[Federal Register Volume 75, Number 184 (Thursday, September 23, 2010)]
[Rules and Regulations]
[Pages 57841-57844]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-23652]
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NATIONAL CREDIT UNION ADMINISTRATION
12 CFR Part 701
RIN 3133-AD67
Secondary Capital Accounts
AGENCY: National Credit Union Administration (NCUA).
ACTION: Final rule.
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SUMMARY: On February 19, 2010, NCUA published an interim final rule
amending its regulation governing secondary capital accounts to permit
low-income designated credit unions to redeem all or part of secondary
capital accepted from the United States Government or any of its
subdivisions at any time after the secondary capital has been on
deposit for two years. The amendments also allowed early redemption,
under the same terms and conditions, of secondary capital accepted as a
match to the government-funded secondary capital. Finally, the
amendments changed the loss-distribution provision that applies to
secondary capital accounts so that secondary capital accepted under the
2010 Community Development Capital Initiative is senior to any required
matching secondary capital accepted from an alternative source. This
rule confirms those amendments as final with some technical changes and
clarifications.
DATES: Effective September 23, 2010.
FOR FURTHER INFORMATION CONTACT: Kevin Tuininga, Trial Attorney, at
1775 Duke Street, Alexandria, Virginia 22314-3428, or telephone: (703)
518-6543.
SUPPLEMENTARY INFORMATION:
A. Background
In February 2010, NCUA issued an interim final rule, with request
for comments, to permit low-income designated credit unions (``LICUs'')
to redeem all or part of secondary capital (``SC'') accepted from the
United States Government or any of its subdivisions (``government-
funded SC'') \1\ and its matching SC, if any, at any time after the SC
has been on deposit for two
[[Page 57842]]
years. 75 FR 7339 (Feb. 19, 2010). This amendment was intended to
facilitate LICU participation in the United States Department of the
Treasury's (``Treasury'') Community Development Capital Initiative
(``CDCI''), which offered funds under the Troubled Asset Relief Program
(``TARP'') to LICUs in the form of SC (``CDCI SC''). To comply with the
terms of the CDCI, the interim final also provided that CDCI SC must be
held senior to its matching SC, if any, and gave LICUs two options for
ensuring the subordination of matching SC. In this final rule, NCUA is
confirming the amendments to its rule on the redemption and priority of
certain SC accounts. The final rule also makes a number of technical
adjustments and clarifications to reflect terms of the CDCI that have
developed since the interim final rule was issued.
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\1\ Where the term appears in this preamble, Government-funded
SC refers only to SC funded by the Federal Government as opposed to
State governments or their subdivisions.
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1. The CDCI
Treasury announced the CDCI on February 3, 2010 as a new program
under the TARP aimed to invest lower-cost capital in community
development financial institutions.\2\ To qualify for CDCI
consideration, credit unions must have a low-income designation
pursuant to 12 CFR 701.34 and a Community Development Financial
Institution (``CDFI'') certification from the CDFI Fund.\3\
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\2\ The Emergency Economic Stabilization Act of 2008 authorized
the Secretary of the Treasury to establish the TARP for the purpose
of restoring and sustaining the viability of financial institutions.
12 U.S.C. 5211.
\3\ The CDFI Fund is operated by Treasury and charged with
promoting economic revitalization and community development through
investment in community development financial institutions.
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The terms of the CDCI provide that a LICU accepted for
participation is eligible to issue CDCI Senior Securities up to an
aggregate principal amount of 3.5 percent of the LICU's total assets.
The Senior Securities have either an eight-year or thirteen-year
maturity and are purchased by Treasury.\4\ Securities with a thirteen-
year maturity pay cumulative interest at an annual rate of two percent
until the eighth anniversary of their date of issuance. Over the
remaining five years to maturity, the securities pay cumulative
interest at an annual rate of nine percent. Securities with an eight-
year maturity pay cumulative interest at an annual rate of two percent
through maturity.
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\4\ At the time the interim final was approved, Treasury was
offering to purchase only thirteen-year Senior Securities.
