Subchapter A—Regulations Affecting Credit Unions

SUBCHAPTER A—REGULATIONS AFFECTING CREDIT UNIONS

PART 700—DEFINITIONS shares of members and non-members, are considered liabilities. Sec. (f) Paid-in and unimpaired capital and 700.1 Scope. surplus means shares plus post-closing, 700.2 Definitions. undivided earnings. This does not in- AUTHORITY: 12 U.S.C. 1752, 1757(6), 1766. clude regular reserves or special reserves required by law, regulation or § 700.1 Scope. special agreement between the credit The definitions in § 700.2 apply to union and its regulator or share in- terms used in this chapter. Many addi- surer. ‘‘Paid-in and unimpaired capital tional definitions appear in the parts and surplus’’ for purposes of the Cen- where the terms are used. tral Liquidity Facility is defined in § 725.2(o) of this chapter. [66 FR 65624, Dec. 20, 2001] (g) Regional Director means the representative of the Administration in § 700.2 Definitions. the designated geographical area in As used in this chapter: which the office of the Federal credit (a) Act means the Federal Credit union is located. Union Act (73 Stat. 628, 84 Stat. 944, 12 (h) Regional Office means the office of U.S.C. 1751 through 1790). the Administration located in the des- (b) Administration means the National ignated geographical areas in which Credit Union Administration. the office of the Federal credit union is (c) Board means the Board of the Na- located. tional Credit Union Administration. (i) State means a State of the United (d) Credit Union means a credit union States, the District of Columbia, any of chartered under the Federal Credit the several territories and possessions Union Act or, as the context permits, of the United States, the Panama under the laws of any State. Canal Zone, and the Commonwealth of (e)(1) Insolvency. A credit union will Puerto Rico. be determined to be insolvent when the (j) Unimpaired capital and surplus total amount of its shares exceeds the means the same as ‘‘paid-in and present cash value of its assets after unimpaired capital and surplus,’’ as de- providing for liabilities unless: fined in paragraph (f) of this section. (i) It is determined by the Board that the facts that caused the deficient [36 FR 23794, Dec. 15, 1971; 37 FR 329, Jan. 11, share-asset ratio no longer exist; and 1972, as amended at 37 FR 10342, May 20, 1972; (ii) The likelihood of further depre- 45 FR 47121, July 14, 1980; 54 FR 48234, Nov. 22, ciation of the share-asset ratio is not 1989; 54 FR 52015, Dec. 20, 1989; 55 FR 1794, probable; and Jan. 19, 1990; 57 FR 47985, Oct. 21, 1992; 58 FR 40042, July 27, 1993; 65 FR 44966, July 20, 2000. (iii) The return of the share-asset Redesignated and amended at 66 FR 65624, ratio to its normal limits within a rea- Dec. 20, 2001; 73 FR 30477, May 28, 2008] sonable time for the credit union concerned is probable; and (iv) The probability of a further po- PART 701—ORGANIZATION AND tential loss to the insurance fund is OPERATION OF FEDERAL CREDIT negligible. UNIONS (2) For purposes of this section, the following definitions are used: Sec. (i) Cash value of assets. Recorded 701.1 Federal credit union chartering, field value will be considered the cash value of membership modifications, and conversions. of any asset account providing accept- 701.2 Federal credit union bylaws. ed accounting principles and practices 701.3 Member inspection of credit union are followed and the provisions of law, books, records, and minutes. regulation, and bylaws are met. 701.4–5 [Reserved] (ii) Liabilities. Recorded liabilities 701.6 Fees paid by Federal credit unions. which are due and payable, excluding 701.7–701.13 [Reserved]

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701.14 Change in official or senior executive § 701.2 Federal credit union bylaws. officer in credit unions that are newly chartered or are in troubled condition. (a) Federal credit unions must oper- 701.15–701.18 [Reserved] ate in accordance with their approved 701.19 Benefits for employees of Federal bylaws. The Federal Credit Union By- credit unions. laws are hereby published as appendix 701.20 Suretyship and guaranty. A to part 701 pursuant to 5 U.S.C. 701.21 Loans to members and lines of credit 552(a)(1) and accompanying regula- to members. tions. Federal credit unions may adopt 701.22 Loan participation. amendments to their bylaws as pro- 701.23 Purchase, sale, and pledge of eligible vided in the Bylaws, with the approval obligations. 701.24 Refund of interest. of the Board. 701.25 Charitable contributions and dona- (b) Copies of the Federal Credit tions. Union Bylaws may be obtained at 701.26 Credit union service contracts. http://www.ncua.gov or by request ad- 701.27–701.29 [Reserved] dressed to [email protected] or Na- 701.30 Services for nonmembers within the tional Credit Union Administration, field of membership. 1775 Duke Street, Alexandria, VA 22314. 701.31 Nondiscrimination requirements. (c) The National Credit Union Ad- 701.32 Payment on shares by public units ministration may issue revisions or and nonmembers. amendments of the Federal Credit 701.33 Reimbursement, insurance, and in- Union Bylaws from time to time. An demnification of officials and employees. 701.34 Designation of low income status; Ac- historic file of amendments or revi- ceptance of secondary capital accounts sions is maintained and made available by low-income designated credit unions. for inspection at the National Credit 701.35 Share, share draft, and share certifi- Union Administration, 1775 Duke cate accounts. Street, Alexandria, VA 22314. 701.36 FCU ownership of fixed assets. [72 FR 61500, Oct. 31, 2007] 701.37 Treasury tax and loan depositaries; depositaries and financial agents of the Government. § 701.3 Member inspection of credit 701.38 Borrowed funds from natural persons. union books, records, and minutes. 701.39 Statutory lien. (a) Member inspection rights. A group APPENDIX A TO PART 701—FEDERAL CREDIT of members of a Federal credit union UNION BYLAWS has the right, upon submission of a pe- APPENDIX B TO PART 701—CHARTERING AND tition to the credit union as described FIELD OF MEMBERSHIP MANUAL in paragraph (b) of this section, to in- AUTHORITY: 12 U.S.C. 1752(5), 1755, 1756, 1757, spect and copy nonconfidential por- 1758, 1759, 1761a, 1761b, 1766, 1767, 1782, 1784, tions of the credit union’s: 1786, 1787, 1789. Section 701.6 is also author- (1) Accounting books and records; ized by 15 U.S.C. 3717. Section 701.31 is also and authorized by 15 U.S.C. 1601 et seq.; 42 U.S.C. (2) Minutes of the proceedings of the 1981 and 3601–3610. Section 701.35 is also au- credit union’s members, board of direc- thorized by 42 U.S.C. 4311–4312. tors, and committees of directors. § 701.1 Federal credit union char- (b) Petition for inspection. The petition tering, field of membership modi- must describe the particular records to fications, and conversions. be inspected and state a proper purpose for the inspection, that is, a purpose National Credit Union Administra- related to the protection of the mem- tion policies concerning chartering, bers’ financial interests in the credit field of membership modifications, and union. The petition must state that the conversions are set forth in Interpre- petitioners as a whole, or certain tive Ruling and Policy Statement 08–2, named petitioners, agree to pay the di- Chartering and Field of Membership rect and reasonable costs associated Manual (IRPS 08–2) published as appen- with search and duplication of re- dix B to this part. The Chartering and quested material. The petition must Field of Membership Manual also is also state that the inspection is not de- available on-line at http:// sired for any purpose other than the www.ncua.gov. stated purpose; that the members sign- [73 FR 73398, Dec. 2, 2008] ing the petition will not sell or offer

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for sale any information obtained from to inspect any portion of the books, the credit union; and that the members records, or minutes of a Federal credit signing the petition have not within union if: five years preceding the signature date (1) Federal law or regulation pro- sold or offered for sale any information hibits disclosure of that portion; acquired from the credit union or aided (2) The publication of that portion or abetted any person in procuring any could cause the credit union predict- information from the credit union for able and substantial financial harm; purposes of sale. The petition must (3) That portion contains nonpublic name one member, and one alternate personal information as defined in member, who will represent the petitioners on issues such as inspection § 716.3 of this part; or procedures, costs, and potential dis- (4) That portion contains information putes. At least one percent of the cred- about credit union employees or offi- it union’s members, with a minimum of cials the disclosure of which would con- 20 members and a maximum of 500 stitute a clearly unwarranted invasion members, must sign the petition. Each of personal privacy. member who signs the petition must (e) Costs. A Federal credit union may have been a member of the credit union charge petitioners the direct and rea- for at least 180 days at the time the pe- sonable costs associated with search titioners submit the petition to the and duplication. The credit union may credit union. not charge for other costs, including (c) Inspection procedures. (1) A Federal indirect costs or attorney’s fees. credit union must respond to peti- (f) Dispute resolution. (1) In the event tioners within 14 days of receiving a pe- of a dispute between a federal credit tition. In its response, a credit union union and its members concerning a must inform petitioners either that it petition for inspection or the associ- will provide inspection of the requested ated costs, either party may submit material and, if so, when, or, if a credit the dispute to the regional director. union is going to withhold all or part The regional director, after obtaining of the requested material, it must in- the views of both parties, will direct form petitioners what part of the requested material it intends to withhold the credit union either to withhold the and the reasons for withholding the re- disputed materials or to make them quested material. As soon as possible available for member inspection and after receiving a petition, a credit copying. The regional director may union must schedule inspection and place conditions upon release. The de- copying of nonconfidential requested cision of the regional director is a final material it determines petitioners may agency decision and is not appealable inspect and copy. to the Board. (2) Inspection may be made in person (2) The regional director has the dis- or by agent or attorney and at any rea- cretion to refer any dispute to the sonable time or times. The credit union credit union’s supervisory committee may, at its option, skip inspection and for review and resolution. If petitioners deliver copies of requested documents are not satisfied with the supervisory directly to the petitioners. Member in- committee’s response, they may resub- spection rights under this section are mit the dispute to the regional direc- in addition to any other member in- tor. spection rights afforded by the credit union’s charter or bylaws or other Fed- [72 FR 56253, Oct. 3, 2007] eral law or Federal regulation. (3) If the credit union denies inspec- §§ 701.4–701.5 [Reserved] tion because the petitioners have failed to obtain the minimum number of § 701.6 Fees paid by Federal credit valid signatures, the credit union must unions. inform the petitioners which signa- (a) Basis for assessment. Each calendar tures were not valid and why. year or as otherwise directed by the (d) Confidential books, records, and Board, each Federal credit union shall minutes. Members do not have the right

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pay to the Administration for the cur- (4) Liquidations. A Federal credit rent National Credit Union Adminis- union placed in liquidation will not pay tration fiscal year (January 1 to De- any operating fee after the date of liq- cember 31) an operating fee in accord- uidation. ance with a schedule as fixed from time (c) Notification. Each Federal credit to time by the National Credit Union union shall be notified at least 30 days Administration Board based on the in advance of the schedule of fees to be total assets of each Federal credit paid. A Federal credit union may sub- union as of December 31 of the pre- mit written comments to the Board for ceding year or as otherwise determined consideration regarding the existing pursuant to paragraph (b) of this sec- fee schedule. Any subsequent revision tion. The operating fee is determined to the schedule shall be provided to based on total assets less the assets created on the books of a natural per- each Federal credit union at least 15 son Federal credit union by invest- days before payment is due. ments made in a corporate credit union (d) Assessment of Administrative Fee under the Credit Union System Invest- and Interest for Delinquent Payment. ment Program or the Credit Union Each Federal credit union shall pay to Homeowners Affordability Relief Pro- the Administration an administrative gram. fee, the costs of collection, and interest (b) Coverage. The operating fee shall on any delinquent payment of its oper- be paid by each Federal credit union ating fee. A payment will be considered engaged in operations as of January 1 delinquent if it is postmarked later of each calendar year, except as other- than the date stated in the notice to wise provided by this paragraph. the credit union provided under (1) New charters. A newly chartered § 701.6(c). The National Credit Union Federal credit union will not pay an Administration may waive or abate operating fee until the year following charges or collection of interest if cir- the first full calendar year after the cumstances warrant. date chartered. (1) The administrative fee for a delin- (2) Conversions. A state chartered quent payment shall be an amount credit union that converts to Federal fixed from time to time by the Na- charter will pay an operating fee in the tional Credit Union Administration year following the conversion. Federal Board and based upon the administra- credit unions converting to state charter will not receive a refund of the op- tive costs of such delinquent payments erating fee paid to the Administration to the Administration in the preceding in the year in which the conversion year. takes place. (2) The costs of collection shall be (3) Mergers. A continuing Federal the actual hours expended by Adminis- credit union that has merged with an- tration personnel multiplied by the av- other credit union will pay an oper- erage hourly salary and benefits costs ating fee in the following year based on of such personnel as determined by the the combined total assets of the National Credit Union Administration merged credit union and the con- Board. tinuing Federal credit union as of De- (3) The interest rate charged on any cember 31 of the year in which the delinquent payment shall be the U.S. merger took place. For purposes of this Department of the Treasury Tax and requirement, a purchase and assump- Loan Rate in effect on the date when tion transaction wherein the con- the payment is due as provided in 31 tinuing Federal credit union purchases U.S.C. 3717. all or essentially all of the assets of an- (4) If a credit union makes a com- other credit union shall be deemed a bined payment of its operating fee and merger. Federal credit unions merging its share insurance deposit as provided with other Federal or state credit unions will not receive a refund of the in § 741.4 of this chapter and such pay- operating fee paid to the Administra- ment is delinquent, only one adminis- tion in the year in which the merger trative fee will be charged and interest took place.

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will be charged on the total combined (C) A 4 or 5 Camel composite rating payment. by NCUA based on core workpapers received from the state supervisor in the [44 FR 27380, May 10, 1979, as amended at 50 FR 20745, May 20, 1985; 55 FR 1799, Jan. 19, case of a federally insured, state-char- 1990; 59 FR 33421, June 29, 1994; 60 FR 58503, tered credit union in a state that does Nov. 28, 1995; 74 FR 29936, June 24, 2009] ot use the Camel system. In this case, the state supervisor will be notified in §§ 701.7–701.13 [Reserved] writing by the Regional Director in the Region in which the credit union is lo- § 701.14 Change in official or senior cated that the credit union has been executive officer in credit unions designated by NCUA as a troubled in- that are newly chartered or are in stitution; troubled condition. (ii) Has been granted assistance as (a) Statement of scope and purpose. outlined under sections 208 or 216 of the Section 212 of the Federal Credit Union Federal Credit Union Act. Act (12 U.S.C. 1790a) sets forth condi- (4) In the case of a corporate credit tions under which a credit union must union, ‘‘troubled condition’’ means any notify NCUA in writing of any pro- insured corporate credit union that has posed changes in its board of directors, one or a combination of the following committee members or senior execu- conditions: tive staff. The regulation only applies (i) Has been assigned in cases of newly chartered credit (A) A 4 or 5 Corporate Risk Informa- unions and credit unions in troubled tion System (CRIS) rating by NCUA in condition. either the Financial Risk or Risk Man- (b) Definitions. For the purposes of agement composites, in the case of a this section: federal corporate credit union, or (1) Committee member means any indi- (B) An equivalent 4 or 5 CRIS rating vidual who serves as an official of the in either the Financial Risk or Risk credit union in the capacity of a credit Management composites by the state committee member or supervisory supervisor in the case of a federally in- committee member. sured, state-chartered corporate credit (2) Senior executive officer means a union in a state that has adopted the credit union’s chief executive officer CRIS system, or an equivalent 4 or 5 (typically this individual holds the CAMEL composite rating by the state title of president or treasurer/man- supervisor in the case of a federally in- ager), any assistant chief executive of- sured, state-chartered corporate credit ficer (e.g., any assistant president, any union in a state that uses the CAMEL vice president or any assistant treas- system, or urer/manager) and the chief financial (C) A 4 or 5 CRIS rating in either the officer (controller). The term ‘‘senior Financial Risk or Risk Management executive officer’’ also includes em- composites by NCUA based on core ployees of an entity, such as a con- workpapers received from the state su- sulting firm, hired to perform the func- pervisor in the case of a federally in- tions of positions covered by the regu- sured, state-chartered credit union in a lation. state that does not use either the CRIS (3) Except as provided in paragraph or CAMEL system. In this case, the (b)(4) of this section for corporate cred- state supervisor will be notified in it unions, ‘‘troubled condition’’ means writing by the Director of the Office of any insured credit union that has one Corporate Credit Unions that the cor- or a combination of the following con- porate credit union has been des- ditions: ignated by NCUA as a troubled institu- (i) Has been assigned tion; (A) A 4 or 5 Camel composite rating (ii) Has been granted assistance as by the NCUA in the case of a federal outlined under sections 208 or 216 of the credit union, or Federal Credit Union Act. (B) An equivalent 4 or 5 Camel com- (c) Procedures for Notice of Proposed posite rating by the state supervisor in Change in Official or Senior Executive Of- the case of a federally insured, state- ficer—(1) Prior Notice Requirement. An chartered credit union, or insured credit union must give NCUA

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written notice at least 30 days before his or her designee may require addi- the effective date of any addition or re- tional information. The information placement of a member of the board of submitted must include the identity, directors or committee member or the personal history, business background, employment or change in responsibil- and experience of the individual, in- ities of any individual to a position of cluding material business activities senior executive officer if: and affiliations during the past five (i) The credit union has been char- years, and a description of any mate- tered for less than two years; or rial pending legal or administrative (ii) The credit union meets the defi- proceedings in which the individual is a nition of troubled condition in para- party and any criminal indictment or graph (b)(3) or (4) of this section. conviction of the individual by a state (2) Waiver of Prior Notice—(i) Waiver or federal court. Each individual on requests. Parties may petition the ap- whose behalf the notice is filed must propriate Regional Director for a waiv- attest to the validity of the informa- er of the prior notice required under tion filed. At the option of the indi- this section. Waiver may be granted if it is found that delay could harm the vidual, the information may be for- credit union or the public interest. warded to the Regional Director by the (ii) Automatic waiver. In the case of individual; however, in such cases, the the election of a new member of the credit union must file a notice to that board of directors or credit committee effect. member at a meeting of the members (iii) Processing. Within ten calendar of a federally insured credit union, the days after receiving the notice, the Re- prior 30-day notice is automatically gional Director will inform the credit waived and the individual may imme- union either that the notice is com- diately begin serving, provided that a plete or that additional, specified incomplete notice is filed with the appro- formation is needed and must be sub- priate Regional Director within 48 mitted within 30 calendar days. If the hours of the election. If NCUA dis- initial notice is complete, the Regional approves a director or credit com- Director will issue a written decision of mittee member, the board of directors approval or disapproval to the indi- of the credit union may appoint its vidual and the credit union within 30 own alternate, to serve until the next calendar days of receipt of the notice. annual meeting, contingent on NCUA If the initial notice is not complete, approval. the Regional Director will issue a writ- (iii) Effect on disapproval authority. A ten decision within 30 calendar days of waiver does not affect the authority of receipt of the original notice plus the NCUA to issue a Notice of Disapproval amount of time the credit union takes within 30 days of the waiver or within to provide the requested additional in- 30 days of any subsequent required no- formation. If the additional informa- tice. tion is not submitted within 30 cal- (3) —(i) Filing procedures Where to file. endar days of the Regional Director’s Notices will be filed with the appro- request, the Regional Director may ei- priate Regional Director or, in the case ther disapprove the proposed individual of a corporate credit union, with the or review the notice based on the infor- Director of the Office of Corporate Credit Unions. All references to Re- mation provided. If the credit union gional Director will, for corporate and the individual have submitted all credit unions, mean the Director of Of- requested information and the Re- fice of Corporate Credit Unions. State- gional Director has not issued a writ- chartered federally insured credit ten decision within the applicable time unions will also file a copy of the no- period, the individual is approved. tice with their state supervisor. (d) Commencement of Service. A pro- (ii) Contents. The notice must contain posed director, committee member, or information about the competence, ex- senior executive officer may begin perience, character, or integrity of the service after the end of the 30-day pe- individual on whose behalf the notice is riod or any other additional period as submitted. The Regional Director or provided under paragraph (c)(3)(iii) of

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this section, unless the NCUA dis- of the Act and part 703 or, as applica- approves the notice before the end of ble, part 704, of this chapter and may the period. purchase an investment that would (e) Notice of disapproval. NCUA may otherwise be impermissible if the in- disapprove the individual’s serving as a vestment is directly related to the fed- director, committee member or senior eral credit union’s obligation or poten- executive officer if it finds that the tial obligation under the employee ben- competence, experience, character, or efit plan and the federal credit union integrity of the individual with respect holds the investment only for as long to whom a notice under this section is as it has an actual or potential obliga- submitted indicates that it would not tion under the employee benefit plan. be in the best interests of the members (d) Defined benefit plans. Under para- of the credit union or of the public to graph (c) of this section, a federal cred- permit the individual to be employed it union may invest to fund a defined by, or associated with, the credit benefit plan if the investment meets union. The Notice of Disapproval will the conditions provided in that para- advise the parties of their rights of ap- graph. If a federal credit union invests peal pursuant to 12 CFR part 747 sub- to fund a defined benefit plan that is part J, of NCUA’s Regulations. not subject to the fiduciary responsibility provisions of part 4 of the Em- [55 FR 43086, Oct. 26, 1990, as amended at 59 FR 36042, July 15, 1994; 60 FR 31911, June 19, ployee Retirement Income Security 1995; 64 FR 28717, May 27, 1999; 66 FR 65624, Act of 1974, it should diversify its in- Dec. 20, 2001; 69 FR 62562, Oct. 27, 2004] vestment portfolio to minimize the risk of large losses unless it is clearly §§ 701.15–701.18 [Reserved] prudent not to do so under the circumstances. § 701.19 Benefits for employees of Fed- (e) Liability insurance. No federal eral credit unions. credit union may occupy the position (a) General authority. A federal credit of a fiduciary, as defined in the Em- union may provide employee benefits, ployee Retirement Income Security including retirement benefits, to its Act of 1974 and the rules and regula- employees and officers who are com- tions issued by the Secretary of Labor, pensated in conformance with the Act unless it has obtained appropriate li- and the bylaws, individually or collec- ability insurance as described and per- tively with other credit unions. The mitted by Section 410(b) of the Em- kind and amount of these benefits ployee Retirement Income Security must be reasonable given the federal Act of 1974. credit union’s size, financial condition, (f) Definitions. For this section, de- and the duties of the employees. fined benefit plan has the same mean- (b) Plan trustees and custodians. Where ing as in 29 U.S.C. 1002(35) and em- a federal credit union is the benefit ployee benefit plan has the same mean- plan trustee or custodian, the plan ing as in 29 U.S.C. 1002(3). must be authorized and maintained in accordance with the provisions of part [68 FR 23027, Apr. 30, 2003] 724 of this chapter. Where the benefit plan trustee or custodian is a party § 701.20 Suretyship and guaranty. other than a federal credit union, the (a) Scope. This section authorizes a benefit plan must be maintained in ac- federal credit union to enter into a cordance with applicable laws gov- suretyship or guaranty agreement as erning employee benefit plans, includ- an incidental powers activity. This sec- ing any applicable rules and regulation does not apply to the guaranty of tions issued by the Secretary of Labor, public deposits or the assumption of li- the Secretary of the Treasury, or any ability for member accounts. other federal or state authority exer- (b) Definitions. A suretyship binds a cising jurisdiction over the plan. federal credit union with its principal (c) Investment authority. A federal to pay or perform an obligation to a credit union investing to fund an em- third person. Under a guaranty agree- ployee benefit plan obligation is not ment, a federal credit union agrees to subject to the investment limitations satisfy the obligation of the principal

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only if the principal fails to pay or per- evaluation in accordance with part 722 form. The principal is the person pri- of this chapter. In determining the marily liable, for whose performance of value of the collateral, the federal his obligation the surety or guarantor credit union must factor in the value of has become bound. any existing senior mortgages, liens or (c) Requirements. The suretyship or other encumbrances on the property guaranty agreement must be for the except those held by the principal to benefit of a principal that is a member the suretyship or guaranty agreement; and is subject to the following condi- or tions: (ii) Marketable securities that the (1) The federal credit union limits its federal credit union is authorized to in- obligations under the agreement to a vest in. The federal credit union must fixed dollar amount and a specified duration; ensure that the value of the security is (2) The federal credit union’s per- 110 percent of the obligation at all formance under the agreement creates times during the term of the agree- an authorized loan that complies with ment. the applicable lending regulations, in- [69 FR 8547, Feb. 25, 2004] cluding the limitations on loans to one member or associated members or offi- § 701.21 Loans to members and lines of cials for purposes of §§ 701.21(c)(5), (d); credit to members. 723.2 and 723.8; and (a) Statement of scope and purpose. (3) The federal credit union obtains a Section 701.21 complements the provi- segregated deposit from the member sions of section 107(5) of the Federal that is sufficient in amount to cover the federal credit union’s total poten- Credit Union Act (12 U.S.C. 1757(5)) au- tial liability. thorizing Federal credit unions to (d) Collateral. A segregated deposit make loans to members and issue lines under this section includes collateral: of credit (including credit cards) to (1) In which the federal credit union members. Section 107(5) of the Act con- has perfected its security interest (for tains limitations on matters such as example, if the collateral is a printed loan maturity, rate of interest, secu- security, the federal credit union must rity, and prepayment penalties. Sec- have obtained physical control of the tion 701.21 interprets and implements security, and, if the collateral is a book those provisions. In addition, § 701.21 entry security, the federal credit union states the NCUA Board’s intent con- must have properly recorded its secu- cerning preemption of state laws, and rity interest); and expands the authority of Federal credit (2) That has a market value, at the unions to enforce due-on-sale clauses in close of each business day, equal to 100 real property loans. Also, while § 701.21 percent of the federal credit union’s generally applies to Federal credit total potential liability and is com- unions only, its provisions may be used posed of: by state-chartered credit unions with (i) Cash; respect to alternative mortgage trans- (ii) Obligations of the United States actions in accordance with 12 U.S.C. or its agencies; 3801 et seq., and certain provisions (iii) Obligations fully guaranteed by apply to loans made by federally in- the United States or its agencies as to principal and interest; or sured state-chartered credit unions as (iv) Notes, drafts, or bills of exchange specified in § 741.203 of this chapter. or banker’s acceptances that are eligi- Part 722 of this chapter sets forth re- ble for rediscount or purchase by a quirements for appraisals for certain Federal Reserve Bank; or real estate secured loans made under (3) That has a market value equal to § 701.21 and any other applicable lend- 110 percent of the federal credit union’s ing authority. Finally, it is noted that total potential liability and is com- § 701.21 does not apply to loans by Fed- posed of: eral credit unions to other credit (i) Real estate, the value of which is unions (although certain statutory established by a signed appraisal or limitations in section 107 of the Act

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apply), nor to loans to credit union or- conditions described above concerning ganizations which are governed by sec- loans and lines of credit, for example: tion 107(5)(D) of the Act and part 712 of (i) Insurance laws; this chapter. (ii) Laws related to transfer of and (b) Relation to other laws—(1) Preemp- security interests in real and personal tion of state laws. Section 701.21 is pro- property (see, however, paragraph (g)(6) mulgated pursuant to the NCUA’s of this section concerning the use and Board’s exclusive authority as set forth exercise of due-on-sale clauses); in section 107(5) of the Federal Credit (iii) Conditions related to: Union Act (12 U.S.C 1757(5)) to regulate (A) Collection costs and attorneys’ the rates, terms of repayment and fees; other conditions of Federal credit (B) Requirements that consumer union loans and lines of credit (includ- lending documents be in ‘‘plain lan- ing credit cards) to members. This ex- guage;’’ and ercise of the Board’s authority pre- empts any state law purporting to (C) The circumstances in which a limit or affect: borrower may be declared in default (i)(A) Rates of interest and amounts and may cure default. of finance charges, including: (3) Other Federal law. Except as pro- (1) The frequency or the increments vided by paragraph (b)(1) of this sec- by which a variable interest rate may tion, it is not the Board’s intent to pre- be changed; empt state laws affecting aspects of (2) The index to which a variable in- credit transactions that are primarily terest rate may be tied; regulated by Federal law other than (3) The manner or timing of notifying the Federal Credit Union Act, for ex- the borrower of a change in interest ample, state laws concering credit cost rate; disclosure requirements, credit dis- (4) The authority to increase the incrimination, credit reporting practices, terest rate on an existing balance; unfair credit practices, and debt collec- (B) Late charges; and tion practices. Applicability of state (C) Closing costs, application, origi- law in these instances should be deter- nation, or other fees; mined pursuant to the preemption (ii) Terms of repayment, including: standards of the relevant Federal law (A) The maturity of loans and lines and regulations. of credit; (4) Examination and enforcement. Ex- (B) The amount, uniformity, and fre- cept as otherwise agreed by the NCUA quency of payments, including the ac- Board, the Board retains exclusive ex- crual of unpaid interest if payments amination and administrative enforce- are insufficient to pay all interest due; ment jurisdiction over Federal credit (C) Balloon payments; and unions. Violations of Federal or appli- (D) Prepayment limits; cable state laws related to the lending (iii) Conditions related to: activities of a Federal credit union (A) The amount of the loan or line of should be referred to the appropriate credit; NCUA regional office. (B) The purpose of the loan or line of (5) Definition of State law. For pur- credit; poses of paragraph (b) of this section (C) The type or amount of security ‘‘state law’’ means the constitution, and the relation of the value of the se- laws, regulations and judicial decisions curity to the amount of the loan or of any state, the District of Columbia, line of credit; the several territories and possessions (D) Eligible borrowers; and of the United States, and the Common- (E) The imposition and enforcement wealth of Puerto Rico. of liens on the shares of borrowers and (c) General rules—(1) Scope. The fol- accommodation parties. lowing general rules apply to all loans (2) Matters not preempted. Except as to members and, where indicated, all provided by paragraph (b)(1) of this sec- lines of credit (including credit cards) tion, it is not the Board’s intent to pre- to members, except as otherwise pro- empt state laws that do not affect vided in the remaining provisions of rates, terms of repayment and other § 701.21.

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(2) Written policies. The board of direc- whole or in part on any business day tors of each Federal credit union shall without penalty. establish written policies for loans and (7) Loan interest rates—(i) General. Ex- lines of credit consistent with the rel- cept when the Board establishes a high- evant provisions of the Act, NCUA’s er maximum rate, federal credit unions regulations, and other applicable laws may not extend credit to members at and regulations. rates exceeding 15 percent per year on (3) Credit applications and overdrafts. the unpaid balance inclusive of all fi- Consistent with policies established by nance charges. Federal credit unions the board of directors, the credit com- may use variable rates of interest but mittee or loan officer shall ensure that only if the effective rate over the term a credit application is kept on file for of a loan or line of credit does not ex- each borrower supporting the decision ceed the maximum permissible rate. to make a loan or establish a line of (ii) Temporary rates. (A) At least credit. A credit union may advance every 18 months, the Board will deter- money to a member to cover an ac- mine if federal credit unions may ex- count deficit without having a credit tend credit to members at an interest application from the borrower on file if rate exceeding 15 percent. After con- the credit union has a written over- sultation with appropriate congres- draft policy. The policy must: set a cap sional committees, the Department of on the total dollar amount of all over- Treasury, and other federal financial drafts the credit union will honor con- institution regulatory agencies, the sistent with the credit union’s ability Board may establish a rate exceeding to absorb losses; establish a time limit the 15 percent per year rate, if it deter- not to exceed forty-five calendar days mines money market interest rates for a member either to deposit funds or have risen over the preceding six- obtain an approved loan from the cred- month period and prevailing interest it union to cover each overdraft; limit rate levels threaten the safety and the dollar amount of overdrafts the soundness of individual federal credit credit union will honor per member; unions as evidenced by adverse trends and establish the fee and interest rate, in liquidity, capital, earnings, and if any, the credit union will charge growth. members for honoring overdrafts. (4) Maturity. The maturity of a loan (B) When the Board establishes a to a member may not exceed 15 years. higher maximum rate, the Board will Lines of credit are not subject to a provide notice to federal credit unions statutory or regulatory maturity of the adjusted rate by issuing a Letter limit. Amortization of line of credit to Federal Credit Unions, as well as pro- balances and the type and amount of viding information in other NCUA pub- security on any line of credit shall be lications and in a statement for the as determined by contract between the press. Federal credit union and the member/ (C) Federal credit unions may con- borrower. tinue to charge rates exceeding the es- (5) Ten percent limit. No loan or line of tablished maximum rate only on exist- credit advance may be made to any ing loans or lines of credit made before member if such loan or advance would the effective date of any lowering of cause that member to be indebted to the maximum rate. the Federal credit union upon loans (8)(i) Except as otherwise provided and advances made to the member in herein, no official or employee of a an aggregate amount exceeding 10% of Federal credit union, or immediate the credit union’s total unimpaired family member of an official or em- capital and surplus. In the case of ployee of a Federal credit union, may member business loans as defined in receive, directly or indirectly, any § 723.1 of this chapter, additional limi- commission, fee, or other compensa- tations apply as set forth in § 723.8 and tion in connection with any loan made 723.9 of this chapter. by the credit union. (6) Early payment. A member may (ii) For the purposes of this section: repay a loan, or outstanding balance on Compensation includes non monetary a line of credit, prior to maturity in items, except those of nominal value.

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Immediate family member means a or guarantor exceeds $20,000 plus spouse or other family member living pledged shares. This paragraph imple- in the same household. ments the requirement by establishing Loan includes line of credit. procedures for determining whether Official means any member of the board of directors’s approval is re- board of directors or a volunteer com- quired. The section also prohibits pref- mittee. erential treatment of officials. Person means an individual or an or- (2) Official. An ‘‘official’’ is any mem- ganization. ber of the board of directors, credit Senior management employee means committee or supervisory committee. the credit union’s chief executive offi- (3) Initial approval. All applications cer (typically, this individual holds the for loans or lines of credit on which an title of President or Treasurer/Man- official will be either a direct obligor ager), any assistant chief executive of- or an endorser, cosigner or guarantor ficers (e.g., Assistant President, Vice shall be initially acted upon by either President, or Assistant Treasurer/Man- the board of directors, the credit com- ager), and the chief financial officer mittee or a loan officer, as specified in (Comptroller). the Federal credit union’s bylaws. Volunteer official means an official of a credit union who does not receive (4) Board of Directors’ review. The compensation from the credit union board of directors shall, in any case, re- solely for his or her service as an offi- view and approve or deny an applica- cial. tion on which an official is a direct ob- (iii) This section does not prohibit: ligor, or endorser, cosigner or guar- (A) Payment, by a Federal credit antor if the following computation pro- union, of salary to employees; duces a total in excess of $20,000: (B) Payment, by a Federal credit (i) Add: union, of an incentive or bonus to an (A) The amount of the current appli- employee based on the credit union’s cation. overall financial performance; (B) The outstanding balances of (C) Payment, by a Federal credit loans, including the used portion of an union, of an incentive or bonus to an approved line of credit, extended to or employee, other than a senior manage- endorsed, cosigned or guaranteed by ment employee, in connection with a the official. loan or loans made by the credit union, (C) The total unused portion of ap- provided that the board of directors of proved lines of credit extended to or the credit union establishes written endorsed, cosigned or guaranteed by policies and internal controls in con- the official. nection with such incentive or bonus (ii) From the above total subtract: and monitors compliance with such (A) The amount of shares pledged by policies and controls at least annually. the official on loans or lines of credit (D) Receipt of compensation from a extended to or endorsed, cosigned or person outside a Federal credit union guaranteed by the official. by a volunteer official or non senior (B) The amount of shares to be management employee of the credit pledged by the official on the loan or union, or an immediate family member of a volunteer official or employee of line of credit applied for. the credit union, for a service or activ- (5) Nonpreferential treatment. The ity performed outside the credit union, rates, terms and conditions on any provided that no referral has been loan or line of credit either made to, or made by the credit union or the offi- endorsed or guaranteed by— cial, employee, or family member. (i) An official, (d) Loans and lines of credit to offi- (ii) An immediate family member of cials—(1) Purpose. Sections 107(5)(A) (iv) an official, or and (v) of the Act require the approval (iii) Any individual having a common of the board of directors of the Federal ownership, investment or other pecu- credit union in any case where the ag- niary interest in a business enterprise gregate of loans to an official and loans with an official or with an immediate on which the official serves as endorser family member of an official,

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shall not be more favorable than the make residential real estate loans to rates, terms and conditions for com- members, including loans secured by parable loans or lines of credit to other manufactured homes permanently af- credit union members. ‘‘Immediate fixed to the land, with maturities of up family member’’ means a spouse or to 40 years, or such longer period as other family member living in the may be permitted by the NCUA Board same household. on a case-by-case basis, subject to the (e) Insured, Guaranteed and Advance conditions of this paragraph (g). Commitment Loans. A loan secured, in (2) Statutory limits. The loan shall be full or in part, by the insurance or made on a one to four family dwelling guarantee of, or with an advance com- that is or will be the principal resi- mitment to purchase the loan, in full dence of the member-borrower and the or in part, by the Federal Government, loan shall be secured by a perfected a State government or any agency of first lien in favor of the credit union on either, may be made for the maturity such dwelling (or a perfected first secu- and under the terms and conditions, including rate of interest, specified in rity interest in the case of either a res- the law, regulations or program under idential cooperative or a leasehold or which the insurance, guarantee or com- ground rent estate). mitment is provided. (3) Loan application. The loan applica- (f) 20-Year Loans. (1) Notwithstanding tion shall be a completed standard Fed- the general 15-year maturity limit on eral Housing Administration, Veterans loans to members, a federal credit Administration, Federal Home Loan union may make loans with maturities Mortgage Corporation, Federal Na- of up to 20 years in the case of: tional Mortgage Association or Federal (i) A loan to finance the purchase of Home Loan Mortgage Corporation/Fed- a mobile home if the mobile home will eral National Mortgage Association ap- be used as the member-borrower’s resi- plication form. In lieu of use of a dence and the loan is secured by a first standard application the Federal credit lien on the mobile home, and the mo- union may have a current attorney’s bile home meets the requirements for opinion on file stating that the forms the home mortgage interest deduction in use meet the requirements of appli- under the Internal Revenue Code, cable Federal, state and local laws. (ii) A second mortgage loan (or a (4) Security instrument and note. The nonpurchase money first mortgage security instrument and note shall be loan in the case of a residence on which executed on the most current version there is no existing first mortgage) if of the FHA, VA, FHLMC, FNMA, or the loan is secured by a residential FHLMC/FNMA Uniform Instruments dwelling which is the residence of the for the jurisdiction in which the prop- member-borrower, and erty is located. No prepayment penalty (iii) A loan to finance the repair, al- shall be allowed, although a Federal teration, or improvement of a residen- credit union may require that any partial dwelling which is the residence of tial prepayments be made on the date the member-borrower. (2) For purposes of this paragraph (f), monthly installments are due and be in mobile home may include a rec- the amount of that part of one or more reational vehicle, house trailer or boat. monthly installments that would be (3) Notwithstanding the general 20- applicable to principal. In lieu of use of year maturity limit on second mort- a standard security instrument and gage loans, a federal credit union par- note, the Federal credit union may ticipating in the Department of the have a current attorney’s opinion on Treasury’s Making Home Affordable file stating that the security instru- Program may extend the term of a ment and note in use meet the require- modified second mortgage to match ments of applicable Federal, state and the term of a modified first mortgage, local laws. in accordance with applicable program (5) First lien, territorial limits. The loan guidelines. shall be secured by a perfected first (g) Long-Term Mortgage Loans—(1) Au- lien or first security interest in favor thority. A federal credit union may of the credit union supported by a

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properly executed and recorded secu- dental property settlement agreement, rity instrument. No loan shall be se- by which the spouse of the borrower be- cured by a residence located outside comes an owner of the property; the United States of America, its terri- (H) A transfer into an inter vivos tories and possessions, or the Common- trust in which the borrower is and re- wealth of Puerto Rico. mains a beneficiary and which does not (6) Due-on-sale clauses. (i) Except as relate to a transfer of rights of occu- otherwise provided herein, the exercise pancy in the property; or of a due-on-sale clause by a Federal (I) Any other transfer or disposition credit union is governed exclusively by described in regulations promulgated section 341 of Pub. L. 97–320 and by any by the Federal Home Loan Bank Board. regulations issued by the Federal Home (7) Assumption of real estate loans by Loan Bank Board implementing sec- nonmembers. A Federal credit union tion 341. may permit a nonmember to assume a (ii) In the case of a contract involv- member’s mortgage loan in conjunc- ing a long-term (greater than fifteen tion with the nonmember’s purchase of years), fixed rate first mortgage loan the member’s principal residence, pro- which was made or assumed, including vided that the nonmember assumes a transfer of the liened property sub- only the remaining unpaid balance of ject to the loan, during the period be- the loan, the terms of the loan remain ginning on the date a State adopted a unchanged, and there is no extension of constitutional provision or statute pro- the original maturity date specified in hibiting the exercise of due-on-sale the loan agreement with the member. clauses, or the date on which the high- An assumption is impermissible if the est court of such state has rendered a original loan was made with the intent decision (or if the highest court has not of having a nonmember assume the so decided, the date on which the next loan. highest court has rendered a decision resulting in a final judgment if such (h) Third-party servicing of indirect ve- decision applies statewide) prohibiting hicle loans. (1) A federally-insured cred- such exercise, and ending on October it union must not acquire any vehicle 15, 1982, a Federal credit union may ex- loan, or any interest in a vehicle loan, ercise a due-on-sale clause in the case serviced by a third-party servicer if the of a transfer which occurs on or after aggregate amount of vehicle loans and November 18, 1982, unless exercise of interests in vehicle loans serviced by the due-on-sale clause would be based that third-party servicer and its affili- on any of the following: ates would exceed: (A) The creation of a lien or other en- (i) 50 percent of the credit union’s net cumbrance subordinate to the lender’s worth during the initial thirty months security instrument which does not re- of that third-party servicing relation- late to a transfer of rights of occu- ship; or pancy in the property; (ii) 100 percent of the credit union’s (B) The creation of a purchase money net worth after the initial thirty security interest for household appli- months of that third-party servicing ances; relationship. (C) A transfer by devise, descent, or (2) Regional directors may grant a operation of law on the death of a joint waiver of the limits in paragraph (h)(1) tenant or tenant by the entirety; of this section to permit greater limits (D) The granting of a leasehold inter- upon written application by a credit est of 3 years or less not containing an union. In determining whether to grant option to purchase; or deny a waiver, a regional director (E) A transfer to a relative resulting will consider: from the death of a borrower; (i) The credit union’s understanding (F) A transfer where the spouse or of the third-party servicer’s organiza- children of the borrower become an tion, business model, financial health, owner of the property; and the related program risks; (G) A transfer resulting from a decree (ii) The credit union’s due diligence of a dissolution of marriage, a legal in monitoring and protecting against separation agreement, or from an inci- program risks;

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(iii) If contracts between the credit (A) Control, are controlled by, or are union and the third-party servicer under common control with, that grant the credit union sufficient con- third-party servicer; or trol over the servicer’s actions and pro- (B) Are under contract with that vide for replacing an inadequate third-party servicer or other entity de- servicer; and scribed in paragraph (h)(4)(ii)(A) of this (iv) Other factors relevant to safety section. and soundness. (iii) The term ‘‘vehicle loan’’ means (3) A regional director will provide a any installment vehicle sales contract written determination on a waiver re- or its equivalent that is reported as an quest within 45 calendar days after re- asset under generally accepted ac- ceipt of the request; however, the 45- counting principles. The term does not day period will not begin until the re- include: questing credit union has submitted all (A) Loans made directly by a credit necessary information to the regional union to a member, or director. If the regional director does (B) Loans in which neither the third- not provide a written determination party servicer nor any of its affiliates within the 45-day period the request is are involved in the origination, under- deemed denied. A credit union may ap- writing, or insuring of the loan or the peal any part of the determination to process by which the credit union ac- the NCUA Board. Appeals must be sub- quires its interest in the loan. mitted through the regional director (iv) The term ‘‘net worth’’ means the within 30 days of the date of the deter- retained earnings balance of the credit mination. union at quarter end as determined (4) For purposes of paragraph (h) of under generally accepted accounting this section: principles. For low income-designated (i) The term ‘‘third-party servicer’’ credit unions, net worth also includes means any entity, other than a feder- secondary capital accounts that are ally-insured depository institution or a uninsured and subordinate to all other wholly-owned subsidiary of a federally- claims, including claims of creditors, insured depository institution, that re- shareholders, and the National Credit ceives any scheduled, periodic pay- Union Share Insurance Fund. ments from a borrower pursuant to the (i) Put option purchases in managing terms of a loan and distributes pay- increased interest-rate risk for real estate ments of principal and interest and any loans produced for sale on the secondary other payments with respect to the amounts received from the borrower as market— may be required pursuant to the terms (1) Definitions. For purposes of of the loan. The term also excludes any § 701.21(i): servicing entity that meets the fol- (i) Financial options contract means an lowing three requirements: agreement to make or take delivery of (A) Has a majority of its voting in- a standardized financial instrument terests owned by federally-insured upon demand by the holder of the con- credit unions; tract at any time prior to the expira- (B) Includes in its servicing agree- tion date specified in the agreement, ments with credit unions a provision under terms and conditions established that the servicer will provide NCUA either by: with complete access to its books and (A) A contract market designated for records and the ability to review its in- trading such contracts by the Com- ternal controls as deemed necessary by modity Futures Trading Commission, NCUA in carrying out NCUA’s respon- or sibilities under the Act; and (B) By a Federal credit union and a (C) Has its credit union clients pro- primary dealer in Government securi- vide a copy of the servicing agreement ties that are counterparties in an over- to their regional directors. the-counter transaction. (ii) The term ‘‘its affiliates,’’ as it re- (ii) FHLMC security means obliga- lates to the third-party servicer, means tions or other securities which are or any entities that: ever have been sold by the Federal

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Home Loan Mortgage Corporation pur- eral credit union’s board of directors, suant to section 305 or 306 of the Fed- and include, at a minimum: eral Home Loan Mortgage Corporation (A) The Federal credit union’s strat- Act (12 U.S.C. 1454 and 1455). egy in using financial options con- (iii) FNMA security means an obliga- tracts and its analysis of how the strat- tion, participation, or any instrument egy will reduce sensitivity to changes of or issued by, or fully guaranteed as in price or interest rates in its commit- to principal and interest by, the Fed- ments to originate real estate loans at eral National Mortgage Association. specified interest rates; (iv) GNMA security means an obliga- (B) A list of brokers or other inter- tion, participation, or any instrument mediaries through which positions may of or issued by, or fully guaranteed as be entered into; to principal and interest by, the Gov- (C) Quantitative limits (e.g., position ernment National Mortgage Associa- and stop loss limits) on the use of fi- tion. nancial options contracts; (v) Long position means the holding of (D) Identification of the persons in- a financial options contract with the volved in financial options contract option to make or take delivery of a fi- transactions, including a description of nancial instrument. these persons’ qualifications, duties, (vi) Primary dealer in Government secu- and limits of authority, and descrip- rities means: tion of the procedures for segregating (A) A member of the Association of these persons’ duties, Primary Dealers in United States Gov- (E) A requirement for written reports ernment Securities; or for review by the Federal credit union’s board of directors at its monthly meet- (B) Any parent, subsidiary, or affili- ings, or by a committee appointed by ated entity of such primary dealer the board on a monthly basis, of: where the member guarantees (to the (1) The type, amount, expiration satisfaction of the FCU’s board of di- date, correlation, cost of, and current rectors) over-the-counter sales of fi- or projected income or loss from each nancial options contracts by the par- position closed since the last board re- ent, subsidiary, or affiliated entity to a view, each position currently open and Federal credit union. current gains or losses from such posi- (vii) Put means a financial options tions, and each position planned to be contract which entitles the holder to entered into prior to the next board resell, entirely at the holder’s option, a view; specified quantity of a security at a (2) Compliance with limits estab- specified price at any time until the lished on the policies and procedures; stated expiration date of the contract. and (2) Permitted options transactions. A (3) The extent to which the positions Federal credit union may, to manage described contributed to reduction of risk of loss through a decrease in value sensitivity to changes in prices or in- of its commitments to originate real terest rates in the Federal credit estate loans at specified interest rates, union’s commitments to originate real enter into long put positions on GNMA, estate loans at a specified interest FNMA, and FHLMC securities: rate; and (i) If the real estate loans are to be (iv) If the Federal credit union has sold on the secondary market within received written permission from the ninety (90) days of closing; appropriate NCUA Regional Director to (ii) If the positions are entered into: engage in financial options contracts (A) Through a contract market des- transactions in accordance with this ignated by the Commodity Futures § 701.21(i) and its policies and proce- Trading Commission for trading such dures as written. contracts, or (3) Recordkeeping and reporting. (i) (B) With a primary dealer in Govern- The reports described in ment securities; § 701.21(i)(2)(iii)(E) for each month must (iii) If the positions are entered into be submitted to the appropriate NCUA pursuant to written policies and proce- Regional Office by the end of the fol- dures which are approved by the Fed- lowing month. This monthly reporting

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requirement may be waived by the ap- eral credit union by the borrower ex- propriate NCUA Regional Director on a ceeds 10 per centum of the Federal case-by-case basis for those Federal credit union’s unimpaired capital and credit unions with a proven record of surplus; responsible use of permitted financial (2) A written master participation options contracts. agreement shall be properly executed, (ii) The records described in acted upon by the Federal credit § 701.21(i)(2)(iii)(E) must be retained for union’s board of directors, or if the two years from the date the financial board has so delegated in its policy, the options contracts are closed. investment committee or senior man- (4) Accounting. A federal credit union agement official(s) and retained in the must account for financial options con- Federal credit union’s office. The mas- tracts transactions in accordance with ter agreement shall include provisions generally accepted accounting prin- for identifying, either through a docu- ciples. ment which is incorporated by ref- [49 FR 30685, Aug. 1, 1984] erence into the master agreement or directly in the master agreement, the EDITORIAL NOTE: For FEDERAL REGISTER citations affecting § 701.21, see the List of CFR participation loan or loans prior to Sections Affected, which appears in the their sale; and Finding Aids section of the printed volume (3) A Federal credit union may sell to and on GPO Access. or purchase from any participant the servicing of any loan in which it owns § 701.22 Loan participation. a participation interest. (a) For purposes of this section: (c) An originating lender which is a (1) Participation loan means a loan Federal credit union shall: where one or more eligible organiza- (1) Originate loans only to its mem- tions participates pursuant to a writ- bers; ten agreement with the originating (2) Retain an interest of at least 10 lender. per centum of the face amount of each (2) Eligible organizations means a cred- loan; it union, credit union organization, or (3) Retain the original or copies of financial organization. the loan documents; and (3) Credit union means any Federal or State chartered credit union. (4) Require the credit committee or (4) Credit union organization means loan officer to use the same under- any credit union service organization writing standards for participation meeting the requirements of part 712 of loans used for loans that are not being this chapter. This term does not in- sold in a participation agreement un- clude trade associations or membership less there is a participation agreement organizations principally composed of in place prior to the disbursement of credit unions. the loan. Where a participation agree- (5) Financial organization means any ment is in place prior to disbursement, federally chartered or federally insured either the credit union’s loan policies financial institution; and any state or or the participation agreement shall federal government agency and their address any variance from non-partici- subdivisions. pation loan underwriting standards. (6) Originating lender means the par- (d) A participant Federal credit ticipant with which the member con- union that is not an originating lender tracts. shall: (b) Subject to the provisions of this (1) Participate only in loans it is em- section any Federal credit union may powered to grant, having a participa- participate in making loans with eligi- tion policy in place which sets forth ble organizations within the limita- the loan underwriting standards prior tions of the board of director’s written to entering into a participation agree- participation loan policies, Provided: ment; (1) No Federal credit union shall ob- (2) Participate in participation loans tain an interest in a participation loan only if made to its own members or if the sum of that interest and any members of another participating cred- (other) indebtedness owing to the Fed- it union;

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(3) Retain the original or a copy of such loans to be sold or pledged on the the written participation loan agree- secondary mortage market. A pool ment and a schedule of the loans cov- must include a substantial portion of ered by the agreement; and the credit union’s members’ loans and (4) Obtain the approval of the board must be sold promptly. of directors or investment committee (2) A Federal credit union may make of the disbursement of proceeds to the purchases in accordance with this para- originating lender. graph (b), provided: (i) The board of directors or invest- [43 FR 51610, Nov. 6, 1978, as amended at 46 FR 38680, July 29, 1981; 46 FR 43830, Sept. 1, ment committee approves the pur- 1981; 47 FR 1371, Jan. 13, 1982; 47 FR 54428, chase; Dec. 3, 1982. Redesignated and amended at 49 (ii) A written agreement and a sched- FR 30688, Aug. 1, 1984; 60 FR 58204, Nov. 27, ule of the eligible obligations covered 1995; 68 FR 75111, Dec. 30, 2003] by the agreement are retained in the purchasers office; and § 701.23 Purchase, sale, and pledge of (iii) For purchases under paragraph eligible obligations. (b)(1)(ii) of this section, any advance (a) For purposes of this section: written approval required by § 741.8 of (1) Eligible obligation means a loan or this chapter is obtained before con- group of loans. summation of such purchase. (2) Student loan means a loan granted (3) The aggregate of the unpaid bal- to finance the borrower’s attendance at ance of eligible obligations purchased an institution of higher education or at under paragraph (b) of this section a vocational school, which is secured shall not exceed 5 percent of the by and on which payment of the out- unimpaired capital and surplus of the standing principal and interest has purchaser. The following can be been deferred in accordance with the exculded in calculating this 5 percent insurance or guarantee of the Federal limitation: Government, of a State government, or (i) Student loans purchased in ac- any agency of either. cordance with paragraph (b)(1)(iii) of (b) Purchase. (1) A Federal credit this section; union may purchase, in whole or in (ii) Real estate loans purchased in ac- part, within the limitations of the cordance with paragraph (b)(1)(iv) of board of directors’ written purchase this section; policies: (iii) Eligible obligations purchased in (i) Eligible obligations of its mem- accordance with paragraph (b)(1)(i) of bers, from any source, if either: (A) this section that are refinanced by the They are loans it is empowered to purchaser so that it is a loan it is em- grant or (B) they are refinanced with powered to grant; the consent of the borrowers, within 60 (iv) An indirect lending or indirect days after they are purchased, so that leasing arrangement that is classified they are loans it is empowered to as a loan and not the purchase of an el- grant; igible obligation because the Federal (ii) Eligible obligations of a liqui- credit union makes the final under- dating credit union’s individual mem- writing decision and the sales or lease bers, from the liquidating credit union; contract is assigned to the Federal (iii) Student loans, from any source, credit union very soon after it is signed if the purchaser is granting student by the member and the dealer or leas- loans on an ongoing basis and if the ing company. purchase will facilitate the purchasing (c) Sale. A Federal credit union may credit union’s packaging of a pool of sell, in whole or in part, to any source, such loans to be sold or pledged on the eligible obligations of its members, eli- secondary market; and gible obligations purchased in accord- (iv) Real estate-secured loans, from ance with paragraph (b)(1)(ii) of this any source, if the purchaser is granting section, student loans purchased in ac- real estate-secured loans pursuant to cordance with paragraph (b)(1)(iii) of § 701.21 on an ongoing basis and if the this section, and real estate loans pur- purchase will facilitate the purchasing chased in accordance with paragraph credit union’s packaging of a pool of (b)(1)(iv) of this section, within the

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limitations of the board of directors’ ployee, other than a senior manage- written sale policies, Provided: ment employee, in connection with (1) The board of directors or invest- that credit union’s purchase, sale or ment committee approves the sale; and pledge of an eligible obligation. This (2) A written agreement and a sched- payment is permissible if the board of ule of the eligible obligations covered directors establishes a written policy by the agreement are retained in the and internal controls for the incentive seller’s office. or bonus program and monitors compli- (d) Pledge. (1) A Federal credit union ance with the policy and controls at may pledge, in whole or in part, to any least annually; and source, eligible obligations of its mem- (iv) Payment by a person other than bers, eligible obligations purchased in the federal credit union of compensa- accordance with paragraph (b)(1)(ii) of tion to a volunteer official, non-senior this section, student loans purchased management employee, or their imme- in accordance with paragraph (b)(1)(iii) diate family member, for a service or of this section, and real estate loans activity performed outside the credit purchased in accordance with para- union provided that the federal credit graph (b)(1)(iv) of this section, within union, the official, employee, or their the limitations of the board of direc- immediate family member has not tors’ written pledge policies, Provided: made a referral. (i) The board of directors or invest- (3) Business associates and family mem- ment committee approves the pledge; bers. All transactions under this sec- (ii) Copies of the original loan docu- tion with business associates or family ments are retained; and members not specifically prohibited by (iii) A written agreement covering paragraph (g)(1) of this section must be the pledging arrangement is retained conducted at arm’s length and in the in the office of the credit union that interest of the federal credit union. pledges the eligible obligations. (4) Definitions. The definitions in (2) The pledge agreement shall iden- § 701.21(c)(8)(ii) of this part apply to tify the eligible obligations covered by the agreement. this section. (e) Servicing. A Federal credit union [44 FR 27071, May 9, 1979, as amended at 46 may agree to service any eligible obli- FR 38680, July 29, 1981. Redesignated at 49 FR gation it purchases or sells in whole or 30688, Aug. 1, 1984, and amended at 53 FR 4844, in part. Feb. 18, 1988; 56 FR 15036, Apr. 15, 1991; 56 FR (f) 10 Percent limitation. The total in- 35811, July 29, 1991; 60 FR 58504, Nov. 28, 1995; debtedness owing to any Federal credit 63 FR 70998, Dec. 23, 1998; 72 FR 65442, Nov. 21, 2007] union by any person, inclusive of retained and reacquired interests, shall § 701.24 Refund of interest. not exceed 10 percent of its unimpaired capital and surplus. (a) The board of directors of a Fed- (g)(1) Conflicts of interest. No federal eral credit union may authorize an in- credit union official, employee, or their terest refund to members who paid in- immediate family member may re- terest to the credit union during any ceive, directly or indirectly, any com- dividend period and who are members pensation in connection with that cred- of record at the close of business on the it union’s purchase, sale, or pledge of last day of such dividend period. Inter- an eligible obligation under the provi- est refunds may be made for a dividend sions of § 701.23. period only if dividends on share ac- (2) Permissible payments. This section counts have been declared and paid for does not prohibit: that period. (i) A federal credit union’s payment (b) The amount of interest refund to of salary to employees; each member shall be determined as a (ii) A federal credit union’s payment percentage of the interest paid by the of an incentive or bonus to an em- member. Such percentage may vary ac- ployee based on the credit union’s over- cording to the type of extension of all financial performance; credit and the interest rate charged. (iii) A federal credit union’s payment (c) The board of directors may ex- of an incentive or bonus to an em- clude from an interest refund:

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(1) A particular type of extension of subject to examination by the NCUA credit; Board to the extent permitted by law. (2) Any extension of credit made at a [47 FR 30462, July 14, 1982, as amended at 63 particular interest rate; and FR 10756, Mar. 5, 1998] (3) Any extension of credit that is presently delinquent or has been delin- §§ 701.27–701.29 [Reserved] quent within the period for which the refund is being made. § 701.30 Services for nonmembers within the field of membership. [53 FR 19747, May 31, 1988] Federal credit unions may provide the following services to persons with- § 701.25 Charitable contributions and in their fields of membership, regard- donations. less of membership status: (a) A federal credit union may make (a) Selling negotiable checks includ- charitable contributions and/or donate ing travelers checks, money orders, funds to recipients not organized for and other similar money transfer in- profit that are located in or conduct struments (including international and activities in a community in which the domestic electronic fund transfers); federal credit union has a place of busi- and ness or to organizations that are tax (b) Cashing checks and money orders exempt organizations under Section and receiving international and domes- 501(c)(3) of the Internal Revenue Code tic electronic fund transfers for a fee. and operate primarily to promote and [71 FR 62876, Oct. 27, 2006] develop credit unions. (b) The board of directors must ap- § 701.31 Nondiscrimination require- prove charitable contributions and/or ments. donations, and the approval must be (a) Definitions. As used in this part, based on a determination by the board the term: of directors that the contributions and/ (1) Application carries the meaning of or donations are in the best interests of that term as defined in 12 CFR 202.2(f) the federal credit union and are reason- (Regulation B), which is as follows: able given the size and financial condi- An oral or written request for an extension tion of the federal credit union. The of credit that is made in accordance with board of directors, if it chooses, may procedures established by a creditor for the establish a budget for charitable con- type of credit requested; tributions and/or donations and au- (2) Dwelling carries the meaning of thorize appropriate officials of the fed- that term as defined in 42 U.S.C. 3602(b) eral credit union to select recipients (Fair Housing Act), which is as follows: and disburse budgeted funds among ‘‘Any building, structure, or portion those recipients. thereof which is occupied as, or designed or intended for occupancy as, a [64 FR 19443, Apr. 21, 1999] residence by one or more families, and any vacant land which is offered for § 701.26 Credit union service contracts. sale or lease for the construction or location thereon of any building, struc- A Federal credit union may act as a ture, or portion thereof’’; and representative of and enter into a con- (3) Real estate-related loan means any tractual agreement with one or more loan for which application is made to credit unions or other organizations for finance or refinance the purchase, con- the purpose of sharing, utilizing, rent- struction, improvement, repair, or ing, leasing, purchasing, selling, and/or maintenance of a dwelling. joint ownership of fixed assets or en- (b) Nondiscrimination in Lending. (1) A gaging in activities and/or services Federal credit union may not deny a which relate to the daily operations of real estate-related loan, nor may it dis- credit unions. Agreements must be in criminate in setting or exercising its writing, and shall advise all parties rights pursuant to the terms or condi- subject to the agreement that the tions of such a loan, nor may it dis- goods and services provided shall be courage an application for such a loan,

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on the basis of the race, color, national plication, with an applicant or joint origin, religion, sex, handicap, or fa- applicant; milial status (having children under (iii) The present or prospective own- the age of 18) of: ers, lessees, tenants, or occupants of (i) Any applicant or joint applicant; the dwelling for which a real estate-re- (ii) Any person associated, in connec- lated loan is requested; tion with a real estate-related loan ap- (iv) The present or prospective own- plication, with an applicant or joint ers, lessees, tenants, or occupants of applicant; other dwellings in the vicinity of the (iii) The present or prospective own- dwelling for which a real estate-related ers, lessees, tenants, or occupants of loan is requested. the dwelling for which a real estate-re- (2) With respect to a real-estate related loan is requested; lated loan, a Federal credit union may (iv) The present or prospective own- not rely upon an appraisal of a dwell- ers, lessees, tenants, or occupants of ing if it knows or should know that the other dwellings in the vicinity of the appraisal is based upon consideration dwelling for which a real estate-related of a criterion which has the effect of loan is requested. discriminating on the basis of race, (2) With regard to a real estate-re- color, national origin, religion, sex, lated loan, a Federal credit union may handicap, or familial status (having not consider a lending criterion or ex- children under the age of 18). Guide- ercise a lending policy which has the lines concerning possible exceptions to effect of discriminating on the basis of this provision appear in paragraph race, color, national origin, religion, (e)(1) of this section. sex, handicap, or familial status (hav- (3) A Federal credit union may not ing children under the age of 18). rely upon an appraisal that it knows or Guidelines concerning possible excep- should know is based upon consider- tions to this provision appear in para- ation of any of the following criteria, graph (e)(1) of this section. for such criteria generally have a dis- (3) Consideration of any of the fol- criminatory effect, and are not nec- lowing factors in connection with a essary to a Federal credit union’s busi- real estate-related loan is not nec- ness: essary to a Federal credit union’s busi- (i) The age or location of the dwell- ness, generally has a discriminatory ef- ing; fect, and is therefore prohibited: (ii) The age or location of dwellings (i) The age or location of the dwell- in the neighborhood of the dwelling; ing; (iii) The income level of the residents in the neighborhood of the dwelling. (ii) Zip code of the applicant’s cur- (4) Notwithstanding paragraph (c)(3) rent residence; of this section, it is recognized that (iii) Previous home ownership; there may be factors concerning loca- (iv) The age or location of dwellings tion of the dwelling which can be prop- in the neighborhood of the dwelling; erly considered in an appraisal. If any (v) The income level of residents in such factor(s) is relied upon, it must be the neighborhood of the dwelling. specifically documented in the ap- Guidelines concerning possible excep- praisal, accompanied by a brief state- tions to this provision appear in para- ment demonstrating the necessity of graph (e)(2) of this section. using such factor(s). Guidelines con- (c) Nondiscrimination in appraisals. (1) cerning the consideration of location A Federal credit union may not rely factors appear in paragraph (e)(3) of upon an appraisal of a dwelling if it this section. knows or should know that the ap- (5) Each Federal credit union shall praisal is based upon consideration of make available, to any requesting the race, color, national origin, reli- member/applicant, a copy of the ap- gion, sex, handicap, or familial status praisal used in connection with that (having children under the age of 18) of: member’s real estate-related loan ap- (i) Any applicant or joint applicant; plication. The appraisal shall be avail- (ii) Any person associated, in connec- able for a period of 25 months after the tion with a real estate-related loan ap- applicant has received notice from the

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Federal credit union of the action (ii) With respect to oral advertise- taken by the Federal credit union on ments, a credit union may satisfy the the real estate-related loan applica- notice requirement by a spoken state- tion. ment that the credit union is an (d) Nondiscrimination in advertising. ‘‘Equal Housing Lender’’ or an ‘‘Equal No federal credit union may engage in Opportunity Lender.’’ any form of advertising of real estate- (iii) When an oral advertisement is related loans that indicates the credit used in conjunction with a written or union discriminates on the basis of visual advertisement, the use of either race, color, religion, national origin, of the methods specified in paragraphs sex, handicap, or familial status in violation of the Fair Housing Act. Adver- (d)(1)(i) or (ii) of this section will sat- tisements must not contain any words, isfy the notice requirement. symbols, models or other forms of com- (iv) A credit union may use any other munication that suggest a discrimina- method reasonably calculated to sat- tory preference or policy of exclusion isfy the notice requirement. in violation of the Fair Housing Act or (2) Lobby notice of nondiscrimination. the Equal Credit Opportunity Act. Every federal credit union that engages (1) Advertising notice of nondiscrimina- in real estate-related lending must dis- tion compliance. Any federal credit play a notice of nondiscrimination. The union that advertises real estate-re- notice must be placed in the public lated loans must prominently indicate lobby of the credit union and in the in such advertisement, in a manner ap- public area of each office where such propriate to the advertising medium loans are made and must be clearly and format used, that the credit union visible to the general public. The no- makes such loans without regard to tice must incorporate either a fac- race, color, religion, national origin, simile of the logotype and language ap- sex, handicap, or familial status. pearing in paragraph (d)(3) of this sec- (i) With respect to written and visual tion or the logotype and language ap- advertisements, a credit union may pearing at 24 CFR 110.25(a). Posters satisfy the notice requirement by including in the advertisement a copy of containing the logotype and language the logotype, with the legend ‘‘Equal appearing in paragraph (d)(3) of this Housing Lender,’’ from the poster de- section may be obtained from the re- scribed in paragraph (d)(3) of this sec- gional offices of the National Credit tion or a copy of the logotype, with the Union Administration. legend ‘‘Equal Housing Opportunity,’’ (3) Logotype and notice of non- from the poster described in § 110.25(a) discrimination compliance. The logotype of the United States Department of and text of the notice required in para- Housing and Urban Development’s graph (d)(2) of this section shall be as (HUD) regulations (24 CFR 110.25(a)). follows:

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(e) Guidelines. (1) Compliance with without presuming that the applicant the Fair Housing Act is achieved when has certain characteristics of a group. each loan applicant’s creditworthiness is evaluated on an individual basis,

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If certain lending policies or proce- of this section, which prohibits consid- dures do presume group characteris- eration of location of the dwelling. Fi- tics, they may violate the Fair Housing nally, the prohibited use of prior home Act, even though the characteristics ownership does not preclude a Federal are not based upon race, color, sex, na- credit union from considering an appli- tional origin, religion, handicap, or fa- cant’s payment history on a loan which milial status. Such a violation occurs was made to obtain a home. Such ac- when otherwise facially nondiscrim- tion entails consideration of the pay- inatory lending procedures (either gen- ment record on a previous loan in de- eral lending policies or specific criteria termining creditworthiness; it does not used in reviewing loan applications) entail consideration of prior home own- have the effect of making real estate- ership. related loans unavailable or less avail- (3)(i) Paragraph (c)(3) of this section able on the basis of race, color, sex, na- prohibits consideration of the age or tional origin, religion, handicap, or fa- location of a dwelling in a real estate- milial status. Note, however, that a related loan appraisal. These restric- policy or criterion which has a dis- tions are intended to prohibit the use criminatory effect is not a violation of of unfounded or unsubstantiated as- the Fair Housing Act if its use achieves sumptions regarding the effect upon a legitimate business necessity which loan risk of the age of a dwelling or the cannot be achieved by using less dis- physical or economic characteristics of criminatory standards. It is also im- an area. Appraisals should be based on portant to note that the Equal Credit the present market value of the prop- Opportunity Act and Regulation B pro- erty offered as security (including con- hibit discrimination, either per se or in sideration of specific improvements to effect, on the basis of the applicant’s be made by the borrower) and the like- age, marital status, receipt of public lihood that the property will retain an assistance, or the exercise of any rights adequate value over the term of the under the Consumer Credit Protection loan. Act. (ii) The term ‘‘age of the dwelling’’ (2) Paragraph (b)(3) of this section does not encompass structural sound- prohibits consideration of certain fac- ness. In addition, the age of the dwell- tors because of their likely discrimina- ing may be used by an appraiser as a tory effect and because they are not basis for conducting further inspec- necessary to make sound real estate- tions of certain structural aspects of related loans. For purposes of clarifica- the dwelling. Paragraph (c)(3) of this tion, the prohibited use of location fac- section does, however, prohibit an un- tors in this section is intended to pre- substantiated determination that a vent abandonment of areas in which a house over X years in age is not struc- Federal credit union’s members live or turally sound. want to live. It is not intended to re- (iii) With respect to location factors, quire loans in those areas that are geo- paragraph (c)(4) of this section recog- graphically remote from the FCU’s nizes that there may be location fac- main or branch offices or that con- tors which may be considered in an ap- travene the parameters of a Federal praisal, and requires that the use of credit union’s charter. Further, this any such factors be specifically docu- prohibition does not preclude requiring mented in the appraisal. These factors a borrower to obtain flood insurance will most often be those location fac- protection pursuant to the National tors which may negatively affect the Flood Insurance Act and part 760 of short range future value (up to 3–5 NCUA’s Rules and Regulations, nor years) of a property. Factors which in does it preclude involvement with Fed- some cases may cause the market eral or state housing insurance pro- value of a property to decline are re- grams which provide for lower interest cent zoning changes or a significant rates for the purchase of homes in cer- number of abandoned homes in the im- tain urban or rural areas. Also, the le- mediate vicinity of the property. How- gitimate use of location factors in an ever, not all zoning changes will cause appraisal does not constitute a viola- a decline in property values, and prox- tion of the provision of paragraph (b)(3) imity to abandoned buildings may not

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affect the market value of a property graph (b)(1) of this section must submit because the cause of abandonment is to the Regional Director a written re- unrelated to high risk. Proper consid- quest including: erations include the condition and util- (i) The new maximum level of public ity of the improvement and various unit and nonmember shares requested, physical factors such as street condi- either as a dollar amount or a percent- tions, amenities such as parks and age of total shares; recreation areas, availability of public (ii) The current plan adopted by the utilities and municipal services, and credit union’s board of directors con- exposure to flooding and land faults. cerning the use of new public unit and [54 FR 46223, Nov. 2, 1989, as amended at 59 nonmember shares; FR 36041, July 15, 1994; 66 FR 48206, Sept. 19, (iii) A copy of the credit union’s lat- 2001] est financial statement; and (iv) A copy of the credit union’s loan § 701.32 Payment on shares by public and investment policies. units and nonmembers. (4) Where the financial condition and (a) Authority. A Federal credit union management of the credit union are may, to the extent permitted under sound and the credit union’s plan for Section 107(6) of the Act and this sec- the funds is reasonable, there will be a tion, receive payments on shares, (reg- presumption in favor of granting the ular shares, share certificates, and request. When granted, exemptions will share draft accounts) from public units normally be for a two-year period. The and political subdivisions thereof (as Regional Director will provide a writ- those terms are defined in § 745.1) and ten explanation for an exemption that nonmember credit unions, and to the is granted for a lesser time period. extent permitted under the Act, this (5) The Regional Director will pro- section and § 701.34, receive payments vide a written determination on an ex- on shares (regular shares, share certifi- emption request within 30 calendar cates, and share draft accounts) from days after receipt of the request. The 30 other nonmembers. day period will not begin to run until (b) Limitations. (1) Unless a greater all necessary information has been sub- amount has been approved by the Re- mitted to the Regional Director. All gional Director, the maximum amount denials may be appealed to the NCUA of all public unit and nonmember Board in a timely manner. Appeals shares shall not, at any given time, ex- should be submitted through the Re- ceed 20% of the total shares of the fed- gional Director. eral credit union or $1.5 million, which- (6) Upon expiration of an exemption, ever is greater. nonmember shares currently in the (2) Before accepting any public unit credit union in excess of the limits es- or nonmember shares in excess of 20% tablished pursuant to (b)(1) of this sec- of total shares, the board of directors tion will continue to be insured by the must adopt a specific written plan con- National Credit Union Insurance Fund cerning the intended use of these within applicable limits. No new shares shares and forward a copy of the plan in excess of the limits established pur- to the Regional Director. The plan suant to (b)(1) of this section shall be must include: accepted. Existing share certificates in (i) A statement of the credit union’s excess of the limits established pursu- needs, sources and intended uses of ant to (b)(1) of this section may remain public unit and nonmember shares; in the credit union only until matu- (ii) Provision for matching maturity. rities of public unit and nonmember (c) The limitations herein do not shares with corresponding assets, or apply to accounts maintained in ac- justification for any mismatch; and cordance with § 701.37 (Treasury Tax (iii) Provision for adequate income and Loan Depositaries; Depositaries spread between public unit and non- and Financial Agents of the Govern- member shares and corresponding as- ment) and matching funds required by sets. § 705.7(b) (Community Development Re- (3) A federal credit union seeking an volving Loan Program for Credit exemption from the limits of para- Unions). Once a loan granted pursuant

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to part 705 is repaid, nonmember share sponsibilities of the official’s credit deposits accepted to meet the match- union position; must cease imme- ing requirement are subject to this sec- diately upon the insured person’s leav- tion. ing office, without providing residual benefits other than from pending [54 FR 31184, July 27, 1989, as amended at 54 FR 51384, Dec. 15, 1989; 55 FR 1794, Jan. 19, claims, if any; except that a credit 1990; 58 FR 21645, Apr. 23, 1993; 59 FR 26102, union must comply with federal and May 19, 1994; 61 FR 3790, Feb. 2, 1996] state laws providing departing officials the right to maintain health insurance § 701.33 Reimbursement, insurance, coverage at their own expense and and indemnification of officials and (iii) Indemnification and related in- employees. surance consistent with paragraph (c) (a) Official. An official is a person who of this section. is or was a member of the board of di- (c) Indemnification. (1) A Federal cred- rectors, credit committee or super- it union may indemnify its officials visory committee, or other volunteer and current and former employees for committee established by the board of expenses reasonably incurred in con- directors. nection with judicial or administrative (b) Compensation. (1) Only one board proceedings to which they are or may officer, if any, may be compensated as become parties by reason of the per- an officer of the board. The bylaws formance of their official duties. must specify the officer to be com- (2) Indemnification shall be con- pensated, if any, as well as the specific sistent either with the standards appli- duties of each of the board officers. No cable to credit unions generally in the other official may receive compensa- state in which the principal or home tion for performing the duties or re- office of the credit union is located, or sponsibilities of the board or com- with the relevant provisions of the mittee position to which the person Model Business Corporation Act. A has been elected or appointed. Federal credit union that elects to pro- (2) For purposes of this section, the vide indemnification shall specify term compensation specifically ex- whether it will follow the relevant cludes: state law or the Model Business Cor- (i) Payment (by reimbursement to an poration Act. Indemnification and the official or direct credit union payment method of indemnification may be pro- to a third party) for reasonable and vided for by charter or bylaw amend- proper costs incurred by an official in ment, contract or board resolution, carrying out the responsibilities of the consistent with the procedural require- position to which that person has been ments of the applicable state law or elected or appointed, if the payment is the Model Business Corporation Act, as determined by the board of directors to specified. A charter or bylaw amend- be necessary or appropriate in order to ment must be approved by the National carry out the official business of the Credit Union Administration. credit union, and is in accordance with (3) A Federal credit union may pur- written policies and procedures, includ- chase and maintain insurance on behalf ing documentation requirements, es- of its officials and employees against tablished by the board of directors. any liability asserted against them and Such payments may include the pay- expenses incurred by them in their offi- ment of travel costs for officials and cial capacities and arising out of the one guest per official; performance of their official duties to (ii) Provision of reasonable health, the extent such insurance is permitted accident and related types of personal by the applicable state law or the insurance protection, supplied for offi- Model Business Corporation Act. cials at the expense of the credit union: (4) Notwithstanding paragraphs (c)(1) Provided, that such insurance protec- through (3) of this section, a federal tion must exclude life insurance; must credit union may not indemnify a dual be limited to areas of risk, including employee for duties performed for any accidental death and dismemberment, employer other than the federal credit to which the official is exposed by rea- union. For purposes of this subsection, son of carrying out the duties or re- a dual employee is a federal credit

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union employee who also performs loan applications or surveys to dem- work functions for another entity as onstrate a majority of their member- part of a sharing arrangement between ship is low-income members. the federal credit union and the other (4) If the regional director deter- entity. mines a low-income designated federal credit union no longer meets the cri- [53 FR 29642, Aug. 8, 1988, as amended at 57 FR 54503, Nov. 19, 1992; 66 FR 65629, Dec. 20, teria for the designation, the regional 2001; 72 FR 30246, May 31, 2007] director will notify the federal credit union in writing, and the federal credit § 701.34 Designation of low income sta- union must, within five years, meet the tus; Acceptance of secondary cap- criteria for the designation or come ital accounts by low-income des- into compliance with the regulatory ignated credit unions. requirements applicable to federal (a) Designation of low-income status. credit unions that do not have a low- (1) Based on data obtained through ex- income designation. The designation aminations, a regional director will no- will remain in effect during the five- tify a federal credit union that it quali- year period. If a federal credit union fies for designation as a low-income does not requalify and has secondary credit union if a majority of its mem- capital or nonmember deposit accounts bership qualifies as low-income mem- with a maturity beyond the five-year bers. A federal credit union that wishes period, a regional director may extend to receive the designation will notify the time for a federal credit union to the regional director in writing within come into compliance with regulatory 30 days of receipt of the regional direc- requirements to allow the federal cred- tor’s notification. it union to satisfy the terms of any ac- (2) Low-income members are those count agreements. A federal credit members who earn 80% or less than the union may appeal a regional director’s median family income for the metro- determination that the credit union no politan area where they live or na- longer meets the criteria for a low-in- tional metropolitan area, whichever is come designation to the Board within greater. A regional director may use 60 days of the date of the notice from total median earnings for individuals the regional director. An appeal must instead of median family income if it is be submitted through the regional di- more beneficial to a federal credit rector. union when determining if the credit (5) Any credit union with a low-in- union qualifies for a low-income credit come credit union designation on Janu- union designation. A regional director ary 1, 2009 will have five years from will use the statewide or national, non- that date to meet the criteria for low- metropolitan area median family in- income designation under paragraph come instead of the metropolitan area (a)(1) of this section, unless the re- or national metropolitan area median gional director determines a longer family income for members living out- time is required to allow the low-inside a metropolitan area. Member earn- come credit union to satisfy the terms ings will be estimated based on data re- of a secondary capital or nonmember ported by the U.S. Census Bureau for deposit account agreement. the geographic area where the member (6) Definitions. The following defini- lives. The term ‘‘low-income members’’ tions apply to this section: also includes those members enrolled Median family income and total median as students in a college, university, earnings for individuals are income sta- high school, or vocational school. tistics reported by the U.S. Census Bu- (3) Federal credit unions that do not reau. The applicable income data can receive notification that they qualify be obtained via the American for a low-income credit union designa- FactFinder on the Census Bureau’s tion but believe they qualify may sub- webpage at http://factfinder.census.gov/ mit information to the regional direc- home/saff/main.html?llang=en. tor to demonstrate they qualify for a Metropolitan area means an area des- low-income credit union designation. ignated by the Office of Management For example, federal credit unions may and Budget pursuant to 31 U.S.C. provide actual member income from 1104(d), 44 U.S.C. 3504(c), and Executive

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Order 10253, 16 FR 5605 (June 13, 1951) National Credit Union Share Insurance (as amended). Fund. (b) Acceptance of secondary capital ac- (7) Availability to cover losses. Funds counts by low-income designated credit deposited into a secondary capital ac- unions. A federal credit union having a count, including interest accrued and designation of low-income status pur- paid into the secondary capital ac- suant to paragraph (a) of this section count, must be available to cover oper- may accept secondary capital accounts ating losses realized by the LICU that from nonnatural person members and exceed its net available reserves (exclu- nonnatural person nonmembers subject sive of secondary capital and allowance to the following conditions: accounts for loan and lease losses), and (1) Secondary capital plan. Before ac- to the extent funds are so used, the cepting secondary capital, a low-in- LICU must not restore or replenish the come credit union (‘‘LICU’’) shall account under any circumstances. The adopt, and forward to the appropriate LICU may, in lieu of paying interest NCUA Regional Director for approval, into the secondary capital account, pay a written ‘‘Secondary Capital Plan’’ accrued interest directly to the inves- that, at a minimum: tor or into a separate account from (i) States the maximum aggregate which the secondary capital investor amount of uninsured secondary capital may make withdrawals. Losses must be the LICU plans to accept; distributed pro-rata among all sec- (ii) Identifies the purpose for which ondary capital accounts held by the the aggregate secondary capital will be LICU at the time the losses are real- used, and how it will be repaid; ized. (iii) Explains how the LICU will pro- (8) Security. The secondary capital ac- vide for liquidity to repay secondary count may not be pledged or provided capital upon maturity of the accounts; by the account investor as security on (iv) Demonstrates that the planned a loan or other obligation with the uses of secondary capital conform to LICU or any other party. the LICU’s strategic plan, business (9) Merger or dissolution. In the event plan and budget; and of merger or other voluntary dissolu- (v) Includes supporting pro forma fi- tion of the LICU, other than merger nancial statements, including any off- into another LICU, the secondary cap- balance sheet items, covering a min- ital accounts will be closed and paid imum of the next two years. out to the account investor to the ex- (2) Decision on plan. If a LICU is not tent they are not needed to cover notified within 45 days of receipt of a losses at the time of merger or dissolu- Secondary Capital Plan that the plan tion. is approved or disapproved, the LICU (10) Contract agreement. A secondary may proceed to accept secondary cap- capital account contract agreement ital accounts pursuant to the plan. must be executed by an authorized rep- (3) Nonshare account. The secondary resentative of the account investor and capital account must be established as of the LICU reflecting the terms and an uninsured secondary capital ac- conditions mandated by this section count or other form of non-share ac- and any other terms and conditions not count. inconsistent with this section. (4) Minimum maturity. The maturity (11) Disclosure and acknowledgement. of the secondary capital account must An authorized representative of the be a minimum of five years. LICU and of the secondary capital ac- (5) Uninsured account. The secondary count investor each must execute a capital account will not be insured by ‘‘Disclosure and Acknowledgment’’ as the National Credit Union Share Insur- set forth in the appendix to this sec- ance Fund or any governmental or pri- tion at the time of entering into the vate entity. account agreement. The LICU must re- (6) Subordination of claim. The sec- tain an original of the account agree- ondary capital account investor’s ment and the ‘‘Disclosure and Ac- claim against the LICU must be subor- knowledgment’’ for the term of the dinate to all other claims including agreement, and a copy must be pro- those of shareholders, creditors and the vided to the account investor.

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(12) Prompt corrective action. As pro- deemed and the schedule for redeeming vided in §§ 702.204(b)(11), 702.304(b) and all any part of each eligible increment, 702.305(b) of this chapter, the NCUA and must demonstrate to the satisfac- Board may prohibit a LICU classified tion of the appropriate Regional Direc- ‘‘critically undercapitalized’’ or, if tor that: ‘‘new,’’ as ‘‘moderately capitalized’’, (i) The LICU will have a post-redemp- ‘‘marginally capitalized’’, ‘‘minimally tion net worth classification of ‘‘ade- capitalized’’ or ‘‘uncapitalized’’, as the quately capitalized’’ under part 702 of case may be, from paying principal, this chapter; dividends or interest on its uninsured (ii) The discounted secondary capital secondary capital accounts established has been on deposit at least two years; after August 7, 2000, except that unpaid (iii) The discounted secondary cap- dividends or interest will continue to ital will not be needed to cover losses accrue under the terms of the account prior to final maturity of the account; to the extent permitted by law. (iv) The LICU’s books and records are (c) Accounting treatment; Recognition current and reconciled; of net worth value of accounts—(1) Equity (v) The proposed redemption will not account. A LICU that issues secondary jeopardize other current sources of capital accounts pursuant to paragraph funding, if any, to the LICU; and (b) of this section must record the (vi) The request to redeem is author- funds on its balance sheet in an equity ized by resolution of the LICU’s board account entitled ‘‘uninsured secondary of directors. capital account.’’ (2) Decision on request. A request to (2) Schedule for recognizing net worth redeem discounted secondary capital value. For accounts with remaining may be granted in whole or in part. If maturities of less than five years, the a LICU is not notified within 45 days of LICU must reflect the net worth value receipt of a request for approval to re- of the accounts in its financial state- deem secondary capital that its request ment in accordance with the following is either granted or denied, the LICU schedule: may proceed to redeem secondary cap- Net worth ital accounts as proposed. value of (3) Schedule for redeeming secondary Remaining maturity original balance capital. (percent) Redemption Four to less than five years ...... 80 Remaining maturity limit as per- Three to less than four years ...... 60 cent of original balance Two to less than three years ...... 40 One to less than two years ...... 20 Four to less than five years ...... 20 Less than one year ...... 0 Three to less than four years ...... 40 Two to less than three years ...... 60 (3) Financial statement. The LICU One to less than two years ...... 80 must reflect the full amount of the secondary capital on deposit in a footnote APPENDIX TO § 701.34 to its financial statement. A LICU that is authorized to accept unin- (d) Redemption of secondary capital. sured secondary capital accounts and each With the written approval of the appro- investor in such an account shall execute priate Regional Director, secondary and date the following ‘‘Disclosure and Ac- capital that is not recognized as net knowledgment’’ form, a signed original of worth under paragraph (c)(2) of this which must be retained by the credit union: section (‘‘discounted secondary cap- DISCLOSURE AND ACKNOWLEDGMENT ital’’ recategorized as subordinated debt) may be redeemed according to [Name of CU] and [Name of investor] here- the remaining maturity schedule in by acknowledge and agree that [Name of in- paragraph (d)(3) of this section. vestor] has committed [amount of funds] to (1) Request to redeem secondary capital. a secondary capital account with [name of credit union] under the following terms and A request for approval to redeem dis- conditions: counted secondary capital may be sub- 1. Term. The funds committed to the sec- mitted in writing at any time, must ondary capital account are committed for a specify the increment(s) to be re- period of ll years.

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2. Redemption prior to maturity. Subject to August 7, 2000, except that unpaid dividends the conditions set forth in 12 CFR 701.34, the or interest will continue to accrue under the funds committed to the secondary capital terms of the account to the extent permitted account are redeemable prior to maturity by law. only at the option of the LICU and only with ACKNOWLEDGED AND AGREED TO this the prior approval of the appropriate re- ll day of [month and year] by: gional director. llllllllllllllllllllllll 3. Uninsured, non-share account. The sec- [name of investor’s official] ondary capital account is not a share ac- [title of official] count and the funds committed to the sec- [name of investor] ondary capital account are not insured by [address and phone number of investor] the National Credit Union Share Insurance [investor’s tax identification number] Fund or any other governmental or private llllllllllllllllllllllll entity. [name of credit union official] 4. Prepayment risk. Redemption of U.S.C. [title of official] prior to the account’s original maturity date may expose the account investor to the risk [61 FR 3790, Feb. 2, 1996, as amended at 61 FR of being unable to reinvest the repaid funds 50695, 50697, Sept. 27, 1996; 64 FR 72270, Dec. at the same rate of interest for the balance 27, 1999; 65 FR 21131, Apr. 20, 2000; 71 FR 4238, of the period remaining until the original Jan. 26, 2006; 73 FR 71912, Nov. 26, 2008] maturity date. The investor acknowledges that it understands and assumes responsi- § 701.35 Share, share draft, and share bility for prepayment risk associated with certificate accounts. the [name of credit union]’s redemption of (a) Federal credit unions may offer the investor’s U.S.C. account prior to the share, share draft, and share certificate original maturity date. 5. Availability to cover losses. The funds com- accounts in accordance with section mitted to the secondary capital account and 107(6) of the Act (12 U.S.C. 1757(6)) and any interest paid into the account may be the board of directors may declare divi- used by [name of credit union] to cover any dends on such accounts as provided in and all operating losses that exceed the cred- section 117 of the Act (12 U.S.C. 1763). it union’s net worth exclusive of allowance (b) A Federal credit union shall accu- accounts for loan losses, and in the event the rately represent the terms and condi- funds are so used, (name of credit union) will tions of its share, share draft, and under no circumstances restore or replenish those funds to [name of institutional inves- share certificate accounts in all adver- tor]. Dividends are not considered operating tising, disclosures, or agreements, losses and are not eligible to be paid out of whether written or oral secondary capital. (c) A Federal credit union may, con- 6. Accrued interest. By initialing below, sistent with this section, parts 707 and [name of credit union] and [name of institu- 740 of this subchapter, other federal tional investor] agree that accrued interest law, and its contractual obligations, will be: determine the types of fees or charges llPaid into and become part of the sec- and other matters affecting the open- ondary capital account; llPaid directly to the investor; ing, maintaining and closing of a share, llPaid into a separate account from which share draft or share certificate ac- the investor may make withdrawals; or count. State laws regulating such ac- llAny combination of the above provided tivities are not applicable to federal the details are specified and agreed to in credit unions. writing. (d) For purposes of this section, 7. Subordination of claims. In the event of ‘‘state law’’ means the constitution, liquidation of [name of credit union], the statutes, regulations, and judicial deci- funds committed to the secondary capital sions of any state, the District of Co- account will be subordinate to all other lumbia, the several territories and pos- claims on the assets of the credit union, including claims of member shareholders, sessions of the United States, and the creditors and the National Credit Union Commonwealth of Puerto Rico. Share Insurance Fund. [47 FR 17979, Apr. 27, 1982, as amended at 50 8. Prompt Corrective Action. Under certain FR 4637, Feb. 1, 1985; 59 FR 50445, Sept. 27, net worth classifications (see 12 CFR 1993] 702.204(b)(11), 702.304(b) and 702.305(b), as the case may be), the NCUA Board may prohibit § 701.36 FCU ownership of fixed assets. [name of credit union] from paying principal, dividends or interest on its uninsured sec- (a) Investment in Fixed Assets. (1) No ondary capital accounts established after Federal credit union with $1,000,000 or

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more in assets may invest in any fixed (b) Premises Not Currently Used To assets if the investment would cause Transact Credit Union Business. (1) When the aggregate of all such investments a Federal credit union acquires prem- to exceed five percent of the credit ises for future expansion and does not union’s shares and retained earnings. fully occupy the space within one year, (2) The NCUA may waive the prohibi- the credit union must have a board res- tion in paragraph (a)(1) of this section. olution in place by the end of that year (i) A Federal credit union desiring a with definitive plans for full occupa- waiver must submit a written request tion. Premises are fully occupied when to the NCUA regional office having ju- the credit union, or a combination of risdiction over the geographical area in the credit union, CUSOs, or vendors, which the credit union’s main office is use the entire space on a full-time located. The request must describe in basis. CUSOs and vendors must be detail the contemplated investment using the space primarily to support and the need for the investment. The the credit union or to serve the credit request must also indicate the approxi- union’s members. The credit union mate aggregate amount of fixed assets, must make any plans for full occupa- as a percentage of shares and retained tion available to an NCUA examiner earnings, that the credit union would upon request. hold after the investment. (2) When a Federal credit union ac- (ii) The regional director will inform quires premises for future expansion, the requesting credit union, in writing, the credit union must partially occupy of the date the request was received the premises within a reasonable pe- and of any additional documentation riod, not to exceed three years. Prem- that the regional director might re- ises are partially occupied when the quire in support of the waiver request. credit union is using some part of the (iii) The regional director will ap- space on a full-time basis. The NCUA prove or disapprove the waiver request may waive this partial occupation re- in writing within 45 days after receipt quirement in writing upon written re- of the request and all necessary sup- quest. The request must be made with- porting documentation. If the regional in 30 months after the property is ac- director approves the waiver, the required. gional director will establish an alternative limit on aggregate investments (3) A Federal credit union must make in fixed assets, either as a dollar limit diligent efforts to dispose of abandoned or as a percentage of the credit union’s premises and any other real property shares and retained earnings. Unless not intended for use in the conduct of otherwise specified by the regional di- credit union business. The credit union rector, the credit union may make fu- must seek fair market value for the ture acquisition of fixed assets only if property, and record its efforts to dis- the aggregate all of such future invest- pose of abandoned premises. After ments in fixed assets does not exceed premises have been abandoned for four an additional one percent of the shares years, the credit union must publicly and retained earnings of the credit advertise the property for sale. Unless union over the amount approved by the otherwise approved in writing by the regional director. NCUA, the credit union must complete (iv) If the regional director does not the sale within five years of abandon- notify the credit union of the action ment. taken on its request within 45 calendar (c) Prohibited Transactions. (1) With- days of the receipt of the waiver re- out the prior written approval of the quest or the receipt of additional re- NCUA, no federal credit union may in- quested supporting information, which- vest in premises through an acquisition ever occurs later, the credit union may or a lease of one year or longer from proceed with its proposed investment any of the following: in fixed assets. The investment, and (i) A director, member of the credit any future investments in fixed assets, committee or supervisory committee, must not cause the credit union to ex- or senior management employee of the ceed the aggregate investment limit federal credit union, or immediate fam- described in its waiver request. ily member of any such individual.

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(ii) A corporation in which any direc- (e) Definitions—As used in this sector, member of the credit committee or tion: supervisory committee, official, or sen- (1) Abandoned premises means real ior management employee, or imme- property previously used to transact diate family members of any such indi- credit union business but no longer vidual, is an officer or director, or has used for that purpose and real property a stock interest of 10 percent or more. originally acquired for future expan- (iii) A partnership, limited liability sion for which the credit union no company, or other entity in which any longer contemplates such use. director, member of the credit com- (2) Fixed assets means premises, fur- mittee or supervisory committee, or niture, fixtures and equipment. senior management employee, or im- (3) Furniture, fixtures, and equipment mediate family members of any such means all office furnishings, office ma- individual, is a general partner, or a chines, computer hardware and soft- limited partner or entity member with ware, automated terminals, and heat- an interest of 10 percent or more. ing and cooling equipment. (2) The prohibition contained in para- (4) Investments in fixed assets means: graph (c)(1) of this section also applies (i) Any investment in improved or to a lease from any other employee if unimproved real property which is the employee is directly involved in in- being used or is intended to be used as vestments in fixed assets unless the premises; board of directors determines that the (ii) Any leasehold improvement on employee’s involvement does not premises; present a conflict of interest. (iii) The aggregate of all capital and (3) All transactions with business as- operating lease payments on fixed associates or family members not specifi- sets, without discounting commit- cally prohibited by this paragraph (c) ments for future payments to present must be conducted at arm’s length and value; and in the interest of the credit union. (iv) Any investment in furniture, fix- (d) Regulatory Flexibility Program. tures and equipment. Federal credit unions that qualify for (5) Immediate family member means a the Regulatory Flexibility Program spouse or other family members living provided for in part 742 of this chapter in the same household. are exempt from the five percent limi- (6) Premises means any office, branch tation described in paragraph (a) of office, suboffice, service center, park- this section. Those federal credit ing lot, other facility, or real estate unions are also exempt from the three- where the credit union transacts or year partial occupancy requirement de- will transact business. scribed in paragraph (b) of this section (7) Senior management employee means when acquiring unimproved land for fu- the credit union’s chief executive offi- ture expansion pursuant to the terms cer (typically this individual holds the of section 742.4(a)(3) of this chapter. title of President or Treasurer/Man- For Federal credit unions eligible for ager), any assistant chief executive of- the Regulatory Flexibility Program ficers (e.g., Assistant President, Vice that subsequently lose eligibility: President or Assistant Treasurer/Man- (1) Section 742.8 of this chapter pro- ager) and the chief financial officer vides that NCUA may require the cred- (Comptroller). it union to divest any existing fixed as- (8) Shares means regular shares, share sets for substantive safety and sound- drafts, share certificates, other sav- ness reasons; and ings. (2) The credit union may not make (9) Retained earnings means undivided any new investments in fixed assets if, earnings, regular reserve, reserve for after the investment, the credit union’s contingencies, supplemental reserves, total investments in fixed assets would reserve for losses, and other appropria- exceed the five percent limitation de- tions from undivided earnings as des- scribed in paragraph (a) of this section. ignated by management or the Admin- The regional director may waive this istration. prohibition to allow for new invest- [69 FR 58042, Sept. 29, 2004, as amended at 74 ments. FR 13083, Mar. 26, 2009]

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§ 701.37 Treasury tax and loan deposi- the aggregate. Funds held in a Treas- taries; depositaries and financial ury General Account and a U.S. Treas- agents of the Government. ury Time Deposit—Open Account shall (a) Definitions. (1) Treasury Tax and be added together and insured up to a Loan (TT&L) Remittance Account maximum of $100,000 in the aggregate. means a nondividend-paying account, (d) Funds held in a TT&L Remittance the balance of which is subject to the Account, a TT&L Note Account, a right of immediate withdrawal, estab- Treasury General Account, and U.S. lished for receipt of payments of Fed- Treasury Time Deposit—Open Account eral taxes and certain United States are not subject to the 60-day notice re- obligations under United States Treas- quirement of Article III, section 5(a) of ury Department regulations. the Federal Credit Union Bylaws. (2) TT&L Note Account means an account subject to the right of immediate [54 FR 18471, May 1, 1989] call, evidencing funds held by deposi- § 701.38 Borrowed funds from natural taries electing the note option under persons. United States Treasury Department regulations. (a) Federal credit unions may borrow (3) Treasury General Account means an from a natural person, provided: account, established under United (1) The borrowing is evidenced by a States Treasury Department regula- signed promissory note which sets tions, in which a zero balance may be forth the terms and conditions regard- maintained and from which the entire ing maturity, prepayment, interest balance may be withdrawn by the de- rate, method of computation, and positor immediately under all cir- method of payment; cumstances except closure of the credit (2) The promissory note and any ad- union. vertisement for such funds contains (4) U.S. Treasury Time Deposit—Open conspicuous langauge indicating that: Account means a nondividend-bearing (i) The note represents money bor- account, established under United rowed by the credit union; States Treasury Department regula- (ii) The note does not represent tions, which generally may not be shares and, therefore, is not insured by withdrawn until the expiration of 14 the National Credit Union Share Insur- days after the date of the United ance Fund. States Treasury Department’s written (b) Federal credit unions must com- notice of intent to withdraw. ply with the maximum borrowing au- (b) Subject to regulation of the thority of § 741.2 of this chapter. United States Treasury Department, a Federal credit union may serve as a [45 FR 29271, May 2, 1980, as amended at 47 Treasury tax and loan depositary, a de- FR 17979, Apr. 27, 1982; 72 FR 30246, May 31, positary of Federal taxes, a depositary 2007] of public money, and a financial agent § 701.39 Statutory lien. of the United States Government. In serving in these capacities, a Federal (a) Definitions. Within this section, credit union may maintain the ac- each of the following terms has the counts defined in subsection (a), pledge meaning prescribed below: collateral, and perform the services de- (1) Except as otherwise provided by law scribed under United States Treasury or except as otherwise provided by federal Department regulations for institu- law is a qualifying phrase referring to a tions acting in these capacities. federal and/or state law, as the case (c) Funds held in a TT&L Remittance may be, which supersedes a require- Account, a TT&L Note Account, a ment of this section. It is the responsi- Treasury General Account, and a U.S. bility of the credit union to ascertain Treasury Time Deposit—Open Account whether such statutory or case law ex- shall be considered deposits of public ists and is applicable; funds. Funds held in a TT&L Remit- (2) Impress means to attach to a mem- tance Account and a TT&L Note Ac- ber’s account and is the act which count shall be added together and in- makes the lien enforceable against sured up to a maximum of $100,000 in that account;

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(3) Member means any member who is ber’s outstanding financial obligations primarily, secondarily or otherwise re- to the credit union. sponsible for an outstanding financial (2) Default required. A federal credit obligation to the credit union, includ- union may enforce its statutory lien ing without limitation an obligor, against a member’s account(s) only maker, co-maker, guarantor, co-signer, when the member fails to satisfy an endorser, surety or accommodation outstanding financial obligation due party; and payable to the credit union. (4) Notice means written notice to a (3) Neither judgment nor set-off re- member disclosing, in plain language, quired. A federal credit union need not that the credit union has the right to obtain a court judgment on the mem- impress and enforce a statutory lien ber’s debt, nor exercise the equitable against the member’s shares and divi- right of set-off, prior to enforcing its dends in the event of failure to satisfy statutory lien against the member’s a financial obligation, and may enforce account. the right without further notice to the member. Such notice must be given at [64 FR 56956, Oct. 22, 1999] the time, or at any time before, the APPENDIX A TO PART 701—FEDERAL member incurs the financial obliga- CREDIT UNION BYLAWS tion; (5) Statutory lien means the right INTRODUCTION granted by section 107(11) of the Fed- A. Effective date. After consideration of eral Credit Union Act, 12 U.S.C. public comment, the National Credit Union 1757(11), to a federal credit union to es- Administration (NCUA) Board adopted these tablish a right in or claim to a mem- Bylaws and incorporated them as appendix A ber’s shares and dividends equal to the to Part 701 of NCUA’s regulations on Novem- amount of that member’s outstanding ber 30, 2007. Unless a federal credit union has financial obligation to the credit adopted bylaws before November 30, 2007, it union, as that amount varies from time must adopt these revised bylaws. to time. B. Adoption of all or part of these bylaws. Al- though federal credit unions may retain any (b) Superior claim. Except as other- previously approved version of the bylaws, wise provided by law, a statutory lien the NCUA Board encourages federal credit gives the federal credit union priority unions to adopt the revised bylaws because it over other creditors when claims are believes they provide greater clarity and asserted against a member’s ac- flexibility for credit unions and their offi- count(s). cials and members. Federal credit unions (c) Impressing a statutory lien. Except may also adopt portions of the revised by- as otherwise provided by federal law, a laws and retain the remainder of previously approved bylaws, but the NCUA Board cau- credit union can impress a statutory tions federal credit unions to be extremely lien on a member’s account(s)— careful. Federal credit unions must be care- (1) Account records. By giving notice ful because they run the risk of having in- thereof in the member’s account agree- consistent or conflicting provisions because ment(s) or other account opening docu- of the various options the revised bylaws mentation; or provide as well as other revisions in the text. (2) Loan documents. In the case of a C. Bylaw amendments. 1. The FCU Bylaws loan, by giving notice thereof in a loan contain several provisions allowing FCU boards to select from an option or range of document signed or otherwise acknowl- options and fill in a blank. Changes to ‘‘fill- edged by the member(s); or in-the-blank’’ provisions are, in fact, changes (3) By-Law or policy. Through a duly to the FCU’s bylaws and require a two-thirds adopted credit union by-law or policy vote of the board. As long as the FCU selects of the board of directors, of which the from the permissible options for completing member is given notice. the blank, the FCU need not submit the (d) Enforcing a statutory lien—(1) Ap- change for NCUA approval using the process plication of funds. Except as otherwise outlined below. provided by federal law, a federal cred- 2. Federal credit unions continue to have the flexibility to request other bylaw amend- it union may enforce its statutory lien ments if the need arises. NCUA must approve against a member’s account(s) by deb- any bylaw amendments; federal credit iting funds in the account and applying unions may no longer adopt amendments them to the extent of any of the mem- from the ‘‘Standard Bylaw Amendments’’

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booklet because the 1999 revisions to the by- with jurisdiction for the credit union for as- laws included sufficient flexibility to make sistance in resolving the dispute. the separate list of standard bylaw amend- 3. NCUA has discretion to take administra- ments superfluous. Thus, NCUA no longer tive actions when a credit union is not in differentiates between ‘‘standard’’ and ‘‘noncompliance with its bylaws. If a potential standard’’ bylaw amendments. violation is identified, NCUA will carefully 3. The procedure for approval of bylaw consider all of the facts and circumstances in amendments is as follows: deciding whether to take enforcement ac- a. The federal credit union wishing to tion. NCUA will not take action against adopt a bylaw amendment must file a re- minor or technical violations, but empha- quest with its regional director. sizes that it retains discretion to enforce the b. The request must include the section of bylaws in appropriate cases, such as safety the bylaws to be amended; the reason for or and soundness concerns or threats to funda- purpose of the amendment, including an ex- mental, material credit union member planation of why the amendment is desirable rights. and what it will accomplish for the credit TABLE OF CONTENTS union; and the specific, proposed wording of the amendment. Page c. After review by the regional director and consultation within the agency, the regional Article I. Name—Purposes director will advise the credit union if a pro- Article II. Qualifications for Membership posed amendment is approved. Article III. Shares of Members 4. Federal credit unions considering an Article IV. Meetings of Members amendment may find it useful to review the Article V. Elections bylaws section of the agency Web site, which Article VI. Board of Directors includes Office of General Counsel opinions Article VII. Board Officers, Management Of- about proposed bylaw amendments. Opinions ficials and Executive Committee issued after April 2006 will include the lan- Article VIII. Credit Committee or Loan Offi- guage of approved amendments. Even if an cers amendment has been previously approved, Article IX. Supervisory Committee the credit union must submit a proposed Article X. Organization Meeting amendment to NCUA for review under the Article XI. Loans and Lines of Credit to procedure listed above to ensure the amend- Members ment is identical. Credit unions requesting Article XII. Dividends previously approved amendments will re- Article XIII. Reserved ceive notice of the regional office’s decision Article XIV. Expulsion and Withdrawal within 15 business days of the receipt of the Article XV. Minors request. Article XVI. General Article XVII. Amendments of Bylaws and D. The nature of the bylaws. 1. The Federal Charter Credit Union Act requires the NCUA Board Article XVIII. Definitions to prepare bylaws for federal credit unions. 12 U.S.C. 1758. The bylaws address a broad BYLAWS range of matters concerning a credit union’s organization and governance, the relation- FEDERAL CREDIT UNION, CHARTER ship of the credit union to its members, and NO.llllll the procedures and rules a credit union follows. The bylaws supplement the broad pro- (A corporation chartered under the laws of visions of: A federal credit union’s charter, the United States) which establishes the existence of a federal ARTICLE I. NAME—PURPOSES credit union; the Federal Credit Union Act, which establishes the powers of federal cred- Section 1. Name. The name of this credit it unions; and NCUA regulations, which im- union is as stated in Section 1 of the charter plement the Federal Credit Union Act. As a (approved organization certificate) of this legal matter, a federal credit union’s bylaws credit union. must conform to and cannot be inconsistent Section 2. Purposes. This credit union is a with any provision of its charter, the Federal member-owned, democratically operated, Credit Union Act, NCUA regulations or other not-for-profit organization managed by a laws or regulations applicable to its oper- volunteer board of directors, with the speci- ations. fied mission of meeting the credit and sav- 2. NCUA expects federal credit unions and ings needs of consumers, especially persons their members will make every effort to re- of modest means. The purpose of this credit solve bylaw disputes using the credit union’s union is to promote thrift among its mem- internal member complaint resolution proc- bers by affording them an opportunity to ac- ess. If a bylaw dispute cannot be resolved in- cumulate their savings and to create for ternally, however, credit union officials or them a source of credit for provident or pro- members should contact the regional office ductive purposes. The credit union may add

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business as one of its purposes by placing a within lll of admission to membership, or comma after ‘‘provident’’ and inserting ‘‘busi- within lll from the increase in the par ness.’’ value of shares, or a member who reduces the share balance below the par value of one ARTICLE II. QUALIFICATIONS FOR MEMBERSHIP share and does not increase the balance to at Section 1. Field of membership. The field of least the par value of one share within lll membership of this credit union is limited to of the reduction will be terminated from that stated in Section 5 of its charter. membership. Section 2. Membership application proce- Section 4. Transferability. Shares may only dures. Applications for membership from per- be transferred from one member to another sons eligible for membership under Section 5 by an instrument in a form as the board may of the charter must be signed by the appli- prescribe. Shares that accrue credits for un- cant on forms approved by the board. The ap- paid dividends retain those credits when plicant is admitted to membership after ap- transferred. proval of an application by a majority of the Section 5. Withdrawals. Money paid in on directors, a majority of the members of a shares or installments of shares may be duly authorized executive committee, or by withdrawn as provided in these bylaws or a membership officer, and after subscription regulation on any day when payment on to at least one share of this credit union and shares may be made, provided, however, that the payment of the initial installment, and (a) The board has the right, at any time, to the payment of a uniform entrance fee if re- require members to give up to 60 days writ- quired by the board. If a person whose mem- ten notice of intention to withdraw the bership application is denied makes a writ- whole or any part of the amounts paid in by ten request, the credit union must explain them. the reasons for the denial in writing. (b) Reserved. Section 3. Maintenance of membership share (c) No member may withdraw any required. A member who withdraws all shareholdings below the amount of the mem- shareholdings or fails to comply with the ber’s primary or contingent liability to the time requirements for restoring his or her credit union if the member is delinquent as account balance to par value in Article III, a borrower, or if borrowers for whom the Section 3, ceases to be a member. By resolu- member is comaker, endorser, or guarantor tion, the board may require persons re- are delinquent, without the written approval admitted to membership to pay another en- of the credit committee or loan officer. Cov- trance fee. erage of overdrafts under an overdraft pro- Section 4. Continuation of membership. Once tection policy does not constitute delin- a member becomes a member that person quency for purposes of this paragraph. may remain a member until the person or or- Shares issued in an irrevocable trust as pro- ganization chooses to withdraw or is expelled vided in Section 6 of this article are not sub- in accordance with the Act and Article XIV ject to withdrawal restrictions except as of these bylaws. A member who is disruptive stated in the trust agreement. to credit union operations may be subject to (d) The share account of a deceased mem- limitations on services and access to credit ber (other than one held in joint tenancy union facilities. A credit union that wishes to with another member) may be continued restrict services to members no longer within the until the close of the dividend period in field of membership should specify the restric- which the administration of the deceased’s tions in this section. estate is completed. Staff commentary on qualifications for (e) The board will have the right, at any membership: time, to impose a fee for excessive share Entrance fee—FCUs may not vary the en- withdrawals from regular share accounts. trance fee among different classes of mem- The number of withdrawals not subject to a bers because the Act requires a uniform fee. fee and the amount of the fee will be estab- FCUs may, however, eliminate the entrance lished by board resolution and will be subject fee for all applicants. to regulations applicable to the advertising and disclosure of terms and conditions on ARTICLE III. SHARES OF MEMBERS member accounts. Section 1. Par value. The par value of each Section 6. Trusts. Shares may be issued in share will be $lll. Subscriptions to shares a revocable or irrevocable trust, subject to are payable at the time of subscription, or in the following: installments of at least $lll per month. When shares are issued in a revocable Section 2. Cap on shares held by one person. trust, the settlor must be a member of this The board may establish, by resolution, the credit union in his or her own right. When maximum amount of shares that any one shares are issued in an irrevocable trust, ei- member may hold. ther the settlor or the beneficiary must be a Section 3. Time periods for payment and member of this credit union. The name of maintenance of membership share. A member the beneficiary must be stated in both a rev- who fails to complete payment of one share ocable and irrevocable trust. For purposes of

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this section, shares issued pursuant to a pen- miles of an office, at the time and place as sion plan authorized by the rules and regula- the board determines and announces in the tions will be treated as an irrevocable trust notice of the annual meeting. unless otherwise indicated in the rules and Section 2. Notice of meetings required. a. At regulations. least 30 but no more than 75 days before the Section 7. Joint accounts and membership re- date of any annual meeting or at least 7 days quirements. Select one option and check the box before the date of any special meeting of the corresponding to that option. members, the secretary must give written l Option A—Separate account not required notice to each member. Notice may be by to establish membership written notice delivered in person or by mail Owners of a joint account may both be to the member’s address, or, for members members of the credit union without opening who have opted to receive statements and separate accounts. For joint membership, notices electronically, by electronic mail. both owners are required to fulfill all of the Notice of the annual meeting may be given membership requirements including each by posting the notice in a conspicuous place member purchasing and maintaining at least in the office of this credit union where it one share in the account. may be read by the members, at least 30 days l Option B—Separate account required to es- before the meeting, if the annual meeting is tablish membership to be held during the same month as that of Each member must purchase and maintain the previous annual meeting and if this cred- at least one share in a share account that it union maintains an office that is readily names the member as the sole or primary accessible to members where regular busi- owner. Being named as a joint owner of a ness hours are maintained. Any meeting of joint account is insufficient to establish the members, whether annual or special, membership. may be held without prior notice, at any Staff commentary on shares: place or time, if all the members entitled to i. Installments—FCUs may insert zero for vote, who are not present at the meeting, the number of installments. The FCU Act al- waive notice in writing, before, during, or lows membership upon the payment of the after the meeting. initial installment of a membership share, but NCUA no longer views this provision as b. Notice of any special meeting must state requiring FCUs to offer the option of paying the purpose for which it is to be held, and no for the membership share in installments. business other than that related to this pur- ii. Par value—FCUs may establish differing pose may be transacted at the meeting. par values for different classes of members Section 3. Special meetings. a. Special meet- or types of accounts, provided this action ings of the members may be called by the does not violate any federal, state or local chair or the board of directors upon a major- antidiscrimination laws. For example, an ity vote, or by the supervisory committee as FCU may want to establish a higher par provided in these bylaws. The chair must value for recent credit union members, with- call a special meeting, meaning the meeting out requiring long-time members to bring must be held, within 30 days of the receipt of their accounts up to the new par value. A a written request of 25 members or 5% of the differing par value may also be permissible members as of the date of the request, for different types of accounts, such as re- whichever number is larger. However, a requiring a higher par value for a member with quest of no more than 750 members may be only a share draft account. If a credit union required to call a special meeting. adopts differing par values, all of the pos- b. The notice of a special meeting must be sible par values should be stated in Section given as provided in Section 2 of this article. 1. Special meetings may be held at any loca- iii. Reduction in share balance below par tion permitted for the annual meeting. value—When a member’s account balance Section 4. Items of business for annual meet- falls below the par value, Section 3 requires ing and rules of order for annual and special FCUs to allow members a minimum time pe- meetings. The suggested order of business at riod to restore their account balance to the annual meetings of members is— par value before membership is terminated. (a) Ascertainment that a quorum is FCUs may not delete this requirement or de- present. lete references to this requirement in Article (b) Reading and approval or correction of II, Section 3. the minutes of the last meeting. (c) Report of directors, if there is one. For ARTICLE IV. MEETINGS OF MEMBERS credit unions participating in the Commu- Section 1. Annual meeting. The annual nity Development Revolving Loan Program, meeting of the members must be held [insert the directors must report on the credit time for annual meeting, for example, ‘‘dur- union’s progress on providing needed coming the month of March/on the third Satur- munity services, if required by NCUA Regu- day of April/ no later than March 31’’], in the lations. county in which any office of the credit (d) Report of the financial officer or the union is located or within a radius of 100 chief management official.

