12 CFR Part 704 — Corporate Credit Unions

PART 704—CORPORATE CREDIT UNIONS Authority: 12 U.S.C. 1766(a), 1781, 1789. Source: 62 FR 12938, Mar. 19, 1997, unless otherwise noted. § 704.1 Scope. (a) This part establishes special rules for all federally insured corporate credit unions. Non-federally insured corporate credit unions must agree, by written contract, to both adhere to the requirements of this part and submit to examinations, as determined by NCUA, as a condition of receiving shares or deposits from federally insured credit unions. This part grants certain additional authorities to federal corporate credit unions. Except to the extent that they are inconsistent with this part, other provisions of NCUA's Rules and Regulations (12 CFR chapter VII) and the Federal Credit Union Act apply to federally chartered corporate credit unions and federally insured state-chartered corporate credit unions to the same extent that they apply to other federally chartered and federally insured state-chartered credit unions, respectively. (b) The Board has the authority to issue orders which vary from this part. This authority is provided under Section 120(a) of the Federal Credit Union Act, 12 U.S.C. 1766(a). Requests by state-chartered corporate credit unions for waivers to this part and for expansions of authority under appendix B of this part must be approved by the state regulator before being submitted to NCUA. [62 FR 12938, Mar. 19, 1997, as amended at 84 FR 1606, Feb. 5, 2019; 85 FR 62211, Oct. 2, 2020] § 704.2 Definitions. As used in this part: Adjusted trading Applicable state regulator Asset-backed security Available to cover losses that exceed retained earnings available to cover losses that exceed retained earnings and perpetual contributed capital (PCC) pro rata pro rata CLF-related bridge loan Collateralized Debt Obligation or Collateralized Loan Obligation (1) Senior tranches of Re-REMIC's consisting of senior mortgage-and asset-backed securities; (2) Any security that is fully guaranteed as to principal and interest by the U.S. Government or its agencies or its sponsored enterprises; or (3) Any security collateralized by other securities where all the underlying securities are fully guaranteed as to principal and interest by the U.S. Government or its agencies or its sponsored enterprises. Collateralized mortgage obligation Commercial mortgage-backed security Compensation Consolidated Credit Union Service Organization Contributed capital Corporate credit union (1) Is chartered under Federal or state law as a credit union; (2) Receives shares from and provides loan services to credit unions; (3) Is operated primarily for the purpose of serving other credit unions; (4) Is designated by NCUA as a corporate credit union; (5) Limits natural person members to the minimum required by state or federal law to charter and operate the credit union; and (6) Does not condition the eligibility of any credit union to become a member on that credit union's membership in any other organization. Corporate CUSO (1) Is a consolidated CUSO; (2) A corporate credit union has the power, directly or indirectly, to direct the CUSO's management or policies; (3) A corporate credit union owns 25 percent or more of the CUSO's contributed equity, stock, or membership interests; or (4) The aggregate corporate credit union ownership meets or exceeds 50 percent of the CUSO's contributed equity, stock, or membership interests. Credit union service organization (CUSO) Critical accounting policies Daily average net assets Derivatives Dollar roll Embedded option Enterprise risk management Equity investment Equity security Examination of internal control Exchangeable collateralized mortgage obligation Fair value Federal funds transaction Financial statements Financial statement audit Foreign bank Generally accepted auditing standards Immediate family member Independent public accountant e.g., Intangible assets Internal control Internal control framework Internal Control—Integrated Framework, Internal control over financial reporting (1) Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the entity; (2) Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the entity are being made only in accordance with authorizations of management and those charged with governance; and (3) Provide reasonable assurance regarding prevention, or timely detection and correction, of unauthorized acquisition, use, or disposition of the entity's assets that could have a material effect on the financial statements. Investment grade Leverage ratio Limited liquidity investment Member reverse repurchase transaction Minimal amount of credit risk Mortgage-backed security Moving daily average net assets Moving monthly average net risk-weighted assets Mutual combination Natural person credit union subordinated debt instrument NCUA Net assets Net economic value Net interest margin security Net risk-weighted Nonperpetual capital i.e., Obligor e.g., Official Pair-off transaction Perpetual contributed capital Private label security Quoted market price Repurchase transaction Residential mortgage-backed security Residential properties Residual interest Retained earnings Retained earnings ratio Risk-weighted assets Section 107(8) institution Securities lending Securitization Senior executive officer e.g., Settlement date Short sale Small business related security Stripped mortgage-backed security Subordinated security Supervisory committee Tier 1 capital (1) Retained earnings; (2) Perpetual contributed capital; (3) Deduct the amount of the corporate credit union's intangible assets that exceed one half percent of its moving daily average net assets (however, the NCUA may direct the corporate credit union to add back some of these assets on the NCUA's own initiative, or the NCUA's approval of petition from the applicable state regulator or application from the corporate credit union); (4) Deduct investments, both equity and debt, in unconsolidated CUSOs; (5) Deduct an amount equal to any PCC or NCA that the corporate credit union maintains at another corporate credit union; (6) Deduct any amount of PCC received from federally insured credit unions that causes PCC minus retained earnings, all divided by moving daily average net assets, to exceed two percent when a corporate credit union's retained earnings ratio is less than two and a half percent; and (7) Deduct any natural person credit union subordinated debt instrument held by the corporate credit union. Tier 1 risk-based capital ratio Tier 2 capital (1) Nonperpetual capital accounts, as amortized under § 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 assets Total capital Total risk-based capital ratio Trade date Trigger Weighted average life When-issued trading [75 FR 64829, Oct. 20, 2010, as amended at 76 FR 23867, Apr. 29, 2011; 76 FR 79533, Dec. 22, 2011; 77 FR 74110, Dec. 13, 2012; 78 FR 32544, May 31, 2013; 80 FR 25936, May 6, 2015; 80 FR 57284, Sept. 23, 2015; 82 FR 55499, Nov. 22, 2017; 85 FR 71825, Nov. 12, 2020; 86 FR 10731, Feb. 23, 2021] § 704.3 Corporate credit union capital. (a) Capital requirements. (i) A leverage ratio of 4.0 percent or greater; (ii) A Tier 1 risk-based capital ratio of 4.0 percent or greater; and (iii) A total risk-based capital ratio of 8.0 percent or greater. (2) To ensure it meets its capital requirements, a corporate credit union must develop and ensure implementation of written short- and long-term capital goals, objectives, and strategies which provide for the building of capital consistent with regulatory requirements, the maintenance of sufficient capital to support the risk exposures that may arise from current and projected activities, and the periodic review and reassessment of the capital position of the corporate credit union. (3) Beginning with the first call report submitted on or after October 21, 2013, a corporate credit union must calculate and report to NCUA the ratio of its retained earnings to its moving daily average net assets. If this ratio is less than 0.45 percent, the corporate credit union must, within 30 days, submit a retained earnings accumulation plan to the NCUA for NCUA's approval. The plan must contain a detailed explanation of how the corporate credit union will accumulate earnings sufficient to meet all its future minimum leverage ratio requirements, including specific semiannual milestones for accumulating retained earnings. In the case of a state-chartered corporate credit union, the NCUA will consult with the appropriate state supervisory authority (SSA) before making a determination to approve or disapprove the plan, and will provide the SSA a copy of the completed plan. If the corporate credit union fails to submit a plan acceptable to NCUA, or fails to comply with any element of a plan approved by NCUA, the corporate will immediately be classified as significantly undercapitalized or, if already significantly undercapitalized, as critically undercapitalized for purposes of prompt corrective actions. The corporate credit union will be subject to all the associated actions under § 704.4. (b) Requirements for nonperpetual capital accounts (NCAs) Form. (2) Disclosure. (i) The initial NCA disclosure must be signed by either all of the directors of the member credit union or, if authorized by board resolution, the chair and secretary of the board; and (ii) The annual disclosure notice must be signed by the chair of the corporate credit union. The chair must sign a statement that certifies that the notice has been sent to all entities with NCAs. The certification must be maintained in the corporate credit union's files and be available for examiner review. (3) Five-year remaining maturity. (4) Release. (5) Redemption. (6) Sale. (7) Merger. (c) Requirements for perpetual contributed capital (PCC) Disclosure. (2) Release. (3) Callability. (4) Perpetual contributed capital. (5) The holder of a PCC instrument may transfer its interests in the instrument to another member or to a nonmember (other than a natural person). At least 14 days before consummating such a transfer, the member must notify the corporate credit union of the pending transfer. The corporate credit union must, within 10 days of such notice, provide the member and the potential transferee all financial information about the corporate credit union that is available to the public or that the corporate credit union has provided to its members, including any call report data submitted by the corporate credit union to NCUA but not yet posted on NCUA's Web site. (6) A corporate credit union is permitted to condition membership, services, or prices for services on a member's ownership of PCC, provided the corporate credit union gives existing members at least six months written notice of: (i) The requirement to purchase PCC, including specific amounts; and (ii) The effects of a failure to purchase the requisite PCC on the pricing of services or on the member's access to membership or services. (d) Individual minimum capital requirements General. (2) Appropriate considerations for establishing individual minimum capital requirements. (i) A corporate credit union is receiving special supervisory attention; (ii) A corporate credit union has or is expected to have losses resulting in capital inadequacy; (iii) A corporate credit union has a high degree of exposure to interest rate risk, prepayment risk, credit risk, concentration risk, certain risks arising from nontraditional activities or similar risks, or a high proportion of off-balance sheet risk including standby letters of credit; (iv) A corporate credit union has poor liquidity or cash flow; (v) A corporate credit union is growing, either internally or through acquisitions, at such a rate that supervisory problems are presented that are not dealt with adequately by other NCUA regulations or other guidance; (vi) A corporate credit union may be adversely affected by the activities or condition of its CUSOs or other persons or entities with which it has significant business relationships, including concentrations of credit; (vii) A corporate credit union with a portfolio reflecting weak credit quality or a significant likelihood of financial loss, or has loans or securities in nonperforming status or on which borrowers fail to comply with repayment terms; (viii) A corporate credit union has inadequate underwriting policies, standards, or procedures for its loans and investments; (ix) A corporate credit union has failed to properly plan for, or execute, necessary retained earnings growth, or (ix) A corporate credit union has a record of operational losses that exceeds the average of other, similarly situated corporate credit unions; has management deficiencies, including failure to adequately monitor and control financial and operating risks, particularly the risks presented by concentrations of credit and nontraditional activities; or has a poor record of supervisory compliance. (3) Standards for determination of appropriate individual minimum capital requirements. (i) The conditions or circumstances leading to the determination that a higher minimum capital requirement is appropriate or necessary for the corporate credit union; (ii) The exigency of those circumstances or potential problems; (iii) The overall condition, management strength, and future prospects of the corporate credit union and, if applicable, its subsidiaries, affiliates, and business partners; (iv) The corporate credit union's liquidity, capital and other indicators of financial stability, particularly as compared with those of similarly situated corporate credit unions; and (v) The policies and practices of the corporate credit union's directors, officers, and senior management as well as the internal control and internal audit systems for implementation of such adopted policies and practices. (4) Procedures—(i) In the case of a state chartered corporate credit union, NCUA will consult with the appropriate state regulator when considering imposing a new minimum capital requirement. (ii) When the NCUA determines that a minimum capital requirement is necessary or appropriate for a particular corporate credit union, it will notify the corporate credit union in writing of its proposed individual minimum capital requirement; the schedule for compliance with the new requirement; and the specific causes for determining that the higher individual minimum capital requirement is necessary or appropriate for the corporate credit union. The NCUA shall forward the notifying letter to the appropriate state supervisory authority (SSA) if a state-chartered corporate credit union would be subject to an individual minimum capital requirement. (iii) The corporate credit union's response must include any information that the credit union wants the NCUA to consider in deciding whether to establish or to amend an individual minimum capital requirement for the corporate credit union, what the individual capital requirement should be, and, if applicable, what compliance schedule is appropriate for achieving the required capital level. The responses of the corporate credit union and SSA must be in writing and must be delivered to the NCUA within 30 days after the date on which the notification was received. The NCUA may extend the time period for good cause, and the time period for response by the insured corporate credit union may be shortened for good cause: (A) When, in the opinion of the NCUA, the condition of the corporate credit union so requires, and the NCUA informs the corporate credit union of the shortened response period in the notice; (B) With the consent of the corporate credit union; or (C) When the corporate credit union already has advised the NCUA that it cannot or will not achieve its applicable minimum capital requirement. (iv) Failure by the corporate credit union to respond within 30 days, or such other time period as may be specified by the NCUA, may constitute a waiver of any objections to the proposed individual minimum capital requirement or to the schedule for complying with it, unless the NCUA has provided an extension of the response period for good cause. (v) After expiration of the response period, the NCUA will decide whether or not the proposed individual minimum capital requirement should be established for the corporate credit union, or whether that proposed requirement should be adopted in modified form, based on a review of the corporate credit union's response and other relevant information. The NCUA's decision will address comments received within the response period from the corporate credit union and the appropriate state supervisory authority (SSA) (if a state-chartered corporate credit union is involved) and will state the level of capital required, the schedule for compliance with this requirement, and any specific remedial action the corporate credit union could take to eliminate the need for continued applicability of the individual minimum capital requirement. The NCUA will provide the corporate credit union and the appropriate SSA (if a state-chartered corporate credit union is involved) with a written decision on the individual minimum capital