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In some circumstances, the CDCI terms may require LICUs to obtain
matching funds from non-government sources. Where match is required, a
LICU must agree to hold the matching SC subordinate to the CDCI SC. In
particular, the subordination terms require that all of a LICU's CDCI
SC be redeemed before any of its match may be redeemed. CDCI SC along
with its matching SC is subject to NCUA's regulation governing SC
accounts. Sec. 701.34(b)-(d).
2. The Interim Final Rule
The interim final rule sought to remove any regulatory disincentive
for LICUs to apply for participation in the CDCI and to make other
changes necessary to alleviate conflicts between NCUA's regulation and
the terms of the CDCI. To do so, the interim final rule exempted all
government-funded SC from the limits of the redemption schedule in
Sec. 701.34(d)(3). It also exempted SC accepted as a match to
government-funded SC from the redemption schedule limits. The exemption
was intended to give LICUs the opportunity to avoid the nine-percent
interest rate over the last five years to maturity on CDCI SC that was
initially offered with only a 13-year maturity. The exception also
sought to avoid subjecting LICUs to potentially high interest rates on
SC accepted as a match to CDCI SC. In contemplation of similar future
opportunities, the exemption language was drafted to encompass the
early redemption of government-funded SC accepted under programs other
than the CDCI that could arise in response to adverse economic
conditions.
The interim final rule also amended the loss distribution
procedures applicable to SC accounts to ensure that CDCI SC would be
held senior to any matching SC required under the Initiative. In
particular, the interim final rule authorized LICUs to choose between
two different methods of match subordination.
The two subordination methods apply only to CDCI SC and its match
accepted under the CDCI of 2010 and not to government-funded SC
accepted under other programs that do not require seniority status.
LICUs eligible to accept CDCI SC without any match must follow the pro-
rata loss distribution procedure that makes the CDCI SC available to
cover a loss at the same rate as any other SC. The interim final rule
did not affect in any manner the SC redemption procedures for non-
government-funded SC that is not accepted as a match to government-
funded SC.
B. Summary of Public Comments
NCUA received two comment letters on the interim final rule: One
from a national trade association and one on behalf of two State credit
union leagues. One comment letter expressed support for the interim
final rule and did not suggest any changes. The other comment letter
also expressed support but advised clarification on whether early
redemption would be permitted where government-funded SC is only
partially matched.
NCUA believes the interim final rule in its current form guards
against ambiguity to the extent possible with regard to early
redemption. The rule states, without reference to ratio, that matching
SC is eligible for early redemption under the same terms and conditions
as the government-funded SC with which it is matched. Under the plain
meaning of the rule, to be ``matching secondary capital,'' the account
in question must necessarily have met all the requirements to qualify
as matching SC pursuant to the terms of the program under which the
government-funded SC was offered. Assuming the SC qualified as match,
the rule makes the match eligible for early redemption. Rather than
eliminating ambiguity, addressing amounts or ratios in clarifying
circumstances where matching SC is eligible for early redemption could
raise further questions with regard to the congruity of rate, term,
priority, or some other unanticipated variable. Divergence in these
variables does not affect whether SC accepted as a match to government-
funded SC is eligible for early redemption.\5\
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\5\ Eligibility for early redemption, however, does not mean
early redemption is automatically approved. The terms of the
particular government program, applicable SC contract, and the
criteria for Regional Director approval could still restrict early
redemption.
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C. Final Rule
This final rule confirms the amendments made in the interim final
rule. It also includes some technical changes and clarifications that
respond to considerations that arose during development and
implementation of the CDCI.
At the time of the interim final's issuance, Treasury referred to
what is now the CDCI as the ``CDC Program.'' To account for this name
change, in Sec. 701.34(b)(7), this final rule replaces ``Community
Development Capital Program'' and its abbreviation with ``Community
Development Capital Initiative'' or ``CDCI.''
In addition, finalized seniority terms with respect to SC accepted
as a match to CDCI SC will be such that no amount of the match can be
redeemed until every dollar of the CDCI SC has been
[[Page 57843]]
returned to Treasury.\6\ Thus, the final rule eliminates the interim
final rule's now-unnecessary language in Sec. 701.34(b)(7)(i)-(ii)
that contemplates the possibility matching SC could be properly
redeemed prior to redemption of CDCI SC.
