.  704.11(g) that a Corporate 
CUSO provide to NCUA and, if applicable, the appropriate state 
supervisory authority (SSA), the kinds of reports required to be 
produced and submitted by natural person credit union service 
organizations pursuant to a recent revision to NCUA's natural person 
credit union service organization rule.\4\
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    \4\ 12 CFR 712.3(d)(4) and (5); 78 FR 72537 (Dec. 3, 2013).
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    Three commenters opposed this provision, all of whom challenged 
NCUA's authority to impose this requirement. Two of these commenters 
noted that the effect of this provision is likely to place CUSOs at a 
competitive disadvantage relative to other service providers. One 
commenter noted that this provision could expose a CUSO to the public 
release of confidential materials should its report become the subject 
of a Freedom of Information Act (FOIA) request. One commenter requested 
further clarification in the rule of the term ``level of activity of 
each credit union'' which the commenter mistakenly asserted appears in 
this section. One commenter, while not opposing the substance of this 
provision, opposed NCUA's use of incorporation by reference to the 
natural person credit union service organization rule.
    The Board recognizes the concerns raised by commenters and notes 
that FOIA, as well as applicable FOIA exemptions, apply to any data or 
information submitted by natural person credit union service 
organizations and Corporate CUSOs to NCUA. The Board anticipates that 
natural person credit union service organization and Corporate CUSO 
submissions often will contain or consist of ``trade secrets and 
commercial or financial information obtained from a person [that is] 
privileged or confidential.'' \5\ This type of information generally is 
subject to withholding under exemption 4 of FOIA. In addition, 
information that is ``contained in or related to examination, 
operating, or condition reports prepared by, on behalf of, or for the 
use of an agency responsible for the regulation or supervision of 
financial institutions'' is generally subject to withholding under 
exemption 8 of FOIA. To the extent, however, that natural person credit 
union service organization or Corporate CUSO submissions may contain or 
consist of data or information not subject to an applicable FOIA 
exemption, for example, an entity's name, address, or other publicly 
available information, that data or information would be releasable 
under FOIA.
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    \5\ 5 U.S.C. 552(b)(4).
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    Further, pursuant to approved Corporate CUSO activities, as found 
on the agency Web site, all Corporate CUSOs engaged in a particular 
approved activity must currently provide NCUA with quarterly and annual 
reports. Most of the reporting required by the Proposal is currently 
required by NCUA via the agency Web site. The Board is adopting the 
proposed changes to this section.

9. Section 704.14--Representation

    The Proposal clarified the provisions in the current regulation 
pertaining to the qualifications required of a Corporate's directors, 
and specified that any candidate for a position on the board of a 
Corporate must currently hold a senior management position at a member 
credit union and hold that position at the time he or she is seated on 
the board of a Corporate. The Board received no comments in opposition 
to this proposed changed and is adopting it as proposed.

[[Page 25935]]

10. Section 704.15--Audit and reporting requirements

    The Proposal made technical changes to this section by eliminating 
dates that are no longer relevant and corrected a typographical error. 
The Board received no comment on these changes and is adopting them as 
proposed.

11. Section 704.18--Fidelity bond coverage

    The Proposal changed the measure in this section from core capital 
to Tier 1 capital, consistent with the definitional changes discussed 
above. The Board received no comments on this change and is adopting it 
as proposed.

12. Section 704.21--Enterprise risk management (ERM)

    The Proposal removed the minimum education and background 
requirements in this section applicable to an independent risk 
management expert. The Board received two comments, which advocated 
that this entire section be the subject of guidance, rather than 
included in the regulations. The Board disagrees with these comments 
and believes ERM should be addressed formally through regulation. 
Without emphasis placed on a strong ERM program, Corporates may be 
practicing good risk management on an exposure-by-exposure basis, but 
they may not be paying close enough attention to the aggregation of 
exposures across the entire institution. A Corporate must measure and 
understand all the individual risks associated with its various 
business components, and also understand how they interact dynamically. 
Accordingly, the Board is adopting the changes in this section as 
proposed.

13. Appendix A to Part 704--Capital Prioritization and Model Forms

    The Proposal removed expired forms and redesignated the remaining 
forms as A-D. The Proposal also removed a sentence from the 
introductory note to current Model Form G, redesignated as Model Form 
C, to clarify that in some instances previously issued ``paid-in 
capital'' may not be considered PCC. The Board received no comments on 
these changes and is adopting them as proposed.

14. Appendix B to Part 704--Expanded Authorities and Requirements

    Consistent with the earlier discussion regarding the simplification 
of terms relating to capital, the Proposal substituted ``leverage 
ratio'' for ``capital ratio'' and ``total capital'' for ``capital'' in 
this appendix. The Board received no comments on these changes and is 
adopting them as proposed.

15. Appendix C to Part 704--Risk-Based Capital Credit Risk-Weight 
Categories

    The Proposal removed references to assets and activities that are 
not consistent with the regular business activities of Corporates. The 
Board received no comments on these changes and is adopting them as 
proposed.

III. Regulatory Procedures

1. Regulatory Flexibility Act

    The Regulatory Flexibility Act requires NCUA to prepare an analysis 
of any significant economic impact a regulation may have on a 
substantial number of small entities (primarily those under $50 million 
in assets).\6\ This final rule only affects Corporates, all of which 
have more than $50 million in assets. Furthermore, the final rule 
consists primarily of technical and clarifying amendments. Accordingly, 
NCUA certifies the rule will not have a significant economic impact on 
a substantial number of small credit unions.
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    \6\ 5 U.S.C. 603(a); 12 U.S.C. 1787(c)(1).
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2. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (PRA) applies to rulemakings in 
which an agency by rule creates a new paperwork burden or increases an 
existing burden.\7\ For purposes of the PRA, a paperwork burden may 
take the form of a reporting or recordkeeping requirement, both 
referred to as information collections. Under the final rule, a 
Corporate with an investment in or loan to a Corporate CUSO will need 
to revise the current agreement it has with the Corporate CUSO to 
provide that the Corporate CUSO will prepare and submit basic or 
expanded reports directly to NCUA and, if applicable, the appropriate 
SSA.
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    \7\ 44 U.S.C. 3507(d); 5 CFR part 1320.
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    Currently, there are 13 Corporates and approximately 16 Corporate 
CUSOs, 13 of which provide the complex or high-risk services that 
require expanded reporting. The information collection burdens imposed, 
on an annual basis, are analyzed below.

    Changing the written agreement relating to reports to NCUA.
    Frequency of response: One-time.
    Initial hour burden: 4.
    4 hours x 13 = 52 hours.

    Initial Corporate CUSO reporting to NCUA and SSA--basic 
information.
    Frequency of response: One-time.
    Initial hour burden: 0.5.
    0.5 hours x 16 = 8 hours.

    Initial Corporate CUSO reporting to NCUA and SSA--expanded 
information.
    Frequency of response: One-time.
    Initial hour burden: 3.
    3 hours x 13 = 39 hours.

    Annual Corporate CUSO reporting to NCUA and SSA--expanded 
information.
    Frequency of response: Annual.
    Annual hour burden: 3.
    3 hours x 13 = 39 hours.

    As required by the PRA, NCUA submitted a copy of this Proposal to 
OMB for its review and approval.

3. Executive Order 13132

    Executive Order 13132 encourages independent regulatory agencies to 
consider the impact of their actions on state and local interests. 
NCUA, an independent regulatory agency as defined in 44 U.S.C. 3502(5), 
voluntarily complies with the executive order to adhere to fundamental 
federalism principles. The final rule does not have substantial direct 
effects on the states, on the relationship between the national 
government and the states, or on the distribution of power and 
responsibilities among the various levels of government. NCUA has, 
therefore, determined that this final rule does not constitute a policy 
that has federalism implications for purposes of the executive order.

4. Assessment of Federal Regulations and Policies on Families

    NCUA has determined that this final rule will not affect family 
well-being within the meaning of section 654 of the Treasury and 
General Government Appropriations Act, 1999, Public Law 105-277, 112 
Stat. 2681 (1998).

5. Small Business Regulatory Enforcement Fairness Act

    The Small Business Regulatory Enforcement Fairness Act of 1996 \8\ 
(SBREFA) provides generally for congressional review of agency rules. A 
reporting requirement is triggered in instances where NCUA issues a 
final rule as defined by Section 551 of the Administrative Procedure 
Act.\9\ NCUA does not believe this final rule is a ``major rule'' 
within the meaning of the relevant sections of SBREFA because it only 
clarifies the mechanics of a number of regulatory provisions and makes 
several non-substantive, technical corrections. NCUA has submitted the 
rule to the Office of Management and

[[Page 25936]]

Budget for its determination in that regard.
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    \8\ Public Law 104-121, 110 Stat. 857 (1996).
    \9\ 5 U.S.C. 551.
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List of Subjects in 12 CFR Part 704

    Credit unions, Corporate credit unions, Reporting and recordkeeping 
requirements.

    By the National Credit Union Administration Board on April 30, 
2015.
Gerard Poliquin,
Secretary of the Board.

    For the reasons discussed above, the National Credit Union 
Administration amends 12 CFR part 704 as follows:

PART 704--CORPORATE CREDIT UNIONS

0
1. The authority citation for part 704 continues to read as follows:

    Authority:  12 U.S.C. 1766(a), 1781, and 1789.


0
2. Amend Sec.  704.2 by:
0
a. Removing the definitions of ``Adjusted core capital'' and ``Asset-
backed commercial paper program'';
0
b. Revising the first two sentences of the definition of ``Available to 
cover losses that exceed retained earnings'';
0
c. Removing the definitions of ``Capital'', ``Capital ratio'', ``Core 
capital'', ``Core capital ratio'', and ``Credit-enhancing interest-only 
strip'';
0
d. Revising the definition of ``Derivatives'';
0
e. Removing the definition of ``Eligible ABCP liquidity facility'';
0
f. Revising the definitions of ``Equity investment'', ``Equity 
security'', ``Fair value'', and ``Internal control'';
0
g. Removing the two definitions of ``Leverage ratio'';
0
h. Adding a new definition, in alphabetical order, for ``Leverage 
ratio'';
0
i. Revising the definitions of ``Net assets'', ``Net risk-weighted 
assets'', and ``Retained earnings'';
0
j. Removing the definition of ``Supplementary Capital'';
0
k. Revising the definitions of ``Tier 1 capital'';
0
l. Adding a definition, in alphabetical order, for ``Tier 1 risk-based 
capital ratio'';
0
m. Revising the definition of ``Tier 2 capital''; and
0
n. Revising the definition of ``Total capital''.
    The revisions and additions read as follows:


Sec.  704.2  Definitions.

