Requirements for Insurance

NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 741

Requirements for Insurance

AGENCY: National Credit Union Administration (NCUA).

ACTION: Proposed rule.

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SUMMARY: NCUA is proposing to revise its rules concerning

capitalization of the share insurance fund through the maintenance of a

deposit by each insured credit union, payment of an insurance premium,

and equity distribution. NCUA is proposing these revisions to conform

its regulation with recent changes to the Federal Credit Union Act.

DATES: The NCUA must receive comments on or before July 26, 1999.

ADDRESSES: Direct comments to Becky Baker, Secretary of the Board. Mail

or hand-deliver comments to: National Credit Union Administration, 1775

Duke Street, Alexandria, Virginia 22314-3428, or you may fax comments

to (703) 518-6319. Please send comments by one method only.

FOR FURTHER INFORMATION CONTACT: Dennis C. Winans, Chief Financial

Officer, Office of the Chief Financial Officer, at the above address or

telephone: (703) 518-6570; or Regina M. Metz, Staff Attorney, Division

of Operations, Office of General Counsel, at the above address or

telephone: (703) 518-6540.

SUPPLEMENTARY INFORMATION:

A. Background

The Credit Union Membership Access Act (CUMAA) was enacted into law

on August 7, 1998. Public Law 105-21. Section 302 of CUMAA amends

section 202 of the Federal Credit Union Act providing for requirements

for obtaining and maintaining share insurance coverage from the

National Credit Union Share Insurance Fund (NCUSIF). 12 U.S.C. 1782.

The revisions concern capitalization of the share insurance fund

through the maintenance of a one percent deposit by each insured credit

union, payment of an insurance premium, and distribution of fund

equity. CUMAA also adds provisions concerning the NCUSIF's equity ratio

and available assets ratio. The amendments will become effective

January 1, 2000. Accordingly, NCUA is proposing to revise Sec. 741.4 to

implement the provisions of section 302 of CUMAA.

B. Section by Section Analysis

Section 741.4(a) Scope

The scope of the proposed rule is to implement the requirements of

Section 202 of the Federal Credit Union Act, as amended by CUMAA. CUMAA

provides for payment of an insurance premium not more than twice in any

calendar year, rather than annually, as under the current rule.

Therefore, the NCUA proposes to change the reference in this paragraph

from ``payment of an annual insurance premium'' to ``payment of an

insurance premium.''

Section 741.4(b) Definitions

In this paragraph, the NCUA proposes to incorporate CUMAA's

definitions for the following terms: ``available assets ratio,''

``equity ratio,'' ``insured shares,'' and ``normal operating level.''

The terms ``available assets ratio'' and ``equity ratio'' are new to

the regulation. The proposed rule changes some words in the definitions

for ``available assets ratio'' and ``equity ratio'' from CUMAA to be

consistent with GAAP terminology. Department of Treasury staff with

whom NCUA staff discussed these wording changes supports them. Under

the proposed rule, after January 1, 2000, the NCUA will calculate the

available assets ratio and equity ratio to determine whether to approve

an annual distribution of NCUSIF equity to insured credit unions, and

if so, the amount. Under the proposed rule, the NCUA will also use the

equity ratio to determine whether to charge insured credit unions an

insurance premium and if so, the amount. The proposed rule does not

change the definition of ``insured shares,'' but renumbers it so that

the list of defined terms remains in alphabetical order. The proposed

section revises the definition of the ``normal operating level.'' The

current rule defines normal operating level as 1.3% of the aggregate of

all insured shares at the end of the insurance year, or such lower

value as established by the action of the NCUA Board. The proposed rule

defines normal operating level as an equity ratio, determined by the

NCUA Board, from 1.2% to 1.5% at the end of the calendar year. As

required by CUMAA, the proposed rule removes the definition for

``insurance year.'' The proposed rule adds a new definition for

``reporting period'' meaning calendar year for credit unions with total

assets of less than $50 million and semiannual period for credit unions

with total assets of $50 million or more.

