80 FR 25932 - Corporate Credit Unions

NATIONAL CREDIT UNION ADMINISTRATION

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

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, 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