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(e) Report of the credit committee, if there the results announced. All elections are de- is one. termined by plurality vote and will be by (f) Report of the supervisory committee, as ballot except where there is only one nomi- required by Section 115 of the Act. nee for the office. (g) Unfinished business. (h) New business other than elections. Option A2—In-Person Elections; Nominating (i) Elections, as required by Section 111 of Committee and Nominations by Petition the Act. Section 1. Nomination procedures. a. At (j) Adjournment. least 120 days before each annual meeting k. To the extent consistent with these by- the chair will appoint a nominating com- laws, all meetings of the members will be mittee of three or more members. It is the conducted according to llllll. The duty of the nominating committee to nomi- order of business for the annual meeting may nate at least one member for each vacancy, vary from the suggested order, provided it including any unexpired term vacancy, for includes all required items and complies which elections are being held, and to deter- with the rules of procedure adopted by the mine that the members nominated are agree- credit union. able to the placing of their names in nomina- The credit union must fill in the blank with tion and will accept office if elected. one of the following authorities, noting the edi- b. The nominating committee files its tion to be used: Democratic Rules of Order, The nominations with the secretary of the credit Modern Rules of Order, Robert’s Rules of Order, union at least 90 days before the annual or Sturgis’ Standard Code of Parliamentary meeting, and the secretary notifies in writ- Procedure. ing all members eligible to vote at least 75 Section 5. Quorum. Except as otherwise days before the annual meeting that nomina- provided, 15 members constitute a quorum at tions for vacancies may also be made by pe- annual or special meetings. If no quorum is tition signed by 1% of the members with a present, an adjournment may be taken to a minimum of 20 and a maximum of 500. The date at least 7 but not more than 14 days secretary may use electronic mail to notify thereafter. The members present at any ad- members who have opted to receive notices journed meeting will constitute a quorum, or statements electronically. regardless of the number of members c. The written notice must indicate that present. The same notice must be given for the election will not be conducted by ballot the adjourned meeting as is prescribed in and there will be no nominations from the Section 2 of this article for the original floor when the number of nominees equals meeting, except that the notice must be the number of positions to be filled. A brief given at least 5 days before the date of the statement of qualifications and biographical meeting as fixed in the adjournment. data in a form approved by the board of directors will be included for each nominee ARTICLE V. ELECTIONS submitted by the nominating committee The Credit Union must select one of the four with the written notice to all eligible mem- voting options. This may be done by printing bers. Each nominee by petition must submit the credit union’s bylaws with the option se- a similar statement of qualifications and biographical data with the petition. The writ- lected or retaining this copy and checking the ten notice must state the closing date for re- box of the option selected. All options continue ceiving nominations by petition. In all cases, with Section 3 of this article. the period for receiving nominations by peti- Option A1—In-Person Elections; Nominating tion must extend at least 30 days from the Committee and Nominations From Floor date that the petition requirement and the list of nominating committee’s nominees are Section 1. Nomination procedures. At least mailed to all members. To be effective, 30 days before each annual meeting, the nominations by petition must be accom- chair will appoint a nominating committee panied by a signed certificate from the nomi- of three or more members. It is the duty of nee or nominees stating that they are agree- the nominating committee to nominate at able to nomination and will serve if elected least one member for each vacancy, includ- to office. Nominations by petition must be ing any unexpired term vacancy, for which filed with the secretary of the credit union elections are being held, and to determine at least 40 days before the annual meeting that the members nominated are agreeable and the secretary will ensure that nomina- to the placing of their names in nomination tions by petition, along with those of the and will accept office if elected. nominating committee, are posted in a con- Section 2. Election procedures. After the spicuous place in each credit union office at nominations of the nominating committee least 35 days before the annual meeting. have been placed before the members, the Section 2. Election procedures. a. All per- chair calls for nominations from the floor. sons nominated by either the nominating When nominations are closed, the chair ap- committee or by petition must be placed be- points the tellers, ballots are distributed, the fore the members. When nominations are vote is taken and tallied by the tellers, and closed, the chair appoints the tellers, ballots

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are distributed, the vote is taken and tallied of nominating committee’s nominees are by the tellers, and the results announced. All mailed to all members. To be effective, elections are determined by plurality vote nominations by petition must be accom- and will be by ballot except where there is panied by a signed certificate from the nomi- only one nominee for each position to be nee or nominees stating that they are agree- filled. able to nomination and will serve if elected b. If sufficient nominations are made by to office. Nominations by petition must be the nominating committee or by petition to filed with the secretary of the credit union provide at least as many nominees as posi- at least 40 days before the annual meeting tions to be filled, nominations cannot be and the secretary will ensure that nomina- made from the floor. In the event nominations by petition along with those of the tions from the floor are permitted and result nominating committee are posted in a con- in more nominees than positions to be filled, spicuous place in each credit union office at when nominations have been closed, the least 35 days before the annual meeting. chair appoints the tellers, ballots are distrib- Section 2. Election procedures. All elections uted, the vote is taken and tallied by the are determined by plurality vote. The elec- tellers, and the results announced. When the tion will be conducted by ballot boxes or vot- number of nominees equals the number of ing machines, subject to the following condi- positions to be filled, the chair may take a tions: voice vote or declare each nominee elected (a) The board of directors will appoint the by general consent or acclamation at the an- election tellers; nual meeting. (b) If sufficient nominations are made by the nominating committee or by petition to Option A3—Election by Ballot Boxes or Voting provide more nominees than positions to be Machine; Nominating Committee and Nomina- filled, the secretary, at least 10 days before tion by Petition the annual meeting, will cause ballot boxes Section 1. Nomination procedures. a. At and printed ballots, or voting machines, to least 120 days before each annual meeting, be placed in conspicuous locations, as deter- the chair will appoint a nominating com- mined by the board of directors with the mittee of three or more members. It is the names of the candidates posted near the duty of the nominating committee to nomi- boxes or voting machines. The name of each nate at least one member for each vacancy, candidate will be followed by a brief state- including any unexpired term vacancy, for ment of qualifications and biographical data which elections are being held, and to deter- in a form approved by the board of directors; mine that the members nominated are agree- (c) After the members have been given 24 able to the placing of their names in nomina- hours to vote at conspicuous locations as de- tion and will accept office if elected. termined by the board of directors, the bal- b. The nominating committee files its lot boxes or voting machines will be opened, nominations with the secretary of the credit the vote tallied by the tellers, the tallies union at least 90 days before the annual placed in the ballot boxes, and the ballot meeting, and the secretary notifies in writ- boxes resealed. The tellers are responsible at ing all members eligible to vote at least 75 all times for the ballot boxes or voting ma- days before the annual meeting that nomina- chines and the integrity of the vote. A record tions for vacancies may also be made by pe- must be kept of all persons voting and the tition signed by 1% of the members with a tellers must assure themselves that each minimum of 20 and a maximum of 500. The person voting is entitled to vote; and secretary may use electronic mail to notify (d) The tellers will take the ballot boxes to members who have opted to receive notices the annual meeting. At the annual meeting, or statements electronically. printed ballots will be distributed to those in c. The written notice must indicate that attendance who have not voted and their the election will not be conducted by ballot votes will be deposited in the ballot boxes and there will be no nominations from the placed by the tellers, before the beginning of floor when the number of nominees equals the meeting, in conspicuous locations with the number of positions to be filled. A brief the names of the candidates posted near statement of qualifications and biographical them. After those members have been given data in a form approved by the board of dian opportunity to vote at the annual meet- rectors will be included for each nominee ing, balloting will be closed, the ballot boxes submitted by the nominating committee opened, the vote tallied by the tellers and with the written notice to all eligible mem- added to the previous count, and the chair bers. Each nominee by petition must submit will announce the result of the vote. a similar statement of qualifications and bi- Option A4—Election by Electronic Device (In- ographical data with the petition. The writ- cluding But Not Limited To Telephone and ten notice must state the closing date for re- Electronic Mail) or Mail Ballot; Nominating ceiving nominations by petition. In all cases, Committee and Nominations by Petition the period for receiving nominations by petition must extend at least 30 days from the Section 1. Nomination procedures. a. At date of the petition requirement and the list least 120 days before each annual meeting,

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the chair will appoint a nominating com- tice of ballot to members who have opted to mittee of three or more members. It is the receive notices or statements electronically; duty of the nominating committee to nomi- (c) If the credit union is conducting its nate at least one member for each vacancy, elections electronically, the secretary will including any unexpired term vacancy, for cause the following materials to be trans- which elections are being held, and to deter- mitted to each eligible voter and the fol- mine that the members nominated are agree- lowing procedures will be followed: able to the placing of their names in nomina- (1) One notice of balloting stating the tion and will accept office if elected. names of the candidates for the board of di- b. The nominating committee files its rectors and the candidates for other sepa- nominations with the secretary of the credit rately identified offices or committees. The union at least 90 days before the annual name of each candidate must be followed by meeting, and the secretary notifies in writ- a brief statement of qualifications and bio- ing all members eligible to vote at least 75 graphical data in a form approved by the days before the annual meeting that nomina- board of directors. Electronic mail may be tions for vacancies may also be made by pe- used to provide the notice of ballot to mem- tition signed by 1% of the members with a bers who have opted to receive notices or minimum of 20 and a maximum of 500. The statements electronically. secretary may use electronic mail to notify (2) One mail ballot that conforms to Sec- members who have opted to receive notices tion 2(d) of this article and one instruction or statements electronically. sheet stating specific instructions for the c. The notice must indicate that the elec- electronic election procedure, including how tion will not be conducted by ballot and to access and use the system, and the period there will be no nominations from the floor of time in which votes will be taken. The in- when the number of nominees equals the struction will state that members without number of positions to be filled. A brief the requisite electronic device necessary to statement of qualifications and biographical vote on the system may vote by submitting data in a form approved by the board of di- the enclosed mail ballot and specify the date rectors will be included for each nominee the mail ballot must be received by the cred- submitted by the nominating committee it union. For members who have opted to re- with the notice to all eligible members. Each nominee by petition must submit a similar ceive notices or statements electronically, statement of qualifications and biographical the mail ballot is not required and electronic data with the petition. The notice must mail may be used to provide the instructions state the closing date for receiving nomina- for the electronic election procedure. tions by petition. In all cases, the period for (3) It is the duty of the tellers of election receiving nominations by petition must ex- to verify, or cause to be verified the name of tend at least 30 days from the date of the pe- the voter and the credit union account num- tition requirement and the list of nomi- ber as they are registered in the electronic nating committee’s nominees are mailed to balloting system. It is the duty of the teller all members. To be effective, nominations by to test the integrity of the balloting system petition must be accompanied by a signed at regular intervals during the election pe- certificate from the nominee or nominees riod. stating that they are agreeable to nomina- (4) Ballots must be received no later than tion and will serve if elected to office. Nomi- midnight, 5 calendar days before the annual nations by petition must be filed with the meeting. secretary of the credit union at least 40 days (5) The vote will be tallied by the tellers. before the annual meeting and the secretary The result must be verified at the annual will ensure that nominations by petition, meeting and the chair will make the result along with those of the nominating com- of the vote public at the annual meeting. mittee, are posted in a conspicuous place in (6) In the event of malfunction of the elec- each credit union office at least 35 days be- tronic balloting system, the board of direc- fore the annual meeting. tors may in its discretion order elections be Section 2. Election procedures. All elections held by mail ballot only. The mail ballots are determined by plurality vote. All elec- must conform to Section 2(d) of this article tions will be by electronic device or mail bal- and must be mailed once more to all eligible lot, subject to the following conditions: members 30 days before the annual meeting. (a) The board of directors will appoint the The board may make reasonable adjustments election tellers; to the voting time frames above, or postpone (b) If sufficient nominations are made by the annual meeting when necessary, to com- the nominating committee or by petition to plete the elections before the annual meet- provide more nominees than positions to be ing. filled, the secretary, at least 30 days before (d) If the credit union is conducting its the annual meeting, will cause either a election by mail ballot, the secretary will printed ballot or notice of ballot to be cause the following materials to be mailed to mailed to all members eligible to vote. Elec- each member and the following procedures tronic mail may be used to provide the no- will be followed:

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(1) One ballot, clearly identified as the bal- officers, executive committee, and members lot on which the names of the candidates for of the credit committee, if applicable, and the board of directors and the candidates for supervisory committees must be forwarded other separately identified offices or com- to the Administration in accordance with mittees are printed in random order. The the Act and regulations in the manner as name of each candidate will be followed by a may be required by the Administration. brief statement of qualifications and bio- Section 7. Minimum age requirement. Mem- graphical data in a form approved by the bers must be at least l years of age by the board of directors; date of the meeting (or for appointed offices, (2) One ballot envelope clearly marked the date of appointment) in order to vote at with instructions that the completed ballot meetings of the members, hold elective or must be placed in that envelope and sealed; appointive office, sign nominating petitions, (3) One identification form to be completed or sign petitions requesting special meet- so as to include the name, address, signature ings. and credit union account number of the The Credit Union’s board should adopt a reso- voter; lution inserting an age no greater than 18, or (4) One mailing envelope in which the the age of majority under the state law applica- voter, following instructions provided with ble to the credit union, in the blank space. the mailing envelope, must insert the sealed The Credit Union may select the absentee bal- ballot envelope and the identification form, lot provision in conjunction with the voting pro- and which must have postage prepaid and be cedure it has selected. This may be done by preaddressed for return to the tellers; printing the credit union’s bylaws with this pro- (5) When properly designed with features vision or by retaining this copy and checking that preserve the secrecy of the ballot, one the box. form can be printed that represents a com- l Section 8. Absentee ballots. The board of bined ballot and identification form, and directors may authorize the use of absentee postage prepaid and preaddressed return en- ballots in conjunction with the other proce- velope; (6) It is the duty of the tellers to verify, or dures authorized in this article, subject to cause to be verified, the name and credit the following conditions: union account number of the voter as ap- (a) The board of directors will appoint the pearing on the identification form; to place election tellers; the verified identification form and the (b) If sufficient nominations are made by sealed ballot envelope in a place of safe- the nominating committee or by petition to keeping pending the count of the vote; in the provide more than one nominee for any posi- case of a questionable or challenged identi- tion to be filled, the secretary, at least 30 fication form, to retain the identification days before the annual meeting, will cause form and sealed ballot envelope together printed ballots to be mailed to all members until the verification or challenge has been of the credit union who are eligible to vote resolved; and who have submitted a written or elec- (7) Ballots mailed to the tellers must be re- tronic request for an absentee ballot; ceived by the tellers no later than midnight (c) The secretary will cause the following 5 days before the date of the annual meeting; materials to be mailed to each eligible voter (8) The vote will be tallied by the tellers. who has submitted a written or electronic The result will be verified at the annual request for an absentee ballot: meeting and the chair will make the result (1) One ballot, clearly identified as the bal- of the vote public at the annual meeting. lot on which the names of the candidates for the board of directors and the candidates for All Options Continue Here other separately identified offices or com- Section 3. Order of nominations. Nomina- mittees are printed in random order. The tions may be in the following order: name of each candidate will be followed by a (a) Nominations for directors. brief statement of qualifications and bio- (b) Nominations for credit committee graphical data in a form approved by the members, if applicable. Elections may be by board of directors; separate ballots following the same order as (2) One ballot envelope clearly marked the above nominations or, if preferred, may with instructions that the completed ballot be by one ballot for all offices. must be placed in that envelope and sealed; Section 4. Proxy and agent voting. Members (3) One identification form to be completed cannot vote by proxy. A member other than so as to include the name, address, signature a natural person may vote through an agent and credit union account number of the designated in writing for the purpose. voter; Section 5. One vote per member. Irrespective (4) One mailing envelope in which the of the number of shares, no member has voter, pursuant to instructions provided more than one vote. with the envelope, must insert the sealed Section 6. Submission of information regard- ballot envelope and the identification form, ing credit union officials to NCUA. The names and which must have postage prepaid and be and addresses of members of the board, board preaddressed for return to the tellers;

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(5) When properly designed with features by the nominating committee; they cannot that preserve the secrecy of the ballot, one be imposed on individuals who meet the eli- form can be printed that represents a com- gibility requirements and are properly nomi- bined ballot and identification form, and nated from the floor or by petition. postage prepaid and preaddressed return en- iii. Candidates’ Names on Ballots: When pro- velope; ducing an election ballot, the FCU’s sec- (d) It is the duty of the election tellers to retary may order the names of the can- verify, or cause to be verified, the name and didates on the ballot using any method for credit union account number of the voter as selection provided it is random and used con- appearing on the identification form; to sistently from year to year so as to avoid place the verified identification and the manipulation or favoritism. sealed ballot envelope in a place of safe- iv. Secret Ballots: An FCU must establish an keeping pending the count of the vote; in the election process that assures members their case of a questionable or challenged identi- votes remain confidential and secret from all fication form, to retain the identification interested parties. If the election process form and the sealed ballot envelope together does not separate the member’s identity until the verification or challenge has been from the ballot, FCUs should use a third- resolved; and in the event that more than party teller that has sole control over com- one voting procedure is used, to verify that pleted ballots. If the ballots are designed so no eligible voter has voted more than one that members’ identities remain secret and time; are not disclosed on the ballot, FCUs may (e) Ballots mailed to the tellers must be reuse election tellers from the FCU. In any ceived by the tellers no later than midnight case, FCU employees, officials, and members 5 days before the date of the annual meeting; must not have access to ballots identifying (f) Absentee ballots will be deposited in the members or to information that links mem- ballot boxes to be taken to the annual meet- bers’ votes to their identities. ing or included in a precount in accordance v. Plurality Voting: At least one nominee with procedures specified in Article V, Sec- must be nominated for each vacant seat. tion 2; and When there are more nominees than seats (g) If a member has chosen to receive open for election, the nominees who receive statements and notices electronically, the the greatest number of votes are elected to credit union may provide notices required in the vacant seats. this section by email and provide instruc- vi. Minimum Age Requirement: The age the tions for voting via electronic means instead board selects may not be greater than the of mail ballots. age of majority under the state law applica- Staff commentary on the election process: ble to the credit union. i. Eligibility Requirements: The Act and the FCU Bylaws contain the only eligibility re- ARTICLE VI. BOARD OF DIRECTORS quirements for membership on an FCU’s Section 1. Number of members. The board board of directors, which are as follows: consists of lllmembers, all of whom must (a) The individual must be a member of the be members of this credit union. The number FCU before distribution of ballots; of directors may be changed to an odd num- (b) the individual cannot have been con- ber not fewer than 5 nor more than 15 by res- victed of a crime involving dishonesty or olution of the board. No reduction in the breach of trust unless the NCUA Board has number of directors may be made unless cor- waived the prohibition for the conviction; responding vacancies exist as a result of and deaths, resignations, expiration of terms of (c) the individual meets the minimum age office, or other actions provided by these by- requirement established under Article V, laws. A copy of the resolution of the board Section 7 of the FCU Bylaws. covering any increase or decrease in the Anyone meeting the three eligibility re- number of directors must be filed with the quirements may run for a seat on the board official copy of the bylaws of this credit of directors if properly nominated. It is the union. nominating committee’s duty to ascertain Section 2. Composition of board. lll(Fill that all nominated candidates, including in the number, which may be zero) directors those nominated by petition, meet the eligi- or committee members may be a paid em- bility requirements. ployee of the credit union. lll(Fill in the ii. Nomination Criteria for Nominating Com- number, which may be zero) immediate fam- mittee: The FCU Act and the FCU Bylaws do ily members of a director or committee not prohibit a board of directors from estab- member may be a paid employee of the cred- lishing reasonable criteria, in addition to the it union. In no case may employees, family eligibility requirements, for a nominating members, or employees and family members committee to follow in making its nomina- constitute a majority of the board. The tions, such as financial experience, years of board may appoint a management official membership, or conflict of interest provi- who lll(may or may not) be a member of sions. The board’s nomination criteria, how- the board and one or more assistant manage- ever, applies only to individuals nominated ment officials who lll(may or may not) be

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a member of the board. If the management (a) Directing the affairs of the credit union official or assistant management official is in accordance with the Act, these bylaws, permitted to serve on the board, he or she the rules and regulations and sound business may not serve as the chair. practices. Section 3. Terms of office. Regular terms of (b) Establishing programs to achieve the office for directors must be for periods of ei- purposes of this credit union as stated in Ar- ther 2 or 3 years as the board determines. All ticle I, Section 2, of these bylaws. regular terms must be for the same number (c) Establishing a loan collection program of years and until the election and qualifica- and authorizing the chargeoff of tion of successors. Regular terms must be uncollectible loans. fixed at the first meeting, or upon any in- (d) Establishing a policy to address train- crease or decrease in the number of direc- ing for newly elected and incumbent directors, so that approximately an equal number tors and volunteer officials, in areas such as of regular terms must expire at each annual ethics and fiduciary responsibility, regu- meeting. latory compliance, and accounting and de- Section 4. Vacancies. Any vacancy on the termining that all persons appointed or board, credit committee, if applicable, or su- elected by this credit union to any position pervisory committee will be filled as soon as requiring the receipt, payment or custody of possible by vote of a majority of the direc- money or other property of this credit union, tors then holding office. If all director posi- or in its custody or control as collateral or tions become vacant simultaneously, the su- otherwise, are properly bonded in accordance pervisory committee immediately becomes with the Act and regulations. the temporary board of directors and must (e) Performing additional acts and exer- follow the procedures in Article IX, Section cising additional powers as may be required 3. Directors and credit committee members or authorized by applicable law. appointed to fill a vacancy will hold office If the credit union has an elected credit com- only until the next annual meeting, at which mittee, you do not need to check a box. If the any unexpired terms will be filled by vote of credit union has no credit committee check Op- the members, and until the qualification of tion 1 and if it has an appointed credit com- their successors. Members of the supervisory mittee check Option 2. committee appointed to fill a vacancy will l Option 1 No Credit Committee. hold office until the first regular meeting of (f) Reviewing denied loan applications of the board following the next annual meeting members who file written requests for re- of members, at which the regular term ex- view. pires, and until the appointment and quali- (g) Appointing one or more loan officers fication of their successors. and delegating to those officers the power to Section 5. Regular and special meetings. A approve or disapprove loans, lines of credit regular meeting of the board must be held or advances from lines of credit. each month at the time and place fixed by (h) In its discretion, appointing a loan re- resolution of the board. One regular meeting view committee to review loan denials and each calendar year must be conducted in per- delegating to the committee the power to son. If a quorum is present in person for the overturn denials of loan applications. The annual in person meeting, the remaining committee will function as a mid-level ap- board members may participate using audio peal committee for the board. Any denial of or video teleconference methods. The other a loan by the committee must be reviewed regular meetings may be conducted using by the board upon written request of the audio or video teleconference methods. The member. The committee must consist of chair, or in the chair’s absence the ranking three members and the regular term of office vice chair, may call a special meeting of the of the committee member will be for two board at any time and must do so upon writ- years. Not more than one member of the ten request of a majority of the directors committee may be appointed as a loan offi- then holding office. Unless the board pre- cer. scribes otherwise, the chair, or in the chair’s l Option 2. Appointed Credit Committee. absence the ranking vice chair, will fix the (f) Appointing an odd number of credit time and place of special meetings. Notice of committee members as provided in Article all meetings will be given in the manner the VIII of these bylaws. board may from time to time by resolution Section 7. Quorum. A majority of the num- prescribe. Special meetings may be con- ber of directors, including any vacant posi- ducted using audio or video teleconference tions, constitutes a quorum for the trans- methods. action of business at any meeting, except Section 6. Board responsibilities. The board that vacancies may be filled by a quorum has the general direction and control of the consisting of a majority of the directors affairs of this credit union and is responsible holding office as provided in Section 4 of this for performing all the duties customarily article. Fewer than a quorum may adjourn performed by boards of directors. This in- from time to time until a quorum is in at- cludes but is not limited to the following: tendance.

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Section 8. Attendance and removal. a. If a for a term of 1 year and until the election director or a credit committee member, if and qualification of their respective succes- applicable, fails to attend regular meetings sors: provided, however, that any person of the board or credit committee, respec- elected to fill a vacancy caused by the death, tively, for 3 consecutive months, or 4 meet- resignation, or removal of an officer is elect- ings within a calendar year, or otherwise ed by the board to serve only for the unex- fails to perform any of the duties as a direc- pired term of that officer and until a suc- tor or a credit committee member, the office cessor is duly elected and qualified. may be declared vacant by the board and the Section 3. Duties of Chair. The chair pre- vacancy filled as provided in the bylaws. sides at all meetings of the members and at b. The board may remove any board officer all meetings of the board, unless disqualified from office for failure to perform the duties through suspension by the supervisory com- thereof, after giving the officer reasonable mittee. The chair also performs other duties notice and opportunity to be heard. customarily assigned to the office of the When any board officer, membership offi- chair or duties he or she is directed to per- cer, executive committee member or invest- form by resolution of the board not incon- ment committee member is absent, disquali- sistent with the Act and regulations and fied, or otherwise unable to perform the du- these bylaws. ties of the office, the board may by resolu- Section 4. Approval required. The board tion designate another member of this credit must approve all individuals who are author- union to fill the position temporarily. The ized to sign all notes of this credit union and board may also, by resolution, designate an- all checks, drafts and other orders for dis- other member or members of this credit bursement of credit union funds. union to act on the credit committee when Section 5. Vice chair. The ranking vice necessary in order to obtain a quorum. chair has and may exercise all the powers, Section 9. Suspension of supervisory com- authority, and duties of the chair during the mittee members. Any member of the super- chair’s absence or inability to act. visory committee may be suspended by a ma- Section 6. Duties of financial officer. i. The jority vote of the board of directors. The financial officer manages this credit union members of this credit union will decide, at a special meeting held not fewer than 7 nor under the control and direction of the board more than 14 days after any suspension, unless the board has appointed a manage- whether the suspended committee member ment official to act as general manager. Sub- will be removed from or restored to the su- ject to limitations, controls and delegations pervisory committee. the board may impose, the financial officer will: ARTICLE VII. BOARD OFFICERS, MANAGEMENT (a) Have custody of all funds, securities, OFFICIALS AND EXECUTIVE COMMITTEE valuable papers and other assets of this credit union. Section 1. Board officers. The board officers (b) Provide and maintain full and complete of this credit union are comprised of a chair, records of all the assets and liabilities of this one or more vice chairs, a financial officer, credit union in accordance with forms and and a secretary, all of whom are elected by procedures prescribed in regulations and the board and from their number. The board determines the title and rank of each board other guidance approved by the Administra- officer and records them in the addendum to tion, including, for small credit unions, the this article. One board officer, the Accounting Manual for Federal Credit llllll, may be compensated for services Unions. as determined by the board. If more than one (c) Within 20 days after the close of each vice chair is elected, the board determines month, ensure that a financial statement their rank as first vice chair, second vice showing the condition of this credit union as chair, and so on. The offices of the financial of the end of the month, including a sum- officer and secretary may be held by the mary of delinquent loans is prepared and same person. If a management official or as- submitted to the board and post a copy of sistant management official is permitted to the statement in a conspicuous place in the serve on the board, he or she may not serve office of the credit union where it will re- as the chair. Unless removed as provided in main until replaced by the financial state- these bylaws, the board officers elected at ment for the next succeeding month. the first meeting of the board hold office (d) Ensure that financial and other reports until the first meeting of the board following the Administration may require are prepared the first annual meeting of the members and and sent. until the election and qualification of their (e) Within standards and limitations pre- respective successors. scribed by the board, employ tellers, clerks, Section 2. Election and term of office. Board bookkeepers, and other office employees, and officers elected at the meeting of the board have the power to remove these employees. next following the annual meeting of the (f) Perform other duties customarily as- members, which must be held not later than signed to the office of the financial officer or 7 days after the annual meeting, hold office duties he or she is directed to perform by

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resolution of the board not inconsistent with may also hold office as chair, vice chair, or the Act, regulations and these bylaws. financial officer, and may authorize them ii. The board may employ one or more as- under direction of the secretary to perform sistant financial officers, none of whom may any of the duties assigned to the secretary. also hold office as chair or vice chair, and Section 10. Executive committee. As author- may authorize them, under the direction of ized by the Act, the board may appoint an the financial officer, to perform any of the executive committee of not fewer than three duties devolving on the financial officer, in- directors to serve at its pleasure, to act for cluding the signing of checks. When des- it with respect to the board’s specifically ignated by the board, any assistant financial delegated functions. When making delega- officer may also act as financial officer dur- tions to the executive committee, the board ing the financial officer’s temporary absence must be specific with regard to the commit- or temporary inability to act. tee’s authority and limitations related to Section 7. Duties of management official and the particular delegation. The board may assistant management official. The board may also authorize any of the following to ap- appoint a management official who is under prove membership applications under condi- the direction and control of the board or of tions the board and these bylaws may pre- the financial officer as determined by the scribe: an executive committee; a member- board. The management official may be as- ship officer(s) appointed by the board from signed any or all of the responsibilities of the membership, other than a board member the financial officer described in Section 6 of paid as an officer; the financial officer; any this article. The board will determine the assistant to the paid officer of the board or title and rank of each management official to the financial officer; or any loan officer. and record them in the addendum to this ar- No executive committee member or member- ticle. The board may employ one or more as- ship officer may be compensated as such. sistant management officials. The board Section 11. Investment committee. The board may authorize assistant management offi- may appoint an investment committee com- cials under the direction of the management posed of not less than two, to serve at its official, to perform any of the duties devolv- pleasure to have charge of making investing on the management official, including ments under rules and procedures estab- the signing of checks. When designated by lished by the board. No member of the in- the board, any assistant management official vestment committee may be compensated as may also act as management official during such. Addendum: The board must list the po- the management official’s temporary ab- sitions of the board officers and management sence or temporary inability to act. officials of this credit union. They are as fol- Section 8. Board powers regarding employees. lows: The board employs, fixes the compensation, Select Option 1 if the credit union has a credit and prescribes the duties of employees as committee and Option 2 if it does not have a necessary, and has the power to remove em- credit committee. ployees, unless it has delegated these powers to the financial officer or management offi- ARTICLE VIII. OPTION 1 CREDIT COMMITTEE cial. Neither the board, the financial officer, Section 1. Credit committee members. The nor the management official has the power credit committee consists of lll members. or duty to employ, prescribe the duties of, or All the members of the credit committee remove necessary clerical and auditing as- must be members of this credit union. The sistance employed or used by the supervisory number of members of the credit committee committee and, if there is a credit com- must be an odd number and may be changed mittee, the power or duty to employ, pre- to not fewer than 3 nor more than 7 by reso- scribe the duties of, or remove any loan offi- lution of the board. No reduction in the num- cer appointed by the credit committee. ber of members may be made unless cor- Section 9. Duties of secretary. The secretary responding vacancies exist as a result of prepares and maintains full and correct deaths, resignations, expiration of terms of records of all meetings of the members and office, or other actions provided by these by- of the board, which records will be prepared laws. A copy of the resolution of the board within 7 days after the respective meetings. covering any increase or decrease in the The secretary must promptly inform the Ad- number of committee members must be filed ministration in writing of any change in the with the official copy of the bylaws of this address of the office of this credit union or credit union. the location of its principal records. The sec- Section 2. Terms of office. Regular terms of retary will give or cause to be given, in the office for elected credit committee members manner prescribed in these bylaws, proper are for periods of either 2 or 3 years as the notice of all meetings of the members, and board determines: provided, however, that perform other duties he or she may be di- all regular terms are for the same number of rected to perform by resolution of the board years and until the election and qualifica- not inconsistent with the Act, regulations tion of successors. The regular terms are and these bylaws. The board may employ one fixed at the beginning, or upon any increase or more assistant secretaries, none of whom or decrease in the number of committee

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members, that approximately an equal num- or a loan officer, determines the security, if ber of regular terms expire at each annual any, required for each application and the meeting. Regular terms of office for ap- terms of repayment. The security furnished pointed credit committee members are for must be adequate in quality and character periods as determined by the board and as and consistent with sound lending practices. noted in the board’s minutes. When funds are not available to make all the Section 3. Officers of credit committee. The loans and lines of credit for which there are credit committee chooses from their number applications, preference should be given, in a chair and a secretary. The secretary of the all cases, to the smaller applications if the committee prepares and maintains full and need and credit factors are nearly equal. correct records of all actions taken by it, and those records must be prepared within 3 ARTICLE VIII. OPTION 2 LOAN OFFICERS (NO days after the action. The offices of the chair CREDIT COMMITTEE) and secretary may be held by the same per- Section 1. Records of loan officer; prohibition son. on loan officer disbursing funds. Each loan of- Section 4. Credit committee powers. The ficer must maintain a record of each ap- credit committee may, by majority vote of proved or not approved transaction within 7 its members, appoint one or more loan offi- days of the filing of the application or re- cers to serve at its pleasure, and delegate to quest, and that record becomes a part of the them the power to approve application for records of the credit union. No individual loans or lines of credit, share withdrawals, may disburse funds of this credit union for releases and substitutions of security, within any application or share withdrawal which limits specified by the committee and within the individual has approved as a loan officer. limits of applicable law and regulations. Not Section 2. Duties of loan officer. For each more than one member of the committee loan or line of credit, the loan officer must may be appointed as a loan officer. Each loan inquire into the character and financial con- officer must furnish to the committee a dition of the applicant and the applicant’s record of each approved or not approved sureties, if any, to ascertain their ability to transaction within 7 days of the date of the repay fully and promptly the obligations in- filing of the application or request, and this record becomes a part of the records of the curred by them and to determine whether committee. All applications or requests not the loan or line of credit will be of probable approved by a loan officer must be acted benefit to the borrower. The loan officers upon by the committee. No individual may should endeavor diligently to assist appli- disburse funds of this credit union for any cants in solving their financial problems. application or share withdrawal which the Section 3. Unapproved loans prohibited. No individual has approved as a loan officer. loan or line of credit may be made unless ap- Section 5. Credit committee meetings. The proved by a loan officer in accordance with credit committee holds meetings as the busi- applicable law and regulations. ness of this credit union may require, and Section 4. Lending procedures. Subject to not less frequently than once a month. No- the limits imposed by law and regulations, tice of meetings will be given to members of these bylaws, and the general policies of the the committee in a manner as the com- board, a loan officer determines the security mittee may from time to time, by resolu- if any required for each application and the tion, prescribe. terms of repayment. The security furnished Section 6. Credit committee duties. For each must be adequate in quality and character loan or line of credit, the credit committee and consistent with sound lending practices. or loan officer must inquire into the char- When funds are not available to make all the acter and financial condition of the appli- loans and lines of credit for which there are cant and the applicant’s sureties, if any, to applications, preference should be given, in ascertain their ability to repay fully and all cases, to the applications for lesser promptly the obligations incurred by them amounts if the need and credit factors are and to determine whether the loan or line of nearly equal. credit will be of probable benefit to the bor- ARTICLE IX. SUPERVISORY COMMITTEE rower. The credit committee and its appointed loan officers should endeavor dili- Section 1. Appointment and membership. The gently to assist applicants in solving their fi- supervisory committee is appointed by the nancial problems. board from among the members of this credit Section 7. Unapproved loans prohibited. No union, one of whom may be a director other loan or line of credit may be made unless ap- than the financial officer or the compensated proved by the committee or a loan officer in officer of the board. The board determines accordance with applicable law and regula- the number of members on the committee, tions. which may not be fewer than 3 nor more Section 8. Lending procedures. Subject to than 5. No member of the credit committee, the limits imposed by applicable law and if applicable, or any employee of this credit regulations, these bylaws, and the general union may be appointed to the committee. policies of the board, the credit committee, Regular terms of committee members are for

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periods of 1, 2, or 3 years as the board deter- Section 4. Verification of accounts. The su- mines: Provided, however, that all regular pervisory committee will cause the terms are for the same number of years and verification of the accounts of members with until the appointment and qualification of the records of the financial officer from time successors. The regular terms are fixed at to time and not less frequently than as re- the beginning, or upon any increase or de- quired by the Act and regulations. The com- crease in the number of committee members, mittee must maintain a record of this so that approximately an equal number of verification. regular terms expires at each annual meet- Section 5. Powers of supervisory committee— ing. removal of directors and credit committee mem- Section 2. Officers of supervisory committee. bers. By unanimous vote, the supervisory The supervisory committee members choose committee may suspend until the next meet- from among their number a chair and a sec- ing of the members any director, board offi- retary. The secretary of the supervisory cer, or member of the credit committee. In committee prepares, maintains, and has cus- the event of any suspension, the supervisory tody of full and correct records of all actions committee must call a special meeting of the taken by it. The offices of chair and sec- members to act on the suspension, which retary may be held by the same person. meeting must be held not fewer than 7 nor Section 3. Duties of supervisory committee. a. more than 14 days after the suspension. The The supervisory committee makes, or causes chair of the committee acts as chair of the to be made, the audits, and prepares and sub- meeting unless the members select another mits the written reports required by the Act person to act as chair. Section 6. Powers of supervisory committee— and regulations. The committee may employ special meetings. By the affirmative vote of a and use clerical and auditing assistance re- majority of its members, the supervisory quired to carry out its responsibilities pre- committee may call a special meeting of the scribed by this article, and may request the members to consider any violation of the board to provide compensation for this as- provisions of the Act, the regulations, or of sistance. It will prepare and forward to the the charter or the bylaws of this credit Administration required reports. union, or to consider any practice of this b. If all director positions become vacant credit union which the committee deems to simultaneously, the supervisory committee be unsafe or unauthorized. immediately assumes the role of the board of directors. The supervisory committee acting ARTICLE X. ORGANIZATION MEETING as the board must generally call and hold a Section 1. When application special meeting to elect a board that will Initial meeting. is made for a federal credit union charter, serve until the next annual meeting. The the subscribers to the organization certifi- special meeting must occur at least 7 but no cate must meet for the purpose of electing a more than 14 days after all director positions board of directors and a credit committee, if became vacant, and candidates for the board applicable. Failure to commence operations at the special meeting may be nominated by within 60 days following receipt of the ap- petition or from the floor. However, if the proved organization certificate is cause for next annual meeting has been scheduled and revocation of the charter unless a request for will occur within 45 days after all the direc- an extension of time has been submitted to tor positions become vacant, the supervisory and approved by the Regional Director. committee may decide to forego the special Section 2. Election of directors and credit meeting and continue serving as the board committee. The subscribers elect a chair and a until the election of new directors at the an- secretary for the meeting. The subscribers nual meeting. then elect from their number, or from those c. If the next annual meeting has not been eligible to become members of this credit scheduled, but the month and day of the pre- union, a board of directors and a credit com- vious year’s meeting plus 7 days falls within mittee, if applicable, all to hold office until 45 days after all the director positions be- the first annual meeting of the members and come vacant, the supervisory committee act- until the election and qualification of their ing as the board may decide to forego the respective successors. If not already a mem- special meeting to elect new directors. In ber, every person elected under this section this case, the supervisory committee must or appointed under Section 3 of this article, schedule the annual meeting within 7 days must qualify within 30 days by becoming a before or after the month and day of the pre- member. If any person elected as a director vious annual meeting and continue to serve or committee member or appointed as a su- as the board until directors are elected at pervisory committee member does not qual- the annual meeting. ify as a member within 30 days of election or d. The supervisory committee acting as the appointment, the office will automatically board may not act on policy matters. How- become vacant and be filled by the board. ever, directors elected at a special meeting Section 3. Election of board officers. Prompt- have the same powers as directors elected at ly following the elections held under the pro- the annual meeting. visions of Section 2 of this article, the board

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must meet and elect the board officers who ARTICLE XVI. GENERAL will hold office until the first meeting of the board of directors following the first annual Section 1. Compliance with law and regula- meeting of the members and until the election. All power, authority, duties, and function and qualification of their respective tions of the members, directors, officers, and successors. The board also appoints a super- employees of this credit union, pursuant to visory committee at this meeting as pro- the provisions of these bylaws, must be exer- vided in Article IX, Section 1, of these by- cised in strict conformity with the provi- laws and a credit committee, if applicable. sions of applicable law and regulations, and The members so appointed hold office until of the charter and the bylaws of this credit the first regular meeting of the board fol- union. lowing the first annual meeting of the mem- Section 2. Confidentiality. The officers, di- bers and until the appointment and quali- rectors, members of committees and employ- fication of their respective successors. ees of this credit union must hold in confidence all transactions of this credit union ARTICLE XI. LOANS AND LINES OF CREDIT TO with its members and all information re- MEMBERS specting their personal affairs, except when permitted by state or federal law. Section 1. Loan purposes. Loans may only Section 3. Removal of directors and committee be made to members and for provident or members. Notwithstanding any other provi- productive purposes in accordance with ap- sions in these bylaws, any director or com- plicable law and regulations. mittee member of this credit union may be The credit union may add business as one of removed from office by the affirmative vote its purposes by placing a comma after ‘‘provi- of a majority of the members present at a dent’’ and inserting ‘‘business.’’ special meeting called for the purpose, but Section 2. Delinquency. Any member whose only after an opportunity has been given to loan is delinquent may be required to pay a be heard. If member votes at a special meet- late charge as determined by the board of di- ing result in the removal of all directors, the rectors. supervisory committee immediately becomes the temporary board of directors and must ARTICLE XII. DIVIDENDS follow the procedures in Article IX, Section Section 1. Power of board to declare divi- 3. dends. The board establishes dividend periods Section 4. Conflicts of interest prohibited. No and declares dividends as permitted by the director, committee member, officer, agent, Act and applicable regulations. or employee of this credit union may participate in any manner, directly or indirectly, in ARTICLE XIII. RESERVED the deliberation upon or the determination of any question affecting his or her pecu- ARTICLE XIV. EXPULSION AND WITHDRAWAL niary or personal interest or the pecuniary interest of any corporation, partnership, or Section 1. Expulsion procedure; expulsion or association (other than this credit union) in withdrawal does not affect members’ liability or which he or she is directly or indirectly in- shares. A member may be expelled by a two- terested. In the event of the disqualification thirds vote of the members present at special of any director respecting any matter pre- meeting called for that purpose, but only sented to the board for deliberation or deter- after the member has been given the oppor- mination, that director must withdraw from tunity to be heard. A member also may be the deliberation or determination; and if the expelled under a nonparticipation policy remaining qualified directors present at the adopted by the board of directors and pro- meeting plus the disqualified director or divided to each member in accordance with the rectors constitute a quorum, the remaining Act. Expulsion or withdrawal will not oper- qualified directors may exercise with respect ate to relieve a member of any liability to to this matter, by majority vote, all the this credit union. All amounts paid in on powers of the board. In the event of the dis- shares by expelled or withdrawing members, qualification of any member of the credit before their expulsion or withdrawal, will be committee, if applicable, or the supervisory paid to them in the order of their withdrawal committee, that committee member must or expulsion, but only as funds become avail- withdraw from the deliberation or deter- able and only after deducting any amounts mination. due to this credit union. Section 5. Records. Copies of the organization certificate of this credit union, its by- ARTICLE XV. MINORS laws and any amendments to the bylaws, and Section 1. Minors permitted to own shares. any special authorizations by the Adminis- Shares may be issued in the name of a tration must be preserved in a place of safe- minor. State law governs the rights of mi- keeping. Copies of the organization certifi- nors to transact business with this credit cate and field of membership amendments union. should be attached as an appendix to these

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bylaws. Returns of nominations and elec- contained a copy of the proposed amendment tions and proceedings of all regular and spe- or amendments. No amendment of these by- cial meetings of the members and directors laws or of the charter may become effective, must be recorded in the minute books of this however, until approved in writing by the credit union. The minutes of the meetings of NCUA Board. the members, the board, and the committees must be signed by their respective chairmen ARTICLE XVIII. DEFINITIONS or presiding officers and by the persons who Section 1. General definitions. When used in serve as secretaries of those meetings. these bylaws the terms: Section 6. Availability of credit union ‘‘Act’’ means the Federal Credit Union records. All books of account and other Act, as amended. records of this credit union must be avail- ‘‘Administration’’ means the National able at all times to the directors and committee members of this credit union pro- Credit Union Administration. vided they have a proper purpose for obtain- ‘‘Applicable law and regulations’’ means ing the records. The charter and bylaws of the Federal Credit Union Act and rules and this credit union must be made available for regulations issued thereunder or other appli- inspection by any member and, if the mem- cable federal and state statutes and rules ber requests a copy, it will be provided for a and regulations issued thereunder as the reasonable fee. context indicates (such as The Higher Edu- Section 7. Member contact information. cation Act of 1965). Members must keep the credit union in- ‘‘Board’’ means board of directors of the formed of their current address. federal credit union. Section 8. Indemnification. (a) The credit ‘‘Immediate family member’’ means union may elect to indemnify to the extent spouse, child, sibling, parent, grandparent, authorized by (check one) grandchild, stepparents, stepchildren, [ ] law of the state of llll: stepsiblings, and adoptive relationships. [ ] Model Business Corporation Act: ‘‘NCUA Board’’ means the Board of the Na- tional Credit Union Administration. the following individuals from any liability ‘‘Regulation’’ or ‘‘regulations’’ means rules asserted against them and expenses reason- and regulations issued by the NCUA Board. ably incurred by them in connection with judicial or administrative proceedings to ‘‘Share’’ or ‘‘shares’’ means all classes of which they are or may become parties by shares and share certificates that may be reason of the performance of their official held in accordance with applicable law and duties (check as appropriate). regulations. [ ] current officials [72 FR 61500, Oct. 31, 2007] [ ] former officials [ ] current employees APPENDIX B TO PART 701—CHARTERING [ ] former employees AND FIELD OF MEMBERSHIP MANUAL (b) The credit union may purchase and maintain insurance on behalf of the individ- CHAPTER 1 uals indicated in (a) above against any liabil- FEDERAL CREDIT UNION CHARTERING ity asserted against them and expenses reasonably incurred by them in their official ca- I—GOALS OF NCUA CHARTERING POLICY pacities and arising out of the performance of their official duties to the extent such in- The National Credit Union Administra- surance is permitted by the applicable state tion’s (NCUA) chartering and field of mem- law or the Model Business Corporation Act. bership policies are directed toward achiev- (c) The term ‘‘official’’ in this bylaw means ing the following goals: a person who is a member of the board of di- • To encourage the formation of credit rectors, credit committee, supervisory com- unions; mittee, other volunteer committee (includ- • To uphold the provisions of the Federal ing elected or appointed loan officers or Credit Union Act; membership officers), established by the • To promote thrift and credit extension; board of directors. • To promote credit union safety and soundness; and ARTICLE XVII. AMENDMENTS OF BYLAWS AND • To make quality credit union service CHARTER available to all eligible persons. Section 1. Amendment procedures. Amend- NCUA may grant a charter to single occu- ments of these bylaws may be adopted and pational/associational groups, multiple amendments of the charter requested by the groups, or communities if: affirmative vote of two-thirds of the author- • The occupational, associational, or mul- ized number of members of the board at any tiple groups possess an appropriate common duly held meeting of the board if the mem- bond or the community represents a well-de- bers of the board have been given prior writ- fined local community, neighborhood, or ten notice of the meeting and the notice has rural district;

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• The subscribers are of good character and vides the group with information about a are fit to represent the proposed credit credit union’s functions and purpose as well union; and as technical assistance in preparing and sub- • The establishment of the credit union is mitting the charter application. Close com- economically advisable. munication and cooperation between the or- Generally, these are the primary criteria ganizer and the proposed members are crit- that NCUA will consider. In unusual cir- ical to the chartering process. cumstances, however, NCUA may examine The Federal Credit Union Act requires that other factors, such as other federal law or seven or more natural persons—the ‘‘sub- public policy, in deciding if a charter should scribers’’—present to NCUA for approval a be approved. sworn organization certificate stating at a Unless otherwise noted, the policies out- minimum: lined in this manual apply only to federal • The name of the proposed federal credit credit unions. union; • The location of the proposed federal cred- II—TYPES OF CHARTERS it union and the territory in which it will op- The Federal Credit Union Act recognizes erate; • The names and addresses of the sub- three types of federal credit union charters— scribers to the certificate and the number of single common bond (occupational and shares subscribed by each; associational), multiple common bond (more • The initial par value of the shares; than one group each having a common bond • The detailed proposed field of member- of occupation or association), and commu- ship; and nity. • The fact that the certificate is made to The requirements that must be met to enable such persons to avail themselves of charter a federal credit union are described the advantages of the Federal Credit Union in Chapter 2. Special rules for credit unions Act. serving low-income groups are described in False statements on any of the required Chapter 3. documentation filed in obtaining a federal If a federal credit union charter is granted, credit union charter may be grounds for fed- Section 5 of the charter will describe the eral criminal prosecution. credit union’s field of membership, which defines those persons and entities eligible for IV—ECONOMIC ADVISABILITY membership. Generally, federal credit unions are only able to grant loans and provide IV.A—General services to persons within the field of mem- Before chartering a federal credit union, bership who have become members of the NCUA must be satisfied that the institution credit union. will be viable and that it will provide needed services to its members. Economic advis- III—SUBSCRIBERS ability, which is a determination that a po- Federal credit unions are generally orga- tential charter will have a reasonable oppor- nized by persons who volunteer their time tunity to succeed, is essential in order to and resources and are responsible for deter- qualify for a credit union charter. mining the interest, commitment, and eco- NCUA will conduct an independent on-site nomic advisability of forming a federal cred- investigation of each charter application to it union. The organization of a successful ensure that the proposed credit union can be federal credit union takes considerable plan- successful. In general, the success of any ning and dedication. credit union depends on: (a) The character Persons interested in organizing a federal and fitness of management; (b) the depth of credit union should contact one of the credit the members’ support; and (c) present and union trade associations or the NCUA re- projected market conditions. gional office serving the state in which the credit union will be organized. Lists of NCUA IV.B—Proposed Management’s Character and offices and credit union trade associations Fitness are shown in the appendices. NCUA will pro- The Federal Credit Union Act requires vide information to groups interested in pur- NCUA to ensure that the subscribers are of suing a federal charter and will assist them good ‘‘general character and fitness.’’ Pro- in contacting an organizer. spective officials and employees will be the While anyone may organize a credit union, subject of credit and background investiga- a person with training and experience in tions. The investigation report must dem- chartering new federal credit unions is gen- onstrate each applicant’s ability to effec- erally the most effective organizer. However, tively handle financial matters. Employees extensive involvement by the group desiring and officials should also be competent, expe- credit union service is essential. rienced, honest and of good character. Fac- The functions of the organizer are to pro- tors that may lead to disapproval of a provide direction, guidance, and advice on the spective official or employee include crimi- chartering process. The organizer also pro- nal convictions, indictments, and acts of

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fraud and dishonesty. Further, factors such The business plan should contain, at a as serious or unresolved past due credit obli- minimum, the following elements: gations and bankruptcies disclosed during • Mission statement; credit checks may disqualify an individual. • Analysis of market conditions, including NCUA also needs reasonable assurance if applicable, geographic, demographic, em- that the management team will have the ployment, income, housing, and other eco- requisite skills—particularly in leadership nomic data; and accounting—and the commitment to • Evidence of member support; dedicate the time and effort needed to make • Goals for shares, loans, and for number of the proposed federal credit union a success. members; Section 701.14 of NCUA’s Rules and Regula- • Financial services needed/desired; tions sets forth the procedures for NCUA ap- • Financial services to be provided to proval of officials of newly chartered credit members of all segments within the field of unions. If the application of a prospective of- membership; ficial or employee to serve is not acceptable • to the regional director, the group can pro- How/when services are to be imple- pose an alternate to act in that individual’s mented; • place. If the charter applicant feels it is es- Organizational/management plan ad- sential that the disqualified individual be re- dressing qualification and planned training tained, the individual may appeal the re- of officials/employees; gional director’s decision to the NCUA • Continuity plan for directors, committee Board. If an appeal is pursued, action on the members and management staff; application may be delayed. If the appeal is • Operating facilities, to include office denied by the NCUA Board, an acceptable space/equipment and supplies, safeguarding new applicant must be provided before the of assets, insurance coverage, etc.; charter can be approved. • Type of record keeping and data processing system; IV.C—Member Support • Detailed semiannual pro forma financial Economic advisability is a major factor in statements (balance sheet, income and ex- determining whether the credit union will be pense projections) for 1st and 2nd year, in- chartered. An important consideration is the cluding assumptions—e.g., loan and dividend degree of support from the field of member- rates; ship. The charter applicant must be able to • Plans for operating independently; demonstrate that membership support is suf- • Written policies (shares, lending, invest- ficient to ensure viability. ments, funds management, capital accumu- NCUA has not set a minimum field of lation, dividends, collections, etc.); membership size for chartering a federal • Source of funds to pay expenses during credit union. Consequently, groups of any initial months of operation, including any size may apply for a credit union charter and subsidies, assistance, etc., and terms or con- be approved if they demonstrate economic ditions of such resources; and advisability. However, it is important to • Evidence of sponsor commitment (or note that often the size of the group is indic- other source of support) if subsidies are crit- ative of the potential for success. For that ical to success of the federal credit union. reason, a charter application with fewer than Evidence may be in the form of letters, con- 3,000 primary potential members (e.g., em- tracts, financial statements from the spon- ployees of a corporation or members of an sor, and any other such document on which association) may not be economically advis- the proposed federal credit union can sub- able. Therefore, a charter applicant with a stantiate its projections. proposed field of membership of fewer than While the business plan may be prepared 3,000 primary potential members may have with outside assistance, the subscribers and to provide more support than an applicant proposed officials must understand and sup- with a larger field of membership. For exam- port the submitted business plan. ple, a small occupational or associational group may be required to demonstrate a V—STEPS IN ORGANIZING A FEDERAL CREDIT commitment for long-term support from the UNION sponsor. V.A—Getting Started IV.D—Present and Future Market Conditions— Following the guidance contained through- Business Plan out this policy, the organizers should submit The ability to provide effective service to wording for the proposed field of membership members, compete in the marketplace, and (the persons, organizations and other legal to adapt to changing market conditions are entities the credit union will serve) to NCUA key to the survival of any enterprise. Before early in the application process for written NCUA will charter a credit union, a business preliminary approval. The proposed field of plan based on realistic and supportable pro- membership must meet all common bond or jections and assumptions must be submitted. community requirements.

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Once the field of membership has been V.B.3—Organization Certificate, NCUA 4008 given preliminary approval, and the orga- This document, which must be completed nizer is satisfied the application has merit, by the subscribers, includes the seven cri- the organizer should conduct an organiza- teria established by the Federal Credit Union tional meeting to elect seven to ten persons Act. NCUA staff assigned to the case will as- to serve as subscribers. The subscribers sist in the proper completion of this docu- should locate willing individuals capable of ment. serving on the board of directors, credit committee, supervisory committee, and as chief V.B.4—Report of Official and Agreement To operating officer/manager of the proposed Serve, NCUA 4012 credit union. This form documents general background Subsequent organizational meetings may information of each official and employee of be held to discuss the progress of the charter the proposed federal credit union. Each offi- investigation, to announce the proposed cial and employee must complete and sign slate of officials, and to respond to any ques- this form. The organizer must review each of tions posed at these meetings. the NCUA 4012s for elements that would pre- If NCUA approves the charter application, vent the prospective official or employee the subscribers, as their final duty, will elect from serving. Further, such factors as seri- the board of directors of the proposed federal ous, unresolved past due credit obligations credit union. The new board of directors will and bankruptcies disclosed during credit then appoint the supervisory committee. checks may disqualify an individual. V.B—Charter Application Documentation V.B.5—Application and Agreements for Insurance of Accounts, NCUA 9500 V.B.1—General This document contains the agreements As discussed previously in this Chapter, with which federal credit unions must com- the organizer of a federal credit union char- ply in order to obtain National Credit Union ter must, at a minimum, provide evidence Share Insurance Fund (NCUSIF) coverage of that: member accounts. The document must be • The group(s) possess an appropriate com- completed and signed by both the chief exec- mon bond or the geographical area to be utive officer and chief financial officer. A served is a well-defined local community, federal credit union must qualify for federal neighborhood, or rural district; share insurance. • The subscribers, prospective officials, and employees are of good character and fit- V.B.6—Certification of Resolutions, NCUA ness; and 9501 • The establishment of the credit union is This document certifies that the board of economically advisable. directors of the proposed federal credit union As part of the application process, the or- has resolved to apply for NCUSIF insurance ganizer must submit the following forms, of member accounts and has authorized the which are available in appendix 4 of this chief executive officer and recording officer Manual: to execute the Application and Agreements • Federal Credit Union Investigation Re- for Insurance of Accounts. Both the chief ex- port, NCUA 4001; ecutive officer and recording officer of the • Organization Certificate, NCUA 4008; proposed federal credit union must sign this • Report of Official and Agreement To form. Serve, NCUA 4012; VI—NAME SELECTION • Application and Agreements for Insur- ance of Accounts, NCUA 9500; and It is the responsibility of the federal credit • Certification of Resolutions, NCUA 9501. union organizers or officials of an existing credit union to ensure that the proposed fed- Each of these forms is described in more eral credit union name or federal credit detail in the following sections. union name change does not constitute an V.B.2—Federal Credit Union Investigation infringement on the name of any corporation Report, NCUA 4001 in its trade area. This responsibility also includes researching any service marks or The application for a new federal credit trademarks used by any other corporation union will be submitted on NCUA 4001. (including credit unions) in its trade area. State-chartered credit unions applying for NCUA will ensure, to the extent possible, conversion to a federal charter will use that the credit union’s name: NCUA 4000. (See Chapter 4 for a full discus- • Is not already being officially used by an- sion.) The organizer is required to certify the other federal credit union; information and recommend approval or dis- • Will not be confused with NCUA or an- approval, based on the investigation of the other federal or state agency, or with an- request. other credit union; and

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• Does not include misleading or inappro- from the regional director. Additionally, the priate language. officials will be advised of the name of the The last three words in the name of every examiner assigned responsibility for super- credit union chartered by NCUA must be vising and examining the credit union. ‘‘Federal Credit Union.’’ The word ‘‘community,’’ while not re- VII.C—Regional Director Disapproval quired, can only be included in the name of When a regional director disapproves any federal credit unions that have been granted charter application, in whole or in part, the a community charter. organizer will be informed in writing of the specific reasons for the disapproval. Where VII—NCUA REVIEW applicable, the regional director will provide VII.A—General information concerning options or suggestions that the applicant could consider for Once NCUA receives a complete charter ap- gaining approval or otherwise acquiring plication package, an acknowledgment of re- credit union service. The letter of denial will ceipt will be sent to the organizer. At some include the procedures for appealing the de- point during the review process, a staff mem- cision. ber will be assigned to perform an on-site contact with the proposed officials and oth- VII.D—Appeal of Regional Director Decision ers having an interest in the proposed federal If the regional director denies a charter ap- credit union. plication, in whole or in part, that decision NCUA staff will review the application may be appealed to the NCUA Board. An ap- package and verify its accuracy and reason- peal must be sent to the appropriate regional ableness. A staff member will inquire into office within 60 days of the date of denial and the financial management experience and must address the specific reasons for denial. the suitability and commitment of the pro- The regional director will then forward the posed officials and employees, and will make appeal to the NCUA Board. NCUA central of- an assessment of economic advisability. The fice staff will make an independent review of staff member will also provide guidance to the facts and present the appeal with a rec- the subscribers in the proper completion of ommendation to the NCUA Board. the Organization Certificate, NCUA 4008. Before appealing, the prospective group Credit and background investigations may may, within 30 days of the denial, provide be conducted concurrently by NCUA with supplemental information to the regional di- other work being performed by the organizer rector for reconsideration. A reconsideration and subscribers to reduce the likelihood of will contain new and material evidence ad- delays in the chartering process. dressing the reasons for the initial denial. The staff member will analyze the prospec- The regional director will have 30 days from tive credit union’s business plan for realistic the date of the receipt of the request for re- projections, attainable goals, adequate service to all segments of the field of member- consideration to make a final decision. If the ship, sufficient start-up capital, and time request is again denied, the applicant may commitment by the proposed officials and proceed with the appeal process within 60 employees. Any concerns will be reviewed days of the date of the last denial. A second with the organizer and discussed with the request for reconsideration will be treated as prospective credit union’s officials. Addi- an appeal to the NCUA Board. tional on-site contacts by NCUA staff may VII.E—Commencement of Operations be necessary. The organizer and subscribers will be expected to take the steps necessary Assistance in commencing operations is to resolve any issues or concerns. Such reso- generally available through the various cred- lution efforts may delay processing the ap- it union trade organizations listed in appen- plication. dix 5. NCUA staff will then make a recommenda- All new federal credit unions are also en- tion to the regional director regarding the couraged to establish a mentor relationship charter application. The recommendation with a knowledgeable, experienced credit may include specific provisions to be in- union individual or an existing, well-oper- cluded in a Letter of Understanding and ated credit union. The mentor should provide Agreement. In most cases, NCUA will require guidance and assistance to the new credit the prospective officials to adhere to certain union through attendance at meetings and operational guidelines. Generally, the agree- general oversight. Upon request, NCUA will ment is for a limited term of two to four provide assistance in finding a qualified years. A sample Letter of Understanding and mentor. Agreement is found in appendix 2. VIII—FUTURE SUPERVISION VII.B—Regional Director Approval Each federal credit union will be examined Once approved, the board of directors of regularly by NCUA to determine that it re- the newly formed federal credit union will mains in compliance with applicable laws receive a signed charter and standard bylaws and regulations and to determine that it

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does not pose undue risk to the NCUSIF. The serve a trade, industry, or profession (TIP), examiner will contact the credit union offi- such as all teachers. cials shortly after approval of the charter in Single Associational: If a credit union order to arrange for the initial examination serves a single associational sponsor, such as (usually within the first six months of oper- the Knights of Columbus, it will be des- ation). ignated as an associational credit union. The examiner will be responsible for moni- Multiple Common Bond: If a credit union toring the progress of the credit union and serves more than one group, each of which providing the necessary advice and guidance has a common bond of occupation and/or as- to ensure it is in compliance with applicable sociation, it will be designated as a multiple laws and regulations. The examiner will also common bond credit union. monitor compliance with the terms of any Community: All community credit unions required Letter of Understanding and Agree- will be designated as such, followed by a de- ment. Typically, the examiner will require scription of their geographic boundaries (e.g., the credit union to submit copies of monthly city or county). board minutes and financial statements. Credit unions desiring to confirm or sub- The Federal Credit Union Act requires all mit an application to change their designa- newly chartered credit unions, up to two tions should contact the appropriate NCUA years after the charter anniversary date, to regional office. obtain NCUA approval prior to appointment XII—FOREIGN BRANCHING of any new board member, credit or supervisory committee member, or senior execu- Federal credit unions are permitted to tive officer. Section 701.14 of the NCUA Rules serve foreign nationals within their fields of and Regulations sets forth the notice and ap- membership wherever they reside provided plication requirements. If NCUA issues a No- they have the ability, resources, and man- tice of Disapproval, the newly chartered agement expertise to serve such persons. Be- credit union is prohibited from making the fore a credit union opens a branch outside change. the United States, it must submit an appli- NCUA may disapprove an individual serv- cation to do so and have prior written ap- ing as a director, committee member or sen- proval of the regional director. A federal ior executive officer if it finds that the com- credit union may establish a service facility petence, experience, character, or integrity on a United States military installation or of the individual indicates it would not be in United States embassy without prior NCUA the best interests of the members of the approval. credit union or of the public to permit the individual to be employed by or associated CHAPTER 2 with the credit union. If a Notice of Dis- FIELD OF MEMBERSHIP REQUIREMENTS FOR approval is issued, the credit union may ap- FEDERAL CREDIT UNIONS peal the decision to the NCUA Board. I—INTRODUCTION IX—CORPORATE FEDERAL CREDIT UNIONS I.A.1—General A corporate federal credit union is one that is operated primarily for the purpose of As set forth in Chapter 1, the Federal Cred- serving other credit unions. Corporate fed- it Union Act provides for three types of federal credit unions operate under and are ad- eral credit union charters—single common ministered by the NCUA Office of Corporate bond (occupational or associational), mul- Credit Unions. tiple common bond (multiple groups), and community. Section 109 (12 U.S.C. 1759) of X—GROUPS SEEKING CREDIT UNION SERVICE the Federal Credit Union Act sets forth the membership criteria for each of these three NCUA will attempt to assist any group in types of credit unions. chartering a credit union or joining an exist- The field of membership, which is specified ing credit union. If the group is not eligible in Section 5 of the charter, defines those per- for federal credit union service, NCUA will sons and entities eligible for membership. A refer the group to the appropriate state su- single common bond federal credit union pervisory authority where different require- consists of one group having a common bond ments may apply. of occupation or association. A multiple XI—FIELD OF MEMBERSHIP DESIGNATIONS common bond federal credit union consists of more than one group, each of which has a NCUA will designate a credit union based common bond of occupation or association. on the following criteria: A community federal credit union consists of Single Occupational: If a credit union persons or organizations within a well-de- serves a single occupational sponsor, such as fined local community, neighborhood, or ABC Corporation, it will be designated as an rural district. occupational credit union. A single occupa- Once chartered, a federal credit union can tional common bond credit union may also amend its field of membership; however, the

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same common bond or community require- Florida for ABC Corporation and subsidi- ments for chartering the credit union must aries; be satisfied. Since there are differences in • Employees of ABC Corporation who are the three types of charters, special rules, paid from * * *; which are fully discussed in the following • Employees of ABC Corporation who are sections of this Chapter, may apply to each. supervised from * * *; • Employees of ABC Corporation who are I.A.2—Special Low-Income Rules headquartered in * * *; and/or Generally, federal credit unions can only • Employees of ABC Corporation who work grant loans and provide services to persons in the United States. who have joined the credit union. The Fed- The corporation or other legal entity (i.e., eral Credit Union Act states that one of the the employer) may also be included in the purposes of federal credit unions is ‘‘to serve common bond—e.g., ‘‘ABC Corporation.’’ The the productive and provident credit needs of corporation or legal entity will be defined in individuals of modest means.’’ Although the last clause in Section 5 of the credit field of membership requirements are appli- union’s charter. cable, special rules set forth in Chapter 3 A charter applicant must provide docu- may apply to low-income designated credit mentation to establish that the single occu- unions and those credit unions assisting low- pational common bond requirement has been income groups or to a federal credit union met. that adds an underserved community to its Some examples of single occupational com- field of membership. mon bonds are: • Employees of the Hunt Manufacturing II—OCCUPATIONAL COMMON BOND Company who work in West Chester, Penn- sylvania. (common bond—same employer II.A.1—General with geographic definition); A single occupational common bond fed- • Employees of the Buffalo Manufacturing eral credit union may include in its field of Company who work in the United States. membership all persons and entities who (common bond—same employer with geo- share that common bond. NCUA permits a graphic definition); person’s membership eligibility in a single • Employees, elected and appointed offi- occupational common bond group to be es- cials of municipal government in Parma, tablished in five ways: Ohio. (common bond—same employer with • Employment (or a long-term contractual geographic definition); relationship equivalent to employment) in a • Employees of Johnson Soap Company single corporation or other legal entity and its majority owned subsidiary, Johnson makes that person part of a single occupa- Toothpaste Company, who work in, are paid tional common bond; from, are supervised from, or are • Employment in a corporation or other headquartered in Augusta and Portland, legal entity with a controlling ownership in- Maine. (common bond—parent and sub- terest (which shall not be less than 10 per- sidiary company with geographic definition); cent) in or by another legal entity makes • Employees of MMLLJS contractor who that person part of a single occupational work regularly at the U.S. Naval Shipyard in common bond; Bremerton, Washington. (common bond—em- • Employment in a corporation or other ployees of contractors with geographic defi- legal entity which is related to another legal nition); entity (such as a company under contract • Employees, doctors, medical staff, tech- and possessing a strong dependency relation- nicians, medical and nursing students who ship with another company) makes that per- work in or are paid from the Newport Beach son part of a single occupational common Medical Center, Newport Beach, California. bond; (single corporation with geographic defini- • Employment or attendance at a school tion); makes that person part of a single occupa- • Employees of JLS, Incorporated and tional common bond (see Chapter 2, Section MJM, Incorporated working for the LKM III.A.1); or Joint Venture Company in Catalina Island, • Employment in the same Trade, Indus- California. (common bond—same employer— try, or Profession (TIP) (see Chapter 2, Sec- ongoing dependent relationship); tion II.A.2). • Employees of and students attending A geographic limitation is not a require- Georgetown University. (common bond— ment for a single occupational common same occupation); bond. However, for purposes of describing the • Employees of all the schools supervised field of membership, the geographic areas by the Timbrook Board of Education in being served may be included in the charter. Timbrook, Georgia. (common bond—same For example: employer); or • Employees, officials, and persons who • All licensed nurses in Fairfax County, work regularly under contract in Miami, Virginia. (occupational common bond TIP).

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Some examples of insufficiently defined graphic limitation is required for a TIP cred- single occupational common bonds are: it union. The geographic limitation will be • Employees of manufacturing firms in Se- part of the credit union’s charter and gen- attle, Washington. (no defined occupational erally correspond to its current or planned sponsor; overly broad TIP); operational area. More than one federal cred- • Persons employed or working in Chicago, it union may serve the same trade, industry, Illinois. (no occupational common bond). or profession, even if both credit unions are in the same geographic location. II.A.2—Trade, Industry, or Profession This type of occupational common bond is A common bond based on employment in a only available to single common bond credit trade, industry, or profession can include unions. A TIP cannot be added to a multiple employment at any number of corporations common bond or community field of mem- or other legal entities that—while not under bership. common ownership—have a common bond by To obtain a TIP designation, the proposed virtue of producing similar products, pro- or existing credit union must submit a re- viding similar services, or participating in quest to the regional director. New charter the same type of business. applicants must follow the documentation While proposed or existing single common requirements in Chapter 1. New charter ap- bond credit unions have some latitude in de- fining a trade, industry, or profession occu- plicants and existing credit unions must sub- pational common bond, it cannot be defined mit a business plan on how the credit union so broadly as to include groups in fields will serve the group with the request to which are not closely related. For example, serve the TIP. The business plan also must the manufacturing industry, energy indus- address how the credit union will verify the try, communications industry, retail indus- TIP. Examples of such verification include try, or entertainment industry would not state licenses, professional licenses, organi- qualify as a TIP because each industry lacks zational memberships, pay statements, the necessary commonality. However, textile union membership, or employer certifi- workers, realtors, nurses, teachers, police of- cation. The regional director must approve ficers, or U.S. military personnel are closely this type of field of membership before a related and each would qualify as a TIP. credit union can serve a TIP. Credit unions The common bond relationship must be converting to a TIP can retain members of one that demonstrates a narrow com- record but cannot add new members from its monality of interests within a specific trade, previous group or groups, unless it is part of industry, or profession. If a credit union the TIP. wants to serve a physician TIP, it can serve Section II.B on Occupational Common all physicians, but that does not mean it can Bond Amendments does not apply to a TIP also serve all clerical staff in the physicians’ common bond. Removing or changing a geo- offices. However, if the TIP is based on the graphical limitation will be processed as a health care industry, then clerical staff housekeeping amendment. If safety and would be able to be served by the credit soundness concerns are present, the regional union because they work in the same indus- director may require additional information try and have the same commonality of inter- before the request can be processed. ests. Section II.H, on Other Persons Eligible for If a credit union wants to include the air- Credit Union Membership, applies to TIP line services industry, it can serve airline based credit unions except for the corporate and airport personnel but not passengers. account provision which only applies to in- Clients or customers of the TIP are not eligi- dustry based TIPs. Credit unions with indus- ble for credit union membership (e.g., pa- try based TIPs may include corporations as tients in hospitals). Any company that is in- members because they have the same com- volved in more than one industry cannot be monality of interests as all employees in the included in an industry TIP (e.g., a company that makes tobacco products, food products, industry. For example, an airline service TIP and electronics). However, employees of (industry) can serve an airline carrier (cor- these companies may be eligible for member- porate account); however, a nurses TIP (pro- ship in a variety of trade/profession occupa- fession) could not serve a hospital (corporate tional common bond TIPs. account) because not everyone working in Since a TIP must be narrowly defined, it the hospital shares the same profession. cannot include third party vendors and other If a TIP designated credit union wishes to suppliers. For example, the steel suppliers to convert to a different TIP or employer-based the automobile industry would not be part of occupational common bond, or different the automobile industry TIP. However, the charter type, it only retains members of automobile industry includes manufacturers record after the conversion. The regional di- and their automobile dealerships. rector, for safety and soundness reasons, In general, except for credit unions cur- may approve a TIP designated credit union rently serving a national field of member- to convert to its original field of membership or operating in multiple states, a geo- ship.

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II.B—OCCUPATIONAL COMMON BOND II.B.3—Economic Advisability AMENDMENTS Prior to granting a common bond expan- II.B.1—General sion, NCUA will examine the amendment’s likely effect on the credit union’s operations Section 5 of every single occupational fed- and financial condition. In most cases, the eral credit union’s charter defines the field information needed for analyzing the effect of membership the credit union can legally of adding a particular group will be available serve. Only those persons or legal entities to NCUA through the examination and finan- specified in the field of membership can be cial and statistical reports; however, in par- served. There are a number of instances in ticular cases, a regional director may re- which Section 5 must be amended by NCUA. quire additional information prior to making First, a group sharing the credit union’s a decision. common bond is added to the field of membership. This may occur through various II.B.4—Documentation Requirements ways including agreement between the group and the credit union directly, or through a A federal credit union requesting a com- merger, corporate acquisition, purchase and mon bond expansion must submit an Appli- assumption (P&A), or spin-off. cation for Field of Membership Amendment Second, if the entire field of membership is (NCUA 4015–EZ) to the appropriate NCUA reacquired by another corporation, the credit gional director. An authorized credit union union can serve the employees of the new representative must sign the request. corporation and any subsidiaries after re- II.C—NCUA’S PROCEDURES FOR AMENDING ceiving NCUA approval. THE FIELD OF MEMBERSHIP Third, a federal credit union qualifies to change its common bond from: II.C.1—General • A single occupational common bond to a single associational common bond; All requests for approval to amend a fed- • A single occupational common bond to a eral credit union’s charter must be sub- community charter; or mitted to the appropriate regional director. • A single occupational common bond to a multiple common bond. II.C.2—Regional Director’s Decision Fourth, a federal credit union removes a NCUA staff will review all amendment re- portion of the group from its field of mem- quests in order to ensure compliance with bership through agreement with the group, a NCUA policy. spin-off, or because a portion of the group is Before acting on a proposed amendment, no longer in existence. the regional director may require an on-site An existing single occupational common review. In addition, the regional director bond federal credit union that submits a re- may, after taking into account the signifi- quest to amend its charter must provide doc- cance of the proposed field of membership umentation to establish that the occupa- amendment, require the applicant to submit tional common bond requirement has been a business plan addressing specific issues. met. The regional director must approve all The financial and operational condition of amendments to an occupational common the requesting credit union will be consid- bond credit union’s field of membership. ered in every instance. NCUA will carefully consider the economic advisability of ex- II.B.2—Corporate Restructuring panding the field of membership of a credit If the single common bond group that com- union with financial or operational prob- prises a federal credit union’s field of mem- lems. bership undergoes a substantial restruc- In most cases, field of membership amend- turing, the result is often that portions of ments will only be approved for credit unions the group are sold or spun off. This requires that are operating satisfactorily. Generally, a change to the credit union’s field of mem- if a federal credit union is having difficulty bership. NCUA will not permit a single com- providing service to its current membership, mon bond credit union to maintain in its or is experiencing financial or other oper- field of membership a sold or spun-off group ational problems, it may have more dif- to which it has been providing service unless ficulty serving an expanded field of member- the group otherwise qualifies for membership. ship in the credit union or the credit union Occasionally, however, an expanded field of converts to a multiple common bond credit membership may provide the basis for re- union. versing current financial problems. In such If the group comprising the single common cases, an amendment to expand the field of bond of the credit union merges with, or is membership may be granted notwith- acquired by, another group, the credit union standing the credit union’s financial or oper- can serve the new group resulting from the ational problems. The applicant credit union merger or acquisition after receiving a must clearly establish that the expanded housekeeping amendment. field of membership is in the best interest of

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the members and will not increase the risk II.D.1—Mergers to the NCUSIF. Generally, the requirements applicable to II.C.3—Regional Director Approval field of membership expansions found in this chapter apply to mergers where the con- If the regional director approves the re- tinuing credit union has a federal charter. quested amendment, the credit union will be That is, the two credit unions must share a issued an amendment to Section 5 of its common bond. charter. Where the merging credit union is state- chartered, the common bond rules applicable II.C.4—Regional Director Disapproval to a federal credit union apply. When a regional director disapproves any Mergers must be approved by the NCUA re- application, in whole or in part, to amend gional director where the continuing credit the field of membership under this chapter, union is headquartered, with the concur- the applicant will be informed in writing of rence of the regional director of the merging the: credit union, and, as applicable, the state • Specific reasons for the action; regulators. • Options to consider, if appropriate, for If a single occupational credit union wants gaining approval; and to merge into a multiple common bond or • Appeal procedure. community credit union, Section IV.D or Section V.D of this Chapter, respectively, II.C.5—Appeal of Regional Director Decision should be reviewed. If a field of membership expansion request, II.D.2—Emergency Mergers merger, or spin-off is denied by the regional director, the federal credit union may appeal An emergency merger may be approved by the decision to the NCUA Board. An appeal NCUA without regard to common bond or must be sent to the appropriate regional of- other legal constraints. An emergency merg- fice within 60 days of the date of denial, and er involves NCUA’s direct intervention and must address the specific reason(s) for the approval. The credit union to be merged denial. The regional director will then for- must either be insolvent or likely to become ward the appeal to the NCUA Board. NCUA insolvent, and NCUA must determine that: central office staff will make an independent • An emergency requiring expeditious ac- review of the facts and present the appeal to tion exists; the Board with a recommendation. • Other alternatives are not reasonably Before appealing, the credit union may, available; and within 30 days of the denial, provide supple- • The public interest would best be served mental information to the regional director by approving the merger. for reconsideration. A reconsideration will If not corrected, conditions that could lead contain new and material evidence address- to insolvency include, but are not limited to: ing the reasons for the initial denial. The re- • Abandonment by management; gional director will have 30 days from the • Loss of sponsor; date of the receipt of the request for recon- • Serious and persistent recordkeeping sideration to make a final decision. If the re- problems; or quest is again denied, the applicant may pro- • Serious and persistent operational con- ceed with the appeal process within 60 days cerns. of the date of the last denial. A second re- In an emergency merger situation, NCUA quest for reconsideration will be treated as will take an active role in finding a suitable an appeal to the NCUA Board. merger partner (continuing credit union). NCUA is primarily concerned that the con- II.D—MERGERS, PURCHASE AND ASSUMPTIONS, tinuing credit union has the financial AND SPIN-OFFS strength and management expertise to ab- In general, other than the addition of com- sorb the troubled credit union without ad- mon bond groups, there are three additional versely affecting its own financial condition ways a federal credit union with a single oc- and stability. cupational common bond can expand its field As a stipulated condition to an emergency of membership: merger, the field of membership of the merg- • By taking in the field of membership of ing credit union may be transferred intact to another credit union through a common the continuing federal credit union without bond or emergency merger; regard to any common bond restrictions. • By taking in the field of membership of Under this authority, therefore, a single oc- another credit union through a common cupational common bond federal credit bond or emergency purchase and assumption union may take into its field of membership (P&A); or any dissimilar charter type. • By taking a portion of another credit The common bond characteristic of the union’s field of membership through a com- continuing credit union in an emergency mon bond spin-off. merger does not change. That is, even

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though the merging credit union is a mul- All common bond requirements apply re- tiple common bond or community, the con- gardless of whether the spun-off group be- tinuing credit union will remain a single comes a new credit union or goes to an exist- common bond credit union. Similarly, if the ing federal charter. merging credit union is also an unlike single The request for approval of a spin-off must common bond, the continuing credit union be supported with a plan that addresses, at a will remain a single common bond credit minimum: union. Future common bond expansions will • Why the spin-off is being requested; be based on the continuing credit union’s • What part of the field of membership is original single common bond. to be spun off; • Emergency mergers involving federally in- Whether the affected credit unions have sured credit unions in different NCUA re- a common bond (applies only to single occu- gions must be approved by the regional di- pational credit unions); • rector where the continuing credit union is Which assets, liabilities, shares, and capital are to be transferred; headquartered, with the concurrence of the • regional director of the merging credit union The financial impact the spin-off will have on the affected credit unions; and, as applicable, the state regulators. • The ability of the acquiring credit union II.D.3—Purchase and Assumption (P&A) to effectively serve the new members; • The proposed spin-off date; and Another alternative for acquiring the field • Disclosure to the members of the require- of membership of a failing credit union is ments set forth above. through a consolidation known as a P&A. A The spin-off request must also include cur- P&A has limited application because, in rent financial statements from the affected most cases, the failing credit union must be credit unions and the proposed voting ballot. placed into involuntary liquidation. In the For federal credit unions spinning off a few instances where a P&A may be appro- group, membership notice and voting re- priate, the assuming federal credit union, as quirements and procedures are the same as with emergency mergers, may acquire the for mergers (see Part 708 of the NCUA Rules entire field of membership if the emergency and Regulations), except that only the mem- merger criteria are satisfied. However, if the bers directly affected by the spin-off—those P&A does not meet the emergency merger whose shares are to be transferred—are per- criteria, it must be processed under the committed to vote. Members whose shares are mon bond requirements. not being transferred will not be afforded the In a P&A processed under the emergency opportunity to vote. All members of the criteria, specified loans, shares, and certain group to be spun off (whether they voted in other designated assets and liabilities, with- favor, against, or not at all) will be trans- out regard to common bond restrictions, ferred if the spin-off is approved by the vot- may also be acquired without changing the ing membership. Voting requirements for character of the continuing federal credit federally insured state credit unions are gov- union for purposes of future field of member- erned by state law. ship amendments. Spin-offs involving federally insured credit unions in different NCUA regions must be If the purchased and/or assumed credit approved by all regional directors where the union’s field of membership does not share a credit unions are headquartered and the common bond with the purchasing and/or as- state regulators, as applicable. Spin-offs in suming credit union, then the continuing the same region also require approval by the credit union’s original common bond will be state regulator, as applicable. controlling for future common bond expansions. II.E—OVERLAPS P&As involving federally insured credit unions in different NCUA regions must be II.E.1—General approved by the regional director where the An overlap exists when a group of persons continuing credit union is headquartered, is eligible for membership in two or more with the concurrence of the regional director credit unions. NCUA will permit single occu- of the purchased and/or assumed credit union pational federal credit unions to overlap any and, as applicable, the state regulators. other charter without performing an overlap analysis. II.D.4—Spin-Offs II.E.2—Organizational Restructuring A spin-off occurs when, by agreement of the parties, a portion of the field of member- A federal credit union’s field of membership, assets, liabilities, shares, and capital of ship will always be governed by the common a credit union are transferred to a new or ex- bond descriptions contained in Section 5 of isting credit union. A spin-off is unique in its charter. Where a sponsor organization ex- that usually one credit union has a field of pands its operations internally, by acquisi- membership expansion and the other loses a tion or otherwise, the credit union may serve portion of its field of membership. these new entrants to its field of membership

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if they are part of the common bond de- • The group is within the field of member- scribed in Section 5. NCUA will permit a ship of two credit unions and one wishes to complete overlap of the credit unions’ fields discontinue service; of membership. • The federal credit union cannot continue If a sponsor organization sells off a group, to provide adequate service to the group; new members can no longer be served unless • The group has ceased to exist; they otherwise qualify for membership in the • The group does not respond to repeated credit union or it converts to a multiple requests to contact the credit union or re- common bond charter. fuses to provide needed support; or Credit unions must submit documentation • The group initiates action to be removed explaining the restructuring and providing from the field of membership. information regarding the new organiza- When a federal credit union requests an tional structure. amendment to remove a group from its field of membership, the regional director will de- II.E.3—Exclusionary Clauses termine why the credit union desires to re- An exclusionary clause is a limitation pre- move the group. If the regional director con- cluding the credit union from serving the curs with the request, membership will con- primary members of a portion of a group tinue for those who are already members otherwise included in its field of member- under the ‘‘once a member, always a mem- ship. NCUA no longer grants exclusionary ber’’ provision of the Federal Credit Union clauses. Those granted prior to the adoption Act. of this new chartering manual will remain in effect unless the credit unions agree to re- II.H—OTHER PERSONS ELIGIBLE FOR CREDIT move them or one of the affected credit UNION MEMBERSHIP unions submits a housekeeping amendment A number of persons, by virtue of their to have it removed. close relationship to a common bond group, may be included, at the charter applicant’s II.F—CHARTER CONVERSION option, in the field of membership. These in- A single occupational common bond fed- clude the following: eral credit union may apply to convert to a • Spouses of persons who died while within community charter provided the field of the field of membership of this credit union; membership requirements of the community • Employees of this credit union; charter are met. Groups within the existing • Persons retired as pensioners or annu- charter which cannot qualify in the new itants from the above employment; charter cannot be served except for members • Volunteers; of record, or groups or communities obtained • Members of the immediate family or in an emergency merger or P&A. A credit household; union must notify all groups that will be re- • Organizations of such persons; and moved from the field of membership as a re- • Corporate or other legal entities in this sult of conversion. Members of record can charter. continue to be served. Also, in order to sup- Immediate family is defined as spouse, port a case for a conversion, the applicant child, sibling, parent, grandparent, or grand- federal credit union may be required to de- child. This includes stepparents, step- velop a detailed business plan as specified in children, stepsiblings, and adoptive relation- Chapter 2, Section V.A.3. ships. A single occupational common bond fed- Household is defined as persons living in eral credit union may apply to convert to a the same residence maintaining a single eco- multiple common bond charter by adding a nomic unit. non-common bond group that is within a rea- Membership eligibility is extended only to sonable proximity of a service facility. individuals who are members of an ‘‘imme- Groups within the existing charter may be diate family or household’’ of a credit union retained and continue to be served. However, member. It is not necessary for the primary future amendments, including any expan- member to join the credit union in order for sions of the original single common bond the immediate family or household member group, must be done in accordance with mul- of the primary member to join, provided the tiple common bond policy. immediate family or household clause is in- II.G—REMOVAL OF GROUPS FROM THE FIELD cluded in the field of membership. However, OF MEMBERSHIP it is necessary for the immediate family member or household member to first join in A credit union may request removal of a order for that person’s immediate family portion of the common bond group from its member or household member to join the field of membership for various reasons. The credit union. A credit union can adopt a most common reasons for this type of more restrictive definition of immediate amendment are: family or household.

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Volunteers, by virtue of their close rela- mining whether a group satisfies tionship with a sponsor group, may be in- associational common bond requirements for cluded. Examples include volunteers working a federal credit union charter, NCUA will at a hospital or school. consider the totality of the circumstances, Under the Federal Credit Union Act, once which includes: a person becomes a member of the credit • Whether members pay dues; union, such person may remain a member of • Whether members participate in the fur- the credit union until the person chooses to therance of the goals of the association; withdraw or is expelled from the membership • Whether the members have voting rights. of the credit union. This is commonly re- To meet this requirement, members need not ferred to as ‘‘once a member, always a mem- vote directly for an officer, but may vote for ber.’’ The ‘‘once a member, always a mem- a delegate who in turn represents the member’’ provision does not prevent a credit bers’ interests; union from restricting services to members • Whether the association maintains a who are no longer within the field of mem- membership list; bership. • Whether the association sponsors other activities; III—ASSOCIATIONAL COMMON BOND • The association’s membership eligibility requirements; and III.A.1—General • The frequency of meetings. A single associational federal credit union A support group whose members are con- may include in its field of membership, re- tinually changing or whose duration is tem- gardless of location, all members and em- porary may not meet the single ployees of a recognized association. A single associational common bond criteria. Each associational common bond consists of indi- class of member will be evaluated based on viduals (natural persons) and/or groups (non- the totality of the circumstances. Individ- natural persons) whose members participate uals or honorary members who only make in activities developing common loyalties, donations to the association are not eligible mutual benefits, and mutual interests. Sepa- to join the credit union. rately chartered associational groups can es- Educational groups—for example, parent- tablish a single common bond relationship if teacher organizations, alumni associations, they are integrally related and share com- and student organizations in any school— mon goals and purposes. For example, two or and church groups may constitute more churches of the same denomination, associational common bonds. Knights of Columbus Councils, or locals of Student groups (e.g., students enrolled at a the same union can qualify as a single public, private, or parochial school) may associational common bond. constitute either an associational or occupa- Individuals and groups eligible for mem- tional common bond. For example, students bership in a single associational credit union enrolled at a church sponsored school could can include the following: share a single associational common bond • Natural person members of the associa- with the members of that church and may tion (for example, members of a union or qualify for a federal credit union charter. church members); Similarly, students enrolled at a university, • Non-natural person members of the asso- as a group by itself, or in conjunction with ciation; the faculty and employees of the school, • Employees of the association (for exam- could share a single occupational common ple, employees of the labor union or employ- bond and may qualify for a federal credit ees of the church); and union charter. • The association. The terminology ‘‘Alumni of Jacksonville Generally, a single associational common State University’’ is insufficient to dem- bond does not include a geographic defini- onstrate an associational common bond. To tion and can operate nationally. However, a qualify as an association, the alumni asso- proposed or existing federal credit union ciation must meet the requirements for an may limit its field of membership to a single associational common bond. The alumni of a association or geographic area. NCUA may school must first join the alumni associa- impose a geographic limitation if it is deter- tion, and not merely be alumni of the school mined that the applicant credit union does to be eligible for membership. not have the ability to serve a larger group Homeowner associations, tenant groups, or there are other operational concerns. All consumer groups, and other groups of per- single associational common bonds should sons having an ‘‘interest in’’ a particular include a definition of the group that may be cause and certain consumer cooperatives served based on the association’s charter, by- may also qualify as an association. laws, and any other equivalent documenta- Associations based primarily on a client- tion. customer relationship do not meet The common bond for an associational associational common bond requirements. group cannot be established simply on the However, having an incidental client-cus- basis that the association exists. In deter- tomer relationship does not preclude an

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associational charter as long as the Some examples of unacceptable single associational common bond requirements associational common bonds are: are met. For example, a fraternal associa- • Alumni of Amos University (no formal tion that offers insurance, which is not a association); condition of membership, may qualify as a • Customers of Fleetwood Insurance Com- valid associational common bond. pany (policyholders or primarily customer/ Applicants for a single associational com- client relationships do not meet mon bond federal credit union charter or a associational standards); field of membership amendment to include • Employees of members of the Reston, an association must provide, at the request Virginia, Chamber of Commerce (not a suffi- of the regional director, a copy of the asso- ciently close tie to the associational com- ciation’s charter, bylaws, or other equivalent mon bond); or documentation, including any legal docu- • Members of St. John’s Lutheran Church ments required by the state or other gov- and St. Mary’s Catholic Church located in erning authority. Anniston, Alabama (churches are not of the The associational sponsor itself may also same denomination). be included in the field of membership—e.g., III.B—ASSOCIATIONAL COMMON BOND ‘‘Sprocket Association’’—and will be shown AMENDMENTS in the last clause of the field of membership. III.B.1—General III.A.2—Subsequent Changes to Association’s Bylaws Section 5 of every associational federal credit union’s charter defines the field of If the association’s membership or geo- membership the credit union can legally graphical definitions in its charter and by- serve. Only those persons who, or legal enti- laws are changed subsequent to the effective ties that, join the credit union and are speci- date stated in the field of membership, the fied in the field of membership can be served. credit union must submit the revised charter There are three instances in which Section 5 or bylaws for NCUA’s consideration and ap- must be amended by NCUA. proval prior to serving members of the asso- First, a group that shares the credit ciation added as a result of the change. union’s common bond is added to the field of III.A.3—Sample Single Associational Common membership. This may occur through var- Bonds ious ways including agreement between the group and the credit union directly, or Some examples of associational common through a merger, purchase and assumption bonds are: (P&A), or spin-off. • Regular members of Locals 10 and 13, Second, a federal credit union qualifies to IBEW, in Florida, who qualify for member- change its common bond from: ship in accordance with their charter and by- • A single associational common bond to a laws in effect on May 20, 2001; single occupational common bond; • Members of the Hoosier Farm Bureau in • A single associational common bond to a Grant, Logan, or Lee Counties of Indiana, community charter; or who qualify for membership in accordance • A single associational common bond to a with its charter and bylaws in effect on multiple common bond. March 7, 1997; Third, a federal credit union removes a • Members of the Shalom Congregation in portion of the group from its field of mem- Chevy Chase, Maryland; bership through agreement with the group, a • Regular members of the Corporate Ex- spin-off, or a portion of the group that is no ecutives Association, located in Westchester, longer in existence. New York, who qualify for membership in ac- An existing single associational federal cordance with its charter and bylaws in ef- credit union that submits a request to fect on December 1, 1997; amend its charter must provide documenta- • Members of the University of Wisconsin tion to establish that the associational com- Alumni Association, located in Green Bay, mon bond requirement has been met. The re- Wisconsin; gional director must approve all amend- • Members of the Marine Corps Reserve Of- ments to an associational common bond ficers Association; or credit union’s field of membership. • Members of St. John’s Methodist Church III.B.2—Organizational Restructuring and St. Luke’s Methodist Church, located in Toledo, Ohio. If the single common bond group that com- Some examples of insufficiently defined prises a federal credit union’s field of mem- single associational common bonds are: bership undergoes a substantial restruc- • All Lutherans in the United States (too turing, the result is often that portions of broadly defined); or the group are sold or spun off. This is an • Veterans of U.S. military service (group event requiring a change to the credit is too broadly defined; no formal association union’s field of membership. NCUA may not of all members of the group). permit a single associational credit union to

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maintain in its field of membership a sold or ational problems, it may have more dif- spun-off group to which it has been providing ficulty serving an expanded field of member- service unless the group otherwise qualifies ship. for membership in the credit union or the Occasionally, however, an expanded field of credit union converts to a multiple common membership may provide the basis for re- bond credit union. versing current financial problems. In such If the group comprising the single common cases, an amendment to expand the field of bond of the credit union merges with, or is membership may be granted notwith- acquired by, another group, the credit union standing the credit union’s financial or oper- can serve the new group resulting from the ational problems. The applicant credit union merger or acquisition after receiving a must clearly establish that the expanded housekeeping amendment. field of membership is in the best interest of the members and will not increase the risk III.B.3—Economic Advisability to the NCUSIF. Prior to granting a common bond expansion, NCUA will examine the amendment’s III.C.3—Regional Director Approval likely impact on the credit union’s oper- If the regional director approves the re- ations and financial condition. In most quested amendment, the credit union will be cases, the information needed for analyzing issued an amendment to Section 5 of its the effect of adding a particular group will charter. be available to NCUA through the examination and financial and statistical reports; III.C.4—Regional Director Disapproval however, in particular cases, a regional di- When a regional director disapproves any rector may require additional information application, in whole or in part, to amend prior to making a decision. the field of membership under this chapter, III.B.4—Documentation Requirements the applicant will be informed in writing of the: A federal credit union requesting a com- • Specific reasons for the action; mon bond expansion must submit an Appli- • Options to consider, if appropriate, for cation for Field of Membership Amendment gaining approval; and (NCUA 4015–EZ) to the appropriate NCUA re- • Appeal procedures. gional director. An authorized credit union representative must sign the request. III.C.5—Appeal of Regional Director Decision

III.C—NCUA PROCEDURES FOR AMENDING THE If a field of membership expansion request, FIELD OF MEMBERSHIP merger, or spin-off is denied by the regional director, the federal credit union may appeal III.C.1—General the decision to the NCUA Board. An appeal All requests for approval to amend a fed- must be sent to the appropriate regional of- eral credit union’s charter must be sub- fice within 60 days of the date of denial and mitted to the appropriate regional director. must address the specific reason(s) for the denial. The regional director will then for- III.C.2—Regional Director’s Decision ward the appeal to the NCUA Board. NCUA NCUA staff will review all amendment re- central office staff will make an independent quests in order to ensure conformance to review of the facts and present the appeal to NCUA policy. the NCUA Board with a recommendation. Before acting on a proposed amendment, Before appealing, the credit union may, the regional director may require an on-site within 30 days of the denial, provide supple- review. In addition, the regional director mental information to the regional director may, after taking into account the signifi- for reconsideration. A reconsideration will cance of the proposed field of membership contain new and material evidence address- amendment, require the applicant to submit ing the reasons for the initial denial. The re- a business plan addressing specific issues. gional director will have 30 days from the The financial and operational condition of date of the receipt of the request for recon- the requesting credit union will be consid- sideration to make a final decision. If the re- ered in every instance. The economic advis- quest is again denied, the applicant may pro- ability of expanding the field of membership ceed with the appeal process within 60 days of a credit union with financial or oper- of the date of the last denial. A second reational problems must be carefully consid- quest for reconsideration will be treated as ered. an appeal to the NCUA Board. In most cases, field of membership amend- III.D—MERGERS, PURCHASE AND ments will only be approved for credit unions ASSUMPTIONS, AND SPIN-OFFS that are operating satisfactorily. Generally, if a federal credit union is having difficulty In general, other than the addition of com- providing service to its current membership, mon bond groups, there are three additional or is experiencing financial or other oper- ways a federal credit union with a single

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associational common bond can expand its As a stipulated condition to an emergency field of membership: merger, the field of membership of the merg- • By taking in the field of membership of ing credit union may be transferred intact to another credit union through a common the continuing federal credit union without bond or emergency merger; regard to any common bond restrictions. • By taking in the field of membership of Under this authority, therefore, a single another credit union through a common associational common bond federal credit bond or emergency purchase and assumption union may take into its field of membership (P&A); or any dissimilar charter type. • By taking a portion of another credit The common bond characteristic of the union’s field of membership through a com- continuing credit union in an emergency mon bond spin-off. merger does not change. That is, even though the merging credit union is a mul- III.D.1—Mergers tiple common bond or community, the con- Generally, the requirements applicable to tinuing credit union will remain a single field of membership expansions found in this common bond credit union. Similarly, if the section apply to mergers where the con- merging credit union is an unlike single tinuing credit union is a federal charter. common bond, the continuing credit union That is, the two credit unions must share a will remain a single common bond credit common bond. union. Future common bond expansions will Where the merging credit union is state- be based on the continuing credit union’s single common bond. chartered, the common bond rules applicable Emergency mergers involving federally in- to a federal credit union apply. sured credit unions in different NCUA re- Mergers must be approved by the NCUA regions must be approved by the regional di- gional director where the continuing credit rector where the continuing credit union is union is headquartered, with the concur- headquartered, with the concurrence of the rence of the regional director of the merging regional director of the merging credit union credit union, and, as applicable, the state and, as applicable, the state regulators. regulators. If a single associational credit union wants III.D.3—Purchase and Assumption (P&A) to merge into a multiple common bond or community credit union, Section IV.D or Another alternative for acquiring the field Section V.D of this Chapter, respectively, of membership of a failing credit union is should be reviewed. through a consolidation known as a P&A. A P&A has limited application because, in III.D.2—Emergency Mergers most cases, the failing credit union must be placed into involuntary liquidation. In the An emergency merger may be approved by few instances where a P&A may be appro- NCUA without regard to common bond or priate, the assuming federal credit union, as other legal constraints. An emergency merg- with emergency mergers, may acquire the er involves NCUA’s direct intervention and entire field of membership if the emergency approval. The credit union to be merged merger criteria are satisfied. However, if the must either be insolvent or likely to become P&A does not meet the emergency merger insolvent, and NCUA must determine that: criteria, it must be processed under the com- • An emergency requiring expeditious ac- mon bond requirements. tion exists; In a P&A processed under the emergency • Other alternatives are not reasonably criteria, specified loans, shares, and certain available; and other designated assets and liabilities, with- • The public interest would best be served out regard to common bond restrictions, by approving the merger. may also be acquired without changing the If not corrected, conditions that could lead character of the continuing federal credit to insolvency include, but are not limited to: union for purposes of future field of member- • Abandonment by management; ship amendments. • Loss of sponsor; If the purchased and/or assumed credit • Serious and persistent record keeping union’s field of membership does not share a problems; or common bond with the purchasing and/or as- • Serious and persistent operational con- suming credit union, then the continuing cerns. credit union’s original common bond will be In an emergency merger situation, NCUA controlling for future common bond expan- will take an active role in finding a suitable sions. merger partner (continuing credit union). P&As involving federally insured credit NCUA is primarily concerned that the con- unions in different NCUA regions must be tinuing credit union has the financial approved by the regional director where the strength and management expertise to ab- continuing credit union is headquartered, sorb the troubled credit union without ad- with the concurrence of the regional director versely affecting its own financial condition of the purchased and/or assumed credit union and stability. and, as applicable, the state regulators.

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III.D.4—Spin-Offs any other charters without performing an overlap analysis. A spin-off occurs when, by agreement of the parties, a portion of the field of member- III.E.2—Organizational Restructuring ship, assets, liabilities, shares, and capital of a credit union are transferred to a new or ex- A federal credit union’s field of member- isting credit union. A spin-off is unique in ship will always be governed by the common that usually one credit union has a field of bond descriptions contained in Section 5 of membership expansion and the other loses a its charter. Where a sponsor organization ex- portion of its field of membership. pands its operations internally, by acquisition or otherwise, the credit union may serve All common bond requirements apply re- these new entrants to its field of membership gardless of whether the spun-off group be- if they are part of the common bond de- comes a new credit union or goes to an exist- scribed in Section 5. NCUA will permit a ing federal charter. complete overlap of the credit unions’ fields The request for approval of a spin-off must of membership. If a sponsor organization be supported with a plan that addresses, at a sells off a group, new members can no longer minimum: be served unless they otherwise qualify for • Why the spin-off is being requested; membership in the credit union or it con- • What part of the field of membership is verts to a multiple common bond. to be spun off; Credit unions must submit documentation • Whether the affected credit unions have explaining the restructuring and providing the same common bond (applies only to sin- information regarding the new organiza- gle associational credit unions); tional structure. • Which assets, liabilities, shares, and capital are to be transferred; III.E.3—Exclusionary Clauses • The financial impact the spin-off will An exclusionary clause is a limitation pre- have on the affected credit unions; cluding the credit union from serving the • The ability of the acquiring credit union primary members of a portion of a group to effectively serve the new members; otherwise included in its field of member- • The proposed spin-off date; and ship. NCUA no longer grants exclusionary • Disclosure to the members of the require- clauses. Those granted prior to the adoption ments set forth above. of this new chartering manual will remain in The spin-off request must also include cur- effect unless the credit unions agree to re- rent financial statements from the affected move them or one of the affected credit credit unions and the proposed voting ballot. unions submits a housekeeping amendment For federal credit unions spinning off a to have it removed. group, membership notice and voting requirements and procedures are the same as III.F—CHARTER CONVERSIONS for mergers (see Part 708 of the NCUA Rules A single associational common bond fed- and Regulations), except that only the mem- eral credit union may apply to convert to a bers directly affected by the spin-off—those community charter provided the field of whose shares are to be transferred—are per- membership requirements of the community mitted to vote. Members whose shares are charter are met. Groups within the existing not being transferred will not be afforded the charter which cannot qualify in the new opportunity to vote. All members of the charter cannot be served except for members group to be spun off (whether they voted in of record, or groups or communities obtained favor, against, or not at all) will be trans- in an emergency merger or P&A. A credit ferred if the spin-off is approved by the vot- union must notify all groups that will be re- ing membership. Voting requirements for moved from the field of membership as a re- federally insured state credit unions are gov- sult of conversion. Members of record can erned by state law. continue to be served. Also, in order to sup- Spin-offs involving federally insured credit port a case for a conversion, the applicant unions in different NCUA regions must be federal credit union may be required to de- approved by all regional directors where the velop a detailed business plan as specified in credit unions are headquartered and the Chapter 2, Section V.A.3. state regulators, as applicable. Spin-offs in A single associational common bond fed- the same region also require approval by the eral credit union may apply to convert to a state regulator, as applicable. multiple common bond charter by adding a non-common bond group that is within a rea- III.E—OVERLAPS sonable proximity of a service facility. Groups within the existing charter may be III.E.1—General retained and continue to be served. However, An overlap exists when a group of persons future amendments, including any expan- is eligible for membership in two or more sions of the original single common bond credit unions. NCUA will permit single group, must be done in accordance with mul- associational federal credit unions to overlap tiple common bond policy.

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III.G—REMOVAL OF GROUPS FROM THE FIELD credit union. A credit union can adopt a OF MEMBERSHIP more restrictive definition of immediate family or household. A credit union may request removal of a portion of the common bond group from its Volunteers, by virtue of their close rela- field of membership for various reasons. The tionship with a sponsor group, may be in- most common reasons for this type of cluded. One example is volunteers working amendment are: at a church. • The group is within the field of member- Under the Federal Credit Union Act, once ship of two credit unions and one wishes to a person becomes a member of the credit discontinue service; union, such person may remain a member of • The federal credit union cannot continue the credit union until the person chooses to to provide adequate service to the group; withdraw or is expelled from the membership • The group has ceased to exist; of the credit union. This is commonly re- • The group does not respond to repeated ferred to as ‘‘once a member, always a mem- requests to contact the credit union or re- ber.’’ The ‘‘once a member, always a mem- fuses to provide needed support; or ber’’ provision does not prevent a credit • The group initiates action to be removed union from restricting services to members from the field of membership. who are no longer within the field of mem- When a federal credit union requests an bership. amendment to remove a group from its field of membership, the regional director will de- IV—MULTIPLE OCCUPATIONAL/ ASSOCIATIONAL termine why the credit union desires to re- COMMON BONDS move the group. If the regional director con- IV.A.1—General curs with the request, membership will continue for those who are already members A federal credit union may be chartered to under the ‘‘once a member, always a mem- serve a combination of distinct, definable ber’’ provision of the Federal Credit Union single occupational and/or associational Act. common bonds. This type of credit union is called a multiple common bond credit union. III.H—OTHER PERSONS ELIGIBLE FOR CREDIT Each group in the field of membership must UNION MEMBERSHIP have its own occupational or associational A number of persons by virtue of their common bond. For example, a multiple com- close relationship to a common bond group mon bond credit union may include two un- may be included, at the charter applicant’s related employers, or two unrelated associa- option, in the field of membership. These in- tions, or a combination of two or more em- clude the following: ployers or associations. Additionally, these • Spouses of persons who died while within groups must be within reasonable geographic the field of membership of this credit union; proximity of the credit union. That is, the • Employees of this credit union; groups must be within the service area of • Volunteers; one of the credit union’s service facilities. • Members of the immediate family or These groups are referred to as select groups. household; A multiple common bond credit union can- • Organizations of such persons; and not include a TIP or expand using single • Corporate or other legal entities in this common bond criteria. charter. A federal credit union’s service area is the Immediate family is defined as spouse, area that can reasonably be served by the child, sibling, parent, grandparent, or grand- service facilities accessible to the groups child. This includes stepparents, step- within the field of membership. The service children, stepsiblings, and adoptive relation- area will most often coincide with that geo- ships. graphic area primarily served by the service Household is defined as persons living in facility. Additionally, the groups served by the same residence maintaining a single eco- the credit union must have access to the nomic unit. service facility. The non-availability of Membership eligibility is extended only to other credit union service is a factor to be individuals who are members of an ‘‘imme- considered in determining whether the group diate family or household’’ of a credit union is within reasonable proximity of a credit member. It is not necessary for the primary union wishing to add the group to its field of member to join the credit union in order for membership. the immediate family or household member A service facility for multiple common of the primary member to join, provided the bond credit unions is defined as a place immediate family or household clause is in- where shares are accepted for members’ ac- cluded in the field of membership. However, counts, loan applications are accepted or it is necessary for the immediate family loans are disbursed. This definition includes member or household member to first join in a credit union owned branch, a mobile order for that person’s immediate family branch, an office operated on a regularly member or household member to join the scheduled weekly basis, a credit union owned

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ATM, or a credit union owned electronic fa- Third, a federal credit union removes a cility that meets, at a minimum, these re- group from its field of membership through quirements. A service facility also includes a agreement with the group, a spin-off, or be- shared branch or a shared branch network if cause the group no longer exists. either: (1) the credit union has an ownership interest in the service facility either directly IV.B.2—Numerical Limitation of Select Groups or through a CUSO or similar organization; or (2) the service facility is local to the cred- An existing multiple common bond federal it union and the credit union is an author- credit union that submits a request to ized participant in the service center. This amend its charter must provide documenta- definition does not include the credit union’s tion to establish that the multiple common Internet Web site. bond requirements have been met. The re- The select group as a whole will be consid- gional director must approve all amend- ered to be within a credit union’s service ments to a multiple common bond credit area when: union’s field of membership. • A majority of the persons in a select NCUA will approve groups to a credit group live, work, or gather regularly within union’s field of membership if the agency de- the service area; termines in writing that the following cri- • The group’s headquarters is located with- teria are met: in the service area; or • The credit union has not engaged in any • The group’s ‘‘paid from’’ or ‘‘supervised unsafe or unsound practice, as determined by from’’ location is within the service area. the regional director, which is material during the one year period preceding the filing IV.A.2—Sample Multiple Common Bond Field of to add the group; Membership • The credit union is ‘‘adequately capital- An example of a multiple common bond ized.’’ NCUA defines adequately capitalized field of membership is: to mean the credit union has a net worth ‘‘The field of membership of this federal ratio of not less than 6 percent. For low-in- credit union shall be limited to the fol- come credit unions or credit unions char- lowing: tered less than ten years, the regional direc- 1. Employees of Teltex Corporation who tor may determine that a net worth ratio of work in Wilmington, Delaware; less than 6 percent is adequate if the credit 2. Partners and employees of Smith & union is making reasonable progress toward Jones, Attorneys at Law, who work in Wil- meeting the 6 percent net worth require- mington, Delaware; ment. For any other credit union, the re- 3. Members of the M&L Association in Wil- gional director may determine that a net mington, Delaware, who qualify for member- worth ratio of less than 6 percent is adequate ship in accordance with its charter and by- if the credit union is making reasonable laws in effect on December 31, 1997.’’ progress toward meeting the 6 percent net worth requirement, and the addition of the IV.B—MULTIPLE COMMON BOND AMENDMENTS group would not adversely affect the credit IV.B.1—General union’s capitalization level; • The credit union has the administrative Section 5 of every multiple common bond capability to serve the proposed group and federal credit union’s charter defines the the financial resources to meet the need for field of membership and select groups the additional staff and assets to serve the new credit union can legally serve. Only those group; persons or legal entities specified in the field • of membership can be served. There are a Any potential harm the expansion may number of instances in which Section 5 must have on any other credit union and its mem- be amended by NCUA. bers is clearly outweighed by the probable First, a new select group is added to the beneficial effect of the expansion. With re- field of membership. This may occur through spect to a proposed expansion’s effect on agreement between the group and the credit other credit unions, the requirements on union directly, or through a merger, cor- overlapping fields of membership set forth in porate acquisition, purchase and assumption Section IV.E of this Chapter are also applica- (P&A), or spin-off. ble; and Second, a federal credit union qualifies to • If the formation of a separate credit change its charter from: union by such group is not practical and con- • A single occupational or associational sistent with reasonable standards for the charter to a multiple common bond charter; safe and sound operation of a credit union. • A multiple common bond to a single oc- A detailed analysis is required for groups cupational or associational charter; of 3,000 or more primary potential members • A multiple common bond to a commu- requesting to be added to a multiple common nity charter; or bond credit union. It is incumbent upon the • A community to a multiple common credit union to demonstrate that the forma- bond charter. tion of a separate credit union by such a

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group is not practical. The group must pro- Desired services and products—the type of vide evidence that it lacks sufficient volun- services the group desires in comparison to teer and other resources to support the effi- the type of services a new credit union could cient and effective operations of a credit offer. union or does not meet the economic advis- Sponsor subsidies—the availability of oper- ability criteria outlined in Chapter 1. If this ating subsidies. can be demonstrated, the group may be The desire of the sponsor—the extent of added to a multiple common bond credit the sponsor’s interest in supporting a credit union’s field of membership. union charter. Employee interest—the extent of the em- IV.B.3—Documentation Requirements ployees’ interest in obtaining a credit union A multiple common bond credit union re- charter. questing a select group expansion must sub- Evidence of past failure—whether the mit a formal written request, using the Ap- group previously had its own credit union or plication for Field of Membership Amend- previously filed for a credit union charter. ment (NCUA 4015 or NCUA 4015–EZ) to the Administrative capacity to provide serv- appropriate NCUA regional director. An au- ices—will the group have the management thorized credit union representative must expertise to provide the services requested. • sign the request. If the group is eligible for membership in The NCUA 4015–EZ (for groups less than any other credit union, documentation must 3,000 potential members) must be accom- be provided to support inclusion of the group panied by the following: under the overlap standards set forth in Sec- • A letter, or equivalent documentation, tion IV.E of this Chapter; and • from the group requesting credit union serv- The most recent copy of the group’s ice. This letter must indicate: charter and bylaws or equivalent documenta- Æ That the group wants to be added to the tion (for associational groups). applicant federal credit union’s field of mem- IV.B.4—Corporate Restructuring bership; Æ The number of persons currently in- If a select group within a federal credit cluded within the group to be added and union’s field of membership undergoes a sub- their locations; and stantial restructuring, a change to the credit Æ The group’s proximity to credit union’s union’s field of membership may be required nearest service facility. if the credit union is to continue to provide • The most recent copy of the group’s service to the select group. NCUA permits a charter and bylaws or equivalent documenta- multiple common bond credit union to main- tion (for associational groups). tain in its field of membership a sold, spun- The NCUA 4015 (for groups of 3,000 or more off, or merged select group to which it has primary potential members) must be accom- been providing service. This type of amend- panied by the following: ment to the credit union’s charter is not • A letter, or equivalent documentation, considered an expansion; therefore, the cri- from the group requesting credit union serv- teria relating to adding new groups are not ice. This letter must indicate: applicable. Æ That the group wants to be added to the When two groups merge and each is in the federal credit union’s field of membership; field of membership of a credit union, then Æ Whether the group presently has other both (or all affected) credit unions can serve credit union service available; the resulting merged group, subject to any Æ The number of persons currently in- existing geographic limitation and without cluded within the group to be added and regard to any overlap provisions. However, their locations; the credit unions cannot serve the other Æ The group’s proximity to credit union’s multiple groups that may be in the field of nearest service facility, and membership of the other credit union. Æ Why the formation of a separate credit IV.C—NCUA’S PROCEDURES FOR AMENDING union for the group is not practical or con- THE FIELD OF MEMBERSHIP sistent with safety and soundness standards. A credit union need not address every item IV.C.1—General on the list, simply those issues that are relevant to its particular request: All requests for approval to amend a fed- Member location—whether the member- eral credit union’s charter must be sub- ship is widely dispersed or concentrated in a mitted to the appropriate regional director. central location. IV.C.2—Regional Director’s Decision Demographics—the employee turnover rate, economic status of the group’s mem- NCUA staff will review all amendment re- bers, and whether the group is more apt to quests in order to ensure conformance to consist of savers and/or borrowers. NCUA policy. Market competition—the availability of Before acting on a proposed amendment, other financial services. the regional director may require an on-site

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review. In addition, the regional director IV.D—MERGERS, PURCHASE AND may, after taking into account the signifi- ASSUMPTIONS, AND SPIN-OFFS cance of the proposed field of membership In general, other than the addition of se- amendment, require the applicant to submit lect groups, there are three additional ways a business plan addressing specific issues. a multiple common bond federal credit union The financial and operational condition of can expand its field of membership: the requesting credit union will be consid- • By taking in the field of membership of ered in every instance. An expanded field of another credit union through a merger; membership may provide the basis for re- • By taking in the field of membership of versing adverse trends. In such cases, an another credit union through a purchase and amendment to expand the field of member- assumption (P&A); or ship may be granted notwithstanding the • By taking a portion of another credit credit union’s adverse trends. The applicant union’s field of membership through a spin- credit union must clearly establish that the off. approval of the expanded field of membership IV.D.1—Voluntary Mergers meets the requirements of Section IV.B.2 of this Chapter and will not increase the risk to a. All Select Groups in the Merging Credit the NCUSIF. Union’s Field of Membership Have Less Than 3,000 Primary Potential Members IV.C.3—Regional Director Approval A voluntary merger of two or more federal If the regional director approves the re- credit unions is permissible as long as each quested amendment, the credit union will be select group in the merging credit union’s issued an amendment to Section 5 of its field of membership has less than 3,000 pri- charter. mary potential members. While the merger requirements outlined in Section 205 of the IV.C.4—Regional Director Disapproval Federal Credit Union Act must still be met, the requirements of Chapter 2, Section When a regional director disapproves any IV.B.2 of this manual are not applicable. application, in whole or in part, to amend the field of membership under this chapter, b. One or More Select Groups in the Merging the applicant will be informed in writing of Credit Union’s Field of Membership Has the: 3,000 or More Primary Potential Members • Specific reasons for the action; If the merging credit unions serve the • Options to consider, if appropriate, for same group, and the group consists of 3,000 or gaining approval; and more primary potential members, then the • Appeal procedure. ability to form a separate credit union analysis is not required for that group. If the IV.C.5—Appeal of Regional Director Decision merging credit union has any other groups consisting of 3,000 or more primary potential If a field of membership expansion request, members, special requirements apply. NCUA merger, or spin-off is denied by the regional will analyze each group of 3,000 or more pri- director, the federal credit union may appeal mary potential members, except as noted the decision to the NCUA Board. An appeal above, to determine whether the formation must be sent to the appropriate regional of- of a separate credit union by such a group is fice within 60 days of the date of denial, and practical. If the formation of a separate must address the specific reason(s) for the credit union by such a group is not practical denial. The regional director will then for- because the group lacks sufficient volunteer ward the appeal to the NCUA Board. NCUA and other resources to support the efficient central office staff will make an independent and effective operations of a credit union or review of the facts and present the appeal to does not meet the economic advisable cri- the Board with a recommendation. teria outlined in Chapter 1, the group may be Before appealing, the credit union may, merged into a multiple common bond credit within 30 days of the denial, provide supple- union. If the formation of a separate credit mental information to the regional director union is practical, the group must be spun- for reconsideration. A reconsideration will off before the merger can be approved. contain new and material evidence addressing the reasons for the initial denial. The re- c. Merger of a Single Common Bond Credit gional director will have 30 days from the Union Into a Multiple Common Bond Cred- date of the receipt of the request for recon- it Union sideration to make a final decision. If the re- A financially healthy single common bond quest is again denied, the applicant may pro- credit union with a primary potential mem- ceed with the appeal process within 60 days bership of 3,000 or more cannot merge into a of the date of the last denial. A second re- multiple common bond credit union, absent quest for reconsideration will be treated as supervisory reasons, unless the continuing an appeal to the NCUA Board. credit union already serves the same group.

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d. Merger Approval As a stipulated condition to an emergency merger, the field of membership of the merg- If the merger is approved, the qualifying ing credit union may be transferred intact to groups within the merging credit union’s the continuing federal credit union without field of membership will be transferred in- regard to any field of membership restric- tact to the continuing credit union and can tions including numerical limitation re- continue to be served. quirements. Under this authority, any single Where the merging credit union is state- occupational or associational common bond, chartered, the field of membership rules ap- multiple common bond, or community char- plicable to a federal credit union apply. ter may merger into a multiple common Mergers must be approved by the NCUA re- bond credit union and that credit union can gional director where the continuing credit continue to serve the merging credit union’s union is headquartered, with the concur- field of membership. Subsequent field of rence of the regional director of the merging membership expansions of the continuing credit union, and, as applicable, the state multiple common bond credit union must be regulators. consistent with multiple common bond poli- IV.D.2—Supervisory Mergers cies. Emergency mergers involving federally in- The NCUA may approve the merger of any sured credit unions in different NCUA re- federally insured credit union when safety gions must be approved by the regional di- and soundness concerns are present without rector where the continuing credit union is regard to the 3,000 numerical limitation. The headquartered, with the concurrence of the credit union need not be insolvent or in dan- regional director of the merging credit union ger of insolvency for NCUA to use this statu- and, as applicable, the state regulators. tory authority. Examples constituting appropriate reasons for using this authority IV.D.4—Purchase and Assumption (P&A) are: abandonment of the management and/or Another alternative for acquiring the field officials and an inability to find replace- of membership of a failing credit union is ments, loss of sponsor support, serious and through a consolidation known as a P&A. persistent record keeping problems, sus- Generally, the requirements applicable to tained material decline in financial condi- field of membership expansions found in this tion, or other serious or persistent cir- chapter apply to purchase and assumptions cumstances. where the purchasing credit union is a federal charter. IV.D.3—Emergency Mergers A P&A has limited application because, in An emergency merger may be approved by most cases, the failing credit union must be NCUA without regard to field of membership placed into involuntary liquidation. How- rules, the 3,000 numerical limitation, or ever, in the few instances where a P&A may other legal constraints. An emergency merg- occur, the assuming federal credit union, as er involves NCUA’s direct intervention and with emergency mergers, may acquire the approval. The credit union to be merged entire field of membership if the emergency must either be insolvent or likely to become criteria are satisfied. Specified loans, shares, insolvent, and NCUA must determine that: and certain other designated assets and li- • An emergency requiring expeditious ac- abilities, without regard to field of member- tion exists; ship restrictions, may also be acquired with- • Other alternatives are not reasonably out changing the character of the continuing available; and federal credit union for purposes of future • The public interest would best be served field of membership amendments. Subse- by approving the merger. quent field of membership expansions must If not corrected, conditions that could lead be consistent with multiple common bond to insolvency include, but are not limited to: policies. • Abandonment by management; P&As involving federally insured credit • Loss of sponsor; unions in different NCUA regions must be • Serious and persistent record keeping approved by the regional director where the problems; or continuing credit union is headquartered, • Serious and persistent operational con- with the concurrence of the regional director cerns. of the purchased and/or assumed credit union In an emergency merger situation, NCUA and, as applicable, the state regulators. will take an active role in finding a suitable IV.D.5—Spin-Offs merger partner (continuing credit union). NCUA is primarily concerned that the con- A spin-off occurs when, by agreement of tinuing credit union has the financial the parties, a portion of the field of member- strength and management expertise to ab- ship, assets, liabilities, shares, and capital of sorb the troubled credit union without ad- a credit union are transferred to a new or ex- versely affecting its own financial condition isting credit union. A spin-off is unique in and stability. that usually one credit union has a field of

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membership expansion and the other loses a it union service is inaccurate, the misin- portion of its field of membership. formation may be grounds for removal of the All common bond requirements apply re- group from the federal credit union’s char- gardless of whether the spun-off group be- ter. comes a new charter or goes to an existing When an overlap situation requiring anal- federal charter. ysis does arise, officials of the expanding The request for approval of a spun-off credit union must ascertain the views of the group must be supported with a plan that ad- overlapped credit union. If the overlapped dresses, at a minimum: credit union does not object, the applicant • Why the spin-off is being requested; must submit a letter or other documentation • What part of the field of membership is to that effect. If the overlapped credit union to be spun off; does not respond, the expanding credit union • Which assets, liabilities, shares, and cap- must notify NCUA in writing of its attempt ital are to be transferred; to obtain the overlapped credit union’s com- • The financial impact the spin-off will ments. have on the affected credit unions; NCUA will approve an overlap if the expan- • The ability of the acquiring credit union sion’s beneficial effect in meeting the con- to effectively serve the new members; venience and needs of the members of the • The proposed spin-off date; and group clearly outweighs any adverse effect • Disclosure to the members of the require- on the overlapped credit union. ments set forth above. In reviewing the overlap, the regional di- The spin-off request must also include cur- rector will consider: rent financial statements from the affected • The view of the overlapped credit credit unions and the proposed voting ballot. union(s); For federal credit unions spinning off a • Whether the overlap is incidental in na- group, membership notice and voting re- ture—the group of persons in question is so quirements and procedures are the same as small as to have no material effect on the for mergers (see Part 708 of the NCUA Rules original credit union; and Regulations), except that only the mem- • Whether there is limited participation by bers directly affected by the spin-off—those members or employees of the group in the whose shares are to be transferred—are per- original credit union after the expiration of mitted to vote. Members whose shares are a reasonable period of time; not being transferred will not be afforded the • Whether the original credit union fails to opportunity to vote. All members of the provide requested service; group to be spun off (whether they voted in • Financial effect on the overlapped credit favor, against, or not at all) will be trans- union; ferred if the spin-off is approved by the vot- • The desires of the group(s); ing membership. Voting requirements for • The desire of the sponsor organization; federally insured state credit unions are gov- and erned by state law. • The best interests of the affected group Spin-offs involving federally insured credit and the credit union members involved. unions in different NCUA regions must be Generally, if the overlapped credit union approved by all regional directors where the does not object, and NCUA determines that credit unions are headquartered and the there is no safety and soundness problem, state regulators, as applicable. Spin-offs in the overlap will be permitted. the same region also require approval by the Potential overlaps of a federally insured state regulator, as applicable. state credit union’s field of membership by a federal credit union will generally be ana- IV.E—OVERLAPS lyzed in the same way as if two federal credit unions were involved. Where a federally in- IV.E.1—General sured state credit union’s field of member- An overlap exists when a group of persons ship is broadly stated, NCUA will exclude its is eligible for membership in two or more field of membership from any overlap protec- credit unions, including state charters. An tion. overlap is permitted when the expansion’s NCUA will permit multiple common bond beneficial effect in meeting the convenience federal credit unions to overlap community and needs of the members of the group pro- charters without performing an overlap anal- posed to be included in the field of member- ysis. ship clearly outweighs any adverse effect on IV.E.2—Overlap Issues as a Result of the overlapped credit union. Organizational Restructuring Credit unions must investigate the possibility of an overlap with federally insured A federal credit union’s field of member- credit unions prior to submitting an expan- ship will always be governed by the field of sion request if the group has 3,000 or more membership descriptions contained in Sec- primary potential members. If cases arise tion 5 of its charter. Where a sponsor organi- where the assurance given to a regional di- zation expands its operations internally, by rector concerning the unavailability of cred- acquisition or otherwise, the credit union

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may serve these new entrants to its field of to be served. Also, in order to support a case membership if they are part of any select for a conversion, the applicant federal credit group listed in Section 5. Where acquisitions union may be required to develop a detailed are made which add a new subsidiary, the business plan as specified in Chapter 2, Sec- group cannot be served until the subsidiary tion V.A.3. is included in the field of membership A multiple common bond federal credit through a housekeeping amendment. union may apply to convert to a single occu- Overlaps may occur as a result of restruc- pational or associational common bond char- turing or merger of the parent organization. ter provided the field of membership require- When such overlaps occur, each credit union ments of the new charter are met. Groups must request a field of membership amend- within the existing charter, which do not ment to reflect the new groups each wishes qualify in the new charter, cannot be served to serve. The credit union can continue to except for members of record, or groups or serve any current group in its field of mem- communities obtained in an emergency bership that is acquiring a new group or has merger or P&A. A credit union must notify been acquired by a new group. The new group all groups that will be removed from the cannot be served by the credit union until field of membership as a result of conver- the field of membership amendment is ap- sion. proved by NCUA. Credit unions affected by organizational IV.G—REMOVAL OF GROUPS FROM THE FIELD restructuring or merger should attempt to OF MEMBERSHIP resolve overlap issues among themselves. A credit union may request removal of a Unless an agreement is reached limiting the group from its field of membership for var- overlap resulting from the corporate restruc- ious reasons. The most common reasons for turing, NCUA will permit a complete overlap this type of amendment are: of the credit unions’ fields of membership. • The group is within the field of member- When two groups merge, or one group is ac- ship of two credit unions and one wishes to quired by the other, and each is in the field discontinue service; of membership of a credit union, both (or all • The federal credit union cannot continue affected) credit unions can serve the result- to provide adequate service to the group; ing merged or acquired group, subject to any • existing geographic limitation and without The group has ceased to exist; • regard to any overlap provisions. This is ac- The group does not respond to repeated complished through a housekeeping amend- requests to contact the credit union or re- ment. fuses to provide needed support; Credit unions must submit to NCUA docu- • The group initiates action to be removed mentation explaining the restructuring and from the field of membership; or provide information regarding the new orga- • The federal credit union wishes to con- nizational structure. vert to a single common bond. When a federal credit union requests an IV.E.3—Exclusionary Clauses amendment to remove a group from its field An exclusionary clause is a limitation pre- of membership, the regional director will de- cluding the credit union from serving the termine why the credit union desires to re- primary members of a portion of a group move the group. If the regional director con- otherwise included in its field of member- curs with the request, membership will con- ship. NCUA no longer grants exclusionary tinue for those who are already members clauses. Those granted prior to the adoption under the ‘‘once a member, always a mem- of this new chartering manual will remain in ber’’ provision of the Federal Credit Union effect unless the credit unions agree to re- Act. move them or one of the affected credit IV.H—OTHER PERSONS ELIGIBLE FOR CREDIT unions submits a housekeeping amendment UNION MEMBERSHIP to have it removed. A number of persons, by virtue of their IV.F—CHARTER CONVERSION close relationship to a common bond group, A multiple common bond federal credit may be included, at the charter applicant’s union may apply to convert to a community option, in the field of membership. These in- charter provided the field of membership re- clude the following: quirements of the community charter are • Spouses of persons who died while within met. Groups within the existing charter the field of membership of this credit union; which cannot qualify in the new charter can- • Employees of this credit union; not be served except for members of record, • Persons retired as pensioners or annu- or groups or communities obtained in an itants from the above employment; emergency merger or P&A. A credit union • Volunteers; must notify all groups that will be removed • Members of the immediate family or from the field of membership as a result of household; conversion. Members of record can continue • Organizations of such persons; and

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• Corporate or other legal entities in this V.A.2—Documentation Requirements charter. In addition to the documentation require- Immediate family is defined as spouse, ments set forth in Chapter 1 to charter a child, sibling, parent, grandparent, or grand- credit union, a community credit union ap- child. This includes stepparents, stepchildren, stepsiblings, and adoptive relation- plicant must provide additional documenta- ships. tion addressing the proposed area to be Household is defined as persons living in served and community service policies. the same residence maintaining a single eco- A community credit union must meet the nomic unit. statutory requirements that the proposed Membership eligibility is extended only to community area is (1) well-defined, and (2) a individuals who are members of an ‘‘imme- local community, neighborhood, or rural dis- diate family or household’’ of a credit union trict. member. It is not necessary for the primary ‘‘Well-defined’’ means the proposed area member to join the credit union in order for has specific geographic boundaries. Geo- the immediate family or household member graphic boundaries may include a city, town- of the primary member to join, provided the ship, county (or its political equivalent), or a immediate family or household clause is in- clearly identifiable neighborhood. Although cluded in the field of membership. However, congressional districts and state boundaries it is necessary for the immediate family are well-defined areas, they do not meet the member or household member to first join in requirement that the proposed area be a order for that person’s immediate family local community. member or household member to join the The well-defined local community, neigh- credit union. A credit union can adopt a borhood, or rural district requirement is met more restrictive definition of immediate if: family or household. • The area to be served is in a recognized Volunteers, by virtue of their close rela- single political jurisdiction, i.e., a city, tionship with a sponsor group, may be in- county, or their political equivalent, or any cluded. Examples include volunteers working contiguous portion thereof. at a hospital or church. The well-defined local community, neigh- Under the Federal Credit Union Act, once borhood, or rural district requirement may be a person becomes a member of the credit met if: union, such person may remain a member of • The area to be served is in multiple con- the credit union until the person chooses to tiguous political jurisdictions, i.e., a city, withdraw or is expelled from the membership county, or their political equivalent, or any of the credit union. This is commonly re- contiguous portion thereof and if the popu- ferred to as ‘‘once a member, always a mem- lation of the requested well-defined area does ber.’’ The ‘‘once a member, always a mem- not exceed 500,000; or ber’’ provision does not prevent a credit • The area to be served is a Metropolitan union from restricting services to members Statistical Area (MSA) or its equivalent, or who are no longer within the field of mem- a portion thereof, where the population of bership. the MSA or its equivalent does not exceed 1,000,000. V—COMMUNITY CHARTER REQUIREMENTS If the proposed area meets either the multiple political jurisdiction or MSA criteria, V.A.1—General the credit union must submit a letter de- Community charters must be based on a scribing how the area meets the standards single, geographically well-defined local for community interaction and/or common community, neighborhood, or rural district interests. where individuals have common interests If NCUA does not find sufficient evidence and/or interact. More than one credit union of community interaction and/or common in- may serve the same community. terests or if the area to be served does not NCUA recognizes four types of affinity on meet the MSA or multiple political jurisdic- which a community charter can be based— tion requirements of the preceding para- persons who live in, worship in, attend graph, the application must include docu- school in, or work in the community. Busi- mentation to support that it is a well-de- nesses and other legal entities within the fined local community, neighborhood, or community boundaries may also qualify for rural district. membership. It is the applicant’s responsibility to dem- NCUA has established the following re- onstrate the relevance of the documentation quirements for community charters: provided in support of the application. This • The geographic area’s boundaries must must be provided in a narrative summary. be clearly defined; The narrative summary must explain how • The area is a ‘‘well-defined local, commu- the documentation demonstrates interaction nity, neighborhood, or rural district;’’ and and/or common interests. For example, sim- • Individuals must have common interests ply listing newspapers and organizations in and/or interact. the area is not sufficient to demonstrate

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that the area is a local community, neigh- Community credit unions will be expected borhood, or rural district. to regularly review and to follow, to the full- Examples of acceptable documentation est extent economically possible, the mar- may include: keting and business plan submitted with • The defined political jurisdictions; their application. • Major trade areas (shopping patterns and traffic flows); V.A.3—Special Documentation Requirements for • Shared/common facilities (for example, a Converting Credit Union educational, medical, police and fire protec- An existing federal credit union may apply tion, school district, water, etc.); to convert to a community charter. Groups • Organizations and clubs within the com- currently in the credit union’s field of mem- munity area; bership but outside the new community cred- • Newspapers or other periodicals pub- it union’s boundaries may not be included in lished for and about the area; the new community charter. Therefore, the • A local map designating the area to be credit union is required to notify groups that served and locations of current and proposed will be removed from the field of member- service facilities and a regional or state map ship as a result of the conversion. Members with the proposed community outlined; or of record can continue to be served. • Other documentation that demonstrates The documentation requirements set forth that the area is a community where individ- in Section V.A.2 of this Chapter must be met uals have common interests and/or interact. before a community charter can be approved. An applicant need not submit a narrative summary or documentation to support a pro- In order to support a case for a conversion to posed community charter, amendment or community charter, the applicant federal conversion as a well-defined local commu- credit union must develop a business plan in- nity, neighborhood or rural district if the corporating the following data: • NCUA has previously determined that the Pro forma financial statements for the same exact geographic area meets that re- first two years after the proposed conver- quirement in connection with consideration sion, including assumptions—e.g., member, of a prior application since IRPS 99–1, as share, loan, and asset growth; • amended. Applicants may contact the appro- Marketing plan addressing how the com- priate regional office to find out if the area munity will be served; • they are interested in has already been de- Financial services to be provided to termined to meet the community require- members; • ments. If the area is the same as a previously A local map showing current and pro- approved area, an applicant need only in- posed service facilities; and • clude a statement to that effect in the appli- Anticipated financial impact on the cred- cation. Applicants may be required to sub- it union in terms of need for additional em- mit their own summary and documentation ployees and fixed assets. regarding the community requirements if Before approval of an application to con- NCUA has reason to believe that prior sub- vert to a community credit union, NCUA missions are no longer accurate. must be satisfied that the institution will be A community credit union is frequently viable and capable of providing services to more susceptible to competition from other its members. local financial institutions and generally V.A.4—Community Boundaries does not have substantial support from any single sponsoring company or association. As The geographic boundaries of a community a result, a community credit union will often federal credit union are the areas defined in encounter financial and operational factors its charter. The boundaries can usually be that differ from an occupational or defined using political borders, streets, riv- associational charter. Its diverse member- ers, railroad tracks, etc. ship may require special marketing pro- A community that is a recognized legal en- grams targeted to different segments of the tity, may be stated in the field of member- community. For example, the lack of payroll ship—for example, ‘‘Gus Township, Texas’’ or deduction creates special challenges in the ‘‘Kristi County, Virginia.’’ development of savings promotional pro- A community that is a recognized MSA grams and in the collection of loans. must state in the field of membership the po- Accordingly, it is essential for the pro- litical jurisdiction(s) that comprise the posed community credit union to develop a MSA. detailed and practical business and mar- V.A.5—Special Community Charters keting plan for at least the first two years of operation. The proposed credit union must A community field of membership may in- not only address the documentation require- clude persons who work or attend school in ments set forth in Chapter 1, but also focus a particular industrial park, shopping mall, on the accomplishment of the unique finan- office complex, or similar development. The cial and operational factors of a community proposed field of membership must have charter. clearly defined geographic boundaries.