* * * * *
    Available to cover losses that exceed retained earnings means that 
the funds are available to cover operating losses realized, in 
accordance with generally accepted accounting principles (GAAP), by the 
corporate credit union that exceed retained earnings and equity 
acquired in a combination. Likewise, available to cover losses that 
exceed retained earnings and perpetual contributed capital (PCC) means 
that the funds are available to cover operating losses realized, in 
accordance with GAAP, by the corporate credit union that exceed 
retained earnings and equity acquired in a combination and PCC. * * *
* * * * *
    Derivatives means a financial contract which derives its value from 
the value and performance of some other underlying financial instrument 
or variable, such as an index or interest rate.
* * * * *
    Equity investment means an investment in an equity security and 
other ownership interest, including, for example, an investment in a 
partnership or limited liability company.
    Equity security means any security representing an ownership 
interest in an enterprise (for example, common, preferred, or other 
capital stock) or the right to acquire (for example, warrants and call 
options) or dispose of (for example, put options) an ownership interest 
in an enterprise at fixed or determinable prices. However, the term 
does not include Federal Home Loan Bank stock, convertible debt, or 
preferred stock that by its terms either must be redeemed by the 
issuing enterprise or is redeemable at the option of the investor.
* * * * *
    Fair value means the price that would be received to sell an asset, 
or paid to transfer a liability, in an orderly transaction between 
market participants at the measurement date, as defined by GAAP.
* * * * *
    Internal control means the process, established by the corporate 
credit union's board of directors, officers and employees, designed to 
provide reasonable assurance of reliable financial reporting and 
safeguarding of assets against unauthorized acquisition, use, or 
disposition. A credit union's internal control structure generally 
consists of five components: Control environment; risk assessment; 
control activities; information and communication; and monitoring. 
Reliable financial reporting refers to preparation of Call Reports as 
well as financial data published and presented to members that meet 
management's financial reporting objectives. Internal control over 
safeguarding of assets against unauthorized acquisition, use, or 
disposition refers to prevention or timely detection of transactions 
involving such unauthorized access, use, or disposition of assets which 
could result in a loss that is material to the financial statements.
* * * * *
    Leverage ratio means the ratio of Tier 1 capital to moving daily 
average net assets.
* * * * *
    Net assets means total assets less Central Liquidity Facility (CLF) 
stock subscriptions, loans guaranteed by the National Credit Union 
Share Insurance Fund (NCUSIF), and member reverse repurchase 
transactions. For its own account, a corporate credit union's payables 
under reverse repurchase agreements and receivables under repurchase 
agreements may be netted out if the GAAP conditions for offsetting are 
met. Also, any amounts deducted in calculating Tier 1 capital are also 
deducted from net assets.
* * * * *
    Net risk-weighted assets means risk-weighted assets less CLF stock 
subscriptions, CLF loans guaranteed by the NCUSIF, and member reverse 
repurchase transactions. For its own account, a corporate credit 
union's payables under reverse repurchase agreements and receivables 
under repurchase agreements may be netted out if the GAAP conditions 
for offsetting are met. Also, any amounts deducted in calculating Tier 
1 capital are also deducted from net risk-weighted assets.
* * * * *
    Retained earnings means undivided earnings, regular reserve, 
reserve for contingencies, supplemental reserves, reserve for losses, 
and other appropriations from undivided earnings as designated by 
management or NCUA.
* * * * *
    Tier 1 capital means the sum of paragraphs (1) through (4) of this 
definition from which paragraphs (5) through (9) of this definition are 
deducted:
    (1) Retained earnings;
    (2) Perpetual contributed capital;
    (3) The retained earnings of any acquired credit union, or of an 
integrated set of activities and assets, calculated at the point of 
acquisition, if the acquisition was a mutual combination;
    (4) Minority interests in the equity accounts of CUSOs that are 
fully consolidated;
    (5) Deduct the amount of the corporate credit union's intangible 
assets that exceed one half percent of its moving daily average net 
assets (however, NCUA may direct the

[[Page 25937]]

corporate credit union to add back some of these assets on NCUA's own 
initiative, by petition from the applicable state regulator, or upon 
application from the corporate credit union);
    (6) Deduct investments, both equity and debt, in unconsolidated 
CUSOs;
    (7) Deduct an amount equal to any PCC or NCA that the corporate 
credit union maintains at another corporate credit union;
    (8) Beginning on October 20, 2016, and ending on October 20, 2020, 
deduct any amount of PCC that causes PCC minus retained earnings, all 
divided by moving daily net average assets, to exceed two percent; and
    (9) Beginning after October 20, 2020, deduct any amount of PCC that 
causes PCC to exceed retained earnings.
    Tier 1 risk-based capital ratio means the ratio of Tier 1 capital 
to the moving monthly average net risk-weighted assets.
    Tier 2 capital means the sum of paragraphs (1) through (4) of this 
definition:
    (1) Nonperpetual capital accounts, as amortized under Sec.  
704.3(b)(3);
    (2) Allowance for loan and lease losses calculated under GAAP to a 
maximum of 1.25 percent of risk-weighted assets;
    (3) Any PCC deducted from Tier 1 capital; and
    (4) Forty-five percent of unrealized gains on available-for-sale 
equity securities with readily determinable fair values. Unrealized 
gains are unrealized holding gains, net of unrealized holding losses, 
calculated as the amount, if any, by which fair value exceeds 
historical cost. NCUA may disallow such inclusion in the calculation of 
Tier 2 capital if NCUA determines that the securities are not prudently 
valued.
* * * * *
    Total capital means the sum of Tier 1 capital and Tier 2 capital, 
less the corporate credit union's equity investments not otherwise 
deducted when calculating Tier 1 capital.
* * * * *

0
3. Amend Sec.  704.3 by revising paragraphs (b)(5), (c)(3), and 
(e)(3)(i) and removing paragraph (f)(4) to read as follows:


Sec.  704.3  Corporate credit union capital.

* * * * *
    (b) * * *
    (5) Redemption. A corporate credit union may redeem NCAs prior to 
maturity or prior to the end of the notice period only if it meets its 
minimum required capital and net economic value ratios after the funds 
are redeemed and only with the prior approval of NCUA and, for state 
chartered corporate credit unions, the applicable state regulator.
* * * * *
    (c) * * *
    (3) Callability. A corporate credit union may call PCC instruments 
only if it meets its minimum required capital and net economic value 
ratios after the funds are called and only with the prior approval of 
the NCUA and, for state chartered corporate credit unions, the 
applicable state regulator. PCC accounts are callable on a pro-rata 
basis across an issuance class.
* * * * *
    (e) * * *
    (3) * * * (i) Notwithstanding the definitions of Tier 1 capital and 
Tier 2 capital in paragraph (d) of this section, NCUA may find that a 
particular asset or Tier 1 capital or Tier 2 capital component has 
characteristics or terms that diminish its contribution to a corporate 
credit union's ability to absorb losses, and NCUA may require the 
discounting or deduction of such asset or component from the 
computation of Tier 1 capital, Tier 2 capital, or total capital.
* * * * *

0
4. Amend Sec.  704.5 by revising paragraph (j) to read as follows:


Sec.  704.5  Investments.

* * * * *
    (j) Grandfathering. A corporate credit union's authority to hold an 
investment is governed by the regulation in effect at the time of 
purchase. However, all grandfathered investments are subject to the 
other requirements of this part.

0
5. Amend Sec.  704.6 by revising paragraphs (c), (d), and (e) to read 
as follows:


Sec.  704.6  Credit risk management.

* * * * *
    (c) Issuer concentration limits--(1) General rule. The aggregate 
value recorded on the books of the corporate credit union of all 
investments in any single obligor is limited to 25 percent of total 
capital or $5 million, whichever is greater.
    (2) Exceptions. (i) Investments in one obligor where the remaining 
maturity of all obligations is less than 30 days are limited to 50 
percent of total capital;
    (ii) Investments in credit card master trust asset-backed 
securities are limited to 50 percent of total capital in any single 
obligor;
    (iii) Aggregate investments in repurchase and securities lending 
agreements with any one counterparty are limited to 200 percent of 
total capital;
    (iv) Investments in non-money market registered investment 
companies are limited to 50 percent of total capital in any single 
obligor;
    (v) Investments in money market registered investment companies are 
limited to 100 percent of total capital in any single obligor; and
    (vi) Investments in corporate CUSOs are subject to the limitations 
of section 11 of this part.
    (d) Sector concentration limits. (1) A corporate credit union must 
establish sector limits based on the value recorded on the books of the 
corporate credit union that do not exceed the following maximums:
    (i) Mortgage-backed securities (inclusive of commercial mortgage-
backed securities)--the lower of 1000 percent of total capital or 50 
percent of assets;
    (ii) Commercial mortgage-backed securities--the lower of 300 
percent of total capital or 15 percent of assets;
    (iii) Federal Family Education Loan Program student loan asset-
backed securities--the lower of 1000 percent of total capital or 50 
percent of assets;
    (iv) Private student loan asset-backed securities--the lower of 500 
percent of total capital or 25 percent of assets;
    (v) Auto loan/lease asset-backed securities--the lower of 500 
percent of total capital or 25 percent of assets;
    (vi) Credit card asset-backed securities--the lower of 500 percent 
of total capital or 25 percent of assets;
    (vii) Other asset-backed securities not listed in paragraphs 
(d)(1)(ii) through (vi) of this section--the lower of 500 percent of 
total capital or 25 percent of assets;
    (viii) Corporate debt obligations--the lower of 1000 percent of 
total capital or 50 percent of assets; and
    (ix) Municipal securities--the lower of 1000 percent of total 
capital or 50 percent of assets.
    (2) Registered investment companies--A corporate credit union must 
limit its investment in registered investment companies to the lower of 
1000 percent of total capital or 50 percent of assets. In addition to 
applying the limit in this paragraph, a corporate credit union must 
also include the underlying assets in each registered investment 
company in the relevant sectors described in paragraph (d)(1) of this 
section when calculating those sector limits.
    (3) A corporate credit union must limit its aggregate holdings in 
any investments not described in paragraphs (d)(1) or (2) of this 
section to the lower of 100 percent of total capital or 5 percent of 
assets. The NCUA may

[[Page 25938]]

approve a higher percentage in appropriate cases.
    (4) Investments in other federally insured credit unions, deposits 
and federal funds investments in other federally insured depository 
institutions, and investment repurchase agreements are excluded from 
the concentration limits in paragraphs (d)(1), (2), and (3) of this 
section.
    (e) Corporate debt obligation subsector limits. In addition to the 
limitations in paragraph (d)(1)(viii) of this section, a corporate 
credit union must not exceed the lower of 200 percent of total capital 
or 10 percent of assets in any single North American Industry 
Classification System (NAICS) industry sector based on the value 
recorded on the books of the corporate credit union. If a corporation 
in which a corporate credit union is interested in investing does not 
have a readily ascertainable NAICS classification, a corporate credit 
union will use its reasonable judgment in assigning such a 
classification. NCUA may direct, however, that the corporate credit 
union change the classification.
* * * * *
0
6. Amend Sec.  704.7 by revising paragraph (c) to read as follows:


Sec.  704.7  Lending.

* * * * *
    (c) Loans to members--(1) Credit unions. (i) The maximum aggregate 
amount in unsecured loans and lines of credit from a corporate credit 
union to any one member credit union, excluding pass-through and 
guaranteed loans from the CLF and the NCUSIF, must not exceed 50 
percent of the corporate credit union's total capital.
    (ii) The maximum aggregate amount in secured loans (excluding those 
secured by shares or marketable securities and member reverse 
repurchase transactions) and unsecured loans (excluding pass-through 
and guaranteed loans from the CLF and the NCUSIF) and lines of credit 
from a corporate credit union to any one member credit union must not 
exceed 150 percent of the corporate credit union's total capital.
    (2) Corporate CUSOs. Any loan or line of credit from a corporate 
credit union to a corporate CUSO must comply with Sec.  704.11.
    (3) Other members. The maximum aggregate amount of loans and lines 
of credit from a corporate credit union to any other one member must 
not exceed 15 percent of the corporate credit union's total capital 
plus pledged shares.
* * * * *
0
7. Amend Sec.  704.8 by revising paragraph (j) to read as follows:


Sec.  704.8  Asset and liability management.

