Rule2022-03845
Prompt Corrective Action: Earnings Retention Waivers and Net Worth Restoration Plans
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
February 28, 2022
Effective
February 28, 2022
Issuing agencies
National Credit Union Administration
Abstract
The NCUA Board (Board) is extending two temporary changes to its prompt corrective action (PCA) regulations to help ensure that federally insured credit unions (FICUs) remain operational and liquid during the COVID-19 crisis. The first amends these regulations to temporarily extend the Board's ability to issue an order applicable to all FICUs to waive the earnings retention requirement for any FICU that is classified as adequately capitalized. The second extends a provision that modifies the specific documentation required for net worth restoration plans (NWRPs) for FICUs that become undercapitalized. These temporary modifications will remain in place until March 31, 2023. This rule is substantially similar to an interim final rule that the Board published on April 19, 2021 ("2021 PCA interim final").
Full Text
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<title>Federal Register, Volume 87 Issue 39 (Monday, February 28, 2022)</title>
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[Federal Register Volume 87, Number 39 (Monday, February 28, 2022)]
[Rules and Regulations]
[Pages 10944-10950]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-03845]
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NATIONAL CREDIT UNION ADMINISTRATION
12 CFR Part 702
[NCUA-2022-0005]
RIN 3133-AF19
Prompt Corrective Action: Earnings Retention Waivers and Net
Worth Restoration Plans
AGENCY: National Credit Union Administration (NCUA).
ACTION: Interim final rule.
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SUMMARY: The NCUA Board (Board) is extending two temporary changes to
its prompt corrective action (PCA) regulations to help ensure that
federally insured credit unions (FICUs) remain operational and liquid
during the COVID-19 crisis. The first amends these regulations to
temporarily extend the Board's ability to issue an order applicable to
all FICUs to waive the earnings retention requirement for any FICU that
is classified as adequately capitalized. The second extends a provision
that modifies the specific documentation required for net worth
restoration plans (NWRPs) for FICUs that become undercapitalized. These
temporary modifications will remain in place until March 31, 2023. This
rule is substantially similar to an interim final rule that the Board
published on April 19, 2021 (``2021 PCA interim final'').
DATES: This rule is effective on February 28, 2022. Comments must be
received on or before April 29, 2022.
ADDRESSES: You may submit written comments, identified by RIN 3133-
AF19, by any of the following methods. Please send comments by one
method only.
<bullet> Federal eRulemaking Portal: <a href="https://www.regulations.gov">https://www.regulations.gov</a>.
Follow the instructions for submitting comments for Docket # NCUA-2022-
0055.
<bullet> Fax: (703) 518-6319. Include ``[Your Name]--Comments on
``Prompt Corrective Action: Earnings Retention Waivers and Net Worth
Restoration Plans'' in the transmittal.
<bullet> Mail: Address to Melane Conyers-Ausbrooks, Secretary of
the Board, National Credit Union Administration, 1775 Duke Street,
Alexandria, Virginia 22314-3428.
<bullet> Hand Delivery/Courier: Same as mail address.
Public Inspection: You may view all public comments on the Federal
eRulemaking Portal at <a href="https://www.regulations.gov">https://www.regulations.gov</a> as submitted, except
for those we cannot post for technical reasons. The NCUA will not edit
or remove any identifying or contact information from the public
comments submitted. Due to social distancing measures in effect, the
usual opportunity to inspect paper copies of comments in the NCUA's law
library is currently unavailable. After social distancing measures are
relaxed, visitors may make an appointment to review paper copies by
calling (703) 518-6540 or emailing <a href="/cdn-cgi/l/email-protection#90dfd7d3ddf1f9fcd0fef3e5f1bef7ffe6"><span class="__cf_email__" data-cfemail="e4aba3a7a9858d88a48a879185ca838b92">[email protected]</span></a>.
FOR FURTHER INFORMATION CONTACT: Policy and Analysis: Kathryn Metzker,
Risk Officer, or Victoria Nahrwold, Associate Director, Office of
Examination and Insurance, at (703) 518-6360; Legal: Marvin Shaw,
Senior Staff Attorney and Thomas Zells, Senior Staff Attorney, Office
of General Counsel, at (703) 518-6540; or by mail at: National Credit
Union Administration, 1775 Duke Street, Alexandria, Virginia 22314.
SUPPLEMENTARY INFORMATION:
I. Legal Authority
The Board is issuing this interim final rule pursuant to its
authority under the Federal Credit Union Act.\1\ The Act grants the
Board a broad mandate to issue regulations that govern both federal
credit unions and, more generally, all FICUs. For example, Section 120
of the Act is a general grant of regulatory authority and authorizes
the Board to prescribe rules and
[[Page 10945]]
regulations for the administration of the Act.\2\ Section 209 of the
Act is a plenary grant of regulatory authority to issue rules and
regulations necessary or appropriate for the Board to carry out its
role as share insurer for all FICUs.\3\ Other provisions of the Act
confer specific rulemaking authority to address prescribed issues or
circumstances.\4\ Such specific rulemaking authority is set forth in
Section 216(b) about PCA.\5\
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\1\ 12 U.S.C. 1751 et seq.