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V.A.6—Sample Community Fields of common interests and/or interact. The credit Membership union must follow the requirements of Sec- tion V.A.3 of this chapter. A community charter does not have to include all four affinities (i.e., live, work, wor- V.C—NCUA PROCEDURES FOR AMENDING THE ship, or attend school in a community). FIELD OF MEMBERSHIP Some examples of community fields of membership are: V.C.1—General • Persons who live, work, worship, or attend school in, and businesses located in the All requests for approval to amend a com- area of Johnson City, Tennessee, bounded by munity credit union’s charter must be sub- Fern Street on the north, Long Street on the mitted to the appropriate regional director. east, Fourth Street on the south, and Elm If a decision cannot be made within a reason- Avenue on the west; able period of time, the regional director will • Persons who live or work in Green Coun- notify the credit union. ty, Maine; V.C.2—NCUA’s Decision • Persons who live, worship, or work in and businesses and other legal entities lo- The financial and operational condition of cated in Independent School District No. 1, the requesting credit union will be consid- DuPage County, Illinois; ered in every instance. The economic advis- • Persons who live, worship, work (or regu- ability of expanding the field of membership larly conduct business in), or attend school of a credit union with financial or oper- on the University of Dayton campus, in Day- ational problems must be carefully consid- ton, Ohio; ered. • Persons who work for businesses located In most cases, field of membership amend- in Clifton Country Mall, in Clifton Park, ments will only be approved for credit unions New York; or that are operating satisfactorily. Generally, • Persons who live, work, or worship in the if a federal credit union is having difficulty Binghamton, New York, MSA, consisting of providing service to its current membership, Broome and Tioga Counties, New York. or is experiencing financial or other oper- Some examples of insufficiently defined ational problems, it may have more dif- community field of membership definitions ficulty serving an expanded field of member- are: ship. • Persons who live or work within and Occasionally, however, an expanded field of businesses located within a ten-mile radius membership may provide the basis for re- of Washington, D.C. (using a radius does not versing current financial problems. In such establish a well-defined area); cases, an amendment to expand the field of • Persons who live or work in the indus- membership may be granted notwith- trial section of New York, New York (not a standing the credit union’s financial or oper- well-defined neighborhood, community, or ational problems. The applicant credit union rural district); or must clearly establish that the expanded • Persons who live or work in the greater field of membership is in the best interest of Boston area (not a well-defined neighbor- the members and will not increase the risk hood, community, or rural district). to the NCUSIF. Some examples of unacceptable local communities, neighborhoods, or rural districts V.C.3—NCUA Approval are: If the requested amendment is approved by • Persons who live or work in the State of NCUA, the credit union will be issued an California (does not meet the definition of amendment to Section 5 of its charter. local community, neighborhood, or rural district). V.C.4—NCUA Disapproval • Persons who live in the first congressional district of Florida (does not meet the When NCUA disapproves any application to definition of local community, neighbor- amend the field of membership, in whole or hood, or rural district). in part, under this chapter, the applicant will be informed in writing of the: V.B—FIELD OF MEMBERSHIP AMENDMENTS • Specific reasons for the action; • A community credit union may amend its If appropriate, options or suggestions field of membership by adding additional af- that could be considered for gaining ap- finities or removing exclusionary clauses. proval; and This can be accomplished with a house- • Appeal procedures. keeping amendment. V.C.5—Appeal of Regional Director Decision A community credit union also may expand its geographic boundaries. Persons who If a field of membership expansion request, live, work, worship, or attend school within merger, or spin-off is denied by the regional the proposed well-defined local community, director, the federal credit union may appeal neighborhood or rural district must have the decision to the NCUA Board. An appeal

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must be sent to the appropriate regional of- field of membership as a result of the merg- fice within 60 days of the date of denial and er. However, the credit union may continue must address the specific reason(s) for the to serve members of record. denial. The regional director will then for- Where a state-chartered credit union is ward the appeal to the NCUA Board. NCUA merging into a community federal credit central office staff will make an independent union, the continuing federal credit union’s review of the facts and present the appeal to field of membership will be worded in accord- the NCUA Board with a recommendation. ance with NCUA policy. Any subsequent field Before appealing, the credit union may, of membership expansions must comply with within 30 days of the denial, provide supple- applicable amendment procedures. mental information to the regional director Mergers must be approved by the NCUA re- for reconsideration. A reconsideration will gional director where the continuing credit contain new and material evidence address- union is headquartered, with the concur- ing the reasons for the initial denial. The re- rence of the regional director of the merging gional director will have 30 days from the credit union, and, as applicable, the state date of the receipt of the request for recon- regulators. sideration to make a final decision. If the request is again denied, the applicant may pro- V.D.2—Emergency Mergers ceed with the appeal process within 60 days of the date of the last denial. A second re- An emergency merger may be approved by quest for reconsideration will be treated as NCUA without regard to field of membership an appeal to the NCUA Board. requirements or other legal constraints. An emergency merger involves NCUA’s direct V.D—MERGERS, PURCHASE AND ASSUMPTIONS, intervention and approval. The credit union AND SPIN-OFFS to be merged must either be insolvent or likely to become insolvent, and NCUA must There are three additional ways a commu- determine that: nity federal credit union can expand its field • An emergency requiring expeditious ac- of membership: tion exists; • By taking in the field of membership of • Other alternatives are not reasonably another credit union through a merger; available; and • By taking in the field of membership • through a purchase and assumption (P&A); The public interest would best be served or by approving the merger. • By taking a portion of another credit If not corrected, conditions that could lead union’s field of membership through a spin- to insolvency include, but are not limited to: off. • Abandonment by management; • Loss of sponsor; V.D.1—Standard Mergers • Serious and persistent record keeping; or Generally, the requirements applicable to • Serious and persistent operational con- field of membership expansions apply to cerns. mergers where the continuing credit union is In an emergency merger situation, NCUA a community federal charter. will take an active role in finding a suitable Where both credit unions are community merger partner (continuing credit union). charters, the continuing credit union must NCUA is primarily concerned that the con- meet the criteria for expanding the commu- tinuing credit union has the financial nity boundaries. A community credit union strength and management expertise to ab- cannot merge into a single occupational/ sorb the troubled credit union without ad- associational, or multiple common bond versely affecting its own financial condition credit union, except in an emergency merger. and stability. However, a single occupational or As a stipulated condition to an emergency associational, or multiple common bond merger, the field of membership of the merg- credit union can merge into a community ing credit union may be transferred intact to charter as long as the merging credit union the continuing federal credit union without has a service facility within the community regard to any field of membership restric- boundaries or a majority of the merging tions, including the service facility require- credit union’s field of membership would ment. Under this authority, a federal credit qualify for membership in the community union may take in any dissimilar field of charter. While a community charter may membership. take in an occupational, associational, or Even though the merging credit union is a multiple common bond credit union in a single common bond credit union or multiple merger, it will remain a community charter. common bond credit union or community Groups within the merging credit union’s credit union, the continuing credit union field of membership located outside of the will remain a community charter. Future community boundaries may not continue to community expansions will be based on the be served. The merging credit union must continuing credit union’s original commu- notify groups that will be removed from the nity area.

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Emergency mergers involving federally in- • Which assets, liabilities, shares, and cap- sured credit unions in different NCUA re- ital are to be transferred; gions must be approved by the regional di- • The financial impact the spin-off will rector where the continuing credit union is have on the affected credit unions; headquartered, with the concurrence of the • The ability of the acquiring credit union regional director of the merging credit union to effectively serve the new members; and, as applicable, the state regulators. • The proposed spin-off date; and • V.D.3—Purchase and Assumption (P&A) Disclosure to the members of the requirements set forth above. Another alternative for acquiring the field The spin-off request must also include cur- of membership of a failing credit union is rent financial statements from the affected through a consolidation known as a P&A. credit unions and the proposed voting ballot. Generally, the requirements applicable to For federal credit unions spinning off a community expansions found in this chapter portion of the community, membership no- apply to purchase and assumptions where tice and voting requirements and procedures the purchasing credit union is a federal char- are the same as for mergers (see Part 708 of ter. the NCUA Rules and Regulations), except A P&A has limited application because, in that only the members directly affected by most instances, the failing credit union must the spin-off—those whose shares are to be be placed into involuntary liquidation. How- transferred—are permitted to vote. Members ever, in the few instances where a P&A may whose shares are not being transferred will occur, the assuming federal credit union, as not be afforded the opportunity to vote. All with emergency mergers, may acquire the members of the group to be spun off (whether entire field of membership if the emergency they voted in favor, against, or not at all) criteria are satisfied. will be transferred if the spin-off is approved In a P&A processed under the emergency by the voting membership. Voting require- criteria, specified loans, shares, and certain ments for federally insured state credit other designated assets and liabilities may unions are governed by state law. also be acquired without regard to field of membership restrictions and without chang- V.E—OVERLAPS ing the character of the continuing federal credit union for purposes of future field of V.E.1—General membership amendments. Generally, an overlap exists when a group If the P&A does not meet the emergency of persons is eligible for membership in two criteria, then only members of record can be or more credit unions. NCUA will permit obtained unless they otherwise qualify for community credit unions to overlap any membership in the community charter. other charters without performing an over- P&As involving federally insured credit lap analysis. unions in different NCUA regions must be approved by the regional director where the V.E.2—Exclusionary Clauses continuing credit union is headquartered, with the concurrence of the regional director An exclusionary clause is a limitation pre- of the purchased and/or assumed credit union cluding the credit union from serving the and, as applicable, the state regulators. primary members of a portion of a group or community otherwise included in its field of V.D.4—Spin-Offs membership. NCUA no longer grants exclu- A spin-off occurs when, by agreement of sionary clauses. Those granted prior to the the parties, a portion of the field of member- adoption of this new chartering manual will ship, assets, liabilities, shares, and capital of remain in effect unless the credit unions a credit union are transferred to a new or ex- agree to remove them or one of the affected isting credit union. A spin-off is unique in credit unions submits a housekeeping that usually one credit union has a field of amendment to have it removed. membership expansion and the other loses a V.F—CHARTER CONVERSIONS portion of its field of membership. All field of membership requirements A community federal credit union may apply regardless of whether the spun-off convert to a single occupational or group goes to a new or existing federal char- associational, or multiple common bond ter. credit union. The converting credit union The request for approval of a spin-off must must meet all occupational, associational, be supported with a plan that addresses, at a and multiple common bond requirements, as minimum: applicable. The converting credit union may • Why the spin-off is being requested; continue to serve members of record of the • What part of the field of membership is prior field of membership as of the date of to be spun off; the conversion, and any groups or commu- • Whether the field of membership require- nities obtained in an emergency merger or ments are met; P&A. A change to the credit union’s field of

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membership and designated common bond available to people of modest means for will be necessary. provident and productive purposes. To help A community credit union may convert to NCUA fulfill this mission, the agency has es- serve a new geographical area provided the tablished special operational policies for fed- field of membership requirements of V.A.3 of eral credit unions that serve low-income this chapter are met. Members of record of groups and underserved areas. The policies the original community can continue to be provide a greater degree of flexibility that served. will enhance and invigorate capital infusion into low-income groups, low-income commu- V.G—OTHER PERSONS WITH A RELATIONSHIP nities, and underserved areas. These unique TO THE COMMUNITY policies are necessary to provide credit A number of persons who have a close rela- unions serving low-income groups with fi- tionship to the community may be included, nancial stability and potential for controlled at the charter applicant’s option, in the field growth and to encourage the formation of of membership. These include the following: new charters as well as the delivery of credit • Spouses of persons who died while within union services in low-income communities. the field of membership of this credit union; • Employees of this credit union; II—LOW-INCOME CREDIT UNION • Volunteers in the community; • Members of the immediate family or II.A—Defined household; and A credit union serving predominantly low- • Organizations of such persons income members may be designated as a low- Immediate family is defined as spouse, income credit union. Section 701.34 of child, sibling, parent, grandparent, or grand- NCUA’s Rules and Regulations defines the child. This includes stepparents, step- term ‘‘low-income members’’ as those mem- children, stepsiblings, and adoptive relation- bers: ships. • Who make less than 80 percent of the av- Household is defined as persons living in erage for all wage earners as established by the same residence maintaining a single eco- the Bureau of Labor Statistics; or nomic unit. • Whose annual household income falls at Membership eligibility is extended only to or below 80 percent of the median household individuals who are members of an ‘‘imme- income for the nation as established by the diate family or household’’ of a credit union Census Bureau. member. It is not necessary for the primary The term ‘‘low-income members’’ also in- member to join the credit union in order for cludes members who are full-time or part- the immediate family or household member time students in a college, university, high of the primary member to join, provided the school, or vocational school. immediate family or household clause is in- To obtain a low-income designation from cluded in the field of membership. However, NCUA, an existing credit union must estab- it is necessary for the immediate family lish that a majority of its members meet the member or household member to first join in low-income definition. An existing commu- order for that person’s immediate family nity credit union that serves a geographic member or household member to join the area where a majority of residents meet the credit union. A credit union can adopt a annual income standard is presumed to be more restrictive definition of immediate serving predominantly low-income members. family or household. A low-income designation for a new credit Under the Federal Credit Union Act, once union charter may be based on a majority of a person becomes a member of the credit the potential membership. union, such person may remain a member of the credit union until the person chooses to II.B—SPECIAL PROGRAMS withdraw or is expelled from the membership of the credit union. This is commonly re- A credit union with a low-income designa- ferred to as ‘‘once a member, always a mem- tion has greater flexibility in accepting non- ber.’’ The ‘‘once a member, always a mem- member deposits insured by the NCUSIF, are ber’’ provision does not prevent a credit exempt from the aggregate loan limit on union from restricting services to members business loans, and may offer secondary cap- who are no longer within the field of mem- ital accounts to strengthen its capital base. bership. It also may participate in special funding programs such as the Community Develop- CHAPTER 3 ment Revolving Loan Program for Credit Unions (CDRLP) if it is involved in the stim- LOW-INCOME CREDIT UNIONS AND CREDIT ulation of economic development and com- UNIONS SERVING UNDERSERVED AREAS munity revitalization efforts. The CDRLP provides both loans and grants I—INTRODUCTION for technical assistance to low-income credit One of the primary reasons for the creation unions. The requirements for participation of federal credit unions is to make credit in the revolving loan program are in Part 705

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of the NCUA Rules and Regulations. Only op- add low-income associations to their fields of erating credit unions are eligible for partici- membership. pation in this program. A low-income designated community federal credit union has additional latitude in II.C—LOW-INCOME DOCUMENTATION serving persons who are affiliated with the A federal credit union charter applicant or community. In addition to serving members existing credit union wishing to receive a who live, work, worship, or attend school in low-income designation should forward a the community, a low-income community separate request for the designation to the federal credit union may also serve persons regional director, along with appropriate who participate in programs to alleviate documentation supporting the request. poverty or distress, or who participate in as- For community charter applicants, the sociations headquartered in the community. supporting material should include the me- Examples of a low-income designated com- dian household income or annual wage fig- munity and an associational-based low-in- ures for the community to be served. If this come federal credit union are as follows: information is unavailable, the applicant • Persons who live in [the target area]; should identify the individual zip codes or persons who work, worship, attend school, or census tracts that comprise the community participate in associations headquartered in and NCUA will assist in obtaining the nec- [the target area]; persons participating in essary demographic data. programs to alleviate poverty or distress Similarly, if single occupational or which are located in [the target area]; incor- associational or multiple common bond porated and unincorporated organizations lo- charter applicants cannot supply income cated in [the target area] or maintaining a data on its potential members, they should facility in [the target area]; and organiza- provide the regional director with a list tions of such persons. which includes the number of potential • Members of the Canarsie Economic As- members, sorted by their residential zip sistance League, in Brooklyn, NY, an asso- codes, and NCUA will assist in obtaining the ciation whose members all meet the low-in- necessary demographic data. come definition of Section 701.34 of the An existing credit union can perform a NCUA Rules and Regulations. loan or membership survey to determine if the credit union is primarily serving low-in- III—SERVICE TO UNDERSERVED COMMUNITIES come members. III.A—General II.D—THIRD PARTY ASSISTANCE A multiple common bond federal credit A low-income federal credit union charter union may include in its field of member- applicant may contract with a third party to ship, without regard to location, an ‘‘under- assist in the chartering and low-income des- served area’’ as defined by the Federal Credit ignation process. If the charter is granted, a Union Act. 12 U.S.C. 1759(c)(2). The addition low-income credit union may contract with a of an ‘‘underserved area’’ will not change the third party to provide necessary manage- charter type of the multiple common bond ment services. Such contracts should not ex- federal credit union. More than one multiple ceed the duration of one year subject to re- common-bond federal credit union can serve newal. the same ‘‘underserved area,’’ provided each credit union is approved as provided below. II.E—SPECIAL RULES FOR LOW-INCOME By adding an ‘‘underserved area,’’ a mul- FEDERAL CREDIT UNIONS tiple common bond federal credit union does In recognition of the unique efforts needed not become eligible to receive the benefits to help make credit union service available afforded to low-income designated credit to low-income groups, NCUA has adopted unions, such as expanded use of nonmember special rules that pertain to low-income deposits and access to the Community Devel- credit union charters, as well as field of opment Revolving Loan Program for Credit membership additions for low-income credit Unions. unions. These special rules provide addi- III.B—‘‘Underserved Area’’ Defined tional latitude to enable underserved, low- income individuals to gain access to credit The Federal Credit Union Act defines an union service. ‘‘underserved area’’ as (1) a ‘‘local commu- NCUA permits credit union chartering and nity, neighborhood, or rural district’’ that field of membership amendments based on (2) meets the definition of an ‘‘investment associational groups formed for the sole pur- area’’ under section 103(16) of the Commu- pose of making credit union service available nity Development Banking and Financial In- to low-income persons. The association must stitutions Act of 1994 (‘‘CDFI’’), 12 U.S.C. be defined so that all of its members will 4702(16), and (3) is ‘‘underserved by other de- meet the low-income definition of Section pository institutions’’ based on data of the 701.34 of the NCUA Rules and Regulations. NCUA Board and the federal banking agen- Any multiple common bond credit union can cies.

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III.B.1—Local Community block group; and (vii) an American Indian or Alaskan Native area. Id. For ease of imple- To be eligible for approval as ‘‘under- mentation, it is advisable to use either a served,’’ a proposed area must be a well-de- census tract or county, as the case may be, fined local community, neighborhood, or rural district as defined in Chapter 2, sec- as the proposed area’s Non-Metro unit. tions V.A.1. and V.A.2. of this Manual. How- Proposed Area Consisting of a Single Metro ever, if the proposed area qualifies as a com- Unit. A proposed area consisting of a single munity either because it consists of multiple whole Metro unit (e.g., a single census tract political jurisdictions with a total popu- located within an MSA) must meet one of lation of 500,000 or less, or is within a Metro- the following distress criteria, as reported by politan Statistical Area (‘‘MSA’’) that has a the most recent decennial Census: population of 1 million or less, the applicant • Unemployment. The proposed area’s un- is not required to submit a supplemental let- employment rate is at least 1.5 times the na- ter describing how the area meets the stand- tional average; or ards for community interaction and/or com- • Poverty. At least 20 percent (20%) of the mon interests. proposed area’s population lives in poverty; or III.B.2—Investment Area • Median Family Income. The proposed To be approved as an ‘‘underserved area,’’ area’s Median Family Income (‘‘MFI’’) is at the proposed area must meet the CDFI defi- or below 80 percent (80%) of either the MFI nition of an ‘‘investment area.’’ Id. § 4702(16). of the corresponding MSA, or of the national A proposed area that, at the time the credit MFI for Metro Areas, whichever is greater; union applies, is designated in its entirety as or • an Empowerment Zone or Enterprise Com- Other Criterion. Any other economic dis- munity (id. § 1391) automatically qualifies as tress criterion the CDFI Fund may adopt in an ‘‘investment area’’; no further criteria of the future. an ‘‘investment area’’ must be met. Id. Id. § 1805.201(b)(3)(ii)(D)(1), (2)(i) and (3) § 4702(16)(B). A proposed area that is not des- (2008). ignated as such must qualify as an ‘‘invest- Proposed Area Consisting of a Single Non- ment area’’ under ‘‘the objective criteria of Metro Unit. A proposed area consisting of a economic distress’’ developed by the CDFI single whole Non-Metro unit (e.g., a single Fund (‘‘distress criteria’’) based on current county located outside an MSA) must meet decennial U.S. Census data, and also must one of the following distress criteria, as re- have ‘‘significant unmet needs’’ for loans and ported by the most recent decennial Census: financial services that credit unions are au- • Unemployment. The proposed area’s un- thorized to offer to their members. Id. employment rate is at least 1.5 times the na- § 4702(16)(A). tional average; or • Poverty. At least 20 percent (20%) of the III.B.2.a—Economic Distress Criteria proposed area’s population lives in poverty; Geographic Unit(s) By Proposed Area’s Loca- or tion. The location of a proposed ‘‘underserved • Median Family Income. The proposed area’’ either within or outside of an MSA area’s MFI is at or below 80 percent (80%) of corresponding to the most recent completed either the corresponding state’s Non-Metro decennial census published by the U.S. Bu- MFI or the national MFI for Non-Metro reau of the Census (‘‘decennial Census’’) de- Areas, whichever is greater; or termines the geographic unit(s) that apply to • Other Criterion. Any other economic dis- determine whether the area meets the distress criterion the CDFI Fund may adopt in tress criteria. the future. Within MSA. For a proposed area located, Id. § 1805.201(b)(3)(ii)(D)(1), (2)(ii) and (3) in whole or in part, within an MSA, the per- (2008). Alternatively, a proposed area con- missible geographic units (‘‘Metro units’’) sisting of a single Non-Metro county (located for implementing the economic distress cri- outside an MSA) may instead meet either of teria are: (i) a census tract; (ii) a block the following two criteria, as reported by the group; and (iii) an American Indian or Alas- decennial Census: kan Native area. 12 CFR 1805.201(b)(3)(ii)(B) • County Population Loss. County’s popu- (2008). For ease of implementation, it is ad- lation loss of at least 10 percent (10%) be- visable to use a census tract as the proposed tween the most recent and the preceding de- area’s Metro unit. cennial Census; or Outside MSA. For a proposed area that is • County Migration Loss. County’s net mi- located entirely outside an MSA, the permis- gration loss of at least 5 percent (5%) in the sible units (‘‘Non-Metro units’’) for imple- 5-year period preceding the most recent de- menting the economic distress criteria are: cennial Census. (i) a county or equivalent area; (ii) a minor Id. § 1805.201(b)(3)(ii)(D)(4)–(5) (2008). civil division that is a unit of local govern- Proposed Area Consisting of Multiple Contig- ment; (iii) an incorporated place; (iv) a cen- uous Units. When a proposed area consists of sus tract; (v) a block numbering area; (vi) a either multiple contiguous Metro units (e.g.,

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a group of adjoining census tracts) or mul- tressed’’ tracts within a proposed area, a tiple contiguous Non-Metro units (e.g., a non-‘‘distressed’’ census tract or larger geo- group of adjoining counties), a population graphic unit (e.g., city or county) of the cred- threshold applies when implementing the it union’s choice that adjoins the proposed economic distress criteria. At least 85 per- area may be used to set the benchmark con- cent (85%) of the area’s total population centration ratio. must reside within the units that are ‘‘dis- Without regard to a proposed area’s loca- tressed,’’ i.e, that meet one of the applicable tion within or outside an MSA, this criterion economic distress criteria above, as reported compares two ratios: the ratio of facilities to by the decennial Census (Unemployment, the population of the non-‘‘distressed’’ tracts Poverty and MFI for census tracts plus, for (the benchmark) versus the same facilities- counties only, Population Loss and Migra- to-population ratio among all the tracts of tion Loss); the balance of the area’s popu- the proposed area as a whole. If the bench- lation may reside in the non-‘‘distressed’’ tract(s). The population threshold is met, mark ratio is greater than the ratio for the and the whole proposed area qualifies as whole area, then the area is ‘‘underserved by ‘‘distressed,’’ when the ‘‘distressed’’ units other depository institutions,’’ and vice represent at least 85 percent of the area’s versa. total population. III.C—NCUA Approval III.B.2.b—Proposed Area’s ‘‘Significant Unmet If NCUA approves the request to add an Needs’’ ‘‘underserved area,’’ the credit union will be A proposed area that is ‘‘distressed’’ also issued an amendment to Section 5 of its must display ‘‘significant unmet needs’’ for charter. loans or for one or more of the financial services credit unions are authorized to III.D—Approval to Serve an Already Approved offer. To meet this criterion, the credit ‘‘Underserved Area’’ union must include within its Business Plan Once a credit union is initially approved to a section, one page in length, entitled ‘‘Sig- nificant Unmet Needs for Credit Union Serv- serve an ‘‘underserved area,’’ other credit ices’’ (‘‘SUN section’’) that establishes the unions that subsequently apply may be ap- existence of such unmet needs by identifying proved to serve the same area. To be ap- the credit and depository needs of the com- proved, the area must qualify as ‘‘under- munity and detailing how the credit union served’’ at the time the new applicant ap- plans to serve those needs. The credit union plies. An applicant must demonstrate the may choose which among the following area continues to be ‘‘distressed’’, as pro- ‘‘credit and depository needs’’ to address in vided above, only if a new decennial Census the SUN section: loans, share draft accounts, has been published since the date the area savings accounts, check cashing, money or- was last approved. In any case, the applicant ders, certified checks, automated teller ma- must demonstrate that the area still has chines, deposit taking, safe deposit box serv- ‘‘significant unmet needs’’ for loans or credit ices, and similar services. The existence of union services (to qualify as an ‘‘investment each ‘‘credit and depository need’’ the credit area’’), and remains ‘‘underserved by other union identifies and plans to serve must be depository institutions’’ (to qualify as ‘‘un- supported by objective reasons and/or accom- derserved’’). panying documentation derived from an identified, authoritative source of the credit III.E—Business Plan union’s choice. Third party documentation generally is the most compelling. A federal credit union that desires to include an underserved community in its field III.B.3—Underserved by Other Depository of membership must first develop, and sub- Institutions mit for approval, a business plan specifying how it will serve the community. In addi- A proposed area that meets the CDFI definition of an ‘‘investment area’’ (i.e, is ‘‘dis- tion, the business plan must include a SUN tressed’’ and has ‘‘significant unmet needs’’) section as provided in section III.B.2.b. must also be underserved by other insured above. The credit union will be expected to depository institutions, including credit regularly review the business plan to deter- unions. 12 U.S.C. 1759(c)(2)(A)(ii). This statu- mine if the community is being adequately tory criterion is met when the concentration served. The regional director may require of depository institution facilities among periodic service status reports from a credit the population of the proposed area’s non- union about the ‘‘underserved area’’ to en- ‘‘distressed’’ tracts—which sets a benchmark sure that the needs of the community are level of adequate service—is greater than the being met, and must require such reports be- concentration of facilities among the popu- fore NCUA allows a multiple common bond lation of all of the proposed area’s census federal credit union to add an additional tracts combined. If there are no non-‘‘dis- ‘‘underserved area.’’

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III.F—Service Facility CHAPTER 4

Once an ‘‘underserved area’’ has been CHARTER CONVERSIONS added to a federal credit union’s field of membership, the credit union must establish I—INTRODUCTION within two years, and maintain, an office or A charter conversion is a change in the ju- service facility in the community. A service risdictional authority under which a credit facility is defined as a place where shares are union operates. accepted for members’ accounts, loan appli- Federal credit unions receive their char- cations are accepted and loans are disbursed. ters from NCUA and are subject to its super- By definition, a service facility includes a vision, examination, and regulation. credit union-owned branch, a shared branch, State-chartered credit unions are incor- a mobile branch, or an office operated on a porated in a particular state, receiving their regularly scheduled weekly basis or a credit charter from the state agency responsible for union owned electronic facility that meets, credit unions and subject to the state’s regulator. If the state-chartered credit union’s at a minimum, the above requirements. This deposits are federally insured, it will also definition does not include an ATM or the fall under NCUA’s jurisdiction. credit union’s Internet Web site. A federal credit union’s power and authority are derived from the Federal Credit IV—APPEAL PROCEDURES FOR DENIAL OF Union Act and NCUA Rules and Regulations. UNDERSERVED AREA State-chartered credit unions are governed IV.A—NCUA Disapproval by state law and regulation. Certain federal laws and regulations also apply to federally When NCUA disapproves any application to insured state chartered credit unions. add an ‘‘underserved area’’ in whole or in There are two types of charter conversions: part, under this chapter, the applicant will federal charter to state charter and state be informed in writing of the: charter to federal charter. Common bond and • Specific reasons for the action; community requirements are not an issue from NCUA’s standpoint in the case of a fed- • Options to consider, if appropriate, for eral to state charter conversion. The proce- gaining approval; and dures and forms relevant to both types of • Appeal procedures. charter conversion are included in appendix 4. IV.B—Appeal of Regional Director Decision If the regional director denies an ‘‘under- II—CONVERSION OF A STATE CREDIT UNION TO served area’’ request, the federal credit A FEDERAL CREDIT UNION union may appeal the decision to the NCUA II.A—General Requirements Board. An appeal must be sent to the appropriate regional office within 60 days of the Any state-chartered credit union may date of denial and must address the specific apply to convert to a federal credit union. In reason(s) for the denial. The regional direc- order to do so it must: • Comply with state law regarding conver- tor will then forward the appeal to the NCUA sion and file proof of compliance with NCUA; Board. NCUA central office staff will make • File the required conversion application, an independent review of the facts and proposed federal credit union organization present the appeal to the NCUA Board with certificate, and other documents with NCUA; a recommendation. • Comply with the requirements of the Before appealing, the credit union may, Federal Credit Union Act, e.g., chartering within 30 days of the denial, provide supple- and reserve requirements; and mental information to the regional director • Be granted federal share insurance by for reconsideration. A reconsideration will NCUA. contain new and material evidence address- Conversions are treated the same as any ing the reasons for the initial denial. The re- initial application for a federal charter, in- gional director will have 30 days from the cluding an on-site examination by NCUA date of the receipt of the request for recon- where appropriate. NCUA will also consult sideration to make a final decision. If the re- with the appropriate state authority regard- quest is again denied, the applicant may pro- ing the credit union’s current financial con- ceed with the appeal process within 60 days dition, management expertise, and past performance. Since the applicant in a conver- of the date of the last denial. A second re- sion is an ongoing credit union, the eco- quest for reconsideration will be treated as nomic advisability of granting a charter is an appeal to the NCUA Board. more readily determinable than in the case of an initial charter applicant. A converting state credit union’s field of membership must conform to NCUA’s chartering policy. The field of membership will

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be phrased in accordance with NCUA char- with NCUA’s chartering policies. The re- tering policy. However, if the converting gional director may make further investiga- credit union is a multiple group charter and tion into the proposal and may require the the new federal charter is a multiple group, submission of additional information to sup- then the new federal charter may retain in port the request to convert. its field of membership any group that the state credit union was serving at the time of II.C.2—On-Site Review conversion. Subsequent changes must con- NCUA may conduct an on-site examination form to NCUA chartering policy in effect at of the books and records of the credit union. that time. Non-federally insured credit unions will be If the converting credit union is a commu- assessed an insurance application fee. nity charter and the new federal charter is community-based, it must meet the commu- II.C.3—Approval by the Regional Director and nity field of membership requirements set Conditions to the Approval forth in Chapter 2, Section V of this manual. The conversion will be approved by the re- If the state-chartered credit union’s commu- gional director if it is in compliance with nity boundary is more expansive than the Section 125 of the Federal Credit Union Act approved federal boundary, only members of and meets the criteria for federal insurance. record outside of the new community bound- Where applicable, the regional director will ary may continue to be served. specify any special conditions that the credit The converting credit union, regardless of union must meet in order to convert to a fed- charter type, may continue to serve mem- eral charter, including changes to the credit bers of record. The converting credit union union’s field of membership in order to con- may retain in its field of membership any form to NCUA’s chartering policies. Some of group or community added pursuant to state these conditions may be set forth in a Letter emergency provisions. of Understanding and Agreement (LUA), II.B—SUBMISSION OF CONVERSION PROPOSAL which requires the signature of the officials TO NCUA and the regional director. The following documents must be sub- II.C.4—Notification mitted with the conversion proposal: The regional director will notify both the • Conversion of State Charter to Federal credit union and the state regulator of the Charter (NCUA 4000); decision on the conversion. • Organization Certificate (NCUA 4008). Only Part (3) and the signature/notary sec- II.C.5—NCUA Disapproval tion should be completed and, where applicable, signed by the credit union officials. When NCUA disapproves any application to • Report of Officials and Agreement to convert to a federal charter, the applicant Serve (NCUA 4012); will be informed in writing of the: • The Application to Convert From State • Specific reasons for the action; Credit Union to Federal Credit Union (NCUA • Options to consider, if appropriate, for 4401); gaining approval; and • The Application and Agreements for In- • Appeal procedures. surance of Accounts (NCUA 9500); II.C.6—Appeal of Regional Director Decision • Certification of Resolution (NCUA 9501); • Written evidence regarding whether the If a conversion to a federal charter is de- state regulator is in agreement with the con- nied by the regional director, the applicant version proposal; and credit union may appeal the decision to the • Business plan, as appropriate, including NCUA Board. An appeal must be sent to the the most current financial report and delin- appropriate regional office within 60 days of quent loan schedule. the date of denial and must address the spe- If the state charter is applying to become cific reason(s) for the denial. The regional di- a federal community charter, it must also rector will then forward the appeal to the comply with the documentation require- NCUA Board. NCUA central office staff will ments included in Chapter 2, Section V.A.2 of make an independent review of the facts and this manual. present the appeal to the NCUA Board with a recommendation. II.C—NCUA CONSIDERATION OF APPLICATION Before appealing, the credit union may, TO CONVERT within 30 days of the denial, provide supplemental information to the regional director II.C.1—Review by the Regional Director for reconsideration. The request will not be The application will be reviewed to deter- considered as an appeal, but a request for re- mine that it is complete and that the pro- consideration by the regional director. The posal is in compliance with Section 125 of the regional director will have 30 business days Federal Credit Union Act. This review will from the date of the receipt of the request include a determination that the state credit for reconsideration to make a final decision. union’s field of membership is in compliance If the application is again denied, the credit

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union may proceed with the appeal process II.E.3—Board of Directors’ Meeting to the NCUA Board within 60 days of the Upon receipt of its federal charter, the date of the last denial by the regional direc- board will hold its first meeting as a federal tor. credit union. At this meeting, the board will transact such business as is necessary to II.D—ACTION BY BOARD OF DIRECTORS complete the conversion as approved and to II.D.1—General operate the credit union in accordance with the requirements of the Federal Credit Union Upon being informed of the regional direc- Act and NCUA Rules and Regulations. tor’s preliminary approval, the board must: As of the commencement of operations, the • Comply with all requirements of the accounting system, records, and forms must state regulator that will enable the credit conform to the standards established by union to convert to a federal charter and NCUA. cease being a state credit union; II.E.4—Credit Union’s Name • Obtain a letter or official statement from the state regulator certifying that the credit Changing of the credit union’s name on all union has met all of the state requirements signage, records, accounts, investments, and and will cease to be a state credit union upon other documents should be accomplished as its receiving a federal charter. A copy of this soon as possible after conversion. The credit union has 180 days from the effective date of document must be submitted to the regional the conversion to change its signage and pro- director; motional material. This requires the credit • Obtain a letter from the private share in- union to discontinue using any remaining surer (includes excess share insurers), if ap- stock of ‘‘state credit union’’ stationery im- plicable, certifying that the credit union has mediately, and discontinue using credit met all withdrawal requirements. A copy of cards, ATM cards, etc., within 180 days after this document must be submitted to the re- the effective date of the conversion, or the gional director; and reissue date,whichever is later. The regional • Submit a statement of the action taken director has the discretion to extend the to comply with any conditions imposed by timeframe for an additional 180 days. Mem- the regional director in the preliminary ap- ber share drafts with the state-chartered proval of the conversion proposal and, if ap- name can be used by the members until de- plicable, submit the signed LUA. pleted.

II.D.2—Application for a Federal Charter II.E.5—Reports to NCUA When the regional director has received Within 10 business days after commence- evidence that the board of directors has sat- ment of operations, the recently converted federal credit union must submit to the re- isfactorily completed the actions described gional director the following: above, the federal charter and new Certifi- • Report of Officials (NCUA 4501); and cate of Insurance will be issued. • Financial and Statistical Reports, as of The credit union may then complete the the commencement of business of the federal conversion as discussed in the following sec- credit union. tion. A denial of a conversion application can be appealed. Refer to Section II.C.6 of III—CONVERSION OF A FEDERAL CREDIT UNION this chapter. TO A STATE CREDIT UNION

II.E—COMPLETION OF THE CONVERSION III.A—GENERAL REQUIREMENTS Any federal credit union may apply to con- II.E.1—Effective Date of Conversion vert to a state credit union. In order to do The date on which the regional director ap- so, it must: proves the Organization Certificate and the • Notify NCUA prior to commencing the Application and Agreements for Insurance of process to convert to a state charter and Accounts is the date on which the credit state the reason(s) for the conversion; • union becomes a federal credit union. The re- Comply with the requirements of Section gional director will notify the credit union 125 of the Federal Credit Union Act that en- and the state regulator of the date of the able it to convert to a state credit union and conversion. to cease being a federal credit union; and • Comply with applicable state law and the II.E.2—Assumption of Assets and Liabilities requirements of the state regulator. It is important that the credit union pro- As of the effective date of the conversion, vide an accurate disclosure of the reasons for the federal credit union will be the owner of the conversion. These reasons should be stat- all of the assets and will be responsible for ed in specific terms, not as generalities. The all of the liabilities and share accounts of federal credit union converting to a state the state credit union. charter remains responsible for the entire

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operating fee for the year in which it con- • If the credit union intends to continue verts. with federal share insurance, an application for insurance of accounts (NCUA 9600); III.B—SPECIAL PROVISIONS REGARDING • Evidence that the state regulator is in FEDERAL SHARE INSURANCE agreement with the conversion proposal; and If the federal credit union intends to con- • A statement of reasons supporting the tinue federal share insurance after the con- request to convert. version to a state credit union, it must sub- PPROVAL OF PROPOSAL TO CONVERT mit an Application for Insurance of Accounts III.D—A (NCUA 9600) to the regional director at the III.D.1—Review by the Regional Director time it requests approval of the conversion proposal. The regional director has the au- The proposal will be reviewed to determine thority to approve or disapprove the applica- that it is complete and is in compliance with tion. Section 125 of the Federal Credit Union Act. If the converting federal credit union does The regional director may make further in- not intend to continue federal share insur- vestigation into the proposal and require the ance or if its application for continued insur- submission of additional information to sup- ance is denied, insurance will cease in ac- port the request. cordance with the provisions of Section 206 of the Federal Credit Union Act. III.D.2—Conditions to the Approval If, upon its conversion to a state credit The regional director will specify any spe- union, the federal credit union will be termi- cial conditions that the credit union must nating its federal share insurance or con- meet in order to proceed with the conver- verting from federal to non-federal share in- sion. surance, it must comply with the membership notice and voting procedures set forth III.D.3—Approval by the Regional Director in Section 206 of the Federal Credit Union The proposal will be approved by the re- Act and Part 708 of NCUA’s Rules and Regu- gional director if it is in compliance with lations, and address the criteria set forth in Section 125 and, in the case where the state Section 205(c) of the Federal Credit Union credit union will no longer be federally in- Act. sured, the notice and voting requirements of Where the state credit union will be non- Section 206 of the Federal Credit Union Act. federally insured, federal insurance ceases on the effective date of the charter conversion. III.D.4—Notification If it will be otherwise uninsured, then federal insurance will cease one year after the date The regional director will notify both the of conversion subject to the restrictions in credit union and the state regulator of the Section 206(d)(1) of the Federal Credit Union decision on the proposal. Act. In either case, the state credit union III.D.5—NCUA Disapproval will be entitled to a refund of the federal credit union’s NCUSIF capitalization deposit When NCUA disapproves any application to after the final date on which any of its convert to a state charter, the applicant will shares are federally insured. be informed in writing of the: The NCUA Board reserves the right to • Specific reasons for the action; delay the refund of the capitalization deposit • If appropriate, options or suggestions for up to one year if it determines that pay- that could be considered for gaining ap- ment would jeopardize the NCUSIF. proval; and • Appeal procedures. III.C—SUBMISSION OF CONVERSION PROPOSAL TO NCUA III.D.6—Appeal of Regional Director Decision Upon approval of a proposition for conver- If the regional director denies a conversion sion by a majority vote of the board of direc- to a state charter, the applicant credit union tors at a meeting held in accordance with may appeal the decision to the NCUA Board. the federal credit union’s bylaws, the conver- An appeal must be sent to the appropriate sion proposal will be submitted to the re- regional office within 60 days of the date of gional director and will include: denial and must address the specific rea- • A current financial report; son(s) for the denial. The regional director • A current delinquent loan schedule; will then forward the appeal to the NCUA • An explanation and appropriate docu- Board. NCUA central office staff will make ments relative to any changes in insurance an independent review of the facts and of member accounts; present the appeal to the NCUA Board with • A resolution of the board of directors; a recommendation. • A proposed Notice of Special Meeting of Before appealing, the credit union may, the Members (NCUA 4221); within 30 days of the denial, provide supple- • A copy of the ballot to be sent to all mental information to the regional director members (NCUA 4506); for reconsideration. The request will not be

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considered as an appeal, but a request for re- able record of the vote, the voting at the consideration by the regional director. The meeting should be by written ballot as well. regional director will have 30 business days • The board of directors shall, within 10 from the date of the receipt of the request days, certify the results of the membership for reconsideration to make a final decision. vote to the regional director. The statement If the application is again denied, the credit shall be verified by affidavits of the Chief union may proceed with the appeal process Executive Officer and the Recording Officer to the NCUA Board within 60 days of the on NCUA 4505. date of the last denial by the regional director. III.F—COMPLIANCE WITH STATE LAWS

III.E—APPROVAL OF PROPOSAL BY MEMBERS If the proposal for conversion is approved by a majority of all members who voted, the The members may not vote on the proposal board of directors will: until it is approved by the regional director. • Ensure that all requirements of state law Once approval of the proposal is received, the and the state regulator have been accommo- following actions will be taken by the board dated; of directors: • Ensure that the state charter or the li- • The proposal must be submitted to the members for approval and a date set for a cense has been received within 90 days from meeting to vote on the proposal. The pro- the date the members approved the proposal posal may be acted on at the annual meeting to convert; and • or at a special meeting for that purpose. The Ensure that the regional director is kept members must also be given the opportunity informed as to progress toward conversion to vote by written ballot to be filed by the and of any material delay or of substantial date set for the meeting. difficulties which may be encountered. • Members must be given advance notice If the conversion cannot be completed (NCUA 4221) of the meeting at which the pro- within the 90-day period, the regional direc- posal is to be submitted. The notice must: tor should be informed of the reasons for the Æ Specify the purpose, time and place of delay. The regional director may set a new the meeting; date for the conversion to be completed. Æ Include a brief, complete, and accurate statement of the reasons for and against the III.G—COMPLETION OF CONVERSION proposed conversion, including any effects it In order for the conversion to be com- could have upon share holdings, insurance of pleted, the following steps are necessary: member accounts, and the policies and prac- • The board of directors will submit a copy tices of the credit union; of the state charter to the regional director Æ Specify the costs of the conversion, i.e., within 10 days of its receipt. This will be ac- changing the credit union’s name, examina- companied by the federal charter and the tion and operating fees, attorney and con- federal insurance certificate. A copy of the sulting fees, tax liability, etc.; financial reports as of the preceding month- Æ Inform the members that they have the end should be submitted at this time. right to vote on the proposal at the meeting, • The regional director will notify the or by written ballot to be filed not later than credit union and the state regulator in writ- the date and time announced for the annual meeting, or at the special meeting called for ing of the receipt of evidence that the credit that purpose; union has been authorized to operate as a Æ Be accompanied by a Federal to State state credit union. • Conversion—Ballot for Conversion Proposal The credit union shall cease to be a fed- (NCUA 4506); and eral credit union as of the effective date of Æ State in bold face type that the issue the state charter. will be decided by a majority of members • If the regional director finds a material who vote. deviation from the provisions that would in- • The proposed conversion must be ap- validate any steps taken in the conversion, proved by a majority of all of the members the credit union and the state regulator who vote on the proposal, a quorum being shall be promptly notified in writing. This present, in order for the credit union to pro- notice may be either before or after the copy ceed further with the proposition, provided of the state charter is filed with the regional federal insurance is maintained. If the pro- director. The notice will inform the credit posed state-chartered credit union will not union as to the nature of the adverse find- be federally insured, 20 percent of the total ings. The conversion will not be effective and membership must participate in the voting, completed until the improper actions and and of those, a majority must vote in favor steps have been corrected. of the proposal. Ballots cast by members who • Upon ceasing to be a federal credit union, did not attend the meeting but who sub- the credit union shall no longer be subject to mitted their ballots in accordance with in- any of the provisions of the Federal Credit structions above will be counted with votes Union Act, except as may apply if federal cast at the meeting. In order to have a suit- share insurance coverage is continued. The

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successor state credit union shall be imme- and other documents should be accomplished diately vested with all of the assets and shall as soon as possible after conversion. Unless continue to be responsible for all of the obli- it violates state law, the credit union has 180 gations of the federal credit union to the days from the effective date of the conver- same extent as though the conversion had sion to change its signage and promotional not taken place. Operation of the credit material. This requires the credit union to union from this point will be in accordance discontinue using any remaining stock of with the requirements of state law and the ‘‘federal credit union’’ stationery imme- state regulator. diately, and discontinue using credit cards, • If the regional director is satisfied that ATM cards, etc., within 180 days after the ef- the conversion has been accomplished in ac- fective date of the conversion, or the reissue cordance with the approved proposal, the date, whichever is later. The regional direc- federal charter will be canceled. tor has the discretion to extend the time- • There is no federal requirement for clos- frame for an additional 180 days. Member ing the records of the federal credit union at share drafts with the federal chartered name the time of conversion or for the manner in can be used by the members until depleted. If which the records shall be maintained there- the state credit union is not federally in- after. The converting credit union is advised sured, it must change its name and must im- to contact the state regulator for applicable mediately cease using any credit union docu- state requirements. ments referencing federal insurance. • • The credit union shall neither use the If the state credit union is to be federally words ‘‘Federal Credit Union’’ in its name insured, the regional director will issue a nor represent itself in any manner as being a new insurance certificate. federal credit union. (Approved by the Office of Management and • Changing of the credit union’s name on Budget under control numbers 3133–0015 and all signage, records, accounts, investments, 3133–0116)

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[73 FR 73398, Dec. 2, 2008] Subpart A—Net Worth Classification

702.101 Measure and effective date of net PART 702—PROMPT CORRECTIVE worth classification. ACTION 702.102 Statutory net worth categories. 702.103 Applicability of risk-based net worth Sec. requirement. 702.1 Authority, purpose, scope and other 702.104 Risk portfolios defined. supervisory authority. 702.105 Weighted-average life of invest- 702.2 Definitions. ments.

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702.106 Standard calculation of risk-based pursuant to FCUA section 120, 12 U.S.C. net worth requirement. 1766. 702.107 Alternative components for standard (b) Purpose. The express purpose of calculation. 702.108 Risk mitigation credit. prompt corrective action under section 1790d is to resolve the problems of fed- APPENDIXES A–H TO SUBPART A erally-insured credit unions at the Subpart B—Mandatory and Discretionary least possible long-term loss to the Na- Supervisory Actions tional Credit Union Share Insurance Fund. This part carries out the purpose 702.201 Prompt corrective action for ‘‘ade- of prompt corrective action by estab- quately capitalized’’ credit unions. lishing a framework of mandatory and 702.202 Prompt corrective action for ‘‘undercapitalized’’ credit unions. discretionary supervisory actions, ap- 702.203 Prompt corrective action for ‘‘sig- plicable according to a credit union’s nificantly undercapitalized’’ credit net worth ratio, designed primarily to unions. restore and improve the net worth of 702.204 Prompt corrective action for ‘‘criti- federally-insured credit unions. cally undercapitalized’’ credit unions. (c) Scope. This part implements the 702.205 Consultation with State officials on provisions of section 1790d as they proposed prompt corrective action. 702.206 Net worth restoration plans. apply to federally-insured credit unions, whether federally- or state- Subpart C—Alternative Prompt Corrective chartered; to such credit unions de- Action for New Credit Unions fined as ‘‘new’’ pursuant to section 1790d(b)(2); and to such credit unions 702.301 Scope and definition. defined as ‘‘complex’’ pursuant to sec- 702.302 Net worth categories for new credit unions. tion 1790d(d). Certain of these provi- 702.303 Prompt corrective action for ‘‘ade- sions also apply to officers and direc- quately capitalized’’ new credit unions. tors of federally-insured credit unions. 702.304 Prompt corrective action for ‘‘mod- This part does not apply to corporate erately capitalized,’’ ‘‘marginally cap- credit unions. Procedures for issuing, italized’’ and ‘‘minimally capitalized’’ reviewing and enforcing orders and di- new credit unions. rectives issued under this part are set 702.305 Prompt corrective action for ‘‘uncapitalized’’ new credit unions. forth in subpart L of part 747 of this 702.306 Revised business plans for new credit chapter, 12 CFR 747.2001 et seq. unions. (d) Other supervisory authority. Nei- 702.307 Incentives for new credit unions. ther § 1790d nor this part in any way limits the authority of the NCUA Subpart D—Reserves Board or appropriate State official 702.401 Reserves. under any other provision of law to 702.402 Full and fair disclosure of financial take additional supervisory actions to condition. address unsafe or unsound practices or 702.403 Payment of dividends. conditions, or violations of applicable AUTHORITY: 12 U.S.C. 1766(a), 1790d. law or regulations. Action taken under this part may be taken independently SOURCE: 65 FR 8584, Feb. 18, 2000, unless of, in conjunction with, or in addition otherwise noted. to any other enforcement action avail- § 702.1 Authority, purpose, scope and able to the NCUA Board or appropriate other supervisory authority. State official, including issuance of (a) Authority. Subparts A, B and C of cease and desist orders, orders of prohi- this part and subpart L of part 747 of bition, suspension and removal, or as- this chapter are issued by the National sessment of civil money penalties, or Credit Union Administration pursuant any other actions authorized by law. to section 216 of the Federal Credit Union Act (FCUA), 12 U.S.C. 1790d (sec- § 702.2 Definitions tion 1790d), as added by section 301 of Except as provided below, the terms the Credit Union Membership Access used in this part have the same mean- Act, Pub. L. No. 105–219, 112 Stat. 913 ings as set forth in FCUA sections 101 (1998). Subpart D of this part is issued and 216, 12 U.S.C. 1752, 1790d.

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(a) Appropriate regional director means has been in operation for less than ten the director of the NCUA regional of- (10) years and has $10,000,000 or less in fice having jurisdiction over federally- total assets. insured credit unions in the state (i) Senior executive officer means a where the affected credit union is prin- senior executive officer as defined by 12 cipally located. CFR 701.14(b)(2). (b) Appropriate State official means (j) Shares means deposits, shares, the commission, board or other super- share certificates, share drafts, or any visory authority having jurisdiction other depository account authorized by over credit unions chartered by the federal or state law. State which chartered the affected (k) Total assets. (1) Total assets credit union. means a credit union’s total assets as (c) Credit union means a federally-in- measured by either— sured, natural person credit union, (i) Average quarterly balance. The av- whether federally- or State-chartered, erage of quarter-end balances of the as defined by 12 U.S.C. 1752(6). current and three preceding calendar (d) CUSO means a credit union serv- quarters; or ice organization as described in 12 CFR (ii) Average monthly balance. The av- 712 et seq. for federally-chartered credit erage of month-end balances over the unions, and as defined under State law three calendar months of the calendar for State-chartered credit unions. quarter; or (e) NCUSIF means the National Cred- (iii) Average daily balance. The aver- it Union Share Insurance Fund as de- age daily balance over the calendar fined by 12 U.S.C. 1783. quarter; or (f) Net Worth means (1) The retained (iv) Quarter-end balance. The quarter- earnings balance of the credit union at end balance of the calendar quarter as quarter-end as determined under gen- reported on the credit union’s Call Re- erally accepted accounting principles, port. subject to paragraph (f)(3) of this sec- (2) For each quarter, a credit union tion. Retained earnings consists of un- must elect a measure of total assets divided earnings, regular reserves, and from paragraph (k)(1) of this section to any other appropriations designated by apply for all purposes under this part management or regulatory authorities; except §§ 702.103 through 702.108 [risk- (2) For a low income-designated cred- based net worth requirement]. it union, net worth also includes sec- (l) Weighted-average life means the ondary capital accounts that are unin- weighted-average time to the return of sured and subordinate to all other a dollar of principal, calculated by claims, including claims of creditors, multiplying each portion of principal shareholders and the NCUSIF; and received by the time at which it is ex- (3) For a credit union that acquires pected to be received (based on a rea- another credit union in a mutual com- sonable and supportable estimate of bination, net worth includes the re- that time), and then summing and di- tained earnings of the acquired credit viding by the total amount of prin- union, or of an integrated set of activi- cipal. ties and assets, at the point of acquisition. A mutual combination is a trans- [65 FR 8584, Feb. 18, 2000, as amended at 65 action in which a credit union acquires FR 44966, July 20, 2000; 67 FR 71087, Nov. 29, another credit union, or acquires an in- 2002; 73 FR 72691, Dec. 1, 2008] tegrated set of activities and assets that is capable of being conducted and Subpart A—Net Worth managed as a credit union. Classification (g) Net worth ratio means the ratio of the net worth of the credit union (as § 702.101 Measures and effective date defined in paragraph (f) of this section of net worth classification. to the total assets of the credit union (a) Net worth measures. For purposes (as defined by a measure chosen under of this part, a credit union must deter- paragraph (j) of this section. mine its net worth category classifica- (h) New credit union means a feder- tion at the end of each calendar quar- ally-insured credit union which both ter using two measures:

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(1) The net worth ratio as defined in responding legal obligations under this § 702.2(g); and part. (2) If determined to be applicable [65 FR 8584, Feb. 18, 2000; 65 FR 55439, Sept. under § 702.103, a risk-based net worth 14, 2000, as amended at 67 FR 12464, Mar. 19, requirement. 2002; 67 FR 71087, Nov. 29, 2002] (b) Effective date of net worth classification. For purposes of this part, the § 702.102 Statutory net worth categories. effective date of a federally-insured credit union’s net worth category clas- (a) Net worth categories. Except for sification shall be the most recent to credit unions defined as ‘‘new’’ under occur of: subpart B of this part, a federally-in- (1) Quarter-end effective date. The last sured credit union shall be classified day of the calendar month following (Table 1)— (1) Well capitalized if it has a net the end of the calendar quarter; or worth ratio of seven percent (7%) or (2) Corrected net worth category. The greater and also meets any applicable date the credit union received subse- risk-based net worth requirement quent written notice from NCUA or, if under §§ 702.103 through 702.108; or State-chartered, from the appropriate (2) Adequately capitalized if it has a State official, of a decline in net worth net worth ratio of six percent (6%) or category due to correction of an error more but less than seven percent (7%), or misstatement in the credit union’s and also meets any applicable risk- most recent Call Report; or based net worth requirement under (3) Reclassification to lower category. §§ 702.103 through 702.108 below; or The date the credit union received (3) Undercapitalized if it has a net written notice from NCUA or, if State- worth ratio of four percent (4%) or chartered, the appropriate State offi- more but less than six percent (6%), or cial, of reclassification on safety and fails to meet any applicable risk-based soundness grounds as provided under net worth requirement under §§ 702.103 §§ 702.102(b) or 702.302(d). through 702.108; or (c) Notice to NCUA by filing Call Re- (4) Significantly undercapitalized if it port. (1) Other than by filing a Call Re- (i) Has a net worth ratio of two per- port, a federally-insured credit union cent (2%) or more but less than four percent (4%); or need not notify the NCUA Board of a (ii) Has a net worth ratio of four per- change in its net worth ratio that cent (4%) or more but less than five places the credit union in a lower net percent (5%), and either— worth category; (A) Fails to submit an acceptable net (2) Failure to timely file a Call Re- worth restoration plan within the time port as required under this section in prescribed in § 702.206; or no way alters the effective date of a (B) Materially fails to implement a change in net worth classification net worth restoration plan approved by under this paragraph (b) of this sec- the NCUA Board; or tion, or the affected credit union’s cor- (5) Critically undercapitalized if it has a net worth ratio of less than two percent (2%).

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(b) Reclassification based on super- of this section, and shall promptly no- visory criteria other than net worth. The tify the appropriate State official of its NCUA Board may reclassify a ‘‘well decision to reclassify. capitalized’’ credit union as ‘‘ade- [65 FR 8584, Feb. 18, 2000, as amended at 65 quately capitalized’’ and may require FR 44966, July 20, 2000; 67 FR 71087, Nov. 29, an ‘‘adequately capitalized’’ or 2002] ‘‘undercapitalized’’ credit union to comply with certain mandatory or dis- § 702.103 Applicability of risk-based cretionary supervisory actions as if it net worth requirement. were in the next lower net worth cat- For purposes of § 702.102, a credit egory (each of such actions hereinafter union is defined as ‘‘complex’’ and a referred to generally as ‘‘reclassifica- risk-based net worth requirement is ap- tion’’) in the following circumstances: plicable only if the credit union meets (1) Unsafe or unsound condition. The both of the following criteria as re- NCUA Board has determined, after no- flected its most recent Call Report: tice and opportunity for hearing pursu- (a) Minimum asset size. Its quarter-end ant to § 747.2003 of this chapter, that total assets exceed ten million dollars the credit union is in an unsafe or un- ($10,000,000); and sound condition; or (b) Minimum RBNW calculation. Its (2) Unsafe or unsound practice. The risk-based net worth requirement as NCUA Board has determined, after no- calculated under § 702.106 exceeds six tice and opportunity for hearing pursu- percent (6%). ant to § 747.2003 of this chapter, that [65 FR 44966, July 20, 2000, as amended by 67 the credit union has not corrected a FR 13464, Mar. 19, 2002; 67 FR 71088, Nov. 29, material unsafe or unsound practice of 2002] which it was, or should have been, aware. § 702.104 Risk portfolios defined. (c) Non-delegation. The NCUA Board A risk portfolio is a portfolio of as- may not delegate its authority to re- sets, liabilities, or contingent liabil- classify a credit union under paragraph ities as specified below, each expressed (b) of this section. as a percentage of the credit union’s (d) Consultation with State officials. quarter-end total assets reflected in its The NCUA Board shall consult and most recent Call Report, rounded to seek to work cooperatively with the two decimal places (Table 2): appropriate State official before reclas- (a) Long-term real estate loans. Total sifying a federally-insured State-char- real estate loans and real estate lines tered credit union under paragraph (b) of credit outstanding, exclusive of

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those outstanding that will contrac- the sum of the risk portfolios in para- tually refinance, reprice or mature graphs (a) through (d) of this section; within the next five (5) years, and ex- (f) Loans sold with recourse. Out- clusive of all member business loans standing balance of loans sold or (as defined in 12 CFR 723.1 or as ap- swapped with recourse, excluding loans proved under 12 CFR 723.20); sold to the secondary mortgage market (b) Member business loans outstanding. that have representations and warran- All member business loans as defined ties consistent with those customarily in 12 CFR 723.1 or as approved under 12 required by the U.S. Government and CFR 723.20; government sponsored enterprises; (c) Investments. Investments as defined by 12 CFR 703.150 or applicable (g) Unused member business loan com- State law, including investments in mitments. Unused commitments for CUSOs (as defined by § 702.2(d)); member business loans as defined in 12 (d) Low-risk assets. Cash on hand (e.g., CFR 723.1 or as approved under 12 CFR coin and currency, including vault, 723.20; and ATM and teller cash) and the NCUSIF (h) Allowance. The Allowance for deposit; Loan and Lease Losses not to exceed (e) Average-risk assets. One hundred the equivalent of one and one-half per- percent (100%) of total assets minus cent (1.5%) of total loans outstanding.

[65 FR 44966, July 20, 2000, as amended at 67 FR 71088, Nov. 29, 2002]

§ 702.105 Weighted-average life of in- lective investment funds, the weighted- vestments. average life is defined as the maximum Except as provided below (Table 3), weighted-average life disclosed, di- the weighted-average life of an invest- rectly or indirectly, in the prospectus ment for purposes of §§ 702.106(c) and or trust instrument; 702.107(c) is defined pursuant to (2) For investments in money market § 702.2(m): funds, as defined in 17 CFR 270.2a–7, and (a) Registered investment companies collective investment funds operated in and collective investment funds. (1) For accordance with short-term investment investments in registered investment fund rules set forth in 12 CFR companies (e.g., mutual funds) and col-

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9.18(b)(4)(ii)(B)(1)–(3), the weighted-av- (d) Capital in mixed-ownership Govern- erage life is defined as one (1) year or ment corporations and corporate credit less; and unions. For capital stock in mixed-own- (3) For other investments in reg- ership Government corporations, as de- istered investment companies or col- fined in 31 U.S.C. 9101(2), and member lective investment funds, the weighted- paid-in capital and membership capital average life is defined as greater than in corporate credit unions, as defined five (5) years, but less than or equal to in 12 CFR 704.2, the weighted-average seven (7) years; life is defined as greater than one (1) year, but less than or equal to three (3) (b) Callable fixed-rate debt obligations years; and deposits. For fixed-rate debt obliga- (e) Investments in CUSOs. For invest- tions and deposits that are callable in ments in CUSOs (as defined in whole, the weighted-average life is de- § 702.2(d)), the weighted-average life is fined as the period remaining to the defined as greater than one (1) year, maturity date; but less than or equal to three (3) (c) Variable-rate debt obligations and years; and deposits. For variable-rate debt obliga- (f) Other equity securities. For other tions and deposits, the weighted-aver- equity securities, the weighted average age life is defined as the period remain- life is defined as greater than ten (10) ing to the next rate adjustment date; years.

[65 FR 44966, July 20, 2000, as amended at 67 FR 71088, Nov. 29, 2002]

§ 702.106 Standard calculation of risk- (a) Long-term real estate loans. The based net worth requirement. sum of: A credit union’s risk-based net worth (1) Six percent (6%) of the amount of requirement is the aggregate of the fol- long-term real estate loans less than or lowing standard component amounts, equal to twenty-five percent (25%) of each expressed as a percentage of the total assets; and credit union’s quarter-end total assets (2) Fourteen percent (14%) of the as reflected in its most recent Call Re- amount in excess of twenty-five per- port, rounded to two decimal places cent (Table 4): (25%) of total assets;

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(b) Member business loans outstanding. years, but less than or equal to ten (10) The sum of: years; and (1) Six percent (6%) of the amount of (4) Twenty percent (20%) of the member business loans outstanding amount of investments with a weight- less than or equal to fifteen percent ed-average life greater than ten (10) (15%) of total assets; years; (2) Eight percent (8%) of the amount (d) Low-risk assets. Zero percent (0%) of member business loans outstanding of the entire portfolio of low-risk as- greater than fifteen percent (15%), but sets; less than or equal to twenty-five per- (e) Average-risk assets. Six percent cent (25%), of total assets; and (6%) of the entire portfolio of average- (3) Fourteen percent (14%) of the risk assets; amount in excess of twenty-five percent (25%) of total assets; (f) Loans sold with recourse. Six per- (c) Investments. The sum of: cent (6%) of the entire portfolio of (1) Three percent (3%) of the amount loans sold with recourse; of investments with a weighted-aver- (g) Unused member business loan com- age life (as specified in § 702.105 above) mitments. Six percent (6%) of the entire of one (1) year or less; portfolio of unused member business (2) Six percent (6%) of the amount of loan commitments; and investments with a weighted-average (h) Allowance. Negative one hundred life greater than one (1) year, but less percent (¥100%) of the balance of the than or equal to three (3) years; Allowance for Loan and Lease Losses (3) Twelve percent (12%) of the account, not to exceed the equivalent amount of investments with a weight- of one and one-half percent (1.5%) of ed-average life greater than three (3) total loans outstanding.

[65 FR 44966, July 20, 2000, as amended at 67 FR 71088, Nov. 29, 2002; 68 FR 56547, Oct. 1, 2003]

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§ 702.107 Alternative components for (iii) Twelve percent (12%) of the standard calculation. amount of such loans with a remaining A credit union may substitute one or maturity greater than 5 years, but less more alternative components below, in than or equal to 7 years; place of the corresponding standard (iv) Fourteen percent (14%) of the components in § 702.106 above, when amount of such loans with a remaining any alternative component amount, ex- maturity greater than 7 years, but less pressed as a percentage of the credit than or equal to 12 years; and union’s quarter-end total assets as re- (v) Sixteen percent (16%) of the flected in its most recent Call Report, amount of such loans with a remaining rounded to two decimal places, is maturity greater than 12 years; and smaller (Table 5): (2) Variable-rate. Variable-rate member business loans outstanding as fol- (a) Long-term real estate loans. The lows: sum of: (i) Six percent (6%) of the amount of (1) Non-callable. Non-callable long- such loans with a remaining maturity term real estate loans as follows: of 3 or fewer years; (i) Eight percent (8%) of the amount (ii) Eight percent (8%) of the amount of such loans with a remaining matu- of such loans with a remaining maturity of greater than 5 years, but less rity greater than 3 years, but less than than or equal to 12 years; or equal to 5 years; (ii) Twelve percent (12%) of the (iii) Ten percent (10%) of the amount amount of such loans with a remaining of such loans with a remaining matu- maturity of greater than 12 years, but rity greater than 5 years, but less than less than or equal to 20 years; and or equal to 7 years; (iii) Fourteen percent (14%) of the (iv) Twelve percent (12%) of the amount of such loans with a remaining amount of such loans with a remaining maturity greater than 20 years; maturity greater than 7 years, but less (2) Callable. Long-term real estate than or equal to 12 years; and loans callable in 5 years or less as fol- (v) Fourteen percent (14%) of the lows: amount of such loans with a remaining (i) Six percent (6%) of the amount of maturity greater than 12 years. such loans with a documented call pro- (c) Investments. The sum of: vision of 5 years or less and with a re- (1) Three percent (3%) of the amount maining maturity of greater than 5 of investments with a weighted-aver- years, but less than or equal to 12 age life (as specified in § 702.105 above) years; of one (1) year or less; (ii) Ten percent (10%) of the amount (2) Six percent (6%) of the amount of of such loans with a documented call investments with a weighted-average provision of 5 years or less and with a life greater than one (1) year, but less remaining maturity of greater than 12 than or equal to three (3) years; years, but less than or equal to 20 (3) Eight percent (8%) of the amount years; and of investments with a weighted-aver- (iii) Twelve percent (12%) of the age life greater than three (3) years, amount of such loans with a docu- but less than or equal to five (5) years; mented call provision of 5 years or less (4) Twelve percent (12%) of the and with a remaining maturity of amount of investments with a weight- greater than 20 years; ed-average life greater than five (5) (b) Member business loans outstanding. years, but less than or equal to seven The sum of: (7) years; (1) Fixed rate. Fixed-rate member (5) Sixteen percent (16%) of the business loans outstanding as follows: amount of investments with a weight- (i) Six percent (6%) of the amount of ed-average life greater than seven (7) such loans with a remaining maturity years, but less than or equal to ten (10) of 3 or fewer years; years; and (ii) Nine percent (9%) of the amount (6) Twenty percent (20%) of the of such loans with a remaining matu- amount of investments with a weight- rity greater than 3 years, but less than ed-average life greater than ten (10) or equal to 5 years; years.

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(d) Loans sold with recourse. The alter- (2) The weighted average recourse native component is the sum of: percent of the amount of loans sold (1) Six percent (6%) of the amount of with contractual recourse obligations loans sold with contractual recourse of less than six percent (6%), as com- obligations of six percent (6%) or great- puted by the credit union. er; and

TABLE 5—§ 702.107 ALTERNATIVE COMPONENTS FOR STANDARD CALCULATION

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[65 FR 44966, July 20, 2000, as amended at 67 FR 71088, Nov. 29, 2002]

§ 702.108 Risk mitigation credit. (c) Application by FISCU. In the case (a) Who may apply. A credit union of a FISCU seeking a risk mitigation may apply for a risk mitigation credit credit— if on any of the current or three pre- (1) Before an application under para- ceding effective dates of classification graph (a) above may be submitted to it either failed an applicable RBNW re- the NCUA Board, it must be submitted quirement or met it by less than 100 in duplicate to the appropriate State basis points. official and the appropriate Regional (b) Application for credit. Upon appli- Director; and cation pursuant to guidelines duly (2) The NCUA Board, when evalu- adopted by the NCUA Board, the NCUA ating the application of a FISCU, shall Board may in its discretion grant a consult and seek to work cooperatively credit to reduce a risk-based net worth with the appropriate State official, and requirement under §§ 702.106 and 702.107 shall provide prompt notice of its deci- upon proof of mitigation of: sion to the appropriate State official. (1) Credit risk; or (2) Interest rate risk as demonstrated [65 FR 44971, July 20, 2000, as amended at 67 by economic value exposure measures. FR 71089, Nov. 29, 2002]

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APPENDIXES A–H TO SUBPART A OF PART 702

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[65 FR 44971, July 20, 2000, as amended at 67 FR 71089, 71090, 71091, Nov. 29, 2002; 68 FR 56548, 56549, 56550, Oct. 1, 2003]

Subpart B—Mandatory and (1) Is necessary to avoid a significant Discretionary Supervisory Actions redemption of shares; and (2) Would further the purpose of this § 702.201 Prompt corrective action for part. ‘‘adequately capitalized’’ credit (c) Decrease by FISCU. The NCUA unions. Board shall consult and seek to work (a) Earnings retention. Beginning the cooperatively with the appropriate effective date of classification as ‘‘ade- State official before permitting a feder- quately capitalized’’ or lower, a federally-insured State-chartered credit ally-insured credit union must increase union to decrease its earnings reten- the dollar amount of its net worth tion under paragraph (b) of this sec- quarterly either in the current quarter, tion. or on average over the current and three preceding quarters, by an amount (d) Periodic review. A decision under equivalent to at least 1/10th percent paragraph (b) of this section to permit (0.1%) of its total assets, and must a credit union to decrease its earnings quarterly transfer that amount (or retention is subject to quarterly review more by choice) from undivided earn- and revocation except when the credit ings to its regular reserve account union is operating under an approved until it is ‘‘well capitalized.’’ net worth restoration plan that pro- (b) Decrease in retention. Upon written vides for decreasing its earnings reten- application received no later than 14 tion as provided under paragraph (b). days before the quarter end, the NCUA Board, on a case-by-case basis, may [67 FR 71091, Nov. 29, 2002] permit a credit union to increase the § 702.202 Prompt corrective action for dollar amount of its net worth and ‘‘undercapitalized’’ credit unions. quarterly transfer an amount that is less than the amount required under (a) Mandatory supervisory actions by paragraph (a) of this section, to the ex- credit union. A federally-insured credit tent the NCUA Board determines that union which is ‘‘undercapitalized’’ such lesser amount— must—

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(1) Earnings retention. Increase net loans outstanding and unused commit- worth and transfer earnings to its reg- ments to lend) as of the preceding ular reserve account in accordance quarter-end unless it is granted an ex- with § 702.201; ception under 12 U.S.C. 1757a(b). (2) Submit net worth restoration plan. (b) ‘‘Second tier’’ discretionary super- Submit a net worth restoration plan visory actions by NCUA. Subject to the pursuant to § 702.206, provided however, applicable procedures for issuing, re- that a credit union in this category viewing and enforcing directives set having a net worth ratio of less than forth in subpart L of part 747 of this five percent (5%) which fails to timely chapter, the NCUA Board may, by di- submit such a plan, or which materi- rective, take one or more of the fol- ally fails to implement an approved lowing actions with respect to an plan, is classified ‘‘significantly under- ‘‘undercapitalized’’ credit union having capitalized’’ pursuant to a net worth ratio of less than five per- § 702.102(a)(4)(ii) above; cent (5%), or a director, officer or em- (3) Restrict increase in assets. Begin- ployee of such a credit union, if it de- ning the effective date of classification termines that those actions are nec- as ‘‘undercapitalized’’ or lower, not essary to carry out the purpose of this permit the credit union’s assets to in- part: crease beyond its total assets (per (1) Requiring prior approval for acquisi- § 702.2(j)) for the preceding quarter un- tions, branching, new lines of business. less— Prohibit a credit union from, directly (i) Plan approved. The NCUA Board or indirectly, acquiring any interest in has approved a net worth restoration any business entity or financial insti- plan which provides for an increase in tution, establishing or acquiring any total assets and— additional branch office, or engaging in (A) The assets of the credit union are any new line of business, unless the increasing consistent with the ap- NCUA Board has approved the credit proved plan; and union’s net worth restoration plan, the (B) The credit union is implementing credit union is implementing its plan, steps to increase the net worth ratio and the NCUA Board determines that consistent with the approved plan; the proposed action is consistent with (ii) Plan not approved. The NCUA and will further the objectives of that Board has not approved a net worth plan; restoration plan and total assets of the credit union are increasing because of (2) Restricting transactions with and increases since quarter-end in balances ownership of CUSO. Restrict the credit of: union’s transactions with a CUSO, or (A) Total accounts receivable and ac- require the credit union to reduce or crued income on loans and invest- divest its ownership interest in a ments; or CUSO; (B) Total cash and cash equivalents; (3) Restricting dividends paid. Restrict or the dividend rates the credit union (C) Total loans outstanding, not to pays on shares to the prevailing rates exceed the sum of total assets (per paid on comparable accounts and ma- § 702.2(j)) plus the quarter-end balance turities in the relevant market area, as of unused commitments to lend and un- determined by the NCUA Board, except used lines of credit provided however that dividend rates already declared on that a credit union which increases a shares acquired before imposing a re- balance as permitted under paragraphs striction under this paragraph may not (A), (B) or (C) cannot offer rates on be retroactively restricted; shares in excess of prevailing rates on (4) Prohibiting or reducing asset shares in its relevant market area, and growth. Prohibit any growth in the cannot open new branches; credit union’s assets or in a category of (4) Restrict member business loans. Be- assets, or require the credit union to ginning the effective date of classifica- reduce its assets or a category of as- tion as ‘‘undercapitalized’’ or lower, sets; not increase the total dollar amount of (5) Alter, reduce or terminate activity. member business loans (defined as Require the credit union or its CUSO

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to alter, reduce, or terminate any ac- (2) Submit net worth restoration plan. tivity which poses excessive risk to the Submit a net worth restoration plan credit union; pursuant to § 702.206; (6) Prohibiting nonmember deposits. (3) Restrict increase in assets. Not per- Prohibit the credit union from accept- mit the credit union’s total assets to ing all or certain nonmember deposits; increase except as provided in (7) Dismissing director or senior execu- § 702.202(a)(3) and tive officer. Require the credit union to (4) Restrict member business loans. Not dismiss from office any director or sen- increase the total dollar amount of ior executive officer, provided however, member business loans (defined as that a dismissal under this clause shall loans outstanding and unused commit- not be construed to be a formal admin- ments to lend) as provided in istrative action for removal under 12 § 702.202(a)(4). U.S.C. 1786(g); (b) Discretionary supervisory actions by (8) Employing qualified senior executive NCUA. Subject to the applicable proce- officer. Require the credit union to em- dures for issuing, reviewing and enforc- ploy qualified senior executive officers ing directives set forth in subpart L of (who, if the NCUA Board so specifies, part 747 of this chapter, the NCUA shall be subject to its approval); and Board may, by directive, take one or (9) Other action to carry out prompt more of the following actions with re- Restrict or require corrective action. spect to any ‘‘significantly under- such other action by the credit union capitalized’’ credit union, or a director, as the NCUA Board determines will officer or employee of such credit carry out the purpose of this part bet- union, if it determines that those acter than any of the actions prescribed tions are necessary to carry out the in paragraphs (b)(1) through (8) of this section. purpose of this part: (1) (c) ‘‘First tier’’ application of discre- Requiring prior approval for acquisi- tionary supervisory actions. An ‘‘under- tions, branching, new lines of business. capitalized’’ credit union having a net Prohibit a credit union from, directly worth ratio of five percent (5%) or or indirectly, acquiring any interest in more, or which is classified ‘‘under- any business entity or financial insti- capitalized’’ by reason of failing to sat- tution, establishing or acquiring any isfy a risk-based net worth require- additional branch office, or engaging in ment under § 702.105 or 702.106, is sub- any new line of business, except as project to the discretionary supervisory vided in § 702.202(b)(1); actions in paragraph (b) of this section (2) Restricting transactions with and if it fails to comply with any manda- ownership of CUSO. Restrict the credit tory supervisory action in paragraph union’s transactions with a CUSO, or (a) of this section or fails to timely im- require the credit union to divest or re- plement an approved net worth res- duce its ownership interest in a CUSO; toration plan under § 702.206, including (3) Restricting dividends paid. Restrict meeting its prescribed steps to increase the dividend rates that the credit its net worth ratio. union pays on shares as provided in § 702.202(b)(3); [65 FR 8584, Feb. 18, 2000, as amended at 67 FR 71092, Nov. 29, 2002] (4) Prohibiting or reducing asset growth. Prohibit any growth in the § 702.203 Prompt corrective action for credit union’s assets or in a category of ‘‘significantly undercapitalized’’ assets, or require the credit union to credit unions. reduce assets or a category of assets; (a) Mandatory supervisory actions by (5) Alter, reduce or terminate activity. credit union. A federally-insured credit Require the credit union or its CUSO(s) union which is ‘‘significantly under- to alter, reduce, or terminate any ac- capitalized’’ must— tivity which poses excessive risk to the (1) Earnings retention. Increase net credit union; worth and transfer earnings to its reg- (6) Prohibiting nonmember deposits. ular reserve account in accordance Prohibit the credit union from accept- with § 702.201; ing all or certain nonmember deposits;

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(7) New election of directors. Order a union has no reasonable prospect of be- new election of the credit union’s board coming ‘‘adequately capitalized.’’ of directors; [65 FR 8584, Feb. 18, 2000, as amended at 67 (8) Dismissing director or senior execu- FR 71092, Nov. 29, 2002] tive officer. Require the credit union to dismiss from office any director or sen- § 702.204 Prompt corrective action for ior executive officer, provided however, ‘‘critically undercapitalized’’ credit that a dismissal under this clause shall unions not be construed to be a formal admin- (a) Mandatory supervisory actions by istrative action for removal under 12 credit union. A federally-insured credit U.S.C. 1786(g); union which is ‘‘critically under- (9) Employing qualified senior executive capitalized’’ must— officer. Require the credit union to em- (1) Earnings retention. Increase net ploy qualified senior executive officers worth and transfer earnings to its reg- (who, if the NCUA Board so specifies, ular reserve account in accordance shall be subject to its approval); with § 702.201; (10) Restricting senior executive officers’ (2) Submit net worth restoration plan. compensation. Except with the prior Submit a net worth restoration plan written approval of the NCUA Board, pursuant to § 702.206; limit compensation to any senior exec- (3) Restrict increase in assets. Not per- utive officer to that officer’s average mit the credit union’s total assets to rate of compensation (excluding bo- increase except as provided in nuses and profit sharing) during the § 702.202(a)(3); and four (4) calendar quarters preceding the (4) Restrict member business loans. Not effective date of classification of the increase the total dollar amount of credit union as ‘‘significantly under- member business loans (defined as capitalized,’’ and prohibit payment of a loans outstanding and unused commit- bonus or profit share to such officer; ments to lend) as provided in (11) Other actions to carry out prompt § 702.202(a)(4). corrective action. Restrict or require (b) Discretionary supervisory actions by such other action by the credit union NCUA. Subject to the applicable procedures for issuing, reviewing and enforc- as the NCUA Board determines will ing directives set forth in subpart L of carry out the purpose of this part bet- part 747 of this chapter, the NCUA ter than any of the actions prescribed Board may, by directive, take one or in paragraphs (b)(1) through (10) of this more of the following actions with re- section; and spect to any ‘‘critically undercapital- (12) Requiring merger. Require the ized’’ credit union, or a director, officer credit union to merge with another fi- or employee of such credit union, if it nancial institution if one or more determines that those actions are nec- grounds exist for placing the credit essary to carry out the purpose of this union into conservatorship pursuant to part: 12 U.S.C. 1786(h)(1)(F), or into liquida- (1) Requiring prior approval for acquisition pursuant to 12 U.S.C. tions, branching, new lines of business. 1787(a)(3)(A)(i). Prohibit a credit union from, directly (c) Discretionary conservatorship or liq- or indirectly, acquiring any interest in uidation if no prospect of becoming ‘‘ade- any business entity or financial insti- quately capitalized.’’ Notwithstanding tution, establishing or acquiring any any other actions required or per- additional branch office, or engaging in mitted to be taken under this section, any new line of business, except as pro- when a credit union becomes ‘‘signifi- vided by § 702.202(b)(1); cantly undercapitalized’’ (including by (2) Restricting transactions with and reclassification under section 702.102(b) ownership of CUSO. Restrict the credit above), the NCUA Board may place the union’s transactions with a CUSO, or credit union into conservatorship pur- require the credit union to divest or re- suant to 12 U.S.C. 1786(h)(1)(F), or into duce its ownership interest in a CUSO; liquidation pursuant to 12 U.S.C. (3) Restricting dividends paid. Restrict 1787(a)(3)(A)(i), provided that the credit the dividend rates that the credit

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union pays on shares as provided in prior written approval before doing any § 702.202(b)(3). of the following: (4) Prohibiting or reducing asset (i) Entering into any material trans- growth. Prohibit any growth in the action not within the scope of an ap- credit union’s assets or in a category of proved net worth restoration plan (or assets, or require the credit union to approved revised business plan under reduce assets or a category of assets; subpart C of this part); (5) Alter, reduce or terminate activity. (ii) Extending credit for transactions Require the credit union or its CUSO(s) deemed highly leveraged by the NCUA to alter, reduce, or terminate any ac- Board or, if State-chartered, by the ap- tivity which poses excessive risk to the propriate State official; credit union; (iii) Amending the credit union’s (6) Prohibiting nonmember deposits. charter or bylaws, except to the extent Prohibit the credit union from accept- necessary to comply with any law, reg- ing all or certain nonmember deposits; ulation, or order; (7) New election of directors. Order a (iv) Making any material change in new election of the credit union’s board accounting methods; and of directors; (v) Paying dividends or interest on (8) Dismissing director or senior execu- new share accounts at a rate exceeding tive officer. Require the credit union to the prevailing rates of interest on in- dismiss from office any director or sen- sured deposits in its relevant market ior executive officer, provided however, area; that a dismissal under this clause shall (13) Other action to carry out prompt not be construed to be a formal admin- corrective action. Restrict or require istrative action for removal under 12 such other action by the credit union U.S.C. 1786(g); as the NCUA Board determines will (9) Employing qualified senior executive carry out the purpose of this part bet- officer. Require the credit union to em- ter than any of the actions prescribed ploy qualified senior executive officers in paragraphs (b)(1) through (12) of this (who, if the NCUA Board so specifies, section; and shall be subject to its approval); (14) Requiring merger. Require the (10) Restricting senior executive officers’ credit union to merge with another fi- compensation. Reduce or, with the prior nancial institution if one or more written approval of the NCUA Board, grounds exist for placing the credit limit compensation to any senior exec- union into conservatorship pursuant to utive officer to that officer’s average 12 U.S.C. 1786(h)(1)(F), or into liquida- rate of compensation (excluding bo- tion pursuant to 12 U.S.C. nuses and profit sharing) during the 1787(a)(3)(A)(i). four (4) calendar quarters preceding the (c) Mandatory conservatorship, liquida- effective date of classification of the tion or action in lieu thereof—(1) Action credit union as ‘‘critically under- within 90 days. Notwithstanding any capitalized,’’ and prohibit payment of a other actions required or permitted to bonus or profit share to such officer; be taken under this section (and re- (11) Restrictions on payments on unin- gardless of a credit union’s prospect of sured secondary capital. Beginning 60 becoming ‘‘adequately capitalized’’), days after the effective date of classi- the NCUA Board must, within 90 cal- fication of a credit union as ‘‘critically endar days after the effective date of undercapitalized,’’ prohibit payments classification of a credit union as of principal, dividends or interest on ‘‘critically undercapitalized’’— the credit union’s uninsured secondary (i) Conservatorship. Place the credit capital accounts established after Au- union into conservatorship pursuant to gust 7, 2000, except that unpaid divi- 12 U.S.C. 1786(h)(1)(G); or dends or interest shall continue to ac- (ii) Liquidation. Liquidate the credit crue under the terms of the account to union pursuant to 12 U.S.C. the extent permitted by law; 1787(a)(3)(A)(ii); or (12) Requiring prior approval. Require (iii) Other corrective action. Take a ‘‘critically undercapitalized’’ credit other corrective action, in lieu of con- union to obtain the NCUA Board’s servatorship or liquidation, to better

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achieve the purpose of this part, pro- (A) Recertify the credit union if it vided that the NCUA Board documents continues to satisfy the criteria of why such action in lieu of conservator- paragraph (c)(3)(ii) of this section; or ship or liquidation would do so, pro- (B) Promptly place the credit union vided however, that other corrective ac- into liquidation, pursuant to 12 U.S.C. tion may consist, in whole or in part, 1787(a)(3)(A)(ii), if it fails to satisfy the of complying with the quarterly time- criteria of paragraph (c)(3)(ii) of this table of steps and meeting the quar- section. terly net worth targets prescribed in (4) Nondelegation. The NCUA Board an approved net worth restoration may not delegate its authority under plan. paragraph (c) of this section, unless the (2) Renewal of other corrective action. credit union has less than $5,000,000 in A determination by the NCUA Board to total assets. A credit union shall have take other corrective action in lieu of a right of direct appeal to the NCUA conservatorship or liquidation under Board of any decision made by dele- paragraph (c)(1)(iii) of this section gated authority under this section shall expire after an effective period within ten (10) calendar days of the ending no later than 180 calendar days date of that decision. after the determination is made, and (d) Mandatory liquidation of insolvent the credit union shall be immediately federal credit union. In lieu of paragraph placed into conservatorship or liquida- (c) of this section, a ‘‘critically under- tion under paragraphs (c)(1)(i) and (ii), capitalized’’ federal credit union that unless the NCUA Board makes a new has a net worth ratio of less than zero determination under paragraph percent (0%) may be placed into liq- (c)(1)(iii) of this section before the end uidation on grounds of insolvency pur- of the effective period of the prior de- suant to 12 U.S.C. 1787(a)(1)(A). termination; [65 FR 8584, Feb. 18, 2000, as amended at 67 (3) Mandatory liquidation after 18 FR 71092, Nov. 29, 2002] months—(i) Generally. Notwithstanding paragraphs (c)(1) and (2) of this section, § 702.205 Consultation with State offi- the NCUA Board must place a credit cials on proposed prompt corrective union into liquidation if it remains action. ‘‘critically undercapitalized’’ for a full (a) Consultation on proposed con- calendar quarter, on a monthly average servatorship or liquidation. Before plac- basis, following a period of 18 months ing a federally-insured State-chartered from the effective date the credit union credit union into conservatorship (pur- was first classified ‘‘critically under- suant to 12 U.S.C. 1786(h)(1)(F) or (G)) capitalized.’’ or liquidation (pursuant to 12 U.S.C. (ii) Exception. Notwithstanding para- 1787(a)(3)) as permitted or required graph (c)(3)(i) of this section, the NCUA under subparts B or C of this part to fa- Board may continue to take other cor- cilitate prompt corrective action— rective action in lieu of liquidation if (1) The NCUA Board shall seek the it certifies that the credit union— views of the appropriate State official (A) Has been in substantial compli- (as defined in § 702.2(b), and give him or ance with an approved net worth res- her an opportunity to take the pro- toration plan requiring consistent imposed action; provement in net worth since the date (2) The NCUA Board shall, upon time- the net worth restoration plan was ap- ly request of the appropriate State offi- proved; cial, promptly provide him or her with (B) Has positive net income or has an a written statement of the reasons for upward trend in earnings that the the proposed conservatorship or liq- NCUA Board projects as sustainable; uidation, and reasonable time to re- and spond to that statement; and (C) Is viable and not expected to fail. (3) If the appropriate State official (iii) Review of exception. The NCUA makes a timely written response that Board shall, at least quarterly, review disagrees with the proposed con- the certification of an exception to liq- servatorship or liquidation and gives uidation under paragraph (c)(3)(ii) of reasons for that disagreement, the this section and shall either— NCUA Board shall not place the credit

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union into conservatorship or liquida- submitted and is operating under a tion unless it first considers the views NWRP approved under this section is of the appropriate State official and not required to submit an additional determines that— NWRP due to a change in net worth (i) The NCUSIF faces a significant category (including by reclassification risk of loss if the credit union is not under § 702.102(b)), unless the NCUA placed into conservatorship or liquida- Board notifies the credit union that it tion; and must submit a new NWRP. A credit (ii) Conservatorship or liquidation is union that is notified to submit a new necessary either to reduce the risk of or revised NWRP shall file the NWRP loss, or to reduce the expected loss, to in writing with the appropriate Re- the NCUSIF with respect to the credit gional Director within 30 calendar days union. of receiving such notice, unless the (b) Nondelegation. The NCUA Board NCUA Board notifies the credit union may not delegate any determination in writing that the NWRP is to be filed under paragraph (a)(3) of this section. within a different period. (c) Consultation on proposed discre- (4) Failure to timely file plan. When a tionary action. The NCUA Board shall credit union fails to timely file an consult and seek to work cooperatively NWRP pursuant to this paragraph, the with the appropriate State official be- NCUA Board shall promptly notify the fore taking any discretionary supervisory action under §§ 702.202(b), credit union that it has failed to file an 702.203(b), 702.204(b), 702.304(b) and NWRP and that it has 15 calendar days 702.305(b) with respect to a federally-in- from receipt of that notice within sured State-chartered credit union; which to file an NWRP. shall provide prompt notice of its deci- (b) Assistance to small credit unions. sion to the appropriate State official; Upon timely request by a credit union and shall allow the appropriate State having total assets of less than $10 mil- official to take the proposed action lion (regardless how long it has been in independently or jointly with NCUA. operation), the NCUA Board shall provide assistance in preparing an NWRP [65 FR 8584, Feb. 18, 2000, as amended at 67 required to be filed under paragraph (a) FR 71092, Nov. 29, 2002] of this section. § 702.206 Net worth restoration plans. (c) Contents of NWRP. An NWRP must— (a) Schedule for filing—(1) Generally. A federally-insured credit union shall file (1) Specify— a written net worth restoration plan (i) A quarterly timetable of steps the (NWRP) with the appropriate Regional credit union will take to increase its Director and, if State-chartered, the net worth ratio so that it becomes appropriate State official, within 45 ‘‘adequately capitalized’’ by the end of calendar days of the effective date of the term of the NWRP, and to remain classification as either ‘‘undercapital- so for four (4) consecutive calendar ized,’’ ‘‘significantly undercapitalized’’ quarters. If ‘‘complex,’’ the credit or ‘‘critically undercapitalized,’’ unless union is subject to a risk-based net the NCUA Board notifies the credit worth requirement that may require a union in writing that its NWRP is to be net worth ratio higher than six percent filed within a different period. (6%) to become ‘‘adequately capital- (2) Exception. An otherwise ‘‘ade- ized’’; quately capitalized’’ credit union that (ii) The projected amount of earnings is reclassified ‘‘undercapitalized’’ on to be transferred to the regular reserve safety and soundness grounds under account in each quarter of the term of § 702.102(b) is not required to submit a the NWRP as required under NWRP solely due to the reclassifica- § 702.201(a), or as permitted under tion, unless the NCUA Board notifies § 702.201(b); the credit union that it must submit (iii) How the credit union will comply an NWRP. with the mandatory and any discre- (3) Filing of additional plan. Notwith- tionary supervisory actions imposed on standing paragraph (a)(1) of this sec- it by the NCUA Board under this sub- tion, a credit union that has already part;

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(iv) The types and levels of activities and provide prompt notice of its deci- in which the credit union will engage; sion to the appropriate State official. and (g) NWRP not approved (1) Submission (v) If reclassified to a lower category of revised NWRP. If an NWRP is re- under § 702.102(b), the steps the credit jected by the NCUA Board, the credit union will take to correct the unsafe or union shall submit a revised NWRP unsound practice(s) or condition(s); within 30 calendar days of receiving no- (2) Include pro forma financial state- tice of disapproval, unless it is notified ments, including any off-balance sheet in writing by the NCUA Board that the items, covering a minimum of the next revised NWRP is to be filed within a two years; and different period. (3) Contain such other information as (2) Notice of decision on revised NWRP. the NCUA Board has required. Within 30 calendar days after receiving (d) Criteria for approval of NWRP. The a revised NWRP under paragraph (g)(1) NCUA Board shall not accept a NWRP of this section, the NCUA Board shall plan unless it— notify the credit union in writing whether the revised NWRP is approved. (1) Complies with paragraph (c) of The Board may extend the time within this section; which notice of its decision shall be (2) Is based on realistic assumptions, provided. and is likely to succeed in restoring (3) Disapproval of reclassified credit the credit union’s net worth; and (3) union’s NWRP. A credit union which Would not unreasonably increase the has been classified ‘‘significantly credit union’s exposure to risk (includ- undercapitalized’’ under ing credit risk, interest-rate risk, and § 702.102(a)(4)(ii) shall remain so classi- other types of risk). fied pending NCUA Board approval of a (e) Consideration of regulatory capital. new or revised NWRP. To minimize possible long-term losses (h) Amendment of NWRP. A credit to the NCUSIF while the credit union union that is operating under an ap- takes steps to become ‘‘adequately cap- proved NWRP may, after prior written italized,’’ the NCUA Board shall, in notice to, and approval by the NCUA evaluating an NWRP under this sec- Board, amend its NWRP to reflect a tion, consider the type and amount of change in circumstance. Pending ap- any form of regulatory capital which proval of an amended NWRP, the credit may become established by NCUA reg- union shall implement the NWRP as ulation, or authorized by State law and originally approved. recognized by NCUA, which the credit (i) Publication. An NWRP need not be union holds, but which is not included published to be enforceable because in its net worth. publication would be contrary to the (f) Review of NWRP—(1) Notice of deci- public interest. sion. Within 45 calendar days after receiving an NWRP under this part, the [65 FR 8584, Feb. 18, 2000, as amended at 67 NCUA Board shall notify the credit FR 71092, Nov. 29, 2002] union in writing whether the NWRP has been approved, and shall provide Subpart C—Alternative Prompt reasons for its decision in the event of Corrective Action for New disapproval. Credit Unions (2) Delayed decision. If no decision is made within the time prescribed in § 702.301 Scope and definition. paragraph (f)(1) of this section, the (a) Scope. This subpart C applies in NWRP is deemed approved. lieu of subpart B of this part exclu- (3) Consultation with State officials. In sively to credit unions defined in para- the case of an NWRP submitted by a graph (b) of this section as ‘‘new’’ pur- federally-insured State-chartered cred- suant to 12 U.S.C. 1790d(b)(2). it union (whether an original, new, ad- (b) New credit union defined. A ‘‘new’’ ditional, revised or amended NWRP), credit union for purposes of this sub- the NCUA Board shall, when evalu- part is a federally-insured credit union ating the NWRP, seek and consider the that both has been in operation for less views of the appropriate State official, than ten (10) years and has total assets

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of not more than $10 million. A credit poses of subpart C, the effective date of union which exceeds $10 million in a new federally-insured credit union’s total assets may become ‘‘new’’ if its classification within a net worth cat- total assets subsequently decline below egory in paragraph (c) of this section $10 million while it is still in operation shall be determined as provided in for less than 10 years. § 702.101(b); and written notice to the (c) Effect of spin-offs. A credit union NCUA Board of a decline in net worth formed as the result of a ‘‘spin-off’’ of category in paragraph (c) of this sec- a group from the field of membership tion shall be given as required by sec- of an existing credit union is deemed to tion 702.101(c). be in operation since the effective date (c) Net worth categories. A federally- of the ‘‘spin-off.’’ A credit union whose insured credit union defined as ‘‘new’’ total assets decline below $10 million under this section shall be classified because a group within its field of (Table 6)— membership has been ‘‘spun-off’’ is (1) Well capitalized if it has a net deemed ‘‘new’’ if it has been in oper- worth ratio of seven percent (7%) or ation less than 10 years. greater; (d) Actions to evade prompt corrective (2) Adequately capitalized if it has a action. If the NCUA Board determines net worth ratio of six percent (6%) or that a credit union was formed, or was more but less than seven percent (7%); reduced in asset size as a result of a ‘‘spin-off,’’ or was merged, primarily to (3) Moderately capitalized if it has a qualify as ‘‘new’’ under this subpart, net worth ratio of three and one-half the credit union shall be deemed sub- percent (3.5%) or more but less than six ject to prompt corrective action under percent (6%); subpart A of this part. (4) Marginally capitalized if it has a net worth ratio of two percent (2%) or § 702.302 Net worth categories for new more but less than three and one-half credit unions. percent (3.5%); (a) Net worth measures. For purposes (5) Minimally capitalized if it has a net of this part, a new credit union must worth ratio of zero percent (0%) or determine its net worth category clas- greater but less than two percent (2%); sification quarterly according to its and net worth ratio as defined in § 702.2(g). (6) Uncapitalized if it has a net worth (b) Effective date of net worth classi- ratio of less than zero percent (0%) fication of new credit union. For pur- (e.g., a deficit in retained earnings).

(d) Reclassification based on super- egory (each of such actions is herein- visory criteria other than net worth. Sub- after referred to generally as ‘‘reclas- ject to § 702.102(b) and (c), the NCUA sification’’) in either of the cir- Board may reclassify a ‘‘well capital- cumstances prescribed in § 702.102(b). ized,’’ ‘‘adequately capitalized’’ or (e) Consultation with State officials. ‘‘moderately capitalized’’ new credit The NCUA Board shall consult and union to the next lower net worth cat- seek to work cooperatively with the

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appropriate State official before reclas- ments to lend) as of the preceding sifying a federally-insured State-char- quarter-end unless it is granted an ex- tered credit union under paragraph (d) ception under 12 U.S.C. 1757a(b). of this section, and shall promptly no- (b) Discretionary supervisory actions by tify the appropriate State official of its NCUA. Subject to the applicable proce- decision to reclassify. dures set forth in subpart L of part 747 [65 FR 8584, Feb. 18, 2000, as amended at 65 of this chapter for issuing, reviewing FR 44974, July 20, 2000; 65 FR 55439, Sept. 14, and enforcing directives, the NCUA 2000; 67 FR 71092, Nov. 29, 2002] Board may, by directive, take one or more of the actions prescribed in § 702.303 Prompt corrective action for § 702.204(b) if the credit union’s net ‘‘adequately capitalized’’ new credit worth ratio has not increased con- unions. sistent with its then-present business Beginning on the effective date of plan, or the credit union has failed to classification, an ‘‘adequately capital- undertake any mandatory supervisory ized’’ new credit union must increase action prescribed in paragraph (a) of the dollar amount of its net worth by this section. the amount reflected in its approved (c) Discretionary conservatorship or liq- initial or revised business plan in ac- uidation. Notwithstanding any other cordance with § 702.304(a)(2), or in the actions required or permitted to be absence of such a plan, in accordance taken under this section, the NCUA with § 702.201, and quarterly transfer Board may place a new credit union that amount from undivided earnings which is ‘‘moderately capitalized,’’ to its regular reserve account, until it ‘‘marginally capitalized’’ or ‘‘mini- is ‘‘well capitalized.’’ mally capitalized’’ (including by re- [67 FR 71092, Nov. 29, 2002] classification under § 702.302(d)) into conservatorship pursuant to 12 U.S.C. § 702.304 Prompt corrective action for 1786(h)(1)(F), or into liquidation pursu- ‘‘moderately capitalized,’’ ‘‘margin- ant to 12 U.S.C. 1787(a)(3)(A)(i), pro- ally capitalized’’ or ‘‘minimally cap- vided that the credit union has no rea- italized’’ new credit unions. sonable prospect of becoming ‘‘ade- (a) Mandatory supervisory actions by quately capitalized.’’ new credit union. Beginning on the date of classification as ‘‘moderately cap- [65 FR 8584, Feb. 18, 2000, as amended at 67 FR 71093, Nov. 29, 2002] italized,’’ ‘‘marginally capitalized’’ or minimally capitalized’’ (including by § 702.305 Prompt corrective action for reclassification under § 702.302(d)), a ‘‘uncapitalized’’ new credit unions. new credit union must— (1) Earnings retention. Increase the (a) Mandatory supervisory actions by dollar amount of its net worth by the new credit union. Beginning on the ef- amount reflected in its approved initial fective date of classification as or revised business plan and quarterly ‘‘uncapitalized,’’ a new credit union transfer that amount from undivided must— earnings to its regular reserve account; (1) Earnings retention. Increase the (2) Submit revised business plan. Sub- dollar amount of its net worth by the mit a revised business plan within the amount reflected in the credit union’s time provided by § 702.306 if the credit approved initial or revised business union either: plan; (i) Has not increased its net worth (2) Submit revised business plan. Sub- ratio consistent with its then-present mit a revised business plan within the approved business plan; time provided by § 702.306, providing for (ii) Has no then-present approved alternative means of funding the credit business plan; or union’s earnings deficit, if the credit (iii) Has failed to comply with para- union either: graph (a)(3) of this section; and (i) Has not increased its net worth (3) Restrict member business loans. Not ratio consistent with its then-present increase the total dollar amount of approved business plan; member business loans (defined as (ii) Has no then-present approved loans outstanding and unused commit- business plan; or

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(iii) Has failed to comply with para- reasonable prospect of becoming ‘‘ade- graph (a)(3) of this section; and quately capitalized.’’ (3) Restrict member business loans. Not (d) Mandatory liquidation of increase the total dollar amount of ‘‘uncapitalized’’ federal credit union. In member business loans as provided in lieu of paragraph (c) of this section, an § 702.304(a)(3). ‘‘uncapitalized’’ federal credit union (b) Discretionary supervisory actions by may be placed into liquidation on NCUA. Subject to the procedures set grounds of insolvency pursuant to 12 forth in subpart L of part 747 of this U.S.C. 1787(a)(1)(A). chapter for issuing, reviewing and en- [65 FR 8584, Feb. 18, 2000, as amended at 67 forcing directives, the NCUA Board FR 71093, Nov. 29, 2002] may, by directive, take one or more of the actions prescribed in § 702.204(b) if § 702.306 Revised business plans for the credit union’s net worth ratio has new credit unions. not increased consistent with its then- (a) Schedule for filing—(1) Generally. present business plan, or the credit Except as provided in paragraph (a)(2) union has failed to undertake any man- of this section, a new credit union clas- datory supervisory action prescribed in sified ‘‘moderately capitalized’’ or paragraph (a) of this section. lower must file a written revised busi- (c) Mandatory liquidation or con- ness plan (RBP) with the appropriate servatorship. Notwithstanding any Regional Director and, if State-char- other actions required or permitted to tered, with the appropriate State offi- be taken under this section, the NCUA cial, within 30 calendar days of either: Board— (i) The last of the calendar month following the end of the calendar quar- (1) Plan not submitted. May place into ter that the credit union’s net worth liquidation pursuant to 12 U.S.C. ratio has not increased consistent with 1787(a)(3)(A)(ii), or conservatorship pur- its the-present approved business plan; suant to 12 U.S.C. 1786(h)(1)(F), an (ii) The effective date of classifica- ‘‘uncapitalized’’ new credit union tion as less than ‘‘adequately capital- which fails to submit a revised business ized’’ if the credit union has no then- plan within the time provided under present approved business plan; or paragraph (a)(2) of this section; or (iii) The effective date of classifica- (2) Plan rejected, approved, imple- tion as less than ‘‘adequately capital- mented. Except as provided in para- ized’’ if the credit union has increased graph (c)(3) of this section, must place the total amount of member business into liquidation pursuant to 12 U.S.C. loans in violation of § 702.304(a)(3). 1787(a)(3)(A)(ii), or conservatorship pur- (2) Exception. The NCUA Board may suant to 12 U.S.C. 1786(h)(1)(F), an notify the credit union in writing that ‘‘uncapitalized’’ new credit union that its RBP is to be filed within a different remains ‘‘uncapitalized’’ one hundred period or that it is not necessary to file twenty (120) calendar days after the an RBP. later of: (3) Failure to timely file plan. When a (i) The effective date of classification new credit union fails to file an RBP as as ‘‘uncapitalized’’; or provided under paragraphs (a)(1) or (ii) The last day of the calendar (a)(2) of this section, the NCUA Board month following expiration of the time shall promptly notify the credit union period provided in the credit union’s that it has failed to file an RBP and initial business plan (approved at the that it has 15 calendar days from re- time its charter was granted) to receipt of that notice within which to do main ‘‘uncapitalized,’’ regardless so. whether a revised business plan was re- (b) Contents of revised business plan. A jected, approved or implemented. new credit union’s RBP must, at a min- (3) Exception. The NCUA Board may imum— decline to place a new credit union into (1) Address changes, since the new liquidation or conservatorship as pro- credit union’s current business plan vided in paragraph (c)(2) of this section was approved, in any of the business if the credit union documents to the plan elements required for charter ap- NCUA Board why it is viable and has a proval under Chapter 1, section IV.D. of

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NCUA’s Chartering and Field of Member- the credit union in writing whether its ship Manual (IRPS 99–1), 63 FR 71998, RBP is approved, and shall provide rea- 72019 (Dec. 30, 1998), or its successor(s), sons for its decision in the event of dis- or for State-chartered credit unions approval. The NCUA Board may extend under applicable State law; the time within which notice of its de- (2) Establish a timetable of quarterly cision shall be provided. targets for net worth during each year (2) Delayed decision. If no decision is in which the RBP is in effect so that made within the time prescribed in the credit union becomes ‘‘adequately paragraph (e)(1) of this section, the capitalized’’ by the time it no longer RBP is deemed approved. qualifies as ‘‘new’’ per § 702.301(b); (3) Consultation with State officials. (3) Specify the projected amount of When evaluating an RBP submitted by earnings to be transferred quarterly to a federally-insured State-chartered its regular reserve as provided under new credit union (whether an original, § 702.304(a)(1) or 702.305(a)(1); new or additional RBP), the NCUA (4) Explain how the new credit union Board shall seek and consider the views will comply with the mandatory and of the appropriate State official, and discretionary supervisory actions im- provide prompt notice of its decision to posed on it by the NCUA Board under the appropriate State official. this subpart; (f) Plan not approved—(1) Submission (5) Specify the types and levels of ac- of new revised plan. If an RBP is re- tivities in which the new credit union jected by the NCUA Board, the new will engage; credit union shall submit a new RBP (6) In the case of a new credit union within 30 calendar days of receiving no- reclassified to a lower category under tice of disapproval of its initial RBP, § 702.302(d), specify the steps the credit unless it is notified in writing by the union will take to correct the unsafe or NCUA Board that the new RBP is to be unsound condition or practice; and filed within a different period. (7) Include such other information as (2) Notice of decision on revised plan. the NCUA Board may require. Within 30 calendar days after receiving (c) Criteria for approval. The NCUA an RBP under paragraph (f)(1) of this Board shall not approve a new credit section, the NCUA Board shall notify union’s RBP unless it— the credit union in writing whether the (1) Addresses the items enumerated new RBP is approved. The Board may in paragraph (b) of this section; extend the time within which notice of (2) Is based on realistic assumptions, its decision shall be provided. and is likely to succeed in building the (g) Amendment of plan. A credit union credit union’s net worth; and that has filed an approved RBP may, (3) Would not unreasonably increase after prior written notice to and ap- the credit union’s exposure to risk (in- proval by the NCUA Board, amend it to cluding credit risk, interest-rate risk, reflect a change in circumstance. Pend- and other types of risk). ing approval of an amended RBP, the (d) Consideration of regulatory capital. new credit union shall implement its To minimize possible long-term losses existing RBP as originally approved. to the NCUSIF while the credit union (h) Publication. An RBP need not be takes steps to become ‘‘adequately cap- published to be enforceable because italized,’’ the NCUA Board shall, in publication would be contrary to the evaluating an RBP under this section, public interest. consider the type and amount of any [65 FR 8584, Feb. 18, 2000, as amended at 67 form of regulatory capital which may FR 71093, Nov. 29, 2002] become established by NCUA regulation, or authorized by State law and § 702.307 Incentives for new credit recognized by NCUA, which the credit unions. union holds, but which is not included (a) Assistance in revising business in its net worth. plans. Upon timely request by a credit (e) Review of revised business plan—(1) union having total assets of less than Notice of decision. Within 30 calendar $10 million (regardless how long it has days after receiving an RBP under this been in operation), the NCUA Board section, the NCUA Board shall notify shall provide assistance in preparing a

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revised business plan required to be count when required under subparts B filed under § 702.306. or C of this part must occur after (b) Assistance. Management training charges for loan or other losses are ad- and other assistance to new credit dressed as provided in paragraph (c) of unions will be provided in accordance this section and § 702.402(d), but before with policies approved by the NCUA payment of any dividends to members. Board. [65 FR 8584, Feb. 18, 2000, as amended at 67 (c) Small credit union program. A new FR 71093, Nov. 29, 2002] credit union is eligible to join and receive comprehensive benefits and as- § 702.402 Full and fair disclosure of fi- sistance under NCUA’s Small Credit nancial condition. Union Program. (a) Full and fair disclosure defined. ‘‘Full and fair disclosure’’ is the level Subpart D—Reserves of disclosure which a prudent person would provide to a member of a feder- § 702.401 Reserves. ally-insured credit union, to NCUA, or, (a) Special reserve. Each federally-in- at the discretion of the board of direc- sured credit union shall establish and tors, to creditors to fairly inform them maintain such reserves as may be re- of the financial condition and the required by the FCUA, by state law, by sults of operations of the credit union. regulation, or in special cases by the (b) Full and fair disclosure imple- NCUA Board or appropriate State offi- mented. The financial statements of a cial. federally-insured credit union shall (b) Regular reserve. Each federally-in- provide for full and fair disclosure of sured credit union shall establish and all assets, liabilities, and members’ eq- maintain a regular reserve account for uity, including such valuation (allow- the purpose of absorbing losses that ex- ance) accounts as may be necessary to ceed undivided earnings and other ap- present fairly the financial condition; propriations of undivided earnings, and all income and expenses necessary subject to paragraph (c) of this section. to present fairly the statement of in- Earnings required to be transferred an- come for the reporting period. nually to a credit union’s regular re- (c) Declaration of officials. The State- serve under subparts B or C of this part ment of Financial Condition, when pre- shall be held in this account. sented to members, to creditors or to (c) Charges to regular reserve after de- the NCUA, shall contain a dual dec- pleting undivided earnings. The board of laration by the treasurer and the chief directors of a federally-insured credit executive officer, or in the latter’s ab- union may authorize losses to be sence, by any other officer designated charged to the regular reserve after by the board of directors of the report- first depleting the balance of the undi- ing credit union to make such declara- vided earnings account and other re- tion, that the report and related finan- serves, provided that the authorization cial statements are true and correct to states the amount and provides an ex- the best of their knowledge and belief planation of the need for the charge, and present fairly the financial condi- and either— tion and the statement of income for (1) The charge will not cause the the period covered. credit union’s net worth classification (d) Charges for loan losses. Full and to fall below ‘‘adequately capitalized’’ fair disclosure demands that a credit under subparts B or C of this part; or union properly address charges for loan (2) If the charge will cause the net losses as follows: worth classification to fall below (1) Charges for loan losses shall be ‘‘adequately capitalized,’’ the appro- made in accordance with generally ac- priate Regional Director and, if State- cepted accounting principles (GAAP); chartered, the appropriate State offi- (2) The allowance for loan and lease cial, have given written approval (in an losses (ALL) established for loans must NWRP or otherwise) for the charge. fairly present the probable losses for (d) Transfers to regular reserve. The all categories of loans and the proper transfer of earnings to a federally-in- valuation of loans. The valuation al- sured credit union’s regular reserve ac- lowance must encompass specifically

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identified loans, as well as estimated 703.5 Discretionary control over invest- losses inherent in the loan portfolio, ments and investment advisers. such as loans and pools of loans for 703.6 Credit analysis. which losses have been incurred but are 703.7 Notice of non-compliant investments. 703.8 Broker-dealers. not identifiable on a specific loan-by- 703.9 Safekeeping of investments. loan basis; 703.10 Monitoring non-security investments. (3) Adjustments to the valuation 703.11 Valuing securities. ALL will be recorded in the expense ac- 703.12 Monitoring securities. count ‘‘Provision for Loan and Lease 703.13 Permissible investment activities. Losses’’; 703.14 Permissible investments. (4) The maintenance of an ALL shall 703.15 Prohibited investment activities. not affect the requirement to transfer 703.16 Prohibited investments. 703.17 Conflicts of interest. earnings to a credit union’s regular re- 703.18 Grandfathered investments. serve when required under subparts B 703.19 Investment pilot program. or C of this part; and (5) At a minimum, adjustments to AUTHORITY: 12 U.S.C. 1757(7), 1757(8), 1757(15). the ALL shall be made prior to the distribution or posting of any dividend to SOURCE: 68 FR 32960, June 3, 2003, unless the accounts of members. otherwise noted.