* * * * *
    (j) Limit breaches. (1)(i) If a corporate credit union's decline in 
NEV, base case NEV ratio, or any NEV ratio calculated under paragraph 
(d) of this section exceeds established or permitted limits, or the 
corporate is unable to satisfy the tests in paragraphs (f) or (g) of 
this section, the operating management of the corporate must 
immediately report this information to its board of directors and ALCO; 
and
    (ii) If the corporate credit union cannot adjust its balance sheet 
to meet the requirements of paragraphs (d), (f), or (g) of this section 
within 10 calendar days after detection by the corporate, the corporate 
must notify in writing the Director of the Office of National 
Examinations and Supervision.
    (2) If any breach described in paragraph (j)(1) of this section 
persists for 30 or more calendar days, the corporate credit union:
    (i) Must immediately submit a detailed, written action plan to the 
NCUA that sets forth the time needed and means by which it intends to 
come into compliance and, if the NCUA determines that the plan is 
unacceptable, the corporate credit union must immediately restructure 
its balance sheet to bring the exposure back within compliance or 
adhere to an alternative course of action determined by the NCUA; and
    (ii) If presently categorized as adequately capitalized or well 
capitalized for prompt corrective action purposes, and the breach was 
of paragraph (d) of this section, the corporate credit union will 
immediately be recategorized as undercapitalized until coming into 
compliance, and
    (iii) If presently categorized as less than adequately capitalized 
for prompt corrective action purposes, and the breach was of paragraph 
(d) of this section, the corporate credit union will immediately be 
downgraded one additional capital category.
* * * * *
0
8. Amend Sec.  704.9 by revising paragraph (b) to read as follows:


Sec.  704.9  Liquidity management.

* * * * *
    (b) Borrowing limits. A corporate credit union may borrow up to 10 
times its total capital.
    (1) Secured borrowings. A corporate credit union may borrow on a 
secured basis for liquidity purposes, but the maturity of the borrowing 
may not exceed 180 days. Only a corporate credit union with Tier 1 
capital in excess of five percent of its moving daily average net 
assets (DANA) may borrow on a secured basis for nonliquidity purposes, 
and the outstanding amount of secured borrowing for nonliquidity 
purposes may not exceed an amount equal to the difference between the 
corporate credit union's Tier 1 capital and five percent of its moving 
DANA.
    (2) Exclusions. CLF borrowings and borrowed funds created by the 
use of member reverse repurchase agreements are excluded from the limit 
in paragraph (b)(1) of this section.
0
9. Amend Sec.  704.11 by:
0
a. Revising paragraphs (b)(1) and (2) and (e)(1) introductory text;
0
b. Removing paragraph (e)(2);
0
c. Redesignating paragraph (e)(3) as paragraph (e)(2);
0
d. Redesignating paragraphs (g)(4) through (7) as paragraphs (g)(5) 
through (8), respectively; and
0
e. Adding new paragraph (g)(4).
    The revisions and addition read as follows:


Sec.  704.11  Corporate Credit Union Service Organizations (Corporate 
CUSOs).

* * * * *
    (b) Investment and loan limitations. (1) The aggregate of all 
investments in member and non-member corporate CUSOs that a corporate 
credit union may make must not exceed 15 percent of a corporate credit 
union's total capital.
    (2) The aggregate of all investments in and loans to member and 
nonmember corporate CUSOs a corporate credit union may make must not 
exceed 30 percent of a corporate credit union's total capital. A 
corporate credit union may lend to member and nonmember corporate CUSOs 
an additional 15 percent of total capital if the loan is collateralized 
by assets in which the corporate has a perfected security interest 
under state law.
* * * * *
    (e) Permissible activities. (1) A corporate CUSO must agree to 
limit its activities to:
* * * * *
    (g) * * *
    (4) Will provide the reports as required by Sec.  712.3(d)(4) and 
(5) of this chapter;
* * * * *
0
10. Amend Sec.  704.14 by revising paragraphs (a)(2), (a)(9), and 
(e)(2) to read as follows:


Sec.  704.14  Representation.

    (a)* * *
    (2) Only an individual who currently holds the position of chief 
executive officer, chief financial officer, chief

[[Page 25939]]

operating officer, or treasurer/manager at a member credit union, and 
will hold that position at the time he or she is seated on the 
corporate credit union board if elected, may seek election or re-
election to the corporate credit union board;
* * * * *
    (9) At least a majority of directors of every corporate credit 
union, including the chair of the board, must serve on the corporate 
board as representatives of natural person credit union members.
* * * * *
    (e)* * *
    (2) The provisions of Sec.  701.14 of this chapter apply to 
corporate credit unions, except that where ``Regional Director'' is 
used, read ``Director of the Office of National Examinations and 
Supervision.''
0
11. Amend Sec.  704.15 by revising paragraph (a)(2)(iii) introductory 
text, the first sentence of paragraph (b)(2), and the first sentence of 
paragraph (d)(1) to read as follows:


Sec.  704.15  Audit and reporting requirements.

    (a) * * *
    (2) * * *
    (iii) An assessment by management of the effectiveness of the 
corporate credit union's internal control structure and procedures as 
of the end of the past calendar year that must include the following:
* * * * *
    (b) * * *
    (2) * * *The independent public accountant who audits the corporate 
credit union's financial statements must examine, attest to, and report 
separately on the assertion of management concerning the effectiveness 
of the corporate credit union's internal control structure and 
procedures for financial reporting.* * *
* * * * *
    (d) * * *
    (1)* * * Each corporate credit union must establish a supervisory 
committee, all of whose members must be independent.* * *
* * * * *


Sec.  704.18  [Amended]

0
12. Amend Sec.  704.18 by:
0
a. Removing the words ``core capital ratio'' from the introductory text 
of paragraph (e)(1) and adding in their place ``leverage ratio'';
0
b. Removing the words ``Core capital ratio'' from the table heading of 
paragraph (e)(1) and adding in their place ``Leverage ratio''; and
0
c. Removing the words ``of core capital'' wherever they appear in the 
table in paragraph (e)(1) and adding in their place ``of Tier 1 
capital''.
0
13. Amend Sec.  704.21 by revising paragraph (c) to read as follows:


Sec.  704.21  Enterprise risk management.

* * * * *
    (c) The ERMC must include at least one independent risk management 
expert. The risk management expert must have at least five years of 
experience in identifying, assessing, and managing risk exposures. This 
experience must be commensurate with the size of the corporate credit 
union and the complexity of its operations. The board of directors may 
hire the independent risk management expert to work full-time or part-
time for the ERMC or as a consultant for the ERMC.
* * * * *

Appendix A to Part 704--[Amended]

0
14. Amend Appendix A to part 704 by:
0
a. Removing Model Forms A, B, E, and F and redesignating Model Forms C, 
D, G, and H as Model Forms A, B, C, and D, respectively; and
0
b. Removing the second sentence of the note in newly redesignated Model 
Form C.

Appendix B to Part 704--[Amended]

0
15. Amend Appendix B to part 704 by:
0
a. Removing the words ``capital ratio'' wherever they appear and adding 
in their place ``leverage ratio'';
0
b. Removing the words ``corporate credit union's capital'' wherever 
they appear and adding in their place ``corporate credit union's total 
capital'';
0
c. Removing the words ``25 percent of capital'' from paragraph (b)(3) 
of Part II and adding in their place ``25 percent of total capital''; 
and
0
d. Removing paragraph (e) from part 1.
0
16. Amend Appendix C to part 704 by:
0
a. In part I(b):
0
(i) Revising paragraph (8) of the definition of ``Direct credit 
substitute'';
0
(ii) Revising paragraph (8) of the definition of ``Recourse''; and
0
(iii) Revising paragraph (2) of the definition of ``Residual 
interest'';
0
b. In part II(a), revising paragraph (4)(xiii);
0
c. In part II(b):
0
(i) Removing paragraphs (1)(iv) and (4);
0
(ii) Redesignating paragraphs (5) and (6) as paragraphs (4) and (5), 
respectively;
0
(iii) Revising newly redesignated paragraph (4)(i); and
0
(iv) Removing newly redesignated paragraph (5)(v)(C).
0
d. In part II(c):
0
(i) Removing paragraph (2)(i);
0
(ii) Redesignating paragraphs (2)(ii) and (iii) as paragraphs (2)(i) 
and (ii), respectively; and
0
(iii) Revising newly redesignated paragraph (2)(i) and the introductory 
text of newly redesignated paragraph (2)(ii).
    The revisions read as follows:

Appendix C to Part 704--Risk-Based Capital Credit Risk-Weight 
Categories

* * * * *
    Part I: Introduction
* * * * *
    (b) Definitions
* * * * *
    Direct credit substitute* * *
    (8) Liquidity facilities that provide support to asset-backed 
commercial paper.
* * * * *
    Recourse * * *
    (8) Liquidity facilities that provide support to asset-backed 
commercial paper.
* * * * *
    Residual interest* * *
    (2) Residual interests generally include spread accounts, cash 
collateral accounts, retained subordinated interests (and other 
forms of overcollateralization), and similar assets that function as 
a credit enhancement. Residual interests further include those 
exposures that, in substance, cause the corporate credit union to 
retain the credit risk of an asset or exposure that had qualified as 
a residual interest before it was sold.
* * * * *
    Part II: Risk-Weightings
    (a) On-Balance Sheet Assets
* * * * *
    (4)* * *
    (xiii) Interest-only strips receivable;
* * * * *
    (b) Off-Balance Sheet Activities
* * * * *
    (4) * * * (i) Unused portions of commitments with an original 
maturity of one year or less;
* * * * *
    (c) Recourse Obligations, Direct Credit Substitutes, and Certain 
Other Positions
* * * * *
    (2)(i) Other residual interests. A corporate credit union must 
maintain risk-based capital for a residual interest equal to the 
face amount of the residual interest, even if the amount of risk-
based capital that must be maintained exceeds the full risk-based 
capital requirement for the assets transferred.
    (ii) Residual interests and other recourse obligations. Where a 
corporate credit union holds a residual interest and another 
recourse obligation in connection with the same transfer of assets, 
the corporate credit union must maintain risk-based capital equal to 
the greater of:
* * * * *

