National Credit Union Administration (NCUA).
Proposed rule.
Pursuant to Congressional mandate, the National Credit Union Administration (NCUA) established a system of prompt corrective action consisting of statutory minimum capital standards for federally-insured credit unions and corresponding remedies to restore net worth. Among the remedies mandated by statute is the requirement to submit a net worth restoration plan for approval by NCUA. NCUA requests public comment on a proposal to allow approval of an abbreviated net worth restoration plan for qualifying credit unions whose net worth ratio has declined marginally below 6 percent because growth in assets outpaces growth in net worth.
Comments must be received on or before January 28, 2003.
Direct comments to Becky Baker, Secretary of the Board. Mail or hand-deliver comments to: National Credit Union Administration, 1775 Duke Street, Alexandria, Virginia 22314–3428.
Except where noted, citations to part 702 in this rule refer to 12 CFR 702
In 1998, the Credit Union Membership Access Act (“CUMAA”), Pub. L. No. 105–219, 112 Stat. 913 (1998), amended the Federal Credit Union Act to require NCUA to adopt by regulation a system of “prompt corrective action” (“PCA”) consisting of minimum capital standards and corresponding remedies to improve the net worth of federally-insured “natural person” credit unions. 12 U.S.C. 1790d
In 2000, the NCUA Board adopted part 702 and subpart L of part 747, establishing a comprehensive system of PCA. 12 CFR 702
Since it was first adopted, part 702 has been amended three times. First, to incorporate limited technical corrections. 65 FR 55439 (Sept. 14, 2000). Second, to delete sections made obsolete by adoption of a uniform quarterly schedule for filing Call Reports. 67 FR 12459 (March 19, 2002). And finally, in a final rule adopted today, to incorporate a series of revisions and adjustments designed to improve and simplify the implementation of PCA. That final rule appears elsewhere in this volume of the
The concept of an abbreviated net worth restoration plan (“NWRP”) was first raised in the proposed rule that preceded the final rule that the NCUA Board has adopted today. 67 FR 38431 (June 4, 2002). While no specific
NCUA received sixteen public comments on the “safe harbor” concept. Fourteen commenters generally supported the concept, suggesting various criteria for eligibility and for plan contents. Regarding eligibility, six commenters suggested a minimum net worth ratio for a “safe harbor” NWRP: one suggested “just under” 6 percent; two suggested 5.5 percent; two suggested 5 percent; one suggested 3 percent. In contrast, one commenter insisted there should be no minimum net worth ratio required for eligibility. Two commenters urged that a credit union should be eligible only if asset growth was not induced by above market rates on shares and deposits, or only in extraordinary circumstances. A banking industry trade association believed the concept was at odds with CUMAA. Finally, two commenters suggested that a “safe harbor” NWRP should not be subject to automatic revocation if its goals are not met.
Regarding the contents of a “safe harbor” NWRP, a commenter suggested requiring net worth to improve within two quarters. Another suggested setting a required return on average assets that would restore net worth within 3 years. One commenter advocated an earnings retention requirement of 80 to 180 basis points per year, depending on how far below six percent the credit union's net worth ratio had fallen.
Another urged that a plan should be accepted if a credit union's earnings are positive, but its net worth ratio remained flat in some quarters due to continued asset growth not induced by above market rates.
Some commenters seemed to equate the concept of “safe harbor” approval with the notion of automatic approval of any form of NWRP that the NCUA Board might adopt as an alternative to the standard NWRP that part 702 now requires. However, as the prior proposed rule confirmed,
To facilitate consideration of the public's views, we ask commenters to address only the proposal for a “1st tier net worth restoration plan.” Also, we urge commenters to recognize that, while given substantial discretion in certain areas of PCA, NCUA lacks the authority to override or expand by regulation the requirements, limitations and definitions that CUMAA expressly prescribed.
The proposed rule permits an “eligible” federally-insured credit union to submit for NCUA approval a “1st tier net worth restoration plan” (“1st tier NWRP”) if the credit union falls marginally below “adequately capitalized” because asset growth, driven primarily by share and deposit growth, outpaces growth in net worth.
To be eligible to file a 1st tier NWRP, the proposed rule establishes historical net worth, performance, and growth criteria. The three eligibility criteria are designed to qualify only those credit unions that historically are profitable and have become marginally “undercapitalized” primarily because of uninduced share growth.
To be eligible, a credit union must meet two net worth criteria. First, a credit union must have a minimum net worth ratio of 5.50% as measured using the quarter-end balance of total assets per § 702.2(k)(1)(iv). New § 702.206(c)(1)(A)(i).