§ 702.403 Payment of dividends. § 703.1 Purpose and scope. (a) Restriction on dividends. Dividends (a) This part interprets several of the shall be available only from undivided provisions of Sections 107(7), 107(8), and earnings, if any. 107(15) of the Federal Credit Union Act (Act), 12 U.S.C. 1757(7), 1757(8), 1757(15), (b) Payment of dividends if undivided which list those securities, deposits, earnings depleted. The board of direc- and other obligations in which a Fed- tors of a ‘‘well capitalized’’ federally- eral credit union may invest. Part 703 insured credit union that has depleted identifies certain investments and de- the balance of its undivided earnings posit activities permissible under the account may authorize a transfer of Act and prescribes regulations gov- funds from the credit union’s regular erning those investments and deposit reserve account to undivided earnings activities on the basis of safety and to pay dividends, provided that either— soundness concerns. Additionally, part (1) The payment of dividends will not 703 identifies and prohibits certain in- cause the credit union’s net worth clas- vestments and deposit activities. In- sification to fall below ‘‘adequately vestments and deposit activities that capitalized’’ under subpart B or C of are permissible under the Act and not this part; or prohibited or otherwise regulated by (2) If the payment of dividends will part 703 remain permissible for Federal cause the net worth classification to credit unions. fall below ‘‘adequately capitalized,’’ (b) This part does not apply to: the appropriate Regional Director and, (1) Investment in loans to members if State-chartered, the appropriate and related activities, which is gov- State official, have given prior written erned by §§ 701.21, 701.22, 701.23, and part approval (in an NWRP or otherwise) to 723 of this chapter; pay a dividend. (2) The purchase of real estate-se- [65 FR 8584, Feb. 18, 2000, as amended at 67 cured loans pursuant to Section FR 71093, Nov. 29, 2002] 107(15)(A) of the Act, which is governed by § 701.23 of this chapter, except those PART 703—INVESTMENT AND real estate-secured loans purchased as DEPOSIT ACTIVITIES a part of an investment repurchase transaction, which is governed by Sec. §§ 703.13 and 703.14 of this chapter; 703.1 Purpose and scope. (3) Investment in credit union service 703.2 Definitions. organizations, which is governed by 703.3 Investment policies. part 712 of this chapter; 703.4 Recordkeeping and documentation re- (4) Investment in fixed assets, which quirements. is governed by § 701.36 of this chapter;

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(5) Investment by corporate credit under 12 CFR part 9 (Comptroller of the unions, which is governed by part 704 of Currency’s regulations). this chapter; or Commercial mortgage related security (6) Investment activity by State- means a mortgage related security, as chartered credit unions, except as pro- defined below, except that it is vided in § 741.3(a)(2) and § 741.219 of this collateralized entirely by commercial chapter. real estate, such as a warehouse or of- [68 FR 32960, June 3, 2003, as amended at 69 fice building, or a multi-family dwell- FR 27828, May 17, 2004; 71 FR 76124, Dec 20, ing consisting of more than four units. 2006] Counterparty means the party on the other side of the transaction. § 703.2 Definitions. Custodial Agreement means a contract The following definitions apply to this in which one party agrees to hold secu- part: rities in safekeeping for others. Adjusted trading means selling an in- Delivery versus payment means pay- vestment to a counterparty at a price ment for an investment must occur si- above its current fair value and simul- multaneously with its delivery. taneously purchasing or committing to Deposit note means an obligation of a purchase from the counterparty an- bank that is similar to a certificate of other investment at a price above its deposit but is rated. current fair value. Derivatives means any derivative in- Associated personnel means a person strument as defined under generally engaged in the investment banking or accepted accounting principles securities business who is directly or (GAAP). indirectly controlled by a National As- Embedded option means a char- sociation of Securities Dealers (NASD) acteristic of an investment that gives member, whether or not this person is the issuer or holder the right to alter registered or exempt from registration the level and timing of the cash flows with NASD. Associated personnel in- of the investment. Embedded options cludes every sole proprietor, partner, include call and put provisions and in- officer, director, or branch manager of terest rate caps and floors. Since a pre- any NASD member. payment option in a mortgage is a type Banker’s acceptance means a time of call provision, a mortgage-backed draft that is drawn on and accepted by security composed of mortgages that a bank and that represents an irrev- may be prepaid is an example of an in- ocable obligation of the bank. vestment with an embedded option. Bank note means a direct, uncondi- Eurodollar deposit means a U.S. dol- tional, and unsecured general obliga- lar-denominated deposit in a foreign tion of a bank that ranks equally with branch of a United States depository all other senior unsecured indebtedness institution. of the bank, except deposit liabilities European financial options contract and other obligations that are subject means an option that can be exercised to any priorities or preferences. only on its expiration date. Borrowing repurchase transaction Exchangeable Collateralized Mortgage means a transaction in which the Fed- Obligation means a class of a eral credit union agrees to sell a secu- collateralized mortgage obligation rity to a counterparty and to repur- (CMO) that, at the time of purchase, chase the same or an identical security represents beneficial ownership inter- from that counterparty at a specified ests in a combination of two or more future date and at a specified price. underlying classes of the same CMO Call means an option that gives the structure. The holder of an exchange- holder the right to buy a specified able CMO may pay a fee and take deliv- quantity of a security at a specified ery of the underlying classes of the price during a fixed time period. CMO. Collateralized Mortgage Obligation Fair value means the amount at (CMO) means a multi-class mortgage which an instrument could be ex- related security. changed in a current, arms-length Collective investment fund means a transaction between willing parties, as fund maintained by a national bank opposed to a forced or liquidation sale.

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Financial options contract means an and fees, providing recordkeeping and agreement to make or take delivery of escrow functions, and, if necessary cur- a standardized financial instrument ing defaults and foreclosing. upon demand by the holder of the con- Negotiable instrument means an in- tract as specified in the agreement. strument that may be freely trans- Immediate family member means a ferred from the purchaser to another spouse or other family member living person or entity by delivery, or en- in the same household. dorsement and delivery, with full legal Independent qualified agent means an title becoming vested in the transferee. agent independent of an investment re- Net worth means the retained earn- purchase counterparty that does not ings balance of the credit union at receive a transaction fee from the quarter end as determined under gen- counterparty and has at least two erally accepted accounting principles years experience assessing the value of and as further defined in § 702.2(f) of mortgage loans. this chapter. Industry-recognized information pro- Official means any member of a Fed- vider means an organization that ob- eral credit union’s board of directors, tains compensation by providing infor- credit committee, supervisory com- mation to investors and receives no mittee, or investment-related com- compensation for the purchase or sale mittee. of investments. Ordinary care means the degree of Investment means any security, obli- care, which an ordinarily prudent and gation, account, deposit, or other item competent person engaged in the same authorized for purchase by a Federal line of business or endeavor should ex- credit union under Sections 107(7), ercise under similar circumstances. 107(8), or 107(15) of the Act, or this part, Pair-off transaction means an invest- other than loans to members. ment purchase transaction that is Investment repurchase transaction closed or sold on, or before the settle- means a transaction in which an inves- ment date. In a pair-off, an investor tor agrees to purchase a security from commits to purchase an investment, a counterparty and to resell the same but then pairs-off the purchase with a or an identical security to that sale of the same investment before or counterparty at a specified future date on the settlement date. and at a specified price. Put means an option that gives the Maturity means the date the last holder the right to sell a specified principal amount of a security is sched- quantity of a security at a specified uled to come due and does not mean price during a fixed time period. the call date or the weighted average Registered investment company means life of a security. an investment company that is reg- Mortgage related security means a se- istered with the Securities and Ex- curity as defined in Section 3(a)(41) of change Commission under the Invest- the Securities Exchange Act of 1934 (15 ment Company Act of 1940 (15 U.S.C. U.S.C. 78c(a)(41)), e.g., a privately- 80a). Examples of registered invest- issued security backed by first lien ment companies are mutual funds and mortgages secured by real estate upon unit investment trusts. which is located a dwelling, mixed resi- Regular way settlement means delivery dential and commercial structure, resi- of a security from a seller to a buyer dential manufactured home, or com- within the time frame that the securi- mercial structure, that is rated in one ties industry has established for imme- of the two highest rating categories by diate delivery of that type of security. at least one nationally-recognized sta- For example, regular way settlement of tistical rating organization. a Treasury security includes settle- Mortgage servicing rights means a con- ment on the trade date (cash), the busi- tractual obligation to perform mort- ness day following the trade date (reg- gage servicing and the right to receive ular way), and the second business day compensation for performing those following the trade date (skip day). services. Mortgage servicing is the ad- Residual interest means the remainder ministration of a mortgage loan, in- cash flows from collateralized mort- cluding collecting monthly payments gage obligations/real estate mortgage

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investment conduits (CMOs/REMICs), received by the time at which it is ex- or other mortgage-backed security pected to be received (based on a rea- transaction, after payments due bond- sonable and supportable estimate of holders and trust administrative ex- that time) and then summing and di- penses have been satisfied. viding by the total amount of prin- Securities lending means lending a se- cipal. curity to a counterparty, either di- When-issued trading of securities rectly or through an agent, and accept- means the buying and selling of securi- ing collateral in return. ties in the period between the an- Security means a share, participation, nouncement of an offering and the or other interest in property or in an issuance and payment date of the secu- enterprise of the issuer or an obliga- rities. tion of the issuer that: Yankee dollar deposit means a deposit (1) Either is represented by an instru- in a United States branch of a foreign ment issued in bearer or registered bank licensed to do business in the form or, if not represented by an in- State in which it is located, or a de- strument, is registered in books main- posit in a State-chartered, foreign contained to record transfers by or on be- trolled bank. half of the issuer; Zero coupon investment means an in- (2) Is of a type commonly dealt in on vestment that makes no periodic inter- securities exchanges or markets or, est payments but instead is sold at a when represented by an instrument, is discount from its face value. The hold- commonly recognized in any area in er of a zero coupon investment realizes which it is issued or dealt in as a me- the rate of return through the gradual dium for investment; and appreciation of the investment, which (3) Either is one of a class or series or is redeemed at face value on a specified by its terms is divisible into a class or maturity date. series of shares, participations, inter- [68 FR 32960, June 3, 2003, as amended at 69 ests, or obligations. FR 39831, July 1, 2004; 71 FR 76124, Dec. 20, Senior management employee means a 2006] Federal credit union’s chief executive officer (typically this individual holds § 703.3 Investment policies. the title of President or Treasurer/ A Federal credit union’s board of di- Manager), an assistant chief executive rectors must establish written invest- officer, and the chief financial officer. ment policies consistent with the Act, Small business related security means a this part, and other applicable laws and security as defined in Section 3(a)(53) regulations and must review the policy of the Securities Exchange Act of 1934 at least annually. These policies may (15 U.S.C. 78c(a)(53), e.g., a security be part of a broader, asset-liability that is rated in 1 of the 4 highest rating management policy. Written invest- categories by at least one nationally ment policies must address the fol- recognized statistical rating organiza- lowing: tion, and represents an interest in one (a) The purposes and objectives of the or more promissory notes or leases of Federal credit union’s investment ac- personal property evidencing the obli- tivities; gation of a small business concern and (b) The characteristics of the invest- originated by an insured depository in- ments the Federal credit union may stitution, insured credit union, insur- make including the issuer, maturity, ance company, or similar institution index, cap, floor, coupon rate, coupon which is supervised and examined by a formula, call provision, average life, Federal or State authority, or a fi- and interest rate risk; nance company or leasing company. (c) How the Federal credit union will This definition does not include Small manage interest rate risk; Business Administration securities per- (d) How the Federal credit union will missible under § 107(7) of the Act. manage liquidity risk; Weighted average life means the (e) How the Federal credit union will weighted-average time to the return of manage credit risk including specifi- a dollar of principal, calculated by cally listing institutions, issuers, and multiplying each portion of principal counterparties that may be used, or

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criteria for their selection, and limits (b) A Federal credit union must on the amounts that may be invested maintain documentation for each in- with each; vestment transaction for as long as it (f) How the Federal credit union will holds the investment and until the doc- manage concentration risk, which can umentation has been audited in accord- result from dealing with a single or re- ance with § 715.4 of this chapter and ex- lated issuers, lack of geographic dis- amined by NCUA. The documentation tribution, holding obligations with should include, where applicable, bids similar characteristics like maturities and prices at purchase and sale and for and indexes, holding bonds having the periodic updates, relevant disclosure same trustee, and holding securitized documents or a description of the secu- loans having the same originator, rity from an industry-recognized infor- packager, or guarantor; mation provider, financial data, and (g) Who has investment authority tests and reports required by the Fed- and the extent of that authority. Those eral credit union’s investment policy with authority must be qualified by and this part. education or experience to assess the (c) A Federal credit union must risk characteristics of investments and maintain documentation its board of investment transactions. Only officials directors used to approve a broker- or employees of the Federal credit dealer or a safekeeper for as long as the union may be voting members of an in- broker-dealer or safekeeper is approved vestment-related committee; and until the documentation has been (h) The broker-dealers the Federal audited in accordance with § 715.4 of credit union may use; this chapter and examined by NCUA. (i) The safekeepers the Federal credit (d) A Federal credit union must ob- union may use; tain an individual confirmation state- (j) How the Federal credit union will ment from each broker-dealer for each handle an investment that, after pur- investment purchased or sold. chase, is outside of board policy or fails [68 FR 32960, June 3, 2003, as amended at 69 a requirement of this part; and FR 27828, May 17, 2004; 72 FR 30246, May 31, (k) How the Federal credit union will 2007] conduct investment trading activities, if applicable, including addressing: § 703.5 Discretionary control over in- (1) Who has purchase and sale author- vestments and investment advisers. ity; (a) Except as provided in paragraph (2) Limits on trading account size; (b) of this section, a Federal credit (3) Allocation of cash flow to trading union must retain discretionary con- accounts; trol over its purchase and sale of in- (4) Stop loss or sale provisions; vestments. A Federal credit union has (5) Dollar size limitations of specific not delegated discretionary control to types, quantity and maturity to be an investment adviser when the Fed- purchased; eral credit union reviews all rec- (6) Limits on the length of time an ommendations from investment advis- investment may be inventoried in a ers and is required to authorize a rec- trading account; and ommended purchase or sale transaction (7) Internal controls, including seg- before its execution. regation of duties. (b)(1) A Federal credit union may delegate discretionary control over the § 703.4 Recordkeeping and documenta- purchase and sale of investments to a tion requirements. person other than a Federal credit (a) Federal credit unions with assets union official or employee: of $10,000,000 or greater must comply (i) Provided the person is an invest- with all generally accepted accounting ment adviser registered with the Secu- principles applicable to reports or rities and Exchange Commission under statements required to be filed with the Investment Advisers Act of 1940 (15 NCUA. Federal credit unions with as- U.S.C. 80b); and sets less than $10,000,000 are encouraged (ii) In an amount up to 100 percent of to do the same, but are not required to its net worth in the aggregate at the do so. time of delegation.

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(2) At least annually, the Federal regularly scheduled board meeting, of credit union must adjust the amount of any investment that either is outside funds held under discretionary control of board policy after purchase or has to comply with the 100 percent of net failed a requirement of this part. The worth cap. The Federal credit union’s board of directors must document its board of directors must receive notice action regarding the investment in the as soon as possible, but no later than minutes of the board meeting, includ- the next regularly scheduled board ing a detailed explanation of any deci- meeting, of the amount exceeding the sion not to sell it. The Federal credit net worth cap and notify in writing the union must notify in writing the appro- appropriate regional director within 5 priate regional director of an invest- days after the board meeting. The cred- ment that has failed a requirement of it union must develop a plan to comply this part within 5 days after the board with the cap within a reasonable period meeting. of time. (3) Before transacting business with § 703.8 Broker-dealers. an investment adviser, a Federal credit (a) A Federal credit union may pur- union must analyze his or her back- chase and sell investments through a ground and information available from broker-dealer as long as the broker- State or Federal securities regulators, dealer is registered as a broker-dealer including any enforcement actions with the Securities and Exchange Com- against the adviser, associated permission under the Securities Exchange sonnel, and the firm for which the ad- Act of 1934 (15 U.S.C. 78a et seq.) or is a viser works. (c) A Federal credit union may not depository institution whose broker- compensate an investment adviser with dealer activities are regulated by a discretionary control over the purchase Federal or State regulatory agency. and sale of investments on a per trans- (b) Before purchasing an investment action basis or based on capital gains, through a broker-dealer, a Federal capital appreciation, net income, per- credit union must analyze and annu- formance relative to an index, or any ally update the following: other incentive basis. (1) The background of any sales rep- (d) A Federal credit union must ob- resentative with whom the Federal tain a report from its investment ad- credit union is doing business; viser at least monthly that details the (2) Information available from State investments under the adviser’s con- or Federal securities regulators and se- trol and their performance. curities industry self-regulatory organizations, such as the National Asso- § 703.6 Credit analysis. ciation of Securities Dealers and the A Federal credit union must conduct North American Securities Adminis- and document a credit analysis on an trators Association, about any enforce- investment and the issuing entity be- ment actions against the broker-deal- fore purchasing it, except for invest- er, its affiliates, or associated per- ments issued or fully guaranteed as to sonnel; and principal and interest by the U.S. gov- (3) If the broker-dealer is acting as ernment or its agencies, enterprises, or the Federal credit union’s corporations or fully insured (including counterparty, the ability of the broker- accumulated interest) by the National dealer and its subsidiaries or affiliates Credit Union Administration or the to fulfill commitments, as evidenced Federal Deposit Insurance Corporation. by capital strength, liquidity, and op- A Federal credit union must update erating results. The Federal credit this analysis at least annually for as union should consider current financial long as it holds the investment. data, annual reports, reports of nationally-recognized statistical rating orga- § 703.7 Notice of non-compliant invest- nizations, relevant disclosure documents. ments, and other sources of financial A Federal credit union’s board of di- information. rectors must receive notice as soon as (c) The requirements of paragraph (a) possible, but no later than the next of this section do not apply when the

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Federal credit union purchases a cer- (b) The requirement of paragraph (a) tificate of deposit or share certificate of this section does not apply to shares directly from a bank, credit union, or and deposits that are securities. other depository institution. (c) If a Federal credit union does not have an investment-related committee, [68 FR 32960, June 3, 2003, as amended at 69 then each member of its board of direc- FR 39831, July 1, 2004] tors must receive a copy of the report § 703.9 Safekeeping of investments. described in paragraph (a) of this section. If a Federal credit union has an (a) A Federal credit union’s pur- investment-related committee, then chased investments and repurchase col- each member of the committee must lateral must be in the Federal credit receive a copy of the report, and each union’s possession, recorded as owned member of the board must receive a by the Federal credit union through summary of the information in the re- the Federal Reserve Book-Entry Sys- port. tem, or held by a board-approved safekeeper under a written custodial § 703.11 Valuing securities. agreement that requires the safekeeper (a) Before purchasing or selling a se- to exercise, at least, ordinary care. curity, a Federal credit union must ob- (b) Any safekeeper used by a Federal tain either price quotations on the se- credit union must be regulated and su- curity from at least two broker-dealers pervised by either the Securities and or a price quotation on the security Exchange Commission, a Federal or from an industry-recognized informa- State depository institution regulatory tion provider. This requirement to ob- agency, or a State trust company regu- tain price quotations does not apply to latory agency. new issues purchased at par or at origi- (c) A Federal credit union must ob- nal issue discount. tain and reconcile monthly a state- (b) At least monthly, a Federal credit ment of purchased investments and re- union must determine the fair value of purchase collateral held in safe- each security it holds. It may deter- keeping. mine fair value by obtaining a price (d) Annually, the Federal credit quotation on the security from an in- union must analyze the ability of the dustry-recognized information pro- safekeeper to fulfill its custodial re- vider, a broker-dealer, or a safekeeper. sponsibilities, as evidenced by capital (c) At least annually, the Federal strength, liquidity, and operating re- credit union’s supervisory committee sults. The Federal credit union should or its external auditor must independ- consider current financial data, annual ently assess the reliability of monthly reports, reports of nationally-recog- price quotations received from a nized statistical rating organizations, broker-dealer or safekeeper. The Fed- relevant disclosure documents, and eral credit union’s supervisory com- other sources of financial information. mittee or external auditor must follow [68 FR 32960, June 3, 2003, as amended at 69 generally accepted auditing standards, FR 39831, July 1, 2004] which require either re-computation or reference to market quotations. § 703.10 Monitoring non-security in- (d) If a Federal credit union is unable vestments. to obtain a price quotation required by (a) At least quarterly, a Federal cred- this section for a particular security, it union must prepare a written report then it may obtain a quotation for a listing all of its shares and deposits in security with substantially similar banks, credit unions, and other deposi- characteristics. tory institutions, that have one or more of the following features: § 703.12 Monitoring securities. (1) Embedded options; (a) At least monthly, a Federal credit (2) Remaining maturities greater union must prepare a written report than 3 years; or setting forth, for each security held, (3) Coupon formulas that are related the fair value and dollar change since to more than one index or are inversely the prior month-end, with summary in- related to, or multiples of, an index. formation for the entire portfolio.

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(b) At least quarterly, a Federal cred- (c) Investment repurchase transaction. it union must prepare a written report A Federal credit union may enter into setting forth the sum of the fair values an investment repurchase transaction of all fixed and variable rate securities so long as: held that have one or more of the fol- (1) Any securities the Federal credit lowing features: union receives are permissible invest- (1) Embedded options; ments for Federal credit unions, the (2) Remaining maturities greater Federal credit union, or its agent, ei- than 3 years; or ther takes physical possession or con- (3) Coupon formulas that are related trol of the repurchase securities or is to more than one index or are inversely recorded as owner of them through the related to, or multiples of, an index. Federal Reserve Book Entry Securities (c) Where the amount calculated in Transfer System, the Federal credit paragraph (b) of this section is greater union, or its agent, receives a daily as- than a Federal credit union’s net sessment of their market value, includ- worth, the report described in that ing accrued interest, and the Federal paragraph must provide a reasonable credit union maintains adequate mar- and supportable estimate of the poten- gins that reflect a risk assessment of tial impact, in percentage and dollar the securities and the term of the terms, of an immediate and sustained transaction; and parallel shift in market interest rates (2) The Federal credit union has en- of plus and minus 300 basis points on: tered into signed contracts with all ap- (1) The fair value of each security in proved counterparties. the Federal credit union’s portfolio; (d) Borrowing repurchase transaction. (2) The fair value of the Federal cred- A Federal credit union may enter into it union’s portfolio as a whole; and a borrowing repurchase transaction so (3) The Federal credit union’s net long as: worth. (d) If the Federal credit union does (1) The transaction meets the re- not have an investment-related com- quirements of paragraph (c) of this sec- mittee, then each member of its board tion; of directors must receive a copy of the (2) Any cash the Federal credit union reports described in paragraphs (a) receives is subject to the borrowing through (c) of this section. If the Fed- limit specified in Section 107(9) of the eral credit union has an investment-re- Act, and any investments the Federal lated committee, then each member of credit union purchases with that cash the committee must receive copies of are permissible for Federal credit the reports, and each member of the unions; and board of directors must receive a sum- (3) The investments referenced in mary of the information in the reports. paragraph (d)(2) of this section mature no later than the maturity of the bor- § 703.13 Permissible investment activi- rowing repurchase transaction. ties. (e) Securities lending transaction. A (a) Regular way settlement and delivery Federal credit union may enter into a versus payment basis. A Federal credit securities lending transaction so long union may only contract for the pur- as: chase or sale of a security as long as (1) The Federal credit union receives the delivery of the security is by reg- written confirmation of the loan; ular way settlement and the trans- (2) Any collateral the Federal credit action is accomplished on a delivery union receives is a legal investment for versus payment basis. Federal credit unions, the Federal (b) Federal funds. A Federal credit credit union, or its agent, obtains a union may sell Federal funds to an in- first priority security interest in the stitution described in Section 107(8) of collateral by taking physical posses- the Act and credit unions, as long as sion or control of the collateral, or is the interest or other consideration re- recorded as owner of the collateral ceived from the financial institution is through the Federal Reserve Book at the market rate for Federal funds Entry Securities Transfer System; and transactions. the Federal credit union, or its agent,

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receives a daily assessment of the mar- ter. A Federal credit union’s aggregate ket value of the collateral, including amount of paid-in capital and member- accrued interest, and maintains ade- ship capital, as defined in part 704 of quate margin that reflects a risk as- this chapter, in one corporate credit sessment of the collateral and the term union is limited to two percent of its of the loan; assets measured at the time of invest- (3) Any cash the Federal credit union ment or adjustment. A Federal credit receives is subject to the borrowing union’s aggregate amount of paid-in limit specified in Section 107(9) of the capital and membership capital in all Act, and any investments the Federal corporate credit unions is limited to credit union purchases with that cash four percent of its assets measured at are permissible for Federal credit the time of investment or adjustment. unions and mature no later than the (c) Registered investment company. A maturity of the transaction; and Federal credit union may invest in a (4) The Federal credit union has exe- registered investment company or col- cuted a written loan and security lective investment fund, as long as the agreement with the borrower. prospectus of the company or fund re- (f)(1) Trading securities. A Federal stricts the investment portfolio to in- credit union may trade securities, investments and investment transactions cluding engaging in when-issued trad- that are permissible for Federal credit ing and pair-off transactions, so long as unions. the Federal credit union can show that (d) Collateralized mortgage obligation/ it has sufficient resources, knowledge, real estate mortgage investment conduit. systems, and procedures to handle the A Federal credit union may invest in a risks. fixed or variable rate collateralized (2) A Federal credit union must mortgage obligation/real estate mort- record any security it purchases or gage investment conduit. sells for trading purposes at fair value (e) Municipal security. A Federal cred- on the trade date. The trade date is the it union may purchase and hold a mu- date the Federal credit union commits, nicipal security, as defined in Section orally or in writing, to purchase or sell 107(7)(K) of the Act, only if a nation- a security. ally-recognized statistical rating orga- (3) At least monthly, the Federal nization has rated it in one of the four credit union must give its board of di- highest rating categories. rectors or investment-related com- (f) Instruments issued by institutions mittee a written report listing all pur- described in Section 107(8) of the Act. A chase and sale transactions of trading Federal credit union may invest in the securities and the resulting gain or loss following instruments issued by an in- on an individual basis. stitution described in Section 107(8) of the Act: § 703.14 Permissible investments. (1) Yankee dollar deposits; (a) Variable rate investment. A Federal (2) Eurodollar deposits; credit union may invest in a variable (3) Banker’s acceptances; rate investment, as long as the index is (4) Deposit notes; and tied to domestic interest rates and not, (5) Bank notes with original weighted for example, to foreign currencies, for- average maturities of less than 5 years. eign interest rates, or domestic or for- (g) European financial options contract. eign commodity prices, equity prices, A Federal credit union may purchase a or inflation rates. For purposes of this European financial options contract or part, the U.S. dollar-denominated Lon- a series of European financial options don Interbank Offered Rate (LIBOR) is contracts only to fund the payment of a domestic interest rate. dividends on member share certificates (b) Corporate credit union shares or de- where the dividend rate is tied to an posits. A Federal credit union may pur- equity index provided: chase shares or deposits in a corporate (1) The option and dividend rate are credit union, except where the NCUA based on a domestic equity index; Board has notified it that the cor- (2) Proceeds from the options are porate credit union is not operating in used only to fund dividends on the eq- compliance with part 704 of this chap- uity-linked share certificates;

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(3) Dividends on the share certifi- option unless the certificate is re- cates are derived solely from the deemed prior to maturity; and change in the domestic equity index (13) The Federal credit union pro- over a specified period; vides its board of directors with a (4) The options’ expiration dates are monthly report detailing at a min- no later than the maturity date of the imum: share certificate. (i) The dollar amount of outstanding (5) The certificate may be redeemed equity-linked share certificates; prior to the maturity date only upon (ii) Their maturities; and the member’s death or termination of (iii) The fair value of the options as the corresponding option; determined by an independent third (6) The total costs associated with party. the purchase of the option is known by (h) Mortgage note repurchase trans- the Federal credit union prior to ef- actions. A federal credit union may in- fecting the transaction; vest in securities that are offered and (7) The options are purchased at the sold pursuant to section 4(5) of the Se- same time the certificate is issued to curities Act of 1933, 15 U.S.C. 77d(5), the member. only as a part of an investment repur- (8) The counterparty to the trans- chase agreement under § 703.13(c), sub- action is a domestic counterparty and has been approved by the Federal cred- ject to the following conditions: it union’s board of directors; (1) The aggregate of the investments (9) The counterparty to the trans- with any one counterparty is limited action: to 25 percent of the credit union’s net (i) Has a long-term, senior, unsecured worth and 100 percent of its net worth debt rating from a nationally-recog- with all counterparties; nized statistical rating organization of (2) At the time a federal credit union AA¥ (or equivalent) or better at the purchases the securities, the time of the transaction, and the con- counterparty, or a party fully guaran- tract between the counterparty and the teeing the transaction, must have out- Federal credit union specifies that if standing debt with a long-term rating the long-term, senior, unsecured debt no lower than A¥or its equivalent and rating declines below AA¥ (or equiva- outstanding debt with a short-term lent) then the counterparty agrees to rating, if any, no lower than A–1 or its post collateral with an independent equivalent; party in an amount fully securing the (3) The federal credit union must ob- value of the option; or tain a daily assessment of the market (ii) Posts collateral with an inde- value of the securities under pendent party in an amount fully se- § 703.13(c)(1) using an independent curing the value of the option if the qualified agent; counterparty does not have a long- (4) The mortgage note repurchase term, senior unsecured debt rating transaction is limited to a maximum from a nationally-recognized statis- term of 90 days; tical rating organization. (5) All mortgage note repurchase (10) Any collateral posted by the transactions will be conducted under counterparty is a permissible invest- tri-party custodial agreements; and ment for Federal credit unions and is (6) A federal credit union must obtain valued daily by an independent third an undivided interest in the securities. party along with the value of the option; [68 FR 32960, June 3, 2003, as amended at 69 (11) The aggregate amount of equity- FR 39831, July 1, 2004; 71 FR 76124, Dec. 20, linked member share certificates does 2006] not exceed the credit union’s net worth; § 703.15 Prohibited investment activi- (12) The terms of the share certificate ties. include a guarantee that there can be Adjusted trading or short sales. A Fed- no loss of principal to the member re- eral credit union may not engage in ad- gardless of changes in the value of the justed trading or short sales.

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§ 703.16 Prohibited investments. lying non-IO CMOs, and that the prin- (a) Derivatives. A Federal credit union cipal on each underlying PO CMO may not purchase or sell financial de- should decline at the same rate as the rivatives, such as futures, options, in- principal, or notional principal, on one terest rate swaps, or forward rate or more of the underlying non-PO swaps. This prohibition does not apply CMOs; and (iii) The credit union staff has the ex- to: (1) Any derivatives permitted under pertise dealing with exchangeable §§ 701.21(i) and 703.14(g) of this chapter; CMOs to apply the conditions in para- (2) Embedded options not required graphs (e)(1)(i) and (e)(1)(ii) of this sec- under GAAP to be accounted for sepa- tion. rately from the host contract; and (2) A Federal credit union that in- (3) Interest rate lock commitments vests in an exchangeable CMO may ex- or forward sales commitments made in ercise the exchange option only if all of connection with a loan originated by the underlying CMOs are permissible the Federal credit union. investments for that credit union. (b) Zero coupon investments. A Federal (3) A Federal credit union may accept credit union may not purchase a zero an exchangeable CMO representing coupon investment with a maturity beneficial ownership interests in one or date that is more than 10 years from more IO CMOs or PO CMOs as an asset the settlement date; associated with an investment repur- (c) Mortgage servicing rights. A Fed- chase transaction or as collateral in a eral credit union may not purchase securities lending transaction. When mortgage servicing rights as an invest- the exchangeable CMO is associated ment but may perform mortgage serv- with one of these two transactions, it icing functions as a financial service need not conform to the conditions in for a member as long as the mortgage paragraphs (e)(1)(i) and (ii) of this section. loan is owned by a member; (f) . A Fed- (d) A Federal credit union may not Other prohibited investments eral credit union may not purchase repurchase a commercial mortgage residual interests in collateralized mort- lated security that is not otherwise gage obligations, real estate mortgage permitted by Section 107(7)(E) of the investment conduits, or small business Act; and (e) Stripped mortgage backed securities related securities. (SMBS). A Federal credit union may [68 FR 32960, June 3, 2003, as amended at 69 not invest in SMBS or securities that FR 39832, July 1, 2004] represent interests in SMBS except as described in paragraphs (1) and (3) § 703.17 Conflicts of interest. below. (a) A Federal credit union’s officials (1) A Federal credit union may invest and senior management employees, and in and hold exchangeable collateralized their immediate family members, may mortgage obligations (exchangeable not receive anything of value in con- CMOs) representing beneficial owner- nection with its investment trans- ship interests in one or more interest- actions. This prohibition also applies only classes of a CMO (IO CMOs) or to any other employee, such as an in- principal-only classes of a CMO (PO vestment officer, if the employee is di- CMOs), but only if: rectly involved in investments, unless (i) At the time of purchase, the ratio the Federal credit union’s board of di- of the market price to the remaining rectors determines that the employee’s principal balance is between .8 and 1.2, involvement does not present a conflict meaning that the discount or premium of interest. This prohibition does not of the market price to par must be less include compensation for employees. than 20 points; (b) A Federal credit union’s officials (ii) The offering circular or other of- and employees must conduct all trans- ficial information available at the time actions with business associates or of purchase indicates that the notional family members that are not specifi- principal on each underlying IO CMO cally prohibited by paragraph (a) of should decline at the same rate as the this section at arm’s length and in the principal on one or more of the under- Federal credit union’s best interest.

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§ 703.18 Grandfathered investments. (2) Board policies approving the activities and establishing limits on (a) Subject to safety and soundness them; considerations, a Federal credit union (3) A complete description of the ac- may hold a CMO/REMIC residual, tivities, with specific examples of how stripped mortgage-backed securities, they will benefit the Federal credit or zero coupon security with a matu- union and how they will be conducted; rity greater than 10 years, if it pur- (4) A demonstration of how the ac- chased the investment: tivities will affect the Federal credit (1) Before December 2, 1991; or union’s financial performance, risk (2) On or after December 2, 1991, but profile, and asset-liability management before January 1, 1998, if for the pur- strategies; pose of reducing interest rate risk and (5) Examples of reports the Federal if the Federal credit union meets the credit union will generate to monitor following: the activities; (i) The Federal credit union has a (6) Projections of the associated costs monitoring and reporting system in of the activities, including personnel, place that provides the documentation computer, audit, and so forth; necessary to evaluate the expected and (7) Descriptions of the internal sys- actual performance of the investment tems that will measure, monitor, and under different interest rate scenarios; report the activities; (ii) The Federal credit union uses the (8) Qualifications of the staff and of- monitoring and reporting system to ficials responsible for implementing conduct and document an analysis that and overseeing the activities; and shows, before purchase, that the pro- (9) Internal control procedures that posed investment will reduce its inter- will be implemented, including audit est rate risk; requirements. (iii) After purchase, the Federal cred- (c) A third-party seeking approval of it union evaluates the investment at an investment pilot program must sub- least quarterly to determine whether mit a request to the Director of the Of- or not it actually has reduced the in- fice of Capital Markets and Planning terest rate risk; and that addresses the following items: (iv) The Federal credit union ac- (1) A complete description of the accounts for the investment consistent tivities with specific examples of how a with generally accepted accounting credit union will conduct and account principles. for them, and how they will benefit a (b) All grandfathered investments are Federal credit union; subject to the valuation and moni- (2) A description of any risks to a toring requirements of §§ 703.10, 703.11, Federal credit union from partici- and 703.12 of this part. pating in the program; and (3) Contracts that must be executed § 703.19 Investment pilot program. by the Federal credit union. (a) Under the investment pilot pro- (d) A Federal credit union need not gram, NCUA will permit a limited obtain individual written approval to number of Federal credit unions to en- engage in investment activities prohib- gage in investment activities prohibited by this part but permitted by stat- ited by this part but permitted by the ute where the activities are part of a Act. third-party investment program that (b) Except as provided in paragraph NCUA has approved under this section. (c) of this section, before a Federal [68 FR 32960, June 3, 2003, as amended at 69 credit union may engage in additional FR 39832, July 1, 2004; 70 FR 55517, Sept. 22, activities it must obtain written ap- 2005] proval from NCUA. To obtain approval, a Federal credit union must submit a PART 704—CORPORATE CREDIT request to its regional director that ad- UNIONS dresses the following items: (1) Certification that the Federal Sec. credit union is ‘‘well-capitalized’’ 704.1 Scope. under part 702 of this chapter; 704.2 Definitions.

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704.3 Corporate credit union capital. § 704.2 Definitions. 704.4 Board responsibilities. 704.5 Investments. Adjusted trading means any method 704.6 Credit risk management. or transaction whereby a corporate 704.7 Lending. credit union sells a security to a ven- 704.8 Asset and liability management. dor at a price above its current market 704.9 Liquidity management. price and simultaneously purchases or 704.10 Investment action plan. 704.11 Corporate Credit Union Service Orga- commits to purchase from the vendor nizations (Corporate CUSOs). another security at a price above its 704.12 Permissible services. current market price. 704.13 [Reserved] Asset-backed security (ABS) means a 704.14 Representation. security that is primarily serviced by 704.15 Audit requirements. the cashflows of a discrete pool of re- 704.16 Contracts/written agreements. 704.17 State-chartered corporate credit ceivables or other financial assets, ei- unions. ther fixed or revolving, that by their 704.18 Fidelity bond coverage. terms convert into cash within a finite 704.19 Wholesale corporate credit unions. time period plus any rights or other as- APPENDIX A TO PART 704—MODEL FORMS sets designed to assure the servicing or APPENDIX B TO PART 704—EXPANDED AU- timely distribution of proceeds to the THORITIES AND REQUIREMENTS securityholders. This definition ex- AUTHORITY: 12 U.S.C. 1766(a), 1781, 1789. cludes mortgage related securities. Capital means the sum of a corporate SOURCE: 62 FR 12938, Mar. 19, 1997, unless otherwise noted. credit union’s retained earnings, paid- in capital, and membership capital. § 704.1 Scope. For a corporate credit union that ac- (a) This part establishes special rules quires another credit union in a mu- for all federally insured corporate cred- tual combination, capital includes the it unions. Non federally insured cor- retained earnings of the acquired credit porate credit unions must agree, by union, or of an integrated set of activi- written contract, to both adhere to the ties and assets, at the point of acquisi- requirements of this part and submit tion. to examinations, as determined by Capital ratio means the corporate NCUA, as a condition of receiving credit union’s capital divided by its shares or deposits from federally in- moving daily average net assets. sured credit unions. This part grants Collateralized mortgage obligation certain additional authorities to fed- (CMO) means a multi-class mortgage eral corporate credit unions. Except to related security. the extent that they are inconsistent Core capital means the sum of a cor- with this part, other provisions of porate credit union’s retained earnings, NCUA’s Rules and Regulations (12 CFR and paid-in capital. For a corporate chapter VII) and the Federal Credit credit union that acquires another Union Act apply to federally chartered credit union in a mutual combination, corporate credit unions and federally core capital includes the retained earn- insured state-chartered corporate cred- ings of the acquired credit union, or of it unions to the same extent that they an integrated set of activities and as- apply to other federally chartered and sets, at the point of acquisition. federally insured state-chartered credit Core capital ratio means the corporate unions, respectively. credit union’s core capital divided by (b) The Board has the authority to its moving daily average net assets. issue orders which vary from this part. Corporate credit union means an orga- This authority is provided under Sec- nization that: tion 120(a) of the Federal Credit Union (1) Is chartered under Federal or Act, 12 U.S.C. 1766(a). Requests by state law as a credit union; state-chartered corporate credit unions (2) Receives shares from and provides for waivers to this part and for expan- loan services to credit unions; sions of authority under appendix B of (3) Is operated primarily for the pur- this part must be approved by the state pose of serving other credit unions; regulator before being submitted to (4) Is designated by NCUA as a cor- NCUA. porate credit union;

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(5) Limits natural person members to tions that market participants would the minimum required by state or fed- use in their estimates of values, future eral law to charter and operate the revenues, and future expenses, includ- credit union; and ing assumptions about interest rates, (6) Does not condition the eligibility default, prepayment, and volatility. of any credit union to become a mem- Federal funds transaction means a ber on that credit union’s membership short-term or open-ended unsecured in any other organization. transfer of immediately available funds Daily average net assets means the av- by one depository institution to an- erage of net assets calculated for each other depository institution or entity. day during the period. Foreign bank means an institution Derivatives means any derivative in- which is organized under the laws of a strument as defined under generally country other than the United States, accepted accounting principles is engaged in the business of banking, (GAAP). and is recognized as a bank by the Dollar roll means the purchase or sale banking supervisory authority of the of a mortgage backed security to a country in which it is organized. counterparty with an agreement to re- Forward settlement of a transaction sell or repurchase a substantially iden- means settlement on a date later than tical security at a future date and at a regular-way settlement. specified price. Immediate family member means a Embedded option means a char- spouse or other family member living acteristic of certain assets and liabil- in the same household. ities which gives the issuer of the in- Limited liquidity investment means a strument the ability to change the fea- private placement or funding agree- tures such as final maturity, rate, prin- ment. cipal amount and average life. Options Member reverse repurchase transaction include, but are not limited to, calls, means an integrated transaction in caps, and prepayment options. which a corporate credit union pur- Exchangeable collateralized mortgage chases a security from one of its mem- obligation means a class of a ber credit unions under agreement by collateralized mortgage obligation that member credit union to repur- (CMO) that, at the time of purchase, chase the same security at a specified represents beneficial ownership inter- time in the future. The corporate cred- ests in a combination of two or more it union then sells that same security, underlying classes of the same CMO on the same day, to a third party, structure. The holder of an exchange- under agreement to repurchase it on able CMO may pay a fee and take deliv- the same date on which the corporate ery of the underlying classes of the credit union is obligated to return the CMO. security to its member credit union. Fair value means the amount at Membership capital means funds con- which an instrument could be ex- tributed by members that: are adjust- changed in a current, arms-length able balance with a minimum with- transaction between willing parties, as drawal notice of 3 years or are term opposed to a forced or liquidation sale. certificates with a minimum term of 3 Quoted market prices in active mar- years; are available to cover losses that kets are the best evidence of fair value. exceed retained earnings and paid-in If a quoted market price in an active capital; are not insured by the NCUSIF market is not available, fair value may or other share or deposit insurers; and be estimated using a valuation tech- cannot be pledged against borrowings. nique that is reasonable and support- Mortgage related security means a se- able, a quoted market price in an ac- curity as defined in section 3(a)(41) of tive market for a similar instrument, the Securities Exchange Act of 1934,15 or a current appraised value. Examples U.S.C. 78c(a)(41), e.g., a privately-issued of valuation techniques include the security backed by mortgages secured present value of estimated future cash by real estate upon which is located a flows, option-pricing models, and op- dwelling, mixed residential and com- tion-adjusted spread models. Valuation mercial structure, residential manufac- techniques should incorporate assump- tured home, or commercial structure

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that is rated in one of the two highest earnings; are not insured by the rating categories by at least one na- NCUSIF or other share or deposit in- tionally recognized statistical rating surers; and cannot be pledged against organization. borrowings. Moving daily average net assets means Pair-off transaction means a security the average of daily average net assets purchase transaction that is closed out exclusive of identifiable intangibles or sold at, or prior to, the settlement and goodwill for the month being meas- or expiration date. ured and the previous eleven (11) Quoted market price means a recent months. sales price or a price based on current Mutual combination means a trans- bid and asked quotations. action or event in which a corporate Regular-way settlement means delivery credit union acquires another credit of a security from a seller to a buyer union, or acquires an integrated set of within the time frame that the securi- activities and assets that is capable of ties industry has established for imme- being conducted and managed as a diate delivery of that type of security. credit union. For example, regular-way settlement NCUA means NCUA Board (Board), of a Treasury security includes settle- unless the particular action has been ment on the trade date (‘‘cash’’), the delegated by the Board. business day following the trade date Net assets means total assets less Cen- (‘‘regular way’’), and the second busi- tral Liquidity Facility (CLF) stock ness day following the trade date subscriptions, CLF loans guaranteed by (‘‘skip day’’). the NCUSIF, U.S. Central CLF certifi- Repurchase transaction means a trans- cates, and member reverse repurchase action in which a corporate credit transactions. For its own account, a union agrees to purchase a security corporate credit union’s payables under from a counterparty and to resell the reverse repurchase agreements and re- same or any identical security to that ceivables under repurchase agreements counterparty at a specified future date may be netted out if the Generally Ac- and at a specified price. cepted Accounting Principles (GAAP) Residual interest means the remainder conditions for offsetting are met. cash flows from a CMO or ABS trans- Net economic value (NEV) means the action after payments due bondholders fair value of assets minus the fair value and trust administrative expenses have of liabilities. All fair value calcula- been satisfied. tions must include the value of forward Retained earnings means the total of settlements and embedded options. The the corporate credit union’s undivided amortized portion of membership cap- earnings, reserves, and any other ap- ital and paid-in capital, which do not propriations designated by manage- qualify as capital, are treated as liabil- ment or regulatory authorities. For ities for purposes of this calculation. purposes of this regulation, retained The NEV ratio is calculated by divid- earnings does not include the allowing NEV by the fair value of assets. ance for loan and lease losses account, Obligor means the primary party obli- accumulated unrealized gains and gated to repay an investment, e.g., the losses on available for sale securities, issuer of a security, the taker of a de- or other comprehensive income items. posit, or the borrower of funds in a fed- Retained earnings ratio means the cor- eral funds transaction. Obligor does porate credit union’s retained earnings not include an originator of receivables divided by its moving daily average net underlying an asset-backed security, assets. For a corporate credit union the servicer of such receivables, or an that acquires another credit union in a insurer of an investment. mutual combination, the numerator of Official means any director or com- the retained earnings ratio also in- mittee member. cludes the retained earnings of the ac- Paid-in capital means accounts or quired credit union, or of an integrated other interests of a corporate credit set of activities and assets, at the point union that: are perpetual, non-cumu- of acquisition. lative dividend accounts; are available Section 107(8) institution means an in- to cover losses that exceed retained stitution described in Section 107(8) of

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the Federal Credit Union Act (12 U.S.C. When-issued trading means the buying 1757(8)). and selling of securities in the period Securities lending means lending a se- between the announcement of an offer- curity to a counterparty, either di- ing and the issuance and payment date rectly or through an agent, and accept- of the securities. ing collateral in return. Wholesale corporate credit union means Senior management employee means a a corporate credit union which pri- chief executive officer, any assistant marily serves other corporate credit chief executive officer (e.g., any assist- unions. ant president, any vice president or [62 FR 12938, Mar. 19, 1997, as amended at 67 any assistant treasurer/manager), and FR 65651, Oct. 25, 2002; 69 FR 39832, July 1, the chief financial officer (controller). 2004; 73 FR 72692, Dec. 1, 2008] Settlement date means the date originally agreed to by a corporate credit § 704.3 Corporate credit union capital. union and a counterparty for settle- (a) Capital plan. A corporate credit ment of the purchase or sale of a secu- union must develop and ensure imple- rity. mentation of written short- and long- Short sale means the sale of a secu- term capital goals, objectives, and rity not owned by the seller. strategies which provide for the build- Small business related security means a ing of capital consistent with regu- security as defined in section 3(a)(53) of latory requirements, the maintenance the Securities Exchange Act of 1934 (15 of sufficient capital to support the risk U.S.C. 78c(a)(53)), e.g., a security that is exposures that may arise from current rated in 1 of the 4 highest rating cat- and projected activities, and the peri- egories by at least one nationally rec- odic review and reassessment of the ognized statistical rating organization, capital position of the corporate credit and represents an interest in 1 or more union. promissory notes or leases of personal (b) Requirements for membership cap- property evidencing the obligation of a ital—(1) Form. Membership capital small business concern and originated funds may be in the form of a term cer- by an insured depository institution, tificate or an adjusted balance account. insured credit union, insurance com- (2) Disclosure. The terms and condi- pany, or similar institution which is tions of a membership capital account supervised and examined by a Federal must be disclosed to the recorded or State authority, or a finance com- owner of the account at the time the pany or leasing company. This defini- account is opened and at least annually tion does not include Small Business thereafter. Administration securities permissible (i) The initial disclosure must be under § 107(7) of the Act. signed by either all of the directors of Stripped mortgage-backed security the member credit union or, if author- means a security that represents either ized by board resolution, the chair and the principal or interest only portion secretary of the board; and of the cash flows of an underlying pool (ii) The annual disclosure notice of mortgages. must be signed by the chair of the cor- Trade date means the date a corporate credit union. The chair must porate credit union originally agrees, sign a statement that certifies that the whether orally or in writing, to enter notice has been sent to member credit into the purchase or sale of a security. unions with membership capital ac- Weighted average life means the counts. The certification must be weighted-average time to the return of maintained in the corporate credit a dollar of principal, calculated by union’s files and be available for exam- multiplying each portion of principal iner review. received by the time at which it is ex- (3) Three-year remaining maturity. pected to be received (based on a rea- When a membership capital account sonable and supportable estimate of has been placed on notice or has a re- that time) and then summing and di- maining maturity of less than three viding by the total amount of prin- years, the amount of the account that cipal. can be considered membership capital

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is reduced by a constant monthly am- credit union must address the meas- ortization that ensures membership ure’s permanency characteristics in its capital is fully amortized one year be- capital plan. fore the date of maturity or one year (iii) Notice of withdrawal. Upon writ- before the end of the notice period. The ten notice of intent to withdraw mem- full balance of a membership capital bership capital, the balance of the ac- account being amortized, not just the count will be frozen (no further adjust- remaining non-amortized portion, is ments) until the conclusion of the no- available to absorb losses in excess of tice period. the sum of retained earnings and paid- (9) Grandfathering. Membership cap- in capital until the funds are released ital issued before the effective date of by the corporate credit union at the this regulation is exempt from the lim- time of maturity or the conclusion of itation of § 704.3(b)(8)(i). the notice period. (c) Requirements for paid-in capital—(1) (4) Release. Membership capital may Disclosure. The terms and conditions of not be released due solely to the merg- any paid-in capital instrument must be er, charter conversion or liquidation of disclosed to the recorded owner of the a member credit union. In the event of instrument at the time the instrument a merger, the membership capital is created and must be signed by either transfers to the continuing credit all of the directors of the member cred- union. In the event of a charter conver- it union or, if authorized by board reso- sion, the membership capital transfers lution, the chair and secretary of the to the new institution. In the event of board. liquidation, the membership capital (2) Release. Paid-in capital may not may be released to facilitate the pay- be released due solely to the merger, out of shares with the prior written ap- charter conversion or liquidation of a proval of the OCCU Director. member credit union. In the event of a (5) Sale. A member may sell its mem- merger, the paid-in capital transfers to bership capital to another member in the continuing credit union. In the the corporate credit union’s field of event of a charter conversion, the paid- membership, subject to the corporate in capital transfers to the new institu- credit union’s approval. tion. In the event of liquidation, the (6) Liquidation. In the event of liq- paid-in capital may be released to fa- uidation of a corporate credit union, cilitate the payout of shares with the membership capital is payable only prior written approval of the OCCU Di- after satisfaction of all liabilities of rector. the liquidation estate, including unin- (3) Callability. Paid-in capital ac- sured share obligations to shareholders counts are callable on a pro-rata basis and the National Credit Union Share across an issuance class only at the op- Insurance Fund (NCUSIF), but exclud- tion of the corporate credit union and ing paid-in capital. only if the corporate credit union (7) Merger. In the event of a merger of meets its minimum level of required a corporate credit union, membership capital and NEV ratios after the funds capital transfers to the continuing cor- are called. porate credit union. The minimum (4) Liquidation. In the event of liq- three-year notice period for withdrawal uidation of the corporate credit union, of membership capital remains in ef- paid-in capital is payable only after fect. satisfaction of all liabilities of the liq- (8) Adjusted balance accounts: uidation estate, including uninsured (i) May be adjusted no more fre- share obligations to shareholders, the quently than once every six months; NCUSIF, and membership capital hold- and ers. (ii) Must be adjusted in relation to a (5) Merger. In the event of a merger of measure, e.g., one percent of a member a corporate credit union, paid-in cap- credit union’s assets, established and ital shall transfer to the continuing disclosed at the time the account is corporate credit union. opened without regard to any min- (6) Paid-in capital. Paid-in capital in- imum withdrawal period. If the meas- cludes both member and nonmember ure is other than assets, the corporate paid-in capital.

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(i) Member paid-in capital means for a particular corporate credit union, paid-in capital that is held by the cor- he or she will notify the corporate porate credit union’s members. A cor- credit union in writing of the proposed porate credit union may not condition capital ratio and the date by which the membership, services, or prices for capital ratio must be reached. The services on a credit union’s ownership OCCU Director also will provide an ex- of paid-in capital. planation of why the proposed capital (ii) Nonmember paid-in capital ratio is considered necessary or appro- means paid-in capital that is not held priate. by the corporate credit union’s mem- (3)(i) The corporate credit union may bers. respond to any or all of the items in (7) Grandfathering. A corporate credit the notice. The response must be in union’s authority to include paid-in writing and delivered to the OCCU Di- capital as a component of capital is rector within 30 calendar days after the governed by the regulation in effect at date on which the corporate credit the time the paid-in capital was issued. When a grandfathered paid-in capital union received the notice. The OCCU instrument has a remaining maturity Director may shorten the time period of less than 3 years, the amount that when, in its opinion, the condition of may be considered paid-in capital is re- the corporate credit union so requires, duced by a constant monthly amortiza- provided that the corporate credit tion that ensures the paid-in capital is union is informed promptly of the new fully amortized 1 year before the date time period, or with the consent of the of maturity. The full balance of grand- corporate credit union. In its discre- fathered paid-in capital being amor- tion, the OCCU Director may extend tized, not just the remaining non-am- the time period for good cause. ortized portion, is available to absorb (ii) Failure to respond within 30 cal- losses in excess of retained earnings endar days or such other time period as until the funds are released by the cor- may be specified by the OCCU Director porate credit union at maturity. shall constitute a waiver of any objec- (d) Capital ratio. A corporate credit tions to any item in the notice. Failure union will maintain a minimum cap- to address any item in a response shall ital ratio of 4 percent, except as other- constitute a waiver of any objection to wise provided in this part. A corporate that item. credit union must calculate its capital (iii) After the close of the corporate ratio at least monthly. credit union’s response period, the (e) Individual capital ratio require- OCCU Director will decide, based on a ment—(1) When significant cir- review of the corporate credit union’s cumstances or events warrant, the response and other information con- OCCU Director may require a different cerning the corporate credit union, minimum capital ratio for an indi- whether a different minimum capital vidual corporate credit union based on ratio should be established for the cor- its circumstances. Factors that may porate credit union and, if so, the cap- warrant a different minimum capital ratio include, but are not limited to: ital ratio and the date the requirement (i) An expectation that the corporate must be reached. The corporate credit credit union has or anticipates losses union will be notified of the decision in resulting in capital inadequacy; writing. The notice will include an ex- (ii) Significant exposure exists, un- planation of the decision, except for a supported by adequate capital or risk decision not to establish a different management processes, due to credit, minimum capital ratio for the cor- liquidity, market, fiduciary, oper- porate credit union. ational, and similar types of risks; (f) Failure to maintain minimum capital (iii) A merger has been approved; or ratio requirement. When a corporate (iv) An emergency exists because of a credit union’s capital ratio falls below natural disaster. the minimum required by paragraphs (2) When the OCCU Director deter- (d) or (e) of this section, or appendix B mines that a different minimum cap- to this part, as applicable, operating ital ratio is necessary or appropriate management of the corporate credit

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union must notify its board of direc- (A) Increase the amount of capital to tors, supervisory committee, and the specific levels; OCCU Director within 10 calendar days. (B) Reduce dividends; (g) Capital restoration plan. (1) A cor- (C) Limit receipt of deposits to those porate credit union must submit a plan made to existing accounts; to restore and maintain its capital (D) Cease or limit issuance of new ac- ratio at the minimum requirement counts or any or all classes of ac- when either of the following conditions counts; exist: (E) Cease or limit lending or making (i) The capital ratio falls below the a particular type or category of loans; minimum requirement and is not re- (F) Cease or limit the purchase of stored to the minimum requirement by specified investments; the next month end; or (G) Limit operational expenditures to (ii) Regardless of whether the capital specified levels; ratio is restored by the next month (H) Increase and maintain liquid as- end, the capital ratio falls below the sets at specified levels; and minimum requirement for three (I) Restrict or suspend expanded au- months in any 12-month period. thorities issued under appendix B of (2) The capital restoration plan must, this part. at a minimum, include the following: (ii) Adhere to a previously submitted (i) Reasons why the capital ratio fell plan to achieve adequate capitaliza- below the minimum requirement; tion. (ii) Descriptions of steps to be taken (iii) Submit and adhere to a capital to restore the capital ratio to the min- plan acceptable to NCUA describing imum requirement within specific time the means and a time schedule by frames; which the corporate credit union shall (iii) Actions to be taken to maintain achieve adequate capitalization. the capital ratio at the minimum re- (iv) Meet with NCUA. quired level and increase it thereafter; (v) Take a combination of these ac- (iv) Balance sheet and income projections. tions, including assumptions, for the (3) Prior to issuing a capital direc- current calendar year and one addi- tive, NCUA will notify a corporate tional calendar year; and credit union in writing of its intention (v) Certification from the board of di- to issue a capital directive. rectors that it will follow the proposed (i) The notice will state: plan if approved by the OCCU Director. (A) The reasons for the issuance of (3) The capital restoration plan must the directive; and be submitted to the OCCU Director (B) The proposed content of the di- within 30 calendar days of the occur- rective. rence. The OCCU Director will respond (ii) A corporate credit union must re- to the corporate credit union regarding spond in writing within 30 calendar the adequacy of the plan within 45 cal- days of receipt of the notice stating endar days of its receipt. that it either concurs or disagrees with (h) Capital directive. (1) If a corporate the notice. If it disagrees with the no- credit union fails to submit a capital tice, it must state the reasons why the restoration plan; or the plan submitted directive should not be issued and/or is not deemed adequate to either re- propose alternative contents for the di- store capital or restore capital within a rective. The response should include all reasonable time; or the credit union matters that the corporate credit fails to implement its approved capital union wishes to be considered. For restoration plan, NCUA may issue a good cause, including the following capital directive. conditions, the response time may be (2) A capital directive may order a shortened or lengthened: corporate credit union to: (A) When the condition of the cor- (i) Achieve adequate capitalization porate requires, and the corporate within a specified time frame by tak- credit union is notified of the short- ing any action deemed necessary, in- ened response period in the notice; cluding but not limited to the fol- (B) With the consent of the corporate lowing: credit union; or

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(C) When the corporate credit union (2) Earnings retention amounts are already has advised NCUA that it can- calculated as follows: not or will not achieve adequate cap- (i) The monthly earnings retention italization. amount is determined by multiplying (iii) Failure to respond within 30 cal- the earnings retention factor by the endar days, or another time period prior month-end moving daily average specified in the notice, shall constitute net assets; and a waiver of any objections to the pro- (ii) The quarterly earnings retention posed directive. amount is determined by multiplying (4) After the closing date of the cor- the earnings retention factor by mov- porate credit union’s response period, ing daily average net assets for each of or the receipt of the response, if ear- the prior three month-ends. lier, NCUA shall consider the response (3) The earnings retention factor is and may seek additional information determined as follows: or clarification. Based on the informa- (i) If the prior month-end retained tion provided during the response pe- earnings ratio is less than 2 percent riod, NCUA will determine whether or and the core capital ratio is less than 3 not to issue a capital directive and, if percent, the earnings retention factor issued, the form it should take. is .15 percent per annum; or (5) Upon issuance, a capital directive (ii) If the prior month-end retained and a statement of the reasons for its earnings ratio is less than 2 percent issuance will be delivered to the cor- and the core capital ratio is equal to or porate credit union. A directive is ef- greater than 3 percent, the earnings re- fective immediately upon receipt by tention factor is .10 percent per annum. the corporate credit union, or upon such later date as may be specified (4) The OCCU Director may approve a therein, and shall remain effective and decrease to the earnings retention enforceable until it is stayed, modified, amount if it is determined a lesser or terminated by NCUA. amount is necessary to avoid a signifi- (6) A capital directive may be issued cant adverse impact upon a corporate in addition to, or in lieu of, any other credit union. action authorized by law in response to (5) Operating management of the cor- a corporate credit union’s failure to porate credit union must notify its achieve or maintain the applicable board of directors, supervisory com- minimum capital ratios. mittee, the OCCU Director and, if ap- (7) Upon a change in circumstances, a plicable, the state regulator within 10 corporate credit union may request re- calendar days of determining that the consideration of the terms of the direc- retained earnings ratio has declined tive. Requests that are not based on a below 2 percent. If the decline in the significant change in circumstances or retained earnings ratio is due, in full or are repetitive or frivolous will not be in part, to a decline in the dollar considered. Pending a decision on re- amount of retained earnings and the consideration, the directive shall con- retained earnings ratio is not restored tinue in full force and effect. to at least 2 percent by the next month (i) Earnings retention requirement. A end, a retained earnings action plan is corporate credit union must increase required to be submitted within 30 cal- retained earnings if the prior month- endar days. end retained earnings ratio is less than (6) The retained earnings action plan 2 percent. must be submitted to the OCCU Direc- (1) Its retained earnings must in- tor and, if applicable, the state regu- crease: lator and, at a minimum, include the (i) During the current month, by an following: amount equal to or greater than the (i) Reasons why the dollar amount of monthly earnings retention amount; or retained earnings has decreased; (ii) During the current and prior two (ii) Description of actions to be taken months, by an amount equal to or to increase the dollar amount of re- greater than the quarterly earnings retained earnings within specific time tention amount. frames; and

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(iii) Monthly balance sheet and in- § 704.5 Investments. come projections, including assump- (a) Policies. A corporate credit union tions, for the next 12-month period. must operate according to an invest- [62 FR 12938, Mar. 19, 1997, as amended at 67 ment policy that is consistent with its FR 65652, 65659, Oct. 25, 2002] other risk management policies, including, but not limited to, those re- § 704.4 Board responsibilities. lated to credit risk management, asset (a) General. A corporate credit and liability management, and liquid- union’s board of directors must ap- ity management. The policy must ad- prove comprehensive written strategic dress, at a minimum: plans and policies, review them annu- (1) Appropriate tests and criteria for ally, and provide them upon request to evaluating investments and investment the auditors, supervisory committee, transactions before purchase; and and NCUA. (2) Reasonable and supportable con- (b) Policies. A corporate credit centration limits for limited liquidity union’s policies must be commensurate investments in relation to capital. with the scope and complexity of the (b) General. All investments must be corporate credit union. U.S. dollar-denominated and subject to (c) Other requirements. The board of the credit policy restrictions set forth directors of a corporate credit union in § 704.6. must ensure: (c) Authorized activities. A corporate (1) Senior managers have an in-depth, credit union may invest in: working knowledge of their direct (1) Securities, deposits, and obliga- areas of responsibility and are capable tions set forth in Sections 107(7), 107(8), of identifying, hiring, and retaining and 107(15) of the Federal Credit Union qualified staff; Act, 12 U.S.C. 1757(7), 1757(8), and (2) Qualified personnel are employed 1757(15), except as provided in this sec- or under contract for all line support tion; and audit areas, and designated back- (2) Deposits in, the sale of federal up personnel or resources with ade- funds to, and debt obligations of cor- quate cross-training are in place; porate credit unions, Section 107(8) institutions, and state banks, trust com- (3) GAAP is followed, except where panies, and mutual savings banks not law or regulation has provided for a de- domiciled in the state in which the cor- parture from GAAP; porate credit union does business; (4) Accurate balance sheets, income (3) Corporate CUSOs, as defined in statements, and internal risk assess- and subject to the limitations of ments (e.g., risk management measures § 704.11; of liquidity, market, and credit risk as- (4) Marketable debt obligations of sociated with current activities) are corporations chartered in the United produced timely in accordance with States. This authority does not apply §§ 704.6, 704.8, and 704.9; to debt obligations that are convertible (5) Systems are audited periodically into the stock of the corporation; and in accordance with industry-estab- (5) Domestically-issued asset-backed lished standards; securities. (6) Financial performance is evalu- (d) Repurchase agreements. A cor- ated to ensure that the objectives of porate credit union may enter into a the corporate credit union and the re- repurchase agreement provided that: sponsibilities of management are met; (1) The corporate credit union, di- and rectly or through its agent, receives (7) Planning addresses the retention written confirmation of the trans- of external consultants, as appropriate, action, and either takes physical pos- to review the adequacy of technical, session or control of the repurchase se- human, and financial resources dedi- curities or is recorded as owner of the cated to support major risk areas. repurchase securities through the Fed- [62 FR 12938, Mar. 19, 1997, as amended at 67 eral Reserve Book-Entry Securities FR 65654, Oct. 25, 2002] Transfer System;

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(2) The repurchase securities are the investment portfolio to invest- legal investments for that corporate ments and investment transactions credit union; that are permissible for that corporate (3) The corporate credit union, di- credit union. rectly or through its agent, receives (g) Forward settlement of transactions daily assessment of the market value later than regular way. A corporate of the repurchase securities and main- credit union may enter into an agree- tains adequate margin that reflects a ment to purchase or sell an instru- risk assessment of the repurchase secu- ment, with settlement later than reg- rities and the term of the transaction; ular way, provided that: and (1) Delivery and acceptance are man- (4) The corporate credit union has en- datory; tered into signed contracts with all ap- (2) The transaction is clearly dis- proved counterparties and agents, and closed in the appropriate risk reporting ensures compliance with the contracts. required under § 704.8(b); Such contracts must address any sup- (3) If the corporate credit union is plemental terms and conditions nec- the purchaser, it has adequate cash essary to meet the specific require- flow projections evidencing its ability ments of this part. Third party ar- to purchase the instrument; rangements must be supported by tri- (4) If the corporate credit union is party contracts in which the repur- the seller, it owns the instrument on chase securities are priced and reported the trade date; and daily and the tri-party agent ensures (5) The transaction is settled on a compliance; and cash basis at the settlement date. (e) Securities Lending. A corporate (h) Prohibitions. A corporate credit credit union may enter into a securi- union is prohibited from: ties lending transaction provided that: (1) The corporate credit union, di- (1) Purchasing or selling derivatives, rectly or through its agent, receives except for embedded options not re- written confirmation of the loan, ob- quired under GAAP to be accounted for tains a first priority security interest separately from the host contract or in the collateral by taking physical forward sales commitments on loans to possession or control of the collateral, be purchased by the corporate credit or is recorded as owner of the collat- union; eral through the Federal Reserve Book- (2) Engaging in trading securities un- Entry Securities Transfer System; less accounted for on a trade date (2) The collateral is a legal invest- basis; ment for that corporate credit union; (3) Engaging in adjusted trading or (3) The corporate credit union, di- short sales; and rectly or through its agent, receives (4) Purchasing mortgage servicing daily assessment of the market value rights, small business related securi- of collateral and maintains adequate ties, residual interests in collateralized margin that reflects a risk assessment mortgage obligations, residual inter- of the collateral and terms of the loan; ests in real estate mortgage invest- and ment conduits, or residual interests in (4) The corporate credit union has en- asset-backed securities; and tered into signed contracts with all (5) Purchasing stripped mortgage agents and, directly or through its backed securities (SMBS), or securities agent, has executed a written loan and that represent interests in SMBS, ex- security agreement with the borrower. cept as described in subparagraphs (i) The corporate or its agent ensures and (iii) below. compliance with the agreements. (i) A corporate credit union may in- (f) Investment companies. A corporate vest in exchangeable collateralized credit union may invest in an invest- mortgage obligations (exchangeable ment company registered with the Se- CMOs) representing beneficial owner- curities and Exchange Commission ship interests in one or more interest- under the Investment Company Act of only classes of a CMO (IO CMOs) or 1940 (15 U.S.C. 80a), provided that the principal-only classes of a CMO (PO prospectus of the company restricts CMOs), but only if:

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(A) At the time of purchase, the ratio subject to the requirements of §§ 704.8 of the market price to the remaining and 704.9. principal balance is between .8 and 1.2, [62 FR 12938, Mar. 19, 1997, as amended at 63 meaning that the discount or premium FR 24105, May 1, 1998; 67 FR 65654, Oct. 25, of the market price to par must be less 2002; 69 FR 39832, July 1, 2004] than 20 points; (B) The offering circular or other of- § 704.6 Credit risk management. ficial information available at the time (a) Policies. A corporate credit union of purchase indicates that the notional must operate according to a credit risk principal on each underlying IO CMO management policy that is commensu- should decline at the same rate as the rate with the investment risks and ac- principal on one or more of the under- tivities it undertakes. The policy must lying non-IO CMOs, and that the prin- address at a minimum: cipal on each underlying PO CMO (1) The approval process associated should decline at the same rate as the with credit limits; principal, or notional principal, on one (2) Due diligence analysis require- or more of the underlying non-PO ments; CMOs; and (3) Maximum credit limits with each (C) The credit union investment staff obligor and transaction counterparty, has the expertise dealing with ex- set as a percentage of capital. In addi- changeable CMOs to apply the condition to addressing deposits and securi- tions in paragraphs (h)(5)(i)(A) and (B) ties, limits with transaction counter- of this section. parties must address aggregate expo- (ii) A corporate credit union that insures of all transactions including, but vests in an exchangeable CMO may ex- not limited to, repurchase agreements, ercise the exchange option only if all of securities lending, and forward settle- the underlying CMOs are permissible ment of purchases or sales of invest- investments for that credit union. ments; and (4) Concentrations of credit risk (e.g., (iii) A corporate credit union may ac- originator of receivables, insurer, in- cept an exchangeable CMO rep- dustry type, sector type, and geo- resenting beneficial ownership inter- graphic). ests in one or more IO CMOs or PO (b) Exemption. The requirements of CMOs as an asset associated with an this section do not apply to invest- investment repurchase transaction or ments that are issued or fully guaran- as collateral in a securities lending teed as to principal and interest by the transaction. When the exchangeable U.S. government or its agencies or en- CMO is associated with one of these terprises (excluding subordinated debt) two transactions, it need not conform or are fully insured (including accumu- to the conditions in paragraphs lated interest) by the NCUSIF or Fed- (h)(5)(i)(A) or (B) of this section. eral Deposit Insurance Corporation. (i) Conflicts of interest. A corporate (c) Concentration limits—(1) General credit union’s officials, employees, and rule. The aggregate of all investments immediate family members of such in- in any single obligor is limited to 50 dividuals, may not receive pecuniary percent of capital or $5 million, which- consideration in connection with the ever is greater. making of an investment or deposit by (2) Exceptions. Exceptions to the gen- the corporate credit union. Employee eral rule are: compensation is exempt from this pro- (i) Aggregate investments in repur- hibition. All transactions not specifi- chase and securities lending agree- cally prohibited by this paragraph ments with any one counterparty are must be conducted at arm’s length and limited to 200 percent of capital; in the interest of the corporate credit (ii) Investments in corporate CUSOs union. are subject to the limitations of (j) Grandfathering. A corporate credit § 704.11; and union’s authority to hold an invest- (iii) Aggregate investments in cor- ment is governed by the regulation in porate credit unions are not subject to effect at the time of purchase. How- the limitations of paragraph (c)(1) of ever, all grandfathered investments are this section.

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(3) For purposes of measurement, prepared and formally approved by the each new credit transaction must be board or an appropriate committee. At evaluated in terms of the corporate least monthly, the board or an appro- credit union’s capital at the time of priate committee must receive an in- the transaction. An investment that vestment watch list of existing and/or fails a requirement of this section be- potential credit problems and summary cause of a subsequent reduction in cap- credit exposure reports, which dem- ital will be deemed nonconforming. A onstrate compliance with the corporate corporate credit union is required to credit union’s risk management poli- exercise reasonable efforts to bring cies. nonconforming investments into con- (2) At a minimum, the corporate formity within 90 calendar days. In- credit union must maintain: vestments that remain nonconforming (i) A justification for each approved for 90 calendar days will be deemed to credit limit; fail a requirement of this section and (ii) Disclosure documents, if any, for the corporate credit union will have to all instruments held in portfolio. Docu- comply with § 704.10. ments for an instrument that has been (d) Credit ratings. (1) All investments, sold must be retained until completion other than in a corporate credit union of the next NCUA examination; and or CUSO, must have an applicable cred- (iii) The latest available financial re- it rating from at least one nationally ports, industry analyses, internal and recognized statistical rating organiza- external analyst evaluations, and rat- tion (NRSRO). ing agency information sufficient to (2) At the time of purchase, invest- support each approved credit limit. ments with long-term ratings must be [62 FR 12938, Mar. 19, 1997, as amended at 67 rated no lower than AA– (or equiva- FR 65654, Oct. 25, 2002] lent) and investments with short-term ratings must be rated no lower than A– § 704.7 Lending. 1 (or equivalent). (a) Policies. A corporate credit union (3) Any rating(s) relied upon to meet must operate according to a lending the requirements of this part must be policy which addresses, at a minimum: identified at the time of purchase and (1) Loan types and limits; must be monitored for as long as the (2) Required documentation and col- corporate owns the investment. lateral; and (4) When two or more ratings are re- (3) Analysis and monitoring stand- lied upon to meet the requirements of ards. this part at the time of purchase, the (b) General. Each loan or line of cred- board or an appropriate committee it limit will be determined after ana- must place on the § 704.6(e)(1) invest- lyzing the financial and operational ment watch list any investment for soundness of the borrower and the abil- which a rating is downgraded below the ity of the borrower to repay the loan. minimum rating requirements of this (c) Loans to members—(1) Credit part. unions. (i) The maximum aggregate (5) Investments are subject to the re- amount in unsecured loans and lines of quirements of § 704.10 if: credit to any one member credit union, (i) One rating was relied upon to excluding pass-through and guaranteed meet the requirements of this part and loans from the CLF and the NCUSIF, that rating is downgraded below the must not exceed 50 percent of capital. minimum rating requirements of this (ii) The maximum aggregate amount part; or in secured loans and lines of credit to (ii) Two or more ratings were relied any one member credit union, exclud- upon to meet the requirements of this ing those secured by shares or market- part and at least two of those ratings able securities and member reverse re- are downgraded below the minimum purchase transactions, must not exceed rating requirements of this part. 100 percent of capital. (e) Reporting and documentation. (1) (2) Corporate CUSOs. Any loan or line At least annually, a written evaluation of credit must comply with § 704.11. of each credit limit with each obligor (3) Other members. The maximum ag- or transaction counterparty must be gregate amount of loans and lines of

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credit to any other one member must (1) The purpose and objectives of the not exceed 15 percent of the corporate corporate credit union’s asset and li- credit union’s capital plus pledged ability activities; shares. (2) The maximum allowable percent- (d) Loans to nonmembers—(1) Credit age decline in net economic value unions. A loan to a nonmember credit (NEV), compared to base case NEV; union, other than through a loan par- (3) The minimum allowable NEV ticipation with another corporate cred- ratio; it union, is only permissible if the loan (4) Policy limits and specific test pa- is for an overdraft related to the pro- rameters for the interest rate sensi- viding of correspondent services pursu- tivity analysis requirements set forth ant to § 704.12. Generally, such a loan in paragraph (d) of this section; will have a maturity of one business (5) The modeling of indexes that day. serve as references in financial instru- (2) Corporate CUSOs. Any loan or line ment coupon formulas; and of credit must comply with § 704.11. (e) Member business loan rule. Loans, (6) The tests that will be used, prior lines of credit and letters of credit to: to purchase, to estimate the impact of (1) Member credit unions are exempt investments on the percentage decline from part 723 of this chapter; in NEV, compared to base case NEV. (2) Corporate CUSOs are not subject The most recent NEV analysis, as de- to part 723 of this chapter. termined under paragraph (d)(1)(i) of (3) Other members not excluded this section may be used as a basis of under § 723.1(b) of this chapter must estimation. comply with part 723 of this chapter (b) Asset and liability management com- unless the loan or line of credit is fully mittee (ALCO). A corporate credit guaranteed by a credit union or fully union’s ALCO must have at least one secured by U.S. Treasury or agency se- member who is also a member of the curities. Those guaranteed and secured board of directors. The ALCO must re- loans must comply with the aggregate view asset and liability management limits of § 723.16 but are exempt from reports on at least a monthly basis. the other requirements of part 723. These reports must address compliance (f) Participation loans with other cor- with Federal Credit Union Act, NCUA porate credit unions. A corporate credit Rules and Regulations (12 CFR chapter union is permitted to participate in a VII), and all related risk management loan with another corporate credit policies. union provided the corporate retains (c) Penalty for early withdrawals. A an interest of at least 5 percent of the corporate credit union that permits face amount of the loan and a master early certificate/share withdrawals participation loan agreement is in must assess market-based penalties place before the purchase or the sale of sufficient to cover the estimated re- a participation. A participating cor- placement cost of the certificate/share porate credit union must exercise the redeemed. This means the minimum same due diligence as if it were the penalty must be reasonably related to originating corporate credit union. the rate that the corporate credit (g) Prepayment penalties. If provided union would be required to offer to at- for in the loan contract, a corporate tract funds for a similar term with credit union is authorized to assess similar characteristics. prepayment penalties on loans. (d) Interest rate sensitivity analysis. (1) [62 FR 12938, Mar. 19, 1997, as amended at 64 A corporate credit union must: FR 57365, Oct. 25, 1999; 67 FR 65655, Oct. 25, (i) Evaluate the risk in its balance 2002; 68 FR 56550, Oct. 1, 2003] sheet by measuring, at least quarterly, the impact of an instantaneous, perma- § 704.8 Asset and liability manage- nent, and parallel shock in the yield ment. curve of plus and minus 100, 200, and 300 (a) Policies. A corporate credit union basis points on its NEV and NEV ratio. must operate according to a written If the base case NEV ratio falls below 3 asset and liability management policy percent at the last testing date, these which addresses, at a minimum: tests must be calculated at least

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monthly until the base case NEV ratio case NEV ratio, or any NEV ratio re- again exceeds 3 percent; sulting from the tests set forth in para- (ii) Limit its risk exposure to levels graph (d)(1)(i) of this section violates that do not result in a base case NEV the limits established by its board, it ratio or any NEV ratio resulting from must determine how it will bring the the tests set forth in paragraph (d)(1)(i) exposure within policy limits. The dis- of this section below 2 percent; and closure to the board of the violation (iii) Limit its risk exposures to levels must occur no later than its next regu- that do not result in a decline in NEV larly scheduled board meeting. of more than 15 percent. (2) A corporate credit union must as- [62 FR 12938, Mar. 19, 1997, as amended at 67 sess annually if it should conduct peri- FR 65655, Oct. 25, 2002; 69 FR 39833, July 1, 2004; 73 FR 30477, May 28, 2008] odic additional tests to address market factors that may materially impact § 704.9 Liquidity management. that corporate credit union’s NEV. These factors should include, but are (a) General. In the management of li- not limited to, the following: quidity, a corporate credit union must: (i) Changes in the shape of the Treas- (1) Evaluate the potential liquidity ury yield curve; needs of its membership in a variety of (ii) Adjustments to prepayment pro- economic scenarios; jections used for amortizing securities (2) Regularly monitor sources of in- to consider the impact of significantly ternal and external liquidity; faster/slower prepayment speeds; (3) Demonstrate that the accounting (iii) Adjustments to the market classification of investment securities spread assumptions for non Treasury is consistent with its ability to meet instruments to consider the impact of potential liquidity demands; and widening spreads; and (4) Develop a contingency funding (iv) Adjustments to volatility as- plan that addresses alternative funding sumptions to consider the impact that strategies in successively deteriorating changing volatilities have on embedded liquidity scenarios. The plan must: option values. (i) List all sources of liquidity, by (e) Regulatory violations. If a cor- category and amount, that are avail- porate credit union’s decline in NEV, able to service an immediate outflow of base case NEV ratio or any NEV ratio funds in various liquidity scenarios; resulting from the tests set forth in (ii) Analyze the impact that poten- paragraph (d)(1)(i) of this section vio- tial changes in fair value will have on lates the limits established by this rule the disposition of assets in a variety of and is not brought into compliance interest rate scenarios; and within 10 calendar days, operating (iii) Be reviewed by the board or an management of the corporate credit appropriate committee no less fre- union must immediately report the in- quently than annually or as market or formation to the board of directors, su- business conditions dictate. pervisory committee, and the OCCU Di- rector. If any violation persists for 30 (b) Borrowing. A corporate credit calendar days, the corporate credit union may borrow up to 10 times cap- union must submit a detailed, written ital or 50 percent of shares (excluding action plan to the OCCU Director that shares created by the use of member sets forth the time needed and means reverse repurchase agreements) and by which it intends to correct the vio- capital, whichever is greater. CLF bor- lation. If the OCCU Director deter- rowings and borrowed funds created by mines that the plan is unacceptable, the use of member reverse repurchase the corporate credit union must imme- agreements are excluded from this diately restructure the balance sheet limit. The corporate credit union must to bring the exposure back within com- demonstrate that sufficient contingent pliance or adhere to an alternative sources of liquidity remain available. course of action determined by the OCCU Director. § 704.10 Investment action plan. (f) Policy violations. If a corporate (a) Any corporate credit union in pos- credit union’s decline in NEV, base session of an investment, including a

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derivative, that fails to meet a require- CUSOs must not exceed 15 percent of a ment of this part must, within 30 cal- corporate credit union’s capital. endar days of the failure, report the (2) The aggregate of all investments failed investment to its board of direc- in and loans to member and non- tors, supervisory committee and the member corporate CUSOs must not ex- OCCU Director. If the corporate credit ceed 30 percent of a corporate credit union does not sell the failed invest- union’s capital. A corporate credit ment, and the investment continues to union may lend to member and non- fail to meet a requirement of this part, member corporate CUSOs an additional the corporate credit union must, with- 15 percent of capital if the loan is in 30 calendar days of the failure, pro- collateralized by assets in which the vide to the OCCU Director a written corporate has a perfected security in- action plan that addresses: terest under state law. (1) The investment’s characteristics (3) If the limitations in paragraphs and risks; (b)(1) and (b)(2) of this section are (2) The process to obtain and ade- reached or exceeded because of the quately evaluate the investment’s mar- profitability of the CUSO and the re- ket pricing, cash flows, and risk; lated GAAP valuation of the invest- (3) How the investment fits into the ment under the equity method without credit union’s asset and liability man- an additional cash outlay by the cor- agement strategy; porate, divestiture is not required. A (4) The impact that either holding or corporate credit union may continue to selling the investment will have on the invest up to the regulatory limit with- corporate credit union’s earnings, li- out regard to the increase in the GAAP quidity, and capital in different inter- valuation resulting from the corporate est rate environments; and CUSO’s profitability. (5) The likelihood that the invest- (c) Due diligence. A corporate credit ment may again pass the requirements union must comply with the due dili- of this part. gence requirements of §§ 723.5 and (b) The OCCU Director may require, 723.6(f) through (j) of this chapter for for safety and soundness reasons, a all loans to corporate CUSOs. This re- shorter time period for plan develop- quirement does not apply to loans ex- ment than that set forth in paragraph cluded under § 723.1(b). (a) of this section. (d) Separate entity. (1) A corporate (c) If the plan described in paragraph CUSO must be operated as an entity (a) of this section is not approved by separate from a corporate credit union. the OCCU Director, the credit union (2) A corporate credit union investing must adhere to the OCCU Director’s di- in or lending to a corporate CUSO must rected course of action. obtain a written legal opinion that [62 FR 12938, Mar. 19, 1997, as amended at 67 concludes the corporate CUSO is orga- FR 65656, 65659, Oct. 25, 2002] nized and operated in a manner that the corporate credit union will not rea- § 704.11 Corporate Credit Union Serv- sonably be held liable for the obliga- ice Organizations (Corporate tions of the corporate CUSO. This opin- CUSOs). ion must address factors that have led (a) A corporate CUSO is an entity courts to ‘‘pierce the corporate veil,’’ that: such as inadequate capitalization, lack (1) Is at least partly owned by a cor- of corporate identity, common boards porate credit union; of directors and employees, control of (2) Primarily serves credit unions; one entity over another, and lack of (3) Restricts its services to those re- separate books and records. lated to the normal course of business (e) Prohibited activities. A corporate of credit unions; and credit union may not use this author- (4) Is structured as a corporation, ity to acquire control, directly or indi- limited liability company, or limited rectly, of another depository financial partnership under state law. institution or to invest in shares, (b) Investment and loan limitations. (1) stocks, or obligations of an insurance The aggregate of all investments in company, trade association, liquidity member and nonmember corporate facility, or similar organization.

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(f) An official of a corporate credit one of the corporate credit unions union which has invested in or loaned agrees to provide services to the other to a corporate CUSO may not receive, corporate credit union or its members. either directly or indirectly, any sal- (2) Credit and investment services. ary, commission, investment income, Credit and investment services are ad- or other income, compensation, or con- visory and consulting activities that sideration from the corporate CUSO. assist the member in lending or invest- This prohibition also extends to imme- ment management. These services may diate family members of officials. include loan reviews, investment port- (g) Prior to making an investment in folio reviews and investment advisory or loan to a corporate CUSO, a cor- services. porate credit union must obtain a writ- (3) Electronic financial services. Elec- ten agreement that the corporate tronic financial services are any serv- CUSO will: ices, products, functions, or activities (1) Follow GAAP; that a corporate credit union is other- (2) Provide financial statements to wise authorized to perform, provide or the corporate credit union at least deliver to its members but performed quarterly; through electronic means. Electronic (3) Obtain an annual CPA opinion services may include automated teller audit and provide a copy to the cor- machines, online transaction proc- porate credit union. A wholly owned or essing through a website, website majority owned CUSO is not required hosting services, account aggregation to obtain a separate annual audit if it services, and internet access services is included in the corporate credit to perform or deliver products or serv- union’s annual consolidated audit; and ices to members. (4) Allow the auditor, board of direc- (4) Excess capacity. Excess capacity is tors, and NCUA complete access to its the excess use or capacity remaining in books, records, and any other pertinent facilities, equipment or services that: a documentation. corporate credit union properly in- (h) Corporate credit union authority vested in or established, in good faith, to invest in or loan to a CUSO is lim- with the intent of serving its members; ited to that provided in this section. A and it reasonably anticipates will be corporate credit union is not author- taken up by the future expansion of ized to invest in or loan to a CUSO services to its members. A corporate under part 712 of this chapter. credit union may sell or lease the ex- [62 FR 12938, Mar. 19, 1997, as amended at 63 cess capacity in facilities, equipment FR 10756, Mar. 5, 1998; 67 FR 65656, Oct. 25, or services, such as office space, em- 2002; 68 FR 56550, Oct. 1, 2003] ployees and data processing. (5) Liquidity and asset and liability § 704.12 Permissible services. management. Liquidity and asset and li- (a) Preapproved services. A corporate ability management services are any credit union may provide to members services, functions or activities that the preapproved services set out in this assist the member in liquidity and bal- section. NCUA may at any time, based ance sheet management. These services upon supervisory, legal, or safety and may include liquidity planning and soundness reasons, limit or prohibit balance sheet modeling and analysis. any preapproved service. The specific (6) Operational services. Operational activities listed within each services are services established to de- preapproved category are provided as liver financial products and services illustrations of activities permissible that enhance member service and pro- under the particular category, not as mote safe and sound operations. Oper- an exclusive or exhaustive list. ational services may include tax pay- (1) Correspondent services agreement. A ment, electronic fund transfers and corporate credit union may only pro- providing coin and currency service. vide financial services to nonmembers (7) Payment systems. Payment sys- through a correspondent services tems are any methods used to facili- agreement. A correspondent services tate the movement of funds for trans- agreement is an agreement between actional purposes. Payment systems two corporate credit unions, whereby may include Automated Clearing

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House, wire transfer, item processing (2) The chair of the board may not and settlement services. serve simultaneously as an officer, di- (8) Trustee or custodial services. Trust- rector, or employee of a credit union ee services are services in which the trade association; corporate credit union is authorized to (3) A majority of directors may not act under a written trust agreement to serve simultaneously as officers, direc- the extent permitted under part 724 of tors, or employees of the same credit this chapter. Custodial and safekeeping union trade association or its affiliates services are services a corporate credit (not including chapters or other union performs on behalf of its member subunits of a state trade association); to act as custodian or safekeeper of in- (4) For purposes of meeting the re- vestments. quirements of paragraphs (a)(2) and (b) Procedure for adding services that (a)(3) of this section, an individual may are not preapproved. To provide a serv- not serve as a director or chair of the ice to its members that is not board if that individual holds a subor- preapproved by NCUA: dinate employment relationship to an- (1) A federal corporate credit union other employee who serves as an offi- must request approval from NCUA. The cer, director, or employee of a credit request must include a full explanation union trade association; and and complete documentation of the (5) In the case of a corporate credit service and how the service relates to a union whose membership is composed corporate credit union’s authority to of more than 25 percent non credit provide services to its members. The unions, the majority of directors serv- request must be submitted jointly to ing as representatives of member cred- the OCCU Director and the Secretary it unions, including the chair, must be of the Board. The request will be treat- elected only by member credit unions. ed as a petition to amend § 704.12 and (b) Credit union trade association. As NCUA will request public comment or used in this section, a credit union otherwise act on the petition within a trade association includes but is not reasonable period of time. Before en- limited to, state credit union leagues gaging in the formal approval process, and league service corporations and na- a corporate credit union should seek an tional credit union trade associations. advisory opinion from NCUA’s Office of (c) Representatives of organizational General Counsel as to whether a proposed service is already covered by one members. (1) An organizational member of the authorized categories without of a corporate credit union is a member filing a petition to amend the regula- that is not a natural person. An organi- tion; and zational member may appoint one of its members or officials as a represent- (2) A state-chartered corporate credit ative to the corporate credit union. union must submit a request for a waiver that complies with § 704.1(b) to The representative shall be empowered the OCCU Director. to attend membership meetings, to vote, and to stand for election on be- (c) Prohibition. A corporate credit half of the member. No individual may union is prohibited from purchasing serve as the representative of more loan servicing rights. than one organizational member in the [67 FR 65656, Oct. 25, 2002] same corporate credit union. (2) Any vacancy on the board of a § 704.13 [Reserved] corporate credit union caused by a representative being unable to complete § 704.14 Representation. his or her term shall be filled by the (a) Board representation. The board board of the corporate credit union ac- will be determined as stipulated in its cording to its bylaws governing the bylaws governing election procedures, filling of board vacancies. provided that: (d) Recusal provision. (1) No director, (1) At least a majority of directors, committee member, officer, or em- including the chair of the board, must ployee of a corporate credit union shall serve on the board as representatives of in any manner, directly or indirectly, member credit unions; participate in the deliberation upon or

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the determination of any question af- employee of a credit union trade asso- fecting his or her pecuniary interest or ciation. the pecuniary interest of any entity (2) The provisions of § 701.14 of this (other than the corporate credit union) chapter apply to corporate credit in which he or she is interested, except unions, except that where ‘‘Regional if the matter involves general policy Director’’ is used, read ‘‘NCUA Board.’’ applicable to all members, such as set- [62 FR 12938, Mar. 19, 1997, as amended at 67 ting dividend or loan rates or fees for FR 65657, Oct. 25, 2002] services. (2) An individual is ‘‘interested’’ in § 704.15 Audit requirements. an entity if he or she: (a) External audit. The corporate cred- (i) Serves as a director, officer, or it union supervisory committee shall employee of the entity; cause an annual opinion audit of the fi- (ii) Has a business, ownership, or de- nancial statements to be made. The posit relationship with the entity; or audit must be performed in accordance (iii) Has a business, financial, or fa- with generally accepted auditing milial relationship with an individual standards and the audited financial whom he or she knows has a pecuniary statements must be prepared con- interest in the entity. sistent with GAAP, except where law (3) In the event of the disqualifica- or regulation has provided for a depar- tion of any directors, by operation of ture from GAAP. The supervisory committee shall submit the audit report to paragraph (c)(1) of this section, the re- the board of directors. A copy of the maining qualified directors present at audit report, and copies of all commu- the meeting, if constituting a quorum nications that are provided to the cor- with the disqualified directors, may ex- porate credit union by the external ercise, by majority vote, all the powers auditor, shall be submitted to the of the board with respect to the matter OCCU Director within 30 calendar days under consideration. Where all of the after receipt by the board of directors. directors are disqualified, the matter If requested by the OCCU Director, the must be decided by the members of the external auditor’s workpapers shall be corporate credit union. made available, at the auditor’s office (4) In the event of the disqualifica- or elsewhere, for the OCCU Director’s tion of any committee member by op- review. The corporate credit union eration of paragraph (c)(1) of this sec- shall submit a summary of the audit tion, the remaining qualified com- report to the membership at the next mittee members, if constituting a annual meeting. quorum with the disqualified com- (b) Internal audit. A corporate credit mittee members, may exercise, by ma- union with average daily assets in ex- jority vote, all the powers of the com- cess of $400 million for the preceding mittee with respect to the matter calendar year, or as ordered by the under consideration. Where all of the OCCU Director, must employ or con- committee members are disqualified, tract, on a full- or part-time basis, the the matter shall be decided by the services of an internal auditor. The in- board of directors. ternal auditor’s responsibilities will, at (e) Administration. (1) A corporate a minimum, comply with the Stand- credit union shall be under the direc- ards and Professional Practices of In- tion and control of its board of direc- ternal Auditing, as established by the tors. While the board may delegate the Institute of Internal Auditors. The in- performance of administrative duties, ternal auditor will report directly to the board is not relieved of its respon- the chair of the corporate credit sibility for their performance. The union’s supervisory committee, who board may employ a chief executive of- may delegate supervision of the inter- ficer who shall have such authority and nal auditor’s daily activities to the such powers as delegated by the board chief executive officer of the corporate to conduct business from day to day. credit union. The internal auditor’s re- Such chief executive officer must an- ports, findings, and recommendations swer solely to the board of the cor- will be in writing and presented to the porate credit union, and may not be an supervisory committee no less than

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quarterly, and will be provided upon re- dorsements which limit the coverage quest to the external auditor and the provided by approved bond forms, must OCCU Director. receive the prior written approval of NCUA. Fidelity bonds must provide [62 FR 12938, Mar. 19, 1997, as amended at 67 FR 65659, Oct. 25, 2002] coverage for the fraud and dishonesty of all employees, directors, officers, § 704.16 Contracts/written agreements. and supervisory and credit committee Services, facilities, personnel, or members. Notwithstanding the fore- equipment shared with any party shall going, all bonds must include a provi- be supported by a written contract, sion, in a form approved by NCUA, re- with the duties and responsibilities of quiring written notification by surety each party specified and the allocation to NCUA: of service fee/expenses fully supported (1) When the bond of a credit union is and documented. terminated in its entirety; (2) When bond coverage is termi- § 704.17 State-chartered corporate nated, by issuance of a written notice, credit unions. on an employee, director, officer, su- (a) This part does not expand the pervisory or credit committee member; powers and authorities of any state- or chartered corporate credit union, be- (3) When a deductible is increased yond those powers and authorities pro- above permissible limits. Said notifica- vided under the laws of the state in tion shall be sent to NCUA and shall which it was chartered. include a brief statement of cause for (b) A state-chartered corporate credit termination or increase. union that is not insured by the (d) Minimum coverage amounts. (1) The NCUSIF, but that receives funds from minimum amount of bond coverage federally insured credit unions, is con- will be computed based on the cor- sidered an ‘‘institution-affiliated porate credit union’s daily average net party’’ within the meaning of Section assets for the preceding calendar year. 206(r) of the Federal Credit Union Act, The following table lists the minimum 12 U.S.C. 1786(r). requirements: (c) NCUA will notify, consult with, Minimum and provide explanation to the appro- Daily average net assets bond priate state supervisory authority be- (million) fore taking administrative action Less than $50 million ...... $1.0 against a state-chartered corporate $50–$99 million ...... 2.0 $100–$499 million ...... 4.0 credit union. $500–$999 million ...... 6.0 $1.0–$1.999 billion ...... 8.0 § 704.18 Fidelity bond coverage. $2.0–$4.999 billion ...... 10.0 $5.0–$9.999 billion ...... 15.0 (a) Scope. This section provides the fi- $10.0–$24.999 billion ...... 20.0 delity bond requirements for employ- $25.0 billion plus ...... 25.0 ees and officials in corporate credit unions. (2) It is the duty of the board of di- (b) Review of coverage. The board of rectors of each corporate credit union directors of each corporate credit to provide adequate protection to meet union shall, at least annually, care- its unique circumstances by obtaining, fully review the bond coverage in force when necessary, bond coverage in ex- to determine its adequacy in relation cess of the minimums in the table in to risk exposure and to the minimum paragraph (d)(1) of this section. requirements in this section. (e) Deductibles. (1) The maximum (c) Minimum coverage; approved forms. amount of deductibles allowed are Every corporate credit union will based on the corporate credit union’s maintain bond coverage with a com- core capital ratio. The following table pany holding a certificate of authority sets out the maximum deductibles, ex- from the Secretary of the Treasury. All cept that in each category the max- bond forms, and any riders and en- imum deductible shall be $5 million:

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Core capital ratio Maximum deductible

Less than 1.0 percent ...... 7.5 percent of the sum of retained earnings and paid-in capital. 1.0–1.74 percent ...... 10.0 percent of the sum of retained earnings and paid-in capital 1.75–2.24 percent ...... 12.0 percent of the sum of retained earnings and paid-in capital. Greater than 2.25 percent ...... 15.0 percent of the sum of retained earnings and paid-in capital.

(2) A deductible may be applied sepa- (3) The earnings retention factor is rately to one or more insuring clauses determined as follows: in a blanket bond. Deductibles in ex- (i) If the prior month-end retained cess of those showing in this section earnings ratio is less than 1 percent must have the written approval of and the core capital ratio is less than 3 NCUA at least 30 calendar days prior to percent, the earnings retention factor the effective date of the deductibles. is .15 percent per annum; or (f) Additional coverage. NCUA may re- (ii) If the prior month-end retained quire additional coverage for any cor- earnings ratio is less than 1 percent porate credit union when, in the opin- and the core capital ratio is equal to or ion of NCUA, current coverage is insuf- greater than 3 percent, the earnings re- ficient. The board of directors of the tention factor is .075 percent per corporate credit union must obtain ad- annum. ditional coverage within 30 calendar (4) The OCCU Director may approve a days after the date of written notice decrease to the earnings retention from NCUA. amount set forth in this section if it is determined a lesser amount is nec- [62 FR 12938, Mar. 19, 1997, as amended at 67 essary to avoid a significant adverse FR 65657, Oct. 25, 2002] impact upon a wholesale corporate credit union. § 704.19 Wholesale corporate credit (5) Operating management of the unions. wholesale corporate credit union must (a) General. Wholesale corporate cred- notify its board of directors, super- it unions are subject to the preceding visory committee, OCCU Director and, requirements of this part, except as set if applicable, the state regulator within forth in this section. 10 calendar days of determining the re- (b) Earnings retention requirement. A tained earnings ratio has declined wholesale corporate credit union must below 1 percent. If the decline in the increase retained earnings if the prior retained earnings ratio is due in full or month-end retained earnings ratio is in part, to a decline in the dollar less than 1 percent. amount of retained earnings and the (1) Its retained earnings must in- retained earnings ratio is not restored crease: to at least 1 percent by the next month (i) During the current month, by an end, a retained earnings action plan is amount equal to or greater than the required to be submitted within 30 cal- monthly earnings retention amount; or endar days. (ii) During the current and prior two (6) The retained earnings action plan months, by an amount equal to or must be submitted to the OCCU Direc- greater than the quarterly earnings re- tor and, if applicable, the state regu- tention amount. lator and, at a minimum, include the (2) Earnings retention amounts are following: calculated as follows: (i) Reasons why the dollar amount of (i) The monthly earnings retention retained earnings has decreased; amount is determined by multiplying (ii) Description of actions to be taken the earnings retention factor by the to increase the dollar amount of re- prior month-end moving daily average tained earnings within specific time net assets; and frames; and (ii) The quarterly earnings retention (iii) Monthly balance sheet and in- amount is determined by multiplying come projections, including assump- the earnings retention factor by mov- tions for the ensuing 12-month period. ing daily average net assets for each of [62 FR 12938, Mar. 19, 1997, as amended at 67 the prior three month-ends. FR 65657, Oct. 25, 2002]

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APPENDIX A TO PART 704—MODEL the chair and secretary of the board of the FORMS credit union. The annual disclosure notice form must be This appendix contains sample forms in- signed by the chair of the corporate credit tended for use by corporate credit unions to union. The chair must then sign a statement aid in compliance with the membership cap- that certifies that the notice has been sent ital account and paid-in capital disclosure to member credit unions with membership requirements of § 704.3. capital accounts. The certification must be maintained in the corporate credit union’s Sample Form 1 files and be available for examiner review.

Terms and Conditions of Membership Capital Sample Form 2 Account (1) A membership capital account is not Terms and Conditions of Paid-In Capital subject to share insurance coverage by the (1) A paid-in capital account is not subject NCUSIF or other deposit insurer. to share insurance coverage by the NCUSIF (2) A membership capital account is not re- or other deposit insurer. leasable due solely to the merger, charter (2) A paid-in capital account is not releas- conversion or liquidation of the member able due solely to the merger, charter con- credit union. In the event of a merger, the version or liquidation of the member credit membership capital account transfers to the union. In the event of a merger, the paid-in continuing credit union. In the event of a capital account transfers to the continuing charter conversion, the membership capital credit union. In the event of a charter con- account transfers to the new institution. In version, the paid-in capital account transfers the event of liquidation, the membership to the new institution. In the event of liq- capital account may be released to facilitate uidation, the paid-in capital account may be the payout of shares with the prior written released to facilitate the payout of shares approval of NCUA. with the prior written approval of NCUA. (3) A member credit union may withdraw (3) The funds are callable only at the op- membership capital with three years’ notice. tion of the corporate credit union and only if (4) Membership capital cannot be used to the corporate credit union meets its min- pledge borrowings. imum required capital and NEV ratios after (5) Membership capital is available to the funds are called. cover losses that exceed retained earnings (4) Paid-in capital cannot be used to pledge and paid-in capital. borrowings. (6) Where the corporate credit union is liq- (5) Paid-in capital is available to cover uidated, membership capital accounts are losses that exceed retained earnings. payable only after satisfaction of all liabil- (6) Where the corporate credit union is liq- ities of the liquidation estate including unin- uidated, paid-in capital accounts are payable sured obligations to shareholders and the only after satisfaction of all liabilities of the NCUSIF. liquidation estate including uninsured obli- (7) Where the corporate credit union is gations to shareholders and the NCUSIF, and merged into another corporate credit union, membership capital holders. the membership capital account will transfer (7) Where the corporate credit union is to the continuing corporate credit union. merged into another corporate credit union, The three-year notice period for withdrawal the paid-in capital account will transfer to of the membership capital account will re- the continuing corporate credit union. main in effect. (8) Paid-in capital is perpetual maturity { } (8) If an adjusted balance account : The and noncumulative dividend. membership capital balance will be adjusted I have read the above terms and conditions (1 or 2) time(s) annually in relation ll lll and I understand them. I further agree to to the member credit union’s (assets lll maintain in the credit union’s files the an- or other measure) as of lll nual notice of terms and conditions of the (date(s)) . {If a term certificate}: lll lll paid-in capital instrument. The membership capital account is a term The notice form must be signed by either certificate that will mature on all of the directors of the credit union or, if lll(date)lll. authorized by board resolution, the chair and I have read the above terms and conditions secretary of the board of the credit union. and I understand them. I further agree to maintain in the credit [67 FR 65657, Oct. 25, 2002] union’s files the annual notice of terms and conditions of the membership capital ac- APPENDIX B TO PART 704—EXPANDED count. AUTHORITIES AND REQUIREMENTS The notice form must be signed by either all of the directors of the member credit A corporate credit union may obtain all or union or, if authorized by board resolution, part of the expanded authorities contained in

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this appendix if it meets the applicable re- porate credit union that has met the require- quirements of Part 704 and appendix B, ful- ments of this Part I may decline as much as: fills additional management, infrastructure, (1) 20 percent; and asset and liability requirements, and re- (2) 28 percent if the corporate credit union ceives NCUA’s written approval. Additional has a 5 percent minimum capital ratio and is guidance is set forth in the NCUA publica- specifically approved by NCUA; or tion Guidelines for Submission of Requests (3) 35 percent if the corporate credit union for Expanded Authority. has a 6 percent minimum capital ratio and is A corporate credit union seeking expanded specifically approved by NCUA. authorities must submit to NCUA a self-as- (d) The maximum aggregate amount in un- sessment plan supporting its request. A cor- secured loans and lines of credit to any one porate credit union may adopt expanded au- member credit union, excluding pass-through thorities when NCUA has provided final ap- and guaranteed loans from the CLF and the proval. If NCUA denies a request for ex- NCUSIF, must not exceed 100 percent of the panded authorities, it will advise the cor- corporate credit union’s capital. The board porate credit union of the reason(s) for the of directors must establish the limit, as a denial and what it must do to resubmit its percent of the corporate credit union’s cap- request. NCUA may revoke these expanded ital plus pledged shares, for secured loans authorities at any time if an analysis indi- and lines of credit. cates a significant deficiency. NCUA will notify the corporate credit union in writing of PART II the identified deficiency. A corporate credit (a) A corporate credit union that has met union may request, in writing, reinstate- the requirements for this Part II may: ment of the revoked authorities by providing (1) Purchase investments with long-term a self-assessment plan detailing how it has ratings no lower than BBB (flat) (or equiva- corrected the deficiency. lent). The aggregate of all investments rated Minimum Requirement BBB+ (or equivalent) or lower in any single obligor is not to exceed 25 percent of capital; In order to participate in any of the au- (2) Purchase investments with short-term thorities set forth in Base-Plus, Part I, Part ratings no lower than A–2 (or equivalent), II, Part III, Part IV, and Part V of this ap- provided that the issuer has a long-term rat- pendix, a corporate credit union must evalu- ing no lower than BBB (flat) (or equivalent) ate monthly the changes in NEV and the or the investment is a domestically issued NEV ratio for the tests set forth in asset-backed security; § 704.8(d)(1)(i). (3) Engage in short sales of permissible investments to reduce interest rate risk; BASE-PLUS (4) Purchase principal only (PO) stripped A corporate that has met the requirements mortgage-backed securities to reduce inter- for this Base-plus authority may, in per- est rate risk; and forming the rate stress tests set forth in (5) Enter into a dollar roll transaction. § 704.8(d)(1)(i), allow its NEV to decline as (b) Aggregate investments in repurchase much as 20 percent. and securities lending agreements with any one counterparty are limited to 400 percent PART I of capital. (a) A corporate credit union that has met (c) In performing the rate stress tests set the requirements for this Part I may: forth in § 704.8(d)(1)(i), the NEV of a cor- (1) Purchase investments with long-term porate credit union which has met the re- ratings no lower than A– (or equivalent); quirements of this Part II may decline as (2) Purchase investments with short-term much as: ratings no lower than A–2 (or equivalent), (1) 20 percent; provided that the issuer has a long-term rat- (2) 28 percent if the corporate credit union ing no lower than A– (or equivalent) or the has a 5 percent minimum capital ratio and is investment is a domestically-issued asset- specifically approved by NCUA; or backed security; (3) 35 percent if the corporate credit union (3) Engage in short sales of permissible in- has a 6 percent minimum capital ratio and is vestments to reduce interest rate risk; specifically approved by NCUA. (4) Purchase principal only (PO) stripped (d) The maximum aggregate amount in un- mortgage-backed securities to reduce inter- secured loans and lines of credit to any one est rate risk; and member credit union, excluding pass-through (5) Enter into a dollar roll transaction. and guaranteed loans from the CLF and the (b) Aggregate investments in repurchase NCUSIF, must not exceed 100 percent of the and securities lending agreements with any corporate credit union’s capital. The board one counterparty are limited to 300 percent of directors must establish the limit, as a of capital. percent of the corporate credit union’s cap- (c) In performing the rate stress tests set ital plus pledged shares, for secured loans forth in § 704.8(d)(1)(i), the NEV of a cor- and lines of credit.

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PART III (B) two or more ratings were relied upon to meet the requirements of this part and at (a) A corporate credit union that has met least two of those ratings are downgraded the requirements of either Part I or Part II below the minimum rating requirements of of this appendix and the additional require- this part. ments for Part III may invest in: (1) Debt obligations of a foreign country; (2) Exceptions. Credit ratings are not re- (2) Deposits and debt obligations of foreign quired for derivative transactions with: banks or obligations guaranteed by these (i) Domestically chartered credit unions; banks; (ii) U.S. government sponsored enterprises; (3) Marketable debt obligations of foreign or corporations. This authority does not apply (iii) Counterparties if the transaction is to debt obligations that are convertible into fully guaranteed by an entity with a min- the stock of the corporation; and imum permissible rating for comparable (4) Foreign issued asset-backed securities. term investments. (b) All foreign investments are subject to the following requirements: PART V (1) Investments must be rated no lower A corporate credit union that has met the than the minimum permissible domestic rat- requirements for this Part V may participate ing under the corporate credit union’s Part I in loans with member natural person credit or Part II authority; unions as approved by the OCCU Director (2) A sovereign issuer, and/or the country and subject to the following: in which an obligor is organized, must have (a) The maximum aggregate amount of a long-term foreign currency (non-local cur- participation loans with any one member rency) debt rating no lower than AA– (or credit union must not exceed 25 percent of equivalent); capital; and (3) For each approved foreign bank line, (b) The maximum aggregate amount of the corporate credit union must identify the participation loans with all member credit specific banking centers and branches to unions will be determined on a case-by-case which it will lend funds; basis by the OCCU Director. (4) Obligations of any single foreign obligor may not exceed 50 percent of capital; and [67 FR 65658, Oct. 25, 2002] (5) Obligations in any single foreign country may not exceed 250 percent of capital. PART 705—COMMUNITY DEVELOP- PART IV MENT REVOLVING LOAN PRO- (a) A corporate credit union that has met GRAM FOR CREDIT UNIONS the requirements for this Part IV may enter into derivative transactions specifically ap- Sec. proved by NCUA to: 705.0 Applicability. (1) Create structured products; 705.1 Scope. (2) Manage its own balance sheet; and 705.2 Purpose of the program. (3) Hedge the balance sheets of its mem- 705.3 Definitions. bers. 705.4 Program activities. (b) Credit Ratings: 705.5 Application for participation. (1) All derivative transactions are subject 705.6 Community needs plan. to the following requirements: 705.7 Loans to participating credit unions. (i) If the counterparty is domestic, the 705.8 State-chartered credit unions. counterparty rating must be no lower than 705.9 Application period. the minimum permissible rating for com- 705.10 Technical assistance. parable term permissible investments; and (ii) If the counterparty is foreign, the cor- AUTHORITY: 12 U.S.C. 1772c–1; 42 U.S.C. 9822 porate must have Part III expanded author- and 9822 note. ity and the counterparty rating must be no SOURCE: 58 FR 21646, Apr. 23, 1993, unless lower that the minimum permissible rating otherwise noted. for a comparable term investment under Part III Authority. § 705.0 Applicability. (iii) Any rating(s) relied upon to meet the requirements of this part must be identified Monies from the Community Devel- at the time the transaction is entered into opment Revolving Loan Fund for Cred- and must be monitored for as long as the it Unions are governed by this part. contract remains open. (iv) Section 704.10 of this part if: § 705.1 Scope. (A) one rating was relied upon to meet the requirements of this part and that rating is (a) This part implements the Com- downgraded below the minimum rating re- munity Developments Revolving Loan quirements of this part; or Program for Credit Unions (Program)

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under the sole administration of the participation in the Program in accord- National Credit Union Administration. ance with this part. (b) This part establishes the fol- [58 FR 21646, Apr. 23, 1993, as amended at 60 lowing: FR 58504, Nov. 28, 1995; 61 FR 50695, Sept. 27, (1) Definitions; 1996; 69 FR 45237, July 29, 2004; 73 FR 71913, (2) The application process and re- Nov. 26, 2008] quirements for qualifying for a loan under the program; § 705.4 Program activities. (3) How loan funds are to be made In order to meet the objectives of the available and their repayment; and Program, a credit union applicant (4) Technical assistance to be pro- should provide a variety of financial vided to participating credit unions. and related services designed to meet the particular needs of the low-income § 705.2 Purpose of the program. community served. These activities (a) The Community Development Re- shall include basic member share ac- volving Loan Program for Credit count and member loan services. Unions is intended to support the efforts of participating credit unions § 705.5 Application for participation. through loans and technical assistance (a) Applications to participate and to those credit unions in: qualify for a loan or technical assist- (1) Providing basic financial and re- ance under the Program may be ob- lated services to residents in their tained from the National Credit Union communities; and Administration, Community Develop- (2) Stimulating economic activities ment Revolving Loan Program For in the communities they service which Credit Unions. will result in increased income, owner- (b) The application for a loan shall ship and employment opportunities for contain the following information: low-income residents, and other com- (1) Information demonstrating a munity growth efforts. sound financial position and the credit (b) The policy of NCUA is to revolve union’s ability to manage its day-to- loan funds to qualifying credit unions day business affairs, including the as often as practical in order to gain credit union’s latest financial state- maximum economic impact on as ment. A nonfederally insured credit many participating credit unions as union must include the following: possible. (i) A copy of its most recent outside audit report; § 705.3 Definitions. (ii) Proof of deposit and surety bond (a) The term ‘‘low-income members’’ insurance which states the maximum means those members defined in § 701.34 insurance levels permitted by the poli- of this chapter. cies; (b) For purposes of this part, a par- (iii) A balance sheet, an income and ticipating credit union means a state- or expense statement, and a schedule of federally-chartered credit union that is delinquent loans, for the most recent specifically involved in the stimulation month-end and each of the twelve of economic development activities and months preceding that month-end. community revitalization efforts (2) Evidence that the credit union has aimed at benefiting the community it a need for increased funds in order to serves; whose membership consists of improve financial services to its mem- predominantly low-income members as bers. defined in paragraph (a) of this section (3) The following information con- or applicable state standards as re- cerning a state-chartered credit flected by a current low-income des- union’s field of membership: ignation pursuant to § 701.34(a)(1) or (i) Current field of membership as set § 741.204 of this chapter or, in the case forth in the credit union’s charter; of a state-chartered nonfederally in- (ii) Changes, if any, to be made to the sured credit union, under applicable field of membership for participation state standards; and has submitted an in the Program, including; application for a loan and/or technical (A) Evidence of approval of change by assistance and has been selected for credit union board of directors;

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(B) Evidence of submission and ap- Loan Fund for Credit Unions. The proval of change by the state super- amount of the loan will be based on visor; funds availability, the creditworthiness (iii) Current designation as a low-in- of the participating credit union, finan- come credit union if the credit union is cial need, and a demonstrated capa- not federally insured. bility of a participating credit union to (4) Along with a community needs provide financial and related services plan, specifics of how the credit union to its members. At the discretion of proposes to serve the needs of its mem- NCUA, a loan will be recorded by a par- bers and the community with Program ticipating credit union as either a note funds. The applicant credit union will payable or a nonmember deposit. also construct and submit a plan for its (b) Matching requirements. Partici- growth and development. The plan will pating credit unions will be encouraged set forth objectives for financial to develop, as rapidly as possible, a per- growth, credit union development and manent source of member shares. capitalization, and the means for (1) Generally loan monies made achieving these objectives. available must be matched by the par- (5) Indication of any other involve- ticipating credit union by increasing ment in existing community develop- its share deposits in an amount equal ment programs of state and federal to the loan amount. However, any loan agencies. monies matched by member share de- (c) NCUA will notify applicant credit posits will be credited as a two-for-one unions as to whether or not they have match. Nonmember share deposits ac- qualified for a loan or technical assist- cepted to meet the matching require- ance under this part. Reasons for non- ment are not subject to the 20% limita- qualification will be stated. Any appli- tion on nonmember deposits under cant whose qualification is denied may § 701.32. Participating credit unions appeal that decision to the NCUA must meet this matching requirement Board. within one year of the approval of the [58 FR 21646, Apr. 23, 1993, as amended at 61 loan application and must maintain FR 50695, Sept. 27, 1996; 73 FR 30477, May 28, the increase in the total amount of 2008] share deposits for the duration of the loan. Once the loan is repaid, non- § 705.6 Community needs plan. member share deposits accepted to (a) The credit union’s board of direc- meet the matching requirement are tors will prepare a Community Needs subject to § 701.32. Plan and submit it with its loan appli- (2) Upon approval of its loan applica- cation. The Plan will contain a list of tion, and before it meets its matching needed community services that the requirement, a participating credit credit union will provide. union may receive the entire loan com- (b) The credit union’s board of direc- mitment in a single payment. If any tors will report on the progress of pro- funds are withheld, the remainder of viding needed community services to the funds committed will be available the credit union members once a year, to the participating credit union only either at the annual meeting or in a after it has documented that it has met written report sent to all members. the match requirement for the total The credit union will also submit the amount of the loan committed. written report or a summary of the re- (3) Failure of a participating credit port given at the annual meeting to union to generate the required match NCUA. within one year of the approval of the loan will result in the reduction of the § 705.7 Loans to participating credit loan proportionate to the amount of unions. match actually generated. Payment of (a) Amount and recording of loans. A any additional funds initially approved participating credit union will be eligi- will be limited as appropriate to reflect ble to receive up to $300,000 in the ag- the revised amount of the loan ap- gregate, as determined by the NCUA proved. Any funds already advanced to Board, in the form of a loan from the the participating credit union in excess Community Development Revolving of the revised amount of loan approval

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must be repaid immediately to NCUA. limited purpose of compliance with Failure to repay such funds to NCUA this part. upon demand shall result in the default of the entire loan. § 705.9 Application period. (c) Terms and repayment. (1) Assist- NCUA will announce annually and ance made available through Program publish in the FEDERAL REGISTER when loans, whether recorded by the credit applications for participation in the union as a note payable or nonmember program may be submitted. Such no- deposit at NCUA’s direction, is in the tice will be dependent upon the avail- form of a loan and must be repaid to ability of funds. NCUA. All loans will be scheduled for repayment within the shortest time § 705.10 Technical assistance. compatible with sound business practices and with objectives of the Pro- NCUA may provide technical assist- gram, but in no case will the term ex- ance to participating credit unions di- ceed five years. rectly or through outside providers selected by the credit unions or NCUA. (2) Semiannual interest payments NCUA will base technical assistance on (beginning six months after the initial funds availability, the needs of the par- distribution of a loan) and semiannual principal payments (beginning one ticipating credit union, and a dem- year after the initial distribution of a onstrated capability of the partici- loan) will be required. pating credit union to provide financial and related services to its members. (d) Interest rates. Loans made under NCUA will consider applications for this part shall bear interest at a fixed technical assistance and determine annual percentage rate of not more whether to grant them in accordance than 3 percent and not less than 1 percent as determined by the NCUA with established procedures and stand- Board. ards that are publicly available. Par- ticipating credit unions can be pro- (e) Default, collections and adjust- vided with technical assistance with- ments. The terms of each loan agree- out obtaining a Program loan. NCUA ment shall provide for the immediate technical assistance will aid partici- acceleration of the unpaid balance for pating credit unions in providing serv- breach or default in the performance by the participating credit union of the ices to their members and in the effi- terms or conditions of the loan. This cient operation of such credit unions. will include misrepresentation, default [61 FR 50696, Sept. 27, 1996, as amended at 65 in making interest/principal payments, FR 80299, Dec. 21, 2000] failure to report, insolvency, failure to maintain adequate match for the dura- PART 706—CREDIT PRACTICES (Eff. tion of the loan period, etc. The unpaid until 7-1-10) balance will also be accelerated and immediately due if any part of the loan funds are improperly used, or if Sec. 706.1 Definitions. uninvested loan proceeds remain un- 706.2 Unfair credit practices. used for an unreasonable or unjustified 706.3 Unfair or deceptive cosigner practices. period of time. 706.4 Late charges. [58 FR 21646, Apr. 23, 1993, as amended at 61 706.5 State exemptions. FR 50696, Sept. 27, 1996] AUTHORITY: 15 U.S.C. 57a(f).

§ 705.8 State-chartered credit unions. SOURCE: 52 FR 46586, Dec. 9, 1987, unless otherwise noted. State-chartered credit union loan applicants approved for participation by EFFECTIVE DATE NOTE: At 74 FR 5575, Jan. NCUA must obtain written concur- 29, 2009, part 706 was revised, effective July 1, rence from their respective state regu- 2010. The revised text follows this part. latory authority. Such applicants shall make copies of their state examination § 706.1 Definitions. reports available to NCUA and shall (a) Person. An individual, corpora- agree to examination by NCUA for the tion, or other business organization.