\2\ 12 U.S.C. 1766(a).
\3\ 12 U.S.C. 1789.
\4\ An example of a provision of the Act that provides the Board
with specific rulemaking authority is Section 207 (12 U.S.C. 1787),
which is a specific grant of authority over share insurance
coverage, conservatorships, and liquidations.
\5\ 12 U.S.C. 1790d(b).
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II. Prompt Corrective Action Background
A. Statutory Provisions
In 1998, Congress enacted the Credit Union Membership Access Act
(``CUMAA'').\6\ CUMAA amended the Federal Credit Union Act (``the
Act'') to require the NCUA to adopt, by regulation, a system of PCA
consisting of minimum capital standards and corresponding remedies to
improve the net worth of federally-insured ``natural person'' credit
unions.\7\ The purpose of PCA is to ``resolve the problems of insured
credit unions at the least possible long-term loss to the [National
Credit Union Share Insurance Fund (`NCUSIF')].'' \8\ The PCA section of
the Act does not apply to corporate credit unions.\9\
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\6\ Pub. L. 105-219, 112 Stat. 913 (1998).
\7\ 12 U.S.C. 1790d et seq.
\8\ 12 U.S.C. 1790d(a)(1).
\9\ 12 U.S.C. 1790d(m). Part 704, which this rulemaking does not
affect, applies capital and PCA requirements to corporate credit
unions.
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The statute designated three principal components of PCA: (1) A
framework combining mandatory actions prescribed by statute with
discretionary actions developed by the NCUA; (2) an alternative system
of PCA to be developed by the NCUA for FICUs which CUMAA defines as
``new;'' and (3) a risk-based net worth requirement to apply to FICUs
which the NCUA defines as ``complex.'' Besides those FICUs that meet
the statutory definition of a ``new'' FICU, CUMAA mandated a framework
of mandatory and discretionary supervisory actions indexed to five
statutory net worth categories. These categories are: ``well
capitalized,'' ``adequately capitalized,'' ``undercapitalized,''
``significantly undercapitalized,'' and ``critically
undercapitalized.'' The mandatory actions and conditions triggering
conservatorship and liquidation are expressly prescribed by
statute.\10\ To supplement the mandatory actions, the statute directed
the NCUA to develop discretionary actions which are ``comparable'' to
the ``discretionary safeguards'' available under Section 38 of the
Federal Deposit Insurance Act, which is the statute that applies PCA to
other federally-insured depository institutions.\11\
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\10\ 12 U.S.C. 1790d(e), (f), (g), and (i); 12 U.S.C.
1786(h)(1)(F); 12 U.S.C. 1786(a)(3)(A)(1).
\11\ 12 U.S.C. 1790d(b)(1)(A); S. Rep. No. 193, 105th Cong., 2d
Sess. 12 (1998) (S.Rep.); H.R. Rep. No. 472, 105th Cong; see also 12
U.S.C. 1831o (Section 38 of the Federal Deposit Insurance Act
setting forth the PCA requirements for banks).
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The Act addresses the earnings retention requirement applicable to
FICUs that are not well capitalized.\12\ Such FICUs are required to
annually set aside as net worth an amount equal to not less than 0.4
percent of their total assets.\13\ The Board has the authority to
decrease the earnings retention requirement.\14\ To do this, the Board
may issue an order if it determines that the decrease is necessary to
avoid a significant redemption of shares and further the purpose of
that PCA provision of the Act. The Act also requires the Board to
periodically review any order issued under that section.\15\
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\12\ 12 U.S.C. 1790d(e).
\13\ 12 U.S.C. 1790d(e)(1).
\14\ 12 U.S.C. 1790d(e)(2).
\15\ 12 U.S.C. 1790d(e)(2)(B).
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Separately, the Act sets forth requirements related to NWRPs, which
FICUs must submit to the NCUA when it becomes undercapitalized.\16\ The
regulatory provisions addressing the procedures and documentation
requirements for NWRPs are codified at 12 CFR 702.111 and are detailed
below.
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\16\ 12 U.S.C. 1790d(f).