To aid understanding of the new definitions for available assets

ratio and equity ratio, the proposed rule contains a representation of

the calculations in the style of a mathematical formula.

Section 741.4(c) One Percent Deposit

This proposed paragraph incorporates the provision of CUMAA that

requires the NCUA to adjust the deposit amount semiannually for insured

credit unions with assets of $50 million or more, while retaining the

annual adjustment requirement for credit unions with less than $50

million in assets. If the aggregate amount of insured shares of the

credit union has increased, the adjustment will be an increase in the

deposit amount. If the aggregate amount of insured shares of the credit

union has decreased, the adjustment will be a refund to the credit

union.

Section 741.4(d) Insurance Premiums

This proposed paragraph incorporates CUMAA's provision that, as of

January 1, 2000, insured credit unions will pay an insurance premium to

the NCUA not more than twice in any calendar year, on the dates the

Board determines. Under the current rule effective until January 1,

2000, all insured credit unions must pay to the NCUA an annual

insurance premium of \1/12\ of one percent of insured shares, unless

the NCUA Board waives the premium.

As required by CUMAA, the proposed section requires the NCUA Board,

as of January 1, 2000, to calculate the amount of the premium not more

than twice in any calendar year based on the amount of the NCUSIF's

equity ratio. The NCUA Board may only assess an insurance premium if

the NCUSIF equity fund ratio is less than 1.3 percent. The premium

charge must not exceed the amount necessary to restore the equity ratio

to 1.3 percent. If the amount of the

[[Page 28416]]

equity ratio is less than 1.2 percent, the NCUA Board must assess an

insurance premium in an amount to restore the equity ratio to 1.2

percent.

Section 741.4(e) Distribution of NCUSIF Equity

This paragraph incorporates the CUMAA provision that requires the

NCUA Board to make a distribution of NCUSIF equity to insured credit

unions after each calendar year when NCUSIF's available assets ratio

exceeds one percent, and the NCUSIF exceeds its normal operating level.

The current rule provides for a redistribution of NCUSIF equity after

each insurance year if the NCUSIF exceeds its normal operating level,

which is defined as 1.3 percent or such lower value as established by

action of the NCUA Board. CUMAA and the proposed rule revise the

definition of normal operating level to not less than 1.2 percent and

not more than 1.5 percent of the aggregate of all insured shares at the

end of the year as established by action of the NCUA Board. The current

rule requires the amount of the distribution to reduce the NCUSIF to

its normal operating level. The proposed rule requires the distribution

to be an amount that reduces the NCUSIF to its normal operating level

and to an available assets ratio of not below 1.0 percent. Under the

proposed rule, the NCUA Board would use the aggregate amount of the

insured shares from all insured credit unions from the final reporting

period of the calendar year in calculating the NCUSIF's equity ratio

and available assets ratio to determine whether to distribute NCUSIF

equity.

The Board requests comments on the appropriate percentage for the

normal operating level for the year 2000.

Section 741.4(f) Invoices

This paragraph states that the NCUA will provide copies of invoices

to all federally insured credit unions in connection with the amount of

their one percent deposit and any premium payment. The proposed rule

updates and clarifies the current rule, in addition to incorporating

changes required under CUMAA.

The current rule identifies the invoices as Forms 1304, for

federally insured state-chartered credit unions, and 1305, for federal

credit unions, and states that Form 1305 includes the annual operating

fee. The NCUA no longer identifies the invoices as Forms 1304 and 1305.

Therefore, the proposed rule generally replaces references to Forms

1304 and 1305 with the word ``invoices'' and states that invoices for

federal credit unions include any annual operating fee due. The

proposed rule also includes other small wording changes to update and

clarify the current rule.

In addition, the current rule refers to the credit unions' annual

premium payment. CUMAA changes the term of the premium payment from

annual to not more than twice in any calendar year. Therefore, the

proposed rule removes the word ``annual'' where it modifies ``premium

payment'' to incorporate the changes required under CUMAA.