requirement, addressing the substantive comments made by the corporate credit union and setting forth the decision and the basis for that decision. Upon receipt of this decision by the corporate credit union, the individual minimum capital requirement becomes effective and binding upon the corporate credit union. This decision represents final agency action. (vi) In lieu of the procedures established above, a corporate credit union may request an informal hearing. The corporate credit union must make the request for a hearing in writing, and NCUA must receive the request no later than 10 days following the date of the notice described in paragraph (d)(4)(ii) of this section. Upon receipt of the request for hearing, NCUA will conduct an informal hearing and render a decision using the procedures described in paragraphs (d), (e), and (f) of § 747.3003 of this chapter. (5) Failure to comply. (6) Change in circumstances. (e) Reservation of authority Transactions for purposes of evasion. (2) Period-end versus average figures. (3) Reservation of authority. (ii) Notwithstanding appendix C to this part, the NCUA will look to the substance of a transaction and may find that the assigned risk-weight for any asset, or credit equivalent amount or credit conversion factor for any off-balance sheet item does not appropriately reflect the risks imposed on the corporate credit union. The NCUA may require the corporate credit union to apply another risk-weight, credit equivalent amount, or credit conversion factor that NCUA deems appropriate. (iii) If appendix C to this part does not specifically assign a risk-weight, credit equivalent amount, or credit conversion factor to a particular asset or activity of the corporate credit union, the NCUA may assign any risk-weight, credit equivalent amount, or credit conversion factor that it deems appropriate. In making this determination, NCUA will consider the risks associated with the asset or off-balance sheet item as well as other relevant factors. (4) Where practicable, the NCUA will consult with the appropriate state regulator before taking any action under this paragraph (e) that involves a state chartered corporate credit union. (5) Before taking any action under this paragraph (e), NCUA will provide the corporate credit union with written notice of the intended action and the reasons for such action. The corporate credit union will have seven days to provide the NCUA with a written response, and the NCUA will consider the response before taking the action. Upon the timely request of the corporate credit union, and for good cause, NCUA may extend the seven day response period. (f) Former capital accounts. (1) For MCAs structured as adjustable balance accounts, the corporate will immediately place the account on notice of withdrawal if the member has not already done so. The corporate will continue to adjust the balance of the MCA account in accordance with the original terms of the account until the entire notice period has run and then return the remaining balance, less any losses, to the member. Until the expiration of the notice period the entire adjusted balance will be available to cover losses at the corporate credit union that exceed retained earnings and PCC (excluding, if a corporate credit union exercises the capital prioritization option under Part I of appendix A to this part, any PCC with priority under that option). (2) For term MCAs, the corporate credit union will return the balance of the MCA account to the member at the expiration of the term. Until the expiration of term, the entire account balance will be available to cover losses that exceed retained earnings and PCC (excluding, if a corporate credit union exercises the capital prioritization option under part I of appendix A to this part, any PCC with priority under that option). (3) A corporate credit union may count a portion of unconverted MCAs as Tier 2 capital. Beginning on the date of issuance (for term MCAs) or the date of notice of withdrawal (for other MCAs), the corporate may count the entire account balance as Tier 2 capital, but will then reduce the amount of the account that can be considered as Tier 2 capital by a constant monthly amortization that ensures the capital is fully amortized one year before the date of maturity or one year before the end of the notice period. For adjustable balance account MCAs where the adjustment is determined based on some impermanent measure, such as shares on deposit with the corporate, the corporate credit union may not treat any part of the account as capital. [75 FR 64829, Oct. 20, 2010, as amended at 80 FR 25937, May 6, 2015] § 704.4 Prompt corrective action. (a) Purpose. (b) Scope. (1) This section does not limit the authority of NCUA in any way to take supervisory actions to address unsafe or unsound practices, deficient capital levels, violations of law, unsafe or unsound conditions, or other practices. The NCUA may take action under this section independently of, in conjunction with, or in addition to any other enforcement action available to the NCUA, including issuance of cease and desist orders, approval or denial of applications or notices, assessment of civil money penalties, or any other actions authorized by law. (2) Unless permitted by the NCUA or otherwise required by law, no corporate credit union may state in any advertisement or promotional material its capital category under this part or that the NCUA has assigned the corporate credit union to a particular category. (3) Any group of credit unions applying for a new corporate credit union charter will submit, as part of the charter application, a detailed draft plan for soliciting contributed capital and building retained earnings. The draft plan will include specific levels of contributed capital and retained earnings and the anticipated timeframes for achieving those levels. The Board will review the draft plan and modify it as necessary. If the Board approves the plan, the Board will include any necessary waivers of this section or part. (c) Notice of capital category. (i) A 5310 Financial Report is required to be filed with the NCUA; (ii) A final NCUA report of examination is delivered to the corporate credit union; or (iii) Written notice is provided by the NCUA to the corporate credit union that its capital category has changed as provided in paragraphs (c)(2) or (d)(3) of this section. (2) Adjustments to reported capital levels and category— (i) Notice of adjustment by corporate credit union. A corporate credit union must provide the NCUA with written notice that an adjustment to the corporate credit union's capital category may have occurred no later than 15 calendar days following the date that any material event has occurred that would cause the corporate credit union to be placed in a lower capital category from the category assigned to the corporate credit union for purposes of this section on the basis of the corporate credit union's most recent call report or report of examination. (ii) Determination by the NCUA to change capital category. After receiving notice pursuant to paragraph (c)(1) of this section, or on its own initiative, the NCUA will determine whether to change the capital category of the corporate credit union and will notify the corporate credit union of the NCUA's determination. (d) Capital measures and capital category definitions Capital measures. (i) The total risk-based capital ratio; (ii) The Tier 1 risk-based capital ratio; and (iii) The leverage ratio. (2) Capital categories. (i) Well capitalized if the corporate credit union: (A) Has a total risk-based capital ratio of 10.0 percent or greater; and (B) Has a Tier 1 risk-based capital ratio of 6.0 percent or greater; and (C) Has a leverage ratio of 5.0 percent or greater; and (D) Is not subject to any written agreement, order, capital directive, or prompt corrective action directive issued by NCUA to meet and maintain a specific capital level for any capital measure. (ii) Adequately capitalized if the corporate credit union: (A) Has a total risk-based capital ratio of 8.0 percent or greater; and (B) Has a Tier 1 risk-based capital ratio of 4.0 percent or greater; and (C) Has: ( 1 ( 2 (iii) Undercapitalized if the corporate credit union: (A) Has a total risk-based capital ratio that is less than 8.0 percent; or (B) Has a Tier 1 risk-based capital ratio that is less than 4.0 percent; or (C) Has a leverage ratio that is less than 4.0 percent. (iv) Significantly undercapitalized if the corporate credit union has: (A) A total risk-based capital ratio that is less than 6.0 percent; or (B) A Tier 1 risk-based capital ratio that is less than 3.0 percent; or (C) A leverage ratio that is less than 3.0 percent. (v) Critically undercapitalized if the corporate credit union has: (A) A total risk-based capital ratio that is less than 4.0 percent; or (B) A Tier 1 risk-based capital ratio that is less than 2.0 percent; or (C) A leverage ratio that is less than 2.0 percent. (3) Reclassification based on supervisory criteria other than capital. (i) Unsafe or unsound condition. The NCUA has determined, after notice and opportunity for hearing pursuant to paragraph (h)(1) of this section, that the corporate credit union is in an unsafe or unsound condition; or (ii) Unsafe or unsound practice. NCUA has determined, after notice and an opportunity for hearing pursuant to paragraph (h)(1) of this section, that the corporate credit union received a less-than-satisfactory CAMELS rating ( i.e., (4) The NCUA may, for good cause, modify any of the percentages in paragraph (d)(2) of this section as described in § 704.3(d). (e) Capital restoration plans Schedule for filing plan In general. (ii) Additional capital restoration plans. (2) Contents of plan. (3) Failure to submit a capital restoration plan. (4) Review of capital restoration plans. (5) Disapproval of capital plan. (6) Failure to implement a capital restoration plan. (7) Amendment of capital plan. (f) Mandatory and discretionary supervisory actions Mandatory supervisory actions Provisions applicable to all corporate credit unions. (ii) Provisions applicable to undercapitalized, significantly undercapitalized, and critically undercapitalized corporate credit unions. Immediately upon receiving notice or being deemed to have notice, as provided in paragraph (c) or (e) of this section, that the corporate credit union is undercapitalized, significantly undercapitalized, or critically undercapitalized, the corporate credit union will be subject to the following provisions of paragraph (k) of this section: (A) Restricting capital distributions (paragraph (k)(1)); (B) NCUA monitoring of the condition of the corporate credit union (paragraph (k)(2)(i)); (C) Requiring submission of a capital restoration plan (paragraph (k)(2)(ii)); (D) Restricting the growth of the corporate credit union's assets (paragraph (k)(2)(iii)); and (E) Requiring prior approval of certain expansion proposals (paragraph (k)(2)(iv)). (iii) Additional provisions applicable to significantly undercapitalized, and critically undercapitalized corporate credit unions. In addition to the mandatory requirements described in paragraph (f)(1) of this section, immediately upon receiving notice or being deemed to have notice that the corporate credit union is significantly undercapitalized, or critically undercapitalized, or that the corporate credit union is subject to the provisions applicable to corporate credit unions that are significantly undercapitalized because the credit union failed to submit or implement in any material respect an acceptable capital restoration plan, the corporate credit union will become subject to the provisions of paragraph (k)(3)(iii) of this section that restrict compensation paid to senior executive officers of the institution. (iv) Additional provisions applicable to critically undercapitalized corporate credit unions. In addition to the provisions described in paragraphs (f)(1)(ii) and (f)(1)(iii) of this section, immediately upon receiving notice or being deemed to have notice that the corporate credit union is critically undercapitalized, the corporate credit union will become subject to these additional provisions of paragraph (k) of this section: (A) Restricting the activities of the corporate credit union ((k)(5)(i)); and (B) Restricting payments on subordinated debt of the corporate credit union ((k)(5)(ii)). (2) Discretionary supervisory actions. (ii) All discretionary actions available to NCUA in the case of an undercapitalized corporate credit union are available to NCUA in the case of a significantly undercapitalized credit union. All discretionary actions available to NCUA in the case of an undercapitalized corporate credit union or a significantly undercapitalized corporate credit union are available to NCUA in the case of a critically undercapitalized corporate credit union. (iii) In taking any discretionary PCA actions with a corporate credit union that is deemed to be undercapitalized, significantly undercapitalized or critically undercapitalized, or has been reclassified as undercapitalized, or significantly undercapitalized; or an action in connection with an officer or director of such corporate credit union; the NCUA will follow the procedures for issuing directives under paragraphs (g) and (i) of this section. (iv) NCUA will consult and seek to work cooperatively with the appropriate state supervisory authority (SSA) before taking any discretionary supervisory action with respect to a state-chartered corporate credit union; will provide notice of its decision to the SSA; and will allow the appropriate SSA an opportunity to take the proposed action independently or jointly with NCUA. (g) Directives to take prompt corrective action. (h) Procedures for reclassifying a corporate credit union based on criteria other than capital. (i) Order to dismiss a Director or senior executive officer. (j) Enforcement of directives. (k) Remedial actions towards undercapitalized, significantly undercapitalized, and critically undercapitalized corporate credit unions. (2) Provisions applicable to undercapitalized corporate credit unions. (i) Monitoring required. The NCUA will— (A) Closely monitor the condition of any undercapitalized corporate credit union; (B) Closely monitor compliance with capital restoration plans, restrictions, and requirements imposed under this section; and (C) Periodically review the plan, restrictions, and requirements applicable to any undercapitalized corporate credit union to determine whether the plan, restrictions, and requirements are achieving the purpose of this section. (ii) Capital restoration plan required. (A) Any undercapitalized corporate credit union must submit an acceptable capital restoration plan to the NCUA. (B) The capital restoration plan will— ( 1 ( i ( ii ( iii ( iv ( 2 (C) The NCUA will not accept a capital restoration plan unless the NCUA determines that the plan— ( 1 ( 2 ( 3 (iii) Asset growth restricted. An undercapitalized corporate credit union must not permit its daily average net assets during any calendar month to exceed its moving daily average net assets unless— (A) The NCUA has accepted the corporate credit union's capital restoration plan; and (B) Any increase in total assets is consistent with the plan. (iv) Prior approval required for acquisitions, branching, and new lines of business. An undercapitalized corporate credit union must not, directly or indirectly, acquire any interest in any entity, establish or acquire any additional branch office, or engage in any new line of business unless the NCUA has accepted the corporate credit union's capital restoration plan, the corporate credit union is implementing the plan, and the NCUA determines that the proposed action is consistent with and will further the achievement of the plan. (3) Provisions applicable to significantly undercapitalized corporate credit unions and undercapitalized corporate credit unions that fail to submit and implement capital restoration plans. (i) In general. (A) Is significantly undercapitalized; or (B) Is undercapitalized and— ( 1 ( 2 (ii) Specific actions authorized. (A) Requiring recapitalization. ( 1 ( 2 ( 3 (B) Restricting any ongoing or future transactions with affiliates. (C) Restricting interest rates paid. ( 1 In general. ( 2 Retroactive restrictions prohibited. (D) Restricting asset growth. Restricting the corporate credit union's asset growth more stringently than in paragraph (k)(2)(iii) of this section, or requiring the corporate credit union to reduce its total assets. (E) Restricting activities. Requiring the corporate credit union or any of its CUSOs to alter, reduce, or terminate any activity that the NCUA determines poses excessive risk to the corporate credit union. (F) Improving management. Doing one or more of the following: ( 1 ( 2 ( 3 (G) Requiring divestiture. Requiring the corporate credit union to divest itself of or liquidate any interest in any entity if the NCUA determines that the entity is in danger of becoming insolvent or otherwise poses a significant risk to the corporate credit union; (H) Conserve or liquidate the