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B. Regulatory Provisions
In February 2000, the Board adopted part 702 and subpart L of part
747 establishing a comprehensive system of PCA that combines mandatory
supervisory actions prescribed by the statute with discretionary
supervisory actions developed by the NCUA (2000 final rule).\17\ Each
of these supervisory actions is indexed to the five statutory net worth
categories noted above. The 2000 final rule also permits the NCUA to
impose ``other action to better carry out the purpose of PCA'' than any
discretionary supervisory action available in that category.\18\ In the
proposal that provided the basis for the 2000 final rule, the Board
noted that ``[p]art 702 also amplifies the terms of the statutory
exception to the 0.4 percent minimum set aside. Specifically, the Board
stated that it interprets the phrase by order to indicate that
exceptions to the 0.4 percent statutory minimum are to be granted on a
case-by-case basis.'' \19\ But the Board revisited this interpretation
in the May 2020 interim final rule on this subject, finding that the
Act does not require FICUs to send a specific application or the NCUA
to issue individual orders for each FICU.\20\ The Board also notes that
the current, specific requirements on earnings retention waivers are
based on a regulatory provision rather than a specific statutory
directive.\21\ Thus, issuing a broadly applicable order is consistent
with the overall statutory structure of PCA, which combines both
mandatory and discretionary provisions. During the COVID-19 pandemic,
many FICUs have broadly faced similar economic circumstances that
affect net worth and earnings. Given these experiences, and the
potential for similar volatility and uncertainty in the future, the
Board has determined it is appropriate to implement the changes in this
rule to extend the provisions that authorize a broadly applicable order
to decrease the earnings-retention requirements for multiple FICUs and
to allow a streamlined NWRP in certain circumstances.
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\17\ 65 FR 8560 (Feb. 18, 2000).
\18\ 12 CFR 702.107(b)(9), which applies to undercapitalized
FICUs.
\19\ 64 FR 27090 (May 18, 1999).
\20\ 85 FR 31952, 31954 (May 28, 2020).
\21\ The Board notes that 12 U.S.C. 1790d(e)(1) requires
earnings retention. However, additional provisions in 12 CFR part
702, including those related to timing and the content of the
application, supplement this statutory provision.
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III. Recent Interim Final Rules
A. May 2020 Interim Final Rule
On May 21, 2020, the Board approved an interim final rule that
temporarily amended two provisions in the PCA regulations in part
702.\22\ The first amendment addressed the earnings retention
requirement in Sec. 702.201 for FICUs classified as adequately
capitalized.\23\ The second amendment addressed the NWRPs for FICUs in
Sec. 702.206(c) that have become undercapitalized.\24\
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\22\ 85 FR 31952 (May 28, 2020) (``2020 PCA interim final
rule'').
\23\ As detailed subsequently in this preamble, the NCUA's 2015
final rule (80 FR 66626 (Oct. 29, 2015)) on risk-based capital went
into effect on January 1, 2022, and amended certain provisions in
part 702. As a result, the earnings retention requirement in Sec.
702.201 was moved to Sec. 702.106. Accordingly, this interim final
rule implements the amendment made by the 2020 and 2021 PCA interim
final rules to Sec. 702.201 in Sec. 702.106.
\24\ As detailed subsequently in this preamble, the NCUA's 2015
final rule on risk-based capital went into effect on January 1,
2022, and amended certain provisions in part 702. As a result, the
requirements for NWRPs in Sec. 702.206(c) were moved to Sec.
702.111(c). Accordingly, this interim final rule implements the
amendment made by the 2020 and 2021 PCA interim final rules to Sec.
702.206(c) in current Sec. 702.111(c).
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[[Page 10946]]
The May 2020 interim final rule was issued in response to the
COVID-19 pandemic and sought to ensure that FICUs continue to operate
efficiently, to ensure that FICUs maintain sufficient liquidity, and to
account for the potential temporary increase in shares that FICUs may
experience during the COVID-19 pandemic. Specifically, the Board
believed the temporary amendments in the interim final rule would allow
FICUs to better utilize resources by reducing the administrative burden
associated with a temporary increase in shares. The Board concluded
that the amendments would provide FICUs with necessary additional
flexibility in a manner consistent with the NCUA's responsibility to
maintain the safety and soundness of the credit union system. The Board
made the temporary amendments effective upon publication and specified
that they would remain in place through the end of calendar year 2020.
The Board sought comment on the interim final rule.
On June 5, 2020, pursuant to the changes made by the May 2020
interim final rule, the Board issued a temporary order decreasing the
earnings retention requirement.\25\ Specifically, the Board determined
that, due to economic circumstances caused by the COVID-19 pandemic,
decreasing the earnings retention requirements set forth in the NCUA's
regulations was necessary to avoid a significant redemption of shares.
This action would further the purposes of the PCA regulations.
Accordingly, the Board ordered that any consumer FICU whose net worth
classification, as defined in part 702 of the NCUA's regulations, was
adequately capitalized between March 31, 2020, and December 31, 2020,
could decrease its earnings retention requirement to zero as set forth
in part 702. The order was effective through and including December 31,
2020.\26\
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\25\ <a href="https://www.ncua.gov/regulation-supervision/letters-credit-unions-other-guidance/temporary-order-decreasing-earnings-retention-requirement">https://www.ncua.gov/regulation-supervision/letters-credit-unions-other-guidance/temporary-order-decreasing-earnings-retention-requirement</a>.
\26\ 12 CFR 702.301. The term consumer FICU is being used
instead of the term natural person FICU. This terminology is being
used for clarity, however, the term natural person FICU will
continue to be used for the accompanying regulatory text changes for
consistency with other sections of the NCUA's regulations.