Sections 741.4(g) New Charters, (h) Conversion to Federal Insurance,

and (j) Return of Deposit

As stated previously, CUMAA removes the term ``insurance year''

from Section 202 of the Federal Credit Union Act. CUMAA provides that

the amount of the one percent deposit will be assessed annually for

credit unions with total assets of not more than $50 million and

semiannually for credit unions with total assets of $50 million or

more. Therefore, the proposed rule conforms with CUMAA by removing the

words ``insurance year'' where they appear in paragraphs (g) and (h)

and replacing them with the words ``calendar year.'' The proposed rule

also conforms with CUMAA by revising the wording in paragraph (h) to

account for the revisions to paragraph (d) concerning premiums.

CUMAA and the proposed rule no longer automatically provide for an

annual premium, but provide that the NCUA Board may assess a premium

not more than twice in a calendar year. CUMAA also provides that any

distribution of NCUSIF equity will occur after each calendar year.

Therefore, the proposed rule conforms with CUMAA by removing the words

``insurance year'' where they appear in paragraph (j) and replacing

them with ``calendar year.''

C. Regulatory Procedures

Regulatory Flexibility Act

The Regulatory Flexibility Act requires NCUA to prepare an analysis

to describe any significant economic impact any proposed regulation may

have on a substantial number of small entities (primarily those under

$1 million in assets). The NCUA has determined and certifies that this

proposed rule, if adopted, will not have a significant economic impact

on a substantial number of small credit unions. Accordingly, the NCUA

has determined that a Regulatory Flexibility Analysis is not required.

Paperwork Reduction Act

NCUA has determined that the proposed amendments do not increase

paperwork requirements under the Paperwork Reduction Act of 1995 and

regulations of the Office of Management and Budget.

Executive Order 12612

Executive Order 12612 requires NCUA to consider the effect of its

actions on state interests. As does the current rule, the proposed

amendments will apply to federal credit unions and federally-insured

state-chartered credit unions. NCUA has determined that the proposed

amendments will 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.

D. Agency Regulatory Goal

NCUA's goal is clear, understandable regulations that impose a

minimal regulatory burden. We request your comments on whether the

proposed rule is understandable and minimally intrusive if implemented

as proposed. Commenters should note that CUMAA mandates the changes in

this regulation.

List of Subjects in 12 CFR Part 741

Credit unions, Requirements for insurance.

By the National Credit Union Administration Board on May 19,

1999.

Becky Baker,

Secretary of the Board.

For the reasons set forth in the preamble, the National Credit

Union Administration proposes to amend 12 CFR part 741 as follows:

PART 741--REQUIREMENTS FOR INSURANCE

Subpart A--Regulations That Apply To Both Federal Credit Unions and

Federally Insured State-Chartered Credit Unions and That Are Not

Codified Elsewhere in NCUA's Regulations

1. The authority citation for Subpart A continues to read as

follows:

Authority: 12 U.S.C. 1782.

2. Amend Sec. 741.4 as follows:

a. In paragraph (a), remove the word ``annual.''

b. In paragraph (g), remove the words ``insurance year'' from

wherever they appear and add, in their place, the words ``calendar

year.''

[[Page 28417]]

c. In paragraph (j), remove the words ``insurance year'' and add,

in their place, the words ``calendar year.''

d. Redesignate paragraph (b)(2) as paragraph (b)(3), revise

paragraph (b)(1), add new paragraphs (b)(2), (b)(4) and (b)(5), and

revise paragraphs (c), (d), (e), (f), and (h) to read as follows:

Sec. 741.4 Insurance premium and one percent deposit.

* * * * *

(b) Definitions. For purposes of this section.

(1) Available assets ratio means the ratio of:

(i) The amount determined by subtracting all liabilities of the

NCUSIF, including contingent liabilities for which no provision for

losses has been made, from the sum of cash and the market value of

unencumbered investments authorized under 12 U.S.C. 1783(c), to:

(ii) The aggregate amount of the insured shares in all insured

credit unions.