corporate credit union if NCUA determines the credit union has no reasonable prospect of becoming adequately capitalized; and (I) Requiring other action. Requiring the corporate credit union to take any other action that the NCUA determines will better carry out the purpose of this section than any of the actions described in this paragraph. (iii) Senior executive officers' compensation restricted. (A) In general. ( 1 ( 2 (B) Failing to submit plan. (iv) Discretion to impose certain additional restrictions. The NCUA may impose one or more of the restrictions prescribed by regulation under paragraph (k)(5) of this section if the NCUA determines that those restrictions are necessary to carry out the purpose of this section. (4) More stringent treatment based on other supervisory criteria. (i) In general. (A) If the corporate credit union is well capitalized, reclassify the corporate credit union as adequately capitalized; (B) If the corporate credit union is adequately capitalized (but not well capitalized), require the corporate credit union to comply with one or more provisions of paragraphs (k)(1) and (k)(2) of this section, as if the corporate credit union were undercapitalized; or (C) If the corporate credit union is undercapitalized, take any one or more actions authorized under paragraph (k)(3)(ii) of this section as if the corporate credit union were significantly undercapitalized. (ii) Contents of plan. (5) Provisions applicable to critically undercapitalized corporate credit unions. (i) Activities restricted. Any critically undercapitalized corporate credit union must comply with restrictions prescribed by the NCUA under paragraph (k)(6) of this section. (ii) Payments on contributed capital and subordinated debt prohibited. A critically undercapitalized corporate credit union must not, beginning no later than 60 days after becoming critically undercapitalized, make any payment of dividends on contributed capital or any payment of principal or interest on the corporate credit union's subordinated debt unless the NCUA determines that an exception would further the purpose of this section. Interest, although not payable, may continue to accrue under the terms of any subordinated debt to the extent otherwise permitted by law. Dividends on contributed capital do not, however, continue to accrue. (iii) Conservatorship, liquidation, or other action. The NCUA may, at any time, conserve or liquidate any critically undercapitalized corporate credit union or require the credit union to combine, in whole or part, with another institution. NCUA will consider, not later than 90 days after a corporate credit union becomes critically undercapitalized, whether NCUA should liquidate, conserve, or combine the institution. (6) Restricting activities of critically undercapitalized corporate credit unions. To carry out the purpose of this section, the NCUA will, by order— (i) Restrict the activities of any critically undercapitalized corporate credit union; and (ii) At a minimum, prohibit any such corporate credit union from doing any of the following without the NCUA's prior written approval: (A) Entering into any material transaction other than in the usual course of business, including any investment, expansion, acquisition, sale of assets, or other similar action. (B) Extending credit for any transaction NCUA determines to be highly leveraged. (C) Amending the corporate credit union's charter or bylaws, except to the extent necessary to carry out any other requirement of any law, regulation, or order. (D) Making any material change in accounting methods. (E) Paying compensation or bonuses NCUA determines to be excessive. (F) Paying interest on new or renewed liabilities at a rate that would increase the corporate credit union's weighted average cost of funds to a level significantly exceeding the prevailing rates of interest on insured deposits in the corporate credit union's normal market areas. [75 FR 64836, Oct. 20, 2010, as amended at 78 FR 77565, Dec. 26, 2013; 85 FR 62211, Oct. 2, 2020; 86 FR 59288, Oct. 27, 2021] § 704.5 Investments. (a) Policies. (1) Appropriate tests and criteria for evaluating investments and investment transactions before purchase; and (2) Reasonable and supportable concentration limits for limited liquidity investments in relation to capital. (b) General. (c) Authorized activities. (1) Securities, deposits, and obligations set forth in Sections 107(7), 107(8), and 107(15) of the Federal Credit Union Act, 12 U.S.C. 1757(7), 1757(8), and 1757(15), except as provided in this section; (2) Deposits in, the sale of federal funds to, and debt obligations of corporate credit unions, Section 107(8) institutions, and state banks, trust companies, and mutual savings banks not domiciled in the state in which the corporate credit union does business; (3) CUSOs, subject to the limitations of § 704.11; (4) Marketable debt obligations of corporations chartered in the United States. This authority does not apply to debt obligations that are convertible into the stock of the corporation; and (5) Domestically-issued asset-backed securities. (d) Repurchase agreements. (1) The corporate credit union, directly or through its agent, receives written confirmation of the transaction, and either takes physical possession or control of the repurchase securities or is recorded as owner of the repurchase securities through the Federal Reserve Book-Entry Securities Transfer System; (2) The repurchase securities are legal investments for that corporate credit union; (3) The corporate credit union, directly or through its agent, receives daily assessment of the market value of the repurchase securities and maintains adequate margin that reflects a risk assessment of the repurchase securities and the term of the transaction; and (4) The corporate credit union has entered into signed contracts with all approved counterparties and agents, and ensures compliance with the contracts. Such contracts must address any supplemental terms and conditions necessary to meet the specific requirements of this part. Third party arrangements must be supported by tri-party contracts in which the repurchase securities are priced and reported daily and the tri-party agent ensures compliance; and (e) Securities Lending. (1) The corporate credit union, directly or through its agent, receives written confirmation of the loan, obtains a first priority security interest in the collateral by taking physical possession or control of the collateral, or is recorded as owner of the collateral through the Federal Reserve Book-Entry Securities Transfer System; (2) The collateral is a legal investment for that corporate credit union; (3) The corporate credit union, directly or through its agent, receives daily assessment of the market value of collateral and maintains adequate margin that reflects a risk assessment of the collateral and terms of the loan; and (4) The corporate credit union has entered into signed contracts with all agents and, directly or through its agent, has executed a written loan and security agreement with the borrower. The corporate credit union or its agent ensures compliance with the agreements. (f) Investment companies. (g) Investment settlement. (h) Prohibitions. (1) Purchasing or selling derivatives, except for embedded options not required under GAAP to be accounted for separately from the host contract or forward sales commitments on loans to be purchased by the corporate credit union; (2) Engaging in trading securities unless accounted for on a trade date basis; (3) Engaging in adjusted trading or short sales; (4) Purchasing mortgage servicing rights, small business related securities, residual interests in collateralized mortgage obligations, residual interests in real estate mortgage investment conduits, or residual interests in asset-backed securities; (5) Purchasing net interest margin securities; (6) Purchasing collateralized debt obligations or collateralized loan obligations; (7) Purchasing private label residential mortgage-backed securities; (8) Purchasing subordinated securities; and (9) Purchasing stripped mortgage-backed securities (SMBS), or securities that represent interests in SMBS, except as described in subparagraphs (i) and (iii) below. (i) A corporate credit union may invest in exchangeable collateralized mortgage obligations (exchangeable CMOs) representing beneficial ownership interests in one or more interest-only classes of a CMO (IO CMOs) or principal-only classes of a CMO (PO CMOs), but only if: (A) At the time of purchase, the ratio of the market price to the remaining principal balance is between .8 and 1.2, meaning that the discount or premium of the market price to par must be less than 20 points; (B) The offering circular or other official information available at the time of purchase indicates that the notional principal on each underlying IO CMO should decline at the same rate as the principal on one or more of the underlying non-IO CMOs, and that the principal on each underlying PO CMO should decline at the same rate as the principal, or notional principal, on one or more of the underlying non-PO CMOs; and (C) The credit union investment staff has the expertise dealing with exchangeable CMOs to apply the conditions in paragraphs (h)(5)(i)(A) and (B) of this section. (ii) A corporate credit union that invests in an exchangeable CMO may exercise the exchange option only if all of the underlying CMOs are permissible investments for that credit union. (iii) A corporate credit union may accept an exchangeable CMO representing beneficial ownership interests in one or more IO CMOs or PO CMOs as an asset associated with an investment repurchase transaction or as collateral in a securities lending transaction. When the exchangeable CMO is associated with one of these two transactions, it need not conform to the conditions in paragraphs (h)(5)(i)(A) or (B) of this section. (i) Conflicts of interest. (j) Grandfathering. [75 FR 64839, Oct. 20, 2010, as amended at 80 FR 25937, May 6, 2015; 85 FR 62211, Oct. 2, 2020; 85 FR 71826, Nov. 12, 2020] § 704.6 Credit risk management. (a) Policies. (1) The approval process associated with credit limits; (2) Due diligence analysis requirements; (3) Maximum credit limits with each obligor and transaction counterparty, set as a percentage of capital. In addition to addressing deposits and securities, limits with transaction counterparties must address aggregate exposures of all transactions including, but not limited to, repurchase agreements, securities lending, and forward settlement of purchases or sales of investments; and (4) Concentrations of credit risk ( e.g., (b) Exemption. (c) Issuer concentration limits General rule. (2) Exceptions. (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 CUSOs are subject to the limitations of section 11 of this part. (d) Sector concentration limits. (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 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. (f) Credit ratings. (2) A corporate credit union must identify and monitor any changes in credit quality of the investment and retain appropriate supporting documentation as long as the corporate credit union owns the investment. (g) Reporting and documentation. (2) At a minimum, the corporate credit union must maintain: (i) A justification for each approved credit limit; (ii) Disclosure documents, if any, for all instruments held in portfolio. Documents for an instrument that has been sold must be retained until completion of the next NCUA examination; and (iii) The latest available financial reports, industry analyses, and internal and external analyst evaluations sufficient to support each approved credit limit. (h) Requirements for investment action plans. (1) Appropriate monitoring of the investment would reasonably lead to the conclusion that the investment presents more than a minimal amount of credit risk; or (2) The investment is part of an asset class or group of investments that exceeds the issuer, sector, or subsector concentration limits of this section. For purposes of measurement, each new credit transaction must be evaluated in terms of the corporate credit union's capital at the time of the transaction. An investment that fails a requirement of this section because of a subsequent reduction in capital will be deemed nonconforming. A corporate credit union is required to exercise reasonable efforts to bring nonconforming investments into conformity within 90 calendar days. Investments that remain nonconforming for more than 90 calendar days will be deemed to fail a requirement of this section and the corporate credit union will have to comply with § 704.10 of this part. [75 FR 64841, Oct. 20, 2010, as amended at 75 FR 71528, Nov. 24, 2010; 76 FR 79533, Dec. 22, 2011; 77 FR 74110, Dec. 13, 2012; 80 FR 25937, May 6, 2015; 85 FR 62211, Oct. 2, 2020; 85 FR 71826, Nov. 12, 2020] § 704.7 Lending. (a) Policies. (1) Loan types and limits; (2) Required documentation and collateral; and (3) Analysis and monitoring standards. (b) General. (c) Loans to members Credit unions. (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) CUSOs. (3) Other members. (d) Loans to nonmembers Credit unions. (2) CUSOs. (e) Member business loan rule. (1) Member credit unions are exempt from part 723 of this chapter; (2) CUSOs are not subject to part 723 of this chapter. (3) Other members not excluded under § 723.1(b) of this chapter must comply with part 723 of this chapter unless the loan or line of credit is fully guaranteed by a credit union or fully secured by U.S. Treasury or agency securities. Those guaranteed and secured loans must comply with the aggregate limits of § 723.8 but are exempt from the other requirements of part 723. (f) Participation loans with other corporate credit unions. (g) Prepayment penalties. [62 FR 12938, Mar. 19, 1997, as amended at 64 FR 57365, Oct. 25, 1999; 67 FR 65655, Oct. 25, 2002; 68 FR 56550, Oct. 1, 2003; 75 FR 34621, June 18, 2010; 80 FR 25938, May 6, 2015; 80 FR 57284, Sept. 23, 2015; 85 FR 71826, Nov. 12, 2020] § 704.8 Asset and liability management. (a) Policies. (1) The purpose and objectives of the corporate credit union's asset and liability activities; (2) The maximum allowable percentage decline in net economic value (NEV), compared to base case NEV; (3) The minimum allowable NEV ratio; (4) Policy limits and specific test parameters for the NEV sensitivity analysis requirements set forth in paragraphs (d), (e), and (f) of this section; (5) The modeling of indexes that serve as references in financial instrument coupon formulas; and (6) The tests that will be used, prior to purchase, to estimate the impact of investments on the percentage decline in NEV compared to base case NEV. The most recent NEV analysis, as determined under paragraph (d)(1)(i) of this section may be used as a basis of estimation. (b) Asset and liability management committee (ALCO). (c) Penalty for early withdrawals. (d) Interest rate sensitivity analysis. (i) Evaluate the risk in its balance sheet by measuring, at least quarterly, including once on the last day of the calendar quarter, the impact of an instantaneous, permanent, and parallel shock in the yield curve of plus and minus 100, 200, and 300 BP on its NEV and NEV ratio. If the base case NEV ratio falls below 3 percent at the last testing date, these tests must be calculated at least monthly, including once on the last day of the month, until the base case NEV ratio again exceeds 3 percent; (ii) Limit its risk exposure to levels that do not result in a base case NEV ratio or any NEV ratio resulting from the tests set forth in paragraph (d)(1)(i) of this section below 2 percent; and (iii) Limit its risk exposures to levels that do not result in a decline in NEV of more than 15 percent. (2) A corporate credit union must assess annually if it should conduct periodic additional tests to address market factors that may materially impact that corporate credit union's NEV. These factors should include, but are not limited to, the following: (i) Changes in the shape of the Treasury yield curve; (ii) Adjustments to prepayment projections used for amortizing securities to consider the impact of significantly faster/slower prepayment speeds; and (iii) Adjustments to volatility assumptions to consider the impact that changing volatilities have on embedded option values. (e) Net interest income modeling. (f) Weighted average asset life. (g) Weighted average asset life with 50 percent slowdown in prepayment speeds. (h) Government issued or guaranteed securities. (i) Effective and spread durations. (j) Limit breaches. (ii) If the corporate credit union cannot adjust its balance sheet to meet the requirements of paragraph (d), (f), or (g) of this section within 10 calendar days after detection by the corporate credit union, the corporate credit union 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. (k) Overall limit on business generated from individual credit unions. [75 FR 64842, Oct. 20, 2010, as amended at 76 FR 79533, Dec. 22, 2011; 80 FR 25938, May 6, 2015; 85 FR 62211, Oct. 2, 2020; 85 FR 71826, Nov. 12, 