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As noted, the Board solicited comment on the May 2020 interim final
rule. The Board received comments from a credit union trade
association, two state credit union leagues, and an organization of
state credit union supervisors. All commenters supported the interim
final rule, and no commenter opposed it. All commenters stated that the
changes were appropriate, noting that they provided regulatory relief
and flexibility to credit unions to manage their liquidity and address
financial hardships caused by COVID-19.
The interim final rule's two provisions expired on December 31,
2020. All commenters requested that the temporary amendments be
extended or made permanent. One commenter stated that if the economic
dislocation caused by the pandemic lingers, the regulatory relief may
be necessary beyond the end of 2020. Among the recommendations to
extend the effective date were: (1) Making the rule permanent; (2)
extending the applicability until the COVID-19 pandemic was declared
over by the Center for Disease Control or other Federal agency; or (3)
making the end date December 31, 2021.
B. April 2021 Interim Final Rule
Based on information available in December 2020, the Board did not
extend these provisions but continued to consider this issue. In light
of new facts and circumstances, the Board subsequently determined in
April 2021 that it was appropriate to reinstate these amendments to the
PCA regulations in part 702 on a temporary basis.\27\ Specifically,
based on the enactment of the American Rescue Plan Act of 2021 \28\ to
provide direct financial relief to individual taxpayers, the Board
expected that credit unions would receive a significant increase in
deposits due to stimulus checks. Accordingly, the Board determined that
it was appropriate to reinstitute the changes to the PCA provisions
that had been adopted in May 2020. The Board also sought comments in
the April 2021 interim final rule.
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\27\ 86 FR 20258 (Apr. 19, 2021).
\28\ Pub. L. 117-2 (Mar. 11, 2021).
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The NCUA received seven substantive comments in response to the
interim final rule, all of which offered support. Commenters stated
that the interim final rule provides assistance to FICUs that have
experienced pandemic-related hardships; reduces regulatory burden; does
not unduly increase risk to the NCUSIF; allows otherwise healthy FICUs
to focus on serving members without discouraging deposits; provides
FICUs and the NCUA flexibility during a time of unprecedented deposit
growth; and helps ensure the relief is available throughout the
pandemic and resulting economic turbulence. Commenters also addressed
the duration of the extension, requesting that the termination date
either be extended beyond March 31, 2022, or be made permanent.
C. This Interim Final Rule
As noted above, the two temporary PCA-related provisions are set to
expire on March 31, 2022. Based on the agency's experience and lessons
learned during the last two years as well as the ongoing economic
fallout related to the COVID-19 pandemic, the Board has determined that
it is appropriate to issue another interim final rule to extend these
provisions until March 31, 2023. Share growth remains unusually high
compared to pre-pandemic levels. Specifically, share growth from
September 30, 2020, to September 30, 2021, exceeded 14 percent.\29\ The
COVID-19 pandemic and Congressional responses to it were the initial
impetus for the two previous interim final rules that temporarily
amended the two PCA provisions. While the environment that precipitated
these temporary amendments has evolved, substantial uncertainties about
the continued impact of the pandemic and the evolving economic
environment remain. Macroeconomic uncertainty has been particularly
significant over the last few months. Inflation, geopolitical tensions,
and a new COVID-19 variant have introduced new economic challenges.
Ultimately, the combined effects of these factors on share growth and
net worth ratios could be quite significant, leading to potentially
greater volatility in those measures in the year ahead.
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\29\ Average annual share growth in the 10 years preceding the
pandemic was only 5.8 percent.
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Also, the flexibilities provided by these temporary amendments have
proven to benefit both the NCUA and FICUs. The Board believes the
agency can use these flexibilities judiciously to address challenges
posed by the current environment and potential issues that may arise
while the rule remains in effect without imposing any additional safety
and soundness risk. Accordingly, the Board believes it is appropriate
to extend these provisions until March 31, 2023. The Board requests
comments on all aspects of this interim final rule.
The Board notes that this interim final rule incorporates new
amendatory language given that the agency's 2015 final rule on risk-
based capital amended certain provisions in part 702.\30\ Specifically,
that final rule amended part 702 by removing Sec. Sec. 702.201 and
702.206 and moving them, mostly unchanged, to new Sec. Sec. 702.106
and
[[Page 10947]]
702.111. As a result, the current regulatory text does not reflect the
April 2021 interim final rule. Because the Board is extending this
authority, it is revising the affected provisions to include these
authorities to run from the effective date of this interim final rule
until March 31, 2023, to ensure there is no interruption in the
flexibility.
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\30\ 80 FR 66626 (Oct. 29, 2015).