[FR Doc. 2015-10546 Filed 5-5-15; 8:45 am]
BILLING CODE 7535-01-P



                                            25932              Federal Register / Vol. 80, No. 87 / Wednesday, May 6, 2015 / Rules and Regulations

                                            NATIONAL CREDIT UNION                                   II. Summary of Comments and Final                     Treasury, and thus questioned the
                                            ADMINISTRATION                                          Amendments                                            rationale of requiring certain amounts to
                                                                                                       In response to the Proposal, NCUA                  be excluded from the calculation of Tier
                                            12 CFR Part 704                                                                                               1 Capital, as discussed below. Some
                                                                                                    received 20 comments, nine from
                                                                                                    Corporates, 10 from trade associations                commenters suggested that the
                                            RIN 3133–AE43                                           and state credit union leagues, and one               mandatory phase-out of PCC would
                                                                                                    from a natural person credit union. All               have the effect of altering a Corporate’s
                                            Corporate Credit Unions                                 of the commenters generally supported                 Tier 1 Capital after the specified dates,
                                                                                                    the clarifications and technical changes.             even though nothing substantive had
                                            AGENCY:National Credit Union                                                                                  changed in the structure of the PCC
                                            Administration (NCUA).                                  As discussed more fully below,
                                                                                                    however, most commenters suggested                    account because of its nature as
                                            ACTION:   Final rule.                                   additional changes beyond the scope of                permanent capital. Another commenter
                                                                                                    the Proposal or commented on                          suggested that the rule be changed to
                                            SUMMARY:  The NCUA Board (Board) is                     provisions of the current Corporate                   provide for a more explicit retained
                                            amending its regulations governing                      regulations that were not addressed in                earnings requirement.
                                            corporate credit unions (Corporates) and                the Proposal. The Board adopts the                       With respect to the comments on PCC
                                            the scope of their activities. The                      Proposal as issued with only one                      and a more explicit retained earnings
                                            amendments clarify the mechanics of a                   modification.                                         requirement, the Board notes that these
                                            number of regulatory provisions and                                                                           are outside the scope of the Proposal.
                                            make several non-substantive, technical                 1. Section 704.2—Definitions                          However, the Board notes that it was
                                            corrections.                                               In the definitions section, the Board              NCUA’s intent, with the adoption of the
                                            DATES: This final rule is effective June                deleted several terms it determined                   final Corporate regulations in 2010, to
                                            5, 2015.                                                were duplicative and redefined a                      ensure that the Corporates would never
                                                                                                    number of other terms to minimize                     again present the sort of systemic risk to
                                            FOR FURTHER INFORMATION CONTACT:    John                confusion and enhance the effectiveness               the entire credit union system that the
                                            Sozanski, Supervision Analyst, Office of                of the Corporate regulations. The Board               Corporates did in that time period and
                                            National Examinations and Supervision,                  removed the definitions of ‘‘adjusted                 which required NCUA to take
                                            1775 Duke Street, Alexandria, Virginia                  core capital’’ and ‘‘core capital’’ and               extraordinary regulatory action.
                                            22314–3428 or telephone (703) 518–                      incorporated them into the definition of                 An aspect of the 2010 Corporate
                                            6640; or Justin M. Anderson, Senior                     ‘‘Tier 1 capital.’’ The Board also deleted            regulations was to incent Corporates to
                                            Staff Attorney, Office of General                       the term ‘‘capital’’ when that term was               build greater reserves of retained
                                            Counsel, 1775 Duke Street, Alexandria,                  used as a specific measure, and replaced              earnings to absorb potential losses.
                                            Virginia 22314–3428 or telephone (703)                  it with the term ‘‘total capital.’’ The               Retained earnings are considered to be
                                            518–6540.                                               Board removed the definition of                       the most superior form of capital carried
                                            SUPPLEMENTARY INFORMATION:                              ‘‘supplementary capital’’ and                         by a Corporate, as retained earnings
                                                                                                    incorporated it into the definition of                absorb losses without causing a
                                            Table of Contents                                                                                             corresponding loss to another party,
                                                                                                    ‘‘Tier 2 capital.’’ The Board also
                                            I. Background                                           eliminated the definitions of certain                 such as a natural person credit union
                                            II. Summary of Comments and Final                       terms in Appendix C to part 704, which                that purchased contributed capital from
                                                  Amendments                                        are no longer relevant to Corporates.                 that Corporate. As referenced in the
                                            III. Regulatory Procedures                                                                                    comment letters, part 704 contains
                                                                                                    Finally, the Board modified a number of
                                            I. Background                                           additional definitions to provide greater             provisions, effective in 2016, that limit
                                                                                                    clarity or to make them consistent with               the amount of contributed capital,
                                               In 2010, in response to the preceding                other NCUA regulations.                               including PCC, which may be counted
                                            financial crisis, the Board                                In response to these proposed                      toward a Corporate’s regulatory capital.
                                            comprehensively revised NCUA’s                          changes, NCUA received one comment                    NCUA intended this provision to
                                            regulations governing Corporates and                    that supported the proposed definition                encourage a Corporate to build its
                                            their activities.1 The Board also                       of retained earnings, stating that the                retained earnings. By increasing
                                            amended those regulations twice more                    change would make it easier for the                   retained earnings, a Corporate could
                                            in 2011.2 In November 2014, the Board                   continuing credit union in a merger                   count more contributed capital as
                                            issued a proposed rule (Proposal) to                    situation to count retained earnings                  regulatory capital.
                                            further amend the Corporate regulations                 carried on the books of the merging                      As noted by commenters, PCC has
                                            by clarifying or modifying several                      credit union. In addition, there were a               elements that are consistent with Tier 1
                                            provisions and making several non-                      number of comments on definitions in                  capital. However, one distinguishing
                                            substantive, technical corrections.3 The                the Corporate regulations that were                   element of PCC is that it is almost
                                            Proposal not only clarified and                         outside the scope of the Proposal.                    entirely sourced from member credit
                                            streamlined the Corporate regulations,                  Specifically, 16 commenters objected to               unions. Accordingly, losses that deplete
                                            but it also enhanced their readability                  the requirement that perpetual                        PCC would summarily impair
                                            and provided a degree of regulatory                     contributed capital (PCC) be discounted               investments made by credit union
                                            relief to Corporates. This final rule                   over time from what may be counted as                 members and their corresponding
                                            adopts all of the amendments in the                     Tier 1 capital. This requirement, which               capital. This downstream effect poses
                                            Proposal, with one change.                              is in the current rule, was not the                   increased risk to the National Credit
tkelley on DSK3SPTVN1PROD with RULES




                                                                                                    subject of any proposed amendment.                    Union Share Insurance Fund that
                                              1 12 CFR part 704; 75 FR 64786 (Oct. 20, 2010).       Commenters, however, stated that PCC                  capital sourced from external sources
                                              2 76 FR 23861 (Apr. 29, 2011); 76 FR 79531 (Dec.      is consistent with the definition of ‘‘Tier           would not. Should Corporates
                                            22, 2011). The Board also made technical changes
                                            to the regulations in 2011 and 2013. 76 FR 16235        1 capital’’ or ‘‘core capital’’ as used by            successfully raise meaningful amounts
                                            (Mar. 23, 2011); 78 FR 77563 (Dec. 24, 2013).           banking regulators, the Securities and                of capital from external sources, the
                                              3 79 FR 65353 (Nov. 4, 2014).                         Exchange Commission, and the U.S.                     Board may consider easing the


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                                                               Federal Register / Vol. 80, No. 87 / Wednesday, May 6, 2015 / Rules and Regulations                                           25933

                                            restrictions on contributed capital in a                4. Section 704.6—Credit risk                          value (NEV) or other NEV-related
                                            future rulemaking.                                      management                                            measures beyond certain thresholds.
                                              The Board is finalizing the proposed                     The Proposal provided clarification                The Proposal included an amendment
                                            amendments to the definitions section                   on how to value investments when                      to clarify that if a Corporate experiences
                                            and Appendix C to part 704 without                      calculating whether a Corporate is in                 such NEV-related breaches, but is able
                                            change.                                                                                                       to adjust its balance sheet to meet
                                                                                                    compliance with various sector and
                                                                                                                                                          required regulatory limits within 10
                                                                                                    issuer limits. NCUA received one
                                            2. Section 704.3—Corporate credit                                                                             days, then the Corporate will not be
                                                                                                    comment on this section, which
                                            union capital                                                                                                 considered to be in violation of the
                                                                                                    suggested that the Board should amend
                                                                                                                                                          regulation. The Proposal clarified that a
                                               The Proposal included amendments                     the rule to provide an exception to the
                                                                                                                                                          regulatory violation would exist only if
                                            to § 704.3(b)(5) and (c)(3) regarding                   single issuer limit for auto and
                                                                                                                                                          a Corporate could not timely resolve a
                                            corporate capital. The proposed                         equipment dealer floor plan asset-
                                                                                                                                                          breach.
                                            amendments clarified that upon                          backed securities so that such securities                NCUA received several comments on
                                            redeeming or calling nonperpetual                       would receive treatment similar to                    this section. One commenter suggested
                                            capital accounts or PCC instruments, a                  credit card master trust asset-backed                 that Corporates should be given more
                                            Corporate must continue to meet its                     securities. This comment is outside the               than 10 days to complete an adjustment
                                            minimum required capital and net                        scope of the Proposal, and the Board                  to its balance sheet to satisfy the
                                            economic value ratios. These                            does not believe such an exception is                 requirements of § 704.8(d), (f), and (g).
                                            clarifications made the provisions                      warranted as auto and equipment asset-                This commenter suggested a 60-day
                                            consistent with each other and with the                 backed security issuances are widely                  grace period and an opportunity to re-
                                            terms and conditions of contributed                     available. The Board is adopting the                  test at the expiration of the grace period.
                                            capital included in the Model Forms in                  amendments to this section as proposed.                  The Board recognizes that, through
                                            Appendix A to part 704. The Proposal                    5. Section 704.7—Lending                              the normal course of business, a
                                            also deleted § 704.3(f)(4), as that                                                                           Corporate may temporarily experience
                                                                                                       Section 704.7(c) currently restricts a             an NEV-related breach. Often, a
                                            provision refers to a regulatory
                                                                                                    Corporate’s unsecured member lending                  Corporate can resolve the breach within
                                            requirement that Corporates were to
                                                                                                    to 50 percent of capital and its secured              a timely manner, which is why the
                                            have complied with before December
                                                                                                    member lending to 100 percent of                      current regulation permits a Corporate
                                            20, 2011.                                               capital. The Proposal provided greater                to resolve any breach within 10 days
                                               NCUA received only one comment on                    flexibility to Corporates by permitting               prior to further regulatory action being
                                            this section. That commenter requested                  them to lend on a secured basis up to                 taken. The Board is concerned that
                                            that the rule be modified to provide                    150 percent of their total capital to any             lengthening the grace period could
                                            enhanced guidance to Corporates on                      individual credit union borrower. No                  allow a Corporate to circumvent the
                                            how to handle the redemption of PCC.                    commenters opposed this change, but                   purpose of the regulation, which is to
                                            The Board notes that this comment is                    eight commenters recommended that                     address breaches that are not resolved in
                                            outside the scope of the Proposal.                      NCUA include an additional exclusion                  a timely manner. The Board, therefore,
                                            Further, the Board does not believe it is               from the lending limit for a bridge loan              continues to believe the proposed 10-
                                            appropriate to consider issuing a                       made to a natural person member credit                day grace period is appropriate.
                                            proposed rule to address this comment                   union in connection with that credit                     In addition, four commenters
                                            at this time. However, if Corporates                    union receiving approval for a loan from              suggested that the rule be expanded to
                                            continue to satisfactorily rebuild                      the Central Liquidity Facility (CLF). All             provide for treatment of government
                                            retained earnings that were depleted                    of the commenters who commented on                    securities, including agency securities,
                                            during the credit crisis of 2007, then                  this aspect of the Proposal supported a               as cash equivalent for purposes of
                                            NCUA may consider revisiting this issue                 ten-day maturity limit on these bridge                assigning weighted average life (WAL)
                                            in the future.                                          loans.                                                values, resulting in such securities
                                               The Board is finalizing the proposed                    The Board agrees with these                        receiving a zero WAL valuation. The
                                            amendments to this section as proposed.                 commenters and intends to provide an                  Board recognizes that government-
                                                                                                    exclusion from the lending limit for                  guaranteed securities present a different
                                            3. Section 704.5—Investments                            bridge loans related to CLF loans. As                 risk profile than other investments that
                                                                                                    this issue was not included in the                    Corporates are permitted to purchase.
                                               The Proposal included an amendment                   Proposal, the Board, in compliance with               However, these securities can pose risks
                                            to § 704.5(j) regarding grandfathering                  the Administrative Procedure Act, will                to a Corporate. Specifically,
                                            certain Corporate investments. This                     issue a subsequent notice of proposed                 government-issued or government-
                                            amendment clarified that, while a                       rulemaking to effect this change.                     guaranteed securities may have longer-
                                            Corporate may continue to hold an                                                                             dated maturities that do not match a
                                            investment that was permissible at the                  6. Section 704.8—Asset and liability                  Corporate’s funding structure. In
                                            time of purchase but later became                       management                                            addition, they are subject to
                                            impermissible because of a regulatory                     Current § 704.8 establishes                         prepayment, extension, and interest rate
                                            change, the investment is still subject to              requirements to identify, measure,                    risks. Given those risks, the Board does
                                            all other sections of part 704 that apply               monitor, and control risk in the                      not believe that government-issued or
                                            to investments, including those                         management of assets and liabilities.                 government-guaranteed securities merit
                                            pertaining to credit risk management,                   These requirements include interest rate              a cash equivalent designation for
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                                            asset and liability management,                         sensitivity analyses, net interest income             purposes of assigning WAL values. It is
                                            liquidity management, and investment                    modeling, and limiting the weighted                   also important to note that government-
                                            action plans.                                           average life of assets. Current § 704.8(j)            guaranteed securities (when compared
                                               NCUA received no comments on this                    also imposes reporting and other                      to non-government-issued or non-
                                            section and is adopting the amendment                   requirements on Corporates that                       government-guaranteed securities) are
                                            as proposed.                                            experience a decline in net economic                  allowed a preferential factoring for