2020] § 704.9 Liquidity management. (a) General. (1) Evaluate the potential liquidity needs of its membership in a variety of economic scenarios; (2) Regularly monitor and demonstrate accessibility to sources of internal and external liquidity; (3) Keep a sufficient amount of cash and cash equivalents on hand to support its payment system obligations; (4) Demonstrate that the accounting classification of investment securities is consistent with its ability to meet potential liquidity demands; and (5) Develop a contingency funding plan that addresses alternative funding strategies in successively deteriorating liquidity scenarios. The plan must: (i) List all sources of liquidity, by category and amount, that are available to service an immediate outflow of funds in various liquidity scenarios; (ii) Analyze the impact that potential changes in fair value will have on the disposition of assets in a variety of interest rate scenarios; and (iii) Be reviewed by the board or an appropriate committee no less frequently than annually or as market or business conditions dictate. (b) Borrowing limits. (1) Secured borrowings. (2) Exclusions. [75 FR 64843, Oct. 20, 2010, as amended at 80 FR 25938, May 6, 2015] § 704.10 Investment action plan. (a) Any corporate credit union in possession of an investment, including a derivative, that fails to meet a requirement of this part must, within 30 calendar days of the failure, report the failed investment to its board of directors, supervisory committee and the Director of the Office of National Examinations and Supervision (ONES). If the corporate credit union does not sell the failed investment, and the investment continues to fail to meet a requirement of this part, the corporate credit union must, within 30 calendar days of the failure, provide to the ONES Director a written action plan that addresses: (1) The investment's characteristics and risks; (2) The process to obtain and adequately evaluate the investment's market pricing, cash flows, and risk; (3) How the investment fits into the credit union's asset and liability management strategy; (4) The impact that either holding or selling the investment will have on the corporate credit union's earnings, liquidity, and capital in different interest rate environments; and (5) The likelihood that the investment may again pass the requirements of this part. (b) The ONES Director may require, for safety and soundness reasons, a shorter time period for plan development than that set forth in paragraph (a) of this section. (c) If the plan described in paragraph (a) of this section is not approved by the ONES Director, the credit union must adhere to the ONES Director's directed course of action. [62 FR 12938, Mar. 19, 1997, as amended at 67 FR 65656, 65659, Oct. 25, 2002; 78 FR 32544, May 31, 2013] § 704.11 Credit Union Service Organizations (CUSOs). (a) Investment and loan limitations. (2) The aggregate of all investments in and loans to member and nonmember 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 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. (3) If the limitations in paragraphs (a)(1) and (2) of this section are reached or exceeded because of the profitability of the CUSO and the related GAAP valuation of the investment under the equity method without an additional cash outlay by the corporate, divestiture is not required. A corporate credit union may continue to invest up to the regulatory limit without regard to the increase in the GAAP valuation resulting from the CUSO's profitability. (b) Due diligence. (c) Requirements for CUSOs that are not corporate CUSOs. (d) Requirements for corporate CUSOs. (1) Structure. (2) Separate entity. (ii) A corporate credit union investing in or lending to a corporate CUSO must obtain a written legal opinion that concludes the corporate CUSO is organized and operated in a manner that the corporate credit union will not reasonably be held liable for the obligations of the corporate CUSO. This opinion must address factors that have led courts to “pierce the corporate veil,” such as inadequate capitalization, lack of corporate identity, common boards of directors and employees, control of one entity over another, and lack of separate books and records. (3) Permissible activities. (A) Brokerage services, (B) Investment advisory services, and (C) Other categories of activities as approved in writing by the NCUA and published on the NCUA's website. (ii) Once the NCUA has approved an activity and published that activity on its website, the NCUA will not remove that particular activity from the approved list, or make substantial changes to the content or description of that approved activity, except through the formal rulemaking process. (4) Compensation restrictions. (5) Written agreement between the corporate credit union and corporate CUSO. (i) Will follow GAAP; (ii) Will provide financial statements to the corporate credit union at least quarterly; (iii) Will obtain an annual CPA opinion audit and provide a copy to the corporate credit union. A consolidated CUSO is not required to obtain a separate annual audit if it is included in the corporate credit union's annual audit; (iv) Will provide the reports as required by § 712.3(d)(4) and (5) of this chapter; (v) Will not acquire control, directly or indirectly, of another depository financial institution or to invest in shares, stocks, or obligations of an insurance company, trade association, liquidity facility, or similar organization; (vi) Will allow the auditor, board of directors, and NCUA complete access to the CUSO's personnel, facilities, equipment, books, records, and any other documentation that the auditor, directors, or NCUA deem pertinent; (vii) Will inform the corporate, at least quarterly, of all the compensation paid by the CUSO to its employees who are also employees of the corporate credit union; and (viii) Will comply with all the requirements of this section. (e) Subsidiary restrictions. [85 FR 71826, Nov. 12, 2020] § 704.12 Permissible services. (a) Preapproved services. (1) Correspondent services agreement. (2) Credit and investment services. (3) Electronic financial services. (4) Excess capacity. (5) Liquidity and asset and liability management. (6) Operational services. (7) Payment systems. (8) Trustee or custodial services. (b) Procedure for adding services that are not preapproved. (1) A federal corporate credit union must request approval from NCUA. The request must include a full explanation and complete documentation of the service and how the service relates to a corporate credit union's authority to provide services to its members. The request must be submitted jointly to the Director of the Office of National Examinations and Supervision and the Secretary of the Board. The request will be treated as a petition to amend § 704.12 and NCUA will request public comment or otherwise act on the petition within a reasonable period of time. Before engaging in the formal approval process, a corporate credit union should seek an advisory opinion from NCUA's Office of General Counsel as to whether a proposed service is already covered by one of the authorized categories without filing a petition to amend the regulation; and (2) A state-chartered corporate credit union must submit a request for a waiver that complies with § 704.1(b) to the Director of the Office of National Examinations and Supervision. (c) Prohibition. [67 FR 65656, Oct. 25, 2002, as amended at 78 FR 32544, May 31, 2013] § 704.13 Board responsibilities. (a) General. (b) Policies. (c) Other requirements. (1) Senior managers have an in-depth, working knowledge of their direct areas of responsibility and are capable of identifying, hiring, and retaining qualified staff; (2) Qualified personnel are employed or under contract for all line support and audit areas, and designated back-up personnel or resources with adequate cross-training are in place; (3) GAAP is followed, except where law or regulation has provided for a departure from GAAP; (4) Accurate balance sheets, income statements, and internal risk assessments ( e.g., (5) Systems are audited periodically in accordance with industry-established standards; (6) Financial performance is evaluated to ensure that the objectives of the corporate credit union and the responsibilities of management are met; (7) Planning addresses the retention of external consultants, as appropriate, to review the adequacy of technical, human, and financial resources dedicated to support major risk areas; and (8) For each item before the board, the meeting minutes list the names of directors and their votes, as well as the names of any directors who did not vote, except that if the minutes include a complete list of directors attending the meeting, the vote tally need only list the names of directors who voted against the item or who abstained. [62 FR 12938, Mar. 19, 1997, as amended at 67 FR 65654, Oct. 25, 2002. Redesignated at 75 FR 64836, Oct. 20, 2010; 76 FR 23868, Apr. 29, 2011] § 704.14 Representation. (a) Board representation. (1) At least a majority of directors, including the chair of the board, must serve on the board as representatives of member credit unions; (2) Only an individual who currently holds a senior staff position (e.g., position of chief executive officer, chief financial officer, chief operating officer, chief information officer, chief risk officer, treasurer/manager, etc.) 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; (3) No individual may be elected or appointed to serve on the board if, after such election or appointment, the individual would be a director at more than one corporate credit union; (4) No individual may be elected or appointed to serve on the board if, after such election or appointment, any member of the corporate credit union would have more than one representative on the board of the corporate credit union; (5) The chair of the board may not serve simultaneously as an officer, director, or employee of a credit union trade association; (6) A majority of directors may not serve simultaneously as officers, directors, or employees of the same credit union trade association or its affiliates (not including chapters or other subunits of a state trade association); (7) For purposes of meeting the requirements of paragraphs (a)(5) and (a)(6) of this section, an individual may not serve as a director or chair of the board if that individual holds a subordinate employment relationship to another employee who serves as an officer, director, or employee of a credit union trade association; (8) In the case of a corporate credit union whose membership is composed of more than 25 percent non-credit unions, the majority of directors serving as representatives of member credit unions, including the chair, must be elected only by member credit unions; and (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. (b) Credit union trade association. (c) Representatives of organizational members. (2) Any vacancy on the board of a corporate credit union caused by a representative being unable to complete his or her term shall be filled by the board of the corporate credit union according to its bylaws governing the filling of board vacancies. (d) Recusal provision. (2) An individual is “interested” in an entity if he or she: (i) Serves as a director, officer, or employee of the entity; (ii) Has a business, ownership, or deposit relationship with the entity; or (iii) Has a business, financial, or familial relationship with an individual whom he or she knows has a pecuniary interest in the entity. (3) In the event of the disqualification of any directors, by operation of paragraph (c)(1) of this section, the remaining qualified directors present at the meeting, if constituting a quorum with the disqualified directors, may exercise, by majority vote, all the powers of the board with respect to the matter under consideration. Where all of the directors are disqualified, the matter must be decided by the members of the corporate credit union. (4) In the event of the disqualification of any committee member by operation of paragraph (c)(1) of this section, the remaining qualified committee members, if constituting a quorum with the disqualified committee members, may exercise, by majority vote, all the powers of the committee with respect to the matter under consideration. Where all of the committee members are disqualified, the matter shall be decided by the board of directors. (e) Administration. (2) The provisions of § 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.” [62 FR 12938, Mar. 19, 1997, as amended at 67 FR 65657, Oct. 25, 2002; 75 FR 64844, Oct. 20, 2010; 80 FR 25938, May 6, 2015; 85 FR 62211, Oct. 2, 2020; 85 FR 71827, Nov. 12, 2020] § 704.15 Audit and reporting requirements. (a) Annual reporting requirements Audited financial statements. (2) Management report. (i) A statement of management's responsibilities for preparing the corporate credit union's annual financial statements, for establishing and maintaining an adequate internal control structure and procedures for financial reporting, and for complying with laws and regulations relating to safety and soundness in the following areas: affiliate transactions, legal lending limits, loans to insiders, restrictions on capital and share dividends, and regulatory reporting that meets full and fair disclosure; (ii) An assessment by management of the corporate credit union's compliance with such laws and regulations during the past calendar year. The assessment must state management's conclusion as to whether the corporate credit union has complied with the designated safety and soundness laws and regulations during the calendar year and disclose any noncompliance with the laws and regulations; and (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: (A) A statement identifying the internal control framework used by management to evaluate the effectiveness of the corporate credit union's internal control over financial reporting; (B) A statement that the assessment included controls over the preparation of regulatory financial statements in accordance with regulatory reporting instructions including identification of such regulatory reporting instructions; and (C) A statement expressing management's conclusion as to whether the corporate credit union's internal control over financial reporting is effective as of the end of the previous calendar year. Management must disclose all material weaknesses in internal control over financial reporting, if any, that it has identified that have not been remediated prior to the calendar year-end. Management may not conclude that the corporate credit union's internal control over financial reporting is effective if there are one or more material weaknesses. (3) Management report signatures. (b) Independent public accountant Annual audit of financial statements. (2) Internal control over financial reporting. (i) A statement identifying the internal control framework used by the independent public accountant, which must be the same as the internal control framework used by management, to evaluate the effectiveness of the corporate credit union's internal control over financial reporting; (ii) A statement that the independent public accountant's evaluation included controls over the preparation of regulatory financial statements in accordance with regulatory reporting instructions including identification of such regulatory reporting instructions; and (iii) A statement expressing the independent public accountant's conclusion as to whether the corporate credit union's internal control over financial reporting is effective as of the end of the previous calendar year. The report must disclose all material weaknesses in internal control over financial reporting that the independent public accountant has identified that have not been remediated prior to the calendar year-end. The independent public accountant may not conclude that the corporate credit union's internal control over financial reporting is effective if there are one or more material weaknesses. (3) Notice by accountant of termination of services. (4) Communications with supervisory committee. (i) All critical accounting policies and practices to be used by the corporate credit union; (ii) All alternative accounting treatments within GAAP for policies and practices related to material items that the independent public accountant has discussed with management, including the ramifications of the use of such alternative disclosures and treatments, and the treatment preferred by the independent public accountant; and (iii) Other written communications the independent public accountant has provided to management, such as a management letter or schedule of unadjusted differences. (5) Retention of working papers. (6) Independence. (7) Peer reviews and inspection reports. (ii) Within 15 days of receiving notification that the AICPA has accepted a peer review or the PCAOB has issued an inspection report, or before commencing any audit under this section, whichever is earlier, the independent public accountant must file a copy of the