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IV. Section-by-Section Analysis
A. Section 702.106--Earnings Retention Requirement for ``Adequately
Capitalized'' FICUs
A FICU that is classified as ``adequately capitalized'' or lower
must increase the dollar amount of its net worth quarterly by an amount
equivalent to at least 1/10th of a percent of its total assets and must
retain at least that amount (for a total of 0.4 percent annually) every
quarter until it is ``well capitalized.'' \31\ The purpose of this
provision is to restore a FICU that is less than well capitalized to a
well-capitalized position in an incremental manner. The Board notes
that newly chartered FICUs are excluded from this relief given that the
relief is intended for FCUs experiencing growth as a result of the
COVID-19 pandemic.
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\31\ This relief is provided for FICUs that are required to
retain earnings under Sec. Sec. 702.106, 702.107, 702.108, and
702.109.
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As discussed previously, current Sec. 702.106 provides that the
Board may waive this requirement on a case-by-case basis upon
application by an affected FICU. The Act provides broader authority for
the Board to issue an order to waive this requirement and does not
require an application or individual orders.\32\ In response to recent
economic conditions, there were previous infusions of stimulus funds
and an increased propensity for consumers to save due to the variety of
pandemic-related circumstances. Thus, the Board has determined that it
is appropriate to extend its decision to amend Sec. 702.106
temporarily to provide express regulatory authority for the Board to
issue a single order waiving the earnings retention requirement for all
FICUs that are classified as adequately capitalized during this time.
As with the previous orders issued under the May 2020 and April 2021
interim final rules, the Board would provide in the order that the
applicable Regional Director has authority to subsequently require an
application if a particular FICU poses undue risk to the NCUSIF or
exhibits material safety and soundness concerns. Extending this
regulatory provision will allow the Board to respond to circumstances
broadly affecting many FICUs with a single issuance rather than
numerous individual waiver approvals. This provision will expire on
March 31, 2023.
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\32\ See 1 U.S.C. 1 (providing that unless context indicates
otherwise, words importing the singular also apply to several
persons or parties).
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In a separate action that will be published on the NCUA website
after this interim final rule becomes effective, the Board intends to
issue the order described above, which will be applicable to adequately
capitalized FICUs and will grant relief from the earnings retention
requirement without requiring those FICUs to submit applications and
receive individual waiver approvals, subject to the qualification noted
above.
The Board is exercising this authority under 12 U.S.C. 1790d(e)(2)
to enhance flexibility in the application of the earnings retention
requirement. The Board believes that this relief remains necessary to
avoid a reduction of shares and thus retain system liquidity and
capital adequacy, thereby furthering the purpose of PCA. Economic
uncertainty caused by the COVID-19 pandemic and its effect on the
economy have resulted in significant asset growth within the credit
union industry. This growth may impact the PCA classification of many
credit unions, resulting in an increased number of credit unions being
subject to the earnings retention requirement. Based on the September
30, 2021, Call Report, 223 credit unions are classified as less than
well capitalized and are thus subject to the earnings retention
requirement. Of those, 42 percent report negative earnings as of
September 30, 2021. With continued uncertainty caused by the COVID-19
pandemic, the credit union system continues to experience the effects
of pandemic-related share growth and additional credit unions may be
subjected to the earnings retention requirement. A comparison of Call
Report data from March 31, 2020, to September 30, 2021, reveals 101
credit unions experienced a decline in their PCA classification from
``well capitalized'' to ``adequately capitalized'' from March 31, 2020,
despite having reported a positive return on average assets in
September 2021. This illustrates the continued impact of the flight to
safety experienced by the industry.
Specifically, during the time period that the two interim final
rules have been effective, the Board issued orders providing that any
consumer FICU that had a net worth classification, as defined in part
702 of the NCUA's regulations, of adequately capitalized could decrease
its earnings-retention requirement to zero as set forth in part 702.
These orders enabled FICUs to better utilize resources by eliminating
the need to request a waiver of the earnings-retention requirement from
their Regional Director. While the interim final rules and earnings-
retention orders have been in effect, the number of FICUs that
benefitted from this relief has varied from an estimated 77 FICUs as of
June 2020 to as many as 179 as of June 30, 2021, based on Call Report
data. The FICUs benefitting from the earnings-retention requirement
reduction have assets representing less than one percent of industry
assets as of September 30, 2021. Accordingly, the Board believes that
this amendment and the implementing orders have not posed an undue risk
to the NCUSIF.
The Board further notes that FICU operations continue to be
significantly disrupted due to social distancing practices, remote
work, supply chain disruption, and related complications. Also, the
unprecedented amount of fiscal stimulus and decreased spending
opportunities have led to a significant increase in the personal saving
rate over the last two years. This, in turn, has resulted in
extraordinary share growth, leaving net worth ratios artificially
depressed.
Given current macroeconomic conditions, downward pressure on net
worth ratios will likely persist in the coming year. Although consumer
spending has rebounded somewhat, the amount of excess savings--the
accumulation of savings over and above pre-pandemic levels--remains
significant and is not likely to abate any time soon. Consumer spending
on services--the most significant share of expenditures--continues to
lag, as the pandemic is resulting in consumers spending less on travel
and other activities that are highly social and could potentially
expose them to COVID-19. Also, strong gains in employment are
supporting incomes and certain loan forbearance programs--which
decrease debt service payments--still remain in effect.