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                                            25934              Federal Register / Vol. 80, No. 87 / Wednesday, May 6, 2015 / Rules and Regulations

                                            purposes of calculating WAL tests                          One commenter recommended that                     opposing the substance of this
                                            pursuant to § 704.8.                                    the Board remove the current limitation               provision, opposed NCUA’s use of
                                              Four commenters also suggested that                   on the amount of secured borrowings                   incorporation by reference to the natural
                                            NCUA should anticipate that certain                     permitted for non-liquidity purposes,                 person credit union service organization
                                            government-sponsored enterprises will                   and to simply allow such borrowings as                rule.
                                            increasingly require that investors in                  long as all capital ratios continue to
                                                                                                                                                             The Board recognizes the concerns
                                            their mortgage-backed securities agree to               exceed the levels required to remain
                                            certain credit-risk sharing features.                                                                         raised by commenters and notes that
                                                                                                    well capitalized. The Board believes
                                            These commenters suggested that NCUA                                                                          FOIA, as well as applicable FOIA
                                                                                                    that Corporates should be limited in
                                            should amend its regulations to                         their ability to borrow on a secured                  exemptions, apply to any data or
                                            specifically allow Corporates to acquire                basis for other than liquidity purposes.              information submitted by natural person
                                            these types of investments. This issue is               The borrowing limitation is intended to               credit union service organizations and
                                            outside the scope of the Proposal, but                  preclude leveraging for investment                    Corporate CUSOs to NCUA. The Board
                                            the Board will continue to consider                     purposes, which can introduce greater                 anticipates that natural person credit
                                            these comments for future rulemakings.                  risk when markets encounter                           union service organization and
                                                                                                    disruption. Secured lenders require                   Corporate CUSO submissions often will
                                            7. Section 704.9—Liquidity management                                                                         contain or consist of ‘‘trade secrets and
                                                                                                    collateral to be valued at market, and
                                               Section 704.9(b) currently restricts a               they impose an additional margin to                   commercial or financial information
                                            Corporate’s general borrowing limit to                  ensure the borrowing is fully and                     obtained from a person [that is]
                                            the lower of 10 times capital or 50                     continuously collateralized. Market                   privileged or confidential.’’ 5 This type
                                            percent of capital and shares. The                      shocks can create short-term market                   of information generally is subject to
                                            Proposal included several changes to                    values that are significantly below long-             withholding under exemption 4 of
                                            this section. First, the Proposal changed               term intrinsic values, which can                      FOIA. In addition, information that is
                                            the limit to 10 times total capital,                    magnify potential losses if the creditor              ‘‘contained in or related to examination,
                                            consistent with the definitional changes                seizes the collateral and sells it as                 operating, or condition reports prepared
                                            discussed above. Second, the Proposal                   permitted by the lending agreements.                  by, on behalf of, or for the use of an
                                            removed the restriction of 50 percent of                The Board is adopting the amendments                  agency responsible for the regulation or
                                            capital and shares. Finally, the Proposal               as proposed, except as noted above.                   supervision of financial institutions’’ is
                                            increased the secured borrowing                                                                               generally subject to withholding under
                                            maturity limit from 30 days to 120 days                 8. Section 704.11—Corporate credit
                                                                                                    union service organizations (Corporate                exemption 8 of FOIA. To the extent,
                                            to accommodate seasonality in the                                                                             however, that natural person credit
                                            borrowing patterns of member credit                     CUSOs)
                                                                                                                                                          union service organization or Corporate
                                            unions.                                                    The Proposal included several
                                               Fifteen commenters requested that the                                                                      CUSO submissions may contain or
                                                                                                    amendments to this section of the                     consist of data or information not
                                            borrowing maturity limit be increased                   regulations. First, the Proposal
                                            beyond 120 days. Most of the                                                                                  subject to an applicable FOIA
                                                                                                    eliminated dates included in § 704.11(e)              exemption, for example, an entity’s
                                            commenters addressing this topic                        that have since passed and are no longer
                                            advocated an extension of one to two                                                                          name, address, or other publicly
                                                                                                    relevant. Second, the Proposal added a
                                            years. In addition, one commenter                                                                             available information, that data or
                                                                                                    requirement to § 704.11(g) that a
                                            advocated the elimination of any                                                                              information would be releasable under
                                                                                                    Corporate CUSO provide to NCUA and,
                                            specific maturity limit. Another                                                                              FOIA.
                                                                                                    if applicable, the appropriate state
                                            commenter sought to tie the maturity                    supervisory authority (SSA), the kinds                   Further, pursuant to approved
                                            limit to the use of highly liquid                       of reports required to be produced and                Corporate CUSO activities, as found on
                                            collateral. Finally, several commenters                 submitted by natural person credit                    the agency Web site, all Corporate
                                            argued for a system that would allow a                  union service organizations pursuant to               CUSOs engaged in a particular approved
                                            Corporate to request a waiver from the                  a recent revision to NCUA’s natural                   activity must currently provide NCUA
                                            borrowing limits.                                       person credit union service organization              with quarterly and annual reports. Most
                                               The Board has considered all of these                rule.4                                                of the reporting required by the Proposal
                                            comments and has determined to extend                      Three commenters opposed this                      is currently required by NCUA via the
                                            the maturity limit to 180 days. The                     provision, all of whom challenged                     agency Web site. The Board is adopting
                                            Board believes this additional extension                NCUA’s authority to impose this                       the proposed changes to this section.
                                            will not materially increase risk, yet will             requirement. Two of these commenters
                                            provide the corporate greater flexibility               noted that the effect of this provision is            9. Section 704.14—Representation
                                            in accommodating the fluctuation of its                 likely to place CUSOs at a competitive
                                            share base attributed to seasonal                                                                                The Proposal clarified the provisions
                                                                                                    disadvantage relative to other service                in the current regulation pertaining to
                                            changes in member credit union                          providers. One commenter noted that
                                            liquidity demands. For example, credit                                                                        the qualifications required of a
                                                                                                    this provision could expose a CUSO to
                                            unions incur routine deposit and                                                                              Corporate’s directors, and specified that
                                                                                                    the public release of confidential
                                            withdrawal patterns associated with                                                                           any candidate for a position on the
                                                                                                    materials should its report become the
                                            payrolls and consumer spending that                                                                           board of a Corporate must currently
                                                                                                    subject of a Freedom of Information Act
                                            can occur on an intra-month or multi-                                                                         hold a senior management position at a
                                                                                                    (FOIA) request. One commenter
                                            month basis. This seasonality of                                                                              member credit union and hold that
                                                                                                    requested further clarification in the
                                            behavior has a direct impact on credit                  rule of the term ‘‘level of activity of each          position at the time he or she is seated
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                                            union funds held on deposit with the                    credit union’’ which the commenter                    on the board of a Corporate. The Board
                                            corporate. The Board believes the                       mistakenly asserted appears in this                   received no comments in opposition to
                                            extension of the maturity limit will                    section. One commenter, while not                     this proposed changed and is adopting
                                            allow corporate credit unions to better                                                                       it as proposed.
                                            serve the unique attributes of their                       4 12 CFR 712.3(d)(4) and (5); 78 FR 72537 (Dec.

                                            members.                                                3, 2013).                                               55   U.S.C. 552(b)(4).



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                                                               Federal Register / Vol. 80, No. 87 / Wednesday, May 6, 2015 / Rules and Regulations                                                   25935