most recent peer review report and the public portion of the most recent PCAOB inspection report, if any, accompanied by any letters of comments, response, and acceptance, with NCUA if the report has not already been filed. (iii) Within 15 days of the PCAOB making public a previously nonpublic portion of an inspection report, the independent public accountant must file a copy of the previously nonpublic portion of the inspection report with NCUA. (c) Filing and notice requirements Annual Report. (i) The audited comparative annual financial statements; (ii) The independent public accountant's report on the audited financial statements; (iii) The management report; and (iv) The independent public accountant's attestation report on management's assessment concerning the corporate credit union's internal control structure and procedures for financial reporting. (2) Public availability. (3) Independent public accountant's letters and reports. (i) Any written communication regarding matters that are required to be communicated to the supervisory committee (for example, critical accounting policies, alternative accounting treatments discussed with management, and any schedule of unadjusted differences); and (ii) Any written communication of significant deficiencies and material weaknesses in internal control required by the AICPA's auditing standards. (4) Notice of engagement or change of accountants. (5) Notification of late filing. (6) Report to Members. (d) Supervisory committee Composition. (i) Neither the committee member, nor any immediate family member of the committee member, is supervised by, or has any material business or professional relationship with, the chief executive officer (CEO) of the corporate credit union, or anyone directly or indirectly supervised by the CEO, and (ii) Neither the committee member, nor any immediate family member of the committee member, has had any of the relationships described in paragraph (d)(1)(i) for at least the past three years. (2) Duties. (3) Independent public accountant engagement letters. (A) Obligate the independent public accountant to comply with the requirements of paragraph (b) of this section (including, but not limited to, the notice of termination of services, communications with the supervisory committee, and notifications of peer reviews and inspection reports); and (B) Do not contain any limitation of liability provisions that: ( 1 ( 2 ( 3 (ii) Engagement letters may include alternative dispute resolution agreements and jury trial waiver provisions provided that the letters do not incorporate any limitation of liability provisions set forth in paragraph (d)(3)(i)(B) of this section. (4) Outside counsel. (e) Internal audit. [76 FR 23868, Apr. 29, 2011, as amended at 80 FR 25939, May 6, 2015] § 704.16 Contracts/written agreements. Services, facilities, personnel, or equipment shared with any party shall be supported by a written contract, with the duties and responsibilities of each party specified and the allocation of service fee/expenses fully supported and documented. § 704.17 State-chartered corporate credit unions. (a) This part does not expand the powers and authorities of any state-chartered corporate credit union, beyond those powers and authorities provided under the laws of the state in which it was chartered. (b) A state-chartered corporate credit union that is not insured by the NCUSIF, but that receives funds from federally insured credit unions, is considered an “institution-affiliated party” within the meaning of Section 206(r) of the Federal Credit Union Act, 12 U.S.C. 1786(r). (c) NCUA will notify, consult with, and provide explanation to the appropriate state supervisory authority before taking administrative action against a state-chartered corporate credit union. § 704.18 Fidelity bond coverage. (a) Scope. (b) Review of bond coverage. (2) The board of directors of each corporate credit union must review all applications for purchase or renewal of its fidelity bond coverage. After review, the credit union's board must pass a resolution approving the purchase or renewal of fidelity bond coverage and delegate one member of the board, who is not an employee of the credit union, to sign the purchase or renewal agreement and all attachments; provided, however, that no board members may be a signatory on consecutive purchase or renewal agreements for the same fidelity bond coverage policy. (c) Minimum coverage; approved forms. (2) Fidelity bonds must provide coverage for the fraud and dishonesty of all employees, directors, officers, and supervisory and credit committee members. (3) The NCUA Board must approve all bond forms before a corporate credit union may use them. Corporate credit unions may not use any bond form that has been amended since the time the NCUA Board approved the form or any rider, endorsement, renewal, or other document that limits coverage of approved bond forms without receiving approval from the NCUA Board. Approval on all bond forms expires 10 years after the date the NCUA Board approved or reapproved use of the bond form unless otherwise determined by the NCUA Board; provided, however, that any bond forms approved before 2019 will expire on January 1, 2029, unless otherwise determined by the NCUA Board. The NCUA reserves the right to review a bond form at any point after its approval. (4) Fidelity bonds must include an option for the liquidating agent to purchase coverage in the event of an involuntary liquidation that extends the discovery period for a covered loss for at least one year after liquidation. In the case of a voluntary liquidation, fidelity bonds must remain in effect, or provide that the discovery period is extended, for at least four months after the final distribution of assets. (5) Notwithstanding the foregoing, all bonds must include a provision, in a form approved by the NCUA Board, requiring written notification by surety to NCUA: (i) When the fidelity bond of a credit union is terminated in its entirety; (ii) When fidelity bond coverage is terminated, by issuance of a written notice, on an employee, director, officer, supervisory or credit committee member; or (iii) When a deductible is increased above permissible limits. Said notification shall be sent to NCUA and shall include a brief statement of cause for termination or increase. (d) Minimum coverage amounts. Daily average net assets Minimum Less than $50 million $1.0 $50-$99 million 2.0 $100-$499 million 4.0 $500-$999 million 6.0 $1.0-$1.999 billion 8.0 $2.0-$4.999 billion 10.0 $5.0-$9.999 billion 15.0 $10.0-$24.999 billion 20.0 $25.0 billion plus 25.0 (2) It is the duty of the board of directors of each corporate credit union to provide adequate protection to meet its unique circumstances by obtaining, when necessary, bond coverage in excess of the minimums in the table in paragraph (d)(1) of this section. (e) Deductibles. Leverage ratio Maximum deductible Less than 1.0 percent 7.5 percent of Tier 1 capital. 1.0-1.74 percent 10.0 percent of Tier 1 capital. 1.75-2.24 percent 12.0 percent of Tier 1 capital. Greater than 2.25 percent 15.0 percent of Tier 1 capital. (2) A deductible may be applied separately to one or more insuring clauses in a blanket bond. Deductibles in excess of those showing in this section must have the written approval of NCUA at least 30 calendar days prior to the effective date of the deductibles. (f) Additional coverage. [62 FR 12938, Mar. 19, 1997, as amended at 67 FR 65657, Oct. 25, 2002; 76 FR 79533, Dec. 22, 2011; 80 FR 25939, May 6, 2015; 84 FR 35524, July 24, 2019] § 704.19 Disclosure of executive compensation. (a) Annual disclosure. (1) For corporate credit unions with forty-one or more full time employees, disclosure is required of the compensation paid to the five most highly compensated employees; (2) For corporate credit unions with between thirty and forty-one full time employees, disclosure is required of the compensation paid to the four most highly compensated employees; (3) For corporate credit unions with thirty or fewer full time employees, disclosure is required of the compensation paid to the three most highly compensated employees; and (4) In all cases, compensation paid to the corporate credit union's chief executive officer must also be disclosed, if the chief executive officer is not already included among the most highly compensated employees described in paragraphs (a)(1) through (a)(3) of this section. (b) Availability of disclosure. (c) Supplemental information. (d) Special rule for mergers. i.e., (1) Describe the compensation arrangement in the merger plan documents submitted to NCUA for approval of the merger, pursuant to § 708b of this part; and (2) In the case of any federally chartered corporate credit union, describe the compensation arrangement in the materials provided to the membership of the merging credit union before the member vote on approving the merger. [75 FR 64844, Oct. 20, 2010, as amended at 76 FR 23871, Apr. 29, 2011; 76 FR 79534, Dec. 22, 2011; 85 FR 62211, Oct. 2, 2020; 85 FR 71827, Nov. 12, 2020] § 704.20 [Reserved] § 704.21 Enterprise risk management. (a) A corporate credit union must develop and follow an enterprise risk management policy. (b) The board of directors of a corporate credit union must establish an enterprise risk management committee (ERMC) responsible for reviewing the enterprise-wide risk management practices of the corporate credit union. The ERMC must report at least quarterly to the board of directors. (c) The ERMC must include at least one risk management expert who may report either directly to the board of directors or to the ERMC. The risk management expert's experience must be commensurate with the size of the corporate credit union and the complexity of its operations. [76 FR 23871, Apr. 29, 2011, as amended at 80 FR 25939, May 6, 2015; 85 FR 71827, Nov. 12, 2020] § 704.22 Membership fees. (a) A corporate credit union may charge its members a membership fee. The fee may be one-time or periodic. (b) The corporate credit union must calculate the fee uniformly for all members as a percentage of each member's assets, except that the corporate credit union may reduce the amount of the fee for members that have contributed capital to the corporate credit union. Any reduction must be proportional to the amount of the member's nondepleted contributed capital. (c) The corporate credit union must give its members at least six months advance notice of any initial or new fee, including terms and conditions, before invoicing the fee. For a recurring fee, the corporate credit union must also give six months notice of any material change to the terms and conditions of the fee. (d) The corporate credit union may terminate the membership of any credit union that fails to pay the fee in full within 60 days of the invoice date. [76 FR 23871, Apr. 29, 2011, as amended at 85 FR 62211, Oct. 2, 2020] Appendix A to Part 704—Capital Prioritization and Model Forms Part I—Optional Capital Prioritization Notwithstanding any other provision in this chapter, a corporate credit union, at its option, may determine that capital contributed to the corporate credit union on or after January 18, 2011 will have priority, for purposes of availability to absorb losses and payout in liquidation, over capital contributed to the corporate credit union before that date. The board of directors at a corporate credit union that desires to make this determination must: (a) On or before January 18, 2011, adopt a resolution implementing its determination. (b) Inform the credit union's members and NCUA, in writing and as soon as practicable after adoption of the resolution, of the contents of the board resolution. (c) Ensure the credit union uses the appropriate initial and periodic Model Form disclosures in Part II below. Part II—Model Forms Part II contains model forms intended for use by corporate credit unions to aid in compliance with the capital disclosure requirements of § 704.3 and Part I of this Appendix. Model Form A Terms and Conditions of Nonperpetual Capital Note: This form is for use on and after October 20, 2011 in the circumstances where the credit union has determined NOT to give newly issued capital priority over older capital as described in Part I of this Appendix. Also, corporate credit unions should ensure that existing membership capital accounts that do not meet the qualifying conditions for nonperpetual capital are modified so as to meet those conditions. Terms and Conditions of Nonperpetual Capital Account (1) A nonperpetual capital account is not subject to share insurance coverage by the NCUSIF or other deposit insurer. (2) A nonperpetual capital account is not releasable due solely to the merger, charter conversion or liquidation of the member credit union. In the event of a merger, the nonperpetual capital account transfers to the continuing credit union. In the event of a charter conversion, the nonperpetual capital account transfers to the new institution. In the event of liquidation, the nonperpetual capital account may be released to facilitate the payout of shares with the prior written approval of NCUA. (3) If the nonperpetual capital account is a notice account, a member credit union may withdraw the nonperpetual capital with a minimum of five years' notice. If the nonperpetual capital account is a term instrument it may be redeemed only at maturity. The corporate credit union may not redeem any account prior to the expiration of the notice period, or maturity, without the prior written approval of the NCUA. (4) Nonperpetual capital cannot be used to pledge borrowings. (5) Nonperpetual capital is available to cover losses that exceed retained earnings and perpetual contributed capital. Any such losses will be distributed pro rata (6) Where the corporate credit union is liquidated, nonperpetual capital accounts are payable only after satisfaction of all liabilities of the liquidation estate including uninsured obligations to shareholders and the NCUSIF. However, nonperpetual capital that is used to cover losses in a calendar year previous to the year of liquidation has no claim against the liquidation estate. (7) Where the corporate credit union is merged into another corporate credit union, the nonperpetual capital account will transfer to the continuing corporate credit union. For notice accounts, the five-year notice period for withdrawal of the nonperpetual capital account will remain in effect. For term accounts, the original term will remain in effect. (8) If a term certificate—: The nonperpetual capital account is a term certificate that will mature on—(date)—(insert date with a minimum five-year original maturity). I have read the above terms and conditions and I understand them. I further agree to maintain in the credit union's files the annual notice of terms and conditions of the nonperpetual capital account. The notice form must be signed by either all of the directors of the member credit union or, if authorized by board resolution, the chair and secretary of the board of the credit union. The annual disclosure notice form must be signed by the chair of the corporate credit union. The chair must then sign a statement that certifies that the notice has been sent to member credit unions with nonperpetual capital accounts. The certification must be maintained in the corporate credit union's files and be available for examiner review. Model Form B Terms and Conditions of Nonperpetual Capital Note: This form is for use on and after October 20, 2011, in the circumstances where the corporate credit union has determined that it will give newly issued capital priority over older capital as described in Part I of this Appendix. Terms and Conditions of Nonperpetual Capital Account (1) A nonperpetual capital account is not subject to share insurance coverage by the NCUSIF or other deposit insurer. (2) A nonperpetual capital account is not releasable due solely to the merger, charter conversion or liquidation of the member credit union. In the event of a merger, the nonperpetual capital account transfers to the continuing credit union. In the event of a charter conversion, the nonperpetual capital account transfers to the new institution. In the event of liquidation, the nonperpetual capital account may be released to facilitate the payout of shares with the prior written approval of NCUA. (3) If the nonperpetual capital account is a notice account, a member credit union may withdraw the nonperpetual capital with a minimum of five years' notice. If the nonperpetual capital account is a term instrument it may be redeemed only at maturity. The corporate credit union may not redeem any account prior to the expiration of the notice period, or maturity, without the prior written approval of the NCUA. (4) Nonperpetual capital cannot be used to pledge borrowings. (5)(a) Nonperpetual capital that is issued on or after January 18, 2011 is available to cover losses that exceed retained earnings, all contributed capital issued before January 18, 2011, and perpetual capital issued on or after January 18, 2011. Any such losses will be distributed pro