By avoiding the need for numerous waiver applications and
responses, the simplified procedure that this interim final rule
extends will reduce the administrative burden on FICUs and the NCUA.
The Board notes qualifications in the planned order regarding FICUs
that pose undue risk or material safety and soundness concerns will
help ensure that the purposes of PCA are maintained during this time.
B. Section 702.111--NWRPs; Contents of NWRP
As for NWRPs, the Act provides a broad directive that a FICU that
is less than adequately capitalized must submit
[[Page 10948]]
an applicable NWRP to the NCUA. The NCUA, by regulation, has provided
additional details to supplement this statutory provision. Section
702.111(a) of the NCUA's regulations specifies the schedule for filing
the plan, and Sec. 702.111(c) of the NCUA's regulations outlines the
contents of a NWRP.
The Board has decided that it is appropriate to continue waiving
the NWRP content requirements for FICUs that become classified as
undercapitalized predominantly as a result of share growth for Call
Reports filed for the periods effective March 31, 2022, June 30, 2022,
September 30, 2022, and December 31, 2022. In these cases, the FICU may
submit a significantly simpler NWRP to the applicable Regional Director
noting that the FICU's PCA classification fell to undercapitalized
because of share growth. Specifically, a FICU would be required to
attest that its reduction in capital was caused by share growth and
that such share growth is a temporary condition due to the COVID-19
pandemic. Federally insured, state-chartered credit unions must comply
with applicable state requirements when submitting NWRPs for state
supervisory authority approval.
When reviewing NWRPs submitted under this authority, the Regional
Director will determine if the decrease in the net worth ratio was
predominantly a result of share growth. To assess the reason for the
decrease, the Regional Director will analyze the numerator and
denominator of the net worth ratio. If there is no change, or if there
is an increase in the numerator and an increase in the denominator,
this would indicate that the decrease in the net worth ratio was due to
share growth. If there is an increase in the denominator and a decrease
in the numerator, the Regional Director will analyze whether the
decrease in the numerator would have caused the FICU to fall to a lower
net worth classification if there were no change in the denominator. If
so, the FICU's net worth decline would not be predominantly due to
share growth, and thus the FICU would not be eligible to submit a
streamlined NWRP.
The Board has determined it is appropriate to extend this
regulatory flexibility for NWRPs given the continued economic
disruption and the corresponding uncertainty caused by the COVID-19
pandemic.
Since the Board published the interim final rule on May 28, 2020,
permitting FICUs that become classified as undercapitalized as a result
of share growth to submit a streamlined NWRP, fourteen credit unions
have submitted such streamlined NWRPs. Of the fourteen streamlined
NWRPs submitted, nine NWRPs were approved, and five streamlined NWRPs
were denied. The denials of the streamlined NWRPs were based on those
FICUs' decline in PCA classification being the result of other economic
factors, and not predominantly the result of share growth. Further, the
Board notes that the FICUs submitting streamlined NWRPs were generally
smaller, or non-complex credit unions, thus presenting limited risk to
the NCUSIF.
Based on September 30, 2021, Call Report data, 59 FICUs would
require a NWRP to be in place or be submitted for approval based on
their PCA classification. This is an increase of over 22 percent from
the 48 credit unions required to have a NWRP to be in place or be
submitted for approval based on December 31, 2020, Call Report data,
illustrating an upward trend.
The streamlined NWRP will provide sufficient information, based on
current economic conditions, to determine if the credit union is
prepared to manage the volatility associated with the COVID-19 pandemic
and the impact on the FICU's financial and operational position.
As it concluded in the April 2021 interim final rule, the Board
continues to believe it can fulfill its statutory duty to evaluate the
NWRPs even if the plans are more concise and streamlined than plans
submitted before the COVID-19 pandemic. Such a streamlined approach is
acceptable because the more extensive information required under the
current requirements may not be practicable or useful under the current
situation. The Board believes it can determine if a plan is acceptable
even if it lacks some of the detailed submissions that the permanent
regulatory provision requires.
A FICU's eligibility to submit a streamlined NWRP to the NCUA will
be determined based on the effective date of the credit union's PCA
classification, as defined in part 702 of the NCUA's regulations.\33\
The streamlined NWRP will apply on a case-by-case basis to FICUs that
become classified as undercapitalized (those that have a net worth
ratio of 4 percent to 5.99 percent) predominantly as a result of share
growth. To further clarify, a FICU that has a declined PCA
classification will be permitted to submit a streamlined NWRP as
reflected in the following table.
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\33\ 12 CFR part 702.
----------------------------------------------------------------------------------------------------------------
Call Report effective sate PCA classification sate Streamlined NWRP permissible
----------------------------------------------------------------------------------------------------------------
March 31, 2022.......................... April 30, 2022................. Yes.
June 30, 2022........................... July 30, 2022.................. Yes.
September 30, 2022...................... October 31, 2022............... Yes.