                                            10. Section 704.15—Audit and reporting                  comments on these changes and is                        Initial Corporate CUSO reporting to
                                            requirements                                            adopting them as proposed.                            NCUA and SSA—expanded
                                              The Proposal made technical changes                                                                         information.
                                                                                                    15. Appendix C to Part 704—Risk-Based
                                            to this section by eliminating dates that               Capital Credit Risk-Weight Categories                   Frequency of response: One-time.
                                            are no longer relevant and corrected a                                                                          Initial hour burden: 3.
                                                                                                      The Proposal removed references to                    3 hours × 13 = 39 hours.
                                            typographical error. The Board received                 assets and activities that are not
                                            no comment on these changes and is                      consistent with the regular business                    Annual Corporate CUSO reporting to
                                            adopting them as proposed.                              activities of Corporates. The Board                   NCUA and SSA—expanded
                                            11. Section 704.18—Fidelity bond                        received no comments on these changes                 information.
                                            coverage                                                and is adopting them as proposed.                       Frequency of response: Annual.
                                                                                                                                                            Annual hour burden: 3.
                                              The Proposal changed the measure in                   III. Regulatory Procedures
                                                                                                                                                            3 hours × 13 = 39 hours.
                                            this section from core capital to Tier 1
                                                                                                    1. Regulatory Flexibility Act                           As required by the PRA, NCUA
                                            capital, consistent with the definitional
                                            changes discussed above. The Board                         The Regulatory Flexibility Act                     submitted a copy of this Proposal to
                                            received no comments on this change                     requires NCUA to prepare an analysis of               OMB for its review and approval.
                                            and is adopting it as proposed.                         any significant economic impact a
                                                                                                                                                          3. Executive Order 13132
                                                                                                    regulation may have on a substantial
                                            12. Section 704.21—Enterprise risk                      number of small entities (primarily                     Executive Order 13132 encourages
                                            management (ERM)                                        those under $50 million in assets).6 This             independent regulatory agencies to
                                              The Proposal removed the minimum                      final rule only affects Corporates, all of            consider the impact of their actions on
                                            education and background requirements                   which have more than $50 million in                   state and local interests. NCUA, an
                                            in this section applicable to an                        assets. Furthermore, the final rule                   independent regulatory agency as
                                            independent risk management expert.                     consists primarily of technical and                   defined in 44 U.S.C. 3502(5), voluntarily
                                            The Board received two comments,                        clarifying amendments. Accordingly,                   complies with the executive order to
                                            which advocated that this entire section                NCUA certifies the rule will not have a               adhere to fundamental federalism
                                            be the subject of guidance, rather than                 significant economic impact on a                      principles. The final rule does not have
                                            included in the regulations. The Board                  substantial number of small credit                    substantial direct effects on the states,
                                            disagrees with these comments and                       unions.                                               on the relationship between the national
                                            believes ERM should be addressed                                                                              government and the states, or on the
                                                                                                    2. Paperwork Reduction Act                            distribution of power and
                                            formally through regulation. Without
                                            emphasis placed on a strong ERM                            The Paperwork Reduction Act of 1995                responsibilities among the various
                                            program, Corporates may be practicing                   (PRA) applies to rulemakings in which                 levels of government. NCUA has,
                                            good risk management on an exposure-                    an agency by rule creates a new                       therefore, determined that this final rule
                                            by-exposure basis, but they may not be                  paperwork burden or increases an                      does not constitute a policy that has
                                            paying close enough attention to the                    existing burden.7 For purposes of the                 federalism implications for purposes of
                                            aggregation of exposures across the                     PRA, a paperwork burden may take the                  the executive order.
                                            entire institution. A Corporate must                    form of a reporting or recordkeeping
                                                                                                    requirement, both referred to as                      4. Assessment of Federal Regulations
                                            measure and understand all the                                                                                and Policies on Families
                                            individual risks associated with its                    information collections. Under the final
                                            various business components, and also                   rule, a Corporate with an investment in                 NCUA has determined that this final
                                            understand how they interact                            or loan to a Corporate CUSO will need                 rule will not affect family well-being
                                            dynamically. Accordingly, the Board is                  to revise the current agreement it has                within the meaning of section 654 of the
                                            adopting the changes in this section as                 with the Corporate CUSO to provide                    Treasury and General Government
                                            proposed.                                               that the Corporate CUSO will prepare                  Appropriations Act, 1999, Public Law
                                                                                                    and submit basic or expanded reports                  105–277, 112 Stat. 2681 (1998).
                                            13. Appendix A to Part 704—Capital                      directly to NCUA and, if applicable, the
                                            Prioritization and Model Forms                          appropriate SSA.                                      5. Small Business Regulatory
                                                                                                       Currently, there are 13 Corporates and             Enforcement Fairness Act
                                              The Proposal removed expired forms
                                            and redesignated the remaining forms as                 approximately 16 Corporate CUSOs, 13                    The Small Business Regulatory
                                            A–D. The Proposal also removed a                        of which provide the complex or high-                 Enforcement Fairness Act of 1996 8
                                            sentence from the introductory note to                  risk services that require expanded                   (SBREFA) provides generally for
                                            current Model Form G, redesignated as                   reporting. The information collection                 congressional review of agency rules. A
                                            Model Form C, to clarify that in some                   burdens imposed, on an annual basis,                  reporting requirement is triggered in
                                            instances previously issued ‘‘paid-in                   are analyzed below.                                   instances where NCUA issues a final
                                            capital’’ may not be considered PCC.                       Changing the written agreement                     rule as defined by Section 551 of the
                                            The Board received no comments on                       relating to reports to NCUA.                          Administrative Procedure Act.9 NCUA
                                            these changes and is adopting them as                      Frequency of response: One-time.                   does not believe this final rule is a
                                            proposed.                                                  Initial hour burden: 4.                            ‘‘major rule’’ within the meaning of the
                                                                                                       4 hours × 13 = 52 hours.                           relevant sections of SBREFA because it
                                            14. Appendix B to Part 704—Expanded                                                                           only clarifies the mechanics of a number
                                            Authorities and Requirements                               Initial Corporate CUSO reporting to
                                                                                                    NCUA and SSA—basic information.                       of regulatory provisions and makes
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                                              Consistent with the earlier discussion                   Frequency of response: One-time.                   several non-substantive, technical
                                            regarding the simplification of terms                      Initial hour burden: 0.5.                          corrections. NCUA has submitted the
                                            relating to capital, the Proposal                          0.5 hours × 16 = 8 hours.                          rule to the Office of Management and
                                            substituted ‘‘leverage ratio’’ for ‘‘capital
                                            ratio’’ and ‘‘total capital’’ for ‘‘capital’’            65   U.S.C. 603(a); 12 U.S.C. 1787(c)(1).              8 Public  Law 104–121, 110 Stat. 857 (1996).
                                            in this appendix. The Board received no                  7 44  U.S.C. 3507(d); 5 CFR part 1320.                 95   U.S.C. 551.



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                                            25936              Federal Register / Vol. 80, No. 87 / Wednesday, May 6, 2015 / Rules and Regulations

                                            Budget for its determination in that                    by the corporate credit union that                    disposition refers to prevention or
                                            regard.                                                 exceed retained earnings and equity                   timely detection of transactions
                                                                                                    acquired in a combination. Likewise,                  involving such unauthorized access,
                                            List of Subjects in 12 CFR Part 704
                                                                                                    available to cover losses that exceed                 use, or disposition of assets which could
                                              Credit unions, Corporate credit                       retained earnings and perpetual                       result in a loss that is material to the
                                            unions, Reporting and recordkeeping                     contributed capital (PCC) means that the              financial statements.
                                            requirements.                                           funds are available to cover operating                *      *     *     *     *
                                              By the National Credit Union                          losses realized, in accordance with                      Leverage ratio means the ratio of Tier
                                            Administration Board on April 30, 2015.                 GAAP, by the corporate credit union                   1 capital to moving daily average net
                                            Gerard Poliquin,                                        that exceed retained earnings and equity              assets.
                                            Secretary of the Board.                                 acquired in a combination and PCC.                    *      *     *     *     *
                                                                                                    * * *                                                    Net assets means total assets less
                                              For the reasons discussed above, the                  *      *     *     *     *
                                            National Credit Union Administration                                                                          Central Liquidity Facility (CLF) stock
                                                                                                       Derivatives means a financial contract             subscriptions, loans guaranteed by the
                                            amends 12 CFR part 704 as follows:                      which derives its value from the value                National Credit Union Share Insurance
                                            PART 704—CORPORATE CREDIT                               and performance of some other                         Fund (NCUSIF), and member reverse
                                            UNIONS                                                  underlying financial instrument or                    repurchase transactions. For its own
                                                                                                    variable, such as an index or interest                account, a corporate credit union’s
                                            ■ 1. The authority citation for part 704                rate.                                                 payables under reverse repurchase
                                            continues to read as follows:                           *      *     *     *     *                            agreements and receivables under
                                              Authority: 12 U.S.C. 1766(a), 1781, and
                                                                                                       Equity investment means an                         repurchase agreements may be netted
                                            1789.                                                   investment in an equity security and                  out if the GAAP conditions for offsetting
                                                                                                    other ownership interest, including, for              are met. Also, any amounts deducted in
                                            ■  2. Amend § 704.2 by:                                 example, an investment in a partnership               calculating Tier 1 capital are also
                                            ■  a. Removing the definitions of                       or limited liability company.                         deducted from net assets.
                                            ‘‘Adjusted core capital’’ and ‘‘Asset-                     Equity security means any security                 *      *     *     *     *
                                            backed commercial paper program’’;                      representing an ownership interest in an                 Net risk-weighted assets means risk-
                                            ■ b. Revising the first two sentences of                enterprise (for example, common,                      weighted assets less CLF stock
                                            the definition of ‘‘Available to cover                  preferred, or other capital stock) or the             subscriptions, CLF loans guaranteed by
                                            losses that exceed retained earnings’’;                 right to acquire (for example, warrants               the NCUSIF, and member reverse
                                            ■ c. Removing the definitions of                        and call options) or dispose of (for                  repurchase transactions. For its own
                                            ‘‘Capital’’, ‘‘Capital ratio’’, ‘‘Core                  example, put options) an ownership                    account, a corporate credit union’s
                                            capital’’, ‘‘Core capital ratio’’, and                  interest in an enterprise at fixed or                 payables under reverse repurchase
                                            ‘‘Credit-enhancing interest-only strip’’;               determinable prices. However, the term
                                            ■ d. Revising the definition of
                                                                                                                                                          agreements and receivables under
                                                                                                    does not include Federal Home Loan                    repurchase agreements may be netted
                                            ‘‘Derivatives’’;                                        Bank stock, convertible debt, or
                                            ■ e. Removing the definition of ‘‘Eligible
                                                                                                                                                          out if the GAAP conditions for offsetting
                                                                                                    preferred stock that by its terms either              are met. Also, any amounts deducted in
                                            ABCP liquidity facility’’;                              must be redeemed by the issuing
                                            ■ f. Revising the definitions of ‘‘Equity
                                                                                                                                                          calculating Tier 1 capital are also
                                                                                                    enterprise or is redeemable at the option             deducted from net risk-weighted assets.
                                            investment’’, ‘‘Equity security’’, ‘‘Fair               of the investor.
                                            value’’, and ‘‘Internal control’’;                                                                            *      *     *     *     *
                                                                                                    *      *     *     *     *                               Retained earnings means undivided
                                            ■ g. Removing the two definitions of
                                                                                                       Fair value means the price that would              earnings, regular reserve, reserve for
                                            ‘‘Leverage ratio’’;                                     be received to sell an asset, or paid to
                                            ■ h. Adding a new definition, in                                                                              contingencies, supplemental reserves,
                                                                                                    transfer a liability, in an orderly                   reserve for losses, and other
                                            alphabetical order, for ‘‘Leverage ratio’’;
                                                                                                    transaction between market participants               appropriations from undivided earnings
                                            ■ i. Revising the definitions of ‘‘Net
                                                                                                    at the measurement date, as defined by                as designated by management or NCUA.
                                            assets’’, ‘‘Net risk-weighted assets’’, and
                                                                                                    GAAP.
                                            ‘‘Retained earnings’’;                                                                                        *      *     *     *     *
                                            ■ j. Removing the definition of                         *      *     *     *     *                               Tier 1 capital means the sum of
                                            ‘‘Supplementary Capital’’;                                 Internal control means the process,                paragraphs (1) through (4) of this
                                            ■ k. Revising the definitions of ‘‘Tier 1
                                                                                                    established by the corporate credit                   definition from which paragraphs (5)
                                            capital’’;                                              union’s board of directors, officers and              through (9) of this definition are
                                            ■ l. Adding a definition, in alphabetical               employees, designed to provide                        deducted:
                                            order, for ‘‘Tier 1 risk-based capital                  reasonable assurance of reliable                         (1) Retained earnings;
                                            ratio’’;                                                financial reporting and safeguarding of                  (2) Perpetual contributed capital;
                                            ■ m. Revising the definition of ‘‘Tier 2                assets against unauthorized acquisition,                 (3) The retained earnings of any
                                            capital’’; and                                          use, or disposition. A credit union’s                 acquired credit union, or of an
                                            ■ n. Revising the definition of ‘‘Total                 internal control structure generally                  integrated set of activities and assets,
                                            capital’’.                                              consists of five components: Control                  calculated at the point of acquisition, if
                                               The revisions and additions read as                  environment; risk assessment; control                 the acquisition was a mutual
                                            follows:                                                activities; information and                           combination;
                                                                                                    communication; and monitoring.                           (4) Minority interests in the equity
                                            § 704.2   Definitions.                                  Reliable financial reporting refers to                accounts of CUSOs that are fully
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                                            *     *     *     *    *                                preparation of Call Reports as well as                consolidated;
                                              Available to cover losses that exceed                 financial data published and presented                   (5) Deduct the amount of the
                                            retained earnings means that the funds                  to members that meet management’s                     corporate credit union’s intangible
                                            are available to cover operating losses                 financial reporting objectives. Internal              assets that exceed one half percent of its
                                            realized, in accordance with generally                  control over safeguarding of assets                   moving daily average net assets
                                            accepted accounting principles (GAAP),                  against unauthorized acquisition, use, or             (however, NCUA may direct the


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                                                               Federal Register / Vol. 80, No. 87 / Wednesday, May 6, 2015 / Rules and Regulations                                          25937

