Requirements for Insurance

NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 741

RIN 3133-AC22

Requirements for Insurance

AGENCY: National Credit Union Administration (NCUA).

ACTION: Final rule.

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SUMMARY: NCUA is issuing a final rule that revises NCUA 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 making these

revisions to conform its regulation with changes to the Federal Credit

Union Act required under the Credit Union Membership Access Act

(CUMAA).

DATES: This rule is effective January 1, 2000.

ADDRESSES: National Credit Union Administration, 1775 Duke Street,

Alexandria, Virginia 22314-3428.

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:

Background

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 to the

Federal Credit Union Act will become effective January 1, 2000.

Accordingly, on May 27, 1999, NCUA issued a proposed rule with request

for comments revising Sec. 741.4 to implement the provisions of section

302 of CUMAA. 64 FR 28415 (May 26, 1999). The Board also requested

comments on the level at which it should set the normal operating level

of the NCUSIF for the year 2000. After reviewing the comments, the NCUA

Board is adopting the final rule unchanged from the proposed rule.

Summary of Comments

NCUA received 18 comment letters: 12 from credit unions, four from

credit union trade associations, and two from bank trade associations.

General Comments

Although CUMAA specifically mandates most of the amendments in the

proposed rule, NCUA received several comments on these statutorily

required provisions. NCUA also received several other comments that

fell outside the scope of the proposed rule and we have noted this in

the specific sections below. The majority of relevant comments were

recommendations concerning the NCUSIF's normal operating level. These

comments are discussed in the section on the normal operating level

below.

Section 741.4(c) One Percent Deposit

This paragraph incorporates the provision of CUMAA that requires

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. NCUA received two comments on this paragraph. The first comment

from a bank trade association suggested that credit unions be required

to expense the one percent ``deposit insurance premium'' and to exclude

the premium from both assets and net worth when assessing capital

adequacy. This comment mistakenly identifies the one percent insurance

deposit as a ``premium'' and is outside the scope of this regulation.

The nature of the one percent insurance deposit is established by

statute. 12 U.S.C. 1782a(c)(1). The second commenter on this paragraph,

a state credit union league, suggested that NCUA adjust the one percent

deposit amount semiannually for all credit unions regardless of size.

NCUA is not adopting this suggestion; it would exceed the requirements

of CUMAA and, further, create accounting burdens for both the NCUSIF

and insured credit unions. Including credit unions with less than $50

million in assets in the semiannual calculation would have only a

minimal impact on the NCUSIF.

Section 741.4(d) Insurance Premium Charges

As required by CUMAA, the 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 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. The NCUA Board will require staff to

report annually on the issue of an insurance premium charge after the

availability of the December 31 Call Report data.

The NCUA received four comment letters on insurance premium

charges: one from a bank trade association and three from credit

unions. Three comment letters concerned requirements mandated by CUMAA

over which NCUA has no discretion.

[[Page 56149]]

One comment letter from a credit union suggested that NCUA calculate

the equity ratio semiannually for large credit unions when the one

percent deposit amount is computed, allowing premiums to be assessed.

This has been NCUA's approach and is permitted under the proposed and

final regulation.

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.

One commenter suggested that the NCUA Board calculate the available

assets ratio and equity ratio twice yearly, allowing equity to be

distributed to credit unions, but CUMAA mandates that NCUA calculate

and make the equity distribution after each calendar year. Under the

final rule, 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 to determine whether to distribute NCUSIF

equity. The NCUA Board will require staff to report annually on the

issue of an equity distribution after the availability of the December

31 Call Report data.

One commenter requested that NCUA give each credit union a choice

of its preferred form of the distribution of the fund equity but

provided no business reason for doing so. CUMAA and the final rule

permit NCUA to determine the form of equity distributions to the credit

unions from the NCUSIF, including a waiver of insurance premiums,

premium rebates, or distributions from NCUSIF equity in the form of

dividends. As a practical matter, if a premium is to be assessed in a

year following a year for which a dividend is to be paid, NCUA's

practice is to net the amounts so that a credit union will receive

either a dividend or a premium depending on its circumstances. Both

premiums and dividends are calculated on the basis of insured shares

for a specific period, therefore, the form of a distribution of the

fund equity for a specific period should be the same for all insured

credit unions.