rata, (b) Nonperpetual capital that is issued before January 18, 2011, is available to cover losses that exceed retained earnings and perpetual capital issued before January 18, 2011. Any such losses will be distributed pro rata, (c) Attached to this disclosure is a statement that describes the amount of NCA the credit union has with the corporate credit union in each of the categories described in paragraphs (5)(a) and (5)(b) above. (6) If the corporate credit union is liquidated: (a) Nonperpetual capital accounts issued on or after January 18, 2011 are payable only after satisfaction of all liabilities of the liquidation estate including uninsured obligations to shareholders and the NCUSIF, but not including contributed capital accounts issued before January 18, 2011 or perpetual capital accounts issued on or after January 18, 2011. However, nonperpetual capital that is used to cover losses in a calendar year previous to the year of liquidation has no claim against the liquidation estate. (b) Nonperpetual capital accounts issued before January 18, 2011 are payable only after satisfaction of all liabilities of the liquidation estate including uninsured obligations to shareholders and the NCUSIF, but not including perpetual capital accounts issued before January 18, 2011. However, nonperpetual capital that is used to cover losses in a calendar year previous to the year of liquidation has no claim against the liquidation estate. (7) Where the corporate credit union is merged into another corporate credit union, the nonperpetual capital account will transfer to the continuing corporate credit union. For notice accounts, the five-year notice period for withdrawal of the nonperpetual capital account will remain in effect. For term accounts, the original term will remain in effect. (8) If a term certificate—: The nonperpetual capital account is a term certificate that will mature on—(date)—(insert date with a minimum five-year original maturity). I have read the above terms and conditions and I understand them. I further agree to maintain in the credit union's files the annual notice of terms and conditions of the nonperpetual capital account. The notice form must be signed by either all of the directors of the member credit union or, if authorized by board resolution, the chair and secretary of the board of the credit union. The annual disclosure notice form must be signed by the chair of the corporate credit union. The chair must then sign a statement that certifies that the notice has been sent to member credit unions with nonperpetual capital accounts. The certification must be maintained in the corporate credit union's files and be available for examiner review. Model Form C Terms and Conditions of Perpetual Contributed Capital Note: This form is for use on and after October 20, 2011 in the circumstances where the credit union has determined NOT to give newly issued capital priority over older capital as described in Part I of this Appendix. (1) A perpetual contributed capital account is not subject to share insurance coverage by the NCUSIF or other deposit insurer. (2) A perpetual contributed capital account is not releasable due solely to the merger, charter conversion or liquidation of the member credit union. In the event of a merger, the perpetual contributed capital account transfers to the continuing credit union. In the event of a charter conversion, the perpetual contributed capital account transfers to the new institution. In the event of liquidation, the perpetual contributed capital account may be released to facilitate the payout of shares with the prior written approval of NCUA. (3) The funds are callable only at the option of the corporate credit union and only if the corporate credit union meets its minimum required capital and NEV ratios after the funds are called. The corporate credit union must also obtain the prior, written approval of the NCUA before releasing any perpetual contributed capital funds. (4) Perpetual contributed capital cannot be used to pledge borrowings. (5) Perpetual contributed capital is perpetual maturity and noncumulative dividend. (6) Perpetual contributed capital is available to cover losses that exceed retained earnings. Any such losses must be distributed pro rata (7) Where the corporate credit union is liquidated, perpetual contributed capital accounts are payable only after satisfaction of all liabilities of the liquidation estate including uninsured obligations to shareholders and the NCUSIF, and nonperpetual capital holders. However, perpetual contributed capital that is used to cover losses in a calendar year previous to the year of liquidation has no claim against the liquidation estate. I have read the above terms and conditions and I understand them. I further agree to maintain in the credit union's files the annual notice of terms and conditions of the perpetual contributed capital instrument. The notice form must be signed by either all of the directors of the credit union or, if authorized by board resolution, the chair and secretary of the board of the credit union. Model Form D Terms and Conditions of Perpetual Contributed Capital Note: This form is for use on and after October 20, 2011, in the circumstances where the corporate credit union has determined that it will give newly issued capital priority over older capital as described in Part I of this Appendix. (1) A perpetual contributed capital account is not subject to share insurance coverage by the NCUSIF or other deposit insurer. (2) A perpetual contributed capital account is not releasable due solely to the merger, charter conversion or liquidation of the member credit union. In the event of a merger, the perpetual contributed capital account transfers to the continuing credit union. In the event of a charter conversion, the perpetual contributed capital account transfers to the new institution. In the event of liquidation, the perpetual contributed capital account may be released to facilitate the payout of shares with the prior written approval of NCUA. (3) The funds are callable only at the option of the corporate credit union and only if the corporate credit union meets its minimum required capital and NEV ratios after the funds are called. The corporate credit union must also obtain the prior, written approval of the NCUA before releasing any perpetual contributed capital funds. (4) Perpetual contributed capital cannot be used to pledge borrowings. (5) Perpetual contributed capital is perpetual maturity and noncumulative dividend. (6) Availability to cover losses. (a) Perpetual contributed capital issued before January 18, 2011 is available to cover losses that exceed retained earnings. Any such losses must be distributed pro rata, (b) Perpetual contributed capital issued on or after January 18, 2011 is available to cover losses that exceed retained earnings and any contributed capital issued before January 18, 2011. Any such losses must be distributed pro rata, (c) Attached to this disclosure is a statement that describes the amount of perpetual capital the credit union has with the corporate credit union in each of the categories described in paragraphs (6)(a) and (6)(b) above. (7) Where the corporate credit union is liquidated: (a) Perpetual contributed capital accounts issued on or after January 18, 2011 are payable only after satisfaction of all liabilities of the liquidation estate including uninsured obligations to shareholders and the NCUSIF, but not including contributed capital accounts issued before January 18, 2011. However, perpetual contributed capital that is used to cover losses in a calendar year previous to the year of liquidation has no claim against the liquidation estate. (b) Perpetual contributed capital accounts issued before January 18, 2011 are payable only after satisfaction of all liabilities of the liquidation estate including uninsured obligations to shareholders and the NCUSIF, nonperpetual capital accounts issued before January 18, 2011, and all contributed capital accounts issued on or after January 18, 2011. However, perpetual contributed capital that is used to cover losses in a calendar year previous to the year of liquidation has no claim against the liquidation estate. I have read the above terms and conditions and I understand them. I further agree to maintain in the credit union's files the annual notice of terms and conditions of the perpetual contributed capital instrument. The notice form must be signed by either all of the directors of the credit union or, if authorized by board resolution, the chair and secretary of the board of the credit union. [75 FR 64848, Oct. 20, 2010, as amended at 75 FR 71528, Nov. 24, 2010; 76 FR 79534, Dec. 22, 2011; 80 FR 25939, May 6, 2015; 85 FR 62211, Oct. 2, 2020] Appendix B to Part 704—Expanded Authorities and Requirements A corporate credit union may obtain all or part of the expanded authorities contained in this appendix if it meets the applicable requirements of part 704 and appendix B, fulfills additional management, infrastructure, and asset and liability requirements, and receives NCUA's written approval. Additional guidance is set forth in the NCUA publication Guidelines for Submission of Requests for Expanded Authority. A corporate credit union seeking expanded authorities must submit to NCUA a self-assessment plan supporting its request. A corporate credit union may adopt expanded authorities when NCUA has provided final approval. If NCUA denies a request for expanded authorities, it will advise the corporate credit union of the reason(s) for the denial and what it must do to resubmit its request. NCUA may revoke these expanded authorities at any time if an analysis indicates a significant deficiency. NCUA will notify the corporate credit union in writing of the identified deficiency. A corporate credit union may request, in writing, reinstatement of the revoked authorities by providing a self-assessment plan detailing how it has corrected the deficiency. A state chartered corporate credit union may not exercise any expanded authority that exceeds the powers and authorities provided for under its state laws. Accordingly, requests by state chartered corporate credit unions for expansions under this part must be approved by the state regulator before being submitted to NCUA. Minimum Requirement In order to participate in any of the authorities set forth in Base-Plus, Part I, Part II, Part III, or Part IV of this Appendix, a corporate credit union must evaluate monthly, including once on the last day of the month, the changes in NEV, NEV ratio, NII, WAL, and duration as required by paragraphs (d)(1)(i), (e), (f), (g), and (i) of § 704.8. Base-Plus A corporate credit union that has met the requirements for this Base-plus authority may, in performing the rate stress tests set forth in 704.8(d)(1)(i), allow its NEV to decline as much as 20 percent. Part I (a) A corporate credit union that has met all the requirements established by NCUA for this Part I, including a minimum leverage ratio of at least six percent, may: (1) Purchase an investment after conducting and documenting an analysis that reasonably concludes the investment is at least investment grade; (2) Engage in short sales of permissible investments to reduce interest rate risk; (3) Purchase principal only (PO) stripped mortgage-backed securities to reduce interest rate risk; and (4) Enter into a dollar roll transaction. (b) In performing the rate stress tests set forth in § 704.8(d), the NEV of a corporate credit union that has met the requirements of this Part I may decline as much as: (1) 20 percent; (2) 28 percent if the corporate credit union has a seven percent minimum leverage ratio and a two and a half percent retained earnings ratio, and is specifically approved by the NCUA; or (3) 35 percent if the corporate credit union has an eight percent minimum leverage ratio and a three percent retained earnings ratio and is specifically approved by the NCUA. (c) The maximum aggregate amount in unsecured loans and lines of credit to any one member credit union, excluding pass-through and guaranteed loans from the CLF and the NCUSIF, must not exceed 100 percent of the corporate credit union's total capital. The board of directors must establish the limit, as a percent of the corporate credit union's total capital plus pledged shares, for secured loans and lines of credit. (d) The aggregate total of investments purchased under the authority of Part I (a)(1) and Part I (a)(2) may not exceed the lower of 500 percent of the corporate credit union's total capital or 25 percent of assets. Part II (a) A corporate credit union that has met the requirements of Part I of this Appendix and the additional requirements established by NCUA for Part II may invest in: (1) Debt obligations of a foreign country; (2) Deposits and debt obligations of foreign banks or obligations guaranteed by these banks; (3) Marketable debt obligations of foreign corporations. This authority does not apply to debt obligations that are convertible into the stock of the corporation; and (4) Foreign issued asset-backed securities. (b) All foreign investments are subject to the following requirements: (1) Investments must be made pursuant to an explicit policy established by the corporate credit union's board of directors. Before purchasing an investment, the corporate credit union must conduct and document an analysis that reasonably concludes the foreign issue or issuer has no more than a minimal amount of credit risk; (2) For each approved foreign bank line, the corporate credit union must identify the specific banking centers and branches to which it will lend funds; (3) Obligations of any single foreign obligor may not exceed 25 percent of total capital or $5 million, whichever is greater; and (4) Obligations in any single foreign country may not exceed 250 percent of capital. Part III (a) A corporate credit union that has met the requirements established by NCUA for this Part III may enter into derivative transactions specifically approved by NCUA to: (1) Create structured products; (2) Mitigate interest rate risk and credit risk on its own balance sheet; and (3) Hedge the balance sheets of its members. (b) Credit Quality: All derivative transactions are subject to the following requirements: (1) If the intended counterparty is domestic, the counterparty must meet minimum credit quality standards as established by the corporate credit union's board of directors; (2) If the intended counterparty is foreign, the corporate credit union must have Part II expanded authority and the counterparty must meet minimum credit quality standards as established by the corporate credit union's board of directors; (3) The corporate credit union must identify the criteria relied upon to determine that the counterparty meets the credit quality requirements of this part at the time the transaction is entered into and monitor those criteria for as long as the contract remains open; and (4) The corporate credit union must comply with § 704.10 of this part if the credit quality of the counterparty deteriorates below the minimum credit quality standards established by the corporate credit union's board of directors. Part IV A corporate credit union that has met all the requirements established by NCUA for this Part IV may participate in loans with member natural person credit unions as approved by the NCUA and subject to the following: (a) The maximum aggregate amount of participation loans with any one member credit union must not exceed 25 percent of capital; and (b) The maximum aggregate amount of participation loans with all member credit unions will be determined on a case-by-case basis by the NCUA. [75 FR 64851, Oct. 20, 2010, as amended at 77 FR 74111, Dec. 13, 2012; 80 FR 25939, May 6, 2015; 82 FR 55500, Nov. 22, 2017; 85 FR 62212, Oct. 2, 2020] Appendix C to Part 704—Risk-Based Capital Credit Risk-Weight Categories Table of Contents I. Introduction (a) Scope (b) Definitions II. Risk-Weightings (a) On-balance sheet assets (b) Off-balance sheet activities (c) Recourse obligations, direct credit substitutes, and certain other positions (d) Collateral Part I: Introduction (a) Scope (1) This Appendix explains how a corporate credit union must compute its risk-weighted assets for purposes of determining its capital ratios. (2) Risk-weighted assets equal risk-weighted on-balance sheet assets (computed under Section II(a) of this Appendix), plus risk-weighted off-balance sheet activities (computed under Section II(b) of this Appendix), plus risk-weighted recourse obligations, direct credit substitutes, and certain other positions (computed under Section II(c) of this Appendix). (3) Assets not included ( i.e., (4) Although this Appendix describes risk-weightings for various assets and activities, this Appendix does not provide authority for corporate credit unions to invest in or purchase any particular type of asset or to engage in any particular type of activity. A corporate credit union must have other identifiable authority (b) Definitions The following definitions apply to this Appendix. Additional