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\6\ The language of the interim final rule states that CDCI SC
becomes available to cover losses only after its matching SC has
been depleted or ``properly redeemed.'' During initial development
of the CDCI, it was unclear whether Treasury would require matching
funds to be on hand for the entire term of the CDCI SC or whether a
shorter, minimum term might apply to matching SC. Since the interim
final's approval, Treasury has confirmed that it will not allow
redemption of any SC accepted as a match to CDCI SC until all of the
CDCI SC has been redeemed.
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Although Treasury's more recent articulation of the CDCI
contemplates issuance of eight-year securities bearing two percent
interest for the entire term, the final rule retains the exceptions for
early redemption of both government-funded SC and its match.\7\ Doing
so will allow LICUs who are able to recruit match with a longer
maturity or that do not require matching SC to choose to accept the
thirteen-year CDCI SC. These LICUs can later decide whether to seek
early redemption or retain the CDCI SC despite the interest rate spike
to nine-percent.
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\7\ Treasury agreed to offer LICUs the option of issuing eight-
year securities to ease concerns investors would be unwilling to
contribute matching SC to LICUs with a maturity as long as thirteen
years.
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The final change relates to the schedule for recognizing net-worth
value set forth in Sec. 701.34(c)(2). Without an adjustment in this
final rule, a problem arises with literal application of the net-worth
recognition schedule in some instances where a LICU suffers a loss to,
or redeems all or part of, government-funded SC and/or its matching SC
before or during the last five years to maturity. To illustrate, if a
LICU redeems half of its government-funded SC in year eight of its
thirteen-year maturity, the net-worth recognition schedule directs the
LICU to recognize 80 percent of the original account balance as net
worth although the LICU retains only half of the account's original
balance.
To correct this problem, the final rule expressly provides that a
LICU's recordation of the net-worth value of an account in its
financial statement may never exceed the remaining balance of the
account after early redemptions or losses. For SC accounts with less
than five years remaining maturity, a LICU must record the net-worth
value of the accounts in its financial statement in accordance with the
lesser of the following: (1) The remaining balance of the account after
early redemptions and losses; or (2) the declining percentage
calculations set forth in the net-worth schedule that are based on the
original balance of the account.\8\
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\8\ Application of the net-worth schedule has no effect on how
losses are distributed among accounts under the pro-rata loss
distribution procedure of Sec. 701.34(b)(7).
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D. Immediate Effective Date
NCUA is issuing this rulemaking as a final rule effective upon
publication. The Administrative Procedure Act (``APA''), 5 U.S.C. 553,
requires that, once finalized, a substantive rulemaking must have a
delayed effective date of 30 days from the date of publication, except
for good cause. In this regard, NCUA believes the 30-day delayed
effective date is inapplicable because the final rule makes only
technical adjustments and clarifications to the interim final rule and
to Sec. 701.34. As such, the rule is not substantive and is not
subject to the 30-day publication requirement. Even if the rule were
otherwise subject to the 30-day requirement, NCUA believes good cause
exists for waiving the 30-day delayed effective date because the
interim final rule is already in effect and is not significantly
altered by this final rule.
Regulatory Procedures
Regulatory Flexibility Act
The Regulatory Flexibility Act requires NCUA to prepare an analysis
to describe any significant economic impact a rule may have on a
substantial number of small entities (primarily those under ten million
dollars in assets). This final rule does not impose any regulatory
burden, instead providing LICUs with the flexibility to redeem SC
accepted from the United States Government or any of its subdivisions,
along with its matching SC, at any time after the SC has been on
deposit for two years. The rule will not have a significant economic
impact on a substantial number of small credit unions. Thus, a
Regulatory Flexibility Analysis is not required.
Paperwork Reduction Act
NCUA has determined this rule will not increase paperwork
requirements under the Paperwork Reduction Act of 1995 and regulations
of the Office of Management and Budget.
Executive Order 13132
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 rule would not have a
substantial 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.
Accordingly, this rule does not constitute a policy that has federalism
implications for purposes of the Executive Order.
Treasury and General Government Appropriations Act, 1999
NCUA has determined the 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).