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(b) Consumer. A natural person mem- § 706.2 Unfair credit practices. ber who seeks or acquires goods, serv- (a) In connection with the extension ices, or money for personal, family, or of credit to consumers, it is an unfair household use. act or practice for a Federal credit (c) Obligation. An agreement between union, directly or indirectly, to take or a consumer and a Federal credit union. receive from a consumer an obligation (d) Debt. Money that is due or alleged that: to be due from one to another. (1) Constitutes or contains a cognovit (e) Earnings. Compensation paid or payable to an individual or for his or or confession of judgment (for purposes her account for personal services ren- other than executory process in the dered or to be rendered by him or her, State of Louisiana), warrant of attor- whether denominated as wages, salary, ney, or other waiver of the right to no- commission, bonus, or otherwise, in- tice and the opportunity to be heard in cluding periodic payments pursuant to the event of suit or process thereon. a pension, retirement, or disability (2) Constitutes or contains an execu- program. tory waiver or a limitation of exemp- (f) Household goods. Clothing, fur- tion from attachment, execution, or niture, appliances, one radio and one other process on real or personal prop- television, linens, china, crockery, erty held, owned by, or due to the con- kitchenware, and personal effects (in- sumer, unless the waiver applies solely cluding wedding rings) of the consumer to property subject to a security inter- and his or her dependents, provided est executed in connection with the ob- that the following are not included ligation. within the scope of the term ‘‘house- (3) Constitutes or contains an assign- hold goods’’: ment of wages or other earnings unless: (1) Works of art; (i) The assignment by its terms is (2) Electronic entertainment equip- revocable at the will of the debtor, or ment (except one television and one (ii) The assignment is a payroll de- radio); duction plan or preauthorized payment (3) Items acquired as antiques; and plan, commencing at the time of the (4) Jewelry (except wedding rings). transaction, in which the consumer au- (g) Antique. Any item over one hun- thorizes a series of wage deductions as dred years of age, including such items a method of making each payment, or that have been repaired or renovated (iii) The assignment applies only to without changing their original form wages or other earnings already earned or character. at the time of the assignment. (h) Cosigner. A natural person who (4) Constitutes or contains a renders himself or herself liable for the nonpossessory security interest in obligation of another person without household goods other than a purchase receiving goods, services, or money in money security interest. return for the credit obligation, or, in the case of an open-end credit obliga- § 706.3 Unfair or deceptive cosigner tion, without receiving the contractual practices. right to obtain extensions of credit (a) Prohibited practices. In connection under the obligation. The term in- with the extension of credit to concludes any person whose signature is sumers, it is: requested as a condition to granting (1) A deceptive act or practice for a credit to a consumer, or as a condition Federal credit union, directly or indi- for forbearance on collection of a con- rectly, to mispresent the nature or ex- sumer’s obligation that is in default. tent of cosigner liability to any person. The term does not include a spouse (2) An unfair act or practice for a whose signature is required on a credit Federal credit union, directly or indi- obligation to perfect a security inter- rectly, to obligate a cosigner unless the est pursuant to state law. A person is a cosigner is informed prior to becoming cosigner within the meaning of this obligated, which in the case of open- definition whether or not he or she is end credit means prior to the time that designated as such on a credit obliga- the agreement creating the cosigner’s tion. liability for future charges is executed,

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of the nature of his or her liability as state law, the notice to cosigner may cosigner. be modified. (b) Disclosure requirement. (1) To comply with the cosigner information re- § 706.4 Late charges. quirement of paragraph (a)(2) of this (a) In connection with collecting a section, a clear and conspicuous disclo- debt arising out of an extension of sure statement shall be given in writ- credit to a consumer, it is an unfair act ing to the cosigner prior to becoming or practice for a Federal credit union, obligated. The disclosure statement directly or indirectly, to levy or collect will contain only the following state- any delinquency charge on a payment, ment, or one which is substantially which payment is otherwise a full pay- equivalent, and shall either be a sepa- ment for the applicable period and is rate document or included in the docu- paid on its due date or within an appli- ments evidencing the consumer credit cable grace period, when the only de- obligation. linquency is attributable to late fee(s) or delinquency charge(s) assessed on NOTICE TO COSIGNER earlier installment(s). You are being asked to guarantee this (b) For purposes of this section, debt. Think carefully before you do. If the ‘‘collecting a debt’’ means any activity borrower doesn’t pay the debt, you will have other than the use of judicial process to. Be sure you can afford to pay if you have that is intended to bring about or does to, and that you want to accept this respon- bring about repayment of all or part of sibility. a consumer debt. You may have to pay up to the full amount of the debt if the borrower does not pay. You § 706.5 State exemptions. may also have to pay late fees or collection costs, which increase this amount. (a) If, upon application to the NCUA The creditor can collect this debt from you by an appropriate state agency, the without first trying to collect from the bor- NCUA determines that: rower. The creditor can use the same collec- (1) There is a state requirement or tion methods against you that can be used prohibition in effect that applies to against the borrower, such as suing you, gar- any transaction to which a provision of nishing your wages, etc. If this debt is ever in default, that fact may become a part of this rule applies; and your credit record. (2) The state requirement or prohibi- This notice is not the contract that makes tion affords a level of protection to you liable for the debt. consumers that is substantially equivalent to, or greater than, the protection (2) If the notice to cosigner is a sepa- afforded by this rule; then that provi- rate document, nothing other than the sion of this rule will not be in effect in following items may appear with the the state to the extent specified by the notice. Items (i) through (v) may not NCUA in its determination, for as long be part of the narrative portion of the as the state administers and enforces notice to cosigner. the state requirement or prohibition (i) The name and address of the Fed- effectively. eral credit union; (b) States that received an exemption (ii) An identification of the debt to from the Federal Trade Commission’s be consigned (e.g., a loan identification Credit Practices Rule prior to Sep- number); tember 17, 1987, are not required to re- (iii) The amount of the loan; apply to NCUA for an exemption under (iv) The date of the loan; paragraph (a) of this section provided (v) A signature line for a cosigner to that the state forwards a copy of its ex- acknowledge receipt of the notice; and emption determination to the appro- (vi) To the extent permitted by state priate Regional Office. NCUA will law, a cosigner notice required by state honor the exemption for as long as the law may be included in the paragraph state administers and enforces the (b)(1) notice. state requirement or prohibition effec- (3) To the extent the notice to co- tively. Any state seeking a greater ex- signer specified in paragraph (b)(1) of emption than that granted to it by the this section refers to an action against Federal Trade Commission must apply a cosigner that is not permitted by to NCUA for the exemption.

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EFFECTIVE DATE NOTE: At 74 FR 5575, Jan. §§ 706.2–706.10 [Reserved] 29, 2009, part 706 was revised, effective July 1, 2010. For the convenience of the user, the re- Subpart B—Consumer Credit Practices vised text is set forth as follows: § 706.11 Definitions. PART 706—UNFAIR OR DECEPTIVE ACTS For purposes of this subpart, the following OR PRACTICES (Eff. 7-1-10) definitions apply: Consumer means a natural person member Subpart A—General Provisions who seeks or acquires goods, services, or money for personal, family, or household Sec. purposes, other than for the purchase of real 706.1 Authority, purpose, and scope. property, and who applies for or is extended 706.2–706.10 [Reserved] consumer credit. Consumer credit means credit extended to a Subpart B—Consumer Credit Practices natural person member for personal, family, 706.11 Definitions. or household purposes. It includes consumer 706.12 Unfair credit contract provisions. loans; educational loans; unsecured loans for 706.13 Unfair or deceptive cosigner prac- real property alteration, repair or improve- tices. ment, or for the equipping of real property; 706.14 Unfair late charges. overdraft loans; and credit cards. It also in- 706.15–706.20 [Reserved] cludes loans secured by liens on real estate and chattel liens secured by mobile homes Subpart C—Consumer Credit Card Account and leases of personal property to consumers Practices Rule that may be considered the functional equivalent of loans on personal security but only 706.21 Definitions. if the federal credit union relies substan- 706.22 Unfair time to make payment. tially upon other factors, such as the general 706.23 Unfair allocation of payments. credit standing of the borrower, guaranties, 706.24 Unfair increases in annual percentage or security other than the real estate or mo- rates. bile home, as the primary security for the 706.25 Unfair balance computation method. loan. 706.26 Unfair charging of security deposits Earnings means compensation paid or pay- and fees for the issuance or availability able to an individual or for the individual’s of credit to consumer credit card ac- account for personal services rendered or to counts. be rendered by the individual, whether denominated as wages, salary, commission, APPENDIX A TO PART 706—OFFICIAL STAFF bonus, or otherwise, including periodic pay- COMMENTARY ments pursuant to a pension, retirement, or AUTHORITY: 15 U.S.C. 57a. disability program. Obligation means an agreement between a SOURCE: 74 FR 5575, Jan. 29, 2009, unless consumer and a federal credit union. otherwise noted. Person means an individual, corporation, or other business organization. Subpart A—General Provisions § 706.12 Unfair credit contract provisions. § 706.1 Authority, purpose, and scope. It is an unfair act or practice for a federal (a) Authority. This part is issued by NCUA credit union, directly or indirectly, to enter under section 18(f) of the Federal Trade Com- into a consumer credit obligation that con- mission Act, 15 U.S.C. 57a(f) (section 202(a) of stitutes or contains, or to enforce in a con- the Magnuson-Moss Warranty—Federal sumer credit obligation the federal credit Trade Commission Improvement Act, Pub. L. union purchased, any of the following provi- 93–637). sions: (b) Purpose. The purpose of this part is to (a) Confession of judgment. A cognovit or prohibit unfair or deceptive acts or practices confession of judgment (for purposes other in violation of section 5(a)(1) of the Federal than executory process in the State of Lou- Trade Commission Act, 15 U.S.C. 45(a)(1). isiana), warrant of attorney, or other waiver Subparts B and C define and contain require- of the right to notice and the opportunity to ments prescribed for the purpose of pre- be heard in the event of suit or process venting specific unfair or deceptive acts or thereon. practices of federal credit unions. The prohi- (b) Waiver of exemption. An executory waiv- bitions in subparts B and C do not limit er or a limitation of exemption from attach- NCUA’s authority to enforce the FTC Act ment, execution, or other process on real or with respect to any other unfair or deceptive personal property held, owned by, or due to acts or practices. the consumer, unless the waiver applies sole- (c) Scope. This part applies to federal credit ly to property subject to a security interest unions. executed in connection with the obligation.

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(c) Assignment of wages. An assignment of You may have to pay up to the full amount wages or other earnings unless: of the debt if the borrower does not pay. You (1) The assignment by its terms is rev- may also have to pay late fees or collection ocable at the will of the debtor; costs, which increase this amount. (2) The assignment is a payroll deduction The creditor can collect this debt from you plan or preauthorized payment plan, com- without first trying to collect from the bor- mencing at the time of the transaction, in rower. The creditor can use the same collec- which the consumer authorizes a series of tion methods against you that can be used wage deductions as a method of making each against the borrower, such as suing you, gar- payment; or nishing your wages, etc. If this debt is ever (3) The assignment applies only to wages in default, that fact may become a part of or other earnings already earned at the time your credit record. of the assignment. (2) Compliance. Compliance with paragraph (d) Security interest in household goods. A (c)(1) of this section constitutes compliance nonpossessory security interest in household with the consumer disclosure requirement in goods other than a purchase-money security paragraph (b) of this section. interest. For purposes of this paragraph, (3) Additional content limitations. If the no- household goods: tice is a separate document, nothing other (1) Means clothing, furniture, appliances, than the following items may appear with linens, china, crockery, kitchenware, and the notice: personal effects of the consumer and the con- (i) The federal credit union’s name and ad- sumer’s dependents. dress; (2) Does not include: (ii) An identification of the debt to be co- (i) Works of art; signed (e.g., a loan identification number); (ii) Electronic entertainment equipment (iii) The date (of the transaction); and (except one television and one radio); (iv) The statement, ‘‘This notice is not the (iii) Antiques (any item over one hundred contract that makes you liable for the debt.’’ years of age, including such items that have (d) Cosigner defined—(1) Cosigner means a been repaired or renovated without changing natural person who assumes liability for the their original form or character); or obligation of a consumer without receiving (iv) Jewelry (other than wedding rings). goods, services, or money in return for the obligation, or, in the case of an open-end § 706.13 Unfair or deceptive cosigner prac- credit obligation, without receiving the con- tices. tractual right to obtain extensions of credit (a) Prohibited deception. It is a deceptive act under the account. or practice for a federal credit union, di- (2) Cosigner includes any person whose sig- rectly or indirectly in connection with the nature is requested as a condition to grant- extension of credit to consumers, to mis- ing credit to a consumer, or as a condition represent the nature or extent of cosigner li- for forbearance on collection of a consumer’s ability to any person. obligation that is in default. The term does (b) Prohibited unfairness. It is an unfair act not include a spouse or other person whose or practice for a federal credit union, di- signature is required on a credit obligation rectly or indirectly in connection with the to perfect a security interest pursuant to extension of credit to consumers, to obligate state law. a cosigner unless the cosigner is informed, (3) A person who meets the definition in before becoming obligated, of the nature of this paragraph is a cosigner, whether or not the cosigner’s liability. the person is designated as such on a credit (c) Disclosure requirement—(1) Disclosure obligation. statement. A clear and conspicuous statement must be given in writing to the cosigner be- § 706.14 Unfair late charges. fore becoming obligated. In the case of open- (a) Prohibition. In connection with col- end credit, the disclosure statement must be lecting a debt arising out of an extension of given to the cosigner before the time that credit to a consumer, it is an unfair act or the cosigner becomes obligated for any fees practice for a federal credit union, directly or transactions on the account. The disclo- or indirectly, to levy or collect any delin- sure statement must contain the following quency charge on a payment, when the only statement or one that is substantially simi- delinquency is attributable to late fees or de- lar: linquency charges assessed on earlier installments and the payment is otherwise a full NOTICE OF COSIGNER payment for the applicable period and is paid You are being asked to guarantee this on its due date or within an applicable grace debt. Think carefully before you do. If the period. borrower doesn’t pay the debt, you will have (b) Collecting a debt defined. Collecting a debt to. Be sure you can afford to pay if you have means, for the purposes of this section, any to, and that you want to accept this respon- activity, other than the use of judicial proc- sibility. ess, that is intended to bring about or does

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bring about repayment of all or part of which the consumer may repay any portion money due (or alleged to be due) from a con- of the credit extended without incurring an sumer. additional finance charge.

§§ 706.15–706.20 [Reserved] § 706.23 Unfair allocation of payments. When different annual percentage rates Subpart C—Consumer Credit Card apply to different balances on a consumer Account Practices Rule credit card account, a federal credit union must allocate any amount paid by the con- § 706.21 Definitions. sumer in excess of the required minimum For purposes of this subpart, the following periodic payment among the balances using definitions apply: one of the following methods: Annual percentage rate means the product (a) High-to-low method. The amount paid by of multiplying each periodic rate for a bal- the consumer in excess of the required min- ance or transaction on a consumer credit imum periodic payment is allocated first to card account by the number of periods in a the balance with the highest annual percent- year. The term ‘‘periodic rate’’ has the same age rate and any remaining portion to the meaning as in 12 CFR 226.2. other balances in descending order based on Consumer means a natural person member the applicable annual percentage rate. to whom credit is extended under a consumer (b) Pro rata method. The amount paid by credit card account or a natural person who the consumer in excess of the required min- is a co-obligor or guarantor of a consumer imum periodic payment is allocated among credit card account. the balances in the same proportion as each Consumer credit card account means an ac- balance bears to the total balance. count provided to a consumer primarily for personal, family, or household purposes § 706.24 Unfair increases in annual percent- under an open-end credit plan that is age rates. accessed by a credit card or charge card. The (a) General rule. At account opening, a fed- terms ‘‘open-end credit,’’ ‘‘credit card,’’ and eral credit union must disclose the annual ‘‘charge card’’ have the same meanings as in percentage rates that will apply to each cat- 12 CFR 226.2. The following are not consumer egory of transactions on the consumer credit credit card accounts for purposes of this sub- card account. A federal credit union must part: not increase the annual percentage rate for a (1) Home equity plans subject to the re- category of transactions on any consumer quirements of 12 CFR 226.5b that are acces- credit card account except as provided in sible by a credit or charge card; paragraph (b) of this section. (2) Overdraft lines of credit tied to asset (b) Exceptions. The prohibition in para- accounts accessed by check-guarantee cards graph (a) of this section on increasing annual or by debit cards; percentage rates does not apply where an an- (3) Lines of credit accessed by check-guar- nual percentage rate may be increased pur- antee cards or by debit cards that can be suant to one of the exceptions in this para- used only at automated teller machines; and graph. (4) Lines of credit accessed solely by ac- (1) Account opening disclosure exception. An count numbers. annual percentage rate for a category of transactions may be increased to a rate dis- § 706.22 Unfair time to make payment. closed at account opening upon expiration of (a) General rule. Except as provided in para- a period of time disclosed at account open- graph (c) of this section, a federal credit ing. union must not treat a payment on a con- (2) Variable rate exception. An annual per- sumer credit card account as late for any centage rate for a category of transactions purpose unless the consumer has been pro- that varies according to an index that is not vided a reasonable amount of time to make under the federal credit union’s control and the payment. is available to the general public may be in- (b) Compliance with general rule—(1) Estab- creased due to an increase in the index. lishing compliance. A federal credit union (3) Advance notice exception. An annual per- must be able to establish that it has com- centage rate for a category of transactions plied with paragraph (a) of this section. may be increased pursuant to a notice under (2) Safe harbor. A federal credit union com- 12 CFR 226.9(c) or (g) for transactions that plies with paragraph (a) of this section if it occur more than seven days after provision has adopted reasonable procedures designed of the notice. This exception does not permit to ensure that periodic statements speci- an increase in any annual percentage rate fying the payment due date are mailed or de- during the first year after the account is livered to consumers at least 21 days before opened. the payment due date. (4) Delinquency exception. An annual per- (c) Exception for grace periods. Paragraph centage rate may be increased due to the fed- (a) of this section does not apply to any time eral credit union not receiving the con- period a federal credit union provides within sumer’s required minimum periodic payment

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within 30 days after the due date for that § 706.26 Unfair charging of security deposits payment. and fees for the issuance or availability (5) Workout arrangement exception. An an- of credit to consumer credit card ac- nual percentage rate may be increased due to counts. the consumer’s failure to comply with the (a) Limitation for first year. During the first terms of a workout arrangement between the year, a federal credit union must not charge federal credit union and the consumer, pro- to a consumer credit card account security vided that the annual percentage rate appli- deposits and fees for the issuance or avail- cable to a category of transactions following ability of credit that in total constitute a any such increase does not exceed the rate majority of the initial credit limit for the that applied to that category of transactions account. prior to commencement of the workout ar- (b) Limitations for first billing cycle and sub- rangement. sequent billing cycles—(1) First billing cycle. (c) Treatment of protected balances. For pur- During the first billing cycle, the federal poses of this paragraph, ‘‘protected balance’’ credit union must not charge to a consumer means the amount owed for a category of credit card account security deposits and transactions to which an increased annual fees for the issuance or availability of credit percentage rate cannot be applied after the that in total constitute more than 25 percent rate for that category of transactions has of the initial credit limit for the account. been increased pursuant to paragraph (b)(3) (2) Subsequent billing cycles. Any additional of this section. security deposits and fees for the issuance or (1) Repayment. A federal credit union must availability of credit permitted by paragraph provide the consumer with one of the fol- (a) of this section must be charged to the ac- lowing methods of repaying a protected bal- count in equal portions in no fewer than the ance or a method that is no less beneficial to five billing cycles immediately following the the consumer than one of the following first billing cycle. methods: (c) Evasion prohibited. A federal credit (i) An amortization period of no less than union must not evade the requirements of five years, starting from the date on which this section by providing the consumer addi- the increased rate becomes effective for the tional credit to fund the payment of security category of transactions; or deposits and fees for the issuance or avail- (ii) A required minimum periodic payment ability of credit that exceed the total that includes a percentage of the protected amounts permitted by paragraphs (a) and (b) balance that is no more than twice the per- of this section. centage required before the date on which (d) Definitions. For purposes of this section, the increased rate became effective for the the following definitions apply: category of transactions. (1) Fees for the issuance or availability of (2) Fees and charges. A federal credit union credit means: must not assess any fee or charge based sole- (i) Any annual or other periodic fee that ly on a protected balance. may be imposed for the issuance or availability of a consumer credit card account, in- § 706.25 Unfair balance computation meth- cluding any fee based on account activity or od. inactivity; and (a) General rule. Except as provided in para- (ii) Any non-periodic fee that relates to graph (b) of this section, a federal credit opening an account. union must not impose finance charges on (2) First billing cycle means the first billing balances on a consumer credit card account cycle after a consumer credit card account is based on balances for days in billing cycles opened. that precede the most recent billing cycle as (3) First year means the period beginning a result of the loss of any time period pro- with the date on which a consumer credit vided by the federal credit union within card account is opened and ending twelve which the consumer may repay any portion months from that date. of the credit extended without incurring a fi- (4) Initial credit limit means the credit limit nance charge. in effect when a consumer credit card ac- (b) Exceptions. Paragraph (a) of this section count is opened. does not apply to: (1) Adjustments to finance charges as a result of the resolution of a dispute under 12 CFR 226.12 or 12 CFR 226.13; or (2) Adjustments to finance charges as a result of the return of a payment for insufficient funds.

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APPENDIX A TO PART 706—OFFICIAL 2. Payment due date. For purposes of STAFF COMMENTARY § 706.22(b)(2), ‘‘payment due date’’ means the date by which a federal credit union requires SUBPART A—GENERAL PROVISIONS FOR the consumer to make the required min- CONSUMER PROTECTION RULES imum periodic payment in order to avoid being treated as late for any purpose, except Section 706.1—Authority, Purpose, and Scope as provided in § 706.22(c). 1(c) Scope 3. Example of alternative method of compliance. Assume that, for a particular type of 1. Penalties for noncompliance. Administra- consumer credit card account, a federal cred- tive enforcement of the rule for federal credit union only provides periodic statements it unions may involve actions under section electronically and only accepts payments 206 of the Federal Credit Union Act (12 U.S.C. electronically, consistent with applicable 1786), including cease-and-desist orders re- law and regulatory guidance. Under these quiring that actions be taken to remedy vio- circumstances, the federal credit union could lations and civil money penalties. comply with § 706.22(a) even if it does not provide periodic statements 21 days before SUBPART C—CONSUMER CREDIT CARD ACCOUNT the payment due date consistent with PRACTICES RULE § 706.22(b)(2). Section 706.22—Unfair Time To Make Payment Section 706.23—Unfair Allocation of 22(a) General Rule Payments 1. Treating a payment as late for any purpose. 1. Minimum periodic payment. Section 706.23 Treating a payment as late for any purpose addresses the allocation of amounts paid by includes increasing the annual percentage a consumer in excess of the minimum peri- rate as a penalty, reporting the consumer as odic payment required by a federal credit delinquent to a credit reporting agency, or union. Section 706.23 does not limit or other- assessing a late fee or any other fee based on wise address a federal credit union’s ability the consumer’s failure to make a payment to determine, consistent with applicable law within the amount of time provided to make and regulatory guidance, the amount of the that payment under this section. required minimum periodic payment or how 2. Reasonable amount of time to make pay- that payment is allocated. A federal credit ment. Whether an amount of time is reason- union may, but is not required to, allocate able for purposes of making a payment is de- the required minimum periodic payment termined from the perspective of the con- consistent with the requirements in § 706.23 sumer, not the federal credit union. Under to the extent consistent with other applica- § 706.22(b)(2), a federal credit union provides a ble law or regulatory guidance. reasonable amount of time to make a pay- 2. Adjustments of one dollar or less permitted. ment if it has adopted reasonable procedures When allocating payments, a federal credit designed to ensure that periodic statements union may adjust amounts by one dollar or specifying the payment due date are mailed less. For example, if a federal credit union is or delivered to consumers at least 21 days be- allocating $100 pursuant to § 706.23(b) among fore the payment due date. balances of $1,000, $2,000, and $4,000, the federal credit union may apply $14 to the $1,000 22(b) Compliance With General Rule balance, $29 to the $2,000 balance, and $57 to 1. Reasonable procedures. A federal credit the $4,000 balance. union is not required to determine the spe- 3. Applicable balances and annual percentage cific date on which periodic statements are rates. Section 706.23 permits a federal credit mailed or delivered to each consumer. A fed- union to allocate an amount paid by the con- eral credit union provides a reasonable sumer in excess of the required minimum amount of time to make a payment if it has periodic payment based on the balances and adopted reasonable procedures designed to annual percentage rates on the date the pre- ensure that periodic statements are mailed ceding billing cycle ends, on the date the or delivered to consumers no later than a payment is credited to the account, or on certain number of days after the closing date any day between those two dates. For exam- of the billing cycle and adds that number of ple, assume that the billing cycles for a con- days to the 21-day period in § 706.24(b)(2) sumer credit card account start on the first when determining the payment due date. For day of the month and end on the last day of example, if a federal credit union has adopt- the month. On the date the March billing ed reasonable procedures designed to ensure cycle ends, March 31, the account has a pur- that periodic statements are mailed or deliv- chase balance of $500 at a variable annual ered to consumers no later than three days percentage rate of 10% and a cash advance after the closing date of the billing cycle, the balance of $200 at a variable annual percent- payment due date on the periodic statement age rate of 13%. On April 1, the rate for pur- must be no less than 24 days after the closing chases increases to 13% and the rate for cash date of the billing cycle. advances increases to 15% consistent with

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§ 706.24(b)(2). On April 15, the purchase bal- ment. A federal credit union using this ance increases to $700. On April 25, the fed- method would allocate the entire $400 to the eral credit union credits to the account $400 cash advance balance. paid by the consumer in excess of the re- iii. Assume that a consumer’s account has quired minimum periodic payment. Under a cash advance balance of $100 at an annual § 706.23, the federal credit union may allocate percentage rate of 15%, a purchase balance of the $400 based on the balances in existence $300 at an annual percentage rate of 13%, and and rates in effect on any day from March 31 a $600 protected balance on which the 10% through April 25. annual percentage rate cannot be increased 4. Use of permissible allocation methods. A pursuant to § 706.24. If the consumer pays $500 federal credit union is not prohibited from in excess of the required minimum periodic changing the allocation method for a con- payment, a federal credit union using this sumer credit card account or from using dif- method would allocate $100 to pay off the ferent allocation methods for different con- cash advance balance, $300 to pay off the pur- sumer credit card accounts, so long as the chase balance, and $100 to the protected bal- methods used are consistent with § 706.23. For ance. example, a federal credit union may change iv. Assume that a consumer’s account has from allocating to the highest rate balance a cash advance balance of $500 at an annual first pursuant to § 706.23(a) to allocating pro percentage rate of 15%, a purchase balance of rata pursuant to § 706.23(b) or vice versa. $1,000 at an annual percentage rate of 12%, Similarly, a federal credit union may allo- and a transferred balance of $2,000 that was cate to the highest rate balance first pursu- previously at a discounted annual percentage ant to § 706.23(a) on some of its accounts and rate of 5% but is now at an annual percent- allocate pro rata pursuant to § 706.23(b) on age rate of 12%. Assume also that the con- other accounts. sumer pays $800 in excess of the required 5. Claims or defenses under Regulation Z, 12 minimum periodic payment. A federal credit CFR 226.12(c). When a consumer has asserted union using this method would allocate $500 a claim or defense against the card issuer to pay off the cash advance balance and allo- pursuant to 12 CFR 226.12(c), a federal credit cate the remaining $300 among the purchase union must allocate consistent with 12 CFR balance and the transferred balance in the 226.12 comment 226.12(c)–4. manner the federal credit union deems ap- 6. Balances with the same annual percentage propriate. rate. When the same annual percentage rate applies to more than one balance on an ac- 23(b) Pro Rata Method count and a different annual percentage rate 1. Total balance. A federal credit union applies to at least one other balance on that may, but is not required to, deduct amounts account, § 706.23 does not require that a fed- paid by the consumer’s required minimum eral credit union use any particular method periodic payment when calculating the total when allocating among the balances with the balance for purposes of § 706.23(b)(3). See com- same annual percentage rate. Under these ment 23(b)–2.iii. circumstances, a federal credit union may 2. Examples. For purposes of the following treat the balances with the same rate as a examples, assume that none of the required single balance or separate balances. See com- minimum periodic payment is allocated to ments 23(a)–1.iv and 23(b)–2.iv. the balances discussed, unless otherwise stated, and that the amounts allocated to 23(a) High-to-Low Method each balance are rounded to the nearest dol- 1. Examples. For purposes of the following lar. examples, assume that none of the required i. Assume that a consumer’s account has a minimum periodic payment is allocated to cash advance balance of $500 at an annual the balances discussed, unless otherwise percentage rate of 15% and a purchase bal- stated. ance of $1,500 at an annual percentage rate of i. Assume that a consumer’s account has a 12% and that the consumer pays $555 in ex- cash advance balance of $500 at an annual cess of the required minimum periodic pay- percentage rate of 15% and a purchase bal- ment. A federal credit union using this ance of $1,500 at an annual percentage rate of method would allocate 25% of the amount 10% and that the consumer pays $800 in ex- ($139) to the cash advance balance and 75% of cess of the required minimum periodic pay- the amount ($416) to the purchase balance. ment. A federal credit union using this ii. Assume that a consumer’s account has a method would allocate $500 to pay off the cash advance balance of $100 at an annual cash advance balance and then allocate the percentage rate of 15%, a purchase balance of remaining $300 to the purchase balance. $300 at an annual percentage rate of 13%, and ii. Assume that a consumer’s account has a a $600 protected balance on which the 10% cash advance balance of $500 at an annual annual percentage rate cannot be increased percentage rate of 15% and a purchase bal- pursuant to § 706.24. If the consumer pays $130 ance of $1,500 at an annual percentage rate of in excess of the required minimum periodic 10% and that the consumer pays $400 in ex- payment, a federal credit union using this cess of the required minimum periodic pay- method would allocate 10% of the amount

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($13) to the cash advance balance, 30% of the a federal credit union must comply with the amount ($39) to the purchase balance, and disclosure requirements in 12 CFR 226.9(c) or 60% of the amount ($78) to the protected bal- (g). However, nothing in § 706.24 alters the re- ance. quirements in 12 CFR 226.9(c) and (g) that iii. Assume that a consumer’s account has creditors provide consumers with written no- a cash advance balance of $300 at an annual tice at least 45 days prior to the effective percentage rate of 15% and a purchase bal- date of certain increases in the annual per- ance of $600 at an annual percentage rate of centage rates on open-end (not home-se- 13%. Assume also that the required min- cured) credit plans. imum periodic payment is $50 and that the federal credit union allocates this payment 24(a) General Rule first to the balance with the lowest annual 1. Rates that will apply to each category of percentage rate, the $600 purchase balance. If transactions. Section 706.24(a) requires federal the consumer pays $300 in excess of the $50 credit unions to disclose, at account opening, minimum payment, a federal credit union the annual percentage rates that will apply using this method could allocate based on a to each category of transactions on the ac- total balance of $850, consisting of the $300 count. A federal credit union cannot satisfy cash advance balance plus the $550 purchase this requirement by disclosing at account balance after application of the $50 minimum opening only a range of rates or that a rate payment. In this case, the federal credit will be ‘‘up to’’ a particular amount. union would apply 35% of the $300 ($105) to 2. Application of prohibition on increasing the cash advance balance and 65% of that rates. Section 706.24(a) prohibits federal cred- amount ($195) to the purchase balance. In the it unions from increasing the annual per- alternative, the federal credit union could centage rate for a category of transactions allocate based on a total balance of $900, on any consumer credit card account unless which does not reflect the $50 minimum pay- specifically permitted by one of the excep- ment. In that case, the federal credit union tions in § 706.24(b). The following examples il- would apply one-third of the $300 excess pay- lustrate the application of the rule: ment ($100) to the cash advance balance and i. Assume that, at account opening on Jan- two-thirds ($200) to the purchase balance. uary 1 of year one, a federal credit union dis- iv. Assume that a consumer’s account has closes that the annual percentage rate for a cash advance balance of $500 at an annual purchases is a non-variable rate of 1% and percentage rate of 15%, a purchase balance of will apply for six months. The federal credit $1,000 at an annual percentage rate of 12%, union also discloses that, after six months, and a transferred balance of $2,000 that was the annual percentage rate for purchases will previously at a discounted annual percentage be a variable rate that is currently 9% and rate of 5%, but is now at an annual percent- will be adjusted quarterly by adding a mar- age rate of 12%. Assume also that the con- gin of 8 percentage points to a publicly- sumer pays $800 in excess of the required available index not under the federal credit minimum periodic payment. A federal credit union’s control. Finally, the federal credit union using this method would allocate 14% union discloses that the annual percentage of the excess payment ($112) to the cash ad- rate for cash advances is the same variable vance balance and allocate the remaining rate that will apply to purchases after six 86% ($688) among the purchase balance and months. The payment due date for the ac- the transferred balance in the manner the count is the twenty-fifth day of the month federal credit union deems appropriate. and the required minimum periodic payments are applied to accrued interest and Section 706.24—Unfair Increases in Annual fees but do not reduce the purchase and cash Percentage Rates advance balances. A. On January 15, the consumer uses the 1. Relationship to Regulation Z, 12 CFR part account to make a $2,000 purchase and a $500 226. A federal credit union that complies cash advance. No other transactions are with the applicable disclosure requirements made on the account. At the start of each in Regulation Z, 12 CFR part 226, has com- quarter, the federal credit union adjusts the plied with the disclosure requirements in variable rate that applies to the $500 cash ad- § 706.24. See 12 CFR 226.5a, 226.6, 226.9. For ex- vance consistent with changes in the index, ample, a federal credit union may comply pursuant to § 706.24(b)(2). All required min- with the requirement in § 706.24(a) to disclose imum periodic payments are received on or at account opening the annual percentage before the payment due date until May of rates that will apply to each category of year one, when the payment due on May 25 is transactions by complying with the disclo- received by the federal credit union on May sure requirements in 12 CFR 226.5a regarding 28. The federal credit union is prohibited by applications and solicitations and the re- § 706.24 from increasing the rates that apply quirements in 12 CFR 226.6 regarding ac- to the $2,000 purchase, the $500 cash advance, count-opening disclosures. Similarly, in or future purchases and cash advances. Six order to increase an annual percentage rate months after account opening, July 1, the on new transactions pursuant to § 706.24(b)(3), federal credit union applies the previously-

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disclosed variable rate determined using an consumer uses the account for a $700 pur- 8-point margin pursuant to § 706.24(b)(1). Be- chase. On November 16, the federal credit cause no other increases in rate were dis- union provides a notice pursuant to 12 CFR closed at account opening, the federal credit 226.9(c) informing the consumer of a new union may not subsequently increase the variable rate that will apply on January 1 of variable rate that applies to the $2,000 pur- year two, calculated using the same index chase and the $500 cash advance, except due and an increased margin of 8 percentage to increases in the index pursuant to points. One year after account opening, Jan- § 706.24(b)(2). On November 16, the federal uary 1 of year two, the federal credit union credit union provides a notice pursuant to 12 begins accruing interest on the $2,200 pur- CFR 226.9(c) informing the consumer of a chase balance at the previously disclosed new variable rate that will apply on January variable rate determined using a 5-point 1 of year two, calculated using the same margin pursuant to § 706.24(b)(1). Because the index and an increased margin of 12 percent- variable rate determined using the 8-point age points. On January 1 of year two, the margin was not disclosed at account open- federal credit union increases the margin ing, the federal credit union may not apply used to determine the variable rate that ap- that rate to the $2,200 purchase balance. Fur- plies to new purchases to 12 percentage thermore, because no other increases in rate points pursuant to § 706.24(b)(3). On January were disclosed at account opening, the fed- 15 of year two, the consumer makes a $300 eral credit union may not subsequently in- purchase. The federal credit union applies crease the variable rate that applies to the the variable rate determined using the 12- $2,200 purchase balance (except due to in- point margin to the $300 purchase but not creases in the index pursuant to the $2,000 purchase. § 706.24(b)(2)). The federal credit union may, B. Same facts as above, except that the re- however, apply the variable rate determined quired minimum periodic payment due on using the 8-point margin to purchases made May 25 of year one is not received by the fed- on or after January 1 of year two pursuant to eral credit union until June 30 of year one. § 706.24(b)(3). Because the federal credit union received the iii. Assume that, at account opening on required minimum periodic payment more January 1 of year one, a federal credit union than 30 days after the payment due date, discloses that the annual percentage rate for § 706.24(b)(4) permits the federal credit union purchases is a variable rate determined by to increase the annual percentage rate appli- adding a margin of 6 percentage points to a cable to the $2,000 purchase, the $500 cash ad- publicly available index outside of the fed- vance, and future purchases and cash ad- eral credit union’s control. The federal credit vances. However, the federal credit union union also discloses that, to the extent con- must first comply with the notice require- sistent with § 706.24 and other applicable law, ments in 12 CFR 226.9(g). Thus, if the federal a non-variable penalty rate of 15% may apply credit union provided a 12 CFR 226.9(g) notice if the consumer makes a late payment. The on June 25 stating that all rates on the ac- due date for the account is the fifteenth of count would be increased to a non-variable the month. On May 30 of year two, the ac- penalty rate of 15%, the federal credit union count has a purchase balance of $1,000. On could apply that 15% rate beginning on Au- May 31, the creditor provides a notice pursu- gust 9, to all balances and future trans- ant to 12 CFR 226.9(c) informing the con- actions. sumer of a new variable rate that will apply ii. Assume that, at account opening on on July 16 for all purchases made on or after January 1 of year one, a federal credit union June 8, calculated by using the same index discloses that the annual percentage rate for and an increased margin of 8 percentage purchases will increase as follows: A non- points. On June 7, the consumer makes a $500 variable rate of 3% for six months; a nonpurchase. On June 8, the consumer makes a variable rate of 8% for an additional six $200 purchase. On June 25, the federal credit months; and thereafter a variable rate that union has not received the payment due on is currently 13% and will be adjusted month- June 15, and provides the consumer with a ly by adding a margin of 5 percentage points notice pursuant to 12 CFR 226.9(g) stating to a publicly available index not under the that the penalty rate of 15% will apply as of federal credit union’s control. The payment August 9, to all transactions made on or due date for the account is the fifteenth day after July 2. On July 4, the consumer makes of the month and the required minimum a $300 purchase. periodic payments are applied to accrued in- A. The payment due on June 15 of year two terest and fees but do not reduce the pur- is received on June 25. On July 17, chase balance. On January 15, the consumer § 706.24(b)(3) permits the federal credit union uses the account to make a $1,500 purchase. to apply the variable rate determined using Six months after account opening, July 1, the 8-point margin to the $200 purchase made the federal credit union begins accruing in- on June 8 but does not permit the federal terest on the $1,500 purchase at the pre- credit union to apply this rate to the $1,500 viously disclosed 8% non-variable rate pursu- purchase balance. On August 9, § 706.24(b)(3) ant to § 706.24(b)(1). On September 15, the permits the federal credit union to apply the

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15% penalty rate to the $300 purchase made tion 706.24 does not permit the federal credit on July 4, but does not permit the federal union to apply the 15% penalty rate to the credit union to apply this rate to the $1,500 $2,000 purchase balance. However, pursuant purchase balance, which remains at the vari- to § 706.24(b)(3), the federal credit union could able rate determined using the 6-point mar- provide a 12 CFR 226.9(c) or (g) notice on No- gin, or the $200 purchase, which remains at vember 16, informing the consumer that, on the variable rate determined using the 8- January 1 of year two, the 15% rate (or a dif- point margin. ferent rate) will apply to new transactions. B. Same facts as above, except the pay- ii. Assume that a federal credit union dis- ment due on September 15 of year two is re- closes at account opening on January 1 of ceived on October 20. Section 706.24(b)(4) per- year one that a non-variable rate of 5% ap- mits the federal credit union to apply the plies to transferred balances but that this 15% penalty rate to all balances on the ac- rate will increase to a non-variable rate of count and to future transactions because it 15% if the consumer does not use the account has not received payment within 30 days for at least $200 in purchases each billing after the due date. However, in order to cycle. On July 1, the consumer transfers a apply the 15% penalty rate to the entire balance of $4,000 to the account. During the $2,000 purchase balance, the federal credit October billing cycle, the consumer uses the union must provide an additional notice pur- account for $150 in purchases. Section 706.24 suant to 12 CFR 226.9(g). This notice must be does not permit the federal credit union to sent no earlier than October 16, which is the apply the 15% rate to the $4,000 transferred first day the account became more than 30 balance. However, pursuant to § 706.24(b)(3), days delinquent. the federal credit union could provide a 12 C. Same facts as paragraph A above, except CFR 226.9(c) or (g) notice on November 16 in- the payment due on June 15 of year two is re- forming the consumer that, on January 1 of ceived on July 20. Section 706.24(b)(4) permits year two, the 15% rate, or a different rate, the federal credit union to apply the 15% will apply to new transactions. penalty rate to all balances on the account iii. Assume that a federal credit union dis- and to future transactions because it has not closes at account opening on January 1 of received payment within 30 days after the year one that interest on purchases will be due date. Because the federal credit union deferred for one year, although interest will provided a 12 CFR 226.9(g) notice on June 24 accrue on purchases during that year at a stating the 15% penalty rate, the federal non-variable rate of 15%. The federal credit credit union may apply the 15% penalty rate union further discloses that, if all purchases to all balances on the account as well as any made during year one are not paid in full by future transactions on August 9, without the end of that year, the federal credit union providing an additional notice pursuant to 12 will begin charging interest on the purchase CFR 226.9(g). balance and new purchases at 15% and will retroactively charge interest on the pur- 24(b) Exceptions chase balance at a rate of 15% starting on the date of each purchase made during year 24(b)(1) Account Opening Disclosure one. On January 1 of year one, the consumer Exception makes a purchase of $1,500. No other trans- 1. Prohibited increases in rate. Section actions are made on the account. On Janu- § 706.24(b)(1) permits an increase in the an- ary 1 of year two, $500 of the $1,500 purchase nual percentage rate for a category of trans- remains unpaid. Section 706.24 does not per- actions to a rate disclosed at account open- mit the federal credit union to reach back to ing upon expiration of a period of time that charge interest on the $1,500 purchase from was also disclosed at account opening. Sec- January 1 through December 31 of year one. tion 706.24(b)(1) does not permit application However, the federal credit union may apply of increased rates that are disclosed at ac- the previously disclosed 15% rate to the $500 count opening but are contingent on a par- purchase balance beginning on January 1 of ticular event or occurrence or may be ap- year two pursuant to § 706.24(b)(1). plied at the federal credit union’s discretion. 2. Loss of grace period. Nothing in § 706.24 The following examples illustrate rate in- prohibits a federal credit union from assess- creases that are not permitted by § 706.24(a): ing interest due to the loss of a grace period i. Assume that a federal credit union dis- to the extent consistent with § 706.25. closes at account opening on January 1 of 3. Application of rate that is lower than dis- year one that a non-variable rate of 8% ap- closed rate. Section 706.24(b)(1) permits an in- plies to purchases, but that all rates on an crease in the annual percentage rate for a account may be increased to a non-variable category of transactions to a rate disclosed penalty rate of 15% if a consumer’s required at account opening upon expiration of a pe- minimum periodic payment is received after riod of time that was also disclosed at ac- the payment due date, which is the fifteenth count opening. Nothing in § 706.24 prohibits a of the month. On March 1, the account has a federal credit union from applying a rate $2,000 purchase balance. The payment due on that is lower than the disclosed rate upon ex- March 15 is not received until March 20. Sec- piration of the period. However, if a lower

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rate is applied to an existing balance, the creasing the margin, even if that change will federal credit union cannot subsequently in- not result in an immediate increase. crease the rate on that balance unless it has 2. External index. A federal credit union provided the consumer with advance notice may increase the annual percentage rate if of the increase pursuant to 12 CFR 226.9(c). the increase is based on an index or indices Furthermore, the federal credit union cannot outside the federal credit union’s control. A increase the rate on that existing balance to federal credit union may not increase the a rate that is higher than the increased rate rate based on its own prime rate or cost of disclosed at account opening. The following funds. A federal credit union is permitted, example illustrates the application of this however, to use a published prime rate, such rule: as that in the Wall Street Journal, even if the i. Assume that, at account opening on Jan- federal credit union’s own prime rate is one uary 1 of year one, a federal credit union dis- of several rates used to establish the pub- closes that a non-variable annual percentage lished rate. rate of 5% will apply to purchases for one 3. Publicly available. The index or indices year and discloses that, after the first year, must be available to the public. A publicly the federal credit union will apply a variable available index need not be published in a rate that is currently 15% and is determined newspaper, but it must be one the consumer by adding a margin of 10 percentage points can independently obtain, by telephone, for to a publicly available index not under the example, and use to verify the rate applied federal credit union’s control. On December to the outstanding balance. 31 of year one, the account has a purchase 4. Changing a non-variable rate to a variable balance of $3,000. rate. Section 706.24 generally prohibits a fed- A. On November 16 of year one, the federal eral credit union from changing a non-vari- credit union provides a notice pursuant to 12 able annual percentage rate to a variable CFR 226.9(c) informing the consumer of a rate because such a change can result in an new variable rate that will apply on January increase in rate. However, § 706.24(b)(1) per- 1 of year two, calculated using the same mits a federal credit union to change a non- index and a reduced margin of 8 percentage variable rate to a variable rate if the change points. The notice further states that, on was disclosed at account opening. Further- July 1 of year two, the margin will increase more, following the first year after the ac- to the margin disclosed at account opening, count is opened, § 706.24(b)(3) permits a fed- 5 percentage points. On July 1 of year two, eral credit union to change a non-variable the federal credit union increases the margin rate to a variable rate with respect to new used to determine the variable rate that ap- transactions, after complying with the no- plies to new purchases to 10 percentage tice requirements in 12 CFR 226.9(c) or (g). points and applies that rate to any remain- Finally, § 706.24(b)(4) permits a federal credit ing portion of the $3,000 purchase balance union to change a non-variable rate to a pursuant to § 706.24(b)(1). variable rate if the required minimum peri- B. Same facts as above, except that the odic payment is not received within 30 days federal credit union does not send a notice of the payment due date, after complying on November 16 of year one. Instead, on Jan- with the notice requirements in 12 CFR uary 1 of year two, the federal credit union 226.9(g). lowers the margin used to determine the 5. Changing a variable annual percentage variable rate to 8 percentage points and ap- rate to a non-variable annual percentage rate. plies that rate to the $3,000 purchase balance Nothing in § 706.24 prohibits a federal credit and to new purchases. 12 CFR 226.9 does not union from changing a variable annual per- require advance notice in these cir- centage rate to an equal or lower non-vari- cumstances. However, unless the account be- able rate. Whether the non-variable rate is comes more than 30 days delinquent, the fed- equal to or lower than the variable rate is eral credit union may not subsequently in- determined at the time the federal credit crease the rate that applies to the $3,000 pur- union provides the notice required by 12 CFR chase balance except due to increases in the 226.9(c). For example, assume that on March index pursuant to § 706.24(b)(2). 1 a variable rate that is currently 15% applies to a balance of $2,000 and the federal 24(b)(2) Variable Rate Exception credit union sends a notice pursuant to 12 1. Increases due to increase in index. Section CFR 226.9(c) informing the consumer that 706.24(b)(2) provides that an annual percent- the variable rate will be converted to a non- age rate for a category of transactions that variable rate of 14% effective April 17. On varies according to an index that is not April 17, the federal credit union may apply under the federal credit union’s control and the 14% non-variable rate to the $2,000 bal- is available to the general public may be in- ance and to new transactions even if the creased due to an increase in the index. This variable rate on March 2 or a later date was section does not permit a federal credit less than 14%. union to increase the annual percentage rate 6. Substitution of index. A federal credit by changing the method used to determine a union may change the index and margin used rate that varies with an index, such as by in- to determine the annual percentage rate

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under § 706.24(b)(2) if the original index be- union on March 22 but is not settled until comes unavailable, as long as historical fluc- March 23. On May 1, § 706.24(b)(3) permits the tuations in the original and replacement in- federal credit union to start charging inter- dices were substantially similar, and as long est at 15% on both the $200 purchase and the as the replacement index and margin will $1,000 purchase. The federal credit union is produce a rate similar to the rate that was not permitted to apply the 15% rate to the in effect at the time the original index be- $2,000 purchase balance as of March 22. came unavailable. If the replacement index iii. Same facts as in paragraph i above, ex- is newly established and therefore does not cept that on September 17 of year two, which have any rate history, it may be used if it is 45 days before expiration of the 18% non- produces a rate substantially similar to the variable rate, the federal credit union pro- rate in effect when the original index became vides a notice pursuant to 12 CFR 226.9(c) in- unavailable. forming the consumer that, on November 2, a new variable rate will apply to new pur- 24(b)(3) Advance Notice Exception chases and any remaining portion of the 1. First year after the account is opened. A $1,000 balance, calculated by using the same federal credit union may not increase an an- index and a reduced margin of 10 percentage nual percentage rate pursuant to § 706.24(b)(3) points. The notice further states that, on during the first year after the account is May 1 of year three, the margin will increase opened. This limitation does not apply to ac- to the margin disclosed at account opening, counts opened prior to July 1, 2010. 12 percentage points. On May 1 of year three, 2. Transactions that occur more than seven § 706.24(b)(3) permits the federal credit union days after notice provided. Section 706.24(b)(3) to increase the margin used to determine the generally prohibits a federal credit union variable rate that applies to new purchases from applying an increased rate to trans- to 12 percentage points and to apply that actions that occur within seven days after rate to any remaining portion of the $1,000 provision of the 12 CFR 226.9(c) or (g) notice. purchase as well as to new purchases. See This prohibition does not, however, apply to comment 24(b)(1)–3. The federal credit union transactions that are authorized within is not permitted to apply this rate to any re- seven days after provision of the 12 CFR maining portion of the $2,200 purchase bal- 226.9(c) or (g) notice but are settled more ance as of March 22. than seven days after the notice was pro- 24(b)(5) Workout Arrangement Exception vided. 3. Examples. 1. Scope of exception. Nothing in i. Assume that a consumer credit card ac- § 706.24(b)(5) permits a federal credit union to count is opened on January 1 of year one. On alter the requirements of § 706.24 pursuant to March 14 of year two, the account has a pur- a workout arrangement between a consumer chase balance of $2,000 at a non-variable an- and the federal credit union. For example, a nual percentage rate of 5%. On March 15, the federal credit union cannot increase an an- federal credit union provides a notice pursu- nual percentage rate pursuant to a workout ant to 12 CFR 226.9(c) informing the con- arrangement unless otherwise permitted by sumer that the rate for new purchases will § 706.24. In addition, a federal credit union increase to a non-variable rate of 15% on cannot require the consumer to make pay- May 1. The notice further states that the 5% ments with respect to a protected balance rate will apply for six months until Novem- that exceed the payments permitted under ber 1, and states that thereafter the federal § 706.24(c). credit union will apply a variable rate that is 2. Variable annual percentage rates. If the currently 15% and is determined by adding a annual percentage rate that applied to a cat- margin of 10 percentage points to a publicly- egory of transactions prior to commence- available index that is not under the federal ment of the workout arrangement varied credit union’s control. The seventh day after with an index consistent with § 706.24(b)(2), provision of the notice is March 22 and, on the rate applied to that category of trans- that date, the consumer makes a $200 pur- actions following an increase pursuant to chase. On March 24, the consumer makes a § 706.24(b)(5) must be determined using the $1,000 purchase. On May 1, § 706.24(b)(3) per- same formula, index and margin. mits the federal credit union to begin accru- 3. Example. Assume that, consistent with ing interest at 15% on the $1,000 purchase § 706.24(b)(4), the margin used to determine a made on March 24. The federal credit union variable annual percentage rate that applies is not permitted to apply the 15% rate to the to a $5,000 balance is increased from 5 per- $2,200 purchase balance as of March 22. After centage points to 15 percentage points. As- six months, November 2, the federal credit sume also that the federal credit union and union may begin accruing interest on any re- the consumer subsequently agree to a work- maining portion of the $1,000 purchase at the out arrangement that reduces the margin previously-disclosed variable rate deter- back to 5 points on the condition that the mined using the 10-point margin. consumer pay a specified amount by the pay- ii. Same facts as above except that the $200 ment due date each month. If the consumer purchase is authorized by the federal credit does not pay the agreed-upon amount by the

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payment due date, the federal credit union date of the increased rate. For example, a may increase the margin for the variable federal credit union could require the con- rate that applies to the $5,000 balance up to sumer to make a minimum payment that 15 percentage points. 12 CFR 226.9 does not amortizes the protected balance in four require advance notice of this type of in- years so long as doing so would not more crease. than double the percentage of the balance included in the minimum payment prior to the 24(c) Treatment of Protected Balances effective date of the increased rate. 1. Protected balances. Because rates cannot 2. Lower limit for required minimum periodic be increased pursuant to § 706.24(b)(3) during payment. If the required minimum periodic the first year after account opening, payment under § 706.24(c)(1)(i) or (c)(1)(ii) is § 706.24(c) does not apply to balances during less than the lower dollar limit for minimum the first year. Instead, the requirements in payments established in the cardholder § 706.24(c) apply only to ‘‘protected bal- agreement before the effective date of the ances,’’ which are amounts owed for a cat- rate increase, the federal credit union may egory of transactions to which an increased set the minimum payment consistent with annual percentage rate cannot be applied that limit. For example, if at account open- after the rate for that category of trans- ing the cardholder agreement stated that the actions has been increased pursuant to required minimum periodic payment would § 706.24(b)(3). For example, assume that, on be either the total of fees and interest March 15 of year two, an account has a pur- charges plus 1% of the total amount owed or chase balance of $1,000 at a non-variable rate $20, whichever is greater, the federal credit of 12% and that, on March 16, the federal union may require the consumer to make a credit union sends a notice pursuant to 12 minimum payment of $20 even if doing so CFR 226.9(c) informing the consumer that would pay off the protected balance in less the rate for new purchases will increase to a than five years or constitute more than 2% non-variable rate of 15% on May 2. On March of the protected balance plus fees and inter- 20, the consumer makes a $100 purchase. On est charges. March 24, the consumer makes a $150 purchase. On May 2, § 706.24(b)(3) permits the Paragraph 24(c)(1)(i) federal credit union to start charging interest at 15% on the $150 purchase made on 1. Amortization period starting from date on March 24 but does not permit the federal which increased rate becomes effective. Section credit union to apply that 15% rate to the 706.24(c)(1)(i) provides for an amortization $1,100 purchase balance as of March 23. Ac- period for the protected balance of no less cordingly, § 706.24(c) applies to the $1,100 pur- than five years, starting from the date on chase balance as of March 23 but not the $150 which the increased annual percentage rate purchase made on March 24. becomes effective. A federal credit union is not required to recalculate the required min- 24(c)(1) Repayment imum periodic payment for the protected 1. No less beneficial to the consumer. A fed- balance if, during the amortization period, eral credit union may provide a method of that balance is reduced as a result of the al- repaying the protected balance that is dif- location of amounts paid by the consumer in ferent from the methods listed in § 706.24(c)(1) excess of the minimum payment consistent so long as the method used is no less bene- with § 706.23 or any other practice permitted ficial to the consumer than one of the listed by these rules and other applicable law. methods. A method is no less beneficial to 2. Amortization when applicable annual per- the consumer if the method amortizes the centage rate is variable. If the annual percent- protected balance in five years or longer or if age rate that applies to the protected bal- the method results in a required minimum ance varies with an index consistent with periodic payment that is equal to or less § 706.24(b)(2), the federal credit union may ad- than a minimum payment calculated con- just the interest charges included in the re- sistent with § 706.24(c)(1)(ii). For example, a quired minimum periodic payment for that federal credit union could increase the per- balance accordingly in order to ensure that centage of the protected balance included in the outstanding balance is amortized in five the required minimum periodic payment years. For example, assume that a variable from 2% to 5% so long as doing so would not rate that is currently 10% applies to a pro- result in amortization of the protected bal- tected balance and that, in order to amortize ance in less than five years. Alternatively, a that balance in five years, the required min- federal credit union could require a con- imum periodic payment must include a spe- sumer to make a minimum payment that cific amount of principal plus all accrued in- amortizes the protected balance in less than terest charges. If the 10% variable rate in- five years so long as the payment does not creases due to an increase in the index, the include a percentage of the balance that is federal credit union may increase the re- more than twice the percentage included in quired minimum periodic payment to in- the minimum payment before the effective clude the additional interest charges.

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Paragraph 24(c)(1)(ii) for each day in the billing cycle, and then dividing by the number of days in the billing 1. Required minimum periodic payment on cycle. The second balance is for the pre- other balances. Section 706.24(c)(1)(ii) address- ceding billing cycle. es the required minimum periodic payment 2. Examples. on the protected balance. Section i. Assume that the billing cycle on a con- 706.24(c)(1)(ii) does not limit or otherwise ad- sumer credit card account starts on the first dress the federal credit union’s ability to de- day of the month and ends on the last day of termine the amount of the required min- the month. The payment due date for the ac- imum periodic payment for other balances. count is the twenty-fifth day of the month. 2. Example. Assume that the method used Under the terms of the account, the con- by a federal credit union to calculate the re- sumer will not be charged interest on pur- quired minimum periodic payment for a con- chases if the balance at the end of a billing sumer credit card account requires the con- cycle is paid in full by the following pay- sumer to pay either the total of fees and in- ment due date. The consumer uses the credit terest charges plus 1% of the total amount card to make a $500 purchase on March 15. owed or $20, whichever is greater. Assume The consumer pays the balance for the Feb- also that the account has a purchase balance ruary billing cycle in full on March 25. At of $2,000 at an annual percentage rate of 10% the end of the March billing cycle, March 31, and a cash advance balance of $500 at an an- the consumer’s balance consists only of the nual percentage rate of 15% and that the fed- $500 purchase and the consumer will not be eral credit union increases the rate for pur- charged interest on that balance if it is paid chases to 15%, but does not increase the rate in full by the following due date, April 25. for cash advances. Under § 706.24(c)(1)(ii), the The consumer pays $400 on April 25, leaving federal credit union may require the con- a $100 balance. The federal credit union may sumer to pay fees and interest plus 2% of the charge interest on the $500 purchase from the $2,000 purchase balance. Section start of the April billing cycle, April 1, 706.24(c)(1)(ii) does not prohibit the federal through April 24 and interest on the remain- credit union from increasing the required ing $100 from April 25 through the end of the minimum periodic payment for the cash ad- April billing cycle, April 30. The federal cred- vance balance. it union is prohibited, however, from reach- 24(c)(2) Fees and Charges ing back and charging interest on the $500 purchase from the date of purchase, March 15 1. Fee or charge based solely on the protected to the end of the March billing cycle, March balance. A federal credit union is prohibited 31. from assessing a fee or charge based solely ii. Assume the same circumstances as in on balances to which § 706.24(c) applies. For the previous example except that the con- example, a federal credit union is prohibited sumer does not pay the balance for the Feb- from assessing a monthly maintenance fee ruary billing cycle in full on March 25 and that would not be charged if the account did therefore, under the terms of the account, is not have a protected balance. A federal cred- not eligible for a time period within which to it union is not, however, prohibited from as- repay the $500 purchase without incurring a sessing fees such as late payment fees or fees finance charge. With respect to the $500 pur- for exceeding the credit limit even if such chase, the federal credit union may charge fees are based in part on the protected bal- interest from the date of purchase, March 15, ance. through April 24 and interest on the remaining $100 from April 25 through the end of the Section 706.25—Unfair Balance Computation April billing cycle, April 30. Method Section 706.26—Unfair Charging of Security De- 25(a) General Rule posits and Fees for the Issuance or Avail- 1. Two-cycle method prohibited. When a con- ability of Credit to Consumer Credit Card Ac- sumer ceases to be eligible for a time period counts provided by the federal credit union within 26(a) Limitation for First Year which the consumer may repay any portion of the credit extended without incurring a fi- 1. Majority of the credit limit. The total nance charge, a grace period, the federal amount of security deposits and fees for the credit union is prohibited from computing issuance or availability of credit constitutes the finance charge using the so-called two- a majority of the initial credit limit if that cycle average daily balance computation total is greater than half of the limit. For method. This method calculates the finance example, assume that a consumer credit card charge using a balance that is the sum of the account has an initial credit limit of $500. average daily balances for two billing cycles. Under § 706.26(a), a federal credit union may The first balance is for the current billing charge to the account security deposits and cycle, and is calculated by adding the total fees for the issuance or availability of credit balance, including or excluding new pur- totaling no more than $250 during the first chases and deducting payments and credits, year (consistent with § 706.26(b)).

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26(b) Limitations for First Billing Cycle and 2. Payment with funds not obtained from the Subsequent Billing Cycles federal credit union. A federal credit union does not violate § 706.26(c) if it requires the 1. Adjustments of one dollar or less permitted. consumer to pay security deposits or fees for When dividing amounts pursuant to the issuance or availability of credit using § 706.26(b)(2), a federal credit union may ad- funds that are not obtained, directly or indi- just amounts by one dollar or less. For ex- rectly, from the federal credit union. For example, if a federal credit union is dividing ample, a federal credit union does not vio- $87 over five billing cycles, the federal credit late § 706.26(c) if a $400 security deposit paid union may charge $18 for two months and $17 by a consumer to obtain a consumer credit for the remaining three months. card account with a credit line of $400 is not 2. Examples. charged to a credit account provided by the i. Assume that a consumer credit card ac- federal credit union or its affiliate. count opened on January 1 has an initial credit limit of $500. Assume also that the 26(d) Definitions billing cycles for this account begin on the 1. Membership fees. Membership fees for first day of the month and end on the last opening an account are fees for the issuance day of the month. Under § 706.26(a), the fed- or availability of credit. A membership fee eral credit union may charge to the account to join an organization that provides a credit no more than $250 in security deposits and or charge card as a privilege of membership fees for the issuance or availability of credit is a fee for the issuance or availability of during the first year after the account is credit only if the card is issued automati- opened. If it charges $250, the federal credit cally upon membership. If membership re- union may charge up to $125 during the first sults merely in eligibility to apply for an ac- billing cycle. If it charges $125 during the count, then such a fee is not a fee for the first billing cycle, it may then charge no issuance or availability of credit. more than $25 in each of the next five billing 2. Enhancements. Fees for optional services cycles. If it chooses, the federal credit union in addition to basic membership privileges in may spread the additional security deposits a credit or charge card account, for example, and fees over a longer period, such as by travel insurance or card-registration serv- charging $12.50 in each of the ten billing cy- ices, are not fees for the issuance or avail- cles following the first billing cycle. ability of credit if the basic account may be ii. Same facts as above except that on July opened without paying such fees. Issuing a 1 the federal credit union increases the cred- card to each primary cardholder, not author- it limit on the account from $500 to $750. Be- ized users, is considered a basic membership cause the prohibition in § 706.26(a) is based on privilege and fees for additional cards, be- the initial credit limit of $500, the increase yond the first card on the account, are fees in credit limit does not permit the federal for the issuance or availability of credit. credit union to charge to the account addi- Thus, a fee to obtain an additional card on tional security deposits and fees for the the account beyond the first card, so that issuance or availability of credit, such as a each cardholder would have his or her own fee for increasing the credit limit. card, is a fee for the issuance or availability of credit even if the fee is optional; that is, 26(c) Evasion Prohibited if the fee is charged only if the cardholder requests one or more additional cards. 1. Evasion. Section 706.26(c) prohibits a fed- 3. One-time fees. Non-periodic fees related eral credit union from evading the require- to opening an account, such as application ments of this section by providing the con- fees or one-time membership or participa- sumer with additional credit to fund the con- tion fees, are fees for the issuance or avail- sumer’s payment of security deposits and ability of credit. Fees for reissuing a lost or fees that exceed the total amounts permitted stolen card, statement reproduction fees, and by § 706.26(a) and (b). For example, assume fees for late payment or other violations of that on January 1 a consumer opens a con- the account terms are examples of fees that sumer credit card account with an initial are not fees for the issuance or availability credit limit of $400 and the federal credit of credit. union charges to that account $100 in fees for the issuance or availability of credit. As- sume also that the billing cycles for the ac- PART 707—TRUTH IN SAVINGS count coincide with the days of the month and that the federal credit union will charge Sec. $20 in fees for the issuance or availability of 707.1 Authority, purpose, coverage and ef- credit in the February, March, April, May, fect on State laws. and June billing cycles. The federal credit 707.2 Definitions. union violates § 706.26(c) if it provides the 707.3 General disclosure requirements. consumer with a separate credit product to 707.4 Account disclosures. fund additional security deposits or fees for 707.5 Subsequent disclosures. the issuance or availability of credit. 707.6 Periodic statement disclosures.

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707.7 Payment of dividends. (d) Effect on state laws. State law re- 707.8 Advertising. quirements that are inconsistent with 707.9 Enforcement and record retention. the requirements of the TISA and this 707.10 [Reserved] 707.11 Additional disclosure requirements part are preempted to the extent of the for overdraft services. inconsistency. APPENDIX A TO PART 707—ANNUAL PERCENT- [58 FR 50445, Sept. 27, 1993, as amended at 61 AGE YIELD CALCULATION FR 68129, Dec. 27, 1996; 74 FR 36103, July 22, APPENDIX B TO PART 707—MODEL CLAUSES 2009] AND SAMPLE FORMS APPENDIX C TO PART 707—OFFICIAL STAFF IN- § 707.2 Definitions. TERPRETATIONS For purposes of this part, the fol- AUTHORITY: 12 U.S.C. 4311. lowing definitions apply: SOURCE: 58 FR 50445, Sept. 27, 1993, unless (a) Account means a share or deposit otherwise noted. account at a credit union held by or offered to a member or potential mem- § 707.1 Authority, purpose, coverage ber. It includes, but is not limited to, and effect on State laws. accounts such as share, share draft, (a) Authority. This regulation is checking and term share accounts. For issued by the National Credit Union purposes of the advertising regulations Administration to implement the in § 707.8, the term also includes an ac- Truth in Savings Act of 1991 (TISA), count at a credit union that is held by contained in the Federal Deposit Insur- or offered by a share or deposit broker. ance Corporation Improvement Act of (b) Advertisement means a commercial 1991, 12 U.S.C. 3201 et seq., Pub. L. 102– message, appearing in any medium, 242, 105 Stat. 2236. Information collec- that promotes directly or indirectly: tion requirements in this regulation (1) The availability or terms of, or a have been approved by the Office of deposit in, a new account; and Management and Budget under the pro- (2) For purposes of § 707.8(a) and visions of 44 U.S.C. 3501 et seq. and have § 707.11 of this part, the terms of, or a been assigned OMB No. 3133–0134. deposit in, a new or existing account. (b) Purpose. The purpose of this part (c) Annual percentage yield means a is to enable credit union members and percentage rate reflecting the total potential members to make informed amount of dividends paid on an ac- decisions about accounts at credit count, based on the dividend rate and unions. This part requires credit the frequency of compounding for a 365- unions to provide disclosures so that day period and calculated according to members and potential members can the rules in appendix A of this part. make meaningful comparisons among (d) Average daily balance method credit unions and depository institu- means the application of a periodic tions. rate to the average daily balance in the (c) Coverage. This part applies to all account for the period. The average credit unions whose accounts are ei- daily balance is determined by adding ther insured by, or eligible to be in- the full amount of principal in the ac- sured by, the National Credit Union count for each day of the period and di- Share Insurance Fund, except for any viding that figure by the number of credit union that has been designated days in the period. as a corporate credit union by the Na- (e) Board means the National Credit tional Credit Union Administration Union Administration Board. and any credit union that has $2 mil- (f) Bonus means a premium, gift, lion or less in assets, after subtracting award, or other consideration worth any nonmember deposits, and is deter- more than $10 (whether in the form of mined to be nonautomated by the Na- cash, credit, merchandise, or any tional Credit Union Administration. In equivalent) given or offered to a mem- addition, the advertising rules in § 707.8 ber during a year in exchange for open- apply to any person who advertises an ing, maintaining, or renewing an ac- account offered by a credit union, in- count, or increasing an account bal- cluding any person who solicits any ance. The term does not include divi- amount from any other person for dends, other consideration worth $10 or placement in a credit union. less given during a year, the waiver or

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reduction of a fee, the absorption of ex- ing account at a state-chartered credit penses, non-dividend membership bene- union offered pursuant to state law, fits, or extraordinary dividends. calculated by application of a periodic (g) Credit union means a federal or rate to the balance. For purposes of state-chartered credit union that is ei- this regulation, the term does not in- ther insured by, or is eligible to apply clude the payment of a bonus or other for insurance from, the National Credit consideration worth $10 or less given Union Share Insurance Fund. during a year, the waiver or reduction (h) Daily balance method means the of a fee, the absorption of expenses, application of a daily periodic rate to non-dividend membership benefits, or the full amount of principal in the ac- extraordinary dividends. Except as is count each day. specifically otherwise provided in this (i) Dividend and dividends mean any part, in the case of an interest-bearing declared or prospective earnings on a account held in or offered by a state- member’s shares in a credit union to be chartered credit union pursuant to paid to a member or to the member’s state law, the word ‘‘interest’’ shall be account. For purposes of this part, the substituted for all references to ‘‘divi- term does not include the payment of a dend’’ or ‘‘dividends’’ in this part. bonus or other consideration worth $10 (q) Member means: or less given during a year, the waiver (1) A natural person member of the or reduction of a fee, the absorption of credit union who holds an account pri- expenses, non-dividend membership marily for personal, family, or house- benefits, or extraordinary dividends. hold purposes; (j) Dividend declaration date means (2) A natural person nonmember who the date that the board of directors of holds an account primarily for per- a credit union declares a dividend for sonal, family, or household purposes, the preceding dividend period. either jointly with a natural person (k) Dividend period means the span of member or in a credit union designated time established by the board of direc- as a low-income credit union, or to tors of a credit union by the end of whom such an account is offered; and which shares in a member account earn (3) A natural person nonmember who dividend credit. The dividend period holds a deposit account in a state-char- may be different for each type of ac- tered credit union pursuant to state count. law, or to whom such deposit account (l) Dividend rate means the declared is offered. or prospective annual dividend rate The term does not include a natural paid on an account, which does not re- person who holds an account for an- flect compounding. For purposes of the other in a professional capacity or an account disclosures in § 707.4(b)(1)(i), unincorporated nonbusiness associa- the rate may, but need not, be referred tion of natural person members. to as the ‘‘annual percentage rate’’ in (r) Non-dividend membership benefits addition to being referred to as the means any property or service provided ‘‘dividend rate.’’ by a credit union to its members, the (m) Extraordinary dividends means a nature of which makes its valuation nonrepetitive dividend paid at an irreg- unreasonable and administratively im- ular time from funds legally available practicable. for such distribution. (s) Passbook account means an ac- (n) Fixed-rate account means an account in which the member retains a count that is not a variable rate ac- book or other document in which the count as defined in paragraph (z) of credit union records transactions on this section. the account. (o) Grace period means a period fol- (t) Periodic statement means a state- lowing the maturity of an automati- ment setting forth information about cally renewing term share account dur- an account (other than a term share ing which the member may withdraw account or passbook account) that is funds without being assessed a penalty. provided to a member on a regular (p) Interest means any payment to a basis four or more times a year. member or to a member’s account for (u) Potential member means a natural the use of funds in a nondividend-bear- person within the credit union’s field of

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membership (or an unincorporated non- §§ 707.4(a)(2) and 707.8 to a member or business association of such persons) or potential member in electronic form otherwise eligible to become a member without regard to the consent or other as defined in paragraph (q) of this sec- provisions of the E–Sign Act in the cir- tion. cumstances set forth in those sections. (v) State means a state, the District Disclosures for each account offered by of Columbia, the Commonwealth of a credit union may be presented sepa- Puerto Rico, and any territory or pos- rately or combined with disclosures for session of the United States. the credit union’s other accounts, as (w) Stepped-rate account means an ac- long as it is clear which disclosures are count that has two or more dividend applicable to the member or potential rates that take effect in succeeding pe- member’s account. riods and are known when the account (b) General. The disclosures shall re- is opened. flect the terms of the legal obligation (x) Term share account means any between the member and the credit share certificate, interest-bearing cer- union. Disclosures may be made in lan- tificate of deposit account, or other ac- guages other than English, provided count with a maturity of at least seven the disclosures are available in English days in which the member generally upon request. does not have a right to make with- (c) Relation to Regulation E (12 CFR drawals for six days after the account part 205). Disclosures required by and is opened, unless the account is subject provided in accordance with the Elec- to an early withdrawal penalty of at tronic Fund Transfer Act (15 U.S.C. least seven days’ dividends on amounts 1601) and its implementing Regulation withdrawn, offered by a credit union to E (12 CFR part 205) that are also re- a member or potential member. quired by this part may be substituted (y) Tiered-rate account means an ac- for the disclosures required by this count that has two or more dividend part. rates that are applicable to specified (d) Multiple members. If an account is balance levels. held by more than one member, disclo- (z) Variable-rate account means a sures may be made to any one of the share, share draft, checking, or term members. share account in which the simple divi- (e) Oral responses to inquiries. In an dend rate may change after the ac- oral response to a member or potential count is opened, unless the credit member’s inquiry about dividend rates union contracts to give at least thirty payable on its accounts, the credit days advance written notice of rate de- union shall state the annual percent- creases. age yield. The dividend rate may be [58 FR 50445, Sept. 27, 1993, as amended at 59 stated in addition to the annual per- FR 13436, Mar. 22, 1994; 59 FR 59899, Nov. 21, centage yield. No other rate may be 1994; 70 FR 72898, Dec. 8, 2005] stated. In stating a dividend rate and annual percentage yield, a credit union § 707.3 General disclosure require- shall: ments. (1) For dividend-bearing accounts (a) Form. Credit unions must make other than term share accounts, speci- the disclosures required by §§ 707.4 fy a dividend rate and annual percent- through 707.6 of this part, as applica- age yield as of the last dividend dec- ble, clearly and conspicuously, in writ- laration date. In the event that disclo- ing, and in a form the member or po- sures of a dividend rate and annual per- tential member may keep. Credit centage yield as of the last dividend unions may provide the disclosures re- declaration date might be inaccurate quired by this part to a member or po- because of known or contemplated div- tential member in electronic form, sub- idend rate changes, the credit union ject to compliance with the consent may disclose the prospective dividend and other applicable provisions of the rate and prospective annual percentage Electronic Signatures in Global and yield. Such prospective dividend rate National Commerce Act (E–Sign Act), and prospective annual percentage 15 U.S.C. 7001 et seq. Credit unions may yield may be disclosed either in lieu of, provide the disclosures required by or in addition to, the dividend rate and

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annual percentage yield as of the last not present at the credit union uses dividend declaration date. electronic means, for example, an (2) For interest-bearing accounts and internet Web site, to open an account for dividend-bearing term share ac- or request a service, the disclosures re- counts, specify an interest (dividend) quired under paragraph (a)(1) of this rate and annual percentage yield that section must be provided before the ac- were offered within the most recent count is opened or the service is pro- seven calendar days; state that the vided. rate and yield are accurate as of an (2) Requests. (i) A credit union must identified date; and provide a telephone provide account disclosures to a mem- number members may call to obtain ber or potential member upon request. current rate information. If a member or potential member who (f) Rounding and accuracy rules for is not present at the credit union rates and yields—(1) Rounding. The an- makes a request, the credit union must nual percentage yield, the annual per- mail or deliver the disclosures within a centage yield earned, and the dividend reasonable time after it receives the rate shall be rounded to the nearest request and may provide the disclo- one-hundredth of one percentage point sures in paper form or electronically if (.01%) and expressed to two decimal the member or potential member places. For account disclosures, the agrees. dividend rate may be expressed to more (ii) In providing disclosures upon re- than two decimal places. quest, the credit union may: (2) Accuracy. The annual percentage (A) Specify rates as follows: yield (and the annual percentage yield (1) For dividend-bearing accounts earned) will be considered accurate if other than term share accounts, speci- not more than one-twentieth of one fy a dividend rate and annual percent- percentage point (.05%) above or below age yield as of the last dividend dec- the annual percentage yield (and the laration date. In the event that disclo- annual percentage yield earned) deter- sures of a dividend rate and annual per- mined in accordance with the rules in centage yield as of the last dividend appendix A of this part. declaration date might be inaccurate (Approved by the Office of Management and because of known or contemplated div- Budget under control number 3133–0134) idend rate changes, the credit union [58 FR 50445, Sept. 27, 1993, as amended at 61 may disclose the prospective dividend FR 114, Jan. 3, 1996; 66 FR 33162, June 21, 2001; rate and prospective annual percentage 74 FR 36104, July 22, 2009] yield. Such prospective dividend rate and prospective annual percentage § 707.4 Account disclosures. yield may be disclosed either in lieu of, (a) Delivery of account disclosures—(1) or in addition to, the dividend rate and Account opening. (i) General. A credit annual percentage yield as of the last union must provide account disclosures dividend declaration date. to a member or potential member be- (2) For interest bearing accounts and fore an account is opened or a service for dividend-bearing term share ac- is provided, whichever is earlier. A counts, specify an interest rate and an- credit union is deemed to have pro- nual percentage yield that were offered vided a service when a fee required to within the most recent seven calendar be disclosed is assessed. Except as pro- days; state that the rate and yield are vided in paragraph (a)(1)(ii) of this sec- accurate as of an identified date; and tion, if a member or potential member provide a telephone number members is not present at the credit union when may call to obtain current rate infor- the account is opened or the service is mation; and provided and has not already received (B) State the maturity of a term the disclosures, the credit union must share account as either a term or a mail or deliver the disclosures no later date. than 10 business days after the account (b) Content of account disclosures. Ac- is opened or the service is provided, count disclosures shall include the fol- whichever is earlier. lowing, as applicable: (ii) Timing of electronic disclosures. If a (1) Rate information—(i) Annual per- member or potential member who is centage yield and dividend rate. (A) For

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interest-bearing accounts and for divi- (ii) Balance computation method. An dend-bearing term share accounts, the explanation of the balance computa- ‘‘annual percentage yield’’ and the tion method specified in § 707.7, used to ‘‘interest rate’’ (‘‘dividend rate’’), using calculate dividends on the account. those terms, and for fixed-rate ac- (iii) When dividends begin to accrue. A counts the period of time the interest statement of when dividends begin to (dividend) rate will be in effect. accrue on noncash deposits. (B) For dividend-bearing accounts (4) Fees. The amount of any fee that other than term share accounts, a cred- may be imposed in connection with the it union shall specify a dividend rate account (or an explanation of how the and annual percentage yield (using fee will be determined) and the condi- those terms) as of the last dividend tions under which the fee may be im- declaration date. In the event that disposed. closures of a dividend rate and annual (5) Transaction limitations. Any limi- percentage yield as of the last dividend tations on the number or dollar declaration date might be inaccurate amount of withdrawals or deposits. because of known or contemplated div- (6) Features of term share accounts. For idend rate changes, the credit union term share accounts: may disclose the prospective dividend (i) Time requirements. The maturity rate and prospective annual percentage date. yield. Such prospective dividend rate (ii) Early withdrawal penalties. A and prospective annual percentage statement that a penalty will be im- yield may be disclosed either in lieu of, posed for early withdrawal, how it is or in addition to, the dividend rate and calculated, and the conditions for its annual percentage yield as of the last assessment. dividend declaration date. (iii) Withdrawal of dividends prior to (ii) Variable rates. For variable-rate maturity. If compounding occurs and accounts: dividends may be withdrawn prior to (A) The fact that the dividend rate maturity, a statement that the annual and annual percentage yield may percentage yield assumes dividends re- change; main in the account until maturity (B) How the dividend rate is deter- and that a withdrawal will reduce earn- mined; ings. For accounts with a stated matu- (C) The frequency with which the div- rity greater than 1 year that do not idend rate may change; and compound dividends on an annual or (D) Any limitation on the amount more frequent basis, that require divi- the dividend rate may change. dend payouts at least annually, and (2) Compounding and crediting—(i) Fre- that disclose an APY determined in ac- quency. The frequency with which divi- cordance with section E of appendix A dends are compounded and credited, of this part, a statement that dividends and the dividend period for dividend- cannot remain on account and that bearing accounts. payout of dividends is mandatory. (ii) Effect of closing an account. If (iv) Renewal policies. A statement of members will forfeit dividends if they whether or not the account will renew close an account before accrued divi- automatically at maturity. If it will, a dends are credited, a statement that statement of whether or not a grace pe- the dividends will not be paid in such riod will be provided and, if so, the cases. length of that period must be stated. If (3) Balance information—(i) Minimum the account will not renew automati- balance requirements. Any minimum cally, a statement of whether dividends balance required to: will be paid after maturity if the mem- (A) Open the account; ber does not renew the account must be (B) Avoid the imposition of a fee; or stated. (C) Obtain the annual percentage (7) Bonuses. The amount or type of yield disclosed. any bonus, when the bonus will be pro- Except for the balance to open the ac- vided, and any minimum balance and count, the disclosure shall state how time requirements to obtain the bonus. the balance is determined for these (8) Nature of dividends. For accounts purposes. earning dividends, other than term

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share accounts, a statement that divi- changes in the annual percentage yield dends are paid from current income in variable-rate accounts. and available earnings, after required (ii) Share draft and check printing fees. transfers to reserves at the end of a Changes in fees for check printing. dividend period. (iii) Short-term term share accounts. (c) Notice to existing account holders— Changes in any term for term share ac- (1) Notice of availability of disclosures. counts with maturities of one month or Credit unions shall provide a notice to less. members who receive periodic state- (b) Notice before maturity for term share ments and who hold existing accounts accounts longer than one month that of the type offered by the credit union renew automatically. For term share ac- on January 1, 1995. The notice shall be counts with a maturity longer than included on or with the first periodic one month that renew automatically statement sent after January 1, 1995 (or at maturity, credit unions shall pro- on or with the first periodic statement vide the disclosures described below be- for a statement cycle beginning on or fore maturity. The disclosures shall be after that date). The notice shall state mailed or delivered at least 30 calendar that the members may request account days before maturity of the existing disclosures containing terms, fees, and account. Alternatively, the disclosures rate information for the account. In re- may be mailed or delivered at least 20 sponding to such a request, credit calendar days before the end of the unions shall provide disclosures in ac- grace period on the existing account, cordance with paragraph (a)(2) of this provided a grace period of at least five section. calendar days is allowed. (2) Alternative to notice. As an alter- (1) Maturities of longer than one year. native to the notice described in para- If the maturity is longer than one year, graph (c)(1) of this section, credit the credit union shall provide account unions may provide account disclo- disclosures set forth in § 707.4(b) for the sures to members. The disclosures may new account, along with the date the be provided either with a periodic existing account matures. If the divi- statement or separately, but must be dend rate and annual percentage yield sent no later than when the periodic that will be paid for the new account statement described in paragraph (c)(1) are unknown when disclosures are proof this section is sent. vided, the credit union shall state that (Approved by the Office of Management and those rates have not yet been deter- Budget under control number 3133–0134) mined, the date when they will be de- [58 FR 50445, Sept. 27, 1993, as amended at 61 termined, and a telephone number FR 114, Jan. 3, 1996; 63 FR 71574, Dec. 29, 1998; members may call to obtain the divi- 66 FR 33163, June 21, 2001; 74 FR 36104, July dend rate and the annual percentage 22, 2009] yield that will be paid for the new account. § 707.5 Subsequent disclosures. (2) Maturities of one year or less but (a) Change in terms—(1) Advance notice longer than one month. If the maturity required. A credit union shall give ad- is one year or less but longer than one vance notice to affected members of month, the credit union shall either: any change in a term required to be (i) Provide disclosures as set forth in disclosed under § 707.4(b), if the change paragraph (b)(1) of this section; or may reduce the annual percentage (ii) Disclose to the member: yield or adversely affect the member. (A) The date the existing account The notice shall include the effective matures and the new maturity date if date of the change. The notice shall be the account is renewed; mailed or delivered at least 30 calendar (B) The dividend rate and the annual days before the effective date of the percentage yield for the new account if change. they are known (or that those rates (2) No notice required. No notice under have not yet been determined, the date this section is required for: when they will be determined, and a (i) Variable-rate changes. Changes in telephone number the member may the dividend rate and corresponding call to obtain the dividend rate and the

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annual percentage yield that will be § 707.11(a)(1) of this part, when fees of paid for the new account); and the same type are imposed more than (C) Any difference in the terms of the once in a statement period, a credit new account as compared to the terms union may itemize each fee separately required to be disclosed under § 707.4(b) or group the fees together and disclose for the existing account. a total dollar amount for all fees of (c) Notice before maturity for term share that type. accounts longer than one year that do not (4) Length of period. The total number renew automatically. For term share ac- of days in the statement period, or the counts with a maturity longer than one year that do not renew automati- beginning and ending dates of the pe- cally at maturity, credit unions shall riod. disclose to members the maturity date (Approved by the Office of Management and and whether dividends will be paid Budget under control number 3133–0134) after maturity. The disclosures shall be mailed or delivered at least 10 calendar [58 FR 50445, Sept. 27, 1993, as amended at 59 FR 59899, Nov. 21, 1994; 61 FR 114, Jan. 3, 1996; days before maturity of the existing 64 FR 66356, Nov. 26, 1999; 66 FR 33163, June account. 21, 2001; 70 FR 72898, Dec. 8, 2005] (Approved by the Office of Management and Budget under control number 3133–0134) § 707.7 Payment of dividends. [58 FR 50445, Sept. 27, 1993, as amended at 61 (a) Permissible methods—(1) Balance on FR 114, Jan. 3, 1996; 63 FR 71574, Dec. 29, 1998] which dividends are calculated. Credit unions shall calculate dividends on the § 707.6 Periodic statement disclosures. full amount of principal in an account (a) Rule when statement and crediting for each day by use of either the daily periods vary. In making the disclosures balance method or the average daily described in paragraph (b) of this sec- balance method. Credit unions shall tion, credit unions that calculate and calculate dividends by use of a daily credit dividends for a period other than rate of at least 1⁄365 of the dividend rate. the statement period, such as the divi- 1 dend period, may calculate and disclose In a leap year a daily rate of ⁄366 of the the annual percentage yield earned and dividend rate may be used. amount of dividends earned based on (2) Determination of minimum balance that period rather than the statement to earn dividends. A credit union shall period. The information in paragraph use the same method to determine any (b)(4) shall be stated for that period as minimum balance required to earn well as for the statement period. dividends as it uses to determine the (b) Statement disclosures. If a credit balance on which dividends are cal- union mails or delivers a periodic culated. A credit union may use an ad- statement, the statement shall include ditional method that is unequivocally the following disclosures: beneficial to the member. (1) Annual percentage yield earned. (b) Compounding and crediting policies. The ‘‘annual percentage yield earned,’’ This section does not require credit using that term as calculated accord- unions to compound or credit dividends ing to the rules in appendix A of this at any particular frequency. part. (2) Amount of dividends. The dollar (c) Date dividends begin to accrue. amount of dividends earned (accrued or Dividends shall begin to accrue not paid and credited) on the account. The later than the day specified in section dollar amount of any extraordinary 606 of the Expedited Funds Availability dividends earned during the statement Act (12 U.S.C. 4005) and implementing period shall be shown as a separate fig- Regulation CC (12 CFR part 229). Divi- ure. dends shall accrue on funds until the (3) Fees imposed. Fees required to be day funds are withdrawn. disclosed under § 707.4(b)(4) of this part (Approved by the Office of Management and that were debited from the account Budget under control number 3133–0134) during the statement period. The fees must be itemized by type and dollar [58 FR 50445, Sept. 27, 1993, as amended at 61 amounts. Except as provided in FR 114, Jan. 3, 1996]

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§ 707.8 Advertising. dition to, the dividend rate and annual (a) Misleading or inaccurate advertise- percentage yield as of the last dividend ments. An advertisement must not: declaration date. (1) Be misleading or inaccurate or (3) Minimum balance. The minimum misrepresent a credit union’s account balance required to earn the advertised agreement; or annual percentage yield. For tiered- (2) Refer to or describe an account as rate accounts, the minimum balance ‘‘free’’ or ‘‘no cost’’ or contain a simi- required for each tier shall be stated in lar term if any maintenance or activity close proximity and with equal promi- fee may be imposed on the account. nence to the applicable annual percent- The word ‘‘profit’’ must not be used in age yield. referring to dividends or interest paid (4) Minimum opening deposit. The min- on an account. imum deposit required to open the ac- (b) Permissible rates. If an advertise- count, if it is greater than the min- ment states a rate of return, it shall imum balance necessary to earn the state the rate as an ‘‘annual percent- advertised annual percentage yield. age yield,’’ using that term. (The ab- (5) Effect of fees. A statement that breviation ‘‘APY’’ may be used pro- fees could reduce the earnings on the vided the term ‘‘annual percentage account. yield’’ is stated at least once in the ad- (6) Features of term share accounts. For vertisement.) The advertisement shall term share accounts: not state any other rate, except that (i) Time requirements. The term of the the ‘‘dividend rate,’’ using that term, account. may be stated in conjunction with, but (ii) Early withdrawal penalties. A not more conspicuously than, the an- statement that a penalty will or may nual percentage yield to which it re- be imposed for early withdrawal. lates. (iii) Required dividend payouts. For (c) When additional disclosures are re- noncompounding term share accounts quired. Except as provided in paragraph with a stated maturity greater than (e) of this section, if the annual per- one year that do not compound divi- centage yield is stated in an advertise- dends on an annual or more frequent ment, the advertisement shall state basis, that require dividend payouts at the following information, to the ex- least annually, and that disclose an tent applicable, clearly and conspicu- APY determined in accordance with ously: section E of appendix A of this part, a (1) Variable rates. For variable-rate statement that dividends cannot re- accounts, a statement that the rate main on account and that payout of may change after the account is dividends is mandatory. opened. (d) Bonuses. Except as provided in (2) Time annual percentage yield is of- paragraph (e) of this section, if a bonus fered. For interest-bearing accounts is stated in an advertisement, the ad- and dividend-bearing term share ac- vertisement shall state the following counts, the period of time the annual information, to the extent applicable, percentage yield will be offered, or a clearly and conspicuously: statement that the annual percentage (1) The ‘‘annual percentage yield,’’ yield is accurate as of a specified date. using that term; For dividend-bearing accounts other (2) The time requirements to obtain than term share accounts, a statement the bonus; that the annual percentage yield is ac- (3) The minimum balance required to curate as of the last dividend declara- obtain the bonus; tion date. In the event that disclosure (4) The minimum balance required to of an annual percentage yield as of the open the account, if it is greater than last dividend declaration date might be the minimum balance necessary to ob- inaccurate because of known or contain the bonus; and templated dividend rate changes, the (5) When the bonus will be provided. credit union may disclose the prospec- (e) Exemption for certain advertise- tive annual percentage yield. Such pro- ments—(1) Certain media. If an adver- spective annual percentage yield may tisement is made through one of the be disclosed either in lieu of, or in ad- following media, it need not contain

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the information in paragraphs (c)(1), § 707.9 Enforcement and record reten- (c)(2), (c)(4), (c)(5), (c)(6)(ii), (d)(4) and tion. (d)(5) of this section: (a) Administrative enforcement. Section (i) Broadcast or electronic media, 270 of TISA (12 U.S.C. 4309) contains the such as television or radio; provisions relating to administrative (ii) Outdoor media, such as bill- sanctions for failure to comply with boards; or the requirements of TISA and this (iii) Telephone response machines. part. (2) Indoors signs. (i) Signs inside the (b) Civil liability. Section 271 of TISA premises of a credit union (or the (12 U.S.C. 4310) contains the provisions premises of a share or deposit broker) relating to civil liability for failure to are not subject to paragraphs (b), (c), comply with the requirements of TISA (d) or (e)(1) of this section. and this part; Section 271 is repealed (ii) If a sign exempted by paragraph effective September 30, 2001. (e)(2) of this section states a rate of re- (c) Record retention. A credit union turn, it shall: shall retain evidence of compliance (A) State the rate as an ‘‘annual per- with this regulation for a minimum of centage yield,’’ using that term or the two years after the date disclosures are term ‘‘APY.’’ The sign shall not state required to be made or action is re- any other rate, except that the divi- quired to be taken. dend rate may be stated in conjunction with the annual percentage yield to (Approved by the Office of Management and Budget under control number 3133–0134) which it relates. (B) Contain a statement advising [58 FR 50445, Sept. 27, 1993, as amended at 59 members to contact an employee for FR 13436, Mar. 22, 1994; 61 FR 114, Jan. 3, 1996; further information about applicable 63 FR 71575, Dec. 29, 1998] fees and terms. § 707.10 [Reserved] (3) Newsletters. (i) Newsletters sent by a credit union to existing members § 707.11 Additional disclosure require- only are not subject to paragraphs (b), ments for overdraft services. (c), (d) or (e)(1) of this section. (a) Disclosure of total fees on periodic (ii) If a newsletter exempted by para- statements—(1) General. A credit union graph (e)(3) of this section states a rate must separately disclose on each peri- of return, it shall: odic statement, as applicable: (A) State the rate as an ‘‘annual per- (i) The total dollar amount for all centage yield,’’ using that term or the fees or charges imposed on the account term ‘‘APY.’’ The newsletter shall not for paying checks or other items when state any other rate, except that the there are insufficient or unavailable dividend rate may be stated in conjunc- funds and the account becomes over- tion with the annual percentage yield drawn; and to which it relates. (ii) The total dollar amount for all (B) Contain a statement advising fees or charges imposed on the account members to contact an employee for for returning items unpaid. further information about applicable (2) Totals required. The disclosures re- fees and terms. quired by paragraph (a)(1) of this sec- (f) Additional disclosures in connection tion must be provided for the state- with the payment of overdrafts. Credit ment period and for the calendar year- unions that promote the payment of to-date. overdrafts in an advertisement must (3) Format requirements. The aggre- include in the advertisement the dis- gate fee disclosures required by para- closures required by § 707.11(b) of this graph (a) of this section must be dis- part. closed in close proximity to fees identi- (Approved by the Office of Management and fied under § 707.6(a)(3), using a format Budget under control number 3133–0134) substantially similar to Sample Form [58 FR 50445, Sept. 27, 1993, as amended at 59 B–10 in appendix B. FR 13436, Mar. 22, 1994; 61 FR 114, Jan. 3, 1996; (b) Advertising disclosures for overdraft 63 FR 71575, Dec. 29, 1998; 70 FR 72898, Dec. 8, services—(1) Disclosures. Except as pro- 2005; 73 FR 30477, May 28, 2008] vided in paragraphs (b)(2),(b)(3), and

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(b)(4) of this section, any advertise- eral notice that items overdrawing an ment promoting the payment of over- account may trigger a fee; drafts must disclose in a clear and con- (xi) Informational or educational ma- spicuous manner: terials concerning the payment of over- (i) The fee or fees for the payment of drafts if the materials do not specifi- each overdraft; cally describe the credit union’s over- (ii) The categories of transactions for draft service; or which a fee for paying an overdraft (xii) An opt-out or opt-in notice re- may be imposed; garding the credit union’s payment of (iii) The time period by which the overdrafts or provision of discretionary member must repay or cover any over- overdraft services. draft; and (3) Exception for ATM screens and tele- (iv) The circumstances under which phone response machines. The disclo- the credit union will not pay an over- sures described in paragraphs (b)(1)(ii) and (b)(1)(iv) of this section are not re- draft. quired in connection with any adver- (2) Communications about the payment tisement made on an ATM screen or of overdrafts not subject to additional ad- using a telephone response machine. vertising disclosures. Paragraph (b)(1) of (4) Exception for indoor signs. Para- this section does not apply to: graph (b)(1) of this section does not (i) An advertisement promoting a apply to advertisements for the pay- service where the credit union’s payment of overdrafts on indoor signs as ment of overdrafts will be agreed upon described by § 707.8(e)(2) of this part, in writing and subject to part 226 of provided that the sign contains a clear this title (Regulation Z); and conspicuous statement that fees (ii) A communication by a credit may apply and that members should union about the payment of overdrafts contact an employee for further infor- in response to a member-initiated in- mation about applicable fees and quiry about share accounts or over- terms. For purposes of this paragraph drafts. Providing information about (b)(4), an indoor sign does not include the payment of overdrafts in response an ATM screen. to a balance inquiry made through an (c) Disclosure of account balances. If a automated system, such as a telephone credit union discloses balance informa- response machine, ATM, or a credit tion to a member through an auto- union’s Internet site, is not a response mated system, the balance may not in- to a member-initiated inquiry for pur- clude additional amounts that the poses of this paragraph; credit union may provide to cover an (iii) An advertisement made through item when there are insufficient or un- broadcast or electronic media, such as available funds in the member’s ac- television or radio; count, whether under a service pro- (iv) An advertisement made on out- vided in its discretion, a service sub- door media, such as billboards; ject to part 226 of this title (Regulation (v) An ATM receipt; Z), or a service to transfer funds from (vi) An in-person discussion with a another member account. The credit member; union may, at its option, disclose addi- (vii) Disclosures required by Federal tional account balances that include or other applicable law; such additional amounts, if the credit (viii) Information included on a peri- union prominently states that any odic statement or a notice informing a such balance includes such additional member about a specific overdrawn amounts and, if applicable, that addi- item or the amount the account is tional amounts are not available for all overdrawn; transactions. (ix) A term in a share account agree- [70 FR 72898, Dec. 8, 2005, as amended at 74 ment discussing the credit union’s FR 36104, July 22, 2009] right to pay overdrafts; (x) A notice provided to a member, APPENDIX A TO PART 707—ANNUAL such as at an ATM, that completing a PERCENTAGE YIELD CALCULATION requested transaction may trigger a fee The annual percentage yield (APY) meas- for overdrawing an account, or a gen- ures the total amount of dividends a credit

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union pays on an account based on the divi- drawals) occur during the term. (This as- dend rate and the frequency of compounding. sumption shall not be used if a credit union The annual percentage yield is expressed as requires, as a condition of the account, that an annualized rate, based on a 365-day year. members withdraw dividends during the (Credit unions may calculate the annual per- term. In such a case, the dividends (and an- centage yield based on a 365-day or a 366-day nual percentage yield calculation) shall re- year in a leap year.) Part I of this appendix flect that requirement.) For term share ac- discusses the annual percentage yield cal- counts that are offered in multiples of culations for account disclosures and adver- months, credit unions may base the number tisements, while Part II discusses annual of days on either the actual number of days percentage yield earned calculations for during the applicable period, or the number statements. The annual percentage yield re- of days that would occur for any actual se- flects only dividends and does not include quence of that many calendar months. If the value of any bonus, as that term is de- credit unions choose to use this permissive fined in part 707, that may be provided to the rule, they must use the same number of days member to open, maintain, increase or renew to calculate the dollar amount of dividends an account. Dividends, interest or other that will be earned on the account in the an- earnings are not to be included in the annual nual percentage yield formula (where ‘‘Divi- percentage yield if such amounts are deter- dends’’ are divided by ‘‘Principal’’.) mined by circumstances that may or may The annual percentage yield is to be cal- not occur in the future. These formulas culated by use of the following general for- apply to both dividend-bearing and interest- mula ((‘‘APY’’) is used for convenience in the bearing accounts held by credit unions. formulas): (365/Days in PART I. ANNUAL PERCENTAGE YIELD FOR AC- APY=100 [(1 + Dividends/Principal) term) ¥ COUNT DISCLOSURES AND ADVERTISING PUR- 1]. POSES ‘‘Principal’’ is the amount of funds assumed to have been deposited at the begin- In general, the annual percentage yield for ning of the account. account disclosures under §§ 707.4 and 707.5 ‘‘Dividends’’ is the total dollar amount of and for advertising under § 707.8 is an dividends earned on the Principal for the annualized rate that reflects the relationship term of the account. between the amount of dividends that would ‘‘Days in term’’ is the actual number of be earned by the member for the term of the days in the term of the account. account and the amount of principal used to When the ‘‘days in term’’ is 365 (that is, calculate those dividends. The amount of where the stated maturity is 365 days or dividends that would be earned may be pro- where the account does not have a stated jected based on the most recent past de- maturity), the APY can be calculated by use clared rate or an anticipated future rate, of the following simple formula: whichever the credit union judges to most reasonably approximate the dividends to be APY=100 (Dividends/Principal). earned. Special rules apply to accounts with Examples: tiered and stepped dividend rates, and to cer- (1) If a credit union would pay $61.68 in tain term share accounts with a stated ma- dividends for a 365-day year on $1,000 depos- turity greater than 1 year. ited into a share draft account, the APY is 6.17%: A. General Rules APY=100 [(1 + 61.68/1,000) (365/365) ¥1] Except as provided in Part I. E. of this ap- APY=6.17%. pendix, the annual percentage yield shall be Or, using the simple formula above (since calculated by the formula shown below. the term is deemed to be 365 days): Credit unions may calculate the annual per- APY=100 (61.68/1,000) centage yield using projected dividends based on either the rate at the last dividend APY=6.17%. declaration date or the rate anticipated at a (2) If a credit union pays $30.37 in dividends future date. The credit union must disclose on a $1,000 six-month term share certificate whichever option it uses to members. Credit account (where the six-month period used by unions shall calculate the annual percentage the credit union contains 182 days), using the yield based on the actual number of days for general formula above, the APY is 6.18%: the term of the account. For accounts with- APY=100 [(1+30.37/1,000)(365/182)¥1] out a stated maturity date (such as a typical APY=6.18%. share or share draft account), the calcula- The APY is affected by the frequency of tion shall be based on an assumed term of 365 compounding, i.e., the amount of dividends days. In determining the total dividends fig- will be greater the more frequently dividends ure to be used in the formula, credit unions are compounded for a given nominal rate. shall assume that all principal and dividends When two credit unions are offering the remain on deposit for the entire term, and same dividend rate on, for example, a share that no other transactions (deposits or with- account, the APY disclosed may be different

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if the credit unions use a different frequency introductory rate) is in effect for the remain- of compounding. der of the year. If the variable rate is tied to Examples: an index, the index-based rate in effect at (1) If a credit union pays $1,268.25 in divi- the time of disclosure must be used for the dends for a 365-day year on $10,000 deposited remainder of the year. If the rate is not tied into a regular share account earning 12%, to an index, the rate in effect for existing and the dividends are compounded monthly, members holding the same account (who are the APY will be 12.68%. not receiving the introductory dividend rate) APY=100 ($1,268.25/10,000) must be used for the remainder of the year. APY=12.68% For example, if a credit union offers an ac- (2) However, if a credit union is count on which it pays a 7% dividend rate, compounding dividends on a quarterly basis compounded daily, for the first three months on an account which otherwise has the same (which, for example, contains 91 days), while terms, the dividends will be $1,255.09 and the the variable dividend rate that would have APY will be 12.55%. been in effect when the account was opened was 5%, the total dividends for a 365-day year APY=100 ($1,255.09/10,000) for a $1,000 account balance is $56.52, (based APY=12.55% on 91 days at 7% followed by 274 days at 5%). B. Stepped-Rate Accounts (Different Rates Using the simple formula, the APY is 5.65%: Apply in Succeeding Periods) APY=100 (56.52/1,000) APY=5.65%. For accounts with two or more dividend rates applied in succeeding periods (where D. Accounts With Tiered Rates (Different Rates the rates are known at the time the account Apply to Specified Balance Level) is opened), a credit union shall assume each For accounts in which two or more divi- dividend rate is in effect for the length of dend rates paid on the account are applicable time provided for in any share agreement. to specified balance levels, the credit union Examples: must calculate the annual percentage yield (1) If a credit union offers a $1,000 6-month in accordance with the method described term share (certificate) account on which it below that it uses to calculate dividends. In pays a 5% dividend rate, compounded daily, all cases, an annual percentage yield (or a for the first three months (which contain 91 range of annual percentage yields, if appro- days), and a 5.5% dividend rate, compounded priate) must be disclosed for each balance daily, for the next three months (which con- tier. tain 92 days), the total dividends for six For purposes of the examples discussed months is $26.68, and, using the general for- below, assume the following: mula above, the APY is 5.39%: APY=100 [(1+26.68/1,000)(365/183)¥1] Simple divi- APY=5.39%. dend rate (Per- Share balance required to earn rate cent) (2) If a credit union offers a $1,000 2-year share certificate on which it pays a 6% divi- 5.25 ...... Up to but not exceeding $2,500. dend rate, compounded daily, for the first 5.50 ...... Above $2,500, but not exceeding $15,000. year, and a 6.5% dividend rate, compounded 5.75 ...... Above $15,000. daily, for the next year, the total dividends for two years is $133.13, and, using the gen- Tiering Method A eral formula above, the APY is 6.45%: Under this method, a credit union pays on ( ) APY=100 [(1+133.13/1,000) 365/730 ¥1] the full balance in the account the stated APY=6.45%. dividend rate that corresponds to the applicable share balance tier. For example, if a C. Variable-Rate Accounts member deposits $8,000, the credit union pays For variable-rate accounts without an in- the 5.50% dividend rate on the entire $8,000. troductory premium or discounted rate, a This is also known as a ‘‘hybrid’’ or ‘‘pla- credit union must base the calculation only teau’’ tiered rate account. on the initial dividend rate in effect when When this method is used to determine the account is opened (or advertised), and as- dividends, only one annual percentage yield sume that this rate will not change during will apply to each tier. Within each tier, the the year. annual percentage yield will not vary with Variable-rate accounts with an introduc- the amount of principal assumed to have tory premium or discount rate must be been deposited. treated like stepped-rate accounts. Thus, a For the dividend rates and account bal- credit union shall assume that: (1) The intro- ances assumed above, the credit union will ductory simple dividend rate is in effect for state three annual percentage yields—one the length of time provided for in the ac- corresponding to each balance tier. Calcula- count contract; and (2) the variable dividend tion of each annual percentage yield is simi- rate that would have been in effect when the lar for this type of account as for accounts account is opened or advertised (but for the with a single fixed dividend rate. Thus, the

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calculation is based on the total amount of APY=100 (53.90/1,000) dividends that would be received by the APY=5.39%. member for each tier of the account for a Second tier. For the second tier the credit year and the principal assumed to have been union would pay between $134.75 and $841.45 deposited to earn that amount of dividends. in dividends, based on assumed balances of First tier. Assuming daily compounding, the $2,500.01 and $15,000, respectively. For credit union will pay $53.90 in dividends on a $2,500.01, dividends would be figured on $2,500 $1,000 account balance. Using the general for- at 5.25% dividend rate plus dividends on $.01 mula for the first tier, the APY is 5.39%: at 5.50%. For the low end of the second tier, APY=100 [(1+53.90/1,000)(365/365)¥1] therefore, the annual percentage yield is APY=5.39%. 5.39%. Using the simple formula: Using the simple formula: APY=100 (134.75/2,500) APY=100 (53.90/1,000) APY=5.39%. APY=5.39%. For $15,000, dividends are figured on $2,500 Second tier. The credit union will pay at 5.25% dividend rate plus dividends on $452.29 in dividends on an $8,000 deposit. $12,500 at 5.50% dividend rate. For the high Thus, using the simple formula, the annual percentage yield for the second tier is 5.65%: end of the second tier, the annual percentage yield, using the simple formula, is 5.61%: APY=100 (452.29/8,000) APY=5.65%. APY=100 (841.45/15,000) Third tier. The credit union will pay APY=5.61%. $1,183.61 in dividends on a $20,000 account bal- Thus, the annual percentage yield range ance. Thus, using the simple formula, the an- that would be stated for the second tier is nual percentage yield for the third tier is 5.39% to 5.61%. 5.92%: Third tier. For the third tier, the credit APY=100 (1,183.61/20,000) union would pay $841.45 and $5,871.78 in divi- APY=5.92%. dends on the low end of the third tier (a balance of $15,000.01). For $15,000.01, dividends Tiering Method B would be figured on $2,500 at 5.25% dividend Under this method, a credit union pays the rate, plus dividends on $12,500 at 5.50% divi- stated dividend rate only on that portion of dend rate, plus dividends on $.01 at 5.75% div- the balance within the specified tier. For ex- idend rate. For the low end of the third tier, ample, if a member deposits $8,000, the credit therefore, the annual percentage yield, using union pays 5.25% on only $2,500 and 5.50% on the simple formula, is 5.61%: $5,500 (the difference between $8,000 and the APY=100 (841.45/15,000) first tier cutoff of $2,500). This is also known APY=5.61%. as a ‘‘pure’’ tiered rate account. Assuming the credit union does not limit The credit union that computes dividends the account balance, it may assume any in this manner must provide a range that maximum amount for the purposes of com- shows the lowest and the highest annual per- puting the annual percentage yield for the centage yields for each tier (other than for high end of the third tier. For an assumed the first tier, which, like the tiers in Method maximum balance amount of $100,000, divi- A, has the same annual percentage yield dends would be figured on $2,500 at 5.25% div- throughout). The low figure for an annual percentage yield is calculated based on the idend rate, plus dividends on $12,500 at 5.50% total amount of dividends earned for a year dividend rate, plus dividends on $85,000 at assuming the minimum principal required to 5.75% dividend rate. For the high end of the earn the dividend rate for that tier. The high third tier, therefore, the annual percentage figure for an annual percentage yield is yield, using the simple formula, is 5.87%: based on the amount of dividends the credit APY=100 (5,871.78/100,000) union would pay on the highest principal that APY=5.87%. could be deposited to earn that same divi- Thus, the annual percentage yield that dend rate. If the account does not have a would be stated for the third tier is 5.61% to limit on the amount that can be deposited, 5.87%. If the assumed maximum balance the credit union may assume any amount. amount is $1,000,000, credit unions would use For the tiering structure assumed above, $985,000 rather than $85,000 in the last cal- the credit union would state a total of five culation. In that case for the high end of the annual percentage yields—one figure for the third tier, the annual percentage yield, using first tier and two figures stated as a range the simple formula, is 5.91%: for the other two tiers. First tier. Assuming daily compounding, the APY=100 (59,134.22/1,000,000) credit union could pay $53.90 in dividends on APY=5.91% a $1,000 account balance. For this first tier, Thus, the annual percentage yield range using the simple formula, the annual per- that would be stated for the third tier is centage yield is 5.39%: 5.61% to 5.91%.

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E. Term Share Accounts with a Stated Maturity the amount of dividends earned and the aver- Greater than One Year that Pay Dividends At age daily balance in the account for the Least Annually other period, such as a crediting or dividend period. 1. For term share accounts with a stated The annual percentage yield shall be cal- maturity greater than one year, that do not culated by using the following formulas compound dividends on an annual or more (‘‘APY Earned’’ is used for convenience in frequent basis, and that require the member the formulas): to withdraw dividends at least annually, the annual percentage yield may be disclosed as A. General Formula equal to the dividend rate. APY Earned=100 [(1+Dividends earned/Bal- Example: ance)(365/Daysinperiod)¥1]. If a credit union offers a $1,000 two-year term share account that does not compound ‘‘Balance’’ is the average daily balance in and that pays out dividends semi-annually the account for the period. by check or transfer at a 6.00% dividend rate, ‘‘Dividends earned’’ is the actual amount the annual percentage yield may be disclosed of dividends accrued or paid and credited to as 6.00%. the account for the period. 2. For term share accounts covered by this ‘‘Days in period’’ is the actual number of paragraph that are also stepped-rate ac- days over which the dividends disclosed on counts, the annual percentage yield may be the statement were earned. disclosed as equal to the composite dividend Examples: rate. (1) If a credit union calculates dividends Example: for the statement period (and uses either the (1) If a credit union offers a $1,000 three- daily balance or the average daily balance year term share account that does not com- method), and the account had a balance of pound and that pays out dividends annually $1,500 for 15 days and a balance of $500 for the by check or transfer at a 5.00% dividend rate remaining 15 days of a 30-day statement pe- for the first year, 6.00% dividend rate for the riod, the average daily balance for the period second year, and 7.00% dividend rate for the is $1,000. Assume that $5.25 in dividends was third year, the credit union may compute earned during the period. The annual per- the composite dividend rate and APY as fol- centage yield earned (using the formula lows: above) is 6.58%: (a) Multiply each dividend rate by the APY Earned=100 [(1+5.25/1,000)(365/30)¥1] number of days it will be in effect; APY Earned=6.58%. (b) Add these figures together; and (2) Assume a credit union calculates divi- (c) Divide by the total number of days in dends on the average daily balance for the the term. calendar month and provides periodic state- (2) Applied to the example, the products of ments that cover the period from the 16th of the dividend rates and days the rates are in one month to the 15th of the next month. effect are (5.00%×365 days) 1825, (6.00%×365 The account has a balance of $2,000 Sep- days) 2190, and (7.00%×365) 2555, respectively. tember 1 through September 15 and a balance The sum of these products, 6570, is divided by of $1,000 for the remaining 15 days of Sep- 1095, the total number of days in the term. tember. The average daily balance for the The composite dividend rate and APY are month of September is $1,500, which results both 6.00%. in $6.50 in dividends earned for the month. The annual percentage yield earned for the PART II. ANNUAL PERCENTAGE YIELD EARNED month of September would be shown on the FOR STATEMENTS periodic statement covering September 16 The annual percentage yield earned for through October 15. The annual percentage statements under § 707.6 is an annualized rate yield earned (using the formula above) is that reflects the relationship between the 5.40%: amount of dividends actually earned (ac- APY Earned=100 [(1+6.50/1,500)(365/30)¥1] crued or paid and credited) to the member’s APY Earned = 5.40%. account during the period and the average (3) Assume a credit union calculates divi- daily balance in the account for the period dends on the average daily balance for a over which the dividends were earned. quarter (for example, the calendar months of Pursuant to § 707.6(a), when dividends are September through November), and provides paid less frequently than statements are monthly periodic statements covering cal- sent, the APY Earned may reflect the num- endar months. The account has a balance of ber of days over which dividends were earned $1,000 throughout the 30 days of September, a rather than the number of days in the state- balance of $2,000 throughout the 31 days of ment period, e.g., if a credit union uses the October, and a balance of $3,000 throughout average daily balance method and calculates the 30 days of November. The average daily dividends for a period other than the state- balance for the quarter is $2,000, which re- ment period, the annual percentage yield sults in $21 in dividends earned for the quar- earned shall reflect the relationship between ter. The annual percentage yield earned

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would be shown on the periodic statement B. SPECIAL FORMULA FOR USE WHERE PERIODIC for November. The annual percentage yield STATEMENT IS SENT MORE OFTEN THAN THE earned (using the formula above) is 4.28%: PERIOD FOR WHICH DIVIDENDS ARE COM- POUNDED. APY Earned=100 [(1+21/2,000)(365/91)¥1] APY Earned=4.28%. Credit unions that use the daily balance method to accrue dividends and that issue periodic statements more often than the period for which dividends are compounded shall use the following special formula:

⎡ (/365 Compounding ) ⎤ ⎧ (/)Dividends earned Balance ⎫ APY Earned =+100⎢⎨ 1⎬ − 1⎥ ⎣⎢⎩ Days in period() Compounding ⎭ ⎦⎥

The following definition applies for use in compounded annually, and provides periodic this formula (all other terms are defined statements for each monthly cycle. The ac- under Part II): count has a daily balance of $1000.00 for a 30- ‘‘Compounding’’ is the number of days in day statement period. The dividend earned of each compounding period. $4.11 for the period, and the annual percent- Assume a credit union calculates dividends age yield earned (using the special formula for the statement period using the daily bal- above) is 5.00%: ance method, pays a 5.00% dividend rate,

⎡⎧ ($4.11 / 1 , 000 ) ⎫(/)365 365 ⎤ APY Earned =+100⎢⎨ 1 ()365⎬ − 1⎥ ⎣⎢⎩ 30 ⎭ ⎦⎥ APY Earned = 5.00%. [58 FR 50445, Sept. 27, 1993, as amended at 63 FR 71575, Dec. 29, 1998]

APPENDIX B TO PART 707—MODEL B–8—Sample Form (Money Market Share CLAUSES AND SAMPLE FORMS Account Disclosures)

Table of Contents B–9—Sample Form (Term Share (Certificate) Account Disclosures) B–1—Model Clauses for Account Disclosures (§ 707.4(b)) B–10—Sample Form (Periodic Statement) B–2—Model Clauses for Changes in Terms (§ 707.5(a)) B–11—Sample Form (Rate and Fee Schedule) B–3—Model Clauses for Pre-Maturity Notices for Term Share Accounts (§ 707.5(b-d)) GENERAL NOTE: Appendix B contains model B–4—Sample Form (Signature Card/ Applica- clauses and sample forms intended for option for Membership) tional use by credit unions to aid in compliance with the disclosure requirements of B–5—Sample Form (Term Share (Certificate) §§ 707.4 (account disclosures), 707.5 (subse- Account) quent disclosures), 707.6 (statement disclo- B–6—Sample Form (Regular Share Account sures), and 707.8 (advertisements). Section Disclosures) 269(b) of TISA provides that credit unions B–7—Sample Form (Share Draft Account that use these clauses and forms will be in Disclosures) compliance with TISA’s disclosure provisions. As discussed in the supplementary information to § 707.3(a), this final rule provides for flexibility in designing the format of the

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disclosures. Credit unions can choose to pre- the potential member or member may call pare a single document or brochure that in- the credit union to obtain up-to-date infor- corporates disclosures for all accounts of- mation. When opening a new account, of fered, or to prepare different documents for course, a credit union could provide the con- each type of account. Credit unions may also tractual rate alone, and delete the sentences use inserts to a document, or fill in blanks to in brackets. Given the definition of fixed- show current rates, fees and other terms. rate account in § 707.2(n), credit unions offer- In the model clauses, words in parentheses ing fixed-rate accounts must contract to indicate the type of disclosure a credit union hold rates steady for at least a 30-day period. should insert in the space provided (for ex- Thus, if the 30-day option of the last sen- ample, a credit union might insert ‘‘July 23, tence is not chosen, the period chosen must 1995’’ in the blank for a ‘‘(date)’’ disclosure). be longer than 30 days. Brackets and ‘‘/’’ indicate that a credit union must choose the alternative that best de- 2. Dividend-bearing Term Share Accounts scribes its practice (for example, ‘‘[daily balance/ average daily balance]’’). It should The dividend rate on your term share ac- be noted that only in sections B–6 through count is lll% with an annual percentage B–10 of this appendix have specific examples yield (APY) of lll%. [For purposes of this of disclosures been given, with dates and fig- disclosure, this is a rate and APY that were ures. Sections B–1 through B–5, and section offered within the most recent seven cal- B–11 provide only unspecific model clauses or endar days and were accurate as of (date). blank forms. The Board felt, as did the FRB Please call (credit union telephone number) in the appendix A to Regulation DD, that a to obtain current rate information.] You will mix of blank clauses and forms and applica- be paid this rate [for (time period)/until tion of the model clauses to real specific sit- (date)/for at least 30 calendar days]. uations would benefit those who must com- NOTE: This provision reflects an accurate ply with TISA. Any references to NCUA Rules and Regula- statement for a fixed-rate, dividend-bearing tions, the NCUA Standard FCU Bylaws, or the term share account. Interest-bearing term NCUA Accounting Manual for FCUs, are pro- share accounts would use the disclosure in vided for guidance and as a point of reference § 1, above. Since account opening disclosures for credit unions. Citations to these sources may be provided to potential members re- does not indicate that their application is requesting account information before opening quired for those credit unions who need not an account, and members opening new ac- follow them. counts, information is provided indicating that the rate may not be current, but that B–1 MODEL CLAUSES FOR ACCOUNT the potential member or member may call DISCLOSURES (§ 707.4(B)) the credit union to obtain up-to-date information. When opening a new account, of (A) Rate Information (Sec. 707.4(b)(1)) course, a credit union could provide the contractual rate alone, and delete the sentences (I) Fixed-Rate Accounts (§ 707.4(b)(1)(i)(A–B)) in brackets. Given the definition of fixed- 1. Interest-bearing Accounts rate account in § 707.2(n), credit unions offering fixed-rate accounts must contract to The interest rate on your deposit account hold rates steady for at least a 30-day period. is lll% with an annual percentage yield Thus, if the 30-day option of the last sen- (APY) of lll%. [For purposes of this dis- tence is not chosen, the period chosen must closure, this is a rate and APY that were of- be longer than 30 days. fered within the most recent seven calendar days and were accurate as of (date). Please 3. Other Dividend-bearing Accounts call (credit union telephone number) to obtain current rate information.] You will be [As of [the last dividend declaration date/ paid this rate [for (time period)/until (date)/ (date)], the dividend rate was lll% with for at least 30 calendar days]. an annual percentage yield (APY) of lll% on your account. /or The prospective divi- NOTE: This provision reflects an accurate dend rate on your account is lll% with a statement for an interest-bearing account prospective APY of lll% for the current authorized by state law for state-chartered dividend period.] You will be paid this rate credit unions. While the definition of the for [(time period)/at least 30 calendar days]. term ‘‘interest’’ permits its substitution for the term ‘‘dividends,’’ separate disclosures or should be made for interest-bearing ac- [As of [the last dividend declaration date/ counts. Since account opening disclosures (date)], the dividend rate was lll% with may be provided to potential members re- an annual percentage yield (APY) of lll% questing account information before opening on your account. /or The prospective divi- an account, and members opening new ac- dend rate on your account is lll% with an counts, information is provided indicating annual percentage yield (APY) of lll% for that the rate may not be current, but that this dividend period.] This rate will not

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change unless the credit union notifies you be current, but that the potential member or at least 30 calendar days prior to any change. member may call the credit union to obtain up-to-date information. When opening a new NOTE: Credit unions may disclose the divi- account, of course, a credit union could pro- dend rate and annual percentage yield on accounts as of the last dividend declaration vide the contractual rate alone, and delete date. This necessitates inclusion of a disclo- the sentences in brackets. Rarely would sure of the actual calendar date of the last there be limitations on rate changes, but dividend declaration date. Additionally or language is provided for this situation in the alternatively (if the last dividend rate could last sentence. Of course, it is only to be used be inaccurate), credit unions may disclose a if it applies to an account. prospective dividend rate and a prospective 2. Dividend-bearing Term Share Accounts annual percentage yield. Such prospective rates and yields must be estimated in good The dividend rate on your term share ac- faith, and must be declared at the proper count is lll%, with an annual percentage time if it is at all possible to do so. As for yield (APY) of lll%. [For purposes of this the last sentence in these disclosures, this disclosure, this is a rate and APY that were provision reflects a credit union policy to set offered within the most recent seven cal- prospective dividend rates for the next endar days and were accurate as of (date). month (or at least 30 days), quarter or other Please call (credit union telephone number) period. Many credit unions, at their mid- to obtain current rate information.] The div- monthly board meeting, set prospective divi- idend rate and annual percentage yield may dend rates for the next month beginning on change every (time period) based on [(name the 1st day of the month and continuing to of index)/the determination of the credit the last day of the month. These rates must union board of directors]. The dividend rate be formalized or ratified at the end of a divi- for your account will [never change by more dend period. Given the timing of the board than lll% each (time period)/never be less/ meetings, the time to prepare and mail no- more than lll% /never exceed lll% tices and the 30 day period, it will often take above or fall more than lll% below the credit unions 45 to 60 days to effectively initial dividend rate]. change rates. For these reasons, the Board strongly suggests that credit unions do not NOTE: This disclosure combines the re- offer fixed-rate, dividend-bearing accounts. quirements of § 707.4(b)(1)(i) with § 707.4(b)(1)(ii) for dividend-bearing, variable- (II) Variable-Rate Accounts (§ 707.4(b)(1)(ii)) rate term share accounts. The variable nature of a deposit account usually is based on 1. Interest-bearing Accounts an external index or is set at the discretion The interest rate on your deposit account of the board. If another means of rate setting is lll%, with an annual percentage yield is used, that, instead of the model language, (APY) of lll%. [For purposes of this dis- must be disclosed. Since account opening closure, this is a rate and APY that were of- disclosures may be provided to potential fered within the most recent seven calendar members requesting account information be- days and were accurate as of (date). Please fore opening an account, and members open- call (credit union telephone number) to ob- ing new accounts, information is provided in- tain current rate information.] The interest dicating that the rate may not be current, rate and annual percentage yield may but that the potential member or member change every (time period) based on [(name may call the credit union to obtain up-to- of index)/the determination of the credit date information. When opening a new ac- union board of directors]. The interest rate count, of course, a credit union could provide for your account will [never change by more the contractual rate alone, and delete the than lll% each (time period)/never be less/ sentences in brackets. Rarely would there be more than lll%/never exceed lll% limitations on rate changes, but language is above or fall more than lll% below the provided for this situation in the last sen- initial interest rate]. tence. Of course, it is only to be used if it applies to an account. NOTE: This disclosure combines the requirements of § 707.4(b)(1)(i) with 3. Other Dividend-bearing Accounts § 707.4(b)(1)(ii) for interest-bearing accounts. The variable nature of a deposit account usu- [As of [the last dividend declaration date/ ally is based on an external index or is set at (date)], the dividend rate was lll% with the discretion of the board. If another means an annual percentage yield (APY) of lll% of rate setting is used, that, instead of the on your account. /or The prospective divi- proposed language, must be disclosed. Since dend rate on your account is lll% with an account opening disclosures may be provided anticipated annual percentage yield (APY) of to potential members requesting account in- lll% for the current dividend period.] The formation before opening an account, and dividend rate and annual percentage yield members opening new accounts, information may change every (dividend period) as deter- is provided indicating that the rate may not mined by the credit union board of directors.