definitions, applicable to this entire part, are located in § 704.2 of this part. Cash items in the process of collection Commitment (1) Purchase loans or securities; (2) Extend credit in the form of loans or leases, participations in loans or leases, overdraft facilities, revolving credit facilities, home equity lines of credit, eligible ABCP liquidity facilities, or similar transactions. Depository institution Bank holding companies and savings and loan holding companies are excluded from this definition. For the purposes of assigning risk-weights, the differentiation between OECD depository institutions and non-OECD depository institutions is based on the country of incorporation. Claims on branches and agencies of foreign banks located in the United States are to be categorized on the basis of the parent bank's country of incorporation. Direct credit substitute pro rata (1) Financial standby letters of credit that support financial claims on a third party that exceed a corporate credit union's pro rata (2) Guarantees, surety arrangements, credit derivatives, and similar instruments backing financial claims that exceed a corporate credit union's pro rata (3) Purchased subordinated interests that absorb more than their pro rata (4) Credit derivative contracts under which the corporate credit union assumes more than its pro rata (5) Loans or lines of credit that provide credit enhancement for the financial obligations of a third party; (6) Purchased loan servicing assets if the servicer is responsible for credit losses or if the servicer makes or assumes credit-enhancing representations and warranties with respect to the loans serviced. Servicer cash advances as defined in this section are not direct credit substitutes; (7) Clean-up calls on third-party assets. However, clean-up calls that are 10 percent or less of the original pool balance and that are exercisable at the option of the corporate credit union are not direct credit substitutes; and (8) Liquidity facilities that provide support to asset-backed commercial paper. Exchange rate contracts Face amount Financial asset Financial standby letter of credit (1) To repay money borrowed by, or advanced to, or for the account of, a second party (the account party); or (2) To make payment on behalf of the account party, in the event that the account party fails to fulfill its obligation to the beneficiary. OECD-based country Original maturity i.e., (1) The commitment is not subject to extension or renewal and will actually expire on its stated expiration date; or (2) If the commitment is subject to extension or renewal beyond its stated expiration date, the stated expiration date will be deemed the original maturity only if the extension or renewal must be based upon terms and conditions independently negotiated in good faith with the member at the time of the extension or renewal and upon a new, bona fide credit analysis utilizing current information on financial condition and trends. Performance-based standby letter of credit Prorated assets Qualifying mortgage loan (1) Is fully secured by a first lien on a one-to four-family residential property; (2) Is underwritten in accordance with prudent underwriting standards, including standards relating to the ratio of the loan amount to the value of the property (LTV ratio), as presented in the Interagency Guidelines for Real Estate Lending Policies (3) Maintains an appropriate LTV ratio based on the amortized principal balance of the loan; and (4) Is performing and is not more than 90 days past due. If a corporate credit union holds the first and junior lien(s) on a residential property and no other party holds an intervening lien, the transaction is treated as a single loan secured by a first lien for the purposes of determining the LTV ratio and the appropriate risk-weight under Appendix C. Also, a loan to an individual borrower for the construction of the borrower's home may be included as a qualifying mortgage loan. Qualifying multifamily mortgage loan. Qualifying multifamily mortgage loan (i) The amortization of principal and interest occurs over a period of not more than 30 years; (ii) The original minimum maturity for repayment of principal on the loan is not less than seven years; (iii) When considering the loan for placement in a lower risk-weight category, all principal and interest payments have been made on a timely basis in accordance with its terms for the preceding year; (iv) The loan is performing and not 90 days or more past due; (v) The loan is made in accordance with prudent underwriting standards; and (vi) If the interest rate on the loan does not change over the term of the loan, the current loan balance amount does not exceed 80 percent of the value of the property securing the loan, and for the property's most recent calendar year, the ratio of annual net operating income generated by the property (before payment of any debt service on the loan) to annual debt service on the loan is not less than 120 percent, or in the case of cooperative or other not-for-profit housing projects, the property generates sufficient cash flows to provide comparable protection to the institution; or (vii) If the interest rate on the loan changes over the term of the loan, the current loan balance amount does not exceed 75 percent of the value of the property securing the loan, and for the property's most recent calendar year, the ratio of annual net operating income generated by the property (before payment of any debt service on the loan) to annual debt service on the loan is not less than 115 percent, or in the case of cooperative or other not-for-profit housing projects, the property generates sufficient cash flows to provide comparable protection to the institution. (2) For purposes of paragraphs (1)(vi) and (1)(vii) of this definition, the term value of the property means, at origination of a loan to purchase a multifamily property, the lower of the purchase price or the amount of the initial appraisal, or if appropriate, the initial evaluation. In cases not involving purchase of a multifamily loan, the value of the property is determined by the most current appraisal, or if appropriate, the most current evaluation. In cases where a borrower refinances a loan on an existing property, as an alternative to paragraphs (1)(iii), (1)(vi), and (1)(vii) of this definition: (i) All principal and interest payments on the loan being refinanced have been made on a timely basis in accordance with the terms of that loan for the preceding year; and (ii) The net income on the property for the preceding year would support timely principal and interest payments on the new loan in accordance with the applicable debt service requirement. Qualifying residential construction loan, (1) The builder must have substantial project equity in the home construction project; (2) The residence being constructed must be a 1-4 family residence sold to a home purchaser; (3) The lending entity must obtain sufficient documentation from a permanent lender (which may be the construction lender) demonstrating that the home buyer intends to purchase the residence and has the ability to obtain a permanent qualifying mortgage loan sufficient to purchase the residence; (4) The home purchaser must have made a substantial earnest money deposit; (5) The construction loan must not exceed 80 percent of the sales price of the residence; (6) The construction loan must be secured by a first lien on the lot, residence under construction, and other improvements; (7) The lending credit union must retain sufficient undisbursed loan funds throughout the construction period to ensure project completion; (8) The builder must incur a significant percentage of direct costs ( i.e., (9) If at any time during the life of the construction loan any of the criteria of this rule are no longer satisfied, the corporate must immediately recategorize the loan at a 100 percent risk-weight and must accurately report the loan in the corporate's next quarterly call report; (10) The home purchaser must intend that the home will be owner-occupied; (11) The home purchaser(s) must be an individual(s), not a partnership, joint venture, trust corporation, or any other entity (including an entity acting as a sole proprietorship) that is purchasing the home(s) for speculative purposes; and (12) The loan must be performing and not more than 90 days past due. The NCUA retains the discretion to determine that any loans not meeting sound lending principles must be placed in a higher risk-weight category. The NCUA also reserves the discretion to modify these criteria on a case-by-case basis provided that any such modifications are not inconsistent with the safety and soundness objectives of this definition. Qualifying securities firm (1) A securities firm incorporated in the United States that is a broker-dealer that is registered with the Securities and Exchange Commission (SEC) and that complies with the SEC's net capital regulations (17 CFR 240.15c3(1)); and (2) A securities firm incorporated in any other OECD-based country, if the corporate credit union is able to demonstrate that the securities firm is subject to consolidated supervision and regulation (covering its subsidiaries, but not necessarily its parent organizations) comparable to that imposed on depository institutions in OECD countries. Such regulation must include risk-based capital requirements comparable to those imposed on depository institutions under the Accord on International Convergence of Capital Measurement and Capital Standards (1988, as amended in 1998). Recourse pro rata (1) Credit-enhancing representations and warranties made on transferred assets; (2) Loan servicing assets retained pursuant to an agreement under which the corporate credit union will be responsible for losses associated with the loans serviced. Servicer cash advances as defined in this section are not recourse obligations; (3) Retained subordinated interests that absorb more than their pro rata (4) Assets sold under an agreement to repurchase, if the assets are not already included on the balance sheet; (5) Loan strips sold without contractual recourse where the maturity of the transferred portion of the loan is shorter than the maturity of the commitment under which the loan is drawn; (6) Credit derivatives that absorb more than the corporate credit union's pro rata (7) Clean-up calls on assets the corporate credit union has sold. However, clean-up calls that are 10 percent or less of the original pool balance and that are exercisable at the option of the corporate credit union are not recourse arrangements; and (8) Liquidity facilities that provide support to asset-backed commercial paper. Replacement Residential properties Residual interest. Residual interest (i) Represents an interest (including a beneficial interest) created by a transfer that qualifies as a sale (in accordance with Generally Accepted Accounting Principles) of financial assets, whether through a securitization or otherwise; and (ii) Exposes a corporate credit union to credit risk directly or indirectly associated with the transferred asset that exceeds a pro rata (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. (3) Corporate credit unions will use this definition of the term “residual interests,” and not the definition in § 704.2, for purposes of applying this Appendix. Risk participation e.g., Risk-weighted assets Servicer cash advance (1) The servicer is entitled to full reimbursement and this right is not subordinated to other claims on the cash flows from the underlying asset pool; or (2) For any one loan, the servicer's obligation to make nonreimbursable advances is contractually limited to an insignificant amount of the outstanding principal amount on that loan. Structured financing program Unconditionally cancelable United States Government or its agencies United States Government-sponsored agency or corporation Part II: Risk-Weightings (a) On-Balance Sheet Assets Except as provided in Section II(b) of this Appendix, risk-weighted on-balance sheet assets are computed by multiplying the on-balance sheet asset amounts times the appropriate risk-weight categories. The risk-weight categories are: (1) Zero percent Risk-Weight (Category 1). (i) Cash, including domestic and foreign currency owned and held in all offices of a corporate credit union or in transit. Any foreign currency held by a corporate credit union must be converted into U.S. dollar equivalents; (ii) Securities issued by and other direct claims on the U.S. Government or its agencies (to the extent such securities or claims are unconditionally backed by the full faith and credit of the United States Government) or the central government of an OECD country; (iii) Notes and obligations issued or guaranteed by the Federal Deposit Insurance Corporation or the National Credit Union Share Insurance Fund and backed by the full faith and credit of the United States Government; (iv) Deposit reserves at, claims on, and balances due from Federal Reserve Banks; (v) The book value of paid-in Federal Reserve Bank stock; (vi) That portion of assets directly and unconditionally guaranteed by the United States Government or its agencies, or the central government of an OECD country. (viii) Claims on, and claims guaranteed by, a qualifying securities firm that are collateralized by cash on deposit in the corporate credit union or by securities issued or guaranteed by the United States Government or its agencies, or the central government of an OECD country. To be eligible for this risk-weight, the corporate credit union must maintain a positive margin of collateral on the claim on a daily basis, taking into account any change in a corporate credit union's exposure to the obligor or counterparty under the claim in relation to the market value of the collateral held in support of the claim. (2) 20 percent Risk-Weight (Category 2). (i) Cash items in the process of collection; (ii) That portion of assets conditionally guaranteed by the United States Government or its agencies, or the central government of an OECD country; (iii) That portion of assets collateralized by the current market value of securities issued or guaranteed by the United States government or its agencies, or the central government of an OECD country; (iv) Securities (not including equity securities) issued by and other claims on the U.S. Government or its agencies which are not backed by the full faith and credit of the United States Government; (v) Securities (not including equity securities) issued by, or other direct claims on, United States Government-sponsored agencies; (vi) That portion of assets guaranteed by United States Government-sponsored agencies; (vii) That portion of assets collateralized by the current market value of securities issued or guaranteed by United States Government-sponsored agencies; (viii) Claims on, and claims guaranteed by, a qualifying securities firm, subject to the following conditions: (A) A qualifying securities firm must meet the minimum credit quality standards as established by the corporate credit union's board of directors or have at least one issue of long-term unsecured debt that is reasonably determined to present no more than a minimal amount of credit risk, whichever requirement is more stringent. Alternatively, a qualifying securities firm may rely on the creditworthiness of its parent consolidated company, if the parent consolidated company guarantees the claim. (B) A collateralized claim on a qualifying securities firm does not have to comply with the requirements of paragraph (a) of this section of Appendix C if the claim arises under a contract that: ( 1 ( 2 ( 3 ( 4 ( 5 (C) If the securities firm uses the claim to satisfy its applicable capital requirements, the claim is not eligible for a risk-weight under this paragraph II(a)(2)(viii); (ix) Claims representing general obligations of any public-sector entity in an OECD country, and that portion of any claims guaranteed by any such public-sector entity; (x) Balances due from and all claims on domestic depository institutions. This includes demand deposits and other transaction accounts, savings deposits and time certificates of deposit, federal funds sold, loans to other depository institutions, including overdrafts and term federal funds, holdings of the corporate credit union's own discounted acceptances for which the account party is a depository institution, holdings of bankers acceptances of other institutions and securities issued by depository institutions, except those that qualify as capital; (xi) The book value of paid-in Federal Home Loan Bank stock; (xii) Deposit reserves at, claims on and balances due from the Federal Home Loan Banks; (xiii) Assets collateralized by cash held in a segregated deposit account by the reporting corporate credit union; (xiv) Claims on, or guaranteed by, official multilateral lending institutions or regional development institutions in which the United States Government is a shareholder or contributing member; 1 1 (xv) That portion of assets collateralized by the current market value of securities issued by official