Small Business Regulatory Enforcement Fairness Act
The Small Business Regulatory Enforcement Fairness Act of 1996
(Pub. L. 104-121) (``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. 5 U.S.C. 551. The Office of
Information and Regulatory Affairs, an office within the Office of
Management and Budget, has determined that this is not a major rule for
purposes of SBREFA.
List of Subjects in 12 CFR Part 701
Credit, Credit unions, Mortgages.
By the National Credit Union Administration Board, this 16th day
of September, 2010.
Mary F. Rupp,
Secretary of the Board.
0
For the reasons discussed above, the interim final rule amending 12 CFR
part 701 published on February 19, 2010 (75 FR 7339), which was
effective February 19, 2010, is confirmed as final with the following
changes:
PART 701--ORGANIZATION AND OPERATION OF FEDERAL CREDIT UNIONS
0
1. The authority citation for part 701 continues to read as follows:
Authority: 12 U.S.C. 1752(5), 1755, 1756, 1757, 1758, 1759,
1761a, 1761b, 1766, 1767, 1782, 1784, 1786, 1787, 1789. Section
701.6 is also authorized by 15 U.S.C. 3717. Section 701.31 is also
authorized by 15 U.S.C. 1601 et seq.; 42 U.S.C. 1981 and 3601-3610.
Section 701.35 is also authorized by 42 U.S.C. 4311-4312.
0
2. Amend Sec. 701.34 by revising paragraphs (b)(7) and (c)(2)
introductory
[[Page 57844]]
text and adding paragraphs (c)(2)(i) and (c)(2)(ii) introductory text
prior to the table to read as follows:
Sec. 701.34 Designation of low income status; Acceptance of secondary
capital accounts by low-income designated credit unions.
* * * * *
(b) * * *
(7) Availability to cover losses. Funds deposited into a secondary
capital account, including interest accrued and paid into the secondary
capital account, must be available to cover operating losses realized
by the LICU that exceed its net available reserves (exclusive of
secondary capital and allowance accounts for loan and lease losses),
and to the extent funds are so used, the LICU must not restore or
replenish the account under any circumstances. The LICU may, in lieu of
paying interest into the secondary capital account, pay accrued
interest directly to the investor or into a separate account from which
the secondary capital investor may make withdrawals. Losses must be
distributed pro-rata among all secondary capital accounts held by the
LICU at the time the losses are realized. In instances where a LICU
accepted secondary capital from the United States Government or any of
its subdivisions under the Community Development Capital Initiative of
2010 (``CDCI secondary capital'') and matching funds were required
under the Initiative and are on deposit in the form of secondary
capital at the time a loss is realized, a LICU must apply either of the
following pro-rata loss distribution procedures to its secondary
capital accounts with respect to the loss:
(i) If not inconsistent with any agreements governing other
secondary capital on deposit at the time a loss is realized, the CDCI
secondary capital may be excluded from the calculation of the pro-rata
loss distribution until all of its matching secondary capital has been
depleted, thereby causing the CDCI secondary capital to be held as
senior to all other secondary capital until its matching secondary
capital is exhausted. The CDCI secondary capital should be included in
the calculation of the pro-rata loss distribution and is available to
cover the loss only after all of its matching secondary capital has
been depleted.
(ii) Regardless of any agreements applicable to other secondary
capital, the CDCI secondary capital and its matching secondary capital
may be considered a single account for purposes of determining a pro-
rata share of the loss and the amount determined as the pro-rata share
for the combined account must first be applied to the matching
secondary capital account, thereby causing the CDCI secondary capital
to be held as senior to its matching secondary capital. The CDCI
secondary capital is available to cover the loss only after all of its
matching secondary capital has been depleted.
* * * * *
(c) * * *
(2) Schedule for recognizing net worth value. The LICU's reflection
of the net worth value of the accounts in its financial statement may
never exceed the full balance of the secondary capital on deposit after
any early redemptions and losses. For accounts with remaining
maturities of less than five years, the LICU must reflect the net worth
value of the accounts in its financial statement in accordance with the
lesser of:
(i) The remaining balance of the accounts after any redemptions and
losses; or
(ii) The amounts calculated based on the following schedule:
* * * * *
[FR Doc. 2010-23652 Filed 9-22-10; 8:45 am]
BILLING CODE 7535-01-P