Second, for each of the three prior quarters, a credit union must have achieved a net worth ratio of at least 6 percent. New § 702.206(c)(1)(B)(i). In contrast to measuring current quarter net worth by quarter-end total assets, for each of the three prior quarters a credit union may elect among any of the four methods of calculating the total assets denominator of the net worth ratio. If that credit union is subject to a RBNW requirement, it also must have met that requirement in each of the three prior quarters. New § 702.206(c)(1)(B)(ii).
A credit union also must meet a performance criterion: for the current and each of the three preceding quarters, a credit union must have increased the dollar amount of its net worth by 60 basis points (0.60 percent) annual return on average assets (“ROAA”). New § 702.206(c)(1)(C)(i). The ROAA is derived from a credit union's ROAA “key ratio” in its most recent Financial Performance Report, unless a more recently filed Call Report corrects earlier data.
Finally, a credit union must meet a growth criterion: for the period combining the current and three preceding quarters, ending total asset growth may not exceed 110% of the growth in net worth plus shares and deposits.
Together, these eligibility criteria would allow 57.25% annualized asset growth for one quarter, causing a credit union's net worth ratio to fall from 6 percent to 5.50 percent, provided that its ROAA is 60 basis points.
A credit union that meets the three eligibility criteria must file its 1st tier NWRP within the same 45-day period that § 702.206(a) prescribes for filing a standard NWRP. New § 702.206(c). And as explained below, an eligible credit union receives a single opportunity to seek NCUA approval of a 1st tier NWRP. New § 702.206(c)(4)(A).
The proposed rule has two content requirements for a 1st tier NWRP. First, a plan must include a realistic pro forma projection of growth in total assets, shares, ROAA and net worth ratio over the next four quarters, that will result in a net worth ratio of at least 6 percent and meet any applicable RBNW requirement. New § 702.206(c)(2)(A). The duration of a 1st tier NWRP is four quarters. Second, a plan must include a statement describing how the credit union will control exposure to market and institution risks arising from any new activities that it plans to undertake over the next four quarters. New § 702.206(c)(2)(B). The following table illustrates the ROAA a credit union would need to achieve to restore net worth from 5.50 to 6 percent over four quarters while offsetting given annual growth rates:
As suggested above, a more detailed standard NWRP typically would be appropriate when the annual rate of asset growth is projected to exceed the capacity of the offsetting ROAA to restore net worth to 6 percent and to meet an applicable RBNW requirement over four quarters.
There are three principal differences between the content requirements of a standard NWRP and those of a 1st tier NWRP. First, a standard plan must include complete pro forma financial statements covering a minimum of two years, whereas a 1st tier plan requires four quarters of pro forma projections of total assets, shares and deposits, return on average assets and net worth. Second, a standard plan requires the credit union to specify what steps it will take to meet its schedule of quarterly net worth targets. In contrast, a 1st tier NWRP does not address what steps the credit union will take to become “adequately capitalized” at the end of the term of the plan. Finally, a standard NWRP requires those steps to extend beyond the term of the plan to ensure that the credit union remains at least “adequately capitalized” thereafter for four consecutive calendar quarters.
For an NWRP to be approved, CUMAA requires NCUA to determine that it “is based on realistic assumptions and is likely to succeed in restoring the net worth of the credit union.” 12 U.S.C. 1790d(f)(5). To avoid any suggestion that a 1st tier NWRP will be exempt from this statutory mandate, the proposed rule clarifies that approval is subject to NCUA's case-by-case determination that the growth rate and ROAA projected for the credit union rest on realistic assumptions that are likely to succeed in restoring its net worth ratio to 6 percent and satisfying any applicable RBNW requirement at the end of the term of the plan. New §§ 702.206(c)(3), 702.206(c)(2)(A).
Under the proposed rule, a 1st tier NWRP would be evaluated under the existing approval criteria that apply to a standard NWRP. § 702.206(d). First, NCUA would determine whether an NWRP satisfied the content requirements of the proposed rule. Second, NCUA would review the plan's growth and ROAA projections to ensure that they are supported by “realistic assumptions.” To that end, the projections will be compared to historical growth and performance measures. Third, absent evidence to the contrary, NCUA would presume that a 1st tier NWRP would not unreasonably increase the credit union's exposure to risk. As part of the three-step evaluation, NCUA may consider the risk presented by any new activities the credit union plans to undertake and by other supervisory information. New § 702.206(c)(2)(B). This would include, for example, information from examination reports or insurance reviews, as well as CAMEL codes (
Once the evaluation is completed, NCUA would follow the same schedule for decision and notification that applies to standard NWRPs. § 702.206(f). Absent safety and soundness concerns, a 1st tier NWRP that meets the content requirements discussed above and that is determined by NCUA to be based on “realistic assumptions” should receive prompt approval.