multilateral lending institutions or regional development institutions in which the United States Government is a shareholder or contributing member. (xvi) All claims on depository institutions incorporated in an OECD country, and all assets backed by the full faith and credit of depository institutions incorporated in an OECD country. This includes the credit equivalent amount of participations in commitments and standby letters of credit sold to other depository institutions incorporated in an OECD country, but only if the originating bank remains liable to the member or beneficiary for the full amount of the commitment or standby letter of credit. Also included in this category are the credit equivalent amounts of risk participations in bankers' acceptances conveyed to other depository institutions incorporated in an OECD country. However, bank-issued securities that qualify as capital of the issuing bank are not included in this risk category; (xvii) Claims on, or guaranteed by depository institutions other than the central bank, incorporated in a non-OECD country, with a remaining maturity of one year or less; (xviii) That portion of local currency claims conditionally guaranteed by central governments of non-OECD countries, to the extent the corporate credit union has local currency liabilities in that country. (3) 50 percent Risk-Weight (Category 3). (i) Revenue bonds issued by any public-sector entity in an OECD country for which the underlying obligor is a public-sector entity, but which are repayable solely from the revenues generated from the project financed through the issuance of the obligations; (ii) Qualifying mortgage loans and qualifying multifamily mortgage loans; (iii) Privately-issued mortgage-backed securities ( i.e., (iv) Qualifying residential construction loans. (4) 100 percent Risk-Weight (Category 4). All assets not specified above or deducted from calculations of capital pursuant to § 704.2 and § 704.3 of this part, including, but not limited to: (i) Consumer loans; (ii) Commercial loans; (iii) Home equity loans; (iv) Non-qualifying mortgage loans; (v) Non-qualifying multifamily mortgage loans; (vi) Residential construction loans; (vii) Land loans; (viii) Nonresidential construction loans; (ix) Obligations issued by any state or any political subdivision thereof for the benefit of a private party or enterprise where that party or enterprise, rather than the issuing state or political subdivision, is responsible for the timely payment of principal and interest on the obligations, e.g., (x) Debt securities not specifically risk-weighted in another category; (xi) Investments in fixed assets and premises; (xii) Servicing assets; (xiii) Interest-only strips receivable; (xiv) Equity investments; (xv) The prorated assets of subsidiaries (except for the assets of consolidated CUSOs) to the extent such assets are included in adjusted total assets; (xvi) All repossessed assets or assets that are more than 90 days past due; and (xvii) Intangible assets not specifically weighted in some other category. (5) Indirect ownership interests in pools of assets. Assets representing an indirect holding of a pool of assets, e.g., pro rata pro rata pro rata (6) Derivatives. Certain transactions or activities, such as derivatives transactions, may appear on a corporate credit union's balance sheet but are not specifically described in the Section II(a) on-balance sheet risk-weight categories. These items will be assigned risk-weights as described in Section II(b) or II(c) below. (b) Off-Balance Sheet Items Except as provided in Section II(c) of this Appendix, risk-weighted off-balance sheet items are determined by the following two-step process. First, the face amount of the off-balance sheet item must be multiplied by the appropriate credit conversion factor listed in this Section II(b). This calculation translates the face amount of an off-balance sheet exposure into an on-balance sheet credit-equivalent amount. Second, the credit-equivalent amount must be assigned to the appropriate risk-weight category using the criteria regarding obligors, guarantors, and collateral listed in Section II(a) of this Appendix. 2 2 (1) 100 percent credit conversion factor (Group A). (i) Risk participations purchased in bankers' acceptances; (ii) Forward agreements and other contingent obligations with a certain draw down, e.g., (iii) Indemnification of members whose securities the corporate credit union has lent as agent. If the member is not indemnified against loss by the corporate credit union, the transaction is excluded from the risk-based capital calculation. When a corporate credit union lends its own securities, the transaction is treated as a loan. When a corporate credit union lends its own securities or is acting as agent, agrees to indemnify a member, the transaction is assigned to the risk-weight appropriate to the obligor or collateral that is delivered to the lending or indemnifying institution or to an independent custodian acting on their behalf; and (2) 50 percent credit conversion factor (Group B). (i) Transaction-related contingencies, including, among other things, performance bonds and performance-based standby letters of credit related to a particular transaction; (ii) Unused portions of commitments (including home equity lines of credit and eligible ABCP liquidity facilities) with an original maturity exceeding one year except those listed in paragraph II (b)(5) of this Appendix. For eligible ABCP liquidity facilities, the resulting credit equivalent amount is assigned to the risk category appropriate to the assets to be funded by the liquidity facility based on the assets of the obligor, after considering any collateral of guarantees. (iii) Revolving underwriting facilities, note issuance facilities, and similar arrangements pursuant to which the corporate credit union's CUSO or member can issue short-term debt obligations in its own name, but for which the corporate credit union has a legally binding commitment to either: (A) Purchase the obligations the member is unable to sell by a stated date; or (B) Advance funds to its member, if the obligations cannot be sold. (3) 20 percent credit conversion factor (Group C). Trade-related contingencies, i.e., (4) Zero percent credit conversion factor (Group E). (i) Unused portions of commitments with an original maturity of one year or less; (ii) Unused commitments with an original maturity greater than one year, if they are unconditionally cancelable at any time at the option of the corporate credit union and the corporate credit union has the contractual right to make, and in fact does make, either: (A) A separate credit decision based upon the borrower's current financial condition before each drawing under the lending facility; or (B) An annual (or more frequent) credit review based upon the borrower's current financial condition to determine whether or not the lending facility should be continued; and (iii) The unused portion of retail credit card lines or other related plans that are unconditionally cancelable by the corporate credit union in accordance with applicable law. (5) Off-balance sheet derivative contracts; interest rate and foreign exchange rate contracts (Group F). (i) Calculation of credit equivalent amounts. The credit equivalent amount of an off-balance sheet derivative contract that is not subject to a qualifying bilateral netting contract in accordance with paragraph II(b)(6)(ii) of this Appendix is equal to the sum of the current credit exposure, i.e., (A) Current credit exposure. The current credit exposure of an off-balance sheet derivative contract is determined by the mark-to-market value of the contract. If the mark-to-market value is positive, then the current credit exposure equals that mark-to-market value. If the mark-to-market value is zero or negative, then the current exposure is zero. In determining its current credit exposure for multiple off-balance sheet derivative contracts executed with a single counterparty, a corporate credit union may net positive and negative mark-to-market values of off-balance sheet derivative contracts if subject to a bilateral netting contract as provided in paragraph II(b)(6)(ii) of this Appendix. (B) Potential future credit exposure. The potential future credit exposure of an off-balance sheet derivative contract, including a contract with a negative mark-to-market value, is estimated by multiplying the notional principal by a credit conversion factor. 3 4 3 4 Remaining maturity Interest rate Foreign Other derivative contracts One year or less 0.0 1.0 10.0 Over one year but less than five years 0.50 5.0 12.0 Over five years 0.50 5.0 15.0 (ii) Off-balance sheet derivative contracts subject to bilateral netting contracts. In determining its current credit exposure for multiple off-balance sheet derivative contracts executed with a single counterparty, a corporate credit union may net off-balance sheet derivative contracts subject to a bilateral netting contract by offsetting positive and negative mark-to-market values, provided that: (A) The bilateral netting contract is in writing; (B) The bilateral netting contract creates a single legal obligation for all individual off-balance sheet derivative contracts covered by the bilateral netting contract. In effect, the bilateral netting contract provides that the corporate credit union has a single claim or obligation either to receive or pay only the net amount of the sum of the positive and negative mark-to-market values on the individual off-balance sheet derivative contracts covered by the bilateral netting contract. The single legal obligation for the net amount is operative in the event that a counterparty, or a counterparty to whom the bilateral netting contract has been validly assigned, fails to perform due to any of the following events: Default, insolvency, bankruptcy, or other similar circumstances; (C) The corporate credit union obtains a written and reasoned legal opinion(s) representing, with a high degree of certainty, that in the event of a legal challenge, including one resulting from default, insolvency, bankruptcy or similar circumstances, the relevant court and administrative authorities would find the corporate credit union's exposure to be the net amount under: ( 1 ( 2 ( 3 (D) The corporate credit union establishes and maintains procedures to monitor possible changes in relevant law and to ensure that the bilateral netting contract continues to satisfy the requirements of this section; and (E) The corporate credit union maintains in its files documentation adequate to support the netting of an off-balance sheet derivative contract. 5 5 (iii) Walkaway clause. A bilateral netting contract that contains a walkaway clause is not eligible for netting for purposes of calculating the current credit exposure amount. The term “walkaway clause” means a provision in a bilateral netting contract that permits a nondefaulting counterparty to make a lower payment than it would make otherwise under the bilateral netting contract, or no payment at all, to a defaulter or the estate of a defaulter, even if the defaulter or the estate of the defaulter is a net creditor under the bilateral netting contract. (iv) Risk-weighting. Once the corporate credit union determines the credit equivalent amount for an off-balance sheet derivative contract, that amount is assigned to the risk-weight category appropriate to the counterparty, or, if relevant, to the nature of any collateral or guarantee. Collateral held against a netting contract is not recognized for capital purposes unless it is legally available for all contracts included in the netting contract. However, the maximum risk-weight for the credit equivalent amount of such off-balance sheet derivative contracts is 50 percent. (v) Exceptions. The following off-balance sheet derivative contracts are not subject to the above calculation, and therefore, are not part of the denominator of a corporate credit union's risk-based capital ratio: (A) A foreign exchange rate contract with an original maturity of 14 calendar days or less; and (B) Any interest rate or foreign exchange rate contract that is traded on an exchange requiring the daily payment of any variations in the market value of the contract. (c) Recourse Obligations, Direct Credit Substitutes, and Certain Other Positions (1) In general. Except as otherwise permitted in this Section II(c), to determine the risk-weighted asset amount for a recourse obligation or a direct credit substitute (but not a residual interest): (i) Multiply the full amount of the credit-enhanced assets for which the corporate credit union directly or indirectly retains or assumes credit risk by a 100 percent conversion factor (For a direct credit substitute that is an on-balance sheet asset ( e.g., i.e., (ii) Assign this credit equivalent amount to the risk-weight category appropriate to the obligor in the underlying transaction, after considering any associated guarantees or collateral. Section II(a) lists the risk-weight categories. (2) Residual interests. Except as otherwise permitted under this Section II(c), a corporate credit union must maintain risk-based capital for residual interests as follows: (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: (A) The risk-based capital requirement for the residual interest as calculated under Section II(c)(2)(i) through (ii) of this Appendix; or (B) The full risk-based capital requirement for the assets transferred, subject to the low-level recourse rules under Section II(c)(5) of this Appendix. (3) Internal ratings-based approach— (i) Calculation. Corporate credit unions with advanced risk management and reporting systems may seek NCUA approval to use credit risk models to calculate risk-weighted asset amounts for positions described in paragraphs II (c)(1) and (2) of this section of the Appendix C. In determining whether to grant approval, NCUA will consider the financial condition and risk management sophistication of the corporate credit union and the adequacy of the corporate credit union's risk models and supporting management information systems. (ii) Consistent use of internal ratings-based approach. A corporate credit union that has been granted NCUA approval to use an internal ratings-based approach and that has determined to use such an approach must do so in a consistent manner for all securities so rated. (4) Limitations on risk-based capital requirements— (i) Low-level exposure rule. If the maximum contractual exposure to loss retained or assumed by a corporate credit union is less than the effective risk-based capital requirement, as determined in accordance with this Section II(c), for the assets supported by the corporate credit union's position, the risk-based capital requirement is limited to the corporate credit union's contractual exposure less any recourse liability account established in accordance with Generally Accepted Accounting Principles. This limitation does not apply when a corporate credit union provides credit enhancement beyond any contractual obligation to support assets it has sold. (ii) Mortgage-related securities or participation certificates retained in a mortgage loan swap. If a corporate credit union holds a mortgage-related security or a participation certificate as a result of a mortgage loan swap with recourse, it must hold risk-based capital to support the recourse obligation and that percentage of the mortgage-related security or participation certificate that is not covered by the recourse obligation. The total amount of risk-based capital required for the security (or certificate) and the recourse obligation is limited to the risk-based capital requirement for the underlying loans, calculated as if the corporate credit union continued to hold these loans as an on-balance sheet asset. (iii) Related on-balance sheet assets. If an asset is included in the calculation of the risk-based capital requirement under this Section II(c) and also appears as an asset on the corporate credit union's balance sheet, the corporate credit union must risk-weight the asset only under this Section II(c), except in the case of loan servicing assets and similar arrangements with embedded recourse obligations or direct credit substitutes. In that case, the corporate credit union must separately risk-weight the on-balance sheet servicing asset and the related recourse obligations and direct credit substitutes under this section, and incorporate these amounts into the risk-based capital calculation. (5) Obligations of CUSOs. All recourse obligations and direct credit substitutes retained or assumed by a corporate credit union on the obligations of CUSOs in which the corporate credit union has an equity investment are risk-weighted in accordance with this Section II(c), unless the corporate credit union's equity investment is deducted from the credit union's capital and assets under § 704.2 and § 704.3. (d) Collateral. [75 FR 64852, Oct. 20, 2010, as amended at 77 FR 74111, Dec. 13, 2012; 80 FR 25939, May 6, 2015; 85 FR 62212, Oct. 2, 2020]

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