                                            corporate credit union to add back some                 only with the prior approval of NCUA                     (iv) Investments in non-money market
                                            of these assets on NCUA’s own                           and, for state chartered corporate credit             registered investment companies are
                                            initiative, by petition from the                        unions, the applicable state regulator.               limited to 50 percent of total capital in
                                            applicable state regulator, or upon                     *      *    *      *     *                            any single obligor;
                                            application from the corporate credit                      (c) * * *                                             (v) Investments in money market
                                            union);                                                    (3) Callability. A corporate credit                registered investment companies are
                                              (6) Deduct investments, both equity                   union may call PCC instruments only if                limited to 100 percent of total capital in
                                            and debt, in unconsolidated CUSOs;                      it meets its minimum required capital                 any single obligor; and
                                              (7) Deduct an amount equal to any                     and net economic value ratios after the                  (vi) Investments in corporate CUSOs
                                            PCC or NCA that the corporate credit                    funds are called and only with the prior              are subject to the limitations of section
                                            union maintains at another corporate                    approval of the NCUA and, for state                   11 of this part.
                                            credit union;                                           chartered corporate credit unions, the                   (d) Sector concentration limits. (1) A
                                              (8) Beginning on October 20, 2016,                    applicable state regulator. PCC accounts              corporate credit union must establish
                                            and ending on October 20, 2020, deduct                  are callable on a pro-rata basis across an            sector limits based on the value
                                            any amount of PCC that causes PCC                       issuance class.                                       recorded on the books of the corporate
                                            minus retained earnings, all divided by                 *      *    *      *     *                            credit union that do not exceed the
                                            moving daily net average assets, to                        (e) * * *                                          following maximums:
                                            exceed two percent; and                                    (3) * * * (i) Notwithstanding the                     (i) Mortgage-backed securities
                                              (9) Beginning after October 20, 2020,                 definitions of Tier 1 capital and Tier 2              (inclusive of commercial mortgage-
                                            deduct any amount of PCC that causes                    capital in paragraph (d) of this section,             backed securities)—the lower of 1000
                                            PCC to exceed retained earnings.                        NCUA may find that a particular asset                 percent of total capital or 50 percent of
                                              Tier 1 risk-based capital ratio means                 or Tier 1 capital or Tier 2 capital                   assets;
                                            the ratio of Tier 1 capital to the moving               component has characteristics or terms                   (ii) Commercial mortgage-backed
                                            monthly average net risk-weighted                       that diminish its contribution to a                   securities—the lower of 300 percent of
                                            assets.                                                 corporate credit union’s ability to absorb            total capital or 15 percent of assets;
                                              Tier 2 capital means the sum of                       losses, and NCUA may require the                         (iii) Federal Family Education Loan
                                            paragraphs (1) through (4) of this                      discounting or deduction of such asset                Program student loan asset-backed
                                            definition:                                             or component from the computation of                  securities—the lower of 1000 percent of
                                              (1) Nonperpetual capital accounts, as                 Tier 1 capital, Tier 2 capital, or total              total capital or 50 percent of assets;
                                            amortized under § 704.3(b)(3);                          capital.                                                 (iv) Private student loan asset-backed
                                              (2) Allowance for loan and lease                                                                            securities—the lower of 500 percent of
                                            losses calculated under GAAP to a                       *      *    *      *     *
                                                                                                                                                          total capital or 25 percent of assets;
                                            maximum of 1.25 percent of risk-                        ■ 4. Amend § 704.5 by revising
                                                                                                                                                             (v) Auto loan/lease asset-backed
                                            weighted assets;                                        paragraph (j) to read as follows:
                                                                                                                                                          securities—the lower of 500 percent of
                                              (3) Any PCC deducted from Tier 1                      § 704.5   Investments.                                total capital or 25 percent of assets;
                                            capital; and                                                                                                     (vi) Credit card asset-backed
                                              (4) Forty-five percent of unrealized                  *      *    *    *     *
                                                                                                       (j) Grandfathering. A corporate credit             securities—the lower of 500 percent of
                                            gains on available-for-sale equity                                                                            total capital or 25 percent of assets;
                                                                                                    union’s authority to hold an investment
                                            securities with readily determinable fair                                                                        (vii) Other asset-backed securities not
                                                                                                    is governed by the regulation in effect at
                                            values. Unrealized gains are unrealized                                                                       listed in paragraphs (d)(1)(ii) through
                                                                                                    the time of purchase. However, all
                                            holding gains, net of unrealized holding                                                                      (vi) of this section—the lower of 500
                                                                                                    grandfathered investments are subject to
                                            losses, calculated as the amount, if any,                                                                     percent of total capital or 25 percent of
                                                                                                    the other requirements of this part.
                                            by which fair value exceeds historical                                                                        assets;
                                            cost. NCUA may disallow such                            ■ 5. Amend § 704.6 by revising
                                                                                                    paragraphs (c), (d), and (e) to read as                  (viii) Corporate debt obligations—the
                                            inclusion in the calculation of Tier 2                                                                        lower of 1000 percent of total capital or
                                            capital if NCUA determines that the                     follows:
                                                                                                                                                          50 percent of assets; and
                                            securities are not prudently valued.                    § 704.6   Credit risk management.                        (ix) Municipal securities—the lower
                                            *     *      *    *     *                               *       *    *     *     *                            of 1000 percent of total capital or 50
                                              Total capital means the sum of Tier                     (c) Issuer concentration limits—(1)                 percent of assets.
                                            1 capital and Tier 2 capital, less the                  General rule. The aggregate value                        (2) Registered investment
                                            corporate credit union’s equity                         recorded on the books of the corporate                companies—A corporate credit union
                                            investments not otherwise deducted                      credit union of all investments in any                must limit its investment in registered
                                            when calculating Tier 1 capital.                        single obligor is limited to 25 percent of            investment companies to the lower of
                                            *     *      *    *     *                               total capital or $5 million, whichever is             1000 percent of total capital or 50
                                            ■ 3. Amend § 704.3 by revising                          greater.                                              percent of assets. In addition to
                                            paragraphs (b)(5), (c)(3), and (e)(3)(i) and              (2) Exceptions. (i) Investments in one              applying the limit in this paragraph, a
                                            removing paragraph (f)(4) to read as                    obligor where the remaining maturity of               corporate credit union must also
                                            follows:                                                all obligations is less than 30 days are              include the underlying assets in each
                                                                                                    limited to 50 percent of total capital;               registered investment company in the
                                            § 704.3   Corporate credit union capital.                  (ii) Investments in credit card master             relevant sectors described in paragraph
                                            *     *      *     *    *                               trust asset-backed securities are limited             (d)(1) of this section when calculating
                                              (b) * * *                                             to 50 percent of total capital in any                 those sector limits.
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                                              (5) Redemption. A corporate credit                    single obligor;                                          (3) A corporate credit union must
                                            union may redeem NCAs prior to                             (iii) Aggregate investments in                     limit its aggregate holdings in any
                                            maturity or prior to the end of the notice              repurchase and securities lending                     investments not described in paragraphs
                                            period only if it meets its minimum                     agreements with any one counterparty                  (d)(1) or (2) of this section to the lower
                                            required capital and net economic value                 are limited to 200 percent of total                   of 100 percent of total capital or 5
                                            ratios after the funds are redeemed and                 capital;                                              percent of assets. The NCUA may


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                                            25938              Federal Register / Vol. 80, No. 87 / Wednesday, May 6, 2015 / Rules and Regulations

                                            approve a higher percentage in                          ■ 7. Amend § 704.8 by revising                        union with Tier 1 capital in excess of
                                            appropriate cases.                                      paragraph (j) to read as follows:                     five percent of its moving daily average
                                              (4) Investments in other federally                                                                          net assets (DANA) may borrow on a
                                            insured credit unions, deposits and                     § 704.8   Asset and liability management.             secured basis for nonliquidity purposes,
                                            federal funds investments in other                      *       *     *     *     *                           and the outstanding amount of secured
                                            federally insured depository                               (j) Limit breaches. (1)(i) If a corporate          borrowing for nonliquidity purposes
                                            institutions, and investment repurchase                 credit union’s decline in NEV, base case              may not exceed an amount equal to the
                                            agreements are excluded from the                        NEV ratio, or any NEV ratio calculated                difference between the corporate credit
                                            concentration limits in paragraphs                      under paragraph (d) of this section                   union’s Tier 1 capital and five percent
                                            (d)(1), (2), and (3) of this section.                   exceeds established or permitted limits,              of its moving DANA.
                                              (e) Corporate debt obligation                         or the corporate is unable to satisfy the                (2) Exclusions. CLF borrowings and
                                            subsector limits. In addition to the                    tests in paragraphs (f) or (g) of this                borrowed funds created by the use of
                                            limitations in paragraph (d)(1)(viii) of                section, the operating management of                  member reverse repurchase agreements
                                            this section, a corporate credit union                  the corporate must immediately report                 are excluded from the limit in paragraph
                                            must not exceed the lower of 200                        this information to its board of directors            (b)(1) of this section.
                                            percent of total capital or 10 percent of               and ALCO; and                                         ■ 9. Amend § 704.11 by:
                                            assets in any single North American                        (ii) If the corporate credit union                 ■ a. Revising paragraphs (b)(1) and (2)
                                            Industry Classification System (NAICS)                  cannot adjust its balance sheet to meet               and (e)(1) introductory text;
                                            industry sector based on the value                      the requirements of paragraphs (d), (f),              ■ b. Removing paragraph (e)(2);
                                            recorded on the books of the corporate                  or (g) of this section within 10 calendar             ■ c. Redesignating paragraph (e)(3) as
                                            credit union. If a corporation in which                 days after detection by the corporate,                paragraph (e)(2);
                                                                                                    the corporate must notify in writing the              ■ d. Redesignating paragraphs (g)(4)
                                            a corporate credit union is interested in
                                            investing does not have a readily                       Director of the Office of National                    through (7) as paragraphs (g)(5) through
                                            ascertainable NAICS classification, a                   Examinations and Supervision.                         (8), respectively; and
                                                                                                       (2) If any breach described in                     ■ e. Adding new paragraph (g)(4).
                                            corporate credit union will use its
                                                                                                    paragraph (j)(1) of this section persists                The revisions and addition read as
                                            reasonable judgment in assigning such a
                                                                                                    for 30 or more calendar days, the                     follows:
                                            classification. NCUA may direct,
                                            however, that the corporate credit union                corporate credit union:
                                                                                                       (i) Must immediately submit a                      § 704.11 Corporate Credit Union Service
                                            change the classification.                                                                                    Organizations (Corporate CUSOs).
                                                                                                    detailed, written action plan to the
                                            *     *      *     *      *                             NCUA that sets forth the time needed                  *     *      *    *     *
                                            ■ 6. Amend § 704.7 by revising                          and means by which it intends to come                   (b) Investment and loan limitations.
                                            paragraph (c) to read as follows:                       into compliance and, if the NCUA                      (1) The aggregate of all investments in
                                                                                                    determines that the plan is                           member and non-member corporate
                                            § 704.7   Lending.                                                                                            CUSOs that a corporate credit union
                                                                                                    unacceptable, the corporate credit union
                                            *      *    *     *    *                                                                                      may make must not exceed 15 percent
                                                                                                    must immediately restructure its
                                              (c) Loans to members—(1) Credit                                                                             of a corporate credit union’s total
                                                                                                    balance sheet to bring the exposure back
                                            unions. (i) The maximum aggregate                                                                             capital.
                                                                                                    within compliance or adhere to an
                                            amount in unsecured loans and lines of                                                                          (2) The aggregate of all investments in
                                                                                                    alternative course of action determined
                                            credit from a corporate credit union to                                                                       and loans to member and nonmember
                                                                                                    by the NCUA; and
                                            any one member credit union, excluding                     (ii) If presently categorized as                   corporate CUSOs a corporate credit
                                            pass-through and guaranteed loans from                  adequately capitalized or well                        union may make must not exceed 30
                                            the CLF and the NCUSIF, must not                        capitalized for prompt corrective action              percent of a corporate credit union’s
                                            exceed 50 percent of the corporate                      purposes, and the breach was of                       total capital. A corporate credit union
                                            credit union’s total capital.                           paragraph (d) of this section, the                    may lend to member and nonmember
                                              (ii) The maximum aggregate amount                     corporate credit union will immediately               corporate CUSOs an additional 15
                                            in secured loans (excluding those                       be recategorized as undercapitalized                  percent of total capital if the loan is
                                            secured by shares or marketable                         until coming into compliance, and                     collateralized by assets in which the
                                            securities and member reverse                              (iii) If presently categorized as less             corporate has a perfected security
                                            repurchase transactions) and unsecured                  than adequately capitalized for prompt                interest under state law.
                                            loans (excluding pass-through and                       corrective action purposes, and the                   *     *      *    *     *
                                            guaranteed loans from the CLF and the                   breach was of paragraph (d) of this                     (e) Permissible activities. (1) A
                                            NCUSIF) and lines of credit from a                      section, the corporate credit union will              corporate CUSO must agree to limit its
                                            corporate credit union to any one                       immediately be downgraded one                         activities to:
                                            member credit union must not exceed                     additional capital category.                          *     *      *    *     *
                                            150 percent of the corporate credit                                                                             (g) * * *
                                            union’s total capital.                                  *       *     *     *     *
                                                                                                    ■ 8. Amend § 704.9 by revising                          (4) Will provide the reports as
                                              (2) Corporate CUSOs. Any loan or line                                                                       required by § 712.3(d)(4) and (5) of this
                                                                                                    paragraph (b) to read as follows:
                                            of credit from a corporate credit union                                                                       chapter;
                                            to a corporate CUSO must comply with                    § 704.9   Liquidity management.
                                                                                                                                                          *     *      *    *     *
                                            § 704.11.                                               *      *     *     *   *                              ■ 10. Amend § 704.14 by revising
                                              (3) Other members. The maximum                           (b) Borrowing limits. A corporate                  paragraphs (a)(2), (a)(9), and (e)(2) to
                                            aggregate amount of loans and lines of                  credit union may borrow up to 10 times                read as follows:
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                                            credit from a corporate credit union to                 its total capital.
                                            any other one member must not exceed                       (1) Secured borrowings. A corporate                § 704.14   Representation.
                                            15 percent of the corporate credit                      credit union may borrow on a secured                    (a)* * *
                                            union’s total capital plus pledged                      basis for liquidity purposes, but the                   (2) Only an individual who currently
                                            shares.                                                 maturity of the borrowing may not                     holds the position of chief executive
                                            *      *    *     *    *                                exceed 180 days. Only a corporate credit              officer, chief financial officer, chief