December 31, 2022....................... January 30, 2023............... Yes.
March 31, 2023.......................... April 30, 2023................. No.
----------------------------------------------------------------------------------------------------------------
V. Regulatory Procedures
A. Administrative Procedure Act
The Board is issuing the interim final rule without prior notice
and the opportunity for public comment and the delayed effective date
ordinarily prescribed by the Administrative Procedure Act (APA).\34\
Pursuant to the APA, general notice and the opportunity for public
comment are not required about a rulemaking when an ``agency for good
cause finds (and incorporates the finding and a brief statement of
reasons therefor in the rules issued) that notice and public procedure
thereon are impracticable, unnecessary, or contrary to the public
interest.'' \35\
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\34\ 5 U.S.C. 553
\35\ 5 U.S.C. 553(b)(3).
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The Board believes the public interest is best served by
implementing the interim final rule immediately upon publication in the
Federal Register. The Board notes that the economic disruption caused
by the COVID-19 pandemic is unprecedented. Even after nearly two years,
the situation continues to evolve, thereby making it difficult to
anticipate how pandemic-induced disruptions will manifest themselves
within the financial system and how individual FICUs may be impacted.
The continued relief measures, including the most recent infrastructure
legislation, combined with the flight to safety and
[[Page 10949]]
reduced spending, places a strain on FICU net worth. To disrupt or end
the regulatory relief in place would conflict with preserving the
safety and soundness of the industry. Because the unprecedented
expansionary monetary and fiscal policies, combined with precautionary
savings, is placing a strain on FICU net worth, the Board believes it
has good cause to determine that ordinary notice and public procedure
are impracticable and that moving expeditiously in the form of an
interim final rule is in the public's best interests and the FICUs that
serve that public. The temporary regulatory changes are necessary steps
designed to alleviate potential liquidity and resource strains
including stress on capital adequacy and are undertaken with expedience
to ensure the maximum intended effects are in place at the earliest
opportunity.
The Board values public input in its rulemakings and, to that end,
believes that regulations are enhanced when the public has the
opportunity to comment. Accordingly, the Board is soliciting comments
on this interim final rule. The amendments made by the interim final
rule will automatically expire on March 31, 2023 and are limited in
number and scope. For these reasons, the Board finds there is good
cause consistent with the public interest to issue the rule without
advance notice and comment.
The APA also requires a 30-day delayed effective date, except for
(1) substantive rules which grant or recognize an exemption or relieve
a restriction; (2) interpretative rules and statements of policy; or
(3) as otherwise provided by the agency for good cause.\36\ Because the
rule relieves currently codified limitations and restrictions, the
interim final rule is exempt from the APA's delayed effective date
requirement. As an alternative to making the rule effective without the
30-day delayed effective date, the Board finds there is good cause to
do so for the same reasons set forth above regarding advance notice and
opportunity for comment.
---------------------------------------------------------------------------
\36\ 5 U.S.C. 553(d).
---------------------------------------------------------------------------
B. Congressional Review Act.
For purposes of the Congressional Review Act (CRA),\37\ the Office
of Management and Budget (OMB) decides whether a final rule constitutes
a ``major'' rule. If the OMB deems a rule to be ``major,'' the CRA
generally provides that the rule may not take effect until at least 60
days following its publication.
---------------------------------------------------------------------------
\37\ 5 U.S.C. 801-808.
---------------------------------------------------------------------------
The CRA defines a ``major rule'' as any rule that the Administrator
of the OMB's Office of Information and Regulatory Affairs finds has
resulted in, or is likely to result in, (A) an annual effect on the
economy of $100,000,000 or more; (B) a major increase in costs or
prices for consumers, individual industries, Federal, State, or local
government agencies or geographic regions; or (C) significant adverse
effects on competition, employment, investment, productivity,
innovation, or on the ability of United States-based enterprises to
compete with foreign-based enterprises in domestic and export
markets.\38\
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\38\ 5 U.S.C. 804(2).
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For the same reasons noted above, the Board is adopting the interim
final rule without the delayed effective date generally prescribed
under the CRA. The delayed effective date required by the CRA does not
apply to any rule for which an agency for good cause finds (and
incorporates the finding and a brief statement of reasons therefor in
the rule issued) that notice and public procedure thereon are
impracticable, unnecessary, or contrary to the public interest.\39\ In
light of current market uncertainty, the Board believes that delaying
the effective date of the rule would be contrary to the public interest
for the same reasons discussed above.
---------------------------------------------------------------------------
\39\ 5 U.S.C. 808.
---------------------------------------------------------------------------
As required by the CRA, the Board will submit the final rule and
other appropriate reports to Congress and the Government Accountability
Office for review.
C. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq.)
requires OMB to approve all collections of information by a Federal
agency from the public before they can be implemented. Respondents are
not required to respond to any collection of information unless it
displays a valid OMB control number. The information collection
requirements prescribed by the May 2020 interim final rule under PCA
remains in effect and are cleared under OMB control number 3133-0154.