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NOTE: This language combines the require- 3. Other Dividend-bearing Accounts ments of § 707.4(b)(1)(i) with § 707.4(b)(1)(ii). [As of [the last dividend declaration date/ Credit unions may disclose the dividend rate (date)], the initial dividend rate on your ac- and annual percentage yield on accounts as count was lll%. /or The prospective divi- of the last dividend declaration date. This dend rate on your account is lll%.] You necessitates inclusion of a disclosure of the will be paid that rate [for (time period)/ until actual calendar date of the last dividend dec- (date)]. After that time, the prospective divi- laration date or use of the phrase ‘‘last dividend rate for your share account will be dend declaration date’’. Additionally or al- lll% and you will be paid such rate [for ternatively, credit unions may disclose a (time period)/ until (date)]. The annual per- prospective dividend rate and a prospective centage yield (APY) for your account is annual percentage yield. Such prospective lll%. You will be paid this rate for [(time rates and yields must be estimated in good period)/at least 30 calendar days]. faith, and must be declared at the proper time if it is at all possible to do so. As for NOTE: Stepped-rate accounts are accounts the last sentence in these disclosures, this with two or more rates that take effect in provision reflects the variable nature of the succeeding periods. The applicable rates and account. Generally, there is only one vari- time periods are known when the account is able-rate feature for share accounts: the fre- opened. By nature these are fixed-rate ac- quency of dividend period rate changes (e.g., counts and are usually associated with term daily, weekly, monthly, quarterly, semi-an- share (certificate) accounts. Accordingly, a nually, annually). Normally, there are no contract provision (for share accounts) to contractual limitations on share account change rates should be included. earnings (unless imposed by a regulator), nor (IV) Tiered-Rate Accounts (§ 707.4(b)(1)(i)) are earnings based on any internal or external index. If contractual limitations or an 1. Interest-bearing Accounts index are involved, however, those factors would need to be disclosed (unless a regu- Tiering Method A lator orders otherwise). 1* If your [daily balance/average daily balance] is $ or more, the interest rate (III) Stepped-Rate Accounts (§ 707.4(b)(1)(i)) lll paid on the entire balance in your account 1. Interest-bearing Accounts will be lll%, with an annual percentage yield (APY) of lll%. The initial interest rate on your deposit 2* If your [daily balance/average daily bal- account is lll%. You will be paid that ance] is more than $lll, but less than rate [for (time period)/ until (date)]. After $lll, the interest rate paid on the entire that time, the interest rate for your deposit balance in your account will be lll%, with account will be lll% and you will be paid an APY of lll%. that rate [for (time period)/ until (date)]. The 3* If your [daily balance/average daily bal- annual percentage yield (APY) for your ac- ance] is $lll or less, the interest rate paid count is lll%. [For purposes of this disclo- on the entire balance will be lll% with an sure, this is a rate and APY that were offered APY of lll%. within the most recent seven calendar days [For purposes of this disclosure, this is a and were accurate as of (date). Please call rate and APY that were offered within the (credit union telephone number) to obtain most recent seven calendar days and were current rate information.] You will be paid accurate as of (date). Please call (credit this rate [for (time period)/until (date)/for at union telephone number) to obtain current least 30 calendar days]. rate information.] [Fixed-rate—You will be paid this rate [for 2. Dividend-bearing Term Share Accounts (time period)/until (date)/for at least 30 cal- The initial dividend rate on your term endar days]./ Variable-rate—The interest rate and APY may change every (time period) share account is lll%. You will be paid that rate [for (time period)/ until (date)]. based on [(name of index)/ the determination After that time, the dividend rate for your of the credit union board of directors.] term share account will be lll% and you NOTE: Tiering Method A pays the stated in- will be paid that rate [for (time period)/ until terest rate that corresponds to the applica- (date)]. The annual percentage yield (APY) ble deposit tier on the full balance in the ac- for your account is lll%. [For purposes of count. This example contemplates a two-tier this disclosure, this is a rate and APY that system. The option (1, 2 or 3) most closely were offered within the most recent seven matching the terms of the account should be calendar days and were accurate as of (date). chosen as the appropriate disclosure. For Please call (credit union telephone number) tiered-rate accounts, a disclosure may be to obtain current rate information.] You will added about the currency of the rate, as is be paid this rate [for (time period)/until provided in the first set of brackets. A dis- (date)/for at least 30 calendar days]. closure regarding the fixed-rate or variable-

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rate nature of the account must be added, as 2. Dividend-bearing Term Share Accounts is provided in the last set of brackets. Tiering Method A Tiering Method B 1* If your [daily balance/average daily bal- 1* An interest rate of llll% will be paid ance] is $llll or more, the dividend rate only on the portion of your [daily balance/ paid on the entire balance in your account will be %, with an annual percentage average daily balance] that is greater than llll yield (APY) of llll%. $llll. The annual percentage yield (APY) 2* If your [daily balance/average daily bal- for this tier will range from % to llll ance] is more than $llll, but less than llll%, depending on the balance in the $llll, the dividend rate paid on the entire account. balance in your account will be llll%, 2* An interest rate of llll% will be paid with an APY of llll%. only on the portion of your [daily balance/ 3* If your [daily balance/average daily bal- average daily balance] that is greater than ance] is $llll or less, the dividend rate $llll, but less than $llll. The annual paid on the entire balance will be llll% percentage yield (APY) for this tier will with an APY of llll%. range from llll% to llll%, depending [For purposes of this disclosure, this is a on the balance in the account. rate and APY that were offered within the 3* If your [daily balance/average daily bal- most recent seven calendar days and were ance] is $llll or less, the interest rate accurate as of (date). Please call (credit union telephone number) to obtain current paid on the entire balance will be llll%, rate information.] with an annual percentage yield (APY) of [Fixed-rate—You will be paid this rate [for llll%. (time period)/until (date)/for at least 30 cal- [For purposes of this disclosure, this is a endar days]./ Variable-rate—The interest rate rate and APY that were offered within the and APY may change every (time period) most recent seven calendar days and were based on [(name of index)/ the determination accurate as of (date). Please call (credit of the credit union board of directors.] union telephone number) to obtain current NOTE: Tiering Method A pays the stated rate information.] dividend rate that corresponds to the appli- [Fixed-rate—You will be paid this rate [for cable account balance tier on the full bal- (time period)/until (date)/for at least 30 cal- ance in the account. This example con- endar days]./ Variable-rate—The interest rate templates a two-tier system. The option (1, 2 and APY may change every (time period) or 3) most closely matching the terms of the based on [(name of index)/ the determination account should be chosen as the appropriate of the credit union board of directors.] disclosure. For tiered-rate accounts, a disclosure may be added about the currency of NOTE: Tiering Method B pays different the rate, as is provided in the first set of stated interest rates corresponding to appli- brackets. A disclosure regarding the fixed- cable deposit tiers, on the applicable balance rate or variable-rate nature of the account in each tier of the account. For example, a must be added, as is provided in the last set credit union might pay 3% interest on ac- of brackets. count funds of $500 or below, and pay 4% interest on the portion of the same account Tiering Method B that exceeds $500. The example contemplates 1* A dividend rate of llll% will be paid an account with two tiers, but additional only on the portion of your [daily balance/ tiers are possible. The option (1, 2 or 3) most average daily balance] that is greater than closely matching the terms of the account $llll. The annual percentage yield (APY) should be chosen as the appropriate disclo- for this tier will range from llll% to sure. For tiered-rate accounts, a disclosure llll%, depending on the balance in the may be added about the currency of the rate, account. as is provided in the first set of brackets. 2* A dividend rate of llll% will be paid Tiered-rate accounts can be either fixed- only on the portion of your [daily balance/ rate or variable-rate accounts. The last sen- average daily balance] that is greater than tence offers an option of either fixed-rate or $llll, but less than $llll. The annual variable-rate disclosure. Thus, the disclo- percentage yield (APY) for this tier will sures outlined above will be made in addition range from llll% to llll%, depending to either: (i) Disclosure of the period the on the balance in the account. 3* If your [daily balance/average daily bal- fixed-rates are in effect or (ii) the variable- ance] is $llll or less, the dividend rate rate disclosures. Tiered-rate accounts are paid on the entire balance will be llll%, also subject to the requirement for disclo- with an annual percentage yield (APY) of sure of the balance computation method, see llll%. paragraph (e) to this appendix. [For purposes of this disclosure, this is a rate and APY that were offered within the

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most recent seven calendar days and were 3* [As of the last dividend declaration date/ accurate as of (date). Please call (credit (date)], if your [daily balance/average daily union telephone number) to obtain current balance] was $llll or less, the dividend rate information.] rate paid on the entire balance in your ac- [Fixed-rate—You will be paid this rate [for count will be llll% with an annual per- (time period)/until (date)/for at least 30 cal- centage yield (APY) of llll%. /or If your endar days]./ Variable-rate—The interest rate [daily balance/average daily balance] is and APY may change every (time period) $llll or less, the prospective dividend based on [(name of index)/ the determination rate of llll% will be paid on the entire of the credit union board of directors.] balance in your account with a prospective NOTE: Tiering Method B pays different annual percentage yield (APY) of llll% stated dividend rates corresponding to appli- for this dividend period. cable account balance tiers, on the applica- [Fixed-rate—You will be paid this rate for ble balance in each tier of the account. For [(time period)/at least 30 calendar days]./ example, a credit union might pay 3% divi- Variable-rate—The dividend rate and APY dend on account funds of $500 or below, and may change every (dividend period) as deter- pay 4% dividend on the portion of the same mined by the credit union board of direc- account that exceeds $500. The example con- tors.] templates an account with two tiers, but additional tiers are possible. The option (1, 2 or NOTE: Tiering Method A pays the stated 3) most closely matching the terms of the ac- dividend rate that corresponds to the appli- count should be chosen as the appropriate cable deposit tier on the full balance in the disclosure. For tiered-rate accounts, a dis- account. This example contemplates a two- closure may be added about the currentness tier system. The option (1, 2 or 3) most close- of the rate, as is provided in the first set of ly matching the terms of the account should brackets. be chosen as the appropriate disclosure. For Tiered-rate accounts can be either fixed- tiered-rate accounts, a disclosure may be rate or variable-rate accounts. The last sen- added about the prospective rate. Note that tence offers an option of either fixed-rate or the prospective rate disclosure options variable-rate disclosure. Thus, the disclo- match the required tiered-rate disclosures sures outlined above will be made in addition based on the previous dividend declaration to either: (i) Disclosure of the period the date. A disclosure regarding the fixed-rate or fixed-rates are in effect or (ii) the variable- variable-rate nature of the account must be rate disclosures. Tiered-rate accounts are added, as is provided in the last set of brack- also subject to the requirement for disclo- ets. sure of the balance computation method, see paragraph (e) to this appendix. Tiering Method B 3. Other Dividend-bearing Accounts 1* [As of [the last dividend declaration date/ (date)], a dividend rate of llll% was Tiering Method A paid only on the portion of your [daily bal- 1* [As of [the last dividend declaration ance/average daily balance] that was greater date/ (date)], if your [daily balance/average than $llll. The annual percentage yield daily balance] was $llll or more, the div- (APY) for this tier ranged from llll% to idend rate paid on the entire balance in your llll%, depending on the balance in the account was llll%, with an annual per- account. /or A prospective dividend rate of centage yield (APY) of llll%. /or If your llll% will be paid only on the portion of [daily balance/average daily balance] is your [daily balance/average daily balance] $llll or more, a prospective dividend rate that is greater than $llll with a prospec- of llll% will be paid on the entire bal- tive annual percentage yield (APY) ranging ance in your account with a prospective an- from llll% to llll%, depending on nual percentage yield (APY) of llll% for the balance in the account, for this dividend this dividend period.] period.] 2* [As of [the last dividend declaration 2* [As of [the last dividend declaration date/ (date)], if your [daily balance/average date/ (date)], a dividend rate of llll% was daily balance] was more than $llll, but paid only on the portion of your [daily bal- was less than $llll, the dividend rate ance/average daily balance] that was greater paid on the entire balance in your account than $llll but less than $llll. The an- was llll%, with an annual percentage nual percentage yield (APY) for this tier yield (APY) of llll%. /or If your [daily ranged from llll% to llll%, depend- balance/average daily balance] is more than ing on the balance in the account. /or A pro- $llll, but is less than $llll, a prospective dividend rate of llll% will be spective dividend rate of llll% will be paid only on the portion of your [daily bal- paid on the entire balance in your account ance/average daily balance] that is greater with a prospective annual percentage yield than $llll, but less than $llll] with a (APY) of llll% for this dividend period.] prospective annual percentage yield (APY)

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ranging from llll% to llll%, depend- (C) Compounding and Crediting (§ 707.4(b)(2)) ing on the balance in the account, for this [Dividends/Interest] will be compounded dividend period.] (frequency) and will be credited (frequency). 3* [As of [the last dividend declaration and, if applicable: date/ (date)], if your [daily balance/average daily balance] was $llll or less, the divi- If you close your [share/deposit] account dend rate paid on the entire balance was before [dividends/interest] [are/is] paid, you llll%, with an annual percentage yield will not receive the accrued [dividends/inter- (APY) of llll%. /or If your [daily balance/ est]. average daily balance] was $lll or less, and, if applicable (for dividend-bearing ac- the prospective dividend rate paid on the en- counts): tire balance in your account will be lll% For this account type, the dividend period with a prospective annual percentage yield is (frequency), for example, the beginning (APY) of lll% for this dividend period. date of the first dividend period of the calendar year is (date) and the ending date of NOTE: Tiering Method B pays different such dividend period is (date). All other divi- stated dividend rates corresponding to appli- dend periods follow this same pattern of cable account tiers, on the applicable bal- dates. The dividend declaration date follows ance in each tier of the account. For exam- the ending date of a dividend period, and for ple, a credit union might pay a 3% dividend the example is (date). on account funds of $500 or below, and pay a 4% dividend on the portion of the same ac- NOTE: Where the word ‘‘(frequency)’’ ap- count that exceeds $500. The example con- pears, time periods must be inserted to coin- templates an account with two tiers, but ad- cide with those specified in board resolutions ditional tiers are possible. The option (1, 2 or of each credit union’s board of directors. A 3) most closely matching the terms of the ac- disclosure of dividend period was added to count should be chosen as the appropriate § 707.4(b)(2)(i) in the final rule to assist mem- disclosure. Note that the prospective rate bers in knowing when dividend rate and APY disclosure options match the required tiered- disclosures would be given by a credit union rate disclosures based on the previous divi- using the optional statement rule of dend declaration date. § 707.6(a). The dividend declaration date is Tiered-rate accounts can be either fixed- important for purposes of § 707.4(a)(2)(ii), re- rate or variable-rate accounts. The last sen- quest disclosures, § 707.4(b)(2), account open- tence offers an option of either fixed-rate or ing disclosures, and § 707.8(c)(2), advertising variable-rate disclosures. Thus, the disclo- disclosures. The Board believes that this is sures outlined above must be made in addi- critical information for dividend-bearing action to either: (i) Disclosure of the period the counts, but that provision by an example fixed-rates are in effect or (ii) the variable- (whether of the first dividend period of the rate disclosures. Tiered-rate accounts are year, or of any randomly chosen dividend pe- also subject to the requirement for disclo- riod) is favorable to providing a list of such dates for the entire year or for a period of sure of the balance computation method, see years (although these methods would also be paragraph (e) to this appendix. permissible). As noted in the supplementary (B) Nature of Dividends (§ 707.4(b)(8)) information to § 707.2(j), dividend declaration date, the dividend period and actual dividend Dividends are paid from current income distribution date may vary. Thus, it is pos- and available earnings, after required trans- sible for crediting periods and dividend peri- fers to reserves at the end of a dividend pe- ods not to coincide, though the Board be- riod. lieves that credit unions should make every effort to attempt to coordinate the two peri- NOTE: The Board of Directors declares divi- ods. dends based on current income and available earnings of the credit union after providing (D) Minimum Balance Requirements for the required reserves at the end of the (§ 707.4(b)(3)(i)) month. The dividend rate and annual percentage yield shown may reflect either the (i) To open the account last dividend declaration date on the account The minimum balance required to open or the earnings the credit union anticipates this account is $llll. having available for distribution. This dis- or, for first share account at a credit union closure only applies to share and share draft The minimum required to open this ac- (as opposed to deposit) accounts and should count is the purchase of a (par value of a be grouped with the Rate Information to share) share in the credit union. make the disclosures more meaningful. This (ii) To avoid imposition of fees disclosure also does not apply to term share You must maintain a minimum daily bal- accounts for reasons discussed in the supple- ance of $llll in your account to avoid a mentary information regarding §§ 707.3(e) and service fee. If, during any (time period), your 707.4(b)(8). account balance falls below the required

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minimum daily balance, your account will two allowable methods, such as stating that be subject to a service fee of $llll for the average daily balance method was the that (time period). same as the daily balance method, is imper- or missible and misleading.

You must maintain a minimum average (F) Accrual of Dividends/Interest on Noncash daily balance of $llll in your account to Deposits (§ 704.4(b)(3)(iii)) avoid a service fee. If, during any (time period), your average daily balance is below [Dividends/Interest] will begin to accrue on the required minimum, your account will be the business day you [place/deposit] noncash subject to a service fee of $llll for that items (e.g. checks) to your account. (time period). or (iii) To obtain the annual percentage yield [Dividends/Interest] will begin to accrue no disclosed later than the business day we receive provi- You must maintain a minimum daily bal- sional credit for the [placement/deposit] of ance of $llll in your account each day to noncash items (e.g. checks) to your account. obtain the disclosed annual percentage yield. NOTE: Accrual information is not included or in the explanation of balance computation You must maintain a minimum average method required by § 707.4(b)(4)(ii). In addi- daily balance of $llll in your account to tion, the disclosures required by TISA do not obtain the disclosed annual percentage yield. affect the substantive requirements of the (iv) Absence of minimum balance requirements EFAA and Regulation CC. No minimum balance requirements apply to this account. The EFAA and Regulation CC control, and (v) Par value any modifications to them should occasion The par value of a share in this credit credit unions to revisit this disclosure with a union is $llll. view to revising it to reflect current law.

NOTE: Where the words ‘‘(time period)’’ ap- (G) Fees and Charges (§ 707.4(b)(4)) pear, time periods should be inserted to coin- The following fees and charges may be as- cide with those specified in board resolutions sessed against your account: of each credit union’s board of directors. As the supplementary information to (Service/explanation)—$lll. § 707.4(b)(3)(i) explains, the par value of a (Service/explanation)—$lll. share to establish membership is a critical NOTE: Fees and charges may be disclosed in disclosure to be made to potential members an account disclosure, or separately in a of credit unions. The par value disclosure is Rate and Fee Schedule (see section B–11 of required by § 707.4(b)(3)(i) as being analogous this appendix). In either event, the disclo- to a minimum balance account opening re- sure should also specify when the fee will be quirement. assessed by using phrases such as ‘‘per item,’’ ‘‘per month,’’ or ‘‘per inquiry.’’ (E) Balance Computation Method (§ 707.4(b)(3)(ii)) (H) Transaction Limitations (§ 707.4(b)(5)) (i) Daily Balance Method The minimum amount you may [withdraw/ [Dividends/Interest] [are/is] calculated by write a draft for] is $llll the daily balance method which applies a During any statement period, you may not daily periodic rate to the balance in the ac- make more than six withdrawals or transfers count each day. to another credit union account of yours or (ii) Average Daily Balance Method to a third party by means of a preauthorized [Dividends/Interest] [are/is] calculated by or automatic transfer or telephonic order or the average daily balance method which ap- instruction. No more than three of the six plies a periodic rate to the average daily bal- transfers may be made by check, draft, debit ance in the account for the period. The aver- card, if applicable, or similar order to a third age daily balance is calculated by adding the party. If you exceed the transfer limitations balance in the account for each day of the set forth above in any statement period, period and dividing that figure by the num- your account will be subject to [closure by ber of days in the period. the credit union/a fee of $llll. NOTE: Any explanation of balance com- NOTE: This paragraph satisfies the require- putation method must contain enough infor- ments of § 707.4(b)(6) with respect to Regula- mation for members to grasp the means by tion D limitations on share accounts and which dividends or interest will be cal- money market accounts. These are some of culated on their accounts. Using a shorthand the more common limitations applicable. form, such as ‘‘day in/day out’’ for the daily balance method or ‘‘average balance’’ for the The credit union reserves the right to re- average daily balance method, without more quire a member intending to make a with- information, is insufficient. In addition, any drawal from any account (except a share disclosure based on the equivalency of the draft account) to give written notice of such

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intent not less than seven days and up to 60 1. Automatically Renewable Term Share days before such withdrawal. Accounts

NOTE: This disclosure is limited to federal Your term share account will automati- credit unions with Bylaws containing this cally renew at maturity. You will have a limitation. See Standard Federal Credit Union grace period of llll [calendar/business] Bylaws, Art. III, section 5(a). Similar disclo- days after the maturity date to withdraw the sures are required of any state-chartered funds in the account without being charged credit unions having similar limitations in an early withdrawal penalty. their bylaws, or under state law. This limita- or tion does not directly relate to the ‘‘num- Your term share account will automati- ber’’ or ‘‘amount’’ of transactions, and ac- cally renew at maturity. There is no grace cordingly, may not be necessary under period following the maturity of this ac- § 707.4(b)(5), but would, if applicable, be re- count. quired by § 707.3(b). 2. Non-Automatically Renewable Term Share (I) Disclosures Related to Term Share Accounts Accounts (§ 707.4(b)(6)) This account will not renew automatically (i) Time requirements at maturity. If you do not renew the ac- Your account will mature on (date). count, your account will [continue to earn/ no longer earn] [dividends/interest] after the or maturity date. Your account will mature after (time period). NOTE: These disclosures should agree with the necessary pre-maturity notices for term (ii) Early withdrawal penalties share accounts in B–3 of this appendix. We [will/may] impose a penalty if you withdraw [any/all] of the [funds/principal] in (v) Required dividend distribution. your account before the maturity date. The This account requires the distribution of penalty will equal [llll [days’/weeks’/ dividends and does not allow dividends to re- months’] [dividends/interest] on your ac- main in the account. count. (J) Bonuses (§ 704.4(b)(7)) or You will [be paid/receive] [$lllll/(de- We [will/may] impose a penalty of scription of item)] as a bonus [when you open $lllll if you withdraw [any/all] of the the account/on (date)]. [funds/principal] before the maturity date. You must maintain a minimum [daily bal- If you withdraw some of your funds before ance/average daily balance] of $lllll to maturity, the [dividend/interest] rate for the obtain the bonus. remaining funds in your account will be To earn the bonus, [$lllll/your entire lll%, with an annual percentage yield of principal] must remain on deposit [for (time lll%. period)/until (date)].

NOTE: In most cases, the dividend rate and NOTE: These disclosures follow the require- annual percentage yield on the funds remain- ments of § 707.4(b)(7) and should be used as ing in the account after early withdrawal are applicable. Further information may also be the same as before the withdrawal. Accord- added, especially if it clarifies the conditions ingly, the disclosure of dividend rate and an- and timing of receiving the bonus, or better nual percentage yield after withdrawal is re- informs the member about the bonus. quired only if the dividend rate and APY will change. B–2 MODEL CLAUSES FOR CHANGES IN TERMS (§ 707.5(A)) (iii) Withdrawal of Dividends/Interest Prior to Maturity On (date), the (type of fee) will increase to The annual percentage yield is based on an $lllll. assumption that [dividends/interest] will re- On (date), the [dividend/interest] rate on main in the account until maturity. A with- your account will decrease to lll%, with drawal will reduce earnings. an annual percentage yield (APY) of lll%. On (date), the [minimum daily balance/av- NOTE: This disclosure may be used if the erage daily balance] required to avoid impo- credit union compounds dividends/interest sition of a fee will increase to $lllll. and allows withdrawal of accrued dividends/ interest before maturity. This disclosure NOTE: These examples apply to the more alerts members that the annual percentage common changes necessitating a change in yield is based on an assumption that the terms notice. However, any change, amend- dividends/interest remain on deposit until ment or modification reducing the APY or maturity. adversely affecting the members holding such accounts must be disclosed. For such (iv) Renewal Policies changes not contemplated by the model

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clauses, the Board recommends the use of as the field of membership of this Credit Union; simple language as possible to convey the the information provided on this application change, along with cross-referencing to the is true and correct; and my signature on this particular sections or paragraph numbers of card applies to all accounts under my name the account opening disclosures, when to do at this Credit Union. I also agree to be bound so to the terms and conditions of any account will assist members in reviewing and under- that I have in the Credit Union now or in the standing the change. future. llllllllllllllllllllllll B–3 MODEL CLAUSES FOR PRE-MATURITY NO- (signature of applicant) TICES FOR TERM SHARE ACCOUNTS (§ 707.5(B– C)) This application approvedllll(date) by the (Check one) (A) Maturity Date ( ) Board ( ) Exec. Committee Your term share account will mature on ( ) Membership Officer lllll. Signed: lllllllllllllllllll (Secretary; Exec. Cmte. Member, or (B) Nonrenewal Membership Officer) Unless your term share account is re- NOTE: This form is modeled on NCUA Form newed, it will not accrue further [dividends/ FCU 150, Application for Membership, as dis- interest] after the maturity date. cussed in the Accounting Manual for FCUs, (C) Rate Information §§ 5030.1, 5150.3. It is noted that other information can also be requested on the signa- The [dividend/interest] rate and annual ture card, as long as it is in accordance with percentage yield that will apply to your federal and state laws. For example, infor- term share account if it is renewed have not mation identifying the member, such as a yet been determined. That information will state driver’s license number, could be be available on llll. After that date, you added. The types of accounts that the signa- may call the credit union during regular ture applies to could be specified. Further- business hours at (telephone number) to find more, the Board notes that this card con- out the [dividend/interest] rate and annual tains much identification information that percentage yield (APY) that will apply to may not be necessary for all credit unions; your term share account if it is renewed. common sense should guide credit union NOTE: Pre-maturity notices should follow boards of directors in designing their appli- the requirements of § 707.5(b–d) as closely as cations for membership/signature cards. possible. Care should be taken to explain any However, the Board believes that the infor- grace periods used. See discussion of use of mation solicited on this form is reasonable alternative timing in supplementary infor- and prudent for many credit unions. Payable mation to § 707.2(o) and § 707.5(b–d). on death designations, joint account language required under state law, life savings B–4 SAMPLE FORM (SIGNATURE CARD/ beneficiary designations, and other like vari- APPLICATION FOR MEMBERSHIP) ations and designations may be added to the card if so desired. The proposed signature Application for Membership/Account Signature card/ application for membership form con- Card tained taxpayer certification language. One ACCOUNT NUMBER lllllll commenter noted that the IRS may always lllll lllll lllll change its requirements in this area, which (last name) (first name) (middle name) are beyond the authority of the Board. Therefore, the Board has deleted reference to llllllllllllllllllllllll the IRS taxpayer certification required by 26 (street address) (apartment number) USC 3406, but notes that such certification lllll lll llll must be made in accordance with applicable (city) (state) (zip code) law and IRS rules. The information may be llllll llllll included on the front and back of a standard (home telephone number) (business telephone size signature card, or on the front of a large number) size signature card. However, no account terms may be included on a signature card ll–ll–llll lllll unless a copy of the signature card is pro- (Social Security # or TIN) (date of birth) vided to the member at the time of account lllllll llllllll opening. The Board recommends that credit (mother’s maiden name) (employer, occu- unions refrain from this practice, and in- pation) stead use standard account disclosures. One I hereby make application for membership reason for this is that if laws, regulations or in and agree to conform to the Bylaws, as credit union policies change, discrepancies amended, of lllll Credit Union (the may result between them and the earlier sig- ‘‘Credit Union’’). I certify that: I am within nature card terms. Given the longevity of

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credit union membership, signature cards porated into the term share certificate itself, may well be in use for up to or over a cen- as long as a copy is presented to the member tury. In addition, as signature cards are relat the account opening. Care should also be atively small, they probably will not contain taken to ensure that the term share certifi- enough space to make all desired and re- cate format addresses any necessary state quired disclosures. Fragmentation of terms, law concerns. As the FRB’s Regulation D on some on signature cards, some on separate reserve requirements permits all term share disclosures, could easily lead to member con- accounts to be represented by a transferable fusion. As terms are usually construed or nontransferable, or a negotiable or non- against the drafter, credit unions should be negotiable, certificate, instrument, pass- very careful in their use of account terms book, statement or otherwise, and still be and conditions varying from those provided considered a ‘‘time deposit’’, the Board has as model clauses and sample forms in this made no entry on this sample form regarding appendix. such terms, leaving the decision instead to each credit union’s board of directors. 12 B–5 SAMPLE FORM (TERM SHARE CFR 202.4(c)(2). (CERTIFICATE) ACCOUNT) B–6 SAMPLE FORM (REGULAR SHARE Term Share Certificate ACCOUNT DISCLOSURES) llllllllllllllllllllllll Regular Share Account Disclosures Date Issued llllllllllllllllllllllll 1. Rate information. As of April 1, 1995, the Account Number dividend rate was 5.00% and the annual percentage yield (APY) was 5.13% on your reg- llllllllllllllllllllllll Certificate Number ular share account. In addition, the credit union estimates a prospective dividend rate llllllllllllllllllllllll of 5.25% and a prospective APY of 5.39% on Social Security Number your share account for this dividend period. This is to certify that (name(s)) The dividend rate and annual percentage lllllllll [is/ are] the owner(s) of a yield may change every quarter as deter- term share certificate account in the mined by the credit union board of directors. lllll Credit Union (the ‘‘Credit Union’’) 2. Compounding and crediting. Dividends in the amount of lllll Dollars will be compounded daily and will be cred- ($lllll). This term share certificate ac- ited quarterly. For this account type, the count may be redeemed on (maturity date) dividend period is quarterly, for example, the lllll only upon presentation of the cer- beginning date of the first dividend period of tificate to the Credit Union. The dividend the calendar year is January 1 and the end- rate of this certificate account is ll% with ing date of such dividend period is March 31. an annual percentage yield of ll%. The an- All other dividend periods follow this same nual percentage yield and dividend rate as- pattern of dates. The dividend declaration sume that dividends are to be [check one] ( date follows the ending date of a dividend pe- ) added to principal/( ) paid to regular share riod, and for the example is April 1. If you account number lllll/ ( ) mailed to close your regular share account before divi- owner(s). This account is subject to all terms dends are credited, you will not receive ac- and conditions stated in the Term Share Cer- crued dividends. tificate Account Disclosures, as they may be 3. Minimum balance requirements. The min- amended from time to time, and incor- imum balance to open this account is the porates the same by reference into this purchase of a $5 share in the Credit Union. agreement. You must maintain a minimum daily bal- llllllllllllllllllllllll ance of $500 in your account to avoid a serv- Authorized signature ice fee. If, during any day during a quarter, your account balance falls below the re- llllllllllllllllllllllll Authorized signature quired minimum daily balance, your account will be subject to a service fee of $5 for that NOTE: This form is modeled on NCUA Form quarter. FCU 107SCP, Credit Union Share Certificate, 4. Balance computation method. Dividends as discussed in the Accounting Manual for are calculated by the daily balance method FCUs, §§ 5030.1, 5150.6. It is simplified to re- which applies a daily periodic rate to the flect the term share (certificate) account principal in your account each day. agreement, the parties involved, the matu- 5. Accrual of dividends. Dividends will begin rity term and the annual percentage yield to accrue on the business day you deposit and dividend rate. All other terms are incor- noncash items (e.g., checks) to your account. porated by reference. This should allow the 6. Fees and charges. The following fees and credit union maximum flexibility in fash- charges may be assessed against your ac- ioning certificate, and other term share account. count, products. If a credit union so desired, a. Statement copies—$5.00 per statement. other terms and conditions could be incor- b. Account inquiries—$3.00 per inquiry.

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c. Dormant account fee—$10.00 per month. 12. Other Terms and Conditions. [In this d. Wire transfers—$8.00 per transfer. item, which may be titled or subdivided in e. Minimum balance service fee—$5.00 per any manner by each credit union, NCUA sug- quarter. gests that the following issues be covered or f. Share transfer—$1.00 per transfer. handled: Statutory lien or setoff; expenses g. Excessive share withdrawals $1.00 per (garnishments and bankruptcy orders and item. holds on account); joint ownership accounts; 7. Transaction limitations. During any state- trust accounts; payable-on-death accounts; ment period, you may not make more than retirement accounts; Uniform Transfer to six withdrawals or transfers to another cred- Minor Act accounts; sole proprietorship ac- it union account of yours or to a third party counts; escrow and custodial accounts; cor- by means of a preauthorized or automatic poration accounts; not-for-profit corporation transfer or telephonic order or instruction. accounts; voluntary association accounts; No more than three of the six transfers may partnership accounts; public unit accounts; be made by check, draft, debit card, if appli- powers of attorney (guardianship orders); tax cable, or similar order to a third party. If disclosures and certifications; Uniform Com- you exceed the transfer limitations set forth mercial Code variances; amendments; reli- above in any statement period, your account ance on signature card; change of address; will be subject to closure by the credit union incorporations of other documents by ref- or to a fee of $1.00 per item. erence, such as expedited funds availability 8. Nature of dividends. Dividends are paid policies, service charges schedules or elec- from current income and available earnings, tronic banking disclosures; ability to sus- after required transfers to reserves at the pend services; and operational matters (stop end of a dividend period. payment orders—verbal and written, satis- 9. Bylaw Requirements. A member who fails factory identification, refusal of deposits not to complete payment of one share within in proper form, wire transfers, stale check lllll of his admission to membership, or deposits, availability of periodic statements within lllll from the increase in the par or passbook feature.)] value in shares, or a member who reduces his NOTE: This form is modeled on the share share balance below the par value of one account disclosures in the Accounting Manual share and does not increase the balance to at for FCUs, § 5150.7. The disclosures are for a least the par value of one share within variable-rate, daily balance method dividend lllll of the reduction may be termi- calculation regular share account in an FCU nated from membership at the end of a divi- with a $500 minimum balance to avoid serv- dend period. [All blanks should be filled with ice fees. For the example, the account was time chosen by credit union board of direc- opened on May 1, 1995. Other terms are self- tors.] Shares may be transferred only from explanatory. The dividend rate paid and an- one member to another, by written instru- nual percentage yield disclosures will reflect ment in such form as the Credit Union may the prospective dividend rate for a given div- prescribe. The Credit Union reserves the idend period. Item nos. 1–8 reflect standard right, at any time, to require members to TISA and part 707 disclosures discussed in give, in writing, not more than 60 days no- sections B–1 through B–3 of this appendix. tice of intention to withdraw the whole or Note that if the credit union limits the max- any part of the amounts so paid in by them. imum amount of shares which may be held No member may withdraw shareholdings by one member under NCUA Standard FCU that are pledged as required on security on Bylaws, Art. III, section 2, that this should loans without the written approval of the be stated in item no. 7, transaction limita- credit committee or a loan officer, except to tions. Item no. 9 reflects various terms pro- the extent that such shares exceed the mem- vided in Art. III, sections 3–6 of the NCUA ber’s total primary and contingent liability Standard FCU Bylaws. Item no. 10 reflects the to the Credit Union. No member may with- par value amount of regular shares in a fed- draw any shareholdings below the amount of eral credit union, pursuant to section 117 of his/her primary or contingent liability to the the FCU Act, 12 U.S.C. 117. It also states the Credit Union if he/she is delinquent as a bor- dividend period of the credit union, which is rower, or if borrowers for whom he/she is set by the board of directors. Item no. 11 ad- comaker, endorser, or guarantor are delin- dresses the requirements of 12 CFR part 740. quent, without the written approval of the Nonfederally insured credit unions (NICUs) credit committee or loan officer. would be expected to disclose information re- 10. Par value of shares; Dividend period. The quired by section 151 of the Federal Deposit par value of a regular share in this Credit Insurance Corporation Improvement Act of Union is $5. The dividend period of the Credit 1991. 12 USC 1831t. By December 19, 1992, all Union is quarterly. NICUs were required to include conspicu- 11. National Credit Union Share Insurance ously on all periodic statements of account, Fund. Member accounts in this Credit Union signature cards, passbooks, share certificates are federally insured by the National Credit and other similar instruments of deposit and Union Share Insurance Fund. in all advertising a notice that the credit

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union is not federally insured. Additional 6. Fees and charges. The following fees and disclosures will be required of NICUs by June charges may be assessed against your ac- 19, 1994. Item no. 12 is inserted to ensure that count. credit unions add other account terms and a. Statement copies—$5.00 per statement. conditions not covered by the proposed regu- b. Account inquiries—$3.00 per inquiry. lation. These sorts of terms are con- c. Dormant account fee—$10.00 per month. templated by proposed § 707.3(b), requiring d. Wire transfers—$8.00 per transfer. that the disclosures reflect the terms of the e. Overdrafts/Returned Items—$5.00 per legal obligation between the member and the draft. credit union. This list is not meant to be ex- f. Share transfer—$1.00 per transfer. haustive, but to give a general idea of other g. Excessive share withdrawals—$1.00 per topics often covered in share account con- item. tracts. Item no. 12 is not expressly required h. Certified checks—$5.00 per check. i. Stop Payment Order—$5.00 per order. by either TISA or part 707, but any of these j. Check Printing Fee—$12.00 per 200 checks terms that are disclosed must be accurate (varies depending on style of check ordered). and not misleading. Also the Board strongly 7. No transaction limitations apply to this ac- recommends that such terms are included in count. account opening disclosures to inform the 8. Nature of dividends. Dividends are paid membership and to clearly set forth the legal from current income and available earnings, relationship between the members and their after required transfers to reserves at the credit union. end of a dividend period. 9. Bylaw Requirements. A member who fails B–7 SAMPLE FORM (SHARE DRAFT ACCOUNT to complete payment of one share within DISCLOSURES) lllll of his admission to membership, or within from the increase in the par Share Draft Account Disclosures lllll value in shares, or a member who reduces his 1. Rate information. As of January 1, 1995, share balance below the par value of one the dividend rate was 3.00% and the annual share and does not increase the balance to at percentage yield (APY) was 3.04% on your least the par value of one share within share account. In addition, the prospective lllll of the reduction may be termi- dividend rate on your account is 3.15% with nated from membership at the end of a divi- a prospective annual percentage yield (APY) dend period. [All blanks should be filled with of 3.20% for the current dividend period. The time chosen by credit union board of direc- dividend rate and APY may change every tors.] Shares may be transferred only from dividend period as determined by the credit one member to another, by written instru- union board of directors. ment in such form as the Credit Union may 2. Compounding and crediting. Dividends prescribe. The Credit Union reserves the will be compounded monthly and will be right, at any time, to require members to credited monthly. For this account type, the give, in writing, not more than 60 days no- dividend period is monthly, for example, the tice of intention to withdraw the whole or beginning date of the first dividend period of any part of the amounts so paid in by them. the calendar year is January 1 and the end- Shares paid in under an accumulated payroll ing date of such dividend period is January deduction plan may not be withdrawn until 31. All other dividend periods follow this credited to a member’s account. No member may withdraw shareholdings that are same pattern of dates. The dividend declara- pledged as required on security on loans tion date follows the ending date of a divi- without the written approval of the credit dend period, and for the example above is committee or a loan officer, except to the ex- February 1. If you close your share draft ac- tent that such shares exceed the member’s count before dividends are credited, you will total primary and contingent liability to the not receive accrued dividends. Credit Union. No member may withdraw any 3. No Minimum balance requirements apply to shareholdings below the amount of his/her this account. primary or contingent liability to the Credit 4. Balance computation method. Dividends Union if he/she is delinquent as a borrower, are calculated by the average daily balance or if borrowers for whom he/she is comaker, method which applies a periodic rate to the endorser, or guarantor are delinquent, with- average daily balance in the account for the out the written approval of the credit com- period. The average daily balance is cal- mittee or loan officer. culated by adding the balance in the account 10. Par value of shares; Dividend period. The for each day of the period and dividing that par value of a regular share in this Credit figure by the number of days in the period. Union is $5. The dividend period of the Credit 5. Accrual of dividends. Dividends will begin Union is monthly, beginning on the first of a to accrue no later than the business day we month and ending on the last day of the receive provisional credit for the placement month. of noncash items (e.g. checks) to your ac- 11. National Credit Union Share Insurance count. Fund. Member accounts in this Credit Union

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are federally insured by the National Credit 6. Fees and charges. The following fees and Union Share Insurance Fund. charges may be assessed against your ac- 12. Other Terms and Conditions. [See section count. B–6, item 12, of this appendix]. a. Statement copies—$5.00 per statement. b. Account inquiries—$3.00 per inquiry. NOTE: This form is modeled on the share c. Dormant account fee—$10.00 per month. account disclosures in the Accounting Manual d. Wire transfers—$8.00 per transfer. for FCUs, § 5150.7. The disclosures are for a e. Minimum balance service fee—$5.00 per variable-rate, average daily balance method (time period). dividend calculation share draft account in f. Share transfer—$1.00 per transfer. an FCU with no minimum balance require- g. Excessive share withdrawals—$1.00 per ment. For purposes of this example, the ac- item. count was opened on January 15, 1995. The h. Certified checks—$5.00 per check. Credit Union has monthly dividend periods. i. Stop Payment Order—$5.00 per order. Other terms are self-explanatory. The divi- j. Check Printing Fee—$12.00 per 200 checks dend rate paid and annual percentage yield (varies depending on style of check ordered). disclosures will reflect the prospective divi- 7. Transaction limitations. During any state- dend rate for a given dividend period. The ment period, you may not make more than disclosures are very similar to the ones in six withdrawals or transfers to another cred- section B–6 of appendix B, except for the roll- it union account of yours or to a third party back and par value disclosures, which have by means of a preauthorized or automatic been removed from the final rule and appen- transfer or telephonic order or instruction. dices. No more than three of the six transfers may B–8 SAMPLE FORM (MONEY MARKET SHARE be made by check, draft, debit card, if appli- ACCOUNT DISCLOSURES) cable, or similar order to a third party. If you exceed the transfer limitations set forth Money Market Share Account Disclosures above in any statement period, your account will be subject to closure by the credit union 1. Rate information. As of January 1, 1995, if or to a fee of $1.00 per item. your average daily balance was $500 or more, 8. Nature of dividends. Dividends are paid the dividend rate paid on the entire balance from current income and available earnings, in your account was 4.75%, with an annual after required transfers to reserves at the percentage yield (APY) of 4.85%. If your av- end of a dividend period. erage daily balance is $500 or more, a pro- 9. Bylaw Requirements. [This section should spective dividend rate of 4.95% will be paid reflect any requirements concerning share on the entire balance in your account with a accounts in the FISCU’s bylaws or charter.] prospective APY of 5.00% for this dividend 10. Par value of shares; Dividend period. The period on your account. The dividend rate par value of a regular share in this Credit and APY may change every dividend period Union is $50. The dividend period of the Cred- as determined by the credit union board of it Union is monthly, beginning on the first of directors. a month and ending on the last day of the 2. Compounding and crediting. Dividends month. will be compounded monthly and will be 11. National Credit Union Share Insurance credited quarterly. If you close your share Fund. Member accounts in this Credit Union money market account before dividends are are federally insured by the National Credit credited, you will not receive accrued divi- Union Share Insurance Fund. dends. 12. Other Terms and Conditions. [See section 3. Minimum balance requirements. The min- B–6, item 12, of this appendix.] imum balance required to open this account is $500. You must maintain a minimum daily NOTE: This form is modeled on the share balance of $500 in your account to avoid a account disclosures in the Accounting Man- service fee. If, during any (time period), your ual for FCUs, § 5150.7 and on the share draft account falls below the required minimum account disclosures in section B–7 of this ap- daily balance, your account will be subject pendix. The disclosures are for a variable- to a service fee of $5 for that (time period). rate, tiered-rate (method A, option 1), aver- 4. Balance computation method. Dividends age daily balance method dividend calcula- are calculated by the average daily balance tion, money market share account in a method which applies a periodic rate to the FISCU with a $500 minimum balance to open average daily balance in your account for the account and to avoid service fees. For the period. The average daily balance is cal- purposes of this example, the account was culated by adding the principal in the ac- opened on January 29, 1995. Other terms are count for each day of the period and dividing self-explanatory. The dividend rate paid and that figure by the number of days in the pe- annual percentage yield disclosures will re- riod. flect the prospective dividend rate for a 5. Accrual of dividends. Dividends will begin given dividend period. Note that the con- to accrue on the business day you deposit tents of Item 9, Bylaw requirements, must be noncash items (e.g., checks) to your account. tailored to the specific bylaws of a FISCU or

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NICU. Also note the high par value amount and ending on the stated maturity date, unin Item 10. less renewed. 15. National Credit Union Share Insurance B–9 SAMPLE FORM (TERM SHARE Fund. Member accounts in this Credit Union (CERTIFICATE) ACCOUNT DISCLOSURES) are federally insured by the National Credit Union Share Insurance Fund. Term Share (Certificate) Account Disclosures 16. Other Terms and Conditions. [See section 1. Rate information. [Repeat rates disclosed B–6, item 12, of this appendix.] on face of term share certificate, see § B–5, NOTE: Even though this disclosure if for an Sample Form (Term Share (Certificate) Ac- account at a FISCU, this form is modeled on count)]. the share account disclosures in the Account- 2. Compounding and crediting. Dividends ing Manual for FCUs, § 5150.7 and upon the will be compounded monthly and will be regular share account disclosures in section credited annually. If you close your certifi- B–6 of this appendix. The disclosures are for cate account before dividends are credited, a fixed-rate, daily balance method dividend you will not receive accrued dividends. calculation, automatically renewing term 3. Minimum balance requirements. The share certificate account in a FISCU with a minium balance required to open this ac- $500 minimum balance to open the account count is $500. and a ten day grace period. For the example, 4. Balance computation method. Dividends the account is opened on January 1, 1995 and are calculated by the daily balance method, matures on January 1, 1996. Other terms are which applies a daily periodic rate to the self-explanatory. The dividend rate paid and principal in your account each day. annual percentage yield disclosures reflect 5. Accrual of dividends. Dividends will begin the contracted, prospective dividend rate for to accrue on the business day you deposit a given dividend period. Note the special dis- noncash items (e.g., checks) to your account. closures for term share certificate accounts, 6. Fees and charges. The following fees and items nos. 8–10. Note also the bonus disclo- charges may be assessed against your ac- sure, item no. 11. count. a. Statement copies—$5.00 per statement. B–10 SAMPLE FORM (PERIODIC STATEMENT) b. Account inquiries—$3.00 per inquiry. c. Share transfer—$1.00 per transfer. Periodic Statement 7. Transaction limitations. After the account llllllllllllllllllllllll is opened, you may not make deposits into Member Name the account until the maturity date stated llllllllllllllllllllllll on the certificate. Account Number 8. Maturity date. Your account will mature on January 1, 1996. [Transaction account activity by date.] [Average daily balance of $1,500 for the 9. Early withdrawal penalties. We may im- month, daily compounding.] pose a penalty if you withdraw any of the Your account earned $6.72, with an annual funds before the maturity date. The penalty percentage yield earned of 5.40%, for the will equal three months’ dividends on your statement period from May 1 through and in- deposit. cluding May 31. In addition, your account 10. Renewal policies. Your certificate ac- earned $15 in extraordinary dividends for this count will automatically renew at maturity. period. Any fees assessed against your ac- You will have a grace period of 10 business count are shown in the body of the periodic days after the maturity date to withdraw the statement and are identified by the code at funds in the account without being charged the bottom margin of this statement. an early withdrawal penalty. 11. Bonus. You will receive a new (insert Service Charge Codes brand name) toaster-oven as a bonus when you open the account after December 31, SC–1 Stop Payment Order Fee 1994, and before June 30, 1995. You must SC–2 Statement Copy Fee maintain your entire principal on deposit SC–3 Draft Return Fee until the maturity date of your certificate SC–4 Transfer from Shares account to obtain the bonus. SC–5 Microfilm Copy 12. [Reserved] SC–6 Share Draft Printing Fee 13. Bylaw Requirements. [This section SC–7 Dormant Account Fee should reflect any requirements concerning SC–8 Wire Transfer Fee share accounts in the FISCU’s bylaws or SC–9 Excessive Share Withdrawal Fee charter.] SC–10 lllllllllll 14. Par value of shares; Dividend period. The Other Transactions par value of a regular share in this Credit Union is $25. The dividend period of the Cred- D Dividends it Union on this type of account is annual, EC Error Correction beginning on the date the account is opened, OR Overdraft Returned

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OL Overdraft Loan Dividends Compounded [Annually, Semi- OS Overdraft Share Transfer annually, Quarterly, Monthly, Weekly, Daily]. NOTE: This form is modeled on the share Dividends Credited—At close of a dividend draft statement of account, Form FCU 107G- period. SD, in the Accounting Manual for FCUs, § 5150.4. All information is self-explanatory. Dividend Period [Annually, Semiannually, Codes of transactions are not required, but Quarterly, Monthly, Weekly, Daily]. are a common credit union practice. The in- Minimum Opening Deposit [None, $ formation regarding fees could also be in- amount]. cluded on the line of the periodic statement Minimum Monthly Balance [None, $ showing when the fees were debited from the amount]. account. Alternatively, a credit union could Money Market show all fees debited against the account for the statement period in a special area of the Dividend Rate as of Last Dividend Declara- periodic statement. Clarity to the member of tion Date lll%. the required information—annual percentage Annual Percentage Yield as of Last Divi- yield earned; amount of dividends; fees im- dend Declaration Date lll%. posed and length of period—is the important Prospective Dividend Rate lll%. goal. An additional disclosure regarding the Prospective Annual Percentage Yield dollar value of any extraordinary dividends lll%. earned must be added to those statements Dividends Compounded [Annually, Semi- showing the payment of such extraordinary annually, Quarterly, Monthly, Weekly, dividends to the member. Daily]. Dividends Credited—At close of a dividend B–11 SAMPLE FORM (RATE AND FEE period. SCHEDULE) Dividend Period [Annually, Semiannually, Quarterly, Monthly, Weekly, Daily]. Rate and Fee Schedule Minimum Opening Deposit [None, $ This Rate and Fee Schedule for all Ac- amount]. counts sets forth certain conditions, rates, Minimum Monthly Balance [None, $ fees and charges applicable to your regular amount]. share, share draft, and money market ac- The following fees may be assessed in con- counts at the lllll Federal Credit Union nection with your accounts: as of lllll [insert date of delivery to member]. This schedule is incorporated as FEES APPLICABLE TO ALL ACCOUNTS part of your account agreement with the Returned item fee—$ll.00 per item. lllll Federal Credit Union. Account reconciliation fee—$ll.00 per hour. Regular Share Statement copies fee—$ll.00 per state- Dividend Rate as of Last Dividend Declara- ment. tion Date lll%. Certified draft fee—$ll.00 per draft. Annual Percentage Yield as of Last Divi- Wire transfer fee—$ll.00 per transfer. dend Declaration Date lll%. Account inquiry fee—$ll.00 per inquiry. Prospective Dividend Rate lll%. Dormant account fee—$ll.00 per month. Prospective Annual Percentage Yield Minimum balance service fee—$ll.00 per lll%. day. Dividends Compounded [Annually, Semi- Share transfer fee—$ll.00 per transfer. annually, Quarterly, Monthly, Weekly, Excessive share withdrawals fee—$ll.00 Daily]. per item. Dividends Credited—At close of a dividend period. SHARE DRAFT ACCOUNT FEES Dividend Period [Annually, Semiannually, Monthly service fee—$ll.00 per month. Quarterly, Monthly, Weekly, Daily]. Overdraft transfers fee—$ll.00 per over- Minimum Opening Deposit $5.00 par value draft. share. Drafts returned insufficient funds fee— Minimum Monthly Balance [None, $ $ll.00 per draft. amount]. Stop payment order fee—$ll.00 per order. Share Draft Draft copy fee—$ll.00 per copy. Check printing fee—$ll.00 per 200 drafts. Dividend Rate as of Last Dividend Declara- tion Date lll%. MONEY MARKET SHARE ACCOUNT FEES Annual Percentage Yield as of Last Divi- Monthly service fee—$ll.00 per month. dend Declaration Date lll%. Check printing fee—$ll.00 per 200 drafts. Prospective Dividend Rate lll%. Prospective Annual Percentage Yield NOTE: This illustration is for use of an lll%. FCU. The information provided on a Rate

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and Fee Schedule can be presented in any member deposits, are exempt from TISA and format. To ensure that it is a part of the ac- part 707. NCUA defines a ‘‘nonautomated count agreement, if used, it should be incor- credit union’’ as a credit union without suffi- porated by reference into the appropriate cient data processing capability and capac- share account disclosures. The figures used ity to establish, operate and maintain a are illustrative only. share and loan software system to timely and accurately process all account trans- B–12 AGGREGATE OVERDRAFT AND RETURNED actions of all members. The nonautomated ITEM FEES SAMPLE FORM credit union exemption is available to all credit unions meeting the asset size and au- Total for Total this period year-to-date tomation standards of this comment, including newly chartered credit unions. If any of Total Overdraft Fees ..... $60.00 $150.00 the credit unions eligible for this exemption Total Returned Item grow to have more than $2 million in assets Fees ...... 0.00 30.00 as of December 31 of any year, the NCUA Board will require such credit unions to com- [58 FR 50445, Sept. 27, 1993, as amended at 59 ply with TISA and part 707 on January 1 of FR 13436, 13437, Mar. 22, 1994; 63 FR 71575, one year after such credit union loses its ex- Dec. 29, 1998; 72 FR 30246, May 31, 2007; 74 FR emption eligibility. Similarly, if a credit 36104, July 22, 2009] union becomes sufficiently automated to operate a complete share and loan system, such APPENDIX C TO PART 707—OFFICIAL credit union will be entitled to the same STAFF INTERPRETATIONS compliance phase-in period. Introduction (d) Effect on State Laws 1. Official status. This commentary is the 1. Preemption of state laws/Inconsistent re- means by which the staff of the Office of quirements. State law requirements that are General Counsel of the National Credit inconsistent with the requirements of TISA Union Administration issues official staff in- and part 707 are preempted to the extent of terpretations of Part 707 of the NCUA Rules the inconsistency. A state law is incon- and Regulations. Good faith compliance with sistent if it requires a credit union to make this commentary affords protection from li- disclosures or take actions that contradict ability under section 271(f) of the Truth in the requirements of the federal law. A state Savings Act (TISA), 12 U.S.C. 4311. law is also contradictory if it requires the Section 707.1—Authority, Purpose, Coverage, use of the same term to represent a different and Effect on State Laws amount or a different meaning than the federal law, requires the use of a term different (c) Coverage from that required in the federal law to describe the same item, or permits a method of 1. Foreign applicability. Part 707 applies to calculating dividends or interest on an ac- all credit unions that offer share and deposit count different from that required in the fed- accounts to residents (including resident aliens) of any state as defined in § 707.2(v) eral law. and that offer accounts insurable by the Na- 2. Preemption determinations. A credit tional Credit Union Share Insurance Fund union, state, or other interested party may (NCUSIF) whether or not such accounts are request the Board to determine whether a insured by the NCUSIF. Corporate credit state law requirement is inconsistent with unions designated as such by NCUA under 12 the federal requirements. A request for a de- CFR 704.2 (definition of ‘‘corporate credit termination should be addressed to NCUA’s union’’) are exempt from part 707. Office of General Counsel, 1775 Duke Street, 2. Persons who advertise accounts. Persons Alexandria, VA 22314. Written preemption re- who advertise accounts are subject to the ad- quests should cite (or include a copy of) the vertising rules. This includes agent and allegedly inconsistent state law, dem- agented accounts, such as a member who onstrate the inconsistency with TISA and subdivides interests in a jumbo term share part 707 and the burden on credit unions, and certificate account for sale to other parties formally request a preemption determina- or among members who form a certificate tion. The Office of General Counsel may pro- account investment club. For example, if an vide other interested parties, particularly af- agent places an advertisement that offers fected states, an informal opportunity to members an interest in an account at a cred- comment on any request for a preemption it union, the advertising rules apply to the determination, unless it finds that such no- advertisement, whether the account is held tice and opportunity for comment would be by the agent or directly by the member. impracticable, unnecessary, or contrary to 3. Nonautomated credit unions. Nonauto- the public interest. NCUA will publicize any mated credit unions with an asset size of $2 preemption determinations using any means million or less, after subtracting any non- readily at its disposal.

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3. Effect of preemption determinations. After iv. Securities or obligations of a credit the Board, through its Office of General union. Counsel, determines that a state law is in- v. Contractual arrangements such as re- consistent, a credit union may not make dis- purchase agreements, interest rate swaps, closures using the inconsistent term or take and bankers acceptances. actions relying on the inconsistent law. vi. Purchases of U.S. Savings Bonds 4. Reversal of determination. The Board re- through a credit union. serves the right to reverse a determination vii. Services offered through a group pur- for any reason bearing on the coverage or ef- chasing plan or a credit union service organi- fect of state or federal law. zation (CUSO). 4. Options. All dividend-bearing and inter- Section 707.2—Definitions est-bearing accounts are either fixed-rate or (a) Account variable-rate accounts. 5. Use of synonyms. Generally, it is not the 1. Covered accounts. Examples of accounts purpose of part 707 to prohibit specific de- subject to the regulation are: scriptive terms for accounts. For example, i. Dividend-bearing and interest-bearing credit unions can use adjectives and trade accounts. names to describe accounts such as ‘‘Best ii. Non-dividend-bearing and non-interest- Share Draft Account,’’ or ‘‘Ultra Money Mar- bearing accounts. ket Share Account.’’ Synonyms for share, iii. Accounts opened as a condition of ob- share draft, money market share, and term taining a credit card. share accounts may be used to describe var- iv. Escrow accounts with a consumer pur- ious types of credit union share and deposit pose, such as an account established by a accounts as long as the synonym is accurate member to escrow rental payments, pending and not misleading and, for account disclo- resolution of a dispute with the member’s sures, is used in conjunction with the correct landlord. legal term. For example, the following syno- v. Accounts held by a parent or custodian nyms may be used: for a minor under a state’s Uniform Gift to i. The term ‘‘checking account’’ may be Minors Act (or Uniform Transfers to Minors used to describe share draft accounts. Act). ii. The term ‘‘money market account’’ may vi. Individual retirement accounts (IRAs) be used to describe money market share ac- and simplified employee pension (SEP) accounts. counts. iii. The term ‘‘savings account’’ may be vii. Payable-on-Death (POD) or ‘‘Totten used to describe regular share and share ac- trust’’ accounts. counts. 2. Other accounts. Examples of accounts not iv. The terms ‘‘share certificate,’’ ‘‘certifi- subject to the regulation are: cate account,’’ or ‘‘certificate’’ may be used i. Mortgage escrow accounts for collecting to describe share certificates and other divi- taxes and property insurance premiums. dend-bearing term share accounts. ii. Accounts established to make periodic v. However, under no circumstances may a disbursements on construction loans. credit union describe a share account as a iii. Trust accounts opened by a trustee pur- deposit account, or vice versa. For example, suant to a formal written trust agreement the term ‘‘certificate of deposit’’ or ‘‘CD’’ (not merely declarations of trust on a signa- may not be used to describe share certifi- ture card such as a ‘‘Totten trust,’’ or an cates and other dividend-bearing term share IRA or SEP account). iv. Accounts opened by an executor in the accounts. Similarly, the terms ‘‘time ac- name of decedent’s estate. count’’ (used in Regulation DD, 12 CFR v. Accounts of individuals operating busi- 230.2(u)) and ‘‘time deposit’’ (used in Regula- nesses as sole proprietors. tion D, 12 CFR 204.2(c)) may not be used to vi. Certificates of indebtedness. Some cred- describe term share accounts. it unions borrow funds from their members (b) Advertisement through a certificate of indebtedness that sets forth the terms and conditions of the re- 1. Covered messages. Advertisements include payment of the borrowing, such as federal commercial messages in visual, oral, or print credit unions do through 12 CFR 701.38. Such media that invite, offer, or otherwise an- an account does not represent an account in nounce generally to members and potential a credit union and is not covered by part 707. members the availability of member ac- vii. Unincorporated nonbusiness associa- counts such as: tion accounts. i. Telephone solicitations. 3. Other investments. The term ‘‘account’’ ii. Messages on automated teller machine does not apply to these products. Examples (ATM) screens (including any printout). of products not covered are: iii. Messages on a computer screen in a i. Government securities. credit union’s lobby (including any printout) ii. Mutual funds. other than a screen viewed solely by the iii. Annuities. credit union’s employee.

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iv. Messages in a newspaper, magazine, or the annual percentage yield earned is af- promotional flyer or on radio or television. fected by additions and withdrawals during v. Messages promoting an account that are the period. The annual percentage yield and provided along with information about the the annual percentage yield earned must be member’s existing account at a credit union calculated according to the formulas pro- and that promote another account at the vided in appendix A to this rule. credit union (such as account promotional messages on the periodic statement). (d) Average Daily Balance Method 2. Other messages. Examples of messages 1. General. One of the two required methods that are not advertisements are: (the daily balance is the other) of deter- i. Rate sheets published in newspapers, mining the balance upon which dividends periodicals, or trade journals (unless the must be accrued and paid. The average daily credit union or share and deposit broker that balance method requires the application of a offers accounts at the credit union pays a fee to have the information included or other- periodic rate to the average daily balance in wise controls publication). the account for the average daily balance ii. Telephone conversations initiated by a calculation period. The average daily bal- member or potential member about an ac- ance is determined by adding the full count. amount of principal in the account for each iii. An in-person discussion with a member day of the period and dividing that figure by about the terms for a specific account. the number of days in the period. iv. For purposes of § 707.8(b) of this part (e) Board. through § 707.8(e) of this part, information given to members about existing accounts, 1. General. The NCUA Board. such as current rates recorded on a voice-response machine or notices for automatically (f) Bonus renewable time account sent before renewal. 1. General. Bonuses include items of value v. Information about a particular trans- offered as incentives to members, such as an action in an existing account. offer to pay the final installment deposit for vi. Disclosures required by Federal or a holiday club account if the final install- other applicable law. ment is over $10. Bonuses do not include the vii. A share account agreement. payment of dividends (including extraor- (c) Annual Percentage Yield. dinary dividends), the waiver or reduction of a fee, the absorption of expenses, non-divi- 1. General. The annual percentage yield dend membership benefits, or other consider- (APY) is required for disclosures for new ac- ation aggregating $10 or less per year. counts, oral responses to inquiries about 2. Examples. The following are examples of rates; disclosures provided upon request; ini- bonuses. tial disclosures (if the credit union chooses i. A credit union offers $25 to potential to provide full disclosures instead of the ab- members for becoming a member and open- breviated notice); notices prior to the re- ing an account. The $25 could be provided by newal of a term share account, if known at check, cash, or direct deposit. the time the notice is sent, and in advertising. The annual percentage yield shows ii. A credit union offers $25 to a member the total amount of dividends for a 365 day with only a regular share account to open a period (or a 366 day period for a leap year) on share draft account. The $25 could be pro- an assumed principal amount based on the vided by check, cash, or direct deposit. dividend rate and frequency of compounding iii. A credit union offers a portable radio as a percentage of the assumed principal (for with a value of $20 to members and potential accounts such as share or share draft ac- members for opening a share draft account. counts) or for the total amount of dividends iv. A credit union pays the final install- over the term of the account for term share ment deposit for a holiday club account if accounts. The annual percentage yield as- over $10. sumes the principal amount remains in the 3. Examples not comprising bonuses. The fol- account for 365 days (366 days for leap year) lowing are examples of items that are not bo- or for the term of the account. nuses: 2. How Annual Percentage Yield Differs from i. Discount coupons distributed by credit Annual Percentage Yield Earned. The annual unions for use at restaurants or stores. percentage yield (APY) differs from the an- ii. A credit union offers $20 to any member nual percentage yield earned (APYE). The if the member is responsible for encouraging annual percentage yield earned is required a potential member to open an account. The for periodic statements only. The annual $20 is not a bonus because the $20 is not paid percentage yield earned shows the total to the individual opening the account. Any amount of dividends earned for the dividend item, including cash, given or offered to a or statement period as a percent of the ac- third party (that is not a joint member or tual average daily balance in the member’s joint owner in an account being opened) in account. Unlike the annual percentage yield, exchange for a member or potential member

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opening (or a member renewing or adding to) iv. Discounts on interest rates charged for an account is not a bonus. loans at the credit union. iii. A credit union offers $25 to a member if v. Rebates of loan interest already paid by the member can locate his name in the body a member. of a newsletter. vi. Discounts on application fees charged iv. Life savings benefits. Many credit for loans at the credit union. unions offer life savings benefits to bene- vii. Packaged, linked, or tied-account serv- ficiaries of deceased members. Because the ices. benefit accrues to a third party, such life 7. Non-dividend membership benefits. Such savings plans offered are not bonuses. benefits are not bonuses because they are v. A credit union offers to pay annual sporadic in nature, often difficult to value, membership dues in a benevolent organiza- and providing non-dividend membership ben- tion for a class of members. efits is a long-standing unique credit union 4. De minimis rule. Items with a de minimis practice. (See commentary to § 707.2(r) for value of $10 or less are not bonuses. Credit examples of such benefits.) unions may rely on the valuation standard used by the Internal Revenue Service (IRS) (g) Credit Union to determine if the value of the item is de 1. General. Includes credit unions in the minimis. Items required to be reported by the United States, Puerto Rico, Guam, U.S. Vir- credit union under IRS rules are bonuses gin Islands, and U.S. territories. Applies to under this regulation. Examples of items of credit unions whether or not the accounts in de minimis values are: the credit union are federally, state, pri- i. Disability insurance premiums on a vately insured, or uninsured. share account valued at an amount of $10 or less per year. (h) Daily Balance Method ii. Coffee mugs, T-shirts or other merchandise with a market value of $10 or less per 1. General. One of the two required methods year. (the average daily balance is the other) of 5. Aggregation. In determining if an item determining the balance upon which divi- valued at $10 or less is a bonus, credit unions dends must be accrued and paid. The daily must aggregate per account per calendar balance method requires the application of a year items that may be given to members. In daily periodic rate to the full amount of making this determination, credit unions ag- principal in the account each day. gregate per account only the market value of (i) Dividend and Dividends items that may be given for a specific promotion. To illustrate, assume a credit union 1. General. Member savings placed in share offers in January to give members an item accounts are equity investments, and the re- valued at $7 for each calendar quarter during turns earned on these accounts are divi- the year that the average account balance in dends. Federal credit unions may only offer a share draft account exceeds $10,000. The dividend-bearing and non-dividend-bearing bonus rules are triggered, since members are share accounts. State-chartered credit eligible under the promotion to receive up to unions may offer both share and deposit ac- $28 during the year. However, the bonus rules counts if permitted by state law. State law, are not triggered if an item valued at $7 is including without limitation regulations and offered to members opening a share draft ac- official interpretations, will determine if re- count during the month of January, even turns earned in accounts in state-chartered though in November the credit union intro- credit unions are dividends. Dividends ex- duces a new promotion that includes, for exclude the payment of a bonus or other con- ample, an offer to existing share draft sideration worth $10 or less given during a accountholders for an item valued at $8 for year, the waiver or reduction of a fee, the ab- maintaining an average balance of $5,000 for sorption of expenses, non-dividend member- the month. ship benefits and extraordinary dividends. 6. Waiver or reduction of a fee or absorption Dividend-bearing accounts must be either of expenses. Bonuses do not include value re- fixed-rate or variable-rate accounts. ceived by members through the waiver or re- 2. Procedure. Credit unions must follow ap- duction of fees for credit union-related serv- propriate law (state law for state-chartered ices (even if the fees waived exceed $10), such credit unions and federal law for federal as the following: credit unions) in determining dividend poli- i. Waiving a safe deposit box rental fee for cies and declaring dividends. Generally, divi- one year for members who open a new ac- dends may be viewed as a portion of the count. available account and undivided earnings of ii. Waiving fees for travelers checks for the credit union which is set apart, after re- members, and waiving check and share draft quired transfer to reserves, by valid act of printing fees. the board of directors, for distribution iii. Nondiscriminatorily waiving all fees among the members. As a matter of legal for a particular class of members, such as procedure, members are usually not entitled seniors or minors. to dividends until the following steps are

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completed: (1) The board of the credit union 19ll. This resolution appears in the min- develops a nondiscriminatory dividend pol- utes of this meeting and has not been re- icy, by establishing dividend periods, divi- scinded or modified. dend credit determination dates dividend B. Resolved, that distribution dates, any associated penalties (1) The Board of Directors has developed a (if applicable), and the method of dividend nondiscriminatory dividend policy, by estab- computation for each type of share account; lishing dividend periods, dividend credit de- (2) the provisions for required transfers to re- termination dates, dividend distribution serves are made; (3) sufficient and available dates, any associated penalties (if applica- prior and/or current earnings are available at ble), and the method of dividend computa- the end of the dividend period; (4) the board tion for each type of share account; formally makes a dividend declaration in ac- (2) The required transfers to reserves have cordance with the credit union’s dividend been made; and policy; and (5) dividends must be paid to (3) Sufficient and available prior and/or members by a credit to the appropriate share current earnings are available at the end of account, payment by check or share draft, or this dividend period. by a combination of the two methods. C. Resolved, further, that the Board of Di- 3. When available. Credit unions must fol- rectors now formally makes a dividend dec- low the law of their primary chartering au- laration in accordance with the Credit thority to determine when dividends are Union’s dividend policy and authorizes that available. Generally, it is the declaration of on llllllll, 19ll, dividends must be the dividend itself which creates the divi- paid to members by a credit to the appro- dend and the member has no right to receive priate share account, payment by share draft a dividend until it is so declared. The deci- or by a combination of the two methods. sion of when to declare dividends lies within D. I further certify that the Board of Di- the official discretion of each credit union’s rectors of this Credit Union has, and the board of directors and cannot be abrogated time of adoption of this resolution had, full by contract. An agreement to pay dividends power and lawful authority to adopt the on a share account is generally interpreted foregoing resolutions and that this resolu- not as an obligation to pay the stipulated tion revokes any prior resolution. dividends absolutely and unconditionally, In witness whereof, this is my signature but as an undertaking to pay them out of the and the date on which I signed this Resolu- earnings when sufficiently accumulated from tion. which dividends in general are properly pay- llllllllllllllllllllllll able. Generally, ‘‘prospective rates’’ are Signature rates set in good faith in advance of the close of a dividend period, that may be altered if llllllllllllllllllllllll sufficient funds are not available, or in the Date event of a superseding event, such as a [Attach list of accounts with dividend rates strike, plant closure, significant fluctuation for each type of account.] in market rates and/or a significant change (ii) The following resolution may be used in financial structure, natural disaster or where the dividend rates are set before the emergency that alters the assumptions close of a dividend period. under which the ‘‘prospective rates’’ were made. It is the intent of TISA that all disclo- RESOLUTION OF BOARD OF DIRECTORS FOR THE sure be accurate when made, and credit DECLARATION OF DIVIDENDS unions are urged to make every effort to rat- A. I, llllllll, certify that I am the ify disclosed ‘‘prospective rates.’’ ‘‘Prospec- Secretary of llllllll Credit Union, tive rates’’ may also be referred to as ‘‘pro- and that the following is a correct copy of jected rates’’ or similar wording, but not as the resolution for declaring dividends adopt- ‘‘estimated rates.’’ (See comment 3(b)–2, pro- ed by the llllllll Credit Union at a hibiting use of estimates). meeting of the Board of Directors duly and 4. Sample dividend resolutions. (i) The fol- properly held on llllllllll, 19ll. lowing resolution may be used where the div- This resolution appears in the minutes of idend rates are set after the close of a divi- that meeting and has not been rescinded or dend period. modified. B. Resolved, that the Board of Directors RESOLUTION OF BOARD OF DIRECTORS FOR THE has adopted a nondiscriminatory dividend DECLARATION OF DIVIDENDS policy, by establishing dividend periods, divi- A. I, llllllll, certify that I am Sec- dend credit determination dates, dividend retary of llllllll Credit Union Board distribution dates, any associated penalties of Directors, and that the following is a cor- (if applicable) and the method of dividend rect copy of the resolution for declaring divi- computation for each type of share account. dend adopted by the llllllll Credit C. Resolved, that it is the policy and prac- Union at a meeting of the Board of Directors tice of the Board of Directors to meet peri- duly and properly held on lllllllll, odically to establish prospective dividend

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rates for each type of dividend-bearing share The most common dividend periods are account. weekly, monthly, quarterly, semi-annually, D. Resolved, that if the required transfers and annually. Dividend periods need not to reserves have been made and there are agree with calendar months, e.g., a monthly sufficient and available prior and/or current dividend period could begin March 15 and end earnings available at the end of a dividend April 14. period, the officers of the Credit Union are authorized to pay dividends at the rate pro- (l) Dividend Rate spectively established by the Board of Direc- 1. General. The dividend rate does not re- tors for each account for the dividend period. flect compounding. Compounding is reflected The officers may pay the dividends without in the ‘‘annual percentage yield’’ definition. any further action of the Board of Directors. 2. Referencing. Except where specifically The act of paying the dividends shall con- stated otherwise, use of the term ‘‘dividend stitute the declaration of the dividends and rate’’ in part 707 also refers to ‘‘interest shall be a ratification of the prospective div- rate,’’ where appropriate (for interest-bear- idend rate. ing and non-interest-bearing deposit ac- In witness whereof, this is my signature counts at some state-chartered credit and the date on which I signed this Resolu- unions). tion. (m) Extraordinary Dividends llllllllllllllllllllllll Signature 1. General. The definition encompasses all llllllllllllllllllllllll irregularly scheduled and declared dividends, Date and as dividends, extraordinary dividends are exempt from the ‘‘bonus’’ disclosure require- [Attach list of accounts with prospective div- ments. Extraordinary dividends do not have idend rates for each type of account.] to be disclosed on account disclosures, but 5. Referencing. Except where specifically the dollar amount of an extraordinary divi- stated otherwise, use of the term ‘‘share’’ in dend credited to the account during the part 707, as in ‘‘share account,’’ also refers to statement period does have to be separately ‘‘deposit,’’ as in ‘‘deposit account,’’ where disclosed on the periodic statement for the appropriate (for interest-bearing or non-in- dividend period during which the extraor- terest-bearing deposit accounts at some dinary dividends are earned. Extraordinary state-chartered credit unions). dividends, like ordinary dividends, do not include the payment of a bonus or other con- (j) Dividend Declaration Date sideration worth $10 or less given during a 1. General. The importance of the dividend year, the waiver or reduction of a fee, the ab- declaration date is to tie the last paid divi- sorption of expenses or non-dividend mem- dend to a certain period of time to place bership benefits. See comments 2(f) 1 members and potential members on notice through 7 and 2(i) 1 through 4. Extraordinary that the last paid dividend is different from dividends may be calculated by any means the next dividend to be paid. In order to determined by the board of directors of a achieve this purpose, a credit union may use credit union and may not be used in the an- any of the following methods: nual percentage yield earned calculation. i. ‘‘As of 3/15/95’’ (the date the board of di- 2. Use of synonym. Extraordinary dividends rectors last met and declared the last paid may be described as ‘‘bonus dividends.’’ dividend). ii. ‘‘As of 3/31/95’’ (the last day of the last (n) Fixed-Rate Account dividend period upon which a dividend has 1. General. Includes all accounts in which been paid). the credit union, by contract, agrees to give iii. ‘‘For the period 1/1/95 to 3/31/95’’ (the at least 30 days advance written notice of de- last dividend period upon which a dividend creases in the dividend rate. Thus, credit has been paid). unions can decrease rates only after pro- iv. ‘‘For the first quarter of 1995’’ (the last viding advance written notice of rate de- dividend period upon which a dividend has creases, e.g., a ‘‘change-in-terms notice.’’ been paid). v. ‘‘For April 1995’’ (the last dividend pe- (o) Grace Period riod upon which a dividend has been paid). 1. General. A period after maturity of an vi. ‘‘As of the last dividend declaration automatically renewing term share account date’’ (the last dividend period upon which a during which the member may withdraw dividend has been paid). funds without being assessed a penalty. Use of a ‘‘grace period’’ is discretionary, not (k) Dividend Period mandatory. This definition does not refer to 1. General. The dividend period is to be set the ‘‘grace period’’ account, which is a syn- by a credit union’s board of directors for onym for ‘‘federal rollback method’’ or ‘‘in each account type, e.g., regular share, share by the 10th’’ accounts, which are prohibited draft, money market share, and term share. by TISA and part 707.

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(p) Interest granted in such quantity as to be includable as calculable dividends. 1. General. Member savings placed in de- 2. Examples. Examples include: posit accounts are debt investments, and the i Food, refreshments, and drawings and return earned on these accounts is interest. raffles at annual meetings, member func- Federal credit unions are not authorized to tions, and branch openings. offer any interest-bearing deposit accounts. ii. Travel club benefits. State-chartered credit unions may offer both iii. Prizes offered at annual meetings, such share and deposit accounts if permitted by as U.S. Savings Bonds, a deposit of funds state law. State law, including without limi- into the winner’s account, trips, and other tation regulations and official interpreta- gifts. Such prizes are not bonuses because tions, will determine if returns earned in ac- they are offered as an incentive to increase counts in state-chartered credit unions are attendance at the annual meeting, and not interest. Interest excludes the payment of a to entice members to open, maintain, or bonus or other consideration worth $10 or renew accounts or increase an account bal- less given during a year, the waiver of reduc- ance. tion of a fee, the absorption of expenses, non- iv. Life savings benefits. dividend membership benefits, and extraordinary dividends. (s) Passbook Account 2. Differences between dividends and interest. 1. Relation to Regulation E. Passbook ac- Generally, dividends are returns on an eq- counts include accounts accessed by uity investment (shares); interest is return preauthorized electronic fund transfers to on a debt investment (deposits). Dividends, the account (as defined in 12 CFR § 205.2(j)), in general, are not properly payable until de- such as an account credited by direct share clared at the close of a dividend period; in- and deposit of social security payments. Ac- terest, in general, is properly payable daily counts that permit access by other elec- according to the deposit contract. Dividend tronic means are not ‘‘passbook accounts,’’ rates are prospective until actually declared; and any statements that are sent four or interest rates are set according to contract more times a year must comply with the re- in advance and are earned on that basis. quirements of § 707.6. Share accounts establish a member (owner)/ credit union (cooperative) relationship; de- (t) Periodic Statement posit accounts establish a depositor (creditor)/depository (debtor) relationship. 1. General. Periodic statements are not re- 3. Referencing. Except where specifically quired by part 707. Passbook and term share stated otherwise, use of the terms ‘‘divi- accounts are exempt from periodic state- dend’’ or ‘‘dividends’’ in part 707 also refers ment requirements. to ‘‘interest’’ where appropriate (for inter- 2. Examples. Periodic statements do not in- est-bearing and non-interest-bearing deposit clude: accounts at some state-chartered credit i. Additional statements provided solely unions). upon request. ii. General service information such as a (q) Member quarterly newsletter or other correspondence that describes available services and prod- 1. Professional capacity. Examples of ac- ucts. counts held by a natural person in a professional capacity for another are: (u) Potential Member i. Attorney-client trust accounts. 1. General. A potential member is a natural ii. Trust, estate and court-ordered ac- person eligible for membership in a credit counts. union, who has not yet taken the steps nec- iii. Landlord-tenant security accounts. essary to become a member. The term also 2. Other accounts. Examples of accounts not includes natural person nonmembers eligible held in a professional capacity include ac- to hold accounts in a credit union pursuant counts held by parents for a child under the to relevant federal or state law. Uniform Gifts to Minors Act (or Uniform 2. Verification of eligibility. It is rec- Transfers to Minors Act. ommended that credit unions have sound 3. Retirement plans. IRAs and SEP accounts written procedures in place to identify those are member accounts to the extent that eligible for membership. If these procedures funds are invested in accounts subject to the include verification measures, such as an ap- regulation. Keogh accounts, like sole propri- plication process, verification telephone call etor accounts, are not subject to the regula- or letter to an employer or association with- tion. in the field of membership, witnessing by an existing member, or similar procedure, then (r) Non-Dividend Membership Benefits the credit union may first verify the mem- 1. General. Term reflects unique credit bership eligibility of a potential member be- union practices that are difficult to value, fore providing account disclosures or other encourage community spirit, and are not information to the potential member. This

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process of verifying a member’s eligibility Tiering Method A accounts, the credit union status, making a recommendation for mem- pays the applicable tiered dividends rate on bership, and providing account disclosures the entire amount in the account. This should be completed within 20 calendar days. method is also known as the ‘‘hybrid’’ or This period also applies when potential ‘‘plateau’’ tiered-rate account. In Tiering members not on credit union premises re- Method B accounts, the credit union does quest disclosures. not pay the applicable tiered dividends rate 3. Nonmembers. Within its sole discretion, on the entire amount in the account, but the board of directors of a credit union may only on the portion of the share account bal- provide TISA disclosures to nonmembers ance that falls within each specified tier. who are ineligible for membership or to hold This method is also known as the ‘‘pure’’ or an account at the credit union. If disclosures ‘‘split-rate’’ tiered-rate account. (See appen- are made to such nonmembers, it is the posi- dix A, part I, D.) tion of the Board that no civil liability can 2. Example. An example of a tiered-rate ac- accrue to the credit union for any errors in count is one in which a credit union pays a such disclosures. (See commentary to 5.00% dividend rate on balances below $1,000, § 707.3(d)). and 5.50% on balances $1,000 and above. 3. Term share accounts. Term share ac- (v) State counts that pay different rates based solely 1. General. Territories and possessions in- on the amount of the initial share and de- clude American Samoa, Guam, the Mariana posit are not tiered-rate accounts. Islands, and the Marshall Islands. 4. Minimum balance accounts. A requirement to maintain a minimum balance to (w) Stepped-Rate Account earn dividends does not make an account a 1. General. Stepped-rate accounts are those tiered-rate account. If dividends are not paid accounts in which two or more dividend on amounts below a specified balance level, rates (known at the time the account is then the account has a minimum balance re- opened) will take effect in succeeding peri- quirement (required to be disclosed under ods. § 707.4(b)(3)(i)), but the account does not con- 2. Example. An example of a stepped-rate stitute a tiered-rate account. A zero rate account is a one-year term share certificate (0%) cannot constitute a tier. Minimum bal- account in which a 5.00% dividend rate is ance accounts are single rate accounts with paid for the first six months, and 5.50% for a minimum balance requirement. the second six months. (z) Variable-Rate Account (x) Term Share Account 1. General. Includes accounts in which the 1. Relation to Regulation D. Regulation D credit union does not contract to give at permits, in limited circumstances, the with- least 30 days advance written notice of de- drawal of funds without penalty during the creases in the dividend rate. An account first six days after a ‘‘time deposit’’ is meets this definition whether the rate opened. (See 12 CFR 204.2(c)(1)(i).) But the change is determined by reference to an fact that a member makes a withdrawal as index, by use of a formula, or merely at the permitted by Regulation D does not dis- discretion of the credit union’s board of di- qualify the account from being a term share rectors. An account that permits one or account for purposes of this regulation (such more rate adjustments prior to maturity at as withdrawals upon the death of the mem- the member’s option, such as a rate relock ber, or within a ‘‘grace period’’ for automati- option, is a variable-rate account. cally renewable term share accounts). 2. Differences between fixed-rate and variable- 2. Club accounts. Club accounts, including rate accounts. All ccounts must either be Christmas club, holiday club, and vacation fixed-rate or variable-rate accounts. club accounts may be either term share or Classifying an account as variable-rate af- regular share accounts, depending on the fects credit unions three ways: terms of the account. Although club ac- i. Additional account disclosures are re- counts typically have a maturity date, they quired (§ 707.4(b)(1)(ii)); are not term share accounts unless they also ii. Rate decreases are exempted from require a penalty of at least seven days’ divi- change-in-terms requirements dends for withdrawals during the first six (§ 707.5(a)(2)(i)); and days after the account is opened. iii. Advertising notice required (§ 707.8(c)(1)). (y) Tiered-Rate Account Fixed-rate accounts require a contract 1. General. Tiered-rate accounts are those term obligating the credit union to a 30-day accounts in which two or more dividend advance, written notice to members before rates are paid on the account and are deter- decreasing the dividend rate on the account. mined by reference to a specified balance Term changes adversely affecting the mem- level. Tiered-rate accounts are of two types: ber and rate decreases cannot take effect Tiering Method A and Tiering Method B. In until 30 days after such fixed-rate change-in-

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terms notices are mailed or delivered to 3. Foreign language. Disclosures may be members (§ 707.5(a)). made in any foreign language, if desired by the board of directors of a credit union. How- Section 707.3—General Disclosure ever, disclosures must also be provided in Requirements English, upon request. (a) Form (c) Relation to Regulation E 1. General. All required disclosures (e.g., ac- 1. General rule. Compliance with Regula- count disclosures, change-in-terms notices, tion E (12 CFR part 205) is deemed to satisfy term share renewal/maturity notices, state- the disclosure requirements of this regula- ment disclosures and advertising disclosures) tion, such as when: must be made clearly and conspicuously, in i. A credit union changes a term that trig- a form the member may retain. Disclosures gers a notice under Regulation E, and the need be made only as applicable (e.g., disclo- timing and disclosure rules of Regulation E sures for a non-dividend-bearing account for sending change-in-terms notices. would not include disclosure of annual per- ii. A member adds an ATM access feature centage yield, dividend rate, or other disclo- to an account, and the credit union provides sures pertaining to dividend calculations). disclosures pursuant to Regulation E, includ- 2. Design requirements. Disclosures must be ing disclosure of fees before the member represented in a format that allows members ceives ATM access. (See 12 CFR 205.7.) and potential members to readily understand iii. A credit union complying with the tim- the terms of their account. Credit unions are ing rules of Regulation E discloses at the not required to use a particular type size or same time fees for electronic services (such typeface, nor are credit unions required to as balance inquiry fees imposed if the in- state any term more conspicuously than any quiry is made at an ATM) that are required other term. Disclosures may be made: to be disclosed by this regulation, but not by i. In any order. Regulation E. ii. In combination with other disclosures iv. A credit union relies on Regulation E’s or account terms. rules regarding disclosures of limitations on iii. In combination with disclosures for the frequency and amount of electronic fund other types of accounts, as long as it is clear transfers, including security-related excep- to members and potential members which tions. But any limitation on the number of disclosures apply to their account. ‘‘intra-institutional transfers’’ to or from iv. On more than one page and on the front the member’s other accounts at the credit and reverse sides. union during a given time period must be v. By using inserts to a document or filling in blanks. disclosed, even though intra-institutional vi. On more than one document, as long as transfers are exempt from Regulation E. the documents are provided at the same (d) Multiple Members time. 3. Consistent terminology. A credit union 1. General. When an account has multiple must use the same terminology to describe natural person member accountholders, de- terms or features that are required to be dis- livery of disclosures to any member closed. For example, if a credit union de- accountholder or agent authorized by the scribes a monthly fee (regardless of account accountholder satisfies the disclosure re- activity), as a ‘‘monthly service fee’’ in ac- quirements of part 707. count opening disclosures, the periodic statements and change-in-terms notices must use (e) Oral Response to Inquiries the same terminology so that members and 1. Application of rule. Credit unions need potential members can readily identify the not provide rate information orally. Disclo- fee. sures need be made only as appropriate. For example, the requirement to give a tele- (b) General phone number for a member to call about 1. Terms and conditions. Credit unions are rates for interest-bearing accounts and divi- required to have disclosures reflect the dend-bearing term share accounts, would not terms of the legal obligation between the be necessary for members calling the credit credit union and a member at the time the union for information. Also, the disclosure member opens the account. This provision requirements are applicable only to credit does not impose any contract terms or super- union employees and volunteers acting in sede state or other laws that define how the the ordinary course of credit union business. legal obligations between a credit union and 2. Relation to advertising. The advertising its membership are determined. rules do not cover an oral response to a ques- 2. Specificity of legal obligation. Credit tion about rates. unions may refer to the calendar month or 3. Existing accounts. This paragraph does to roughly equivalent intervals during a cal- not apply to oral responses about rate infor- endar year as a ‘‘month.’’ Use of estimates is mation for existing term share accounts or prohibited in TISA disclosures. accounts not currently offered. For example,

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if a member holding a one-year term share count numbers are not required by this re- account requests dividend rate information quirement. about the account during the term, the cred- 2. Acquired accounts. New account disclo- it union need not disclose the annual per- sures need not be given when a credit union centage yield, unless the member is calling acquires an account through an acquisition for rate information under a maturity no- of, or merger with, another credit union (but tice. see § 707.5(a) regarding advance notice requirements if terms are changed). (f) Rounding and Accuracy Rules for Rates and Yields 3. Combination disclosures. New account disclosures need not be given when a member (f)(1) Rounding has already received disclosures covering several accounts, and opens a new account 1. Permissible rounding. The annual percent- properly disclosed by the already received age yield, annual percentage yield earned combination disclosures, if the new account and dividend rate must be rounded to the is opened within a reasonable amount of nearest one-hundredth of one percentage point (.01%) when disclosed. Examples of per- time after receipt of the combination disclo- missible rounding are an annual percentage sures and if the received disclosures and yield calculated to be 5.644%, rounded down terms are accurate at the time the new ac- and shown as 5.64%; 5.645% would be rounded count is opened. up and disclosed as 5.65%. For account dis- (a)(2) Requests closures, the dividend rate may be expressed to more than two decimal places. (a)(2)(i) (f)(2) Accuracy 1. Inquiries versus requests. A response to an 1. Annual percentage yield and annual per- oral inquiry (by telephone or in person) centage yield earned. The tolerance for annual about rates and yields or fees does not trig- percentage yield and annual percentage yield ger the duty to provide account disclosures. earned calculations is designed to accommo- But, when a member asks for written infor- date inadvertent errors. Credit unions may mation about an account (whether by tele- not purposely incorporate the one-twentieth phone, in person, or by other means), the of one percentage point (.05%) tolerance into credit union must provide disclosures unless their calculation of yields. the account is no longer offered to the pub- 2. Dividend rate. There is no tolerance for lic. an inaccuracy in the dividend rate. 2. General requests. When member’s or potential member’s request disclosures about a Section 707.4—Account Disclosures type of account (a share draft account, for (a) Delivery of Account Disclosures example), a credit union that offers several variations may provide disclosures for any (a)(1) Account Opening one of them. No disclosures need be made to nonmembers, though a credit union may pro- 1. New accounts. New account disclosures vide disclosures to nonmembers within its must be provided when: i. A term share account that does not auto- sole discretion. matically rollover is renewed by a member. 3. Timing for response. Ten business days is ii. A member changes the term for a renew- a reasonable time for responding to requests able term share account (from a one-year for account information that members or po- term share account to a six-month term tential members do not make in person, in- share account, for instance) (see comment cluding requests made by electronic means, 5(b)–5 regarding disclosure alternatives). such as by electronic mail. iii. A credit union transfers funds from an 4. Use of electronic means. If a member or account to open a new account not at the potential member who is not present at the member’s request, unless the credit union credit union makes a request for account dis- previously gave account disclosures and any closures, including a request made by tele- change-in-terms notices for the new account phone, e-mail, or via the credit union’s Web (e.g., funds in a money market share account site, the credit union may send the disclo- are transferred by a credit union to open a sures in paper form or, if the member or po- new account for the member, such as a share tential member agrees, may provide the dis- draft account, because the member exceeded closures electronically, such as to an e-mail transaction limitations on the money mar- address that the member or potential mem- ket share account). ber provides for that purpose, or on the cred- iv. A credit union accepts a deposit from a it union’s Web site, without regard to the member to an account that the credit union consent or other provisions of the E–Sign had previously deemed to be ‘‘closed,’’ under Act. The regulation does not require a credit applicable federal or state law, for the pur- union to provide, nor a member or potential pose of treating accrued, but uncredited, member to agree to receive, the disclosures dividends as forfeited dividends. New ac- required by § 707.4(a)(2) in electronic form.

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(a)(2)(ii)(A)(2) when using the daily balance method. Nor is a disclosure of 0% required for credit unions 1. Recent rates. Credit unions comply with using the average daily balance method, if this paragraph if they disclose an interest the member fails to meet the minimum bal- rate (or dividend rate on a dividend-bearing ance required for the average daily balance term share account) and annual percentage period. yield accurate within the seven calendar days preceding the date they send the disclo- (b)(1)(ii) Variable Rates sures. (b)(1)(ii)(B) (a)(2)(ii)(B) 1. Determining dividend rates. To disclose 1. Describing the maturity of a term Term. how the dividend rate is determined, credit share account as ‘‘1 year’’ or ‘‘6 months,’’ for unions must: example, illustrates a response stating the i. Identify the index and specific margin, if maturity of a term share account as a term the dividend rate is tied to an index. rather than a date (e.g., ‘‘June 1, 1995’’). ii. State that rate changes are within the (b) Content of Account Disclosures credit union’s discretion, if the credit union does not tie changes to an index. (b)(1) Rate Information (b)(1)(ii)(C) (b)(1)(i) Annual Percentage Yield and Dividend Rate 1. Frequency of rate changes. A credit union reserving the right to change rates at its dis- 1. Rate disclosures. In addition to the divi- cretion must state the fact that rates may dend rate and annual percentage yield, credit change at any time. unions may disclose a periodic rate corresponding to the dividend rate. No other (b)(1)(ii)(D) rate or yield (such as ‘‘tax effective yield’’) is 1. Limitations. A floor or ceiling on rates or permitted. If the annual percentage yield is on the amount the rate may decrease or in- the same as the dividend rate, credit unions crease during any time period must be dis- may disclose a single figure but must use closed. Credit unions need not disclose the both terms. absence of limitations on rate changes. 2. Fixed-rate accounts. For fixed-rate term share accounts paying the opening rate until (b)(2) Compounding and Crediting maturity, credit unions may disclose the period of time the dividend rate will be in ef- (b)(2)(i) Frequency fect by stating, or cross-referencing, the maturity date. For other fixed-rate accounts, 1. General. Descriptions such as ‘‘quar- credit unions may use a date (such as ‘‘This terly’’ or ‘‘monthly’’ are sufficient. Irregular rate will be in effect through June 30, 1995’’) crediting and compounding periods, such as or a period (such as ‘‘This rate will be in ef- if a cycle is out short at year end for tax re- fect for at least 30 days’’). porting purposes, need not be disclosed. 3. Tiered-rate accounts. Each dividend rate, 2. Dividend period. For dividend-bearing ac- along with the corresponding annual per- counts, the dividend period must be dis- centage yield for each specified balance level closed. (A specific example must also be (or range of annual percentage yields, if ap- given, see appendix B, § B–1(c).) The dividend propriate), must be disclosed for tiered-rate period for term share accounts generally accounts. (See appendix A, Part I, Paragraph may be disclosed as the account’s term (e.g., D.) two years). 4. Stepped-rate accounts. A single composite (b)(2)(ii) Effect of Closing an Account annual percentage yield must be disclosed for stepped-rate accounts. (See appendix A, 1. Deeming an account closed. A credit union Part I, Paragraph B.) The dividend rates and may, subject to state or other law, provide in the period of time each will be in effect also account contracts the actions by members must be provided. When the initial rate of- that will be treated as closing the account fered for a specified time on a variable-rate and that will result in the forfeiture of ac- account is higher or lower than the rate that crued but uncredited dividends. An example would otherwise be paid on the account, the is the withdrawal of all funds from the ac- calculation of the annual percentage yield count prior to the date dividends are cred- must be made as if for a stepped-rate ac- ited. Credit unions are cautioned that bylaw count. (See appendix A, Part I, Paragraph C.) requirements may prevent a credit union 5. Minimum balance accounts. If a credit from deeming a member’s account closed union sets a minimum balance to earn divi- until certain time periods are extinguished if dends, the credit union may, but need not, funds remain in a member’s account. NCUA state that the annual percentage yield is 0% Standard FCU Bylaws, Art. III, § 3. Such for those days the balance in the account bylaw requirements may not be overridden drops below the minimum balance level without proper agency approval.

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(b)(3) Balance Information dividends begin to accrue. Under the ledger balance method, dividends begin to accrue (b)(3)(i) Minimum Balance Requirements on the day of deposit. Under the collected 1. Par value. Credit unions must disclose balance methods, dividends begin to accrue any minimum balance required to open the when provisional credit is received for the account, to avoid the imposition of a fee, or item deposited. to obtain the annual percentage yield. Since (b)(4) Fees members cannot generally maintain any accounts until the par value of the membership 1. Types of fees. Fees related to the routine share is paid in full, this section requires use of an account must be disclosed. The fol- that credit unions disclose the par value of a lowing are types of fees that must be dis- share necessary to become a member and closed in connection with an account: maintain accounts at the credit union. The i. Maintenance fees, such as monthly serv- par value of a share and the minimum bal- ice fees. ance requirement do not have to be the same ii. Fees related to share deposits or with- amount (e.g., a credit union may have a $5 drawals. par value for a membership share, in order iii. Fees for special services, such as stop for accounts to be opened and maintained, payment fees, fees for balance inquiries or and a $100 minimum balance requirement, in verification of share and deposits, fees asso- order for the account to earn dividends). ciated with checks returned unpaid, fees for 2. Disclosures. The explanation of minimum regularly sending to members share drafts balance computation methods may be com- that otherwise would be held by the credit bined with the balance computation method union, and overdraft line of credit access fees disclosures (§ 707.4(b)(3)(ii)) if they are the (if charged against the share account). same. If a credit union uses different cycles iv. Fees to open or to close an account. for determining minimum balance require- v. Fees imposed upon dormant or inactive ments for purposes of assessing fees and for accounts. paying dividends, the credit union must dis- 2. Other fees. Credit unions need not disclose the specific cycle or time period used close fees such as the following: for each purpose (e.g., use of a midmonth i. Fees for services offered to members and statement cycle for determining dividends, nonmembers alike, such as fees for certain and use of a calendar month cycle for deter- travelers checks, for wire transfers and auto- mining fees). Credit unions may assess fees mated clearinghouse (ACH) transfers, to by using any method. If fees on one account process credit card cash advances, or to han- are tied to the balance in another account, dle U.S. Savings Bond Redemption (even if such provision must be explained (e.g., if different amounts are charged to members share draft fees are tied to a minimum bal- and nonmembers). ance in the regular share account (or a com- ii. Incidental fees, such as fees associated bination of the share draft and regular share with state escheat laws, garnishment or at- accounts), the share draft account must ex- torneys fees, to change names on an account, plain that fact and how the balance in the to generate a midcycle periodic statement, regular share account (or both accounts) is to wrap loose coins, for photocopying, for determined). The fee need not be disclosed in statements returned to the credit union be- the account disclosures if the fee is not im- cause of a wrong address, and locator fees. posed on that account. 3. Amount of fees. Credit unions are cautioned that merely providing fee information (b)(3)(ii) Balance Computation Method in an account disclosure may not be sufficient to gain the legal right to impose the 1. Methods and periods. Credit unions may fee involved under applicable law. Credit use different methods or periods to calculate unions must state the amount and condi- minimum balances for purposes of imposing tions under which a fee may be imposed. a fee (the daily balance for a calendar Naming and describing the fee typically sat- month, for example) and accruing dividends isfies this requirement. Some examples are: (the average daily balance for a statement i. ‘‘$4.00 monthly service fee’’. period, for example). Each method and cor- ii. $7.00 and up’’ or ‘‘fee depends on style of responding period must be disclosed. checks ordered’’ for check printing fees. 4. Tied-accounts. Credit unions must state (b)(3)(iii) When dividends begin to accrue if fees that may be assessed against an ac- 1. Additional information. Credit unions count are tied to other accounts at the cred- must include a statement as to when divi- it union. For example, if a credit union ties dends begin to accrue for noncash deposits. the fees payable on a share draft account to Credit unions may disclose additional infor- balances held in the share draft account and mation such as the time of day after which in a regular share account, the share draft deposits are treated as having been received account disclosures must state that fact and the following business day, and may use ad- explain how the fee is determined. ditional descriptive terms such as ‘‘ledger’’ 5. Regulation E statements. Some fees are re- or ‘‘collected’’ balances to disclose when quired to be disclosed under both Regulation

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E (12 CFR 205.7) and part 707. If such fees, 3. Relation to rules for IRAs or similar plans. such as ATM transaction fees, are disclosed Penalties imposed by the Internal Revenue on a Regulation E statement, they need not Code for certain withdrawals from IRAs or be disclosed again on a periodic statement similar pension or savings plans are not required under part 707. early withdrawal penalties for purposes of 6. Fees for overdrawing an account. Under this regulation. § 707.4(b)(4) of this part, credit unions must 4. Disclosing penalties. Penalties may be disclose the conditions under which a fee stated in months, whether credit unions as- may be imposed. In satisfying this require- sess the penalty using the actual number of ment credit unions must specify the cat- days during the period or using another egories of transactions for which an over- method such as a number of days that occurs draft fee may be imposed. An exhaustive list in any actual sequence of the total calendar of transactions is not required. It is suffi- months involved. For example, stating ‘‘one cient for a credit union to state that the fee month’s dividends’’ is permissible, whether applies to overdrafts ‘‘created by check, in- the credit union assesses 30 days’ dividends person withdrawal, ATM withdrawal, or during the month of April, or selects a time other electronic means.’’ Disclosing a fee period between 28 and 31 days for calculating ‘‘for overdraft items’’ would not be suffi- the dividends for all early withdrawals re- cient. gardless of when the penalty is assessed. (b)(5) Transaction Limitations (b)(6)(iv) Renewal Policies 1. General rule. Examples of limitations on 1. Rollover term share accounts. Credit the number of dollar amount of share depos- unions are not required to provide a grace its or withdrawals that credit unions must period, to pay dividends during the grace pe- disclose are: riod, or to disclose whether or not dividends i. Limits on the number of share drafts or will be paid during the grace period. Credit checks that may be written on an account unions offering a grace period on term share for a given time period. accounts must give the length of the grace ii. Limits on withdrawals or share deposits period. Commentary, appendix B, Model during the term of a term share account. Clauses, § B–1(i)(iv). iii. Limitations required by Regulation D, 2. Nonrollover term share accounts. Credit such as the number of withdrawals permitted unions that pay dividends on funds following from money market share accounts by check the maturity of term share accounts that do to third parties each month (credit unions not renew automatically need not state the need not disclose reservation of right to re- rate (or annual percentage yield) that may quire a notice for withdrawals from accounts be paid. required by federal or state law). (b)(7) Bonuses (b)(6) Features of Term Share Accounts 1. General. Credit unions are required to state the amount and type of bonus, and dis- (b)(6)(i) Time Requirements close any minimum balance or time require- 1. ‘‘Callable’’ term share accounts. In addi- ment to obtain the bonus and when the tion to the maturity date, credit unions bonus will be provided. If the minimum bal- must state the date or the circumstances ance or time requirement is otherwise re- under which the credit union may redeem a quired to be disclosed, credit unions need not term share account at the credit union’s op- duplicate the disclosure for purposes of this tion (a ‘‘callable’’ term share account). paragraph. (b)(6)(ii) Early Withdrawal Penalties (b)(8) Nature of Dividends 1. General. The term ‘‘penalty’’ may, but 1. General. Dividends are not payable until need not, be used to describe the loss that declared and unless sufficient current and may be incurred by members for early with- undivided earnings are available after re- drawal of funds from term share accounts. quired transfers to reserves at the close of a 2. Examples. Examples of early withdrawal dividend period. A disclosure explaining divi- penalties are: dends educates members and protects credit i. Monetary penalties, such a specific dol- unions in the event that a prospective divi- lar amount (e.g., ‘‘$10.00’’) or a specific days’ dend cannot be paid, or is not properly pay- worth of dividends (e.g., ‘‘seven days’ divi- able. This disclosure is required for all dividends plus accrued but uncredited dividends, dend-bearing share accounts. Term share ac- but only if the account is closed’’). counts need not include a statement regard- ii. Adverse changes to terms such as the ing the nature of dividends. lowering of the dividend rate, annual per- 2. State-chartered credit unions with interest- centage yield, or reducing the compounding bearing deposit accounts. State law controls or crediting frequency for funds remaining in the nature of accounts (i.e., whether an ac- shares or on deposit. count is a share account or a deposit ac- iii. Reclamation of bonuses. count). If a member of a state-chartered

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credit union is opening only an interest- sures when, following receipt of the notice, bearing deposit account, or is requesting ac- members ask for account disclosures. Such count disclosures only for an interest-bear- disclosures must be provided even if they are ing deposit account (if state law requires the requested before the compliance date of part depositor to hold a share account), the dis- 707. Credit unions who provide early notice closures must generally include the fol- to existing members need to comply with lowing information on any dividend-bearing other aspects of part 707, but need not pro- share portion of the account (e.g., member- vide disclosures already provided in compli- ship share): the par value of a share; a state- ance with part 707. ment that the portion of the deposit that represents the par value of the membership Section 707.5—Subsequent Disclosures share will earn dividends, and that dividends are paid from current income and available (a) Change in Terms earnings after required transfers to reserves. Further additional disclosures, such as a sep- (a)(1) Advance Notice required arate dividend rate and annual percentage 1. Form of notice. Credit unions may provide yield for the membership share, are not re- a change-in-term notice on or with a regular quired (if the additional disclosures would periodic statement or in another mailing agree with the remainder of the account (such as a highlighted portion of a news- which is invested in an interest-bearing de- letter or statement stuffer insert). If a credit posit). union provides notice through revised ac- (c) Notice to Existing Accountholders count disclosures, the changed term must be highlighted in some manner. For example, 1. General. Only members who receive peri- credit unions may state that a particular fee odic statements (provided regularly at least has been changed (also specifying the new four times per year) and who hold accounts amount) or use an accompanying letter that of the type offered by the credit union as of refers to the changed term. Credit unions are the compliance date of part 707 (generally cautioned that unless credit unions have re- January 1, 1995) must receive the notice. If served the right to change terms in the ac- following receipt of the notice members request disclosures, credit unions have twenty count agreement or disclosures, a change-in- calendar days from receipt of the request to terms notice may not be sufficient to amend provide the disclosures. Rate and annual per- the terms under applicable law. centage yield information in such disclo- 2. Effective date. An example of a language sures must conform to that required for dis- for disclosing the effective date of a change closures upon request. As an alternative to is: ‘‘As of May 11, 1995’’. including the notice in or on the periodic 3. Terms that change upon the occurrence of statement, the final rule permits credit an event. A credit union offering terms that unions to send the account disclosures them- will automatically change upon the occur- selves, as long as they are sent at the same rence of a stated event need not send an ad- time as the periodic statement (the disclo- vance notice of the change provided the cred- sures may be mailed either with the periodic it union fully describes the conditions of the statement or separately). change in the account opening disclosures 2. Form of the notice. The notice may be in- (and sends any change-in-term notices re- cluded on the periodic statement, in a mem- gardless of whether the changed term affects ber newsletter, or on a statement stuffer or that member’s account at that time). other insert, if it is clear and conspicuous. 4. Examples. Examples of changes not re- The notice cannot be sent in a separate mail- quiring an advance change-in-terms notice ing from the periodic statement. are: 3. Timing. The notice may accompany the i. The termination of employment for em- first periodic statement after the compliance ployee-members for whom account mainte- date for part 707, or the periodic statement nance or activity fees were waived during for the first cycle beginning after that date. their employment by the credit union. For example, a credit union’s statement ii. The expiration of one year in a pro- cycle is December 15, 1994-January 14, 1995. motion described in the account opening dis- The statement is mailed on January 15, The closures to ‘‘waive $4.00 monthly service next cycle is January 15, 1995 through Feb- ruary 14, 1995, and the statement for that charges for one year’’. cycle is mailed on February 15. The credit (a)(2) No Notice Required union may provide the notice either on or with the January 15 statement or on or with (a)(2)(ii) Check Printing Fees the February 15 statement, as it covers the first cycle after January 1, 1995. 1. Increase in fees. A notice is not required 4. Early compliance. Credit unions that pro- for an increase in fees for printing share vide the notice to existing members prior to drafts (or deposit and withdrawal slips) even the compliance date of part 707, must be pre- if the credit union adds some amount to the pared to provide accurate and timely disclo- price charged by the vendor.

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(b) Notice Before Maturity for Term Share Ac- since the last account disclosures were pro- counts Longer Than One Month That Renew vided. Automatically. (c) Notice Before Maturity for Term Share Ac- 1. Maturity dates on nonbusiness days. In de- counts Longer Than One Year That Do not termining the term of a term share account, Renew Automatically credit unions may disregard the fact that the term will be extended beyond the disclosed 1. Subsequent account. When funds are number of days if the maturity date falls on transferred following maturity of a nonroll- a nonbusiness day. For example, a holiday or over term share account, credit unions need weekend may cause a ‘‘one-year’’ term share not provide account disclosures unless a new account to extend beyond 365 days (or 366, in account is established. a leap year), or a ‘‘one-month’’ term share account to extend beyond 31 days. Section 707.6—Periodic Statement 2. Disclosing when rates will be determined. Disclosures Ways to disclose when the annual percentage yield will be available include the use of: (a) Rule When Statement and Crediting Periods i. A specific date, such as ‘‘October 28’’. Vary ii. A date that is easily discernible, such as 1. General. Credit unions are not required ‘‘the Tuesday prior to the maturity date to provide periodic statements. If they pro- stated on the notice’’ or ‘‘as of the maturity vide periodic statements, disclosures need date stated on this notice’’. only be furnished to the extent applicable. 3. Alternative timing rule. Under the alter- For example, if no dividends are earned for a native timing rule, a credit union that offers statement period, credit unions need not a 10-day grace period would have to provide state that fact. Or, credit unions may dis- the disclosures at least 10 calendar days close ‘‘$0’’ dividends earned and ‘‘0%’’ annual prior to the scheduled maturity date. percentage yield earned. 4. Club accounts. If members have agreed to 2. Regulation E interim statements. When a the transfer of payments from another ac- credit union provides regular quarterly count to a club term share account for the statements, and in addition provides a next club period, the credit union must com- monthly interim statement to comply with ply with the requirements for automatically Regulation E, the interim statement need renewable term share accounts—even though not comply with this section unless it states members may withdraw funds from the club dividend or rate information. (See 12 CFR account at the end of the current club pe- 205.9). For credit unions that choose not to riod. treat Regulation E activity statements as 5. Renewal of a term share account. In the part 707 periodic statements, the quarterly case of a change-in-terms that becomes ef- periodic statement must reflect the annual fective if a rollover term share account is percentage yield earned and dividends earned subsequently renewed: for the full quarter. However, credit unions i. If the change is initiated by the credit choosing this option need not redisclose fees union, the disclosure requirements of this already disclosed on an interim Regulation E paragraph apply. (Section 707.5(a) applies if activity statement on the quarterly periodic the change becomes effective prior to the statement. For credit unions that choose to maturity of the existing term share ac- treat Regulation E activity statements as count.) part 707 periodic statements, the Regulation ii. If the change is initiated by the mem- E statement must meet all part 707 require- ber, the account opening disclosure requirements. ments of § 707.4(b) apply. (If the notice re- 3. Combined statements. Credit unions may quired by this paragraph has been provided, provide certain information about an ac- credit unions may give new account disclo- count (such as a money market share ac- sures or disclosures that reflect the new count or regular share account) on the peri- term.) odic statement for another account (such as 6. Example. If a member receives a notice a share draft account) without triggering the prior to maturity on a one-year term share disclosures required by this section, as long account and requests a rollover to a six- as: month account, the credit union must pro- i. The information is limited to informa- vide either account opening disclosures in- tion such as the account number, the type of cluding the new maturity date or, if all other account, balance information, terms previously disclosed in the pre- accountholders’ names, and social security maturity notice remain the same, only the or tax identification number; and new maturity date. ii. The credit union also provides members a periodic statement complying with this (b)(1) Maturities of Longer Than One Year section for the account (the money market 1. Highlighting changed terms. Credit unions share account or regular share account, in need not highlight terms that have changed the example).

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4. Other information. Additional informa- earned) figure. Alternatively, a credit union tion that may be given on or with a periodic may disclose three dividends earned and statement, includes: three annual percentage yield earned figures, i. Dividend rates and corresponding peri- one of each month in the quarter, as long as odic rates to the dividend rate applied to bal- the credit union states the number of days ances during the statement period. (or beginning and ending date) in each divi- ii. The dollar amount of dividends earned dend period if it varies from the statement year-to-date. period. iii. Bonuses paid (or any de minimis consid- 8. Additional voluntary disclosures. For cred- eration of $10 or less). it unions not disclosing the annual percent- iv. Fees for other products, such as safe de- age yield earned and dividends earned on all posit boxes. periodic statements, credit unions may place v. Accounts not covered by the periodic a notice on statements without dividends statement disclosure requirements (passbook and annual percentage yield earned figures, and term share accounts) may disclose any that the annual percentage yield earned and information on the statement related to dollar amount of dividends earned will ap- such accounts, so long as such information is pear on the first statement at the close of accurate and not misleading. the dividend (or average daily balance) pe- 5. When statement and crediting periods vary. riod, or similar wording. Credit unions may This rule permits credit unions, on dividend- also choose to include a telephone number to bearing share accounts, to report the annual call for interim information, if desired by a percentage yield earned and the amount of member. dividends earned on a statement other than on each periodic statement when the divi- (b) Statement Disclosures dend period does not agree with, varies from, or is different than, the statement period. (b)(1) Annual Percentage Yield Earned For dividend-bearing share accounts, credit 1. Ledger and collected balances. Credit unions may disclose the required informa- unions that accrue interest using the col- tion either upon each periodic statement, or lected balance method may use either the on the statement on which dividends are ac- ledger or collected balance methods to deter- tually earned (credited or posted) to the mine the balance used to determine the an- member’s account. In addition, for accounts nual percentage yield earned. Ledger balance using the average daily balance method of means the record of the balance in a mem- calculating dividends, when the average ber’s account, as per the credit union’s daily balance period and the statement peri- records. (The ledger balance may reflect ad- ods do not agree, vary or are different, credit ditions and deposits for which the credit unions may also report annual percentage union has not yet received final payment). yield earned and the dollar amount of divi- Collected balance means the record of bal- dends earned on the periodic statement on ance in a member’s account reflecting col- which the dividends or interest is earned. lected funds, that is, cash or checks depos- For example, if a credit union has quarterly ited in the credit union which have been pre- dividend periods, or uses a quarterly average sented for payment and for which payment daily balance on an account, the first two has actually been received. (See Regulation monthly statements may not state annual CC, 12 CFR 229.14). percentage yield earned and dividends earned figures; the third ‘‘monthly’’ statement will (b)(2) Amount of Dividends or Interest reflect the dividends earned and the annual 1. Definition of earned. The term ‘‘earned’’ percentage yield earned for the entire quar- is defined to include dividends and interest ter. The fees imposed disclosure must be either ‘‘accrued’’ or ‘‘paid and credited.’’ given on the periodic statement on which Credit unions may use either the ‘‘ledger’’ or they are imposed. the ‘‘collected’’ balance for either option. 6. Length of the period. Credit unions must (See 707.6(b)(1)1. and 707.7(c)2. of this appen- disclose the length of both the dividend pe- dix.) riod (or average daily balance calculation pe- 2. Accrued interest. Credit unions must state riod) and the statement period. For example, the amount of interest that accrued during a statement could disclose a statement pe- the statement period, even if it was not cred- riod of April 16 through May 15 and further ited. state that ‘‘the dividends earned and the an- 3. Terminology. In disclosing dividends nual percentage yield earned are based on earned for the period, credit unions must use your dividend period (or average daily bal- the term ‘‘dividends’’ or terminology such ance) for the period April 1 through April as: ‘‘Dividends paid,’’ to describe dividends 30.’’ that have been credited; ‘‘Dividends ac- 7. Dividend period more frequent than state- crued,’’ to indicate that dividends are not ment period. Credit unions that calculate yet credited. dividends on a monthly basis, but send state- 4. Closed accounts. If a member closes an ments on a quarterly basis, may disclose a account between crediting periods and for- single dividend (and annual percentage yield feits accrued dividends, the credit union may

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not show any figures for ‘‘dividends earned’’ (b)(4) Length of Period or annual percentage yield earned for the pe- 1. General. Credit unions providing the be- riod (other than zero, at the credit union’s ginning and ending dates of the period must option). make clear whether both dates are included 5. Extraordinary dividends. Extraordinary in the period. For example, stating ‘‘April 1 dividends are not a component of the annual through April 30’’ would clearly indicate percentage yield earned or the dividend rate, that both April 1 and April 30 are included in but are an addition to the member’s account. the period. The dollar amount of the extraordinary divi- 2. Opening or closing an account mid-cycle. If dends paid, denoted as a separate, identified an account is opened or closed during the pe- figure, must be disclosed on the periodic riod for which a statement is sent, credit statement on which the extraordinary divi- unions must calculate the annual percentage dends are earned. A credit union may also yield earned based on account balances for disclose information regarding the calcula- each day the account was open. tion of the extraordinary dividends, and additional annual percentage yield earned and Section 707.7—Payment of Dividends dividend rate figures taking into account the extraordinary dividend, so long as such in- (a) Permissible Methods formation is accurate and not misleading. 1. Prohibited calculation methods. Calcula- tion methods that do not comply with the (b)(3) Fees Imposed requirement to pay dividends on the full 1. General. Periodic statements must state amount of principal in the account each day fees disclosed under § 707.4(b) that were deb- include: ited to the account during the statement pe- i. The ‘‘rollback’’ method, also known as riod, even if assessed for an earlier period. the ‘‘grace period’’ or ‘‘in by the 10th’’ meth- 2. Itemizing fees by type. In itemizing fees od, where credit unions pay dividends on the imposed more than once in the period, credit lowest balance in the account for the period. unions may group fees if they are the same ii. The ‘‘increments of par value’’ method, type. See § 707.11(a)(1) of this part regarding where credit unions only pay dividends on certain fees that must be grouped when a full shares in an account, e.g., a credit union credit union promotes the payment of over- with $5 par value shares pays dividends on drafts. When fees of the same type are $20 of a $24 account balance. grouped together, the description must make iii. The ‘‘ending balance’’ method, where clear that the dollar figure represents more credit unions pay dividends on the balance in than a single fee, for example, ‘‘total fees for the account at the end of the period. checks written this period.’’ Examples of fees iv. The ‘‘investable balance’’ method, that may not be grouped together are— where credit unions pay dividends on a per- i. Monthly maintenance and excess-activ- centage of the balance, excluding an amount ity fees. credit unions set aside for reserve require- ii. ‘‘Transfer’’ fees, if different dollar ments. amounts are imposed, such as $.50 for depos- v. The ‘‘low balance’’ method, where credit its and $1.00 for withdrawals. unions pay dividends on the lowest balance in the account for any day in that period. iii. Fees for electronic fund transfers and fees for other services, such as balance-in- 2. Use of 365-day basis. Credit unions may apply a daily periodic rate that is greater quiry or maintenance fees. than 1⁄365 of the dividend rate—such as 1⁄360 of iv. Fees for paying overdrafts and fees for the dividend rate—as long as it is applied 365 returning checks or other items unpaid. days a year. 3. Identifying fees. Statement details must 3. Periodic dividend payments. A credit enable the member to identify the specific union can pay dividends each day on the ac- fee. For example: count and still make uniform dividend pay- i. Credit unions may use a code to identify ments. For example, for a one-year term a particular fee if the code is explained on share account, a credit union could make the periodic statement or in documents ac- monthly dividend payments that are equal companying the statement. to 1⁄12 of the amount of dividends that will be ii. Credit unions using debit slips may dis- earned for a 365-day period (or 11 uniform close the date the fee was debited on the monthly payments—each equal to roughly periodic statement and show the amount and 1⁄12 of the total amount of dividends—and one type of fee on the dated debit slip. payment that accounts to the remainder of 4. Relation to Regulation E. Disclosure of the total amount of dividends earned for the fees in compliance with Regulation E com- period). plies with this section for fees related to 4. Leap year. Credit unions may apply a electronic fund transfers (for example, total- daily rate of 1⁄366 or 1⁄365 of the dividend rate ing all electronic funds transfer fees in a sin- for 366 days in a leap year, if the account will gle figure). earn dividends for February 29.