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                                                               Federal Register / Vol. 80, No. 87 / Wednesday, May 6, 2015 / Rules and Regulations                                                  25939

                                            operating officer, or treasurer/manager                 ■ 13. Amend § 704.21 by revising                      ■ (ii) Redesignating paragraphs (2)(ii)
                                            at a member credit union, and will hold                 paragraph (c) to read as follows:                     and (iii) as paragraphs (2)(i) and (ii),
                                            that position at the time he or she is                                                                        respectively; and
                                            seated on the corporate credit union                    § 704.21   Enterprise risk management.
                                                                                                                                                          ■ (iii) Revising newly redesignated
                                            board if elected, may seek election or re-              *     *     *     *    *
                                                                                                                                                          paragraph (2)(i) and the introductory
                                            election to the corporate credit union                    (c) The ERMC must include at least
                                                                                                                                                          text of newly redesignated paragraph
                                            board;                                                  one independent risk management
                                                                                                                                                          (2)(ii).
                                            *      *     *     *    *                               expert. The risk management expert
                                               (9) At least a majority of directors of              must have at least five years of                        The revisions read as follows:
                                            every corporate credit union, including                 experience in identifying, assessing, and             Appendix C to Part 704—Risk-Based
                                            the chair of the board, must serve on the               managing risk exposures. This                         Capital Credit Risk-Weight Categories
                                            corporate board as representatives of                   experience must be commensurate with
                                            natural person credit union members.                    the size of the corporate credit union                *        *      *     *     *
                                                                                                    and the complexity of its operations.                     Part I: Introduction
                                            *      *     *     *    *
                                               (e)* * *                                             The board of directors may hire the                   *        *      *     *     *
                                               (2) The provisions of § 701.14 of this               independent risk management expert to                     (b) Definitions
                                            chapter apply to corporate credit                       work full-time or part-time for the                   *        *      *     *     *
                                            unions, except that where ‘‘Regional                    ERMC or as a consultant for the ERMC.                   Direct credit substitute* * *
                                            Director’’ is used, read ‘‘Director of the              *     *     *     *    *                                (8) Liquidity facilities that provide support
                                            Office of National Examinations and                                                                           to asset-backed commercial paper.
                                                                                                    Appendix A to Part 704—[Amended]                      *        *      *     *     *
                                            Supervision.’’
                                            ■ 11. Amend § 704.15 by revising                        ■ 14. Amend Appendix A to part 704                      Recourse * * *
                                            paragraph (a)(2)(iii) introductory text,                by:                                                     (8) Liquidity facilities that provide support
                                            the first sentence of paragraph (b)(2),                 ■ a. Removing Model Forms A, B, E, and                to asset-backed commercial paper.
                                            and the first sentence of paragraph (d)(1)              F and redesignating Model Forms C, D,                 *        *      *     *     *
                                            to read as follows:                                     G, and H as Model Forms A, B, C, and                     Residual interest* * *
                                                                                                    D, respectively; and                                     (2) Residual interests generally include
                                            § 704.15   Audit and reporting requirements.                                                                  spread accounts, cash collateral accounts,
                                                                                                    ■ b. Removing the second sentence of
                                               (a) * * *                                            the note in newly redesignated Model                  retained subordinated interests (and other
                                               (2) * * *                                            Form C.                                               forms of overcollateralization), and similar
                                               (iii) An assessment by management of                                                                       assets that function as a credit enhancement.
                                            the effectiveness of the corporate credit               Appendix B to Part 704—[Amended]                      Residual interests further include those
                                            union’s internal control structure and                                                                        exposures that, in substance, cause the
                                                                                                    ■  15. Amend Appendix B to part 704 by:               corporate credit union to retain the credit
                                            procedures as of the end of the past                    ■  a. Removing the words ‘‘capital ratio’’
                                            calendar year that must include the                                                                           risk of an asset or exposure that had qualified
                                                                                                    wherever they appear and adding in                    as a residual interest before it was sold.
                                            following:                                              their place ‘‘leverage ratio’’;
                                            *       *    *    *    *                                                                                      *        *      *     *     *
                                                                                                    ■ b. Removing the words ‘‘corporate
                                               (b) * * *                                                                                                      Part II: Risk-Weightings
                                                                                                    credit union’s capital’’ wherever they                    (a) On-Balance Sheet Assets
                                               (2) * * *The independent public                      appear and adding in their place
                                            accountant who audits the corporate                     ‘‘corporate credit union’s total capital’’;           *        *      *     *     *
                                            credit union’s financial statements must                                                                          (4)* * *
                                                                                                    ■ c. Removing the words ‘‘25 percent of
                                            examine, attest to, and report separately                                                                         (xiii) Interest-only strips receivable;
                                                                                                    capital’’ from paragraph (b)(3) of Part II
                                            on the assertion of management                          and adding in their place ‘‘25 percent of             *        *      *     *     *
                                            concerning the effectiveness of the                     total capital’’; and                                      (b) Off-Balance Sheet Activities
                                            corporate credit union’s internal control               ■ d. Removing paragraph (e) from part                 *        *      *     *     *
                                            structure and procedures for financial                  1.                                                      (4) * * * (i) Unused portions of
                                            reporting.* * *                                                                                               commitments with an original maturity of
                                                                                                    ■ 16. Amend Appendix C to part 704 by:
                                            *       *    *    *    *                                                                                      one year or less;
                                                                                                    ■ a. In part I(b):
                                               (d) * * *                                            ■ (i) Revising paragraph (8) of the                   *        *      *     *     *
                                               (1)* * * Each corporate credit union                                                                         (c) Recourse Obligations, Direct Credit
                                                                                                    definition of ‘‘Direct credit substitute’’;
                                            must establish a supervisory committee,                                                                       Substitutes, and Certain Other Positions
                                                                                                    ■ (ii) Revising paragraph (8) of the
                                            all of whose members must be                                                                                  *        *      *     *     *
                                                                                                    definition of ‘‘Recourse’’; and
                                            independent.* * *                                                                                                (2)(i) Other residual interests. A corporate
                                                                                                    ■ (iii) Revising paragraph (2) of the
                                            *       *    *    *    *                                                                                      credit union must maintain risk-based capital
                                                                                                    definition of ‘‘Residual interest’’;
                                                                                                                                                          for a residual interest equal to the face
                                            § 704.18   [Amended]                                    ■ b. In part II(a), revising paragraph
                                                                                                                                                          amount of the residual interest, even if the
                                            ■ 12. Amend § 704.18 by:                                (4)(xiii);                                            amount of risk-based capital that must be
                                            ■ a. Removing the words ‘‘core capital                  ■ c. In part II(b):                                   maintained exceeds the full risk-based
                                            ratio’’ from the introductory text of                   ■ (i) Removing paragraphs (1)(iv) and                 capital requirement for the assets transferred.
                                            paragraph (e)(1) and adding in their                    (4);                                                     (ii) Residual interests and other recourse
                                            place ‘‘leverage ratio’’;                               ■ (ii) Redesignating paragraphs (5) and               obligations. Where a corporate credit union
                                            ■ b. Removing the words ‘‘Core capital                  (6) as paragraphs (4) and (5),                        holds a residual interest and another recourse
                                            ratio’’ from the table heading of                       respectively;                                         obligation in connection with the same
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                                                                                                    ■ (iii) Revising newly redesignated
                                                                                                                                                          transfer of assets, the corporate credit union
                                            paragraph (e)(1) and adding in their
                                                                                                                                                          must maintain risk-based capital equal to the
                                            place ‘‘Leverage ratio’’; and                           paragraph (4)(i); and
                                                                                                                                                          greater of:
                                            ■ c. Removing the words ‘‘of core                       ■ (iv) Removing newly redesignated
                                            capital’’ wherever they appear in the                   paragraph (5)(v)(C).                                  *        *      *     *     *
                                            table in paragraph (e)(1) and adding in                 ■ d. In part II(c):                                   [FR Doc. 2015–10546 Filed 5–5–15; 8:45 am]
                                            their place ‘‘of Tier 1 capital’’.                      ■ (i) Removing paragraph (2)(i);                      BILLING CODE 7535–01–P




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Document Created: 2015-12-16 07:40:56
Document Modified: 2015-12-16 07:40:56
CategoryRegulatory Information
CollectionFederal Register
sudoc ClassAE 2.7:
GS 4.107:
AE 2.106:
PublisherOffice of the Federal Register, National Archives and Records Administration
SectionRules and Regulations
ActionFinal rule.
DatesThis final rule is effective June 5, 2015.
ContactJohn Sozanski, Supervision Analyst, Office of National Examinations and Supervision, 1775 Duke Street, Alexandria, Virginia 22314-3428 or telephone (703) 518-6640; or Justin M. Anderson, Senior Staff Attorney, Office of General Counsel, 1775 Duke Street, Alexandria, Virginia 22314-3428 or telephone (703) 518- 6540.
FR Citation80 FR 25932 
RIN Number3133-AE43
CFR AssociatedCredit Unions; Corporate Credit Unions and Reporting and Recordkeeping Requirements

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