There are three circumstances in which a credit union that is eligible to file a 1st tier NWRP will be required to file a standard NWRP instead. First, unlike a credit union that files a standard NWRP, the proposed rule gives an eligible credit union a single opportunity to submit a 1st tier NWRP for approval. If that plan is not approved, the credit union will then be required to file a standard NWRP under § 702.206(b), within the time period provided in § 702.206(g). New § 702.206(c)(3)(A).
Second, a continuing decline in net worth ratio while operating under an approved 1st tier NWRP will trigger the requirement to file a standard NWRP. The proposed rule requires a credit union to file a standard NWRP if, during the term of an approved 1st tier NWRP, its net worth ratio declines below 5.5% or declines more than 50 basis points below an applicable RBNW requirement. New § 702.206(c)(4)(B). A more detailed, standard NWRP will enable NCUA to assess the adequacy of a credit union's plans to address the
Finally, the proposed rule requires a credit union to file a standard NWRP under § 702.206(b) if, at the end of the term of its 1st tier NWRP (
The Regulatory Flexibility Act requires NCUA to prepare an analysis describing any significant economic impact a proposed regulation may have on a substantial number of small credit unions (primarily those under $1 million in assets). The proposed rule expedites implementation of the existing system of PCA mandated by Congress. 12 U.S.C. 1790d. The NCUA Board has determined and certifies that the proposed rule, if adopted, will not have a significant economic impact on a substantial number of small credit unions. Thus, a Regulatory Flexibility Analysis is not required.
NCUA has determined that the proposed rule would not increase paperwork requirements under the Paperwork Reduction Act of 1995 and regulations of the Office of Management and Budget. Control number 3133–0161 has been issued for part 702 and will be displayed in the table at 12 CFR part 795.
Executive Order 13132 encourages independent regulatory agencies to consider the impact of their regulatory actions on State and local interests. NCUA, an independent regulatory agency as defined in 44 U.S.C. 3502(5), voluntarily adheres to the fundamental federalism principles addressed by the executive order. This proposed rule would apply to all federally-insured credit unions, including State-chartered credit unions. Accordingly, it may have a direct effect 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. This impact is an unavoidable consequence of carrying out the statutory mandate to adopt a system of prompt corrective action to apply to all federally-insured credit unions. NCUA staff has consulted with a committee of representative State regulators regarding the impact of the proposed rule on State-chartered credit unions. Their comments and suggestions are reflected in the proposed rule.
NCUA has determined that the proposed rule will not affect family well-being within the meaning of section 654 of the Treasury and General Appropriations Act, 1999, Pub. L. 105–277, 112 Stat. 2681 (1998).
NCUA's goal is clear, understandable regulations that impose a minimal regulatory burden. A purpose of the proposed rule is to improve and simplify the existing system of PCA. We request your comments on whether the proposed rule is understandable and minimally intrusive if implemented as proposed.
Credit unions, Reporting and recordkeeping requirements.
For the reasons set forth above, 12 CFR part 702 is proposed to be amended as follows:
1. The authority citation for part 702 continues to read as follows:
12 U.S.C. 1766(a), 1790d.
2. Amend § 702.206 as follows:
a. Redesignate current paragraphs (c) through (i) as new paragraphs (d) through (j) respectively.
b. Add new paragraph (c) to read as follows:
(c)
(1)
(i) For the current quarter—
(A) Its net worth ratio is not less than five and one-half percent (5.50%) as measured using the quarter-end balance of total assets per § 702.2(k)(1)(iv); or
(B) It fails to meet any applicable risk-based net worth requirement by not more than 50 basis points (0.50%); and
(ii) For each of the three prior quarters—
(A) It had a net worth ratio of at least 6 percent (6.0%) as measured using any method of measuring total assets available under § 702.2(k)(1); or
(B) It met any applicable RBNW requirement; and
(iii) For the current and three preceding quarters—
(A) The dollar amount of its net worth increased, on average, by at least the equivalent of 60 basis points (0.60%) return on average assets as reflected in the credit union's Financial Performance Report; and
(B) Growth in ending total assets for the four-quarter period did not exceed one hundred ten percent (110%) of growth in the sum of net worth, shares and deposits for that period.
(2)
(i) Include pro forma projections of total assets, shares and deposits, return on average assets and net worth, covering the next four quarters and resulting in a net worth ratio that restores the credit union to at least “adequately capitalized” at the end of the fourth quarter; and
(ii) Describe how the credit union will control exposure to risk from any new activities over the next four quarters.
(3)
(4)
(i)
(ii)
(A) Below five and one-half percent (5.50%) as measured using the quarter-end balance of total assets per § 702.2(k)(1)(iv); or
(B) More than 50 basis points (0.50%) below an applicable risk-based net worth requirement; or
(iii)