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5. Maturity of term share accounts. Credit minimum to earn dividends has been met. unions are not required to pay dividends Credit unions may have a par value of a after term share accounts mature. Examples share that is different from the minimum include: balance requirement to earn dividends. (See i. During any grace period offered by a commentary to § 707.4(b)(3)(i)). credit union for an automatically renewable 2. Daily balance accounts. Credit unions term share account, if the member decides that require a minimum balance to earn during that period not to renew the account. dividends may choose not to pay dividends ii. Following the maturity of nonrollover for days when the balance drops below the term share accounts. required minimum balance if they use the iii. When the maturity date falls on a holi- daily balance method to calculate dividends. day, and the member must wait until the For example, a credit union could set a min- next business day to obtain the funds. imum daily balance level of $200 and pay 6. Dormant accounts. Credit unions must dividends only those days the $200 daily bal- pay dividends on funds in an account, even if ance is maintained. inactivity or the infrequency of transactions 3. Average daily balance accounts. Credit would permit the credit union to consider unions that require a minimum balance to the account to be ‘‘inactive’’ or ‘‘dormant’’ earn dividends may choose not to pay divi- (or similar status) as defined by state or dends for the average daily balance calcula- other law or the account contract. tion period in which the average daily bal- 7. Credit unions are not Insufficient funds. ance drops below the required minimum, if required to pay dividends on checks or share they use the average daily balance method drafts deposited to a member’s account that to calculate dividends. For example, a credit are returned for insufficient funds. If a credit union could set a minimum average daily union accrues dividends on a check that it balance level of $200 and pay dividends only later determines is not good, it may deduct if the $200 average daily balance is met for from the accrued dividends any dividends at- the calculation period. tributed to the proceeds of the returned check. If dividends have already been cred- 4. Beneficial method. Credit unions may not ited before the credit union determines the require members to maintain both a min- item has insufficient funds, the credit union imum daily balance and a minimum average may deduct the amount of the check and as- daily balance to earn dividends, such as by sociated dividends from the account balance. requiring the member to maintain a $500 The amount deducted will not be reflected in daily balance and a prescribed average daily the dividend amount and annual percentage balance (whether higher or lower). But a yield earned reported for the next period. credit union could offer a minimum balance 8. Account drawn below par value of a share. to earn dividends that includes an additional If a member draws his or her account below method that is ‘‘unequivocally beneficial’’ to the par value of a share, dividends would the member such as the following: continue to accrue on the account so long as i. A credit union using the daily balance any minimum balance requirement is met. method to calculate dividends and requiring However, under the NCUA Standard FCU By- a $500 minimum daily balance could choose laws, if a member who reduces his or her to pay dividends on the account (for those share balance below the value of a par value days the minimum balance is not met) as share and does not increase the balance long as the member maintained an average within at least six months, the credit union daily balance throughout the month of $400. may terminate the member’s membership. ii. A credit union using the average daily State-chartered credit unions may have balance method to calculate dividends and similar termination provisions. requiring a $400 minimum average daily balance could choose to pay dividends on the ac- (a)(2) Determination of Minimum Balance To count as long as the member maintained a Earn Dividends daily balance of $500 for at least half of the 1. General. Credit unions may set minimum days in the period. balance requirements that must be met in iii. A credit union using either the daily order to earn dividends. However, credit balance method or average daily balance unions must use the same method to deter- method to calculate dividends that requires: mine a minimum balance required to earn (A) a $500 daily balance; or (B) a $400 average dividends as they use to determine the bal- daily balance to pay dividends on the ac- ance upon which dividends will accrue and count. pay. For example, a credit union that cal- 5. Paying on full balance. Credit unions culates dividends on the daily balance meth- must pay dividends on the full balance in the od must use the daily balance method to de- account that meets the required minimum termine if the minimum balance to earn balance. For example, if $300 is the minimum dividends has been met. Similarly, a credit daily balance required to earn dividends, and union that calculates dividends on the aver- a member deposits $500, the credit union age daily balance method must use the aver- must pay the stated dividend rate on the full age daily balance method to determine if the $500 and not just on the $200.

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6. Negative balances prohibited. Credit (c) Date Dividends Begin To Accrue unions must treat a negative account bal- 1. Relation to Regulation CC. Credit unions ance as zero to determine: may rely on the Expedited Funds Avail- i. The daily or average daily balance on ability Act (EFAA) and Regulation CC (12 which dividends will be paid. CFR part 229) to determine, for example, ii. Whether any minimum balance to earn when a deposit is considered made for pur- dividends is met. (See commentary to appen- poses of dividend accrual, or when dividends dix A, Part II, which prohibits credit unions need not be paid on funds because a depos- from using negative balances in calculating ited check is later returned unpaid. the dividends figure for the annual percent- 2. Ledger and collected balances. Credit age yield earned.) unions may calculate dividends by using a 7. Club accounts. Credit unions offering club ‘‘ledger’’ balance or ‘‘collected’’ balance accounts (such as a ‘‘holiday’’ or ‘‘vacation’’ method, as long as the crediting require- club accounts) cannot impose a minimum ments of the EFAA are met (12 CFR 229.14). balance requirement for dividends based on 3. Withdrawal of principal. Credit unions the total number or dollar amount of pay- must accrue dividends on funds until the ments required under the club plan. For ex- funds are withdrawn from the account. For ample, if a plan calls for $10 weekly pay- example, if a check is debited to an account ments for 50 weeks, the credit union cannot on a Tuesday, the credit union must accrue set a $500 minimum balance and then pay dividends on those funds through Monday. only if the member makes all 50 payments. Section 707.8—Advertising 8. Minimum balances not affecting dividends. Credit unions may use the daily balance, av- (a) Misleading or Inaccurate Advertisements erage daily balance, or other computation 1. General. All advertisements are subject method to calculate minimum balance re- to the rule against misleading or inaccurate quirements not involving the payment of advertisements, even though the disclosure dividends—such as to compute minimum bal- applicable to various media differ. The word ances for assessing fees. ‘‘profit’’ may be used when referring to divi- (b) Compounding and Crediting Policies dend-bearing share accounts, as it reflects the nature of dividends. The word ‘‘profit’’ 1. General. Credit unions choosing to com- may not be used when referring to interest- pound dividends may compound or credit bearing deposit accounts. dividends annually, semi-annually, quar- 2. Indoor signs. An indoor sign advertising terly, monthly, daily, continuously, or on an annual percentage yield is not misleading any other basis. or inaccurate if: 2. Withdrawals prior to crediting date. If i. For a tiered-rate account, it also pro- members withdraw funds (without closing vides the upper and lower dollar amounts of the account), prior to a scheduled crediting the tier corresponding to the advertised an- date, credit unions may delay paying the ac- nual percentage yield. crued dividends on the withdrawn amount ii. For a term share account, it also pro- until the scheduled crediting date, but may vides the term required to obtain the adver- not avoid paying dividends. tised annual percentage yield. 3. ‘‘Free’’ or ‘‘no cost’’ accounts. For pur- 3. Closed accounts. Subject to state or other poses of determining whether an account can law, a credit union may choose not to pay be advertised as ‘‘free’’ or ‘‘no cost,’’ mainte- accrued dividends if members close an ac- nance and activity fees include: count prior to the date accrued dividends are i. Any fee imposed if a minimum balance credited, as long as the credit union has dis- requirement is not met, or if the member ex- closed that fact. If accrued dividends are ceeds a specified number of transactions. paid, accrued dividends must be paid on ii. Transaction and service fees that mem- funds up until the account is closed or the bers reasonably expect to be imposed on an account is deemed closed. For example, if an account on a regular basis (see comments account is closed on a Tuesday, accrued divi- 4(b)(4)–1 and 2). dends on the funds through Monday would be iii. A flat fee, such as a monthly service paid. Whether (and the conditions under fee. which) credit unions are permitted to deem iv. Fees imposed to deposit, withdraw or an account closed by a member is deter- transfer funds, including per-check or per- mined by state or other law, if any. Credit transaction charges (for example, $.25 for unions are cautioned that bylaw require- each withdrawal, whether by check, in per- ments may prevent a credit union from son). deeming a member’s account closed until 4. Other fees. Examples of fees that are not certain time periods are extinguished. (See maintenance or activity fees include: NCUA Standard FCU Bylaws, Art. III, § 3. i. Fees that are not required to be disclosed Such bylaw requirements may not be over- under § 707.4(b)(4). ridden without proper agency approval.) ii. Check printing fees of any type.

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iii. Fees for obtaining copies of checks, transactions that overdraw an account, with whether or not the original checks have been or without a specified dollar limit, when the truncated or returned to the member peri- credit union retains discretion at any time odically. not to honor checks or authorize trans- iv. Balance inquiry fees. actions. v. Fees assessed against a dormant ac- iii. Representing that members with an count. overdrawn account can maintain a negative vi. Fees for using an ATM. balance when the terms of the account’s vii. Fees for electronic transfer services overdraft service require members promptly that are not required to obtain an account, to return the share account to a positive bal- such as preauthorized transfers or home elec- ance. tronic credit union services. iv. Describing a credit union’s overdraft viii. Stop payment fees and fees for share service solely as protection against bounced drafts or checks returned unpaid. checks when the credit union also permits 5. Similar terms. An advertisement may not overdrafts for a fee for overdrawing their ac- use a term such as ‘‘fees waived’’ if a mainte- counts by other means, such as ATM with- nance or activity fee may be imposed be- drawals, debit card transactions, or other cause it is similar to the terms ‘‘free’’ or ‘‘no electronic fund transfers. cost.’’ v. Advertising an account-related service 6. Specific account services. Credit unions for which the credit union charges a fee in an may advertise a specific account service or advertisement that also uses the word ‘‘free’’ feature as free as long as no fee is imposed or ‘‘no cost’’ or a similar term to describe for that service or feature. For example, the account, unless the advertisement clear- credit unions offering an account that is free ly and conspicuously indicates that there is of deposit or withdrawal fees could advertise a cost associated with the service. If the fee that fact, as long as the advertisement does is a maintenance or activity fee under not mislead members by implying that the § 707.8(a)(2) of this part, however, an adver- account is free and that no other fee (a tisement may not describe the account as monthly service fee, for example) may be ‘‘free’’ or ‘‘no cost’’ or contain a similar charged. term even if the fee is disclosed in the adver- 7. Free for limited time. If an account (or a tisement. specific account service) is free only for a 11. Additional disclosures in connection with limited period of time—for example, for one the payment of overdrafts. The rule in year following the account opening—the ac- § 707.3(a), providing that disclosures required count (or service) may be advertised as free by § 707.8 may be provided to the member in as long as the time period is stated. electronic form without regard to E–Sign 8. Conditions not related to share accounts. Act requirements, applies to the disclosures Credit unions may advertise accounts as described in § 707.11(b), which are incor- ‘‘free’’ for members that meet conditions not porated by reference in § 707.8(f). related to share accounts, such as the member’s age. For example, credit unions may (b) Permissible Rates advertise a share draft account as ‘‘free for 1. Tiered-rate accounts. An advertisement persons over 65 years old,’’ even though a for a tiered-rate account that states an an- maintenance or activity fee may be assessed nual percentage yield must also state the an- on accounts held by members that are 65 or nual percentage yield for each tier, along younger. with corresponding minimum balance re- 9. Electronic advertising. If an electronic ad- quirements. Any dividend rates stated must vertisement, such as an advertisement ap- appear in conjunction with the annual per- pearing on an internet Web site, displays a centage yields for each tier. triggering term, such as a bonus or annual 2. Stepped-rate accounts. An advertisement percentage yield, the advertisement must that states a dividend rate for a stepped-rate clearly refer the member to the location account must state all the dividend rates where the additional required information and the time period that each rate is in ef- begins. For example, an advertisement that fect. includes a bonus or annual percentage yield 3. Representative examples. An advertise- may be accompanied by a link that directly ment that states an annual percentage yield takes the member to the additional informa- for a type of account (such as a term share tion. account for a specified term) need not state 10. Examples. Examples of advertisements the annual percentage yield applicable to that would ordinarily be misleading, inac- every variation offered by the credit union curate, or misrepresent the deposit contract or indicate that other maturity terms are are: available. In an advertisement stating that i. Representing an overdraft service as a rates for an account may vary depending on ‘‘line of credit,’’ unless the service is subject the amount of the initial deposit or the term to 12 CFR part 226 (Regulation Z). of a term share account, credit unions need ii. Representing that the credit union will not list each balance level and term offered. honor all checks or authorize payment of all Instead, the advertisement may:

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i. Provide a representative example of the (c)(6) Features of Term Share Accounts annual percentage yields offered, clearly described as such. For example, if a credit (c)(6)(i) Time Requirements union offers a $25 bonus on all term share ac- 1. Club accounts. If a club account has a counts and the annual percentage yield will maturity date, but the term may vary de- vary depending on the term selected, the pending on when the account is opened, cred- credit union may provide a disclosure of the it unions may use a phrase such as: ‘‘The ma- annual percentage yield as follows: ‘‘For ex- turity date of this club account is November ample, our 6-month share certificate cur- 15; its term varies depending on when the ac- rently pays a 3.15% annual percentage count is opened.’’ yield.’’ ii. Indicate that various rates are avail- (c)(6)(ii) Early Withdrawal Penalties able, such as by stating short-term and 1. Discretionary penalties. Credit unions im- longer-term maturities along with the appli- posing early withdrawal penalties on a case- cable annual percentage yields: ‘‘We offer by-case basis may disclose that they ‘‘may’’ share certificates with annual percentage (rather than ‘‘will’’) impose a penalty if that yields that depend on the maturity you accurately describes the account terms. choose. For example, our one-month share certificate earns a 2.75% APY. Or, earn a (d) Bonuses 5.25% APY for a three-year share certifi- 1. General reference to ‘‘bonus.’’ General cate.’’ statements such as ‘‘bonus checking’’ or (c) When Additional Disclosures are Required ‘‘get a bonus when you open a checking account’’ do not trigger the bonus disclosures. 1. Trigger terms. The following are examples of information stated in advertisements that (e) Exemption for Certain Advertisements are not ‘‘trigger’’ terms: (e)(1) Certain Media i. ‘‘One, three, and five year share certificates available’’. (e)(1)(i) ii. ‘‘Bonus rates available’’. 1. Internet advertisements. The exemption iii. ‘‘1% over our current rate,’’ so long as for advertisements made through broadcast the rates are not determinable from the ad- or electronic media does not extend to adver- vertisement. tisements posted on the internet or sent by (c)(2) Time Annual Percentage Yield is Offered e-mail. 2. Internet advertisements. The exemption 1. Specified recent date. If an advertisement for advertisements made through broadcast discloses an annual percentage yield as of a or electronic media does not extend to adver- specified date, that date must be recent in tisements made by electronic communica- relation to the publication or broadcast fre- tion, such as advertisements posted on the quency of the media used. For example, the Internet or sent by e-mail. printing date of a brochure printed once for an account promotion that will be in effect (e)(1)(iii) for six months would be considered ‘‘recent,’’ 1. Tiered-rate accounts. Solicitations for even though rates change during the six- tiered-rate accounts made through telephone month period. Dividend rates published in a response machines must provide all annual daily newspaper or on television must be a percentage yields and the balance require- rate offered shortly before (or on) the date ments applicable to each tier. the rates are published or broadcast. Simi- larly, dividend rates published in a daily (e)(2) Indoor Signs newspaper or on television must be a rate reflecting either the preceding dividend period, (e)(2)(i) or a prospective rate, and the option chosen 1. General. Indoor signs include advertise- should be noted. ments displayed on computer screens, ban- 2. Reference to date of publication. An adver- ners, preprinted posters, and chalk or peg tisement may refer to the annual percentage boards. Any advertisement inside the prem- yield as being accurate as of the date of pub- ises that can be retained by a member (such lication, if the date is on the publication as a brochure or a printout from a computer) itself. For instance, an advertisement in a is not an indoor sign. periodical may state that a rate is ‘‘current through the date of this issue,’’ if the peri- (e)(3) Newsletters odical shows the date. 1. General. The partial exemption applies to all credit union newsletters, whether insti- (c)(5) Effect of Fees tuted before or after the compliance date of 1. Scope. This requirement applies only to part 707. Nor must a newsletter be of any maintenance or activity fees as described in particular circulation frequency (e.g., week- paragraph 8(a). ly, monthly, quarterly, biannually, annually,

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or irregularly) or of any certain format (e.g. Section 707.10 [Reserved] magazine, bulletin, broadside, circular, mim- eograph, letter, or pamphlet) in order to be Section 707.11—Additional Disclosures eligible for the partial advertising exemp- Regarding the Payment of Overdrafts tion. (a) Disclosure of total fees on periodic 2. Permissible Distribution. In order for news- statements letters to retain the partial advertising exemption, newsletters can be sent to existing (a)(1) General credit union members only. Any distribution 1. Examples of credit unions advertising the reasonably calculated to reach only mem- payment of overdrafts. A credit union would bers is also acceptable, such as: trigger the periodic statement disclosures if i. Mailing newsletters to existing mem- it: bers. i. Promotes the credit union’s policy or ii. Distributing newsletters at a function practice of paying some overdrafts, unless reasonably limited to members, such as an the service would be subject to 12 CFR part annual meeting or member picnic. 226 (Regulation Z), in advertisements using iii. Displaying or offering newsletters at a broadcast media, brochures, telephone solici- credit union lobby, branch, or office. tations,or electronic mail, or on Internet sites, ATM screens or receipts, billboards, 3. Impermissible Distribution. Distributing a orindoor signs. But see, § 707.11(a)(2) of this newsletter in a place open to nonmembers, part regarding communications about the such as a sponsor’s lunch room, is not rea- payment of overdrafts that would not trigger sonably calculated to reach only members, periodic statement disclosures; and such newsletter would be subject to all ii. Includes a message on a periodic state- applicable advertising rules. ment informing the member of an overdraft limit or the amount of funds available for Section 707.9—Enforcement and Record overdrafts. For example, a credit union that Retention includes a message on a periodic statement informing the member of a $500 overdraft (c) Record Retention limit or that the member has $300 remaining 1. Evidence of required actions. Credit unions on the overdraft limit, is promoting an over- comply with the regulation by dem- draft service; onstrating they have done the following: iii. Discloses an overdraft limit or includes i. Established and maintained procedures the dollar amount of an overdraft limit in a for paying dividends and providing timely balance disclosed by any means, including on disclosures as required by the regulation, an ATM receipt or on an automated system, and such as a telephone response machine, ATM screen, or the credit union’s Internet site. ii. Retained sample disclosures for each type account offered to members, such as ac- EDITORIAL NOTE: At 74 FR 36105, July 22, count-opening disclosures, copies of adver- 2009, appendix C to part 707 was amended in tisements, and change-in-term notices; and section 707.11(a)(1) by removing paragraph 2. information regarding the dividend rates and and redesignating paragraphs 3. through 8. as annual percentage yields offered. 1. through 6.; however, paragraph 1. already 2. Methods of retaining evidence. Credit exists in the 2009 volume. unions must be able to reconstruct the re- 1. Transfer services. The overdraft services quired disclosures or other actions. They covered by § 707.11(a)(1) of this part do not in- need not keep disclosures or other business clude a service providing for the transfer of records in hard copy. Records evidencing funds from another share account of the compliance may be retained on microfilm, member to permit the payment of items without creating an overdraft, even if a fee is microfiche, or by other methods that repro- charged for the transfer. duce records accurately (including computer 2. Fees for paying overdrafts. Credit unions files). Credit unions must retain copies of all must disclose on periodic statements a total printed advertisements and the text of all dollar amount for all fees or charges imposed advertisements conveyed by electronic or on the account for paying overdrafts. The broadcast media, and newsletters. credit union must disclose separate totals 3. Payment of dividends. Credit unions must for the statement period and for the calendar retain sufficient rate and balance informa- year-to-date. The total dollar amount in- tion to permit the verification of dividends cludes per-item fees as well as interest paid on an account, including the payment of charges, daily or other periodic fees, or fees dividends on the full principal balance. charged for maintaining an account in overdraft status, whether the overdraft is by check or by other means. It also includes fees charged when there are insufficient funds because previously deposited funds are

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subject to a hold or are uncollected. It does (a)(3) Time period covered by disclosures not include fees for transferring funds from 1. Periodic statement disclosures. The disclo- another member account to avoid an over- sures under § 707.11(a) must be included on draft, or fees charged under a service subject periodic statements provided by a credit to part 226 of this title (Regulation Z). union starting with the first statement pe- 3. Fees for returning items unpaid. The total riod that begins after January 1, 2010. For ex- dollar amount for all fees for returning items ample, if a member’s statement period typi- unpaid must include all fees charged to the cally closes on the 15th of each month, a account for dishonoring or returning checks credit union must provide the disclosures re- or other items drawn on the account. The quired by § 707.11(a)(1) on subsequent periodic credit union must disclose separate totals statements for that member beginning with for the statement period and for the calendar the statement reflecting the period from year-to-date. Fees imposed when deposited January 16, 2010 to February 15, 2010. items are returned are not included. Credit unions may use terminology such as ‘‘re- (a)(5) Acquired accounts turned item fee’’ or ‘‘NSF fee’’ to describe (b) Advertising disclosures in connection with fees for returning items unpaid. overdraft services 4. Waived fees. In some cases, a credit union may provide a statement for the current pe- 1. Examples of credit unions promoting the riod reflecting that fees imposed during a payment of overdrafts. A credit union must in- previous period were waived and credited to clude the advertising disclosures in § 707.11(b)(1) of this part if the credit union: the account. Credit unions may, but are not i. Promotes the credit union’s policy or required to, reflect the adjustment in the practice of paying overdrafts, unless the total for the calendar year-to-date and in the service would be subject to 12 CFR part 226 applicable statement period. For example, if (Regulation Z). This includes advertisements a credit union assesses a fee in January and using print media such as newspapers or bro- refunds the fee in February, the credit union chures, telephone solicitations, electronic could disclose a year-to-date total reflecting mail, or messages posted on an Internet site. the amount credited, but it should not affect But see, § 707.11(b)(2) of this part for commu- the total disclosed for the February state- nications that are not subject to the addi- ment period, because the fee was not as- tional advertising disclosures; sessed in the February statement period. If a ii. Includes a message on a periodic state- credit union assesses and then waives and ment informing the member of an overdraft credits a fee within the same cycle, the cred- limit or the amount of funds available for it union may, at its option, reflect the ad- overdrafts. For example, a credit union that justment in the total disclosed for fees im- includes a message on a periodic statement posed during the current statement period informing the member of a $500 overdraft and for the total for the calendar year-to- limit or that the member has $300 remaining date. Thus, if the credit union assesses and on the overdraft limit, is promoting an over- waives the fee in the February statement pe- draft service. riod, the February fee total could reflect a iii. Discloses an overdraft limit or includes total net of the waived fee. the dollar amount of an overdraft limit in a 5. Totals for the calendar year to date. Some balance disclosed on an automated system, credit unions’ statement periods do not coin- such as a telephone response machine, ATM cide with the calendar month. In such cases, screen, or the credit union’s Internet site. the credit union may disclose a calendar See, however, § 707.11(b)(3) of this part. 2. Transfer services. The overdraft services year-to-date total by aggregating fees for 12 covered by § 707.11(b)(1) of this part do not in- monthly cycles, starting with the period clude a service providing for the transfer of that begins during January and finishing funds from another share account of the with the period that begins during Decem- member to permit the payment of items ber. For example, if statement periods begin without creating an overdraft, even if a fee is on the 10th day of each month, the state- charged for the transfer. ment covering December 10, 2006 through 3. Electronic media. The exception for adver- January 9, 2007 may disclose the year-to-date tisements made through broadcast or elec- total for fees imposed from January 10, 2006 tronic media, such as television or radio, through January 9, 2007. Alternatively, the does not apply to advertisements posted on a credit union could provide a statement for credit union’s Internet site, on an ATM the cycle ending January 9, 2007, showing the screen, provided on telephone response ma- year-to-date total for fees imposed January chines, or sent by electronic mail. 1, 2006 through December 31, 2006. 4. Fees. The fees that must be disclosed 6. Itemization of fees. A credit union may under § 707.11(b)(1) of this part include per- itemize each fee in addition to providing the item fees as well as interest charges, daily or disclosures required by § 707.11(a)(1) of this other periodic fees, and fees charged for part. maintaining an account in overdraft status,

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whether the overdraft is by check or by title (Regulation CC). In addition, the bal- other means. The fees also include fees ance may, but need not, include funds that charged when there are insufficient funds be- are held by the credit union to satisfy a prior cause previously deposited funds are subject obligation of the member, for example, to to a hold or are uncollected. The fees do not cover a hold for an ATM or debit card trans- include fees for transferring funds from an- action that has been authorized but for other account to avoid an overdraft or fees which the credit union has not settled. charged when the credit union has pre- 2. Additional balance. The credit union may viously agreed in writing to pay items that disclose additional balances supplemented by overdraw the account and the service is sub- funds that may be provided by the credit ject to 12 CFR part 226 (Regulation Z). union to cover an overdraft, whether pursu- 5. Categories of transactions. An exhaustive ant to a discretionary overdraft service, a list of transactions is not required. Dis- service subject to part 226 of this title (Regu- closing that a fee may be imposed for cov- lation Z), or a service that transfers funds ering overdrafts created by check, in-person from another account held individually or withdrawal, ATM withdrawal, or other elec- jointly by the member, so long as the credit tronic means would satisfy the requirements union prominently states that any addi- of § 707.11(b)(1)(ii) of this part where the fee tional balance includes these additional may be imposed in these circumstances. See overdraft amounts. The credit union may comment 4(b)(4)-5 of this part. not simply state, for instance, that the sec- 6. Time period to repay. If a credit union re- ond balance is the member’s ‘‘available bal- serves the right to require a member to pay ance,’’ or contains ‘‘available funds.’’ Rath- an overdraft immediately or on demand iner, the credit union should provide enough stead of affording members a specific time information to convey that the second bal- period to establish a positive balance in the ance includes these amounts. For example, account, a credit union may comply with the credit union may state that the balance § 707.11(b)(1)(iii) of this part by disclosing includes ‘‘overdraft funds.’’ Where a member this fact. has opted out of the credit union’s discre- 7. Circumstances for nonpayment. A credit tionary overdraft service, any additional bal- union must describe the circumstances under ance disclosed should not include funds cred- which it will not pay an overdraft. It is suffi- it unions provide under that service. Where a cient to state, as applicable: ‘‘Whether your member has opted out of the credit union’s overdrafts will be paid is discretionary and discretionary overdraft service for some, but we reserve the right not to pay. For example, not all transactions, e.g., the member has we typically do not pay overdrafts if your ac- opted out of overdraft services for ATM and count is not in good standing, or you are not debit card transactions, a credit union that making regular deposits, or you have too includes funds from its discretionary over- many overdrafts.’’ draft service in the balance should convey 8. Advertising an account as ‘‘free.’’ If the that the overdraft funds are not available for advertised account-related service is an all transactions. For example, the credit overdraft service subject to the requirements union could state that overdraft funds are of § 707.11(b)(1) of this part, credit unions not available for ATM and debit card trans- must disclose the fee or fees for the payment actions. of each overdraft, not merely that a cost is 3. Automated systems. The balance disclo- associated with the overdraft service, as well sure requirement in § 707.11(c) applies to any as other required information. Compliance automated system through which the mem- with comment 8(a)—10.v is not sufficient. ber requests a balance, including, but not limited to, a telephone response system, the (c) Disclosure of account balances credit union’s Internet site, or an ATM. The 1. Balance that does not include additional requirement applies whether the credit amounts. For purposes of the balance disclo- union discloses a balance through an ATM sure requirement in § 707.11(c), if a credit owned or operated by the credit union or union discloses balance information to a through an ATM not owned or operated by member through an automated system, it the credit union, including an ATM operated must disclose a balance that excludes any by an entity that is not a financial institu- funds the credit union may provide to cover tion. If the balance is obtained at an ATM, an overdraft pursuant to a discretionary the requirement also applies whether the overdraft service that will be paid by the balance is disclosed on the ATM screen or on credit union under a service subject to part a paper receipt. 226 of this title (Regulation Z) or that will be transferred from another account held indi- Appendix A to Part 707—Annual Percentage vidually or jointly by a member. The balance Yield Calculation may, but need not, include funds that are de- Part I. Annual Percentage Yield for Account posited in the member’s account, such as Disclosures and Advertising Purposes from a check, that are not yet made available for withdrawal in accordance with the 1. Rounding for calculations. The following funds availability rules under part 229 of the are examples of permissible rounding rules

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for calculating dividends and the annual per- may not be increased each day to reflect the centage yield: effect of daily compounding. Assume a credit i. The daily rate applied to a balance car- union will pay $13.70 in dividends on $100,000 ried to five or more decimals. For example; for the first day, $6.85 in dividends on .008219178%, 3.00% for a 365 day year, would $50,013.70 for the second day, and $3.43 in divi- be rounded to no less than .00822%. dends on $25,020.55 for the third day. The sum ii. The daily dividends or interest earned of each days balance is $175,000 (does not in- carried to five or more decimals. For exam- clude accrued, but uncredited, dividends ple; $.08219178082, daily dividends on $1,000 at amounts $13.70, $6.85, and $3.43), thereby re- 3% for a 365 day year, would be rounded to no sulting in an average daily balance for the less than $.08219. three days of $58,333.33. 2. Exponents in a leap year. The annual per- ii. Must be included in the balance for suc- centage yield formula’s exponent numerator ceeding statements if a statement is issued will remain 365 in leap years. The ‘‘days in more frequently than compounded dividends term’’ figure used in the denominator should is credited on an account. For example, if be consistent with the length of term used in monthly statements are sent for an account the dividends calculation. that compounds dividends daily and credits 3. First tier of a tiered-rate account. When dividends quarterly, the balance for the sec- credit unions use a rate table, the first tier ond monthly statement would include divi- of a tiered rate account is to be disclosed and dends that had accrued for the prior month. advertised; ‘‘Up to but not exceeding * * * ’’, Assume a credit union will pay $411.78 in ‘‘$.01 to * * * ’’, or similar language. dividends on 30 days of $100,000, $427.28 in 4. Term Share Accounts Opened in Midterm. dividends on 31 days of $100,411.78, and $415.23 For club accounts that meet the definition of in dividends on 30 days of $100,839.06. The bal- a term share account, the annual percentage ance (average daily balance in the account yield is based on the maximum number of for the period) for the second 31 days is days in the term not to exceed 365 days (or $100,411.78. 366 days in a leap year). 2. Rounding. The dividends earned figure used to calculate the annual percentage Part II. Annual Percentage Yield Earned for yield earned must be rounded to two deci- Periodic Statements mals to reflect the amount actually paid. 1. Balance method. The dividend or interest For example, if the dividends earned for a figure used in the calculation of the annual statement period is $20.074 and the credit percentage yield earned may be derived from union pays the member $20.07, the credit the daily balance method or the average union must use $20.07 (not $20.074) to cal- daily balance method. Regardless of the divi- culate the annual percentage yield earned. dend calculation method, the balance used in For accounts that pay dividends based on the the annual percentage yield earned formula daily balance method, compound and credit is the average daily balance. The average dividends or interest quarterly, and send daily balance calculation is the sum of the monthly statements, the credit union may, balances for each day in the period divided but need not, round accrued dividends to two by the number of days in the period. The bal- decimals for calculating the ‘‘projected’’ or ance for each day is based on a point in time; ‘‘anticipated’’ annual percentage yield i.e. beginning of day balance, end of day bal- earned on the first two monthly statements ance, closing of day balance, etc. Each day’s issued during the quarter. However, on the balance, for dividend accrual and payment quarterly statement the dividends earned purposes, must be based on the same point in figure must reflect the amount actually time and cannot be based on the day’s low paid. balance. 3. Compounding frequency using the average 2. Negative balances prohibited. Credit daily balance method. Any compounding fre- unions must treat a negative account bal- quency, including daily compounding, can be ance as zero to determine the balance on used when calculating dividends using the which the annual percentage yield earned is average daily balance method. (See comment calculated. (See commentary to § 707.7(a)(2).) 707.7(b), which does not require credit unions to compound or credit dividends at any par- A. General Formula ticular frequency). 1. Accrued but uncredited dividends. To cal- B. Special Formula for Use Where Periodic culate the annual percentage yield earned, Statement is Sent More Often Than the Period accrued but uncredited dividends: for Which Dividends are Compounded i. May not be included in the balance for statements that are issued at the same time 1. Statements triggered by Regulation E. Cred- or less frequently than the account’s it unions may, but need not, use this formula compounding and crediting frequency. For to calculate the annual percentage yield example, if monthly statements are sent for earned for accounts that receive quarterly an account that compounds dividends daily statements and that are subject to Regula- and credits dividends monthly, the balance tion E’s rule calling for monthly statements

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when an electronic fund transfer has oc- the model clauses. They illustrate various curred. They may do so even though no ways of adapting the model clauses to spe- monthly statement was issued during a specific accounts. The clauses shown relate only cific quarter. This formula must be used for to the specific transactions described. accounts that compound and credit dividends quarterly and that receive monthly state- [59 FR 59899, Nov. 21, 1994, as amended at 60 ments, triggered by Regulation E, which FR 21699, May 3, 1995; 61 FR 68129, Dec. 27, comply with the provisions of § 707.6. 1996; 63 FR 71575, Dec. 29, 1998; 66 FR 33163, 2. Days in compounding period. Credit June 21, 2001; 70 FR 72899, Dec. 8, 2005; 72 FR unions using the special annual percentage 30246, May 31, 2007; 74 FR 36105, July 22, 2009] yield earned formula must use the actual number of days in the compounding period. PART 708a—CONVERSION OF IN- Appendix B to Part 707—Model Clauses and SURED CREDIT UNIONS TO MU- Sample Forms TUAL SAVINGS BANKS 1. Modifications. Credit unions that modify the model clauses will be deemed in compli- Sec. ance as long as they do not delete informa- 708a.1 Definitions. tion required by TISA or regulation or rear- 708a.2 Authority to convert. range the format so as to affect the sub- 708a.3 Board of directors’ approval and stance or clarity of the disclosures. members’ opportunity to comment. 2. Format. Credit unions may use inserts to 708a.4 Disclosures and communications to a document (see Sample Form B–11) or fill-in members. blanks (see Sample Forms B–4 and B–5, 708a.5 Notice to NCUA. which use double underlining to indicate 708a.6 Membership approval of a proposal to terms that have been filled in) to show cur- convert. rent rates, fees or other terms. 708a.7 Certification of vote on conversion 3. Disclosures for opening accounts. The sam- proposal. ple forms illustrate the information that 708a.8 NCUA oversight of methods and pro- must be provided to a member when an ac- cedures of membership vote. count is opened, as required by § 707.4(a)(1). 708a.9 Other regulatory oversight of meth- (See § 707.4(a)(2), which states the require- ods and procedures of membership vote. ments for disclosing the annual percentage 708a.10 Completion of conversion. yield, the dividend rate, and the maturity of 708a.11 Limit on compensation of officials. a term share account in responding to a 708a.12 Voting incentives. member’s request.) 708a.13 Voting guidelines. 4. Compliance with Regulation E. Credit unions may satisfy certain requirements AUTHORITY: 12 U.S.C. 1766, 12 U.S.C. 1785(b). under Part 707 with disclosures that meet SOURCE: 71 FR 77167, Dec 22, 2006, unless the requirements of Regulation E. (See otherwise noted. § 707.3(c).) The model clauses and sample forms do not give examples of disclosures that would be covered by both this regula- § 708a.1 Definitions. tion and Regulation E (such as disclosing the As used in this part: amount of a fee for ATM usage). Credit Clear and conspicuous means text in unions should consult appendix A to Regula- bold type in a font size at least one size tion E for appropriate model clauses. 5. Duplicate disclosures. If a requirement larger than any other text used in the such as a minimum balance applies to more document (exclusive of headings), but than one account term (to obtain a bonus in no event smaller than 12 point. and determine the annual percentage yield, Credit union has the same meaning as for example), credit unions need not repeat insured credit union in section 101 of the requirement for each term, as long as it the Federal Credit Union Act. is clear which terms the requirement applies Federal banking agencies have the to. 6. Guide to model clauses. In the model same meaning as in section 3 of the clauses, italicized words indicate the type of Federal Deposit Insurance Act. disclosure a credit union should insert in the Mutual savings bank and savings asso- space provided (for example, a credit union ciation have the same meaning as in might insert ‘‘March 25, 1995’’ in the blank section 3 of the Federal Deposit Insur- for ‘‘(date)’’ disclosure). Brackets and diago- ance Act. nals (‘‘/’’) indicate a credit union must Regional director means the director choose the alternative that describes its practice (for example, [daily balance/average of the NCUA regional office for the re- daily balance]). gion where a natural person credit 7. Sample forms. The sample forms (B–4 union’s main office is located. For cor- through B–11) serve a purpose different from porate credit unions, regional director

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means the director of NCUA’s Office of proposal to the credit union’s board of Corporate Credit Unions. directors by regular mail, electronic Senior management official means a mail, or facsimile; chief executive officer, an assistant (v) The date on which the board plans chief executive officer, a chief financial to vote on the proposal and the date by officer, and any other senior executive which members must submit their officer as defined by the appropriate comments for consideration, which federal banking agencies pursuant to may not be more than 5 days before the section 32(f) of the Federal Deposit In- board vote; surance Act. (vi) The street address, electronic mail address, and facsimile number of § 708a.2 Authority to convert. the credit union where members may A credit union, with the approval of submit comments; and its members, may convert to a mutual (vii) A statement that, in the event savings bank or a savings association the board approves the proposal to con- that is in mutual form without the vert, the proposal will be submitted to prior approval of the NCUA, subject to the membership of the credit union for applicable law governing mutual sav- a vote following a notice period that is ings banks and savings associations no shorter than 90 days. and the other requirements of this (3) The board of directors must ap- part. prove publication of the notice. § 708a.3 Board of directors’ approval (b) The credit union must collect and members’ opportunity to com- member comments and retain copies at ment. the credit union’s main office until the (a) A credit union’s board of directors conversion process is completed. must comply with the following notice (c) The board of directors may vote requirements before voting on a pro- on the conversion proposal only after posal to convert. reviewing and considering all member (1) No later than 30 days before a comments. The conversion proposal board of directors votes on a proposal may only be approved by an affirma- to convert, it must publish a notice in tive vote of a majority of board mem- a general circulation newspaper, or in bers who have determined the conver- multiple newspapers if necessary, serv- sion is in the best interests of the ing all areas where the credit union has members. If approved, the board of dian office, branch, or service center. It rectors must set a date for a vote on must also post the notice in a clear and the proposal by the members of the conspicuous fashion in the lobby of the credit union. credit union’s home office and branch offices and on the credit union’s Web § 708a.4 Disclosures and communica- site, if it has one. If the notice is not tions to members. on the home page of the Web site, the (a) After the board of directors has home page must have a clear and con- complied with § 708a.3 and approves a spicuous link, visible on a standard conversion proposal, the credit union monitor without scrolling, to the no- must provide written notice of its in- tice. tent to convert to each member who is (2) The public notice must include eligible to vote on the conversion. The the following: notice to members must be submitted (i) The name and address of the cred- 90 calendar days, 60 calendar days, and it union; 30 calendar days before the date of the (ii) The type of institution to which membership vote on the conversion. A the credit union’s board is considering ballot must be included in the same en- a proposal to convert; velope as the 30-day notice and only in (iii) A brief statement of why the the 30-day notice. A converting credit board is considering the conversion and union may not distribute ballots with the major positive and negative effects either the 90-day or 60-day notice, in of the proposed conversion; any other written communications, or (iv) A statement that directs mem- in person before the 30-day notice is bers to submit any comments on the sent.

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(b)(1) The notice to members must but may not include any further infor- adequately describe the purpose and mation without the prior written ap- subject matter of the vote to be taken proval of the Regional Director. at the special meeting or by submis- (c) An adequate description of the sion of the written ballot. The notice purpose and subject matter of the must clearly inform members that member vote on conversion, as re- they may vote at the special meeting quired by paragraph (b) of this section, or by submitting the written ballot. must include: The notice must state the date, time, (1) A clear and conspicuous disclosure and place of the meeting. that the conversion from a credit union (2) The notices that are submitted 90 to a mutual savings bank could lead to and 60 days before the membership vote members losing their ownership inter- on the conversion must state in a clear ests in the credit union if the mutual and conspicuous fashion that a written savings bank subsequently converts to ballot will be mailed together with an- a stock institution and the members do other notice 30 days before the date of not become stockholders; the membership vote on conversion. (2) A clear and conspicuous disclosure The notice submitted 30 days before of how a conversion from a credit the membership vote on the conversion union to a mutual savings bank will af- must state in a clear and conspicuous fect members’ voting rights and if the fashion that a written ballot is in- mutual savings bank intends to base cluded in the same envelope as the 30- voting rights on account balances; day notice materials. (3) For purposes of facilitating the (3) A clear and conspicuous disclosure member-to-member contact described of any conversion-related economic in paragraph (f) of this section, the 90- benefit a director or senior manage- day notice must indicate the number of ment official will or may receive in- credit union members eligible to vote cluding receipt of or an increase in on the conversion proposal and state compensation and an explanation of how many members have agreed to ac- any foreseeable stock-related benefits cept communications from the credit associated with a subsequent conver- union in electronic form. The 90-day sion to a stock institution or mutual notice must also include the informa- holding company structure. The expla- tion listed in paragraph (f)(9) of this nation of stock-related benefits must section. include a comparison of the opportuni- (4) The member ballot must include: ties to acquire stock available to offi- (i) A brief description of the proposal cials and employees with those oppor- (e.g., ‘‘Proposal: Approval of the Plan tunities available to the general mem- Charter Conversion by which (insert bership; name of credit union) will convert its (4) A clear and conspicuous disclosure charter to that of a federal mutual sav- of how the conversion from a credit ings bank.’’); union to a mutual savings bank will af- (ii) Two blocks marked respectively fect the institution’s ability to make as ‘‘FOR’’ and ‘‘AGAINST;’’ and non-housing-related consumer loans (ii) The following language: ‘‘A vote because of a mutual savings bank’s ob- FOR the proposal means that you want ligations to satisfy certain lending re- your credit union to become a mutual quirements as a mutual savings bank. savings bank. A vote AGAINST the This disclosure should specify possible proposal means that you want your reductions in some kinds of loans to credit union to remain a credit union.’’ members; and This language must be displayed in a (5) An affirmative statement that, at clear and conspicuous fashion imme- the time of conversion to a mutual sav- diately beneath the FOR and AGAINST ings bank, the credit union does or blocks. does not intend to convert to a stock (5) The ballot may also include vot- institution or a mutual holding coming instructions and the recommenda- pany structure. tion of the board of directors (i.e., (d)(1) A converting credit union must ‘‘Your Board of Directors recommends provide the following disclosures in a a vote FOR the Plan of Conversion’’) clear and conspicuous fashion with the

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90-, 60-, and 30-day notices it sends to its members regarding the conversion:

IMPORTANT REGULATORY DISCLOSURE ABOUT YOUR VOTE The National Credit Union Administration, the federal government agency that supervises credit unions, requires [insert name of credit union] to provide the following disclosures: 1. LOSS OF CREDIT UNION MEMBERSHIP. A vote ‘‘FOR’’ the proposed conversion means you want your credit union to become a mutual savings bank. A vote ‘‘AGAINST’’ the proposed conversion means you want your credit union to remain a credit union. 2. RATES ON LOANS AND SAVINGS. If your credit union converts to a bank, you may experience changes in your loan and savings rates. Available historic data indicates that, for most loan products, credit unions on average charge lower rates than banks. For most savings products, credit unions on average pay higher rates than banks. 3. POTENTIAL PROFITS BY OFFICERS AND DIRECTORS. Conversion to a mutual savings bank is often the first step in a two-step process to convert to a stock-issuing bank or holding company structure. In such a scenario, the officers and directors of the institution often profit by obtaining stock in excess of that available to other members.

(2) This text must be placed in a box, (f)(1) A converting credit union must must be the only text on the front side mail or e-mail a requesting member’s of a single piece of paper, and must be proper conversion-related materials to placed so that the member will see the other members eligible to vote if: text after reading the credit union’s (i) A credit union’s board of directors cover letter but before reading any has adopted a proposal to convert; other part of the member notice. The (ii) A member makes a written re- back side of the paper must be blank. A quest that the credit union mail or e- converting credit union may modify mail materials for the member; this text only with the prior written (iii) The request is received by the consent of the Regional Director and, credit union no later than 35 days after in the case of a state-chartered credit it sends out the 90-day member notice; union, the appropriate state regulatory and agency. (iv) The requesting member agrees to (e) All written communications from reimburse the credit union for the rea- a converting credit union to its mem- sonable expenses, excluding overhead, bers regarding the conversion must be of mailing or e-mailing the materials written in a manner that is simple and and also provides the credit union with easy to understand. Simple and easy to an appropriate advance payment. understand means the communications (2) A member’s request must indicate are written in plain language designed if the member wants the materials to be understood by ordinary con- mailed or e-mailed. If a member re- sumers and use clear and concise sen- quests that the materials be mailed, tences, paragraphs, and sections. For the credit union will mail the mate- purposes of this part, examples of fac- rials to all eligible voters. If a member tors to be considered in determining requests the materials be e-mailed, the whether a communication is in plain credit union will e-mail the materials language and uses clear and concise to all members who have agreed to ac- sentences, paragraphs and sections in- cept communications electronically clude the use of short explanatory sen- from the credit union. The subject line tences; use of definite, concrete, every- of the credit union’s e-mail will be day words; use of active voice; avoid- ‘‘Proposed Credit Union Conversion— ance of multiple negatives; avoidance Views of Member (insert member of legal and technical business termi- name).’’ nology; avoidance of explanations that are imprecise and reasonably subject to (3) (i) A converting credit union may, different interpretations; and use of at its option, include the following language that is not misleading. statement with a member’s material:

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On (date), the board of directors of (name possible, to make them proper. The Re- of converting credit union) adopted a pro- gional Director will review the commu- posal to convert from a credit union to a munication, communicate with the re- tual savings bank. Credit union members who wish to express their opinions about the questing member, and respond to the proposed conversion to other members may credit union within seven days with a provide those opinions to (name of credit determination on the propriety of the union). By law, the credit union, at the re- materials. The credit union must then questing members’ expense, must then send immediately mail or e-mail the mate- those opinions to the other members. The at- rial to the members if so directed by tached document represents the opinion of a NCUA. member of this credit union. This opinion is (6) A credit union must ensure that a personal opinion and does not necessarily reflect the views of the management or di- its members receive all materials that rectors of the credit union. meet the requirements of § 708a.4(f) on or before the date the members receive (ii) A converting credit union may the 30-day notice and associated ballot. not add anything other than this state- If a credit union cannot meet this de- ment to a member’s material without livery requirement, it must postpone the prior approval of the Regional Di- mailing the 30-day notice until it can rector. deliver the member materials. If a (4) The term ‘‘proper conversion-re- credit union postpones the mailing of lated materials’’ does not include ma- the 30-day notice, it must also post- terials that: pone the special meeting by the same (i) Due to size or similar reasons are number of days. When the credit union impracticable to mail or e-mail; has completed the delivery, it must in- (ii) Are false or misleading with reform the requesting member that the spect to any material fact; (iii) Omit a material fact necessary delivery was completed and provide the to make the statements in the mate- number of recipients. rial not false or misleading; (7) The term ‘‘appropriate advance (iv) Relate to a personal claim or a payment’’ means: personal grievance, or solicit personal (i) For requests to mail materials to gain or business advantage by or on be- all eligible voters, a payment in the half of any party; amount of 150% of the first class post- (v) Relate to any matter, including a age rate times the number of mailings, general economic, political, racial, re- and ligious, social, or similar cause, that is (ii) For requests to e-mail materials not significantly related to the pro- only to members that have agreed to posed conversion; accept electronic communications, a (vi) Directly or indirectly and with- payment in the amount of 200 dollars. out expressed factual foundation im- (8) If a credit union posts conversion- pugn a person’s character, integrity, or related information or material on its reputation; Web site, then it must simultaneously (vii) Directly or indirectly and with- make a portion of its Web site avail- out expressed factual foundation make able free of charge to its members to charges concerning improper, illegal, post and share their opinions on the or immoral conduct; or conversion. A link to the portion of the (viii) Directly or indirectly and with- Web site available to members to post out expressed factual foundation make their views on the conversion must be statements impugning the stability marked ‘‘Members: Share your views and soundness of the credit union. on the proposed conversion and see (5) If a converting credit union be- other members views’’ and the link lieves some or all of a member’s re- must also be visible on all pages on quest is not proper it must submit the which the credit union posts its own member materials to the Regional Di- conversion-related information or ma- rector within seven days of receipt. terial, as well as on the credit union’s The credit union must include with its homepage. If a credit union believes a transmittal letter a specific statement particular member submission is not of why the materials are not proper proper for posting, it will provide that and a specific recommendation for how submission to the Regional Director the materials should be modified, if for review as described in paragraph

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(f)(5) of this section. The credit union written materials the credit union has may also post a content-neutral dis- distributed or intends to distribute to claimer using language similar to the members. The term ‘‘written mate- language in paragraph (f)(3)(i) of this rials’’ includes written documentation section. or information of any sort, including (9) A converting credit union must electronic communications posted on a inform members with the 90-day notice Web site or transmitted by electronic that if they wish to provide their opin- mail. ions about the proposed conversion to (2) As part of its notice to NCUA of other members they can submit their intent to convert, the credit union’s opinions in writing to the credit union board of directors must provide the Re- no later than 35 days from the date of gional Director with a certification of the notice and the credit union will its support for the conversion proposal forward those opinions to other mem- and plan. Each director who voted in bers. The 90-day notice will provide a favor of the conversion proposal must contact at the credit union for delivery sign the certification. The certification of communications, will explain that must contain the following: members must agree to reimburse the (i) A statement that each director credit union’s costs of transmitting the signing the certification supports the communication including providing an proposed conversion and believes the advance payment, and will refer mem- proposed conversion is in the best in- bers to this section of NCUA’s rules for terests of the members of the credit further information about the commu- union; nication process. The credit union, at (ii) A description of all materials its option, may include additional fac- submitted to the Regional Director tual information about the commu- with the notice and certification; nication process with its 90-day notice. (iii) A statement that each board (10) A group of members may make a member signing the certification has joint request that the credit union send examined all these materials carefully its materials to other members. For and these materials are true, correct, purposes of paragraphs (f)(2) and (f)(3) current, and complete as of the date of of this section, the credit union will submission; and use the group name provided by the (iv) An acknowledgement that fed- group. eral law (18 U.S.C. 1001) prohibits any misrepresentations or omissions of ma- § 708a.5 Notice to NCUA. terial facts, or false, fictitious or (a) If a converting credit union’s fraudulent statements or representa- board of directors approves a proposal tions made with respect to the certifi- to convert, it must provide the Re- cation or the materials provided to the gional Director with notice of its in- Regional Director or any other docu- tent to convert during the 90 calendar ments or information provided to the day period preceding the date of the members of the credit union or NCUA membership vote on the conversion. in connection with the conversion. (1) A credit union must give notice to (3) A state-chartered credit union the Regional Director of its intent to must state as part of the notice re- convert by providing a letter describ- quired by § 708a.5(a) if its state char- ing the material features of the conver- tering law permits it to convert to a sion or a copy of the filing the credit mutual savings bank and provide the union has made or intends to make specific legal citation. A state-char- with another federal or state regu- tered credit union will remain subject latory agency in which the credit to any state law requirements for con- union seeks that agency’s approval of version that are more stringent than the conversion. A credit union must in- those this part imposes, including any clude with the notice to the Regional internal governance requirements, Director copies of the notices the cred- such as the requisite membership vote it union has provided or intends to pro- for conversion and the determination vide to members under §§ 708a.3 and of a member’s eligibility to vote. If a 708a.4. The credit union must also in- state-chartered credit union relies for clude a copy of the ballot form and all its authority to convert to a mutual

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savings bank on a state law parity pro- approval by a majority of the members vision, meaning a provision in state who vote on the proposal. law permitting a state-chartered credit (b) The board of directors must set a union to operate with the same or voting record date to determine mem- similar authority as a federal credit ber voting eligibility that is at least union, it must: one day before the publication of no- (i) Include in its notice a statement tice required in § 708a.3. that its state regulatory authority (c) A member may vote on a proposal agrees that it may rely on the state to convert in person at a special meet- law parity provision as authority to ing held on the date set for the vote or convert; and by written ballot filed by the member. (ii) Indicate its state regulatory The vote on the conversion proposal authority’s position as to whether fed- must be by secret ballot and conducted eral law and regulations or state law by an independent entity. The inde- will control internal governance issues pendent entity must be a company in the conversion such as the requisite with experience in conducting cor- membership vote for conversion and porate elections. No official or senior the determination of a member’s eligi- management official of the credit bility to vote. union or the immediate family mem- (b) If it chooses, a credit union may bers of any official or senior manage- seek a preliminary determination from ment official may have any ownership the Regional Director regarding any of interest in or be employed by the inde- the notices required under this part and its proposed methods and proce- pendent entity. dures applicable to the membership § 708a.7 Certification of vote on con- conversion vote. The Regional Director version proposal. will make a preliminary determination regarding the notices and methods and (a) The board of directors of the con- procedures applicable to the member- verting credit union must certify the ship vote within 30 calendar days of re- results of the membership vote to the ceipt of a credit union’s request for re- Regional Director within 10 calendar view unless the Regional Director ex- days after the vote is taken. tends the period as necessary to re- (b) The certification must also in- quest additional information or review clude a statement that the notice, bal- a credit union’s submission. A credit lot and other written materials pro- union’s prior submission of any notice vided to members were identical to or proposed voting procedures does not those submitted to NCUA pursuant to relieve the credit union of its obliga- § 708a.5. If the board cannot certify tion to certify the results of the mem- this, the board must provide copies of bership vote required by § 708a.6 or any new or revised materials and an eliminate the right of the Regional Di- explanation of the reasons for any rector to disapprove the actual meth- changes. ods and procedures applicable to the membership vote if the credit union § 708a.8 NCUA oversight of methods fails to conduct the membership vote and procedures of membership in a fair and legal manner consistent vote. with the Federal Credit Union Act and (a) The Regional Director will review these rules. the methods by which the membership (c) After receiving the notice de- vote was taken and the procedures ap- scribed in paragraph (a)(3) of this sec- plicable to the membership vote. The tion, the Regional Director will con- Regional Director will determine: if tact and consult with the appropriate the notices and other communications State Supervisory Authority. to members were accurate, not mis- § 708a.6 Membership approval of a leading, and timely; the membership proposal to convert. vote was conducted in a fair and legal manner; and the credit union has oth- (a) A proposal for conversion ap- erwise complied with part 708a. proved by a board of directors requires

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(b) After completion of this review, then adopt a new conversion proposal the Regional Director will issue a de- and solicit another member vote if it termination that the methods and pro- still desires to convert. cedures applicable to the membership (c) The Regional Director may, upon vote are approved or disapproved. The timely request and for good cause, ex- Regional Director will issue this deter- tend the one year completion period for mination within 30 calendar days of re- an additional six months. ceipt from the credit union of the cer- (d) After notification by the board of tification of the result of the member- directors of the mutual savings bank or ship vote required under § 708a.7 unless mutual savings association that the the Regional Director extends the pe- conversion has been completed, the riod as necessary to request additional NCUA will cancel the insurance certifi- information or review the credit cate of the credit union and, if applica- union’s submission. Approval of the ble, the charter of a federal credit methods and procedures under this union. paragraph remains subject to a credit union fulfilling the requirements in § 708a.11 Limit on compensation of of- § 708a.10 for timely completion of the ficials. conversion. No director or senior management of- (c) If the Regional Director dis- ficial of an insured credit union may approves the methods by which the receive any economic benefit in con- membership vote was taken or the pro- nection with the conversion of a credit cedures applicable to the membership union other than compensation and vote, the Regional Director may direct other benefits paid to directors or sen- that a new vote be taken. ior management officials of the con- (d) A converting credit union may ap- verted institution in the ordinary peal the Regional Director’s deter- course of business. mination to the NCUA Board. The credit union must file the appeal with- § 708a.12 Voting incentives. in 30 days after receipt of the Regional If a converting credit union offers an Director’s determination. The NCUA incentive to encourage members to Board will act on the appeal within 90 participate in the vote, including a days of receipt. prize raffle, every reference to such incentive made by the credit union in a § 708a.9 Other regulatory oversight of written communication to its members methods and procedures of mem- must also state that members are eligi- bership vote. ble for the incentive regardless of The federal or state regulatory agen- whether they vote for or against the cy that will have jurisdiction over the proposed conversion. financial institution after conversion must verify the membership vote and § 708a.13 Voting guidelines. may direct that a new vote be taken, if A converting credit union must con- it disapproves of the methods by which duct its member vote on conversion in the membership vote was taken or the a fair and legal manner. NCUA provides procedures applicable to the member- the following guidelines as suggestions ship vote. to help a credit union obtain a fair and legal vote and otherwise fulfill its reg- § 708a.10 Completion of conversion. ulatory obligations. These guidelines (a) After receipt of the approvals are not an exhaustive checklist and do under § 708a.8 and § 708a.9 the credit not by themselves guarantee a fair and union may complete the conversion. legal vote. (b) The credit union must complete (a) Applicability of state law. While the conversion within one year of the NCUA’s conversion rule applies to all date of receipt of NCUA approval under conversions of federally insured credit § 708a.8. If a credit union fails to com- unions, federally insured state-char- plete the conversion within one year tered credit unions (FISCUs) are also the Regional Director will disapprove subject to state law on conversions. of the methods and procedures. The NCUA’s position is that a state legisla- credit union’s board of directors must ture or state supervisory authority

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may impose conversion requirements result of their joint account, but were more stringent or restrictive than required to open another account NCUA’s. States that permit this kind where they were the first or only per- of conversion may have substantive son listed on the account. Over time, and procedural requirements that vary some individuals who became members from federal law. For example, there of the federal credit union as the sec- may be different voting standards for ond person listed on a joint account approving a vote. While the Federal were treated like those individuals who Credit Union Act requires a simple ma- were listed as the second person on a jority of those who vote to approve a joint account opened directly with the conversion, some states have higher state-chartered credit union. Specifi- voting standards requiring two-thirds cally, both of those groups were treat- or more of those who vote. A FISCU ed as non-members not entitled to should be careful to understand both vote. This example makes the point federal and state law to navigate the that a credit union must be diligent in conversion process and conduct a prop- maintaining a reliable membership er vote. list. (b) Eligibility to vote. (1) Determining (c) Scheduling the special meeting. who is eligible to cast a ballot is funda- NCUA’s conversion rule requires a con- mental to any vote. No conversion vote verting credit union to permit mem- can be fair and legal if some members bers to vote by written mail ballot or are improperly excluded. A converting in person at a special meeting held for credit union should be cautious to the purpose of voting on the conver- identify all eligible members and make sion. Although most members may certain they are included on its voting choose to vote by mail, a significant list. NCUA recommends that a con- number may choose to vote in person. verting credit union establish internal As a result, a converting credit union procedures to manage this task. should be careful to conduct its special (2) A converting credit union should meeting in a manner conducive to ac- be careful to make certain its member commodating all members wishing to list is accurate and complete. For ex- attend, including selecting a meeting ample, when a credit union converts location that can accommodate the an- from paper recordkeeping to computer ticipated number of attendees and is recordkeeping, some member names conveniently located. The meeting may not transfer unless the credit should also be held on a day and time union is careful in this regard. This suitable to most members’ schedules. A same problem can arise when a credit credit union should conduct its meet- union converts from one computer sys- ing in accordance with applicable fed- tem to another where the software is eral and state law, its bylaws, Robert’s not completely compatible. Rules of Order or other appropriate (3) Problems with keeping track of parliamentary procedures, and deter- who is eligible to vote can also arise mine before the meeting the nature when a credit union converts from a and scope of any discussion to be per- federal charter to a state charter or mitted. vice versa. NCUA is aware of an in- (d) Voting incentives. Some credit stance where a federal credit union unions may wish to offer incentives to used membership materials allowing members, such as entry to a prize raf- two or more individuals to open a joint fle, to encourage participation in the account and also allowed each to be- conversion vote. The credit union must come a member. The federal credit exercise care in the design and execu- union later converted to a state-char- tion of such incentives. tered credit union that, like most (1) The credit union should ensure other state-chartered credit unions in that the incentive complies with all its state, used membership materials applicable state, federal, and local allowing two or more individuals to laws. open a joint account but only allowed (2) The incentive should not be un- the first person listed on the account reasonable in size. The cost of the in- to become a member. The other indi- centive should have a negligible impact viduals did not become members as a on the credit union’s net worth ratio

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and the incentive should not be so 708b.205 Modifications to notice and ballot. large that it distracts the member 708b.206 Share insurance communications from the purpose of the vote. If the to members. board desires to use such incentives, the cost of the incentive should be in- Subpart C—Forms cluded in the directors’ deliberation 708b.301 Conversion of insurance (State and determination that the conversion Chartered Credit Union) is in the best interests of the credit 708b.302 Conversion of insurance (Federal union’s members. Credit Union). (3) The credit union should ensure 708b.303 Conversion of insurance through that the incentive is available to every merger. member that votes regardless of how or AUTHORITY: 12 U.S.C. 1752(7), 1766, 1785, 1786, when he or she votes. All of the credit 1789. union’s written materials promoting SOURCE: 70 FR 3288, Jan. 24, 2005, unless the incentive to the membership must otherwise noted. disclose to the members, as required by § 708a.12 of this part, that they have an § 708b.1 Scope. equal opportunity to participate in the (a) Subpart A of this partprescribes incentive program regardless of wheth- the procedures for merging one or more er they vote for or against the conver- credit unions with a continuing credit sion. The credit union should also de- union where at least one of the credit sign its incentives so that they are unions is federally-insured. available equally to all members who vote, regardless of whether they vote (b) Subpart B of this partprescribes by mail or in person at the special the procedures and notice requirements meeting. for termination of federal insurance or conversion of federal insurance to nonfederal insurance, including termi- PART 708b—MERGERS OF FEDER- nation or conversion resulting from a ALLY-INSURED CREDIT UNIONS; merger. VOLUNTARY TERMINATION OR (c) Subpart C prescribes required CONVERSION OF INSURED STA- forms for use in conversion of federal TUS insurance to nonfederal insurance. (d) Nothing in this partrestricts or Sec. otherwise impairs the authority of the 708b.1 Scope. NCUA to approve a merger pursuant to 708b.2 Definitions. section 205(h) of the Act. (e) This part does not address proce- Subpart A—Mergers dures or requirements that may be ap- 708b.101 Mergers generally. plicable under state law for a state 708b.102 Special provisions for federal insur- credit union. ance. 708b.103 Preparation of merger plan. § 708b.2 Definitions. 708b.104 Submission of merger proposal to the NCUA. (a) Continuing credit union means the 708b.105 Approval of merger proposal by the credit union that will continue in oper- NCUA. ation after the merger. 708b.106 Approval of the merger proposal by (b) Convert, conversion, and converting, members. when used in connection with insur- 708b.107 Certificate of vote on merger pro- ance, refer to the act of canceling fed- posal. 708b.108 Completion of merger. eral insurance and simultaneously obtaining insurance from another insur- Subpart B—Voluntary Termination or ance carrier. They mean that after can- Conversion of Insured Status cellation of federal insurance the credit union will be nonfederally-insured. 708b.201 Termination of insurance. (c) Federally-insured means insured by 708b.202 Notice to members of proposal to terminate insurance. the National Credit Union Administra- 708b.203 Conversion of insurance. tion (NCUA) through the National 708b.204 Notice to members of proposal to Credit Union Share Insurance Fund convert insurance. (NCUSIF).

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(d) Independent entity means a com- (k) Uninsured means there is no share pany with experience in conducting or deposit insurance available on the corporate elections. No official or sen- credit union accounts. ior manager of the credit union, or the immediate family members of any offi- Subpart A—Mergers cial or senior manager, may have any ownership interest in, or be employed § 708b.101 Mergers generally. by, the entity. (a) In any case where a merger will (e) Insurance and insured refer to pri- result in the termination of federal in- mary share or deposit insurance. These surance or conversion to nonfederal in- terms do not include excess share or surance, the merging credit union must deposit insurance as referred to in part comply with the provisions of subparts 740 of this chapter. B and C of this part in addition to this (f) Merging credit union means the subpart A. credit union that will cease to exist as (b) A federally-insured credit union an operating credit union at the time must have the prior written approval of the NCUA before merging with any of the merger. other credit union. (g) Nonfederally-insured means in- (c) Where the continuing credit union sured by a private or cooperative insur- is a federal credit union, it must be in ance fund or guaranty corporation or- compliance with the chartering poli- ganized or chartered under state or ter- cies of the NCUA. ritorial law. (d) Where the continuing or merging (h) Share insurance communication credit union is a state credit union, the means any written communication, ex- merger must be permitted by state law cluding the forms in Subpart C of this or authorized by the state authority. Part, that is made by or on behalf of a (e) Where both the merging and con- federally-insured credit union that is tinuing credit unions are federally-in- intended to be read by two or more sured and the two credit unions have credit union members and that men- overlapping fields of membership, the tions share insurance conversion or continuing credit union must, within termination. The term: three months after completion of the (1) Includes communications deliv- merger, either: ered or made available before, during, (1) Notify all members of the con- and after the credit union’s board of di- tinuing credit union of the potential rectors decides to seek conversion or loss of insurance coverage if they had termination. overlapping membership, (2) Includes, but is not limited to, (2) Notify all individuals and entities communications delivered or made that were actually members of both available by mail, e-mail, and internet credit unions of the potential loss of website posting. insurance coverage, or (3) Determine which members of both (3) Does not include communications credit unions may actually have unin- intended to be read only by the credit sured funds six months after the merg- union’s own employees or officials. er and notify those members of the po- (i) State credit union means any credit tential loss of insurance coverage. union organized and operated according to the laws of any state, the several § 708b.102 Special provisions for fed- territories and possessions of the eral insurance. United States, or the Commonwealth (a) Where the continuing credit union of Puerto Rico. Accordingly, state au- is federally-insured, the NCUSIF will thority means the appropriate state or assess a deposit and a prorated insur- territorial regulatory or supervisory ance premium (unless waived in whole authority for any such credit union. or in part for all insured credit unions (j) Terminate, termination, and termi- during that year) on the additional nating, when used in reference to insur- share accounts insured as a result of ance, refer to the act of canceling fed- the merger of a nonfederally-insured or eral insurance and mean that the cred- uninsured credit union with a feder- it union will become uninsured. ally-insured credit union.

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(b) Where the continuing credit union ciples (GAAP) net worth of each credit is nonfederally-insured or uninsured union before the merger and the GAAP but desires to be federally-insured as of net worth of the continuing credit the date of the merger, it must submit union after the merger; an application to the appropriate Re- (4) Analyses of share values; gional Director when the merging cred- (5) Explanation of any proposed share it union requests approval of the merg- adjustments; er proposal. If the Regional Director (6) Explanation of any provisions for approves the merger, the NCUSIF will reserves, undivided earnings or divi- assess a deposit and a prorated insur- dends; ance premium (unless waived in whole (7) Provisions with respect to notifi- or in part for all insured credit unions cation and payment of creditors; during that year) on any additional (8) Explanation of any changes rel- share accounts insured as a result of ative to insurance such as life savings the merger. and loan protection insurance and in- (c) Where the continuing credit union surance of member accounts; is nonfederally-insured or uninsured (9) Provisions for determining that and does not make application for in- all assets and liabilities of the con- surance, but the merging credit union tinuing credit union will conform with is federally-insured, the continuing the requirements of the Act (where the credit union is entitled to a refund of continuing credit union is a federal the merging credit union’s NCUSIF de- credit union); and posit and to a refund of the unused por- (10) Proposed charter amendments tion of the NCUSIF share insurance (where the continuing credit union is a premium (if any). If the continuing federal credit union). These amend- credit union is uninsured, the NCUSIF ments, if any, will usually pertain to will make the refund only after expira- the name of the credit union and the tion of the one-year period of contin- definition of its field of membership. ued insurance coverage noted in para- (b) [Reserved] graph (e) of this section. (d) Where the continuing credit union § 708b.104 Submission of merger pro- is nonfederally-insured, NCUSIF insur- posal to the NCUA. ance of the member accounts of a (a) Upon approval of the merger plan merging federally-insured credit union by the boards of directors of the credit ceases as of the effective date of the unions, the credit unions must submit merger. the following information to the Re- (e) Where the continuing credit union gional Director: is uninsured, NCUSIF insurance of the (1) The merger plan, as described in member accounts of the merging feder- this part; ally-insured credit union will continue (2) Resolutions of the boards of direc- for a period of one year, subject to the tors; restrictions in section 206(d)(1) of the (3) Proposed Merger Agreement; Act. (4) Proposed Notice of Special Meet- ing of the Members (for merging fed- § 708b.103 Preparation of merger plan. eral credit unions); (a) Upon the approval of a propo- (5) Copy of the form of Ballot to be sition for merger by the boards of di- sent to the members (for merging fed- rectors of the credit unions, the two eral credit unions); credit unions must prepare a plan for (6) Evidence that the state’s super- the proposed merger that includes: visory authority approves the merger (1) Current financial statements for proposal (for states that require such both credit unions; agreement before NCUA approval); (2) Current delinquent loan sum- (7) Application and Agreement for In- maries and analyses of the adequacy of surance of Member Accounts (for con- the Allowance for Loan and Lease tinuing state credit unions desiring to Losses account; become federally-insured); (3) Consolidated financial state- (8) If the merging credit union has $50 ments, including an assessment of the million or more in assets on its latest generally accepted accounting prin- call report, a statement about whether

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the two credit unions intend to make a § 708b.106 Approval of the merger pro- Hart-Scott-Rodino Act premerger noti- posal by members. fication filing with the Federal Trade (a) When the merging credit union is Commission and, if not, an explanation a federal credit union, the members why not; and must: (9) For mergers where the continuing (1) Have the right to vote on the credit union is not federally-insured merger proposal in person at the an- and will not apply for federal insur- nual meeting, if within 60 days after ance: NCUA approval, or at a special meeting (i) A written statement from the con- to be called within 60 days of NCUA ap- tinuing credit union that it ‘‘is aware proval, or by mail ballot, received no of the requirements of 12 U.S.C. later than the date and time an- 1831t(b), including all notification and nounced for the annual meeting or the special meeting called for that purpose. acknowledgment requirements’’; and (2) Be given advance notice of the (ii) Proof that the accounts of the meeting in accordance with the provi- credit union will be accepted for cov- sions of Article IV, Meetings of Mem- erage by the nonfederal insurer (if the bers, Federal Credit Union Bylaws. The credit union will have nonfederal insur- notice must: ance). (i) Specify the purpose of the meeting (b) [Reserved] and the time and place; (ii) Contain a summary of the merger § 708b.105 Approval of merger pro- plan, including, but not necessarily posal by the NCUA. limited to, current financial state- (a) In any case where the continuing ments for each credit union, a consoli- credit union is federally-insured and dated financial statement for the con- the merging credit union is nonfeder- tinuing credit union, analyses of share ally-insured or uninsured, the NCUA values, explanation of any proposed will determine the potential risk to the share adjustments, explanation of any NCUSIF. changes relative to insurance such as (b) If the NCUA finds that the merger life savings and loan protection insurance and insurance of member ac- proposal complies with the provisions counts; of this part and does not present an (iii) State reasons for the proposed undue risk to the NCUSIF, it may ap- merger; prove the proposal subject to any other (iv) Provide name and location, in- specific requirements as it may pre- cluding branches, of the continuing scribe to fulfill the intended purposes credit union; of the proposed merger. For mergers of (v) Inform the members that they federal credit unions into federally-in- have the right to vote on the merger sured credit unions, if the NCUA deter- proposal in person at the meeting or by mines that the merging credit union is written ballot to be received no later in danger of insolvency and that the than the date and time announced for proposed merger would reduce the risk the annual meeting or the special or avoid a threatened loss to the meeting called for that purpose; and NCUSIF, the NCUA may permit the (vi) Be accompanied by a Ballot for merger to become effective without an Merger Proposal. affirmative vote of the membership of (b) Approval of a proposal to merge a the merging credit union otherwise re- federal credit union into a federally-in- quired by § 708b.106 of this part. sured credit union requires the affirma- (c) NCUA may approve any proposed tive vote of a majority of the members charter amendments for a continuing of the merging credit union who vote federal credit union contingent upon on the proposal. If the continuing credit union is uninsured or nonfederally- the completion of the merger. All char- insured, the voting requirements of ter amendments must be consistent subpart B apply. If the continuing cred- with NCUA chartering policy. it union is nonfederally-insured, the [70 FR 3288, Jan. 24, 2005, as amended at 73 merging credit union must use the FR 30477, May 28, 2008] form notice and ballot in subpart C of

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this part unless the Regional Director of insurance by affirmative vote. The approves the use of different forms. credit union must use an independent entity to collect and tally the votes § 708b.107 Certificate of vote on merg- and certify the results for all termi- er proposal. nations, including terminations that The board of directors of the merging involve a merger or charter conversion. federal credit union must certify the The vote must be taken by secret bal- results of the membership vote to the lot, meaning that no credit union em- Regional Director within 10 days after ployee or official can determine how a the vote is taken. The certification particular member voted. must include the total number of mem- (d) Termination of federal insurance bers of record of the credit union, the requires the NCUA’s prior written ap- number who voted on the merger, the proval. A credit union must notify the number who voted in favor, and the NCUA and request approval of the ter- number who voted against. If the con- mination through the Regional Direc- tinuing credit union is nonfederally-in- tor in writing at least 90 days before sured, the merging credit union must the proposed termination date and use the certification form in subpart C within one year after obtaining the of this part unless the Regional Direc- membership vote. The notice to the tor approves the use of a different NCUA must include: form. (1) A written statement from the credit union that it ‘‘is aware of the re- § 708b.108 Completion of merger. quirements of 12 U.S.C. 1831t(b), includ- (a) Upon approval of the merger pro- ing all notification and acknowledg- posal by the NCUA and by the state su- ment requirements;’’ and pervisory authority (where the con- (2) A certification of the member tinuing or merging credit union is a vote that must include the total num- state credit union) and by the members ber of members of record of the credit of each credit union where required, union, the number who voted in favor the credit unions may complete the of the termination, and the number merger. who voted against. (b) Upon completion of the merger, (e) The NCUA will approve or dis- the board of directors of the continuing approve the termination in writing credit union must certify the comple- within 90 days after being notified by tion of the merger to the Regional Di- the credit union. rector within 30 days after the effective date of the merger. § 708b.202 Notice to members of pro- (c) Upon the NCUA’s receipt of cer- posal to terminate insurance. tification that the merger has been (a) When the board of directors of a completed, the NCUA will cancel the federally-insured credit union adopts a charter of the merging federal credit resolution proposing to terminate fed- union (if applicable) and the insurance eral insurance, including termination certificate of any merging federally-in- due to a merger or conversion of char- sured credit union. ter, it must provide its members with written notice of the proposal to termi- Subpart B—Voluntary Termination nate and of the date set for the mem- or Conversion of Insured Status bership vote. The first written communication following the resolution that § 708b.201 Termination of insurance. is made by or on behalf of the credit (a) A state credit union may termi- union and that informs the members nate federal insurance, if permitted by that the credit union will seek termi- state law, either on its own or by merg- nation is the notice of the proposal to ing into an uninsured credit union. terminate. This notice must: (b) A federal credit union may termi- (1) Inform the members of the re- nate federal insurance only by merging quirement for a membership vote and into, or converting its charter to, an the date for the vote; uninsured state credit union. (2) Explain that the insurance pro- (c) A majority of the credit union’s vided by the NCUA is federal insurance members must approve a termination and is backed by the full faith and

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credit of the United States govern- (d) Approval of a conversion of fed- ment; and eral to nonfederal insurance requires (3) Include a conspicuous statement the affirmative vote of a majority of that if the termination or merger is ap- the credit union’s members who vote proved, and the credit union, or the on the proposition, provided at least 20 continuing credit union in the case of a percent of the total membership par- merger, subsequently fails, the federal ticipates in the voting. The credit government does not guarantee the union must use an independent entity member will get his or her money to collect and tally the votes and cer- back. tify the results for all share insurance (b) The credit union must deliver the conversions, including share insurance notice in person to each member, or conversions that involve a merger or mail it to each member at the address charter conversion. The vote must be for the member as it appears on the taken by secret ballot, meaning that records of the credit union, not more no credit union employee or official than 30 nor less than 7 days before the can determine how a particular mem- date of the vote. The membership must ber voted. be given the opportunity to vote by (e) For all conversions, the notice to mail ballot. The credit union may pro- the NCUA must include: vide the notice of the proposal and the ballot to members at the same time. (1) A written statement from the (c) If the membership and the NCUA credit union that ‘‘it is aware of the re- approve the proposition for termi- quirements of 12 U.S.C. 1831t(b), includ- nation of insurance, the credit union ing all notification and acknowledg- must give the members prompt and ment requirements;’’ and reasonable notice of termination. (2) Proof that the nonfederal insurer is authorized to issue share insurance § 708b.203 Conversion of insurance. in the state where the credit union is (a) A federally-insured state credit located and that the insurer will insure union may convert to nonfederal insur- the credit union. ance, if permitted by state law, either (f) The board of directors of the cred- on its own or by merging into a nonfed- it union and the independent entity erally-insured credit union. that conducts the membership vote (b) A federal credit union may con- must certify the results of the member- vert to nonfederal insurance only by ship vote to the NCUA within 10 days merging into, or converting its charter after the deadline for receipt of votes. to, a nonfederally-insured state credit The certification must include the union. total number of members of record of (c) Conversion to nonfederal insur- the credit union, the number who voted ance requires the prior written ap- on the conversion, the number who proval of the NCUA. After the credit voted in favor of the conversion, and union board of directors resolves to the number who voted against. The seek a conversion, the credit union certification must be in the form speci- must notify the Regional Director fied in subpart C of this part. promptly, in writing, of the desired (g) Generally, the NCUA will approve conversion and request NCUA approval or disapprove the conversion in writing of the conversion. The notification within 14 days after receiving the cer- must be in the form specified in sub- tification of the vote. part C of this part, unless the Regional (h) For conversions by merger, the Director approves a different form. The merging credit unions must follow the credit union must provide this notifica- procedures specified in subparts A and tion and request for approval to the B of this part and use the forms speci- Regional Director at least 14 days be- fied in subpart C of this part. In the fore the credit union notifies its mem- event the procedures of Subpart A and bers and seeks their vote and at least B conflict, the credit union must follow 90 days before the proposed conversion date. NCUA will approve or disapprove subpart B. the conversion as described in para- [70 FR 3288, Jan. 24, 2005, as amended at 73 graph (g) of this section. FR 30477, May 28, 2008]

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§ 708b.204 Notice to members of pro- prompt and reasonable notice to the posal to convert insurance. membership. The credit union must de- (a) When the board of directors of a liver the notice at least 30 days before federally-insured credit union adopts a the effective date of the conversion. resolution proposing to convert from The notice must identify the effective federal to nonfederal insurance, includ- date of the conversion, and the first ing an insurance conversion associated page must also include a conspicuous with a merger or conversion of charter, statement (i.e., in bold and no smaller it must provide its members with writ- than any other font size used in the no- ten notice of the proposal to convert tice) that: insurance and of the date set for the (1) The conversion will result in the membership vote. The first written loss of federal share insurance, and communication following this resolu- (2) The credit union will, at any time tion that is made by or on behalf of the before the effective date of conversion, credit union and that informs the permit all members who have share members that the credit union will certificates or other term accounts to seek conversion of insurance is the no- close the federally-insured portion of tice of the proposal to convert. This those accounts without an early with- notice must: drawal penalty. (1) Inform the members of the requirement for a membership vote and § 708b.205 Modifications to notice and the date for the vote; ballot. (2) Explain that the insurance pro- (a) Converting credit unions will use vided by the NCUA is federal insurance the form notice and ballot as provided and is backed by the full faith and in subpart C of this part unless the Re- credit of the United States govern- gional Director approves the use of a ment, while the insurance provided by different form. the nonfederal insurer is not guaran- (b) A converting credit union will teed by the federal or any state govern- provide the Regional Director with a ment; copy of the notice and ballot, including (3) Include a conspicuous statement any reasons for conversion and esti- that if the conversion or merger is ap- mated costs of conversion, on or before proved, and the credit union, or the the date the notice and ballot are continuing credit union in the case of a mailed to the members. merger, subsequently fails, the federal (c) Federally-insured state credit government does not guarantee the unions may include additional lan- member will get his or her money guage in the notice and ballot regard- back; and ing state requirements for mergers, (4) Be in the form set forth in subpart where appropriate. C of this part, unless the Regional Di- rector approves a different form. § 708b.206 Share insurance commu- (b) The credit union must deliver the nications to members. notice in person to each member or (a) Every share insurance commu- mail it to each member at the address nication must comply with § 740.2 of for the member as it appears on the this chapter, which, in part, prohibits records of the credit union, not more federally-insured credit unions from than 30 nor less than 7 days before the making any representation that is in- date for the vote. The credit union accurate or deceptive in any par- must give the membership the oppor- ticular. tunity to vote by mail ballot. The form (b) Every share insurance commu- of the ballot must be as set forth in nication about share insurance conver- subpart C of this part, unless the Re- sion must contain the following con- gional Director approves the use of a spicuous statement: ‘‘IF YOU ARE A different form. The notice of the pro- MEMBER OF THIS CREDIT UNION, posal and the ballot may be provided to YOUR ACCOUNTS ARE CURRENTLY the members at the same time. INSURED BY THE NATIONAL CRED- (c) If the membership and the NCUA IT UNION ADMINISTRATION, A FED- approve the proposition for conversion ERAL AGENCY. THIS FEDERAL IN- of insurance, the credit union will give SURANCE IS BACKED BY THE FULL

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FAITH AND CREDIT OF THE UNITED converting credit union must inform STATES GOVERNMENT. IF THE the Regional Director when the com- CREDIT UNION CONVERTS TO PRI- munication is to be made, to which VATE INSURANCE AND THE CREDIT members it will be directed, and how it UNION FAILS, THE FEDERAL GOV- will be disseminated. For purposes of ERNMENT DOES NOT GUARANTEE this section, the voting period begins THAT YOU WILL GET YOUR MONEY on the date of the board of director’s BACK.’’ The statement must: resolution to seek conversion or termi- (1) Appear on the first page of the nation and ends on the date the mem- communication where conversion is ber voting closes. discussed and, if the communication is (e) The Regional Director may take on an internet website posting, the appropriate action, including dis- credit union must make reasonable ef- approving a conversion, if he or she de- forts to make it visible without termines that a converting credit scrolling; and union, by inclusion or omission of in- (2) Must be in capital letters, bolded, formation in a share insurance commu- offset from the other text by use of a nication, materially mislead or mis- border, and at least one font size larger informed its membership. For example, than any other text (exclusive of head- the Regional Director will treat any ings) used in the communication. share insurance communication that (c) Every share insurance commu- compares the relative strength, safety, nication about share insurance termi- or claims paying ability of a private in- nation must contain the following con- surer with that of the National Credit spicuous statement: ‘‘IF YOU ARE A Union Share Insurance Fund as materi- MEMBER OF THIS CREDIT UNION, ally misleading if the comparison fails YOUR ACCOUNTS ARE CURRENTLY to mention that the federal insurance INSURED BY THE NATIONAL CRED- provided by the NCUA is backed by the IT UNION ADMINISTRATION, A FED- full faith and credit of the United ERAL AGENCY. THIS FEDERAL IN- States government. SURANCE IS BACKED BY THE FULL FAITH AND CREDIT OF THE UNITED Subpart C—Forms STATES GOVERNMENT. IF THE CREDIT UNION TERMINATES ITS § 708b.301 Conversion of insurance FEDERAL INSURANCE AND THE (State Chartered Credit Union). CREDIT UNION FAILS, THE FED- Unless the Regional Director ap- ERAL GOVERNMENT DOES NOT proves the use of different forms, a GUARANTEE THAT YOU WILL GET state chartered credit union must use YOUR MONEY BACK.’’ The statement the forms in this section in connection must: with a conversion to nonfederal insur- (1) Appear on the first page of the ance. communication where termination is (a) Form letter notifying NCUA of in- discussed and, if the communication is tent to convert: on an internet website posting, the (insert name), NCUA Regional Director credit union must make reasonable ef- (insert address of NCUA Regional Director) forts to make it visible without Re: Notice of Intent to Convert to Private scrolling; and Share Insurance (2) Must be in capital letters, bolded, Dear Director (insert name): offset from the other text by use of a In accordance with federal law at Title 12, border, and at least one font size larger United States Code Section 1785(b)(1)(D), I than any other text (exclusive of head- request the National Credit Union Adminis- ings) used in the communication. tration approve the conversion of (insert (d) A converting credit union must name of credit union) from federal share in- provide the Regional Director with a surance to private primary share insurance copy of any share insurance commu- with (insert name of private insurance com- nication that the credit union will pany). On (insert date), the board of directors of make during the voting period. The Re- (insert name of credit union) resolved to pur- gional Director must receive the copy sue the conversion from federal insurance to at or before the time the credit union private insurance. A copy of the resolution is makes it available to members. The enclosed.

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On (insert date), the credit union plans to NOTICE OF PROPOSAL TO CONVERT TO NONFED- solicit the vote of our members on the con- ERALLY-INSURED STATUS AND SPECIAL version. The credit union will employ (insert MEETING OF MEMBERS name, address, and telephone number of independent entity) to conduct the member (INSERT NAME OF CONVERTING CREDIT UNION) vote. The credit union will use the form no- On (insert date), the board of directors of tice and ballot required by NCUA regula- your credit union approved a proposition to tions, and will certify the results to NCUA as convert from federal share (deposit) insur- required by NCUA regulations. ance to private insurance. You are encour- Aside from the notice and ballot, the credit aged to attend a special meeting of our cred- union (does)(does not) intend to provide its it union at (insert address) on (insert time members with additional written informa- and date) to address this proposition. tion about the conversion. I understand that NCUA regulations forbid any communica- PURPOSE OF MEETING tions to members, including communications about NCUA insurance or private insurance, The meeting has two purposes: that are inaccurate or deceptive. 1. To consider and act upon a proposal to (Insert name of State) allows credit unions convert your account insurance from federal to obtain primary share insurance from (in- insurance to private insurance. sert name of private insurance company). I 2. To approve the action of the Board of Di- have enclosed a copy of a letter from (insert rectors in authorizing the officers of the name and title of state regulator) estab- credit union to carry out the proposed con- lishing that (insert name of private insurer) version. has the authority to provide (insert name of INSURANCE CONVERSION credit union) with primary share insurance. I have enclosed a copy of a letter from (in- Currently, your accounts have share insur- sert name of private insurer) indicating it ance provided by the National Credit Union has accepted (insert name of credit union) Administration, an agency of the federal for primary share insurance and will insure government. The basic federal coverage is up the credit union immediately upon the date to $100,000, but accounts may be structured that it loses its federal share insurance. in different ways, such as joint accounts, I am aware of the requirements of 12 U.S.C. payable-on-death accounts, or IRA accounts, 1831t(b), including all notification and ac- to achieve federal coverage of much more knowledgment requirements. than $100,000. If the conversion is approved, The point of contact for conversion mat- your federal insurance will terminate on the ters is (insert name and title of credit union effective date of the conversion. Instead, employee), who can be reached at (insert your accounts in the credit union will be in- telephone number). sured up to $(insert dollar amount) by (insert Sincerely, name of insurer), a corporation chartered by the State of (insert name of State). The fed- (signature) eral insurance provided by the National Chief Executive Officer. Credit Union Administration is backed by Enclosures the full faith and credit of the United States government. The private insurance you will (b) Form notice to members of intent receive from (insert name of insurer), how- to convert and special meeting of mem- ever, is not guaranteed by the federal or any bers: state or local government.

IF THIS CONVERSION IS APPROVED, AND THE (insert name of credit union) FAILS, THE FEDERAL GOVERNMENT DOES NOT GUARANTEE YOU WILL GET YOUR MONEY BACK.

Also, because this conversion, if approved, of those accounts without an early with- would result in the loss of federal share in- drawal penalty. (This is an optional sen- surance, the credit union will, at any time tence. It may be deleted without the ap- between the approval of the conversion and proval of the Regional Director. The mem- the effective date of conversion and upon re- bers must be informed about this right, how- quest by the member, permit all members ever, as described in 12 CFR 708b.204(c).) who have share certificates or other term ac- The board of directors has concluded that counts to close the federally-insured portion the proposed conversion is desirable for the

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following reasons: (insert reasons). (This is BALLOT FOR CONVERSION TO NONFEDERALLY- an optional paragraph. It may be deleted INSURED STATUS without the prior approval of the Regional Director.) (INSERT NAME OF CONVERTING CREDIT UNION) The proposed conversion will result in the following one-time cost associated with the Name of Member: (insert name) conversion: (List the total estimated dollar Account Number: (insert account number) amount, including (1) the cost of conducting The credit union must receive this ballot the vote, (2) the cost of changing the credit by (insert date and time for vote). Please union’s name and insurance logo, and (3) at- mail or bring it to: (Insert name of inde- torney and consultant fees.) pendent entity and address). The conversion must have the approval of I understand if the conversion of the (in- a majority of members who vote on the pro- sert name of credit union) is approved, the posal, provided at least 20 percent of the National Credit Union Administration share total membership participates in the voting. Enclosed with this Notice of Special Meet- (deposit) insurance I now have, up to $100,000, ing is a ballot. If you cannot attend the or possibly more if I use different account meeting, please complete the ballot and re- structures, will terminate upon the effective turn it to (insert name and address of inde- date of the conversion. Instead, my shares in pendent entity conducting the vote) by no the (insert name of credit union) will be in- later than (insert time and date). To be sured up to $(insert dollar amount) by (insert counted, your ballot must reach us by that name of insurer), a corporation chartered by date and time. the State of (insert name of state). The fed- By order of the board of directors. eral insurance provided by the National (signature of Board Presiding Officer) Credit Union Administration is backed by the full faith and credit of the United States (insert title and date) Government. The private insurance provided (c) Form ballot: by (insert name of insurer) is not.

I FURTHER UNDERSTAND THAT IF THIS CONVERSION IS APPROVED AND THE (insert name of credit union) FAILS, THE FEDERAL GOVERNMENT DOES NOT GUARANTEE THAT I WILL GET MY MONEY BACK.

I vote on the proposal as follows (check 2. Not more than 30 nor less than 7 days be- one box): fore the date of the vote, copies of the notice [ ] Approve the conversion to private in- of special meeting and the ballot, as ap- surance and authorize the Board of Directors proved by the National Credit Union Admin- to take all necessary action to accomplish istration, were mailed to our members. the conversion. 3. The credit union arranged for the con- [ ] Do not approve the conversion to pri- duct of a special meeting of our members at vate insurance. the time and place announced in the Notice Signed: lllllllllllllllllll to consider and act upon the proposed con- (Insert printed member’s name) version. Date: llllllllllllllllllll 4. At the special meeting, the credit union arranged for an explanation of the conver- (d) Form certification of member sion to the members present at the special vote to NCUA: meeting. 5. The (insert name), an entity independent CERTIFICATION OF VOTE ON CONVERSION TO of the credit union, conducted the member- NONFEDERALLY-INSURED STATUS ship vote at the special meeting. The mem- We, the undersigned officers of the (insert bers voted as follows: name of converting credit union), certify the (insert) Number of total members completion of the following actions: (insert) Number of members present at the 1. At a meeting on (insert date), the Board special meeting of Directors adopted a resolution to seek the (insert) Number of members present who conversion of our primary share insurance voted in favor of the conversion coverage from NCUA to (insert name of pri- (insert) Number of members present who vate insurer). voted against the conversion

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(insert) Number of additional written bal- certify the results to NCUA as required by lots in favor of the conversion NCUA regulations. (insert) Number of additional written bal- Aside from the notice and ballot, the credit lots opposed to the conversion union (does)(does not) intend to provide our (insert ‘‘20% or more’’) OR (insert ‘‘Less members with additional written informa- than 20%’’) of the total membership voted. tion about the conversion. I understand that Of those who voted, a majority voted (insert NCUA regulations forbid any communica- ‘‘in favor of’’) OR (‘‘against’’) conversion. tions to members, including communications The action of the members at the special about NCUA insurance or private insurance, meeting was recorded in the minutes. that are inaccurate or deceptive. This certification signed the (insert date). I have enclosed a copy of a letter from (in- (signature of Board Presiding Officer) sert name and title of state regulator) indi- (insert typed name and title) cating approval of our conversion to a state (signature of Board Secretary) charter. (insert typed name and title) (Insert name of State) allows credit unions I (insert name), an officer of the (insert to obtain primary share insurance from (in- name of independent entity that conducted sert name of private insurance company). I the vote), hereby certify that the informa- have enclosed a copy of a letter from (insert tion recorded in paragraph 5 above is accu- name and title of state regulator) estab- rate. lishing that (insert name of private insurer) This certification signed the (insert date): has the authority to provide (insert name of credit union), after conversion to a state (signature of officer of independent entity) charter, with primary share insurance. (typed name, title, and phone number) I have enclosed a copy of a letter from (in- [70 FR 3288, Jan. 24, 2005, as amended at 73 sert name of private insurer) indicating it FR 30477, May 28, 2008] has accepted (insert name of credit union) for primary share insurance and will insure § 708b.302 Conversion of Insurance the credit union immediately upon the date (Federal Credit Union). that it loses its federal share insurance. I am aware of the requirements of 12 U.S.C. Unless the Regional Director ap- 1831t(b), including all notification and ac- proves the use of different forms, a fed- knowledgment requirements. eral credit union must use the fol- Enclosed you will also find other informa- lowing forms in this section in connection required by NCUA’s Chartering and tion with a conversion to a nonfeder- Field of Membership Manual, Chapter 4, ally-insured state charter. § III.C. (a) Form letter notifying NCUA of in- The point of contact for conversion mat- tent to convert: ters is (insert name and title of credit union employee), who can be reached at (insert (insert name), NCUA Regional Director telephone number). (insert address of NCUA Regional Director) Sincerely, Re: Notice of Intent To Convert to State Charter and to Private Share Insurance (signature), Chief Executive Officer. Dear Director (insert name): In accordance with federal law at Title 12, Enclosures United States Code Section 1785(b)(1)(D), I (b) Form notice to members of intent request the National Credit Union Adminis- tration approve the conversion of (insert to convert and special meeting of mem- name of federal credit union) to a state char- bers: ter in (insert name of state) and from federal share insurance to private primary share in- NOTICE OF PROPOSAL TO CONVERT TO A STATE surance with (insert name of private insur- CHARTER AND TO NONFEDERALLY-INSURED ance company). STATUS AND SPECIAL MEETING OF MEM- On (insert date), the board of directors of BERS (insert name of credit union) resolved to pur- (INSERT NAME OF CONVERTING CREDIT UNION) sue the charter conversion and the conversion from federal insurance to private insur- On (insert date), the board of directors of ance. A copy of the resolution is enclosed. your credit union approved a proposition to On (insert date), the credit union plans to convert from federal share (deposit) insur- solicit the vote of our members on the con- ance to private insurance and to convert version. The credit union will employ (insert from a federal credit union to a state-char- name, address, and telephone number of tered credit union. You are encouraged to at- independent entity) to conduct the vote. The tend a special meeting of our credit union at credit union will use the form notice and bal- (insert address) on (insert time and date) to lot required by NCUA regulations, and will address this proposition.

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PURPOSE OF MEETING to $100,000, but accounts may be structured in different ways, such as joint accounts, The meeting has two purposes: payable-on-death accounts, or IRA accounts, 1. To consider and act upon a proposal to to achieve federal coverage of much more convert your credit union from a federal than $100,000. If the conversion is approved, charter to a state charter and your account your federal insurance will terminate on the insurance from federal insurance to private effective date of the conversion. Instead, insurance. your accounts in the credit union will be in- 2. To approve the action of the Board of Di- sured up to $(insert dollar amount) by (insert rectors in authorizing the officers of the name of insurer), a corporation chartered by credit union to carry out the proposed con- the State of (insert name of State). The fed- version. eral insurance provided by the National Credit Union Administration is backed by INSURANCE CONVERSION the full faith and credit of the United States Currently, your accounts have share insur- government. The private insurance you will ance provided by the National Credit Union receive from (insert name of insurer), how- Administration, an agency of the federal ever, is not guaranteed by the federal or any government. The basic federal coverage is up state or local government.

IF THIS CONVERSION IS APPROVED, AND THE (insert name of credit union) FAILS, THE FEDERAL GOVERNMENT DOES NOT GUARANTEE YOU WILL GET YOUR MONEY BACK.

Also, because this conversion, if approved, later than (insert time and date). To be would result in the loss of federal share in- counted, your ballot must reach us by that surance, the credit union will, at any time date and time. between the approval of the conversion and By order of the board of directors. the effective date of conversion and upon request of the member, permit all members (signature of Board Presiding Officer) who have share certificates or other term ac- (insert title and date) counts to close the federally-insured portion of those accounts without an early with- (c) Form ballot: drawal penalty. (This is an optional sen- BALLOT FOR CONVERSION TO STATE CHARTER tence. It may be deleted without the ap- AND NONFEDERALLY-INSURED STATUS proval of the Regional Director. The members must be informed about this right, how- (INSERT NAME OF CONVERTING CREDIT UNION) ever, as described in 12 CFR 708b.204(c).) The board of directors has concluded that Name of Member: (insert name) the proposed conversion is desirable for the Account Number: (insert account number) following reasons: (Insert reasons) (This is The credit union must receive this ballot an optional paragraph. It may be deleted by (insert date and time for vote). Please without the approval of the Regional Direc- mail or bring it to: (Insert name of inde- tor.). pendent entity and address) The proposed conversion will result in the I understand if the conversion of the (in- following one-time cost associated with the sert name of credit union) is approved, the conversion: (List the total estimated dollar National Credit Union Administration share amount, including (1) the cost of conducting (deposit) insurance I now have, up to $100,000, the vote, (2) the cost of changing the credit or possibly more if I use different accounts union’s name and insurance logo, and (3) at- structures, will terminate upon the effective torney and consultant fees.) date of the conversion. Instead, my shares in The conversion must have the approval of the (insert name of credit union) will be in- a majority of members who vote on the pro- sured up to $(insert dollar amount) by (insert posal, provided at least 20 percent of the name of insurer), a corporation chartered by total membership participates in the voting. the State of (insert name of state). The fed- Enclosed with this Notice of Special Meet- eral insurance provided by the National ing is a ballot. If you cannot attend the Credit Union Administration is backed by meeting, please complete the ballot and re- the full faith and credit of the United States turn it to (insert name and address of inde- Government. The private insurance provided pendent entity conducting the vote) by no by (insert name of insurer) is not.

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I FURTHER UNDERSTAND THAT, IF THIS CONVERSION IS APPROVED AND THE (insert name of credit union) FAILS, THE FEDERAL GOVERNMENT DOES NOT GUARANTEE THAT I WILL GET MY MONEY BACK.

I vote on the proposal as follows (check (insert) Number of additional written bal- one box): lots opposed to the conversion [ ] Approve the conversion of charter and (insert ‘‘20% or more’’) OR (insert ‘‘Less conversion to private insurance and author- than 20%’’) of the total membership voted. ize the Board of Directors to take all nec- Of those who voted, a majority voted (inset essary action to accomplish the conversion. ‘‘in favor of’’) OR (‘‘against’’) conversion. [ ] Do not approve the conversion of char- The action of the members at the special ter and the conversion to private insurance. meeting was recorded in the minutes. This certification signed the (insert date). Signed: lllllllllllllllllll (Insert printed member’s name) (signature of Board Presiding Officer) Date: llllllllllllllllllll (insert typed name and title) (signature of Board Secretary) (d) Form certification to NCUA of (insert typed name and title) member vote: I (insert name), an officer of the (insert name of independent entity that conducted CERTIFICATION OF VOTE ON CONVERSION TO the vote), hereby certify that the informa- STATE CHARTER AND NONFEDERALLY-IN- tion recorded in paragraph 5 above is accu- SURED STATUS rate. We, the undersigned officers of the (insert This certification signed the (insert date): name of converting credit union), certify the (signature of officer of independent entity) completion of the following actions: (typed name, title, and phone number) 1. At a meeting on (insert date), the Board [70 FR 3288, Jan. 24, 2005, as amended at 73 of Directors adopted a resolution to seek the FR 30477, May 28, 2008] conversion of our credit union to a state charter and the conversion of our primary § 708b.303 Conversion of insurance share insurance coverage from NCUA to (in- through merger. sert name of private insurer). 2. Not more than 30 nor less than 7 days be- Unless the Regional Director ap- fore the date of the vote, copies of the notice proves the use of different forms, a fed- of special meeting and ballot, as approved by erally-insured credit union that is the National Credit Union Administration, merging into a nonfederally-insured were mailed to our members. credit union must use the forms in this 3. The credit union arranged for the con- section. duct of a special meeting of our members at the time and place announced in the Notice (a) Form notice to members of intent to consider and act upon the proposed con- to merge and convert and special meet- version. ing of members: 4. At the special meeting, the credit union arranged for an explanation of the conver- NOTICE OF SPECIAL MEETING ON PROPOSAL TO sion to the members present at the special MERGE AND CONVERT TO NONFEDERALLY-IN- meeting. SURED STATUS 5. The (insert name), an entity independent (INSERT NAME OF MERGING CREDIT UNION) of the credit union, conducted the membership vote at the special meeting. The mem- On (insert date), the Board of Directors of bers voted as follows: your credit union approved a proposition to (insert) Number of total members merge with (insert name of continuing credit (insert) Number of members present at the union) and to convert from federal share (de- special meeting posit) insurance to private insurance. You (insert) Number of members present who are encouraged to attend a special meeting voted in favor of the conversion of our credit union at (insert address) on (in- (insert) Number of members present who sert time and date). voted against the conversion PURPOSE OF MEETING (insert) Number of additional written ballots in favor of the conversion The meeting has two purposes:

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1. To consider and act upon a proposal to Administration, an agency of the federal merge our credit union with (insert name of government. The basic federal coverage is up continuing credit union), the continuing to $100,000, but accounts may be structured credit union. in different ways, such as joint accounts, 2. To approve the action of the Board of Di- payable-on-death accounts, or IRA accounts, rectors of our credit union in authorizing the to achieve federal coverage of much more officers of the credit union, subject to mem- than $100,000. If the merger is approved, your ber approval, to carry out the proposed federal insurance will terminate on the effec- merger. tive date of the merger. Instead, your ac- If this merger is approved, our credit union will transfer all its assets and liabilities to counts in the credit union will be insured up the continuing credit union. As a member of to $(insert dollar amount) by (insert name of our credit union, you will become a member insurer), a corporation chartered by the of the continuing credit union. On the effec- State of (insert name of State). The federal tive date of the merger, you will receive insurance provided by the National Credit shares in the continuing credit union for the Union Administration is backed by the full shares you own now in our credit union. faith and credit of the United States government. The private insurance you will receive INSURANCE CONVERSION from (insert name of insurer), however, is Currently, your accounts have share insur- not guaranteed by the federal or any state or ance provided by the National Credit Union local government.

IF THIS MERGER IS APPROVED AND THE (insert name of continuing credit union) FAILS, THE FEDERAL GOVERNMENT DOES NOT GUARANTEE YOU WILL GET YOUR MONEY BACK.

Also, because this merger, if approved, The main office of the continuing credit would result in the loss of federal share in- union will be as follows: (insert location) surance, the (insert name of merging credit The branch office(s) of the continuing cred- union) will, at any time between the ap- it union will be as follows: (insert locations) proval of the merger and the effective date of The merger must have the approval of a merger and upon request of the member, per- majority of members who vote on the pro- mit all members who have share certificates posal, provided at least 20 percent of the or other term accounts to close the feder- total membership participates in the voting. ally-insured portion of those accounts with- Enclosed with this Notice of Special Meet- out an early withdrawal penalty. (This is an ing is a Ballot for Merger Proposal and Con- optional sentence. It may be deleted without version to Nonfederally-insured Status. If you cannot attend the meeting, please com- the approval of the Regional Director. The plete the ballot and return it to (insert name members must be informed about this right, of independent entity conducting vote) at however, as described in 12 CFR 708b.204(c).) (insert mailing address) by no later than (insert date and time). To be counted, your bal- OTHER INFORMATION RELATED TO THE lot must reach (insert name of independent PROPOSED MERGER entity conducting vote) by the date and time The directors of the participating credit announced for the meeting. unions carefully analyzed the assets and li- By order of the board of directors. abilities of the participating credit unions (signature of Board Presiding Officer) and appraised each credit union’s share val- (insert name and title of Board Presiding Of- ues. The appraisal of the share values ap- ficer) (insert date) pears on the attached individual and consolidated financial statements of the partici- (b) Form ballot: pating credit unions. BALLOT FOR MERGER PROPOSAL AND CONVER- The directors of the participating credit SION TO NONFEDERALLY-INSURED STATUS unions have concluded that the proposed merger is desirable for the following reasons: Name of Member: (insert name) (insert reasons) Account Number: (insert account number) The Board of Directors of our credit union The credit union must receive this ballot believes the merger should include/not in- by (insert date and time for vote). Please clude an adjustment in shares for the fol- mail or bring it to: (Insert name of inde- lowing reasons: (insert reasons) pendent entity and address)

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I understand if the merger or conversion of name of credit union) will be insured up to the (insert name of merging credit union) $(insert dollar amount) by (insert name of into the (insert name of continuing credit insurer), a corporation chartered by the union) is approved, the National Credit State of (insert name of state). The federal Union Administration share (deposit) insur- insurance provided by the National Credit ance I now have, up to $100,000, or possibly Union Administration is backed by the full more if I use different account structures, faith and credit of the United States Govern- will terminate upon the effective date of the ment. The private insurance provided by (in- conversion. Instead, my shares in the (insert sert name of insurer) is not.

I FURTHER UNDERSTAND THAT, IF THIS MERGER IS APPROVED AND THE (insert name of continuing credit union) FAILS, THE FEDERAL GOVERNMENT DOES NOT GUARANTEE THAT I WILL GET MY MONEY BACK.

I vote on the proposal as follows (check membership vote at the special meeting. At one box): least 20 percent of our total membership [ ] Approve the merger and the conversion voted and a majority of voting members to private insurance and authorize the Board favor the merger as follows: of Directors to take all necessary action to (insert) Number of total members accomplish the merger and conversion. (insert) Number of members present at the [ ] Do not approve the merger and the special meeting conversion to private insurance. (insert) Number of members present who Signed: lllllllllllllllllll voted in favor of the merger (Insert printed member’s name) (insert) Number of members present who Date: llllllllllllllllllll voted against the merger (c) Form certification of vote: (insert) Number of additional written ballots in favor of the merger CERTIFICATION OF VOTE ON MERGER PROPOSAL (insert) Number of additional written bal- AND CONVERSION TO NONFEDERALLY-IN- lots opposed to the merger SURED STATUS OF THE (INSERT NAME OF 6. The action of the members at the special MERGING CREDIT UNION) meeting was recorded in the minutes. We, the undersigned officers of the (insert This certification signed the (insert date): name of merging credit union), certify the (signature of Board Presiding Officer) completion of the following actions: (insert typed name and title) 1. At a meeting on (insert date), the Board (signature of Board Secretary) of Directors adopted a resolution approving the merger of our credit union with (insert (insert typed name and title) name of continuing credit union). I (insert name), an officer of the (insert 2. Not more than 30 nor less than 7 days be- name of independent entity that conducted fore the date of the vote, copies of the notice the vote), hereby certify that the informa- of special meeting and the ballot, as ap- tion recorded in paragraph 5 above is accu- proved by the National Credit Union Admin- rate. istration, and a copy of the merger plan an- This certification signed the (insert date): nounced in the notice, were mailed to our (signature of officer of independent entity) members. 3. The credit union arranged for the con- (typed name, title, and phone number) duct of a special meeting of our members at [70 FR 3288, Jan. 24, 2005, as amended at 73 the time and place announced in the Notice FR 30477, May 28, 2008] to consider and act upon the proposed merger. 4. At the special meeting, the credit union arranged for an explanation of the merger proposal and any changes in federally-insured status to the members present at the special meeting. 5. The (insert name), and entity independent of the credit union, conducted the

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PART 709—INVOLUNTARY LIQUIDA- erally insured credit union. Insurance TION OF FEDERAL CREDIT claims are decided pursuant to part 745 UNIONS AND ADJUDICATION OF of this chapter. CREDITOR CLAIMS INVOLVING [56 FR 56925, Nov. 7, 1991, as amended at 65 FEDERALLY INSURED CREDIT FR 55442, Sept. 14, 2000; 66 FR 11230, Feb. 23, UNIONS IN LIQUIDATION 2001; 66 FR 40575, Aug. 3, 2001] § 709.1 Definitions. Sec. 709.0 Scope. For the purposes of this part, the fol- 709.1 Definitions. lowing definitions apply: 709.2 NCUA Board as liquidating agent. (a) General Counsel means the Gen- 709.3 Challenge to revocation of charter and involuntary liquidation. eral Counsel of the National Credit 709.4 Powers and duties of liquidating Union Administration or any attorney agent. assigned to the General Counsel’s staff. 709.5 Payout priorities in involuntary liq- (b) Liquidating Agent means the uidation. NCUA Board or person(s) appointed by 709.6 Initial determination of creditor it with delegated authority to carry claims by the liquidating agent. out the liquidation of the credit union. 709.7 Procedures for appeal of initial determination. (c) Insolvent means insolvent as that 709.8 Administrative appeal of the initial term is defined in § 700.1(e)(1) of this determination. chapter. 709.9 Expedited determination of creditor (d) Claim means a creditor’s claim claims. against the credit union in liquidation. 709.10 Treatment by conservator or liquidating agent of financial assets trans- This term does not include insurance ferred in connection with a claims arising out of the liquidation of securitization or participation. a federally insured credit union. Insur- 709.11 Treatment by conservator or liqui- ance claims are decided pursuant to dating agent of collateralized public part 745 of this chapter. funds. (e) Shareholder means members, non- 709.12 Prepayment fees to Federal Home members, accountholders or any other Loan Bank. 709.13 Treatment of swap agreements in liq- party or entity that is the owner of a uidation or conservatorship. share, share certificate or share draft account or the equivalent of such ac- AUTHORITY: 12 U.S.C. 1757, 1766, 1767, 1786(h), 1787, 1788, 1789, 1789a. counts under state law.