(iii) Shown as an abbreviated mathematical formula, the available

assets ratio is:

[GRAPHIC] [TIFF OMITTED] TP26MY99.063

(2) Equity ratio means the ratio of:

(i) The amount of NCUSIF's capitalization, meaning insured credit

unions' one percent capitalization deposits plus the retained earnings

balance of the NCUSIF (less contingent liabilities for which no

provision for losses has been made) to:

(ii) The aggregate amount of the insured shares in all insured

credit unions.

(ii) Shown as an abbreviated mathematical formula, the equity ratio

is:

[GRAPHIC] [TIFF OMITTED] TP26MY99.064

(3) * * *

(4) Normal operating level means an equity ratio not less than 1.2

percent and not more than 1.5 percent, as established by action of the

NCUA Board.

(5) Reporting period means calendar year for credit unions with

total assets of less than $50,000,000 and means semiannual period for

credit union with total assets of $50,000,000 or more.

(c) One percent deposit. Each insured credit union shall maintain

with the NCUSIF during each reporting period a deposit in an amount

equaling one percent of the total of the credit union's insured shares

at the close of the preceding reporting period. For credit unions with

total assets of less than $50,000,000, insured shares will be measured

and adjusted annually based on the insured shares reported in the

credit union's semiannual 5300 report due in January of each year. For

credit unions with total assets of $50,000,000 or more, insured shares

will be measured and adjusted semiannually based on the insured shares

reported in the credit union's quarterly 5300 reports due in January

and July of each year.

(d) Insurance premium charges. (1) In general. Each insured credit

union will pay to the NCUSIF, on dates the NCUA Board determines, but

not more than twice in any calendar year, an insurance premium in an

amount stated as a percentage of insured shares, which will be the same

for all insured credit unions.

(2) Relation of premium charge to equity ratio of NCUSIF. (i) The

NCUA Board may assess a premium charge only if the NCUSIF's equity

ratio is less than 1.3 percent and the premium charge does not exceed

the amount necessary to restore the equity ratio to 1.3 percent.

(ii) If the equity ratio of NCUSIF falls below 1.2 percent, the

NCUA Board is required to assess a premium in an amount it determines

is necessary to restore the equity ratio to, and maintain that ratio

at, 1.2 percent.

(e) Distribution of NCUSIF equity. If, as of the end of a calendar

year, the NCUSIF exceeds its normal operating level and its available

assets ratio exceeds 1.0 percent, the NCUA Board will make a

proportionate distribution of NCUSIF equity to insured credit unions.

The distribution will be the maximum amount possible that does not

reduce the NCUSIF's equity ratio below its normal operating level and

does not reduce its available assets ratio below 1.0 percent. The

distribution will be after the calendar year and in the form determined

by the NCUA Board. The form of the distribution may include a waiver of

insurance premiums, premium rebates, or distributions from NCUSIF

equity in the form of dividends. The NCUA Board will use the aggregate

amount of the insured shares from all insured credit unions from the

final reporting period of the calendar year in calculating the NCUSIF's

equity ratio and available assets ratio for purposes of this paragraph.

(f) Invoices. The NCUA provides invoices to all federally insured

credit unions stating any change in the amount of a credit union's one

percent deposit and the computation and funding of any premium payment

due. Invoices for federal credit unions also include any annual

operating fees that are due. Invoices are calculated based on a credit

union's insured shares as of the most recently ended reporting period.

The invoices may also provide for any distribution the NCUA Board

declares in accordance with paragraph (e) of this section, resulting in

a single net transfer of funds between a credit union and the NCUA.

* * * * *

(h) Conversion to Federal insurance. An existing credit union that

converts to insurance coverage with the NCUSIF shall immediately fund

its one percent deposit based on the total of its insured shares as of

the close of the month prior to conversion and, if any premiums have

been assessed in that calendar year, will pay a prorated premium amount

to reflect the remaining number of months in that calendar year. The

credit union will be entitled to a prorated share of any distribution

from

[[Page 28418]]

NCUSIF equity declared subsequent to the credit union's conversion.

* * * * *

[FR Doc. 99-13305 Filed 5-25-99; 8:45 am]

BILLING CODE 7535-01-U