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 final rule

updates and clarifies the current rule, in addition to incorporating

changes required under CUMAA. Three commenters suggested that the final

rule establish a deadline from the invoice date for credit unions to

adjust their one percent deposit amounts and forward their premium

payments. Two of these commenters recommended 30 calendar days and one

recommended 60 days. NCUA's current practice is to provide credit

unions with a specific calendar due date on invoices that is

approximately 45 calendar days after sending the invoice. This practice

provides the NCUA with more flexibility than would a regulatory

deadline and has worked well because there is no need for the credit

union to calculate when the due date is, so NCUA sees no need to

establish a regulatory deadline at this time.

Normal Operating Level for Year 2000

In the proposed rule, the Board requested comments on the

appropriate percentage, 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,

for the normal operating level for the year 2000. Ten of the sixteen

commenters on this issue, including the two national credit union trade

associations, recommended that NCUA keep the normal operating level for

the year 2000 at 1.3 percent, its current level. Four commenters

suggested that NCUA lower the normal operating level for the year 2000

below 1.3 percent, with one of these commenters recommending that NCUA

increase the percent gradually over five years. The remaining two

commenters suggested that NCUA raise the normal operating level above

1.3 percent, with one of these commenters recommending that NCUA

increase the percent gradually over five years and one over ten years.

The NCUA Board has decided to set the normal operating level for the

year 2000 at 1.3 percent.

NCUA received various other general comments about the normal

operating level. Six of the sixteen commenters on this issue

recommended that any increase in the normal operating level should be

in small increments gradually over a period of years. Two of the

sixteen commenters suggested that NCUA establish a long-term policy for

operation and soundness of the NCUSIF and the normal operating level.

Two commenters suggested that NCUA should conduct a thorough study on

the NCUSIF's performance, including investment income, loss record, and

whether the amount allocated for provision for credit union losses is

on target. NCUA does conduct this type of research on a continual basis

regarding the NCUSIF. Five commenters recommended that NCUA not base it

decisions on the NCUSIF on how the other financial regulatory agencies

manage their funds, because credit unions have a different type and

amount of risk than banks.

Regulatory Procedures

Regulatory Flexibility Act

The Regulatory Flexibility Act requires NCUA to prepare an analysis

to describe any significant economic impact any final 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

final rule 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 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 amendments

will apply to federal credit unions and federally-insured state-

chartered credit unions. NCUA has determined that the 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.

Small Business Regulatory Enforcement Fairness Act

The Small Business Regulatory Enforcement Fairness Act of 1996

(Pub. L. 104-121) 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

Procedures Act. 5 U.S.C. 551. The Office of Management and Budget is

reviewing this rule to determine that it is not major for purposes of

the Small Business Regulatory Enforcement Fairness Act of 1996.

List of Subjects in 12 CFR Part 741

Bank deposit insurance, Credit unions.

[[Page 56150]]

By the National Credit Union Administration Board on October 6,

1999.

Becky Baker,

Secretary of the Board.

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

Union Administration amends 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 part 741 continues to read as

follows:

Authority: 12 U.S.C. 1757, 1766, and 1781-1790.

Section 741.4 is also authorized by 31 U.S.C. 3717.

Sec. 741.4 [Amended]

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.''

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

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

d. Remove paragraph (b)(3), 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] TR18OC99.001

(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.

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

ratio is:

[GRAPHIC] [TIFF OMITTED] TR18OC99.002

* * * * *

(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

[[Page 56151]]

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 NCUSIF equity declared subsequent to the credit union's

conversion.

* * * * *

[FR Doc. 99-26753 Filed 10-15-99; 8:45 am]

BILLING CODE 7535-01-U