D. Executive Order 13132
Executive Order 13132 \40\ encourages independent regulatory
agencies to consider the impact of their actions on state and local
interests. The NCUA, an independent regulatory agency, as defined in 44
U.S.C. 3502(5), voluntarily complies with the Executive order to adhere
to fundamental federalism principles. The interim final rule will not
have substantial direct effects on the states, on the relationship
between the National Government and the states, or on the distribution
of power and responsibilities among the various levels of government.
The Board has thus determined that this rule does not constitute a
policy that has federalism implications for purposes of the Executive
order. But the Board notes that it has consulted with state regulators,
as described in the PCA section of the Act, and will continue to do so
during the comment period and implementation of this interim final
rule.\41\
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\40\ Executive Order 13132 on Federalism was signed by former
President Clinton on August 4, 1999, and subsequently published in
the Federal Register on August 10, 1999 (64 FR 43255).
\41\ 12 U.S.C. 1790d(I).
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E. Assessment of Federal Regulations and Policies on Families
The NCUA has determined that this interim final rule will not
affect family well-being within the meaning of Section 654 of the
Treasury and General Government Appropriations Act, 1999.\42\
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\42\ Public Law 105-277, 112 Stat. 2681 (1998).
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F. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) generally requires that when
an agency issues a proposed rule or a final rule pursuant to the APA
\43\ or another law, the agency must prepare a regulatory flexibility
analysis that meets the requirements of the RFA and publish such
analysis in the Federal Register.\44\ Specifically, the RFA normally
requires agencies to describe the impact of a rulemaking on small
entities by providing a regulatory impact analysis. For purposes of the
RFA, the Board considers FICUs with assets less than $100 million to be
small entities.\45\
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\43\ 5 U.S.C. 553(b).
\44\ 5 U.S.C. 603, 604.
\45\ NCUA Interpretive Ruling and Policy Statement (IRPS) 15-1.
80 FR 57512 (Sept. 24, 2015).
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As discussed previously, consistent with the APA,\46\ the Board has
determined for good cause that general notice and opportunity for
public comment is unnecessary, and thus, the Board is not issuing a
notice of proposed rulemaking. Rules that are exempt from notice and
comment procedures are also exempt from the RFA requirements, including
conducting a regulatory flexibility analysis, when among other things
the agency for good cause finds that notice and public procedure are
impracticable, unnecessary, or contrary to the public interest.
Accordingly, the Board has concluded that the RFA's requirements
[[Page 10950]]
relating to initial and final regulatory flexibility analysis do not
apply.
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\46\ 5 U.S.C. 553(b)(3)(B).
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Nevertheless, the Board seeks comment on whether, and to what
extent, the interim final rule would affect a significant number of
small entities.
List of Subjects in 12 CFR Part 702
Credit unions, Reporting and recordkeeping requirements.
By the NCUA Board, this 17th day of February 2022.
Melane Conyers-Ausbrooks,
Secretary of the Board.
For the reasons set forth in the preamble, the Board is amending 12
CFR part 702 as follows:
PART 702--CAPITAL ADEQUACY
0
1. The authority citation for part 702 continues to read as follows:
Authority: 12 U.S.C. 1766(a), 1790d.
0
2. Amend Sec. 702.106 by redesignating paragraphs (b)(1) and (2) as
paragraphs (b)(1)(i) and (ii), respectively, and adding a new paragraph
(b)(2) to read as follows:
Sec. 702.106 Prompt corrective action for adequately capitalized
credit unions.
* * * * *
(b) * * *
(2) Notwithstanding paragraph (a) of this section, from February
28, 2022, until March 31, 2023, for a credit union that is adequately
capitalized:
(i) The NCUA Board may issue an administrative order specifying
temporary revisions to the earnings retention requirement, to the
extent the NCUA Board determines that such lesser amount--
(A) Is necessary to avoid a significant redemption of shares; and
(B) Would further the purpose of this part.
(ii) Despite the issuance of an administrative order under
paragraph (b)(2) of the section, the Regional Director may require a
credit union to submit an earnings retention waiver under paragraph
(b)(1) if the credit union poses an undue risk the National Credit
Union Share Insurance Fund or exhibits material safety and soundness
concerns.
* * * * *
0
3. Amend Sec. 702.111 by adding paragraph (c)(4) to read as follows:
Sec. 702.111 Net worth restoration plans (NWRP).
* * * * *
(c) * * *
(4) Notwithstanding paragraphs (c)(1), (2), and (3) of this
section, the Board may permit a credit union that is undercapitalized
to submit to the Regional Director a streamlined NWRP attesting that
its reduction in capital was caused by share growth and that such share
growth is a temporary condition due to the COVID-19 pandemic. A
streamlined NWRP plan may be accepted from February 28, 2022, until
March 31, 2023.
* * * * *
[FR Doc. 2022-03845 Filed 2-25-22; 8:45 am]
BILLING CODE 7535-01-P
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