SOURCE: 56 FR 56925, Nov. 7, 1991, unless [56 FR 56925, Nov. 7, 1991, as amended at 69 otherwise noted. FR 27828, May 17, 2004]

§ 709.0 Scope. § 709.2 NCUA Board as liquidating agent. The rules and procedures in this part apply to charter revocations of federal (a) The Board, as liquidating agent, credit unions under 12 U.S.C. by operation of law and without any 1787(a)(1)(A), (B), the involuntary liq- conveyance or other instrument, act or uidation and adjudication of creditor deed, shall succeed to all the rights, ti- claims in all cases involving federally- tles, powers, and privileges of the cred- insured credit unions, the treatment by it union, and of its shareholders, offi- the Board as conservator or liquidating cers, and directors, with respect to the agent of financial assets transferred in credit union and its assets, and such connection with a securitization or shareholders, officers, or directors, participation or of public funds held by shall not thereafter have or exercise a federally-insured credit union, and any such rights, powers, or privileges the allowance of prepayment fees to or act in connection with any assets or Federal Home Loan Banks under speci- property of any nature of the credit fied conditions. Remaining sections of union. this part are applicable to all federally (b) The Board, as liquidating agent, insured credit unions. This part does shall take possession of and title to not apply to share insurance claims books, records, and assets of every de- arising out of the liquidation of a fed- scription of such credit union to which

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such credit union has rights of posses- dating agent shall republish such no- sion and title to all offices and other tice approximately one and two facilities of such credit union. months, respectively, after the initial publication. At the time of initial pub- § 709.3 Challenge to revocation of lication, the liquidating agent shall charter and involuntary liquida- mail a notice similar to the published tion. notice to any creditor shown on the If a Federal credit union is deter- credit union’s books at the last address mined to be insolvent and placed into appearing therein. If the liquidating liquidation pursuant to 12 U.S.C. 1787, agent discovers the name of a creditor the Federal credit union may, not later whose name does not appear on the than 10 days after the date on which credit union’s books, a notice similar the Board closes the credit union for to the published notice shall be mailed liquidation, apply to the United States to such creditor within 30 days after District Court for the Judicial district the discovery of the name and address. in which the principal office of the (c) General. The liquidating agent credit union is located or the United shall collect all obligations and money States District Court for the District due such credit union and may, to the of Columbia for an order requiring the extent consistent with its appoint- Board to show cause why it should not ment, do all things desirable or expe- be prohibited from continuing such liq- dient in its discretion to wind up the uidation. Notwithstanding other provi- affairs of the credit union including, sions of this part, the board of direc- but not limited to, the following: tors of the credit union may meet fol- (1) Exercise all rights and powers of lowing the placing of the institution the credit union including, but not lim- into liquidation for the sole purpose of ited to, any rights and powers under considering and authorizing the filing any mortgage, deed of trust, chose in of this action in the name of the credit action, option, collateral note, con- union. No such action in the name of tract, judgment or decree, or instru- the credit union may be instituted ment of any nature; without the authorization of the board (2) Institute, prosecute, maintain, de- of directors of the institution pursuant fend, intervene, and otherwise partici- to a valid board of directors resolution. pate in any and all actions, suits, or No credit union funds shall be available other legal proceedings by and against to pay expenses incurred in bringing a the liquidating agent or the credit legal action to challenge the Board’s union or in which the liquidating liquidation action. agent, the credit union, or its creditors or shareholders, or any of them, shall § 709.4 Powers and duties of liqui- have an interest, and in every way to dating agent. represent the credit union, its share- (a) Inventory of assets. As soon as holders and creditors, subject to the di- practicable after taking possession, the rection of General Counsel; liquidating agent shall inventory the (3) Employ on a salary or fee basis assets of such credit union as of the such persons as in the judgment of the date of taking possession, showing the liquidating agent are necessary or de- value as carried on the books of the sirable to carry out its responsibilities credit union, and the security therefor, and functions, including, but not lim- if any, a brief description of the assets ited to, appraisers and Certified Public and any security, and a record of the Accountants, and pay the costs out of credit union’s creditor and accounts li- the assets of the liquidated credit abilities. union; (b) Notice to creditors. The liquidating (4) Employ or retain any attorney or agent shall promptly publish a notice attorneys designated by, or acceptable to the credit union’s creditors to to, the General Counsel in connection present their claims, together with with litigation or for legal advice and proof, to the liquidating agent by a assistance, for the liquidation gen- date specified in the notice. This date erally or in particular instances, and shall be not less than 90 days after the pay compensation and retainers of such publication of the notice. The liqui- attorney or attorneys, together with

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all expenses, including, but not limited (1) Pay all costs and expenses of the to, the costs and expenses of any litiga- liquidation as determined by the liqui- tion, as approved by the General Coun- dating agent; sel, out of the assets of the liquidated (2) Pay off and discharge taxes and credit union; liens; (5) Execute, acknowledge, and deliver (3) Pay out and expend such sums as any and all deeds, contracts, leases, as- are deemed necessary or advisable for signments, bills of sale, releases, exten- or in connection with the preservation, sions, satisfactions, and other instru- maintenance, conservation, protection, ments necessary or proper for any pur- remodeling, repair, rehabilitation, or poses, including, but not limited to, improvement of any asset or property the effectuation, termination, or trans- of any nature of the credit union or the fer of real, personal or mixed property, liquidating agent; or that shall be necessary or proper to (4) Pay off and discharge any assess- liquidate the credit union, and any ments, liens, claims, or charges of any deed or other instrument executed pur- kind against any asset or property of suant to the authority hereby given any nature on which the credit union shall be as valid and effective for all or the liquidating agent has a lien by purposes as if the same had been exe- way of mortgage, deed of trust, pledge, cuted as the act and deed of the credit or otherwise, or in which the credit union; union or liquidating agent has any in- (6) With concurrence of General terest; Counsel, disaffirm or repudiate any (5) Settle, compromise, or obtain the contract or lease to which the credit release of, for cash or other consider- union is a party, the performance of ation, claims and demands against the which the liquidating agent, in his sole credit union or the liquidating agent; discretion, determines to be burden- and (6) Indemnify its employees and some, and which disaffirmance or repu- agents from the assets of the credit diation in the liquidating agent’s sole union against liabilities incurred in the discretion will promote the orderly ad- good faith performance of their duties. ministration of the credit union’s af- (e) Assets, claims, and contracts. The fairs; liquidating agent shall have power to: (7) Deposit, withdraw, or transfer (1) Sell for cash or on terms, ex- funds, and otherwise exercise complete change, assign, or otherwise dispose of, control over all investment or deposi- in whole or in part, any or all of the as- tory accounts maintained by or for the sets and property of the credit union, credit union at financial dispository or real, personal and mixed, tangible and similar institutions; intangible, of any nature, including (8) Do such things, and have such any mortgage, deed of trust, chose in rights, powers, privileges, immunities, action, bond, note, contract, judgment, and duties, whether or not otherwise or decree, share or certificate of share granted in this part 709, as shall be au- of stock or debt, owing to the credit thorized, directed, conferred, or im- union or the liquidating agent; and posed from time to time by the Board, (2) Surrender, abandon, and release or as shall be conferred by the Federal any chose in action, or other assets or Credit Union Act; property of any nature, whether the (9) Exercise such other authority as subject of pending litigation or not, is conferred by the Federal Credit and settle, compromise, modify, or re- Union Act; and lease, for cash or other consideration, (10) Where acting as liquidating claims and demands in favor of the agent for a state-chartered federally credit union or the liquidating agent. insured credit union, exercise all the rights, powers, and privileges granted § 709.5 Payout priorities in involun- by state law to such a liquidating tary liquidation. agent. (a) Claimants whose claims are se- (d) Expenditure of funds of the liquida- cured shall receive their security. To tion. The liquidating agent shall have the extent their respective claims ex- power to: ceed the value of the security for those

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claims, as determined to the satisfac- any claims of lesser priority are paid. tion of the liquidating agent, they If there are insufficient funds to pay all shall each have an unsecured claim claims of a category or class, payment against the credit union having pri- shall be made pro rata. Notwith- ority as provided in paragraph (b) of standing anything to the contrary this section. herein, the liquidating agent may, at (b) Unsecured claims against the liq- any time, and from time to time, prior uidation estate that are proved to the to the payment in full of all claims of satisfaction of the liquidating agent a category or class with higher pri- shall have priority in the following ority, make such distributions to order: claimants in priority categories de- (1) Administrative costs and expenses scribed in paragraphs (b)(1), (b)(2), of liquidation; (b)(3), (b)(4), and (b)(5) of this section as (2) Claims for wages and salaries, in- the liquidating agent believes are rea- cluding vacation, severance, and sick sonably necessary to conduct the liq- leave pay; uidation, provided that the liquidating (3) Taxes legally due and owing to agent determines that adequate funds the United States or any state or sub- exist or will be recovered during the division thereof; liquidation to pay in full all claims of (4) Debts due and owing the United any higher priority. If a surplus re- States, including the National Credit mains after making distribution in full Union Administration; on all allowed claims described in para- (5) General creditors, and secured creditors (to the extent that their re- graphs (b)(1) through (b)(9) of this sec- spective claims exceed the value of the tion, such surplus shall be distributed security for those claims); pro rata to the credit union’s share- (6) Shareholders to the extent of holders. their respective uninsured shares and [56 FR 56825, Nov. 7, 1991, as amended at 61 the National Credit Union Share Insur- FR 3791, Feb. 2, 1996; 62 FR 12949, Mar. 19, ance Fund to the extent of its payment 1997; 64 FR 57365, Oct. 25, 1999] of share insurance; (7) In a case involving liquidation of § 709.6 Initial determination of cred- a corporate credit union, membership itor claims by the liquidating agent. capital; (a)(1) Any party wishing to submit a (8) In a case involving liquidation of claim against the liquidated credit a low-income designated credit union, union must submit a written proof of any outstanding secondary capital ac- claim in accordance with the require- counts issued pursuant to the author- ments set forth in the notice to credi- ity of §§ 701.34 or 741.204(c) of this chap- tors. A failure to submit a written ter; and claim within the time provided in the (9) In a case involving liquidation of notice to creditors shall be deemed a a corporate credit union, paid-in cap- waiver of said claim and claimant shall ital. have no further rights or remedies with (c) Priorities are to be based on the respect to such claim. circumstances that exist on the date of (2) Notwithstanding paragraph (a)(1) liquidation. of this section, the liquidating agent (d) If the repudiation or may, at his discretion, consider an un- disaffirmance of any contract or lease gives rise to a claim for damages, such timely claim provide the following two claim shall be considered a general criteria are present: creditor claim under paragraph (b)(5) of (i) The claimant did not receive no- this section and not a cost or expense tice of the appointment of the liqui- of liquidation under paragraph (b)(1) of dating agent in time to file a claim be- this section. fore the date provided for in the notice; (e) All unsecured claims of any cat- and egory or class or priority described in (ii) The claim is filed in time to per- paragraphs (b)(1) through (b)(7) of this mit payment of the claim. section shall be paid in full, or provi- (b) The liquidating agent may require sions made for such payment, before submission of supplemental evidence

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by the claimant and by interested par- § 709.7 Procedures for appeal of initial ties in the event of a dispute con- determination. cerning a claim against any asset of In order to appeal all or part of an the liquidated credit union. In requir- initial decision which disallows a ing the submission of supplemental claim, in whole or in part, a claimant evidence, the liquidating agent may set must, within 60 days of the mailing of such limitations of time, scope, and the initial determination, file an ad- size as the liquidating agent deems rea- ministrative appeal pursuant to § 709.8 sonable in the circumstances, and may of this part, or file suit against the liq- refuse to include in the record submis- uidated credit union in the United sions or portions of submissions not in States District Court for the District compliance with such limitations or of Columbia or in the United States requirements. The liquidating agent district court having jurisdiction over shall compile such written record of a the place where the credit union’s prin- claim or dispute as, in its discretion, is cipal place of business is located, or deemed sufficient to provide a reason- continue an action commenced before able basis for allowing or disallowing a the appointment of the liquidating claim or resolving a dispute. This writ- agent. If the claimant does not appeal ten record shall be considered the ad- or file or continue a suit, any disallow- ministrative record. ance shall be final and the claimant (c) The liquidating agent shall deter- shall have no further rights or rem- mine whether to allow or disallow a edies with respect to such claim. claim and shall notify the claimant § 709.8 Administrative appeal of the within 180 days from the date a claim initial determination. against a credit union is filed pursuant to paragraph (a)(1) of the section. This (a) General. A claimant requesting an 180-day period may be extended by administrative appeal may request re- written agreement between the claim- view pursuant to any of the procedures ant and the liquidating agent. Failure listed in paragraph (b) or (c) of this sec- by the liquidating agent to determine a tion. Any appeal of the initial deter- claim and notify the claimant within mination must be in writing and must the 180-day period or, if the period is specify what type of appeal the claim- extended, within the extended period, ant requests. The determination of shall be deemed a denial of the claim. whether to agree to a request for administrative appeal shall rest solely (d) If a claim or any portion thereof with the Board, which shall notify the is disallowed, the notice to the claim- claimant of its decision in writing. The ant shall contain a statement of the 60 day period for filing a lawsuit in reasons for the disallowance and an ex- United States district court, provided planation of appeal rights pursuant to for in § 709.7 of this part, shall be tolled § 709.7 of this part. from the date of claimant’s request for (e) Notice of any determination with an administrative appeal to the date of respect to a claim shall be sufficient if the Board’s decision regarding that re- mailed to the most recent address of quest. the claimant which appears: (b) Hearing on the record. Except as (1) On the credit union’s books; provided herein, any hearing requested (2) In the claim filed by the claimant; pursuant to this section shall be con- or ducted in accordance with the provi- (3) In the documents submitted in the sions of subpart A, part 747, of this proof of claim. chapter. The Board shall render a final (f) In the event the liquidating agent decision with respect to such claim disallows all or part of a claim, the liq- after consideration of the hearing uidating agent shall file with the record and recommended decision. The Board, or its designated agent, a report Board’s determination shall be subject of its determination. This report shall to judicial review under chapter 7 of become part of the record and shall in- title 5, United States Code. Any claim- clude the notice to the claimant and ant seeking judicial review of the findings on all issues raised and de- Board’s final decision under this para- cided by the liquidating agent. graph must file a petition in the court

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of appeals for the circuit in which the Board may request in writing that the principal office of the credit union is claimant submit supplemental evi- located, or in the United States Court dence in support of its appeal. If addi- of Appeals for the District of Columbia tional evidence is requested, the claim- Circuit, within 30 days of the date of ant shall have 45 days from the date of the Board’s final decision. If a claim- issuance of such request to provide ant does not file a petition before the such additional information. Failure end of the 30-day period, the Board’s by the claimant to provide such addi- decision shall be final, and the claim- tional information may, as determined ant shall have no further rights or rem- solely by the Board, result in denial of edies with respect to such claim. the claimant’s appeal. (1) Burden of proof. In any hearing on (B) Within 60 days from the date of the record, the burden of proof to es- the Board’s receipt of an appeal, pursu- tablish entitlement to any modifica- ant to paragraph (c)(1) of this section, tion of the initial determination shall the claimant may amend or supple- rest solely upon the claimant. ment the appeal in writing. In the (2) Order of procedure. In any hearing event the claimant does amend or sup- on the record, at the time for opening plement the appeal, the provisions of arguments, counsel for the claimant paragraph (c)(1)(ii)(A) of this section, shall argue first, and at the time for with respect to requests for additional closing arguments, counsel for the information and responses to such re- claimant shall argue last. quests, shall apply with equal force to (c) Alternative dispute resolution. Para- any such amendment or supplement to graphs (c) (1) and (2) of this section list an appeal. alternatives for dispute resolution (iii) Determination on appeal. (A) which may be available at the discre- Within 180 days from the date of re- tion of the Board. From time to time, ceipt of an appeal by the Board, the the NCUA Board may authorize addi- Board shall issue a decision allowing or tional alternative dispute resolution disallowing claimant’s appeal. processes. (B) The decision by the Board on ap- (1) Appeal to the Board. Pursuant to peal shall be provided to the claimant this paragraph (c)(1), the claimant may in writing, stating the reasons for the file an appeal with the NCUA Board decision, and shall constitute a final within the time provided for in § 709.7. agency decision regarding the claim- The appeal must be in writing and filed ant’s claim. with the Secretary of the Board, Na- (C) Failure by the Board to issue a tional Credit Union Administration, decision on appeal of the claimant’s 1775 Duke Street, Alexandria, VA 22314– claim within the 180-day period pro- 3428. There shall be no personal appear- vided for under paragraph (c)(1)(iii)(A) ance before the Board in connection of this section shall be deemed to be a with an appeal under this paragraph denial of such appeal for the purposes (c)(1). of paragraph (c)(1)(iv) of this section. (i) Content of appeal. Any appeal must (iv) Judicial review. (A) For the pur- include: poses of seeking judicial review of ac- (A) A statement of the facts on which tions taken pursuant to paragraph the appeal is based; (c)(1) of this section, only a determina- (B) A statement of the basis for the tion on appeal issued by the NCUA initial determination to which the Board pursuant to this section shall claimant objects and the alleged error constitute a final determination re- in such determination, including cita- garding a claim. tions to applicable statutes and regula- (B) A final determination by the tions; Board is reviewable in accordance with (C) Any other evidence relied upon by the provisions of chapter 7, title 5, the claimant which was not previously United States Code, by the United provided to the liquidating agent. States Court of Appeals for the District (ii) Procedures for review of the appeal. of Columbia or the court of appeals for (A) Within 60 days of the date of the the Federal judicial circuit where the Board’s receipt of an appeal, pursuant credit union’s principal place of busi- to paragraph (c)(1) of this section, the ness is located. Any request for judicial

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review under this paragraph must be harm likely to occur if expedited relief filed within 60 days of the date of the is not granted; Board’s final decision. If any claimant (4) An assessment of the likelihood of fails to file before the end of the 60-day success on the merits of the underlying period, the Board’s decision shall be claim, including statutory citations final, and the claimant shall have no and relevant documentation supporting further rights or remedies with respect the merits of the claim; to such claim. (5) Any other relevant documenta- (2) The following additional proce- tion that supports the request; dures for dispute resolution may be (6) Citations to applicable statutes, made available at the sole discretion of regulations, or other legal authority; the Board: mediation; nonbinding arbi- and tration; and neutral fact finding. (7) A signed statement certifying [56 FR 56925, Nov. 7, 1991, as amended at 59 that a copy of the request has been FR 36041, July 15, 1994] mailed or hand delivered to the liquidating agent on or before the day that § 709.9 Expedited determination of the request was filed with the Board. creditor claims. (d) Burden of proof. The burden of (a) General. The provisions of this proving entitlement to expedited relief section establish procedures under rests at all times with the requester. which claimants may request expedited (e) Additional information. The Board relief in lieu of the procedures set forth may order the filing of additional in- in § 709.6 of this part. A claimant shall formation and or documentation in be entitled to expedited determination order to make its determination. Such of a claim only upon a showing that filing shall be on a date certain, and there exists a legally valid and enforce- failure to provide the additional docu- able or perfected security interest in mentation or information may con- assets of the liquidated credit union stitute the sole grounds for denial of and that irreparable injury will occur the request. if the routine claims procedure is fol- (f) Decision. Before the end of the 90- lowed. day period beginning on the date a re- (b) Filing of request for expedited relief. quest if filed, the Board shall render its All requests for expedited relief must decision and provide it to the re- be filed within 30 days from the date of quester. The Board will determine mailing, by the liquidating agent, of whether to grant expedited review and the notice to the creditor concerned. allow or disallow the claim or whether The request shall be deemed to be filed such claim should be resolved pursuant when received by the Secretary of the to the claims process described in Board, National Credit Union Adminis- § 709.6 of this part. tration, 1775 Duke Street, Alexandria, (1) Expedited review denied. A decision VA 22314–3428. A copy of the request by the Board that expedited review is must be simultaneously served upon not appropriate shall be final and the the liquidating agent for the credit claim shall be decided pursuant to the union concerned. There shall be no claims adjudication process set forth in right of personal appearance before the § 709.6 of this part. Board in connection with any claim (2) Expedited review granted. If expe- submitted under this paragraph. dited review is granted, the Board shall (c) Content of request for expedited re- decide the claim. If the claim is dis- lief. Any Request for Expedited Relief allowed, in whole or part, the decision must contain the following: shall contain a statement of each rea- (1) A clear and concise statement of son for the disallowance and the proce- the facts and issues on which the re- dure for obtaining judicial review. quest is based; (g) Period for filing or renewing suit. (2) A clear and concise statement de- Any claimant who files a request for scribing the nature of any security in- expedited relief shall be permitted to terests in any assets of the credit file a suit, or to continue a suit filed union; before the appointment of the liqui- (3) A clear and concise statement of dating agent, seeking a determination the probable, imminent and irreparable of the claimant’s rights with respect to

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its security interest after the earlier agreement that requires the lead to re- of: purchase the participant’s interest or (1) The end of the 90-day period be- to otherwise compensate the partici- ginning on the date of the filing of a re- pant due to a default on the underlying quest for expedited relief; or obligation. (2) The date the Board denies all or (5) Securitization means the issuance part of the claim. by a special purpose entity of bene- (h) Statute of limitations. If an action ficial interests: described in paragraph (g) of this sec- (i) The most senior class of which at tion is not filed, or the motion to time of issuance is rated in one of the renew a previously filed suit is not four highest categories assigned to made, before the end of the 30-day pe- long-term debt or in an equivalent riod beginning on the date on which such action or motion may be filed in short-term category (within either of accordance with paragraph (g) of this which there may be sub-categories or section, the claim shall be deemed to gradations indicating relative stand- be disallowed as of the end of such pe- ing) by one or more nationally recog- riod (other than any portion of such nized statistical rating organizations; claim that was allowed by the Board). or Such disallowance shall be final and (ii) Which are sold in transactions by the claimant shall have no further an issuer not involving any public of- rights or remedies with respect to such fering for purposes of section 4 of the claim. Securities Act of 1933, as amended, or in transactions exempt from registra- [56 FR 56925, Nov. 7, 1991, as amended at 59 FR 36041, July 15, 1994] tion under such Act under 17 CFR 230.91 through 230.905 (Regulation S) there- § 709.10 Treatment by conservator or under (or any successor regulation). liquidating agent of financial assets (6) Special purpose entity means a transferred in connection with a trust, corporation, or other entity de- securitization or participation. monstrably distinct from the federally- (a) Definitions. (1) Beneficial interest insured credit union that is primarily means debt or equity (or mixed) inter- engaged in acquiring and holding (or ests or obligations of any type issued transferring to another special purpose by a special purpose entity that entitle entity) financial assets, and in activi- their holders to receive payments that ties related or incidental thereto, in depend primarily on the cash flow from connection with the issuance by such financial assets owned by the special special purpose entity (or by another purpose entity. special purpose entity that acquires fi- (2) Financial asset means cash or a nancial assets directly or indirectly contract or instrument that conveys to from such special purpose entity) of one entity a contractual right to re- beneficial interests. ceive cash or another financial instrument from another entity. (b) The Board, by exercise of its au- (3) Legal isolation means that trans- thority to disaffirm or repudiate conferred financial assets have been put tracts under 12 U.S.C. 1787(c), will not presumptively beyond the reach of the reclaim, recover, or recharacterize as transferor, its creditors, a trustee in property of the credit union or the liq- bankruptcy, or a receiver, either by a uidation estate any financial assets single transaction or a series of trans- transferred to another party by a feder- actions taken as a whole. ally-insured credit union in connection (4) Participation means the transfer or with a securitization or participation, assignment of an undivided interest in provided that a transfer meets all con- all or part of a loan or a lease from a ditions for sale accounting treatment seller, known as the ‘‘lead,’’ to a buyer, under generally accepted accounting known as the ‘‘participant,’’ without principles, other than the ‘‘legal isola- recourse to the lead, under an agree- tion’’ condition addressed by this sec- ment between the lead and the partici- tion. pant. Without recourse means that the (c) Paragraph (b) of this section will participation is not subject to any not apply unless the federally-insured

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credit union received adequate consid- § 709.11 Treatment by conservator or eration for the transfer of financial as- liquidating agent of collateralized sets at the time of the transfer, and the public funds. documentation effecting the transfer of An agreement to provide for the law- financial assets reflects the intent of ful collateralization of funds of a fed- the parties to treat the transaction as eral, state, or local governmental enti- a sale, and not as a secured borrowing, ty or of any depositor or member re- for accounting purposes. ferred to in section 207(k)(2)(A) of the (d) Paragraph (b) of this section will Act will not be deemed to be invalid not be construed as waiving, limiting, under sections 207(b)(9) and 208(a)(3) of or otherwise affecting the power of the the Act solely because such agreement Board, as conservator or liquidating was not executed contemporaneously agent, to disaffirm or repudiate any with the acquisition of collateral or agreement imposing continuing obliga- with any changes, increases, or substi- tions or duties upon the federally-in- tutions in the collateral made in ac- sured credit union in conservatorship cordance with such agreement, pro- or the liquidation estate. vided the following conditions are met: (a) The agreement was undertaken in (e) Paragraph (b) of this section will the ordinary course of business, not in not be construed as waiving, limiting contemplation of insolvency, and with or otherwise affecting the rights or no intent to hinder, delay or defraud powers of the Board to take any action the credit union or its creditors; or to exercise any power not specifi- (b) The secured obligation represents cally limited by this section, including, a bona fide and arm’s length trans- but not limited to, any rights, powers action; or remedies of the Board regarding (c) The secured party or parties are transfers taken in contemplation of the not insiders or affiliates of the credit credit union’s insolvency or with the union; intent to hinder, delay, or defraud the (d) The grant or creation of the secu- credit union or the creditors of such rity interest was for adequate consider- credit union, or that is a fraudulent ation; and, transfer under applicable law. (e) The security agreement evidenc- (f) The Board will not seek to avoid ing the security interest is in writing, an otherwise legally enforceable was approved by the credit union’s securitization agreement or participa- board of directors, and has been con- tion agreement executed by a feder- tinuously an official record of the cred- ally-insured credit union solely be- it union from the time of its execution. cause such agreement does not meet [65 FR 55443, Sept. 14, 2000] the ‘‘contemporaneous’’ requirement of sections 207(b)(9) and 208(a)(3) of the § 709.12 Prepayment fees to Federal Federal Credit Union Act. Home Loan Bank. (g) This section may be repealed by The Board as conservator or liqui- the NCUA upon 30 days notice and op- dating agent of a federally-insured portunity for comment provided in the credit union in receipt of any extension FEDERAL REGISTER, but any such repeal of credit from a Federal Home Loan or amendment will not apply to any Bank will allow a claim for a prepay- transfers of financial assets made in ment fee by the Bank if: connection with a securitization or (a) The claim is made pursuant to a participation that was in effect before written contract that provides for a such repeal or modification. For pur- prepayment fee but the prepayment fee poses of this paragraph, a allowed by the Board will not exceed securitization would be in effect on the the present value of the loss attrib- earliest date that the most senior level utable to the difference between the of beneficial interests is issued, and a contract rate of the secured borrowing participation would be in effect on the and the reinvestment rate then avail- date that the parties executed the parable to the Bank; and (b) The indebtedness owed to the ticipation agreement. Bank is secured by sufficient collateral [65 FR 55442, Sept. 14, 2000] in which a perfected security interest

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in favor of the Bank exists or as to § 710.0 Scope. which the Bank’s security interest is This part describes the requirements entitled to priority under section 306(d) that must be followed to accomplish of the Competitive Equality Banking the voluntary liquidation of a Federal Act of 1987, 12 U.S.C. 1430(e), or other- credit union. Federally insured state wise so that the aggregate of the out- credit unions are only subject to the standing principal on the advances se- notification requirement provided in cured by the collateral, the accrued but § 710.9; voluntary liquidation is to be unpaid interest on the outstanding accomplished in accordance with state principal and the prepayment fee appli- law or procedures established by the cable to the advances can be paid in state regulatory authority. full from the amounts realized from the collateral. For purposes of this § 710.1 Definitions. paragraph, the adequacy of the collat- For the purpose of this part, the fol- eral will be determined as of the date lowing definitions apply: the prepayment fees are due and pay- (a) Voluntary liquidation means the able under the terms of the written dissolution of a solvent Federal credit contract. union with the assets being sold or col- [66 FR 40575, Aug. 3, 2001] lected, liabilities paid, and shares distributed under the direction of the § 709.13 Treatment of swap agree- board of directors or its duly appointed ments in liquidation or con- liquidating agent. servatorship. (b) Liquidation date means the date the members vote to approve liquida- The Board has determined that a tion. swap agreement, as defined in the Fed- (c) Liquidating agent means the per- eral Deposit Insurance Act at 12 U.S.C. son or persons, including any legally 1821(e)(8)(D)(vi), is a qualified financial recognized entity, appointed by the contract for purposes of the special board of directors to liquidate the Fed- treatment for qualified financial con- eral credit union. tracts provided in 12 U.S.C. 1787(c). Any master agreement for any swap agree- § 710.2 Responsibility for conducting ment, together with all supplements to voluntary liquidation. such master agreement, will be treated (a) The board of directors shall be re- as one swap agreement. sponsible for conserving the assets, for [68 FR 32356, May 30, 2003] expediting the liquidation, and for equitable distribution of the assets to the members. PART 710—VOLUNTARY (b) After voting to present the ques- LIQUIDATION tion of liquidation to the members, the board of directors may appoint a liqui- Sec. dating agent and delegate all or part of 710.0 Scope. the board’s responsibility to such agent 710.1 Definitions. and authorize reasonable compensation 710.2 Responsibility for conducting vol- for the services provided. untary liquidation. (c) The board of directors shall deter- 710.3 Approval of the liquidation proposal mine that the liquidating agent and all by members. persons who handle or have access to 710.4 Transaction of business during liq- funds of the Federal credit union are uidation. adequately covered by surety bond and 710.5 Notice of liquidation to creditors. that either such coverage remains in 710.6 Distribution of assets. 710.7 Retention of records. effect, or the discovery period is ex- 710.8 Certificate of dissolution and liquida- tended, for at least four months after tion. final distribution of assets. 710.9 Federally insured state credit unions. (d) Within three days after the decision of the board of directors to submit AUTHORITY: 12 U.S.C. 1766(a), 1786, and 1787. the question of liquidation to the mem- SOURCE: 58 FR 35365, July 1, 1993, unless bers, the Regional Director will be no- otherwise noted. tified in writing, setting forth in detail

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the reasons for the proposed action. A board of directors may rescind the de- balance sheet and income statement as cision to liquidate unless the Regional of the previous month-end will be in- Director concurs in the recision. cluded with the notification. During (e) The Regional Director will be no- the liquidation process, financial state- tified in writing of the results of the ments will be submitted to the Re- membership vote on the voluntary liq- gional Director as requested. uidation proposal within three days of (e) Promptly after the decision to the date of the vote. present the question of liquidation to [58 FR 35365, July 1, 1993, as amended at 72 the members, the board of directors or FR 30246, May 31, 2007] liquidating agency shall develop a written plan for the liquidation of the § 710.4 Transaction of business during assets and payment of shares (liquida- liquidation. tion plan). The plan should provide for (a) Immediately upon decision by the the liquidation of assets and payment board of directors to present the ques- of creditors and shareholders within tion of liquidation to the members, one year of the liquidation date. If the payments on shares, withdrawal of liquidation period is projected to ex- shares (except for transfer of shares to ceed one year, an explanation must be loans and interest), transfer of shares provided in the liquidation plan. A to another share account, granting of copy of the liquidation plan will be loans, and making of investments mailed to the Regional Director within other than short-term investments 30 days of the date the board of direc- shall be suspended pending action by tors votes to present the question of the members on the proposal to liq- liquidation to the members. uidate. Collection of loans and interest, payment of necessary expenses, clear- § 710.3 Approval of the liquidation pro- ing of share drafts and credit card posal by members. charges will continue. (a) When the board of directors de- (b) Upon approval of the members, cides to present the question of liquida- payments on shares, withdrawal of tion to the members, it shall act shares (except for transfer of shares to promptly to obtain the members’ ap- loans and interest), transfer of shares proval. The members shall be given ad- to another share account, granting of vance notice of the membership meet- loans, and making of investments ing at which the liquidation proposal is other than short-term investments to be submitted. The notice shall: shall be discontinued permanently. (1) Inform members that they have Collection of loans and interest and the right to vote on the liquidation payment of necessary expenses will proposal in person at the membership continue during the period of liquida- meeting called for that purpose or by tion. Members will be notified to dis- written ballot to be received no later continue the use of share drafts and than the time and date indicated on credit cards, and items will not be the notice. cleared 15 days from the liquidation (2) Include or be accompanied by a date. ballot for the liquidation proposal. (c) Approval of the Regional Director (b) The liquidation proposal must be must be obtained prior to consum- approved by the affirmative vote of a mating any sale of assets which would majority of the Federal credit union not provide sufficient funds to pay members who vote on the proposal. shareholders at par. (c) If the members do not approve the liquidation, the board of directors, or if § 710.5 Notice of liquidation to credi- delegated the authority, the liqui- tors. dating agent, must decide within seven (a) When approval for liquidation is days whether the Federal credit union obtained from the members, the board should resume operations or, if good of directors or the liquidating agent cause exists, to resubmit the question shall cause notice to be given to credi- of liquidation to the members. tors to present their claims. (d) If the members approve the liq- (1) Federal credit unions with assets uidation, neither the members nor the in excess of $5 million as of the month

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end prior to the liquidation date shall puted, checks shall be drawn for the publish the notice once a week in each amounts to be distributed to each of three successive weeks, in a news- member. The checks shall be mailed to paper of general circulation, in each the members at their last known ad- county in which the Federal credit dress or handed to them in person. union maintains an office or branch for (d) Unclaimed share accounts, unpaid the transaction of business on the liq- claims, and unpaid claims of members uidation date. The first notice shall be or creditors who failed to cash their published within seven days of the liq- final distribution checks shall be uidation date. trusteed or escheated in accordance (2) Federal credit unions with assets with the laws of the state in which the in excess of $500,000 but less than $5 member or creditor resides. million as of the month end prior to (e) The Regional Director will be no- the liquidation date shall publish the tified in writing within three days notice once, in a newspaper of general when the final distribution of assets to circulation, in each county in which the members is started. the Federal credit union maintains an office or branch for the transaction of § 710.7 Retention of records. business on the liquidation date. The (a) The board of directors or liqui- notice shall be published within seven dating agent shall appoint a custodian days of the liquidation date. for the Federal credit union’s records (3) Federal credit unions with assets which are to be retained after the final less than $500,000 as of the month end distribution of assets. prior to the liquidation date shall not (b) All records of the liquidated Fed- be required to publish the notice. eral credit union necessary to establish (b) Within 10 days of the liquidation that creditors were paid and that as- date, a copy of the notice of liquidation sets were equitably distributed to the shall be mailed to all creditors re- members shall be retained by the cus- flected on the records of the Federal todian for a period of five years fol- credit union. lowing the date of charter cancellation. (c) Creditors shall be provided 30 days from the liquidation date to submit § 710.8 Certificate of dissolution and their claims. liquidation. § 710.6 Distribution of assets. Within 120 days after the final dis- (a) With the approval of the regional tribution of assets to members is start- director, a partial pro rata distribution ed, a duly executed Certificate of Dis- of the Federal credit union’s assets solution and Liquidation shall be filed may be made to its members from cash with the Regional Director. funds available on authorization by the § 710.9 Federally insured state credit board of directors or liquidating agent. unions. Payment of a partial distribution may exclude member accounts of less than A federal insured state credit union $25.00. will notify the Regional Director in (b) After all assets of the Federal writing within three days after the credit union have been converted to board of directors’ decision to liquidate cash or found to be worthless and all is made. A balance sheet and income loans and debts owing to it have been statement as of the previous month- collected or found to be uncollectible end and a copy of any liquidation plan and all obligations of the Federal cred- will be included with the notification it union have been paid, with the ex- to the Regional Director. ception of shares due its members, the books shall be closed and the pro rata PART 711—MANAGEMENT distribution to the members shall be OFFICIAL INTERLOCKS computed. The computation shall be based on the total amount in each Sec. share account. 711.1 Authority, purpose, and scope. (c) Promptly after the pro rata dis- 711.2 Definitions. tribution to members has been com- 711.3 Prohibitions.

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711.4 Interlocking relationships permitted agency determines, after giving the af- by statute. fected persons the opportunity to re- 711.5 Small market share exemption. spond, that the asserted affiliation was 711.6 General exemption. established in order to avoid the prohi- 711.7 Change in circumstances. 711.8 Enforcement. bitions of the Interlocks Act and does not represent a true commonality of AUTHORITY: 12 U.S.C. 1757 and 3201–3208. interest between the depository organi- SOURCE: 61 FR 50702, Sept. 27, 1996, unless zations. In making this determination, otherwise noted. the appropriate Federal supervisory agency considers, among other things, § 711.1 Authority, purpose, and scope. whether a person, including members (a) Authority. This part is issued of his or her immediate family, whose under the provisions of the Depository shares are necessary to constitute the Institution Management Interlocks group owns a nominal percentage of Act (Interlocks Act) (12 U.S.C. 3201 et the shares of one of the organizations seq). and the percentage is substantially dis- (b) Purpose. The purpose of the Inter- proportionate to that person’s owner- locks Act and this part is to foster ship of shares in the other organiza- competition by generally prohibiting a tion. management official from serving two (b) Area median income means: nonaffiliated depository organizations (1) The median family income for the in situations where the management metropolitan statistical area (MSA), if interlock likely would have an anti- a depository organization is located in competitive effect. an MSA; or (c) Scope. This part applies to man- (2) The statewide nonmetropolitan agement officials of federally insured median family income, if a depository credit unions. Section 711.4(c) exempts organization is located outside an a management official of a credit union MSA. from the prohibitions of the Interlocks (c) Community means a city, town, or Act when the individual serves as a village, and contiguous or adjacent cit- management official of another credit ies, towns, or villages. union. Therefore, the Interlocks Act (d) Contiguous or adjacent cities, towns, prohibitions contained in this part or villages means cities, towns, or vil- only apply to a management official of lages whose borders touch each other a credit union when that individual or whose borders are within 10 road also serves as a management official of miles of each other at their closest another type of depository organiza- points. The property line of an office tion (usually a bank or thrift). located in an unincorporated city, town, or village is the boundary line of § 711.2 Definitions. that city, town, or village for the pur- For purposes of this part, the fol- pose of this definition. lowing definitions apply: (e) Depository holding company means (a) Affiliate. (1) The term affiliate has a bank holding company or a savings the meaning given in section 202 of the and loan holding company (as more Interlocks Act (12 U.S.C. 3201). For pur- fully defined in section 202 of the Inter- poses of that section 202, shares held by locks Act (12 U.S.C. 3201) having its an individual include shares held by principal office located in the United members of his or her immediate fam- States. ily. ‘‘Immediate family’’ means spouse, (f) Depository institution means a com- mother, father, child, grandchild, sis- mercial bank (including a private ter, brother, or any of their spouses, bank), a savings bank, a trust com- whether or not any of their shares are pany, a savings and loan association, a held in trust. building and loan association, a home- (2) For purposes of section 202(3)(B) of stead association, a cooperative bank, the Interlocks Act (12 U.S.C. an industrial bank, or a credit union, 3201(3)(B)), an affiliate relationship in- chartered under the laws of the United volving a depository institution based States and having a principal office lo- on common ownership does not exist if cated in the United States. Addition- the appropriate federal supervisory ally, a United States office, including a

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branch or agency, of a foreign commer- (m) Person means a natural person, cial bank is a depository institution. corporation, or other business entity. (g) Depository institution affiliate (n) Relevant metropolitan statistical means a depository institution that is area (RMSA) means an MSA, a primary an affiliate of a depository organiza- MSA, or a consolidated MSA that is tion. not comprised of designated primary (h) Depository organization means a MSAs to the extent that these terms depository institution or a depository are defined and applied by the Office of holding company. Management and Budget. (i) District bank means any State (o) Representative or nominee means a bank operating under the Code of Law natural person who serves as a manage- of the District of Columbia. ment official and has an obligation to (j) Low and moderate-income areas act on behalf of another person with re- means census tracts (or, if an area is spect to management responsibilities. not in a census tract, block numbering NCUA will find that a person has an ob- areas delineated by the United States ligation to act on behalf of another Bureau of the Census) where the me- person only if the first person has an dian family income is less than 100 per- agreement, express or implied, to act cent of the area median income. on behalf of the second person with re- (k) Management official. (1) The term spect to management responsibilities. management official means: NCUA will determine, after giving the (i) A director; affected persons an opportunity to re- (ii) An advisory or honorary director spond, whether a person is a representa- of a depository institution with total tive or nominee. assets of $100 million or more; (p) Total assets. (1) The term total as- (iii) A senior executive officer as that sets means assets measured on a con- term is defined in 12 CFR 701.14(b)(2), or solidated basis and reported in the a person holding an equivalent position most recent fiscal year-end Consoli- regardless of title; dated Report of Condition and Income. (iv) A branch manager; (2) The term total assets does not in- (v) A trustee of a depository organi- clude: zation under the control of trustees; (i) Assets of a diversified savings and and loan holding company as defined by (vi) Any person who has a representa- section 10(a)(1)(F) of the Home Owners’ tive or nominee serving in any of the Loan Act (12 U.S.C. 1467a(a)(1)(F)) capacities in this paragraph (m)(1). other than the assets of its depository (2) The term management official does institution affiliate; not include: (ii) Assets of a bank holding company (i) A person whose management func- that is exempt from the prohibitions of tions relate exclusively to the business section 4 of the Bank Holding Company of retail merchandising or manufac- Act of 1956 pursuant to an order issued turing; under section 4(d) of that Act (12 U.S.C. (ii) A person whose management 1843(d)) other than the assets of its de- functions relate principally to the busi- pository institution affiliate; or ness outside the United States of a for- (iii) Assets of offices of a foreign eign commercial bank; or commercial bank other than the assets (iii) A person described in the provi- of its United States branch or agency. sions of section 202(4) of the Interlocks (q) United States includes any State Act (12 U.S.C. 3201(4)) (referring to an or territory of the United States of officer of a State-chartered savings America, the District of Columbia, bank, cooperative bank, or trust com- Puerto Rico, Guam, American Samoa, pany that neither makes real estate and the Virgin Islands. mortgage loans nor accepts savings). [61 FR 50702, Sept. 27, 1996, as amended at 64 (l) Office means a principal or branch FR 66360, Nov. 26, 1999; 73 FR 30477, May 28, office of a depository institution lo- 2008] cated in the United States. Office does not include a representative office of a § 711.3 Prohibitions. foreign commercial bank, an electronic (a) Community. A management offi- terminal, or a loan production office. cial of a depository organization may

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not serve at the same time as a man- (d) A depository organization that agement official of an unaffiliated de- does not do business within the United pository organization if the depository States except as an incident to its ac- organizations in question (or a deposi- tivities outside the United States; tory institution affiliate thereof) have (e) A State-chartered savings and offices in the same community. loan guaranty corporation; (b) RMSA. A management official of a (f) A Federal Home Loan Bank or any depository organization may not serve other bank organized solely to serve at the same time as a management of- depository institutions (a bankers’ ficial of an unaffiliated depository or- bank) or solely for the purpose of pro- ganization if the depository organiza- viding securities clearing services and tions in question (or a depository insti- services related thereto for depository tution affiliate thereof) have offices in institutions and securities companies; the same RMSA and each depository (g) A depository organization that is organization has total assets of $50 mil- closed or is in danger of closing as de- lion or more. termined by the appropriate Federal (c) Major assets. A management offi- depository institutions regulatory cial of a depository organization with agency and is acquired by another de- total assets exceeding $2.5 billion (or pository organization. This exemption any affiliate thereof) may not serve at lasts for five years, beginning on the the same time as a management offi- date the depository organization is ac- cial of an unaffiliated depository orga- quired; and nization with total assets exceeding (h)(1) A diversified savings and loan $1.5 billion (or any affiliate thereof), holding company (as defined in section regardless of the location of the two 10(a)(1)(F) of the Home Owners’ Loan depository organizations. The NCUA Act (12 U.S.C. 1467a(a)(1)(F)) with re- will adjust these thresholds, as nec- spect to the service of a director of essary, based on year-to-year change in such company who also is a director of the average of the Consumer Price an unaffiliated depository organization Index for the Urban Wage Earners and if: Clerical Workers, not seasonally ad- (i) Both the diversified savings and justed, with rounding to the nearest loan holding company and the unaffili- $100 million. The NCUA will announce ated depository organization notify the revised thresholds by publishing a their appropriate Federal depository notice in the FEDERAL REGISTER. institutions regulatory agency at least [61 FR 50702, Sept. 27, 1996, as amended at 64 60 days before the dual service is pro- FR 66360, Nov. 26, 1999; 72 FR 58249, Oct. 15, posed to begin; and 2007] (ii) The appropriate regulatory agency does not disapprove the dual service § 711.4 Interlocking relationships per- before the end of the 60-day period. mitted by statute. (2) The NCUA Board or its designee The prohibitions of § 711.3 do not may disapprove a notice of proposed apply in the case of any one or more of service if it finds that: the following organizations or to a sub- (i) The service cannot be structured sidiary thereof: or limited so as to preclude an anti- (a) A depository organization that competitive effect in financial services has been placed formally in liquida- in any part of the United States; tion, or which is in the hands of a re- (ii) The service would lead to sub- ceiver, conservator, or other official stantial conflicts of interest or unsafe exercising a similar function; or unsound practices; or (b) A corporation operating under (iii) The notificant failed to furnish section 25 or section 25A of the Federal all the information required by NCUA. Reserve Act (12 U.S.C. 601 et seq. and 12 (3) The NCUA Board or its designee U.S.C. 611 et seq., respectively) (Edge may require that any interlock per- Corporations and Agreement Corpora- mitted under this paragraph (h) be ter- tions); minated if a change in circumstances (c) A credit union being served by a occurs with respect to one of the management official of another credit interlocked depository organizations union; that would have provided a basis for

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disapproval of the interlock during the (c) Duration. Unless a shorter expira- notice period. tion period is provided in the NCUA approval, an exemption permitted by § 711.5 Small market share exemption. paragraph (a) of this section may con- (a) Exemption. A management inter- tinue so long as it would not result in lock that is prohibited by § 711.3(a) or a monopoly or substantial lessening of § 711.3(b) is permissible, provided: competition, or be unsafe or unsound. (1) The interlock is not prohibited by If the NCUA grants an interlock ex- § 711.3(c); and emption in reliance upon a presump- (2) The depository organizations (and tion under paragraph (b) of this sec- their depository institution affiliates) tion, the interlock may continue for hold, in the aggregate, no more than three years, unless otherwise provided 20% of the deposits, in each RMSA or community in which the depository or- in the approval. ganizations (or their depository insti- [64 FR 66360, Nov. 26, 1999] tution affiliates) are located. The amount of deposits will be determined § 711.7 Change in circumstances. by reference to the most recent annual (a) Termination. A management offi- Summary of Deposits published by the cial shall terminate his or her service FDIC. This information is available on the Internet at http://www.fdic.gov. if a change in circumstances causes the (b) Confirmation and records. Each de- service to become prohibited. A change pository organization must maintain in circumstances may include, but is records sufficient to support its deter- not limited to, an increase in asset size mination of eligibility for the exemp- of an organization, a change in the de- tion under paragraph (a) of this sec- lineation of the RMSA or community, tion, and must reconfirm that deter- the establishment of an office, an in- mination on an annual basis. crease in the aggregate deposits of the [64 FR 66360, Nov. 26, 1999] depository organization, or an acquisition, merger, consolidation, or reorga- § 711.6 General exemption. nization of the ownership structure of (a) Exemption. NCUA may, by agency a depository organization that causes a order issued following receipt of an ap- previously permissible interlock to be- plication, exempt an interlock from come prohibited. the prohibitions in § 711.3, if NCUA (b) Transition period. A management finds that the interlock would not re- official described in paragraph (a) of sult in a monopoly or substantial less- this section may continue to serve the ening of competition, and would not depository organization involved in the present other safety and soundness interlock for 15 months following the concerns. date of the change in circumstances. (b) Presumptions. In reviewing appli- NCUA may shorten this period under cations for an exemption under this appropriate circumstances. section, NCUA will apply a rebuttable presumption that an interlock will not [61 FR 50702, Sept. 27, 1996, as amended at 64 result in a monopoly or substantial FR 66360, Nov. 26, 1999] lessening of competition if the depository organization seeking to add a § 711.8 Enforcement. management official: Except as provided in this section, (1) Primarily serves, low- and mod- NCUA administers and enforces the erate-income areas; Interlocks Act with respect to feder- (2) Is controlled or managed by per- ally insured credit unions, and may sons who are members of a minority refer any case of a prohibited inter- group or women; locking relationship involving these (3) Is a depository institution that entities to the Attorney General of the has been chartered for less than two United States to enforce compliance years; or with the Interlocks Act and this part. (4) Is deemed to be in ‘‘troubled condition’’ as defined in § 701.14(b)(3) of this chapter.

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PART 712—CREDIT UNION SERVICE (c) Parties. An FCU may invest in or ORGANIZATIONS (CUSOs) loan to a CUSO by itself, with other credit unions, or with non-credit union Sec. parties. 712.1 What does this part cover? (d) Measurement for calculating regu- 712.2 How much can an FCU invest in or latory limitation. For purposes of para- loan to CUSOs, and what parties may graphs (a) and (b) of this section: participate? (1) Paid-in and unimpaired capital and 712.3 What are the characteristics of and surplus means shares plus post-closing, what requirements apply to CUSOs? undivided earnings (this does not in- 712.4 What must an FCU and a CUSO do to clude regular reserves or special re- maintain separate corporate identities? serves required by law, regulation or 712.5 What activities and services are preapproved for CUSOs? special agreement between the credit 712.6 What activities and services are pro- union and its regulator or share in- hibited for CUSOs? surer); and 712.8 What transaction and compensation (2) Total investments in and total limits might apply to individuals related loans to CUSOs will be measured con- to both an FCU and a CUSO? sistent with GAAP. 712.9 When must an FCU comply with this (3) Special rule in the case of less than part? adequately capitalized FCUs. This para- 712.10 How can a state supervisory author- graph (d)(3) applies in the case of either ity obtain an exemption for state chartered credit unions from compliance with an FCU that is currently less than ade- § 712.3(d)(3)? quately capitalized, as determined under part 702, or where the making of AUTHORITY: 12 U.S.C. 1756, 1757(5)(D) and an investment in a CUSO would render (7)(I), 1766, 1782, 1784, 1785, and 1786. the FCU less than adequately capital- SOURCE: 63 FR 10756, Mar. 5, 1998, unless ized under part 702. Before making an otherwise noted. investment in a CUSO, the FCU must obtain prior written approval from the § 712.1 What does this part cover? appropriate NCUA regional office if the This part establishes when a Federal making of the investment would result credit union (FCU) can invest in and in an aggregate cash outlay, measured make loans to CUSOs. CUSOs are sub- on a cumulative basis (regardless of ject to review by NCUA. This part does how the investment is valued for ac- not apply to corporate credit unions counting purposes) in an amount in ex- that have CUSOs subject to § 704.11 of cess of one percent of the credit union’s this title. Sections 712.3(d)(3) and 712.4 paid in and unimpaired capital and sur- of this part apply to state-chartered plus. credit unions and their subsidiaries, as (e) Divestiture. If the limitations in provided in § 741.222 of this chapter. paragraph (a) of this section are [63 FR 10756, Mar. 5, 1998, as amended at 73 reached or exceeded because of the FR 79311, Dec. 29, 2008] profitability of the CUSO and the related GAAP valuation of the invest- § 712.2 How much can an FCU invest ment under the equity method, within or loan to CUSOs, and what par- out an additional cash outlay by the ties may participate? FCU, divestiture is not required. An (a) Investments. An FCU’s total in- FCU may continue to invest up to 1% vestments in CUSOs must not exceed, without regard to the increase in the in the aggregate, 1% of its paid-in and GAAP valuation resulting from a unimpaired capital and surplus as of its CUSO’s profitability. last calendar year-end financial report. [63 FR 10756, Mar. 5, 1998, as amended at 64 (b) Loans. An FCU’s total loans to FR 33187, June 22, 1999; 66 FR 65624, Dec. 20, CUSOs must not exceed, in the aggre- 2001; 73 FR 79312, Dec. 29, 2008] gate, 1% of its paid-in and unimpaired capital and surplus as of its last cal- § 712.3 What are the characteristics of endar year-end financial report. Loan and what requirements apply to authority is independent and separate CUSOs? from the 1% investment authority of (a) Structure. An FCU can invest in or subsection (a) of this section. loan to a CUSO only if the CUSO is

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structured as a corporation, limited li- ments by a licensed certified public ac- ability company, or limited partner- countant in accordance with generally ship. An FCU may only participate in a accepted auditing standards. A wholly limited partnership as a limited part- owned CUSO is not required to obtain a ner. For purposes of this part, ‘‘cor- separate annual financial statement poration’’ means a legally incorporated audit if it is included in the annual corporation as established and main- consolidated financial statement audit tained under relevant federal or state of the credit union that is its parent; law. For purposes of this part, ‘‘limited and partnership’’ means a legally estab- (3)(i) Provide NCUA, its representa- lished limited partnership as estab- tives, and the state credit union regu- lished and maintained under relevant latory authority having jurisdiction state law. For purposes of this part, over any federally insured, state-char- ‘‘limited liability company’’ means a tered credit union with an outstanding legally established limited liability loan to, investment in or contractual company as established and main- agreement for products or services tained under relevant state law, pro- with the CUSO with complete access to vided that the FCU obtains written any books and records of the CUSO and legal advice that the limited liability the ability to review CUSO internal company is a recognized legal entity controls, as deemed necessary by under the applicable laws of the state NCUA or the state credit union regu- of formation and that the limited li- latory authority in carrying out their ability company is established in a respective responsibilities under the manner that will limit potential expo- Act and the relevant state credit union sure of the FCU to no more than the statute. amount of funds invested in, or loaned (ii) The effective date for compliance to, the CUSO. with this section is June 29, 2009. (b) Customer base. An FCU can invest (e) Other laws. A CUSO must comply in or loan to a CUSO only if the CUSO with applicable Federal, state and local primarily serves credit unions, its laws. membership, or the membership of credit unions contracting with the [63 FR 10756, Mar. 5, 1998, as amended at 64 CUSO; provided, however, that with re- FR 33187, June 22, 1999; 64 FR 57365, Oct. 25, spect to any approved CUSO service, as 1999; 66 FR 40578, Aug. 3, 2001; 70 FR 55228, Sept. 21, 2005; 73 FR 79312, Dec. 29, 2008] set out in § 712.5, that also meets the description of services set out in § 701.30 § 712.4 What must an FCU and a CUSO of this chapter, this requirement is met do to maintain separate corporate if the CUSO primarily provides such identities? services to persons who are eligible for membership in the FCU or are eligible (a) Corporate separateness. An FCU for membership in credit unions con- and a CUSO must be operated in a tracting with the CUSO. manner that demonstrates to the public the separate corporate existence of (c) Federal credit union accounting for the FCU and the CUSO. Good business financial reporting purposes. An FCU must account for its investments in or practices dictate that each must oper- loans to a CUSO in conformity with ate so that: ‘‘generally accepted accounting prin- (1) Its respective business trans- ciples’’ (GAAP). actions, accounts, and records are not (d) CUSO accounting; audits and finan- intermingled; cial statements; NCUA access to informa- (2) Each observes the formalities of tion. An FCU must obtain written its separate corporate procedures; agreements from a CUSO, prior to in- (3) Each is adequately financed as a vesting in or lending to the CUSO, that separate unit in the light of normal ob- the CUSO will: ligations reasonably foreseeable in a (1) Account for all its transactions in business of its size and character; accordance with GAAP; (4) Each is held out to the public as (2) Prepare quarterly financial state- a separate enterprise; ments and obtain an annual financial (5) The FCU does not dominate the statement audit of its financial state- CUSO to the extent that the CUSO is

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treated as a department of the FCU; (4) Stored value products and (b) Clerical, professional and manage- (6) Unless the FCU has guaranteed a ment services: loan obtained by the CUSO, all bor- (1) Accounting services; rowings by the CUSO indicate that the (2) Courier services; FCU is not liable. (3) Credit analysis; (b) Legal opinion. Prior to an FCU in- (4) Facsimile transmissions and copy- vesting in a CUSO, the FCU must ob- ing services; tain written legal advice as to whether (5) Internal audits for credit unions; the CUSO is established in a manner (6) Locator services; that will limit potential exposure of (7) Management and personnel train- the FCU to no more than the loss of ing and support; funds invested in, or lent to, the CUSO. (8) Marketing services; In addition, if a CUSO in which an FCU (9) Research services; has an investment plans to change its (10) Supervisory committee audits; structure under § 712.3(a), an FCU must and also obtain prior, written legal advice (11) Employee leasing services. that the CUSO will remain established (c) Business loan origination, includ- in a manner that will limit potential ing the authority to buy and sell par- exposure of the FCU to no more than ticipation interests in such loans; the loss of funds invested in, or loaned (d) Consumer mortgage loan origina- to, the CUSO. The legal advice must tion, including the authority to buy address factors that have led courts to and sell participation interests in such ‘‘pierce the corporate veil’’ such as in- loans; adequate capitalization, lack of sepa- (e) Electronic transaction services: (1) Automated teller machine (ATM) rate corporate identity, common services; boards of directors and employees, con- (2) Credit card and debit card serv- trol of one entity over another, and ices; lack of separate books and records. The (3) Data processing; legal advice may be provided by inde- (4) Electronic fund transfer (EFT) pendent legal counsel of the investing services; FCU or the CUSO. (5) Electronic income tax filing; § 712.5 What activities and services are (6) Payment item processing; preapproved for CUSOs? (7) Wire transfer services; and (8) Cyber financial services; NCUA may at any time, based upon (f) Financial counseling services: supervisory, legal, or safety and sound- (1) Developing and administering In- ness reasons, limit any CUSO activities dividual Retirement Accounts (IRA), or services, or refuse to permit any Keogh, deferred compensation, and CUSO activities or services. Otherwise, other personnel benefit plans; an FCU may invest in, loan to, and/or (2) Estate planning; contract with only those CUSOs that (3) Financial planning and coun- are sufficiently bonded or insured for seling; their specific operations and engaged (4) Income tax preparation; in the preapproved activities and serv- (5) Investment counseling; ices related to the routine daily oper- (6) Retirement counseling; and ations of credit unions. The specific ac- (7) Business counseling and consult- tivities listed within each preapproved ant services; category are provided in this section as (g) Fixed asset services: illustrations of activities permissible (1) Management, development, sale, under the particular category, not as or lease of fixed assets; and an exclusive or exhaustive list. (2) Sale, lease, or servicing of com- (a) Checking and currency services: puter hardware or software; (1) Check cashing; (h) Insurance brokerage or agency: (2) Coin and currency services; (1) Agency for sale of insurance; (3) Money order, savings bonds, trav- (2) Provision of vehicle warranty pro- elers checks, and purchase and sale of grams; U.S. Mint commemorative coins serv- (3) Provision of group purchasing pro- ices; and grams; and

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(4) Real estate settlement services; § 712.6 What activities and services are (i) Leasing: prohibited for CUSOs? (1) Personal property; and General. CUSOs must not acquire (2) Real estate leasing of excess control of, either directly or indirectly, CUSO property; another depository financial institu- (j) Loan support services: tion, nor invest in shares, stocks, or (1) Debt collection services; obligations of an insurance company, (2) Loan processing, servicing, and sales; trade association, liquidity facility or (3) Sale of repossessed collateral; and similar organization, corporation, or (4) Real estate settlement services; association. (5) Purchase and servicing of non-per- [63 FR 10756, Mar. 5, 1998, as amended at 64 forming loans; and FR 66361, Nov. 26, 1999] (6) Referral and processing of loan applications for members whose loan ap- § 712.8 What transaction and com- plications have been denied by the pensation limits might apply to in- credit union; dividuals related to both an FCU (k) Record retention, security and dis- and a CUSO? aster recovery services: (a) Officials and Senior Management (1) Alarm-monitoring and other secu- Employees. The officials, senior man- rity services; agement employees, and their imme- (2) Disaster recovery services; diate family members of an FCU that (3) Microfilm, microfiche, optical and has outstanding loans or investments electronic imaging, CD-ROM data stor- in a CUSO must not receive any salary, age and retrieval services; commission, investment income, or (4) Provision of forms and supplies; other income or compensation from the and CUSO either directly or indirectly, or (5) Record retention and storage; from any person being served through (l) Securities brokerage services; the CUSO. This provision does not pro- (m) Shared credit union branch (service hibit such FCU officials or senior man- center) operations; agement employees from assisting in (n) Student loan origination, including the operation of a CUSO, provided the the authority to buy and sell participa- officials or senior management em- tion interests in such loans; ployees are not compensated by the (o) Travel agency services; and CUSO. Further, the CUSO may reim- (p) Trust and trust-related services: burse the FCU for the services provided (1) Acting as administrator for pre- by such FCU officials and senior man- paid legal service plans; agement employees only if the account (2) Acting as trustee, guardian, con- receivable of the FCU due from the servator, estate administrator, or in CUSO is paid in full at least every 120 any other fiduciary capacity; and days. For purposes of this paragraph (3) Trust services. (a), ‘‘official’’ means affiliated credit (q) Real estate brokerage services. union directors or committee mem- (r) CUSO investments in non-CUSO bers. For purposes of this paragraph service providers: In connection with (a), ‘‘senior management employee’’ providing a permissible service, a means affiliated credit union chief ex- CUSO may invest in a non-CUSO serv- ecutive officer (typically this indi- ice provider. The amount of the CUSO’s vidual holds the title of President or investment is limited to the amount Treasurer/Manager), any assistant necessary to participate in the service chief executive officers (e.g. Assistant provider, or a greater amount if nec- President, Vice President, or Assistant essary to receive a reduced price for Treasurer/Manager) and the chief fi- goods or services. nancial officer (Comptroller). For pur- (s) Credit card loan origination; poses of this paragraph (a), ‘‘immediate (t) Payroll processing services. family member’’ means a spouse or other family members living in the [63 FR 10756, Mar. 5, 1998, as amended at 64 FR 33187, June 22, 1999; 64 FR 66361, Nov. 26, same household. 1999; 66 FR 40578, Aug. 3, 2001; 68 FR 56551, (b) Employees. The prohibition con- Oct. 1, 2003; 73 FR 79312, Dec. 29, 2008] tained in paragraph (a) of this section

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also applies to FCU employees not oth- gional office having responsibility for erwise covered if the employees are di- that state, along with all procedural rectly involved in dealing with the and operational documentation sup- CUSO unless the FCU’s board of direc- porting and describing the actual prac- tors determines that the FCU employ- tices by which it implements and exer- ees’ positions do not present a conflict cises the authority. of interest. (c) The state supervisory authority (c) Others. All transactions with busi- must also provide the regional director ness associates or family members of with an assurance that NCUA exam- FCU officials, senior management em- iners will be provided with co-extensive ployees, and their immediate family authority and will be allowed direct ac- members, not specifically prohibited cess to CUSO books and records at such by paragraphs (a) and (b) of this sec- times as NCUA, in its sole discretion, tion must be conducted at arm’s length may determine necessary or appro- and in the interest of the FCU. priate. For purposes of this section, access includes the right to make and re- § 712.9 When must an FCU comply with this part? tain copies of any CUSO record, as to which NCUA will accord the same level (a) Investments. An FCU’s invest- of control and confidentiality that it ments in CUSOs in existence prior to uses with respect to all other examina- April 1, 1998, must conform with this tion-related materials it obtains in the part not later than April 1, 2001, unless course of its duties. the Board grants prior approval to con- (d) The regional director will review tinue such investment for a stated pe- the applicable authority, procedures riod. and assurances and forward the exemp- (b) Loans. An FCU’s loans to CUSOs in existence prior to April 1, 1998, must tion request, along with the regional conform with this part not later than director’s recommendation, to the April 1, 2001, unless: NCUA Board for a final determination. (1) The Board grants prior approval (e) For purposes of this section, to continue the FCU’s loan for a stated whether an entity is a CUSO shall be period; or determined in accordance with the def- (2) Under the terms of its loan agree- inition set out in § 741.222 of this chap- ment, the FCU cannot require acceler- ter. ated repayment without breaching the [73 FR 79312, Dec. 29, 2008] agreement.

§ 712.10 How can a state supervisory PART 713—FIDELITY BOND AND IN- authority obtain an exemption for SURANCE COVERAGE FOR FED- state chartered credit unions from ERAL CREDIT UNIONS compliance with § 712.3(d)(3)? (a) The NCUA Board may exempt fed- Sec. erally insured credit unions in a given 713.1 What is the scope of this section? state from compliance with § 712.3(d)(3) 713.2 What are the responsibilities of a cred- if the NCUA Board determines the laws it union’s board of directors under this and procedures available to the super- section? visory authority in that state are suffi- 713.3 What bond coverage must a credit cient to provide NCUA with the degree union have? of access to CUSO books and records it 713.4 What bond forms may be used? believes is necessary to evaluate the 713.5 What is the required minimum dollar safety and soundness of credit unions amount of coverage? having business relationships with 713.6 What is the permissible deductible? CUSOs owned by credit union(s) char- 713.7 May the NCUA Board require a credit union to secure additional insurance cov- tered in that state. erage? (b) To obtain the exemption, the state supervisory authority must sub- AUTHORITY: 12 U.S.C. 1761a, 1761b, 1766(a), mit a copy of the legal authority pur- 1766(h), 1789(a)(11). suant to which it secures access to SOURCE: 64 FR 28720, May 27, 1999, unless CUSO books and records to NCUA’s re- otherwise noted.

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§ 713.1 What is the scope of this sec- directors, officers, supervisory com- tion? mittee members, and credit committee This section provides the require- members. ments for fidelity bonds for Federal credit union employees and officials § 713.4 What bond forms may be used? and for other insurance coverage for (a) A current listing of basic bond losses such as theft, holdup, vandalism, forms that may be used without prior etc., caused by persons outside the NCUA Board approval is on NCUA’s credit union. Web site, http://www.ncua.gov. If you are unable to access the NCUA website, § 713.2 What are the responsibilities of a credit union’s board of directors you can get a current listing of ap- under this section? proved bond forms by contacting The board of directors of each Fed- NCUA’s Public and Congressional Af- eral credit union must at least annu- fairs Office, at (703) 518–6330. ally review its fidelity and other insur- (b) To use any of the following, you ance coverage to ensure that it is ade- need prior written approval from the quate in relation to the potential risks Board: facing the credit union and the min- (1) Any other basic bond form; or imum requirements set by the Board. (2) Any rider or endorsement that [64 FR 28720, May 27, 1999, as amended at 64 limits coverage of approved basic bond FR 57365, Oct. 25, 1999] forms.

§ 713.3 What bond coverage must a [64 FR 28720, May 27, 1999, as amended at 70 credit union have? FR 61716, Oct. 26, 2005; 73 FR 30478, May 28, 2008] At a minimum, your bond coverage must: § 713.5 What is the required minimum (a) Be purchased in an individual pol- dollar amount of coverage? icy from a company holding a certifi- (a) The minimum required amount of cate of authority from the Secretary of the Treasury; and fidelity bond coverage for any single (b) Include fidelity bonds that cover loss is computed based on a federal fraud and dishonesty by all employees, credit union’s total assets.

Assets Minimum bond

$0 to $4,000,000 ...... Lesser of total assets or $250,000. $4,000,001 to $50,000,000 ...... $100,000 plus $50,000 for each million or fraction thereof over $1,000,000. $50,000,000 to $500,000,000 ...... $2,550,000 plus $10,000 for each million or fraction thereof over $50,000,000, to a maximum of $5,000,000. Over $500,000,000 ...... One percent of assets, rounded to the nearest hundred million, to a maximum of $9,000,000.

(b) This is the minimum coverage re- credit unions should maintain in- quired, but a federal credit union’s creased coverage equal to the greater board of directors should purchase ad- of either of the following amounts ditional or enhanced coverage when its within thirty days of discovery of the circumstances warrant. In making this need for such increase: determination, a board of directors (1) The amount of the daily cash should consider its own internal risk fund, i.e. daily cash plus anticipated assessment, its fraud trends and loss daily money receipts on the credit experience, and factors such as its cash union’s premises, or on hand, cash in transit, and the na- (2) The total amount of the credit ture and risks inherent in any ex- union’s money in transit in any one panded services it offers such as wire shipment. transfer and remittance services. (3) Increased coverage is not required (c) While the above is the required pursuant to paragraph (c) of this sec- minimum amount of bond coverage, tion, however, when the credit union

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temporarily increased its cash fund be- twenty days in advance of the proposed cause of unusual events which cannot effective date of the reduction. reasonably be expected to recur. (d) Any aggregate limit of liability [64 FR 28720, May 27, 1999, as amended at 70 provided for in a fidelity bond policy FR 61716, Oct. 26, 2005] must be at least twice the single loss § 713.6 What is the permissible deduct- limit of liability. This requirement ible? does not apply to optional insurance coverage. (a)(1) The maximum amount of al- (e) Any proposal to reduce your re- lowable deductible is computed based quired bond coverage must be approved on a federal credit union’s asset size in writing by the NCUA Board at least and capital level, as follows:

Assets Maximum deductible

$0 to $100,000 ...... No deductible allowed. $100,001 to $250,000 ...... $1,000. $250,000 to $1,000,000 ...... $2,000. Over $1,000,000...... $2,000 plus 1/1000 of total assets up to a maximum of $200,000; for credit unions over $1 million in assets that qualify for NCUA’s Regulatory Flexibility Program in Part 742, the maximum deductible is $1,000,000.

(2) The deductibles may apply to one notify the appropriate NCUA regional or more insurance clauses in a policy. office in writing of its changed status Any deductibles in excess of the above and confirm that it has obtained the amounts must receive the prior written required coverage. permission of the NCUA Board. [64 FR 28720, May 27, 1999, as amended at 70 (b) A deductible may not exceed 10 FR 61716, Oct. 26, 2005] percent of a credit union’s Regular Re- serve unless a separate Contingency § 713.7 May the NCUA Board require a Reserve is set up for the excess. In credit union to secure additional in- computing the maximum deductible, surance coverage? valuation accounts such as the allow- The NCUA Board may require addi- ance for loan losses cannot be consid- tional coverage when the Board deter- ered. mines that a credit union’s current (c) A credit union’s eligibility to coverage is inadequate. The credit qualify for a deductible in excess of union must purchase this additional $200,000 is determined based on it hav- coverage within 30 days. ing assets in excess of $1 million as reflected in its most recent year-end 5300 PART 714—LEASING call report and, as of that same year- end, qualifying for NCUA’s Regulatory Sec. Flexibility Program under part 742 of 714.1 What does this part cover? this title as determined by its most re- 714.2 What are the permissible leasing ar- cent examination report. A credit rangements? union that previously qualified for a 714.3 Must you own the leased property in deductible in excess of $200,000, but an indirect leasing arrangement? that subsequently fails to qualify based 714.4 What are the lease requirements? 714.5 What is required if you rely on an esti- on its most recent year-end 5300 call re- mated residual value greater than 25% of port because either its assets have de- the original cost of the leased property? creased or it no longer meets the net 714.6 Are you required to retain salvage worth requirements of part 742 of this powers over the leased property? title or fails to meet the CAMEL rating 714.7 What are the insurance requirements requirements of part 742 of this title as applicable to leasing? determined by its most recent exam- 714.8 Are the early payment provisions, or interest rate provisions, applicable in ination report, must obtain the cov- leasing arrangements? erage otherwise required by paragraph 714.9 Are indirect leasing arrangements sub- (b) of this section within 30 days of fil- ject to the purchase of eligible obligation ing its year-end call report and must limit set forth in § 701.23 of this chapter?

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714.10 What other laws must you comply (b) You are named as the sole with when engaged in leasing? lienholder of the leased property; AUTHORITY: 12 U.S.C. 1756, 1757, 1766, 1785, (c) You receive a security agreement, 1789. signed by the leasing company, grant- SOURCE: 65 FR 34585, May 31, 2000, unless ing you a sole lien in the leased prop- otherwise noted. erty and the right to take possession and dispose of the leased property in § 714.1 What does this part cover? the event of a default by the lessee, a This part covers the standards and default in the leasing company’s obli- requirements that you, a federal credit gations to you, or a material adverse union, must follow when engaged in change in the leasing company’s finan- the leasing of personal property. cial condition; and (d) You take all necessary steps to § 714.2 What are the permissible leas- record and perfect your security inter- ing arrangements? est in the leased property. Your state’s (a) You may engage in direct leasing. Commercial Code may treat the auto- In direct leasing, you purchase per- mobiles as inventory, and require a fil- sonal property from a vendor, becoming with the Secretary of State. ing the owner of the property at the request of your member, and then lease § 714.4 What are the lease require- the property to that member. ments? (b) You may engage in indirect leas- (a) Your lease must be a net lease. In ing. In indirect leasing, a third party a net lease, your member assumes all leases property to your member and the burdens of ownership including you then purchase that lease from the maintenance and repair, licensing and third party for the purpose of leasing registration, taxes, and insurance; the property to your member. You do (b) Your lease must be a full payout not have to purchase the leased prop- lease. In a full payout lease, you must erty if you comply with the require- reasonably expect to recoup your en- ments of § 714.3. tire investment in the leased property, (c) You may engage in open-end leas- plus the estimated cost of financing, ing. In an open-end lease, your member from the lessee’s payments and the es- assumes the risk and responsibility for timated residual value of the leased any difference in the estimated resid- property at the expiration of the lease ual value and the actual value of the term; and property at lease end. (c) The amount of the estimated re- (d) You may engage in closed-end sidual value you rely upon to satisfy leasing. In a closed-end lease, you as- the full payout lease requirement may sume the risk and responsibility for not exceed 25% of the original cost of any difference in the estimated resid- the leased property unless the amount ual value and the actual value of the above 25% is guaranteed. Estimated re- property at lease end. However, your sidual value is the projected value of member is always responsible for any the leased property at lease end. Esti- excess wear and tear and excess mile- mated residual value must be reason- age charges as established under the able in light of the nature of the leased lease. property and all circumstances relevant to the leasing arrangement. § 714.3 Must you own the leased property in an indirect leasing arrange- § 714.5 What is required if you rely on ment? an estimated residual value greater You do not have to own the leased than 25% of the original cost of the property in an indirect leasing arrange- leased property? ment if: If the amount of the estimated resid- (a) You obtain a full assignment of ual value you rely upon to satisfy the the lease. A full assignment is the as- full payout lease requirement of signment of all the rights, interests, § 714.4(b) exceeds 25% of the original obligations, and title in a lease to you, cost of the leased property, a finan- that is, you become the owner of the cially capable party must guarantee lease; the excess. The guarantor may be the

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manufacturer. The guarantor may also § 714.8 Are the early payment provi- be an insurance company with an A.M. sions, or interest rate provisions, Best rating of at least a B+, or with at applicable in leasing arrangements? least the equivalent of an A.M. Best B+ You are not subject to the early pay- rating from another major rating comment provisions set forth in pany. You must obtain or have on file § 701.21(c)(6) of this chapter. You are financial documentation dem- also not subject to the interest rate onstrating that the guarantor has the provisions in § 701.21(c)(7). resources to meet the guarantee. § 714.9 Are indirect leasing arrange- § 714.6 Are you required to retain sal- ments subject to the purchase of el- vage powers over the leased prop- igible obligation limit set forth in erty? § 701.23 of this chapter? You must retain salvage powers over Your indirect leasing arrangements the leased property. Salvage powers are not subject to the eligible obliga- protect you from a loss and provide tion limit if they satisfy the provisions of § 701.23(b)(3)(iv) that require that you you with the power to take action if make the final underwriting decision there is an unanticipated change in and that the lease contract is assigned conditions that threatens your finan- to you very soon after it is signed by cial position by significantly increas- the member and the dealer or leasing ing your exposure to risk. Salvage pow- company. ers allow you: (a) As the owner and lessor, to take § 714.10 What other laws must you reasonable and appropriate action to comply with when engaged in leas- salvage or protect the value of the ing? property or your interests arising You must comply with the Consumer under the lease; or Leasing Act, 15 U.S.C. 1667–67f, and its (b) As the assignee of a lease, to be- implementing regulation, Regulation come the owner and lessor of the leased M, 12 CFR part 213. You must comply property pursuant to your contractual with state laws on consumer leasing, rights, or take any reasonable and ap- but only to the extent that the state propriate action to salvage or protect leasing laws are consistent with the the value of the property or your inter- Consumer Leasing Act, 15 U.S.C. 1667e, ests arising under the lease. or provide the member with greater protections or benefits than the Con- § 714.7 What are the insurance re- sumer Leasing Act. You are also sub- quirements applicable to leasing? ject to the lending rules set forth in § 701.21 of this chapter, except as pro- (a) You must maintain a contingent vided in § 714.8 and § 714.9 of this part. liability insurance policy with an en- The lending rules in § 701.21 address the dorsement for leasing or be named as preemption of other state and federal the co-insured if you do not own the laws that impact on credit trans- leased property. Contingent liability actions. insurance protects you should you be sued as the owner of the leased prop- PART 715—SUPERVISORY COM- erty. You must use an insurance company with a nationally recognized in- MITTEE AUDITS AND dustry rating of at least a B+. VERIFICATIONS (b) Your member must carry the nor- Sec. mal liability and property insurance on 715.1 Scope of this part. the leased property. You must be 715.2 Definitions used in this part. named as an additional insured on the 715.3 General responsibilities of the Super- liability insurance policy and as the visory Committee. loss payee on the property insurance 715.4 Audit responsibility of the Super- policy. visory Committee. 715.5 Audit of Federal Credit Unions. 715.6 Audit of Federally-insured State-chartered credit unions.

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715.7 Supervisory Committee audit altering accompanying notes, derived from natives to a financial statement audit. accounting records of the credit union, 715.8 Requirements for verification of ac- and intended to disclose a credit counts and passbooks. 715.9 Assistance from outside, compensated union’s economic resources or obliga- person. tions at a point in time, or the changes 715.10 Audit report and working paper therein for a period of time, in con- maintenance and access. formity with GAAP, as defined herein, 715.11 Sanctions for failure to comply with or regulatory accounting procedures. this part. Each of the following is considered to 715.12 Statutory audit remedies for Federal be a financial statement: a balance credit unions. sheet or statement of financial condi- AUTHORITY: 12 U.S.C. 1761(b), 1761d, tion; statement of income or statement 1782(a)(6). of operations; statement of undivided SOURCE: 64 FR 41035, July 29, 1999, unless earnings; statement of cash flows; otherwise noted. statement of changes in members’ equity; statement of revenue and ex- § 715.1 Scope of this part. penses; and statement of cash receipts This part implements section and disbursements. 202(a)(6)(D) of the Federal Credit Union (d) Financial statement audit (also Act, 12 U.S.C. 1782(a)(6)(D), as added by known as an ‘‘opinion audit’’) refers to section 201(a) of the Credit Union Mem- an audit of the financial statements of bership Access Act, Pub. L. No. 105–219, a credit union performed in accordance 112 Stat. 918 (1998). This part prescribes with GAAS by an independent person the responsibilities of the Supervisory who is licensed by the appropriate Committee to obtain an annual audit State or jurisdiction. The objective of of the credit union according to its a financial statement audit is to ex- charter type and asset size, and to con- press an opinion as to whether those fi- duct a verification of members’ ac- nancial statements of the credit union counts. present fairly, in all material respects, the financial position and the results of § 715.2 Definitions used in this part. its operations and its cash flows in con- As used in this part: formity with GAAP, as defined herein, (a) Balance sheet audit refers to the or regulatory accounting practices. examination of a credit union’s assets, (e) GAAP is an acronym for ‘‘gen- liabilities, and equity under generally erally accepted accounting principles’’ accepted auditing standards (GAAS) by which refers to the conventions, rules, an independent public accountant for and procedures which define accepted the purpose of opining on the fairness accounting practice. GAAP includes of the presentation on the balance both broad general guidelines and de- sheet. Credit unions required to file tailed practices and procedures, pro- call reports consistent with GAAP vides a standard by which to measure should ensure the audited balance financial statement presentations, and sheet is likewise prepared on a GAAP encompasses not only accounting prin- basis. The opinion under this type of ciples and practices but also the meth- engagement would not address the fair- ods of applying them. ness of the presentation of the credit (f) GAAS is an acronym for ‘‘gen- union’s income statement, statement erally accepted auditing standards’’ of changes in equity (including com- which refers to the standards approved prehensive income), or statement of and adopted by the American Institute cash flows. of Certified Public Accountants which (b) Compensated person refers to any apply when an ‘‘independent, licensed accounting/auditing professional, ex- certified public accountant’’ audits fi- cluding a credit union employee, who is nancial statements. Auditing standards compensated for performing more than differ from auditing procedures in that one supervisory committee audit and/ ‘‘procedures’’ address acts to be per- or verification of members’ accounts formed, whereas ‘‘standards’’ measure per calendar year. the quality of the performance of those (c) Financial statements refers to a acts and the objectives to be achieved presentation of financial data, includ- by use of the procedures undertaken. In

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addition, auditing standards address annual or year-end Call Report, with a the auditor’s professional qualifica- concentration in high risk areas. For tions as well as the judgment exercised credit unions, such high risk areas in performing the audit and in pre- most often include: lending activity; paring the report of the audit. investing activity; and cash handling (g) Independent means the impar- and deposit-taking activity. tiality necessary for the dependability (k) State-licensed person refers to a of the compensated auditor’s findings. certified public accountant or public Independence requires the exercise of accountant who is licensed by the fairness toward credit union officials, State or jurisdiction where the credit members, creditors and others who union is principally located to perform may rely upon the report of a super- accounting or auditing services for visory committee audit report. that credit union. (h) Internal control refers to the proc- (l) Supervisory committee refers to a ess, established by the credit union’s supervisory committee as defined in board of directors, officers and employ- Section 111(b) of the Federal Credit ees, designed to provide reasonable as- Union Act, 12 U.S.C. 1761(b). For some surance of reliable financial reporting federally-insured state chartered credit and safeguarding of assets against un- unions, the ‘‘audit committee’’ des- authorized acquisition, use, or disposi- ignated by state statute or regulation tion. A credit union’s internal control is the equivalent of a supervisory com- structure consists of five components: mittee. control environment; risk assessment; (m) Supervisory committee audit refers control activities; information and to an engagement under either § 715.5 communication; and monitoring. Reli- or § 715.6 of this part. able financial reporting refers to prepa- (n) Working papers refers to the prin- ration of Call Reports (NCUA Forms cipal record, in any form, of the work 5300 and 5310) that meet management’s performed by the auditor and/or super- financial reporting objectives. Internal visory committee to support its find- control over safeguarding of assets ings and/or conclusions concerning sig- against unauthorized acquisition, use, nificant matters. Examples include the or disposition refers to prevention or written record of procedures applied, timely detection of transactions in- tests performed, information obtained, volving such unauthorized access, use, and pertinent conclusions reached in or disposition of assets which could re- the engagement, proprietary audit pro- sult in a loss that is material to the fi- grams, analyses, memoranda, letters of nancial statements. confirmation and representation, ab- (i) Reportable conditions refers to a stracts of credit union documents, re- matter coming to the attention of the viewer’s notes, if retained, and sched- independent, compensated auditor ules or commentaries prepared or ob- which, in his or her judgment, rep- tained in the course of the engagement. resents a significant deficiency in the [64 FR 41035, July 29, 1999, as amended at 66 design or operation of the internal con- FR 65624, Dec. 20, 2001] trol structure of the credit union, which could adversely affect its ability § 715.3 General responsibilities of the to record, process, summarize, and re- Supervisory Committee. port financial data consistent with the (a) Basic. The supervisory committee representations of management in the is responsible for ensuring that the financial statements. board of directors and management of (j) Report on Examination of Internal the credit union— Control over Call Reporting refers to an (1) Meet required financial reporting engagement in which an independent, objectives and licensed, certified public accountant or (2) Establish practices and procedures public accountant, consistent with at- sufficient to safeguard members’ as- testation standards, examines and re- sets. ports on management’s written asser- (b) Specific. To carry out the respon- tions concerning the effectiveness of sibilities set forth in paragraph (a) of its internal control over financial re- this section, the supervisory com- porting in its most recently filed semi- mittee must determine whether:

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(1) Internal controls are established § 715.4 Audit responsibility of the Su- and effectively maintained to achieve pervisory Committee. the credit union’s financial reporting (a) Annual audit requirement. A feder- objectives which must be sufficient to ally-insured credit union is required to satisfy the requirements of the super- obtain an annual supervisory com- visory committee audit, verification of mittee audit which occurs at least once members’ accounts and its additional every calendar year (period of perform- responsibilities; ance) and must cover the period (2) The credit union’s accounting elapsed since the last audit period (pe- records and financial reports are riod effectively covered). promptly prepared and accurately re- (b) Financial statement audit option. flect operations and results; Any federally-insured credit union, (3) The relevant plans, policies, and whether Federally- or State-chartered control procedures established by the and regardless of asset size, may board of directors are properly admin- choose to fulfill its Supervisory Com- istered; and mittee audit responsibility by obtain- (4) Policies and control procedures ing an annual audit of its financial are sufficient to safeguard against statements performed in accordance error, conflict of interest, self-dealing with GAAS by an independent person and fraud. who is licensed to do so by the State or (c) Mandates. In carrying out the re- jurisdiction in which the credit union sponsibilities set forth in paragraphs is principally located. (A ‘‘financial (a) and (b) of this section, the Super- statement audit’’ is distinct from a visory Committee must: ‘‘supervisory committee audit,’’ al- (1) Ensure that the credit union ad- though a financial statement audit is heres to the measurement and filing re- included among the options for ful- quirements for reports filed with the filling the supervisory committee audit NCUA Board under § 741.6 of this chap- requirement. Compare § 715.2(c) and (j).) ter; (c) Other audit options. A federally in- (2) Perform or obtain a supervisory sured credit union which does not committee audit, as prescribed in choose to obtain a financial statement § 715.4 of this part; audit as permitted by subsection (b) (3) Verify or cause the verification of must fulfill its supervisory audit re- members’ passbooks and accounts sponsibility under either of § 715.5 or against the records of the credit union, § 715.6 of this part, whichever is appli- as prescribed in § 715.8 of this part; cable. See Table 1. For purposes of this (4) Act to avoid imposition of sanc- part, a credit union’s asset size is the tions for failure to comply with the re- amount of total assets reported in the quirements of this part, as prescribed year-end Call Report (NCUA form 5300) in §§ 715.11 and 715.12 of this part. filed for the calendar year-end imme- [64 FR 41035, July 29, 1999, as amended at 69 diately preceding the period under FR 27828, May 17, 2004] audit.

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1 The Supervisory Committee audit respon- Supervisory Committee audit as pre- sibility under Part 715 can always be fulfilled scribed in § 715.7. by obtaining a financial statement audit. (d) Other requirements. A federally § 715.4(b). chartered credit union, regardless of § 715.5 Audit of Federal Credit Unions. which audit it is required to obtain under this section, must meet other ap- (a) Total assets of $500 million or great- plicable requirements of this part. er. To fulfill its Supervisory Com- mittee audit responsibility, a federal § 715.6 Audit of Federally-insured credit union having total assets of $500 State-chartered credit unions. million or greater must obtain an an- (a) Total assets of $500 million or great- nual audit of its financial statements er. To fulfill its Supervisory Com- performed in accordance with GAAS by mittee audit responsibility, a feder- an independent person who is licensed ally-insured State-chartered credit to do so by the State or jurisdiction in union having total assets of $500 mil- which the credit union is principally lion or greater must obtain an annual located. audit of its financial statements per- (b) Total assets of less than $500 million formed in accordance with GAAS by an but more than $10 million. To fulfill its independent person who is licensed to Supervisory Committee audit responsi- do so by the State or jurisdiction in bility, a Federally-chartered credit which the credit union is principally union having total assets of less than located. $500 million but more than $10 Million (b) Total assets of less than $500 million. which does not choose to obtain an To fulfill its Supervisory Committee audit under § 715.5(a), must obtain an audit responsibility, a federally-in- annual supervisory committee audit as sured State-chartered credit union hav- prescribed in § 715.7. ing total assets of less than $500 mil- (c) Total assets of $10 million or less. To lion must obtain either an annual su- fulfill its Supervisory Committee audit pervisory committee audit as pre- responsibility, a Federally-chartered scribed under either § 715.6(a) or § 715.7, credit union having total assets of $10 or an audit as prescribed by the State million or less must obtain an annual or jurisdiction in which the credit

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union is principally located, whichever NCUA Board) and accounts of the audit is more stringent. members to be verified against the (c) Other requirements. A federally-in- records of the treasurer of the credit sured, state-chartered credit union, re- union. gardless of which audit it is required to (b) Methods. Any of the following obtain under this section, must meet methods may be used to verify mem- other applicable requirements of this bers’ passbooks and accounts, as appro- part except §§ 715.5 and 715.12. priate: (1) Controlled verification. A controlled § 715.7 Supervisory Committee audit verification of 100 percent of members’ alternatives to a financial state- share and loan accounts; ment audit. (2) Statistical method. A sampling A credit union which is not required method which provides for: to obtain a financial statement audit (i) Random selection: may fulfill its supervisory committee (ii) A sample which is representative responsibility by any one of the fol- of the population from which it was se- lowing engagements: lected; (a) Balance sheet audit. A balance (iii) An equal chance of selecting sheet audit, as defined in § 715.2(a), per- each dollar in the population; formed by a person who is licensed to do so by the State or jurisdiction in (iv) Sufficient accounts in both num- which the credit union is principally ber and scope on which to base conclu- located; or sions concerning management’s finan- (b) Report on Examination of Internal cial reporting objectives; and Control over Call Reporting. An engage- (v) Additional procedures to be per- ment and report on management’s formed if evidence provided by con- written assertions concerning the ef- firmations alone is not sufficient. fectiveness of internal control over fi- (3) Non-statistical method. When the nancial reporting in the credit union’s verification is performed by an Inde- most recently filed semiannual or pendent person licensed by the State or year-end call report (NCUA Form 5300), jurisdiction in which the credit union as defined in § 715.2(j), performed by a is principally located, the auditor may person who is licensed to do so by the choose among the sampling methods State or jurisdiction in which the cred- set forth in paragraphs (b)(1) and (2) of it union is principally located, and in this section and non-statistical sam- which management specifies the cri- pling methods consistent with GAAS if teria on which it based its evaluation such methods provide for: of internal control; or (i) Sufficient accounts in both num- (c) Audit per Supervisory Committee ber and scope on which to base conclu- Guide. An audit performed by the su- sions concerning management’s finan- pervisory committee, its internal audi- cial reporting objectives to provide as- tor, or any other qualified person (such surance that the General Ledger ac- as a certified public accountant, public counts are fairly stated in relation to accountant, league auditor, credit the financial statements taken as a union auditor consultant, retired fi- whole; nancial institutions examiner, etc.) in (ii) Additional procedures to be per- accordance with the procedures pre- formed by the auditor if evidence pro- scribed in NCUA’s Supervisory Com- vided by confirmations alone is not suf- mittee Guide. Qualified persons who are ficient; and not State-licensed cannot provide as- (iii) Documentation of the sampling surance services under this subsection. procedures used and of their consistency with GAAS (to be provided to the § 715.8 Requirements for verification NCUA Board upon request). of accounts and passbooks. (c) Retention of records. The super- (a) Verification obligation. The Super- visory committee must retain the visory Committee shall, at least once records of each verification of mem- every two years, cause the passbooks bers’ passbooks and accounts until it (including any book, statements of ac- completes the next verification of count, or other record approved by the members’ passbooks and accounts.

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§ 715.9 Assistance from outside, com- union or at a mutually agreed upon lo- pensated person. cation, for purposes of inspection; and (a) Unrelated to officials. A com- (8) Acknowledge that working papers pensated auditor who performs a Su- shall be retained for a minimum of pervisory Committee audit on behalf of three years from the date of the writ- a credit union shall not be related by ten audit report. blood or marriage to any management (d) Complete scope. If the engagement employee, member of either the board is to perform a Supervisory Committee of directors, the Supervisory Com- Guide audit intended to fully meet the mittee or the credit committee, or loan requirements of § 715.7(c), the engage- officer of that credit union. ment letter shall certify that the audit (b) Engagement letter. The engage- will address the complete scope of that ment of a compensated auditor to per- engagement; form all or a portion of the scope of a (e) Exclusions from scope. If the en- financial statement audit or super- gagement is to perform a Supervisory visory committee audit shall be evi- Committee Guide audit which will ex- denced by an engagement letter. In all clude any item required by the applica- cases, the engagement must be con- ble section, the engagement letter tracted directly with the Supervisory shall: Committee. The engagement letter (1) Identify the excluded items; must be signed by the compensated (2) State that, because of the exclu- auditor and acknowledged therein by sion(s), the resulting audit will not, by the Supervisory Committee prior to itself, fulfill the scope of a supervisory commencement of the engagement. committee audit; and (c) Contents of letter. The engagement letter shall: (3) Caution that the supervisory com- (1) Specify the terms, conditions, and mittee will remain responsible for ful- objectives of the engagement; filling the scope of a supervisory com- (2) Identify the basis of accounting to mittee audit with respect to the ex- be used; cluded items. (3) If a Supervisory Committee Guide audit, include an appendix setting § 715.10 Audit report and working paper maintenance and access. forth the procedures to be performed; (4) Specify the rate of, or total, com- (a) Audit report. Upon completion and/ pensation to be paid for the audit; or receipt of the written report of a fi- (5) Provide that the auditor shall, nancial statement audit or a super- upon completion of the engagement, visory committee audit, the Super- deliver to the Supervisory Committee visory Committee must verify that the a written report of the audit and notice audit was performed and reported in in writing, either within the report or accordance with the terms of the en- communicated separately, of any inter- gagement letter prescribed herein. The nal control reportable conditions and/ Supervisory Committee must submit or irregularities or illegal acts, if any, the report(s) to the board of directors, which come to the auditor’s attention and provide a summary of the results during the normal course of the audit of the audit to the members of the (i.e., no notice required if none noted); credit union orally or in writing at the (6) Specify a target date of delivery next annual meeting of the credit of the written reports, such target date union. If a member so requests, the Su- not to exceed 120 days from date of cal- pervisory Committee shall provide the endar or fiscal year-end under audit member access to the full audit report. (period covered), unless the supervisory If the National Credit Union Adminis- committee obtains a waiver from the tration (‘‘NCUA’’) so requests, the Su- supervising NCUA Regional Director; pervisory Committee shall provide (7) Certify that NCUA staff and/or the NCUA a copy of each of the audit re- State credit union supervisor, or des- ports it receives or produces. ignated representatives of each, will be (b) Working papers. The supervisory provided unconditional access to the committee shall be responsible for pre- complete set of original working pa- paring and maintaining, or making pers, either at the offices of the credit available, a complete set of original

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working papers supporting each super- ment audit or performed a supervisory visory committee audit. The super- committee audit; or visory committee shall, upon request, (2) The Supervisory Committee has provide NCUA staff unconditional ac- obtained a financial statement audit or cess to such working papers, either at performed a supervisory committee the offices of the credit union or at a audit which does not meet the require- mutually agreeable location, for pur- ments of part 715 including those in poses of inspecting such working pa- § 715.8. pers. (3) The credit union has experienced serious and persistent recordkeeping § 715.11 Sanctions for failure to comply with this part. deficiencies as defined in paragraph (c) of this section. (a) Sanctions. Failure of a supervisory (b) Financial statement audit required. committee and/or its independent com- The NCUA Board may compel a federal pensated auditor or other person to credit union to obtain a financial comply with the requirements of this statement audit performed in accord- section, or the terms of an engagement ance with GAAS by an independent letter required by this section, is person who is licensed by the State or grounds for: jurisdiction in which the credit union (1) The regional director to reject the is principally located (even if such supervisory committee audit and provide a reasonable opportunity to cor- audit is not required by § 715.5), for any rect deficiencies; fiscal year in which the credit union has experienced serious and persistent (2) The regional director to impose the remedies available in § 715.12, pro- recordkeeping deficiencies as defined in vided any of the conditions specified paragraph (c) of this section. The ob- therein is present; and jective of a financial statement audit (3) The NCUA Board to seek formal performed under this paragraph is to administrative sanctions against the reconstruct the records of the credit supervisory committee and/or its inde- union sufficient to allow an unqualified pendent, compensated auditor pursuant or, if necessary, a qualified opinion on to section 206(r) of the Federal Credit the credit union’s financial statements. Union Act, 12 U.S.C. 1786(r). An adverse opinion or disclaimer of (b) State Charters. In the case of a fed- opinion should be the exception rather erally-insured state chartered credit than the norm. union, NCUA shall provide the state (c) ‘‘Serious and persistent record- regulator an opportunity to timely im- keeping deficiencies.’’ A record-keeping pose a remedy satisfactory to NCUA deficiency is ‘‘serious’’ if the NCUA before exercising it authority under Board reasonably believes that the § 741.202 of this chapter to impose a board of directors and management of sanction permitted under paragraph (a) the credit union have not timely met of this section. financial reporting objectives and established practices and procedures suf- § 715.12 Statutory audit remedies for ficient to safeguard members’ assets. A Federal credit unions. serious recordkeeping deficiency is (a) Audit by alternative licensed person. ‘‘persistent’’ when it continues beyond The NCUA Board may compel a federal a usual, expected or reasonable period credit union to obtain a supervisory of time. committee audit which meets the minimum requirements of § 715.5 or § 715.7, and which is performed by an inde- PART 716—PRIVACY OF CON- pendent person who is licensed by the SUMER FINANCIAL INFORMA- State or jurisdiction in which the cred- TION it union is principally located, for any fiscal year in which any of the fol- Sec. lowing three conditions is present: 716.1 Purpose and scope. (1) The Supervisory Committee has 716.2 Model privacy form and examples. not obtained an annual financial state- 716.3 Definitions.

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Subpart A—Privacy and Opt Out Notices (3) Provides a method for consumers to prevent a credit union from dis- 716.4 Initial privacy notice to consumers re- closing that information to most non- quired. 716.5 Annual privacy notice to members re- affiliated third parties by ‘‘opting out’’ quired. of that disclosure, subject to the excep- 716.6 Information to be included in privacy tions in §§ 716.13, 716.14, and 716.15. notices. (b) Scope. (1) This part applies only to 716.7 Form of opt out notice to consumers nonpublic personal information about and opt out methods. individuals who obtain financial prod- 716.8 Revised privacy notices. ucts or services for personal, family or 716.9 Delivering privacy and opt out no- household purposes. This part does not tices. apply to information about companies Subpart B—Limits on Disclosures or about individuals who obtain financial products or services for business, 716.10 Limits on disclosure of nonpublic per- commercial or agricultural purposes. sonal information to nonaffiliated third This part applies to federally-insured parties. credit unions. This part refers to a fed- 716.11 Limits on redisclosure and reuse of erally-insured credit union as ‘‘you’’ or information. ‘‘the credit union.’’ 716.12 Limits on sharing of account number information for marketing purposes. (2) Nothing in this part modifies, limits, or supersedes the standards gov- Subpart C—Exceptions erning individually identifiable financial information promulgated by the 716.13 Exception to opt out requirements for Secretary of Health and Human Serv- service providers and joint marketing. ices under the authority of §§ 262 and 716.14 Exceptions to notice and opt out re- 264 of the Health Insurance Portability quirements for processing and servicing transactions. and Accountability Act of 1996 (42 716.15 Other exceptions to notice and opt U.S.C. 1320d–1320d–8). out requirements § 716.2 Model privacy form and exam- Subpart D—Relation to Other Laws; ples. Effective Date (a) Model privacy form. Use of the model privacy form in Appendix A of 716.16 Protection of Fair Credit Reporting Act. this part, consistent with the instruc- 716.17 Relation to state laws. tions in Appendix A, constitutes com- 716.18 Effective date; transition rule. pliance with the notice content re- APPENDIX A TO PART 716—MODEL PRIVACY quirements of §§ 716.6 and 716.7 of this FORM part, although use of the model privacy APPENDIX B TO PART 716—SAMPLE CLAUSES form is not required. (b) Examples. The examples in this AUTHORITY: 15 U.S.C. 6801 et seq., 12 U.S.C. 1751 et seq. part are not exclusive. Compliance with an example, to the extent applica- SOURCE: 65 FR 31740, May 18, 2000, unless ble, constitutes compliance with this otherwise noted. part. § 716.1 Purpose and scope. [74 FR 62955, Dec 1, 2009] (a) Purpose. This part governs the treatment of nonpublic personal infor- § 716.3 Definitions. mation about consumers by the credit As used in this part, unless the con- unions listed in paragraph (b) of this text requires otherwise: section. This part: (a)(1) Affiliate means any company (1) Requires a credit union to provide that controls, is controlled by, or is notice to members about its privacy under common control with another policies and practices; company. (2) Describes the conditions under (2) Examples. (i) An affiliate of a fed- which a credit union may disclose non- eral credit union is a credit union serv- public personal information about con- ice organization (CUSO), as provided in sumers to nonaffiliated third parties; 12 CFR part 712, that is controlled by and the federal credit union.

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(ii) An affiliate of a federally-insured, (B) Place a link on a screen fre- state-chartered credit union is a com- quently accessed by consumers, such as pany that is controlled by the credit a home page or a page on which trans- union. actions are conducted, that connects (b)(1) Clear and conspicuous means directly to the notice and is labeled ap- that a notice is reasonably understand- propriately to convey the importance, able and designed to call attention to nature and relevance of the notice. the nature and significance of the in- (c) Collect means to obtain informa- formation in the notice. tion that you organize or can retrieve (2) Examples. (i) Reasonably under- by the name of an individual or by standable. You make your notice rea- identifying number, symbol, or other sonably understandable if you: identifying particular assigned to the (A) Present the information con- individual, irrespective of the source of tained in the notice in clear, concise the underlying information. sentences, paragraphs and sections; (d) Company means any corporation, (B) Use short, explanatory sentences limited liability company, business or bullet lists whenever possible; trust, general or limited partnership, (C) Use definite, concrete, everyday association or similar organization. words and active voice whenever pos- (e)(1) Consumer means an individual sible; who obtains or has obtained a financial (D) Avoid multiple negatives; product or service from you, that is to (E) Avoid legal and highly technical be used primarily for personal, family business terminology wherever pos- or household purposes, or that individ- sible; and ual’s legal representative. (F) Avoid explanations that are im- (2) Examples. (i) An individual who precise and readily subject to different provides nonpublic personal informa- interpretations. tion to you in connection with obtain- (ii) Designed to call attention. You de- ing or seeking to obtain credit union sign your notice to call attention to membership is your consumer regard- the nature and significance of the in- less of whether you establish a member formation in it if you: relationship. (A) Use a plain-language heading to (ii) An individual who provides non- call attention to the notice; public personal information to you in (B) Use a typeface and type size that connection with using your ATM is are easy to read; your consumer. (C) Provide wide margins and ample (iii) If you hold ownership or serv- line spacing; icing rights to an individual’s loan, the (D) Use boldface or italics for key individual is your consumer, even if words; and you hold those rights in conjunction (E) In a form that combines your no- with one or more financial institu- tice with other information, use dis- tions. The individual is also a con- tinctive type size, style, and graphic sumer with respect to the other finan- devices, such as shading or sidebars. cial institutions involved. This applies, (iii) Notices on websites. If you provide even if you, or another financial insti- notices on a web page, you design your tution with those rights, hire an agent notice to call attention to the nature to collect on the loan or to provide and significance of the information in processing or other services. it if you use text or visual cues to en- (iv) An individual who is a consumer courage scrolling down the page if nec- of another financial institution is not essary to view the entire notice and en- your consumer solely because you act sure that other elements on the as agent for, or provide processing or website (such as text graphics, other services to, that financial insti- hyperlinks or sound) do not distract at- tution. tention from the notice, and you ei- (v) An individual is not your con- ther: sumer solely because he or she is a par- (A) Place the notice on a screen fre- ticipant or a beneficiary of an em- quently accessed by consumers, such as ployee benefit plan that you sponsor or a home page or a page on which trans- for which you act as a trustee or fidu- actions are conducted; or ciary.

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(f) Consumer reporting agency has the cial activity as described in section same meaning as in section 603(f) of the 4(k) of the Bank Holding Company Act Fair Credit Reporting Act (15 U.S.C. of 1956 (12 U.S.C. 1843(k)). 1681a(f)). (2) Examples of financial institutions (g) Control of a company means: may include, but are not limited to: (1) Ownership, control, or power to credit unions; banks; insurance compa- vote 25 percent or more of the out- nies; securities brokers, dealers, and standing shares of any class of voting underwriters; loan brokers and security of the company, directly or in- servicers; tax planners and preparation directly, or acting through one or more services; personal property appraisers; other persons; real estate appraisers; career coun- (2) Control in any manner over the selors for employees in financial occu- election of a majority of the directors, pations; digital signature services; cou- trustees or general partners (or indi- rier services; real estate settlement viduals exercising similar functions) of services; manufacturers of computer the company; or software and hardware; and travel (3) The power to exercise, directly or agencies operated in connection with indirectly, a controlling influence over financial services. the management or policies of the (3) Financial institution does not in- company, as the NCUA determines. clude: With respect to state-chartered credit (i) Any person or entity with respect unions, NCUA will consult with the ap- to any financial activity that is subject propriate state regulator prior to mak- to the jurisdiction of the Commodity ing its determination. Futures Trading Commission under the (4) Example. NCUA will presume a Commodity Exchange Act (7 U.S.C. 1 et credit union has a controlling influence seq.); over the management or policies of a CUSO, if the CUSO is 67% owned by (ii) The Federal Agricultural Mort- credit unions. gage Corporation or any entity char- (h) Credit union means a federal or tered and operating under the Farm state-chartered credit union that the Credit Act of 1971 (12 U.S.C. 2001 et seq.); National Credit Union Share Insurance or Fund insures. (iii) Institutions chartered by Con- (i) Customer means a consumer who gress specifically to engage in has a customer relationship with a fi- securitizations, secondary market sales nancial institution other than a credit (including sales of servicing rights) or union. similar transactions related to a trans- (j) Customer relationship means a con- action of a consumer, as long as such tinuing relationship between a con- institutions do not sell or transfer non- sumer and a financial institution other public personal information to a non- than a credit union. affiliated third party. (k) Federal functional regulator (m) (1) Financial product or service means— means any product or service that a fi- (1) The National Credit Union Admin- nancial holding company could offer by istration Board; engaging in an activity that is finan- (2) The Board of Governors of the cial in nature or incidental to such a fi- Federal Reserve System; nancial activity under section 4(k) of (3) The Office of the Comptroller of the Bank Holding Company Act of 1956 the Currency; (12 U.S.C. 1843(k)). (4) The Board of Directors of the Fed- (2) Financial service includes your eral Deposit Insurance Corporation; evaluation or brokerage of information (5) The Director of the Office of that you collect in connection with a Thrift Supervision; and request or an application from a con- (6) The Securities and Exchange sumer for a financial product or serv- Commission. ice. (l)(1)Financial institution means any (n) Member means a consumer who institution the business of which is en- has a member relationship with you. gaging in activities that are financial For purposes of this part only, it will in nature or incidental to such finan- include certain nonmembers.

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(o)(1) Member relationship means a (i) Publicly available information, continuing relationship between a con- except as included on a list described in sumer and you under which you pro- paragraph (q)(1)(ii) of this section; or vide one or more financial products or (ii) Any list, description, or other services to the consumer that are to be grouping of consumers (and publicly used primarily for personal, family or available information pertaining to household purposes. As noted in the ex- them) that is derived without using amples, this will include certain con- any personally identifiable financial sumers that are not your members. information, other than publicly avail- (2) Examples. (i) A consumer has a able information. continuing relationship with you if the (3) Examples of lists. (i) Nonpublic per- consumer: sonal information includes any list of (A) Is your member as defined in individuals’ names and street addresses your bylaws; that is derived in whole or in part (B) Is a nonmember who has a share, using personally identifiable financial share draft, or credit card account with information, other than publicly avail- you jointly with a member; able information, such as account num- (C) Is a nonmember who has a loan bers. that you service; (ii) Nonpublic personal information (D) Is a nonmember who has an ac- does not include any list of individuals’ count with you and you are a credit names and addresses that contains union that has been designated as a only publicly available information, is low-income credit union; or not derived using personally identifi- (E) Is a nonmember who has an ac- able financial information, other than count in a federally-insured, state- publicly available information, either chartered credit union pursuant to in whole or in part, and is not disclosed state law. in a manner that indicates that any of (ii) A consumer does not, however, the individuals on the list is a con- have a member relationship with you if sumer of a credit union, other than the consumer is a nonmember and: publicly available information. (A) The consumer only obtains a fi- (r)(1) Personally identifiable financial nancial product or service in isolated information means any information: transactions, such as using your ATM (i) A consumer provides to you to ob- to withdraw cash from an account tain a financial product or service from maintained at another financial insti- you; tution or purchasing travelers checks; (ii) About a consumer resulting from or any transaction involving a financial (B) You sell the consumer’s loan and product or service between you and a do not retain the rights to service that consumer; or loan. (iii) You otherwise obtain about a (p)(1) Nonaffiliated third party means consumer in connection with providing any person except: a financial product or service to that (i) Your affiliate; or consumer. (ii) A person employed jointly by you (2) Personally identifiable financial and any company that is not your affil- information does not include publicly iate (but nonaffiliated third party in- available information. cludes the other company that jointly (3) Examples. (i) Information included. employs the person). Personally identifiable financial infor- (q)(1) Nonpublic personal information mation includes: means: (A) Information a consumer provides (i) Personally identifiable financial to you on an application to obtain information; and membership, a loan, credit card or (ii) Any list, description or other other financial product or service; grouping of consumers (and publicly (B) Account balance information, available information pertaining to payment history, overdraft history, them) that is derived using any person- and credit or debit card purchase infor- ally identifiable financial information. mation; (2) Nonpublic personal information does (C) The fact that an individual is or not include: has been one of your members or has

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obtained a financial product or service tributed media includes information from you; from a telephone book, a television or (D) Any information about your con- radio program, a newspaper or a web sumer if it is disclosed in a manner site that is available to the general that indicates that the individual is or public on an unrestricted basis. A web has been your consumer; site is not restricted merely because an (E) Any information that a consumer Internet service provider or site oper- provides to you or that you or your ator requires a fee or a password, so agent otherwise obtain in connection long as access is available to the gen- with collecting on a loan or servicing a eral public. loan; (iii) Reasonable basis. (1) You have a (F) Any information you collect reasonable basis to believe that mort- through an Internet ‘‘cookie’’ (an in- gage information is lawfully made formation collecting device from a web available to the general public if you server); and have determined that the information (G) Information from a consumer re- is of the type included on the public port. record in the jurisdiction where the (ii) Information not included. Person- mortgage would be recorded. ally identifiable financial information (2) You have a reasonable basis to be- does not include: lieve that an individual’s telephone (A) A list of names and addresses of number is lawfully made available to customers of an entity that is not a fi- the general public if you have located nancial institution; and the telephone number in the telephone (B) Information that does not iden- book or have been informed by the con- tify a consumer, such as aggregate in- sumer that the telephone number is formation or blind data that does not not unlisted. contain personal identifiers such as ac- (t) You means a federally-insured count numbers, names, or addresses. credit union. (s)(1) Publicly available information [65 FR 31740, May 18, 2000, as amended at 73 means any information that you have a FR 30478, May 28, 2008] reasonable basis to believe is lawfully made available to the general public Subpart A—Privacy and Opt Out from: Notices (i) Federal, state or local government records; § 716.4 Initial privacy notice to con- (ii) Widely distributed media; or sumers required. (iii) Disclosures to the general public (a) Initial notice requirement. You that are required to be made by fed- must provide a clear and conspicuous eral, state or local law. notice that accurately reflects your (2) Reasonable basis. You have a rea- privacy policies and practices to a: sonable basis to believe that informa- (1) Member, not later than when you tion is lawfully made available to the establish a member relationship, ex- general public if you have taken steps cept as provided in paragraph (e) of to determine: this section; and (i) That the information is of the (2) Consumer, before you disclose any type that is available to the general nonpublic personal information about public; and the consumer to any nonaffiliated (ii) Whether an individual can direct third party, if you make such a disclo- that the information not be made sure other than as authorized by available to the general public and, if §§ 716.14 and 716.15. so, that your member or consumer has (b) When initial notice to a consumer is not done so. not required. You are not required to (3) Examples. (i) Government records. provide an initial notice to a consumer Publicly available information in gov- under paragraph (a) of this section if: ernment records includes information (1) You do not disclose any nonpublic in government real estate records and personal information about the con- security interest filings. sumer to any nonaffiliated third party, (ii) Widely distributed media. Publicly other than as authorized by §§ 716.14 available information from widely dis- and 716.15; and

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(2) You do not have a member rela- member’s new financial product or tionship with the consumer. service; or (c) When you establish a member rela- (2) If the initial, revised, or annual tionship—(1) General rule. You establish notice that you most recently provided a member relationship when you and to that member was accurate with re- the consumer enter into a continuing spect to the new financial product or relationship. service, you do not need to provide a (2) Special rule for loans. You establish new privacy notice under paragraph (a) a member relationship with a con- of this section. sumer when you originate, or acquire (e) Exceptions to allow subsequent de- the servicing rights to a loan to the livery of notice. (1) You may provide the consumer for personal, household or initial notice required by paragraph family purposes and that is the only (a)(1) of this section within a reason- basis for the member relationship. If able time after you establish a member you subsequently transfer the servicing relationship if: rights to that loan to another financial (i) Establishing the member relation- institution, the member relationship ship is not at the member’s election; transfers with the servicing rights. (ii) Providing notice not later than (3)(i) Examples of establishing member when you establish a member relation- relationship. You establish a member ship would substantially delay the relationship when the consumer: member’s transaction and the member (A) Becomes your member under agrees to receive the notice at a later your bylaws; time. (B) Is a nonmember and opens a cred- (2) Examples of exceptions. (i) Not at it card account with you jointly with a member’s election. Establishing a mem- member under your procedures; ber relationship is not at the member’s (C) Is a nonmember and executes the election if you acquire a member’s de- contract to open a share or share draft posit liability from another financial account with you or obtains credit institution and the member does not from you jointly with a member, in- have a choice about your acquisition. cluding an individual acting as a guar- (ii) Substantial delay of member’s trans- antor; action. Providing notice not later than (D) Is a nonmember and opens an ac- when you establish a member relation- count with you and you are a credit ship would substantially delay the union designated as a low-income cred- member’s transaction when: it union; (A) You and the individual agree over (E) Is a nonmember and opens an ac- the telephone to enter into a member count with you pursuant to state law relationship involving prompt delivery and you are a state-chartered credit of the financial product or service; or union. (B) You establish a member relation- (ii) Examples of loan rule. You estab- ship with an individual under a pro- lish a member relationship with a con- gram authorized by Title IV of the sumer who obtains a loan for personal, Higher Education Act of 1965 (20 U.S.C. family, or household purposes when 1070 et seq.) or similar student loan pro- you: grams where loan proceeds are dis- (A) Originate the loan to the con- bursed promptly without prior commu- sumer and retain the servicing rights; nication between you and the member. or (iii) No substantial delay of member’s (B) Purchase the servicing rights to transaction. Providing notice not later the consumer’s loan. than when you establish a member re- (d) Existing members. When an existing lationship would not substantially member obtains a new financial prod- delay the member’s transaction when uct or service that is to be used pri- the relationship is initiated in person marily for personal, family, or house- at your office or through other means hold purposes, you satisfy the initial by which the member may view the no- notice requirements of paragraph (a) of tice, such as on a web site. this section as follows: (f)(1) Joint relationships. If two or (1) You may provide a revised policy more consumers jointly obtain a finan- notice, under § 716.8, that covers the cial product or service, other than a

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loan, from you, you may satisfy the re- (ii) In the case of a nonmember’s quirements of paragraph of this section share or share draft account, the ac- by providing one initial notice to those count is inactive under the credit consumers jointly. union’s policies; (2) Special rule for loans. (i) You are (iii) In the case of a nonmember’s required to provide an initial notice to closed-end loan, the loan is paid in full, a borrower or guarantor on a loan if you charge off the loan, or you sell the you share his or her nonpublic personal loan without retaining servicing information with nonaffiliated third rights; parties other than for purposes under (iv) In the case of a credit card rela- §§ 716.13, 716.14 and 716.15. (ii) You may tionship or other open-end credit rela- satisfy the annual notice requirements tionship with a nonmember, you no of § 716.5 by providing one notice to longer provide any statements or no- those borrowers and guarantors joint- tices to the nonmember concerning ly. that relationship or you sell the credit (g) Delivery. When you are required to card receivables without retaining deliver an initial privacy notice by this servicing rights; or section, you must deliver it according (v) You have not communicated with to the methods in § 716.9. If you use a the nonmember about the relationship short-form initial notice for non- for a period of twelve consecutive member consumers according to months, other than to provide annual § 716.6(c), you may deliver your privacy privacy notices or promotional mate- notice according to § 716.6(c)(3). rial. [65 FR 31740, May 18, 2000, as amended at 65 (c) Delivery. When you are required to FR 36783, June 12, 2000] deliver an annual privacy notice by this section, you must deliver it ac- § 716.5 Annual privacy notice to mem- cording to the methods in § 716.9. bers required. (a)(1) General rule. You must provide § 716.6 Information to be included in privacy notices. a clear and conspicuous notice to members that accurately reflects your pri- (a) General rule. The initial and an- vacy policies and practices not less nual privacy notices under §§ 716.4 and than annually during the continuation 716.5 must include each of the following of the member relationship. Annually items of information that applies to means at least once in any period of 12 you or to the consumers to whom you consecutive months during which that send your privacy notice, in addition to relationship exists. You may define the any other information you wish to pro- 12-consecutive-month period, but you vide: must apply it to the member on a con- (1) The categories of nonpublic persistent basis. sonal information that you collect; (2) Example. You provide a notice an- (2) The categories of nonpublic per- nually if you define the 12-consecutive- sonal information that you disclose; month period as a calendar year and (3) The categories of affiliates and provide the annual notice to the mem- nonaffiliated third parties to whom ber once in each calendar year fol- you disclose nonpublic personal infor- lowing the calendar year in which you mation, other than those parties to provide the initial notice. For example, whom you disclose information under if a member opens an account on any §§ 716.14 and 716.15; day of year one, you must provide an (4) The categories of nonpublic per- annual notice to that member by De- sonal information about your former cember 31 of year two. members that you disclose and the cat- (b) (1) Termination of member relation- egories of affiliates and nonaffiliated ship. You are not required to provide third parties to whom you disclose it, an annual notice to a former member. other than those parties to whom you (2) Examples. Your member becomes disclose information under §§ 716.14 and your former member when: 716.15; (i) An individual is no longer your (5) If you disclose nonpublic personal member as defined in your bylaws; information to a nonaffiliated third

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party under § 716.13 (and no other ex- (iii) Explain a reasonable means by ception applies to that disclosure), a which the consumer may obtain that separate statement of the categories of notice. information you disclose and the cat- (3) You must deliver your short-form egories of third parties with whom you initial notice according to § 716.9. You have contracted; are not required to deliver your pri- (6) An explanation of the consumer’s vacy notice with your short form ini- right under § 716.10(a) to opt out of the tial notice. You instead may simply disclosure of nonpublic personal infor- provide the consumer a reasonable mation to nonaffiliated third parties, means to obtain your privacy notice. If including the methods by which the a consumer who receives your short- consumer may exercise that right at form notice requests your privacy no- that time; tice, you must deliver your privacy no- (7) Any disclosures that you make tice according to § 716.9. under section 603(d)(2)(A)(iii) of the (4) Examples of obtaining privacy no- Fair Credit Reporting Act (15 U.S.C. tice. You provide a reasonable means by 1681a(d)(2)(A)(iii)) (that is, notices re- which a consumer may obtain a copy of garding the ability to opt out of disclo- your privacy notice if you: sure of information among affiliates); (i) Provide a toll-free telephone num- (8) Your policies and practices with ber that the consumer may call to re- respect to protecting the confiden- quest the notice; or tiality and security of nonpublic per- (ii) For a consumer who conducts sonal information; and business in person at your office, main- (9) Any disclosures you make under tain copies of the notice on hand that paragraph (b) of this section. you provide to a consumer imme- (b) Description of nonaffiliated third diately upon request. parties subject to exceptions. If you dis- (d) Future disclosures. Your notice close nonpublic personal information may include: to third parties as authorized under (1) Categories of nonpublic personal §§ 716.14 and 716.15, you are not required information that you reserve the right to list those exceptions in the initial or to disclose in the future, but do not annual privacy notices required by currently disclose; and §§ 716.4 and 716.5. When describing the (2) Categories of affiliates or non- categories with respect to those par- affiliated third parties to whom you re- ties, it is sufficient to state that you serve the right in the future to dis- make disclosures to other nonaffiliated close, but to whom you do not cur- companies: rently disclose, nonpublic personal in- (1) For your everyday business pur- formation. poses, such as [include all that apply] to (e) Examples—(1) Categories of non- process transactions, maintain ac- public personal information that you col- count(s), respond to court orders and lect. You satisfy the requirement to legal investigations, or report to credit categorize the nonpublic personal in- bureaus; or formation that you collect if you list (2) As permitted by law. the following categories, as applicable: (c) Short-form initial notice with opt (i) Information from the consumer; out notice for nonmember consumers. (1) (ii) Information about the consumer’s You may satisfy the initial notice re- transactions with you or your affili- quirements in §§ 716.4(a)(2), 716.7(b), and ates; 716.7(c) for a consumer who is not a (iii) Information about the con- member by providing a short-form ini- sumer’s transactions with nonaffiliated tial notice at the same time as you de- third parties; and liver an opt out notice as required in (iv) Information from a consumer re- § 716.7. porting agency. (2) A short-form initial notice must: (2) Categories of nonpublic personal in- (i) Be clear and conspicuous; formation you disclose. (i) You satisfy (ii) State that your privacy notice is the requirement to categorize the non- available upon request; and public personal information that you

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disclose if you list the categories de- (6) Confidentiality and security. You scribed in paragraph (e)(1) of this sec- describe your policies and practices tion, as applicable, and a few examples with respect to protecting the con- to illustrate the types of information fidentiality and security of nonpublic in each category. personal information if you do both of (ii) If you reserve the right to dis- the following: close all of the nonpublic personal in- (i) Describe in general terms who is formation about consumers that you authorized to have access to the infor- collect, you may simply state that fact mation. without describing the categories or (ii) State whether you have security examples of the nonpublic personal in- practices and procedures in place to en- formation you disclose. sure the confidentiality of the informa- (3) Categories of affiliates and non- tion in accordance with your policy. affiliated third parties to whom you dis- You are not required to describe tech- close. You satisfy the requirement to nical information about the safeguards categorize the affiliates and non- you use. affiliated third parties to whom you (7) Joint notice with affiliates. You disclose nonpublic personal informa- may provide a joint notice from you tion if you list the following cat- and one or more of your affiliates or egories, as applicable, and a few exam- other financial institutions, as speci- ples to illustrate the types of third par- fied in the notice, as long as the notice ties in each category. (i) Financial service providers; is accurate with respect to you and the (ii) Non-financial companies; and other institution. (iii) Others. (f) Model privacy form. Pursuant to (4) Disclosures under exception for serv- § 716.2(a) of this part, a model privacy ice providers and joint marketers. If you form that meets the notice content redisclose nonpublic personal informa- quirements of this section is included tion under the exception in § 716.13 to a in appendix A of this part. nonaffiliated third party to market (g) Sample clauses. Sample clauses il- products or services that you offer lustrating some of the notice content alone or jointly with another financial required by this section are included in institution, you satisfy the disclosure appendix B of this part. Use of a sample requirement of paragraph (a)(5) of this clause in a privacy notice provided on section if you: or before December 31, 2010, to the ex- (i) List the categories of nonpublic tent applicable, constitutes compliance personal information you disclose, with this part. using the same categories and exam- [65 FR 31740, May 18, 2000, as amended at 74 ples you used to meet the requirements FR 62955, Dec. 1, 2009] of paragraphs (a)(2) of this section, as applicable; and EFFECTIVE DATE NOTE: At 74 FR 62955, Dec. (ii) State whether the third party is: 1, 2009, § 716.6 was amended by removing (g), (A) A service provider that performs effective Jan. 1, 2012. marketing services on your behalf or § 716.7 Form of opt out notice to con- on behalf of you and another financial sumers and opt out methods. institution; or (B) A financial institution with (a)(1) Form of opt out notice. If you are whom you have a joint marketing required to provide an opt out notice agreement. under § 716.10(a)(1), you must provide a (5) Simplified notices. If you do not dis- clear and conspicuous notice to each of close, and do not intend to disclose, your consumers that accurately ex- nonpublic personal information about plains the right to opt out under that members or former members to affili- section. The notice must state: ates or nonaffiliated third parties ex- (i) That you disclose or reserve the cept as authorized under §§ 716.14 and right to disclose nonpublic personal in- 716.15, you may simply state that fact, formation about your consumer to a in addition to the information you nonaffiliated third party; must provide under paragraphs (a)(1), (ii) That the consumer has the right (a)(8), (a)(9) and (c) of this section. to opt out of that disclosure; and

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(iii) A reasonable means by which the ten or electronic form as the initial no- consumer may exercise the opt out tice you provide in accordance with right. § 716.4. (2) Examples. (i) Adequate opt out no- (c) Initial notice required when opt out tice. You provide adequate notice that notice delivered subsequent to initial no- the consumer can opt out of the disclo- tice. If you provide the opt out notice sure of nonpublic personal information later than required for the initial no- to a nonaffiliated third party if you: tice in accordance with § 716.4, you (A) Identify all of the categories of must also include a copy of the initial nonpublic personal information that notice in writing or, if the consumer you disclose or reserve the right to disagrees, electronically. close and all of the categories of non- (d) Joint relationships. (1) If two or affiliated third parties to whom you more consumers jointly obtain a finan- disclose the information, as described cial product or service, other than a in § 716.6(a)(2) and (3) and state that the loan, from you, you may provide only a consumer can opt out of the disclosure single opt out notice. Your opt out no- of that information; and tice must explain how you will treat an (B) Identify the financial products or opt out direction by a joint consumer services that the consumer obtains as explained in the examples in para- from you, either singly or jointly, to graph (d)(5) of this section. which the opt out direction would (2) Any of the joint consumers may apply. exercise the right to opt out. You may (ii) Reasonable opt out means. You pro- either: vide a reasonable means to exercise an (i) Treat an opt out direction by a opt out right if you: joint consumer to apply to all of the (A) Designate check-off boxes in a associated joint consumers; or prominent position on the relevant (ii) Permit each joint consumer to forms with the opt out notice; opt out separately. (B) Include a reply form together (3) If you permit each joint consumer with the opt out notice; to opt out separately, you must permit (C) Provide an electronic means to one of the joint consumers to opt out opt out, such as a form that can be sent on behalf of all of the joint consumers. via electronic mail or a process at your (4) You may not require all joint con- web site, if the consumer agrees to the sumers to opt out before you imple- electronic delivery of information; or ment any opt out direction. (D) Provide a toll-free telephone (5) Example. If John and Mary have a number that consumers may call to opt joint share account with you and ar- out. range for you to send statements to (iii) Unreasonable opt out means. You John’s address, you may do any of the do not provide a reasonable means of following, but you must explain in opting out if: your opt out notice which opt out pol- (A) The only means of opting out is icy you will follow: for the consumer to write his or her (i) Send a single opt out notice to own letter to exercise that opt out John’s address, but you must accept an right; or opt out direction from either John or (B) The only means of opting out as Mary. described in any notice subsequent to (ii) Treat an opt out direction by ei- the initial notice is to use a check-off ther John or Mary as applying to the box that was provided with the initial entire account. If you do so, and John notice but not included with the subse- opts out, you may not require Mary to quent notice. opt out as well before implementing (iv) Specific opt out means. You may John’s opt out direction. require each consumer to opt out (iii) Permit John and Mary to make through a specific means, as long as different opt out directions. If you do that means is reasonable for that con- so, and if John and Mary both opt out, sumer. you must permit one or both of them (b) Same form as initial notice per- to notify you in a single response (such mitted. You may provide the opt out no- as on a form or through a telephone tice together with or on the same writ- call).

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(6) Special rule for loans. (i) You are (1) You have provided to the con- required to provide an initial opt out sumer a revised notice that accurately notice to a borrower or guarantor on a describes your policies and practices; loan if you share his or her nonpublic (2) You have provided to the con- personal information with non- sumer a new opt out notice; affiliated third parties other than for (3) You have given the consumer a purposes under §§ 716.13, 716.14 and reasonable opportunity, before you dis- 716.15. close the information to the non- (ii) You may satisfy your annual opt affiliated third party, to opt out of the out notice requirement by providing disclosure; and one notice to those borrowers and (4) The consumer does not opt out. guarantors jointly. (b) Examples. (1) Except as otherwise (e) Time to comply with opt out. You permitted by §§ 716.13, 716.14 and 716.15, must comply with the consumer’s opt you must provide a revised notice if out direction as soon as reasonably you— practicable after you receive it. (i) Disclose a new category of non- (f) Continuing right to opt out. A con- public personal information to any sumer may exercise the right to opt nonaffiliated third party; out at any time. (ii) Disclose nonpublic personal infor- (g) Duration of consumer’s opt out di- mation to a new category of non- rection. (1) A consumer’s direction to affiliated third party; or opt out under this section is effective (iii) Disclose nonpublic personal in- until the consumer revokes it in writ- formation about a former member to a ing or, if the consumer agrees, elec- nonaffiliated third party, and that tronically. former member has not had the oppor- (2) When a member relationship ter- tunity to exercise an opt out right re- minates, the member’s opt out direc- garding that disclosure. tion continues to apply to the non- (2) A revised notice is not required if public personal information that you you disclose nonpublic personal infor- collected during or related to the rela- mation to a new nonaffiliated third tionship. If the individual subsequently party that you adequately described in establishes a new member relationship your prior notice. with you, the opt out direction that ap- (c) Delivery. When you are required to plied to the former relationship does deliver a revised privacy notice by this not apply to the new relationship. section, you must deliver it according (h) Delivery. When you are required to to the methods in § 716.9. deliver an opt out notice by this section, you must deliver it according to § 716.9 Delivering privacy and opt out the methods in § 716.9. notices. (i) Model privacy form. Pursuant to (a) How to provide notices. You must § 716.2(a) of this part, a model privacy provide any privacy notices and opt form that meets the notice content re- out notices, including short-form ini- quirements of this section is included tial notices, that this part requires so in appendix A of this part. that each consumer can reasonably be [65 FR 31740, May 18, 2000, as amended at 65 expected to receive actual notice in FR 36783, June 12, 2000; 74 FR 62956, Dec. 1, writing or, if the consumer agrees, 2009] electronically. (b) (1) Examples of reasonable expecta- § 716.8 Revised privacy notices. tion of actual notice. You may reason- (a) General rule. Except as otherwise ably expect that a consumer will re- authorized in this part, you must not, ceive actual notice if you: directly or through any affiliate, dis- (i) Hand-deliver a printed copy of the close any nonpublic personal informa- notice to the consumer; tion about a consumer to a non- (ii) Mail a printed copy of the notice affiliated third party other than as de- to the last known address of the con- scribed in the initial notice that you sumer; provided to that consumer under § 716.4, (iii) For the consumer who conducts unless: transactions electronically, post the

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notice on the electronic site and re- (i) Hand-deliver a printed copy of the quire the consumer to acknowledge re- notice to the member; ceipt of the notice as a necessary step (ii) Mail a printed copy of the notice to obtaining a particular financial to the last known address of the mem- product or service; ber upon request of the member; or (iv) For an isolated transaction with (iii) Make your current privacy no- the consumer, such as an ATM trans- tice available on a web site (or a link action, post the notice on the ATM to another web site) for the member screen and require the consumer to ac- who obtains a financial product or knowledge receipt of the notice as a service electronically and agrees to re- necessary step to obtaining the par- ceive the notice at the web site. ticular financial product or service. (2) Examples of unreasonable expecta- Subpart B—Limits on Disclosures tions of actual notice. You may not, however, reasonably expect that a con- § 716.10 Limits on disclosure of non- sumer will receive actual notice if you: public personal information to non- (i) Only post a sign in your branch or affiliated third parties. office or generally publish advertise- (a) (1) Conditions for disclosure. Except ments of your privacy policies and as otherwise authorized in this part, practices; you may not, directly or through any (ii) Send the notice via electronic affiliate, disclose any nonpublic per- mail to a consumer who does not ob- sonal information about a consumer to tain a financial product or service from a nonaffiliated third party unless: you electronically. (i) You have provided to the con- (c) Annual notices only. You may rea- sumer an initial notice as required sonably expect that a member will re- under § 716.4; ceive actual notice of your annual pri- (ii) You have provided to the con- vacy notice if: sumer an opt out notice as required in (1) The member uses your web site to § 716.7; access financial products and services (iii) You have given the consumer a electronically and agrees to receive no- reasonable opportunity, before you dis- tices at your web site and you post close the information to the non- your current privacy notice continu- affiliated third party, to opt out of the ously in a clear and conspicuous man- disclosure; and ner on your web site; or (iv) The consumer does not opt out. (2) The member has requested that (2) Opt out definition. Opt out means a you refrain from sending any informa- direction by the consumer that you not tion regarding the member relation- disclose nonpublic personal informa- ship, and your current privacy notice tion about that consumer to a non- remains available to the member upon affiliated third party, other than as request. permitted by §§ 716.13, 716.14 and 716.15. (d) Oral description of notice insuffi- (3) Examples of reasonable opportunity cient. You may not provide any notice to opt out. You provide a consumer with required by this part solely by orally a reasonable opportunity to opt out if: explaining the notice, either in person (i) By mail. You mail the notices re- or over the telephone. quired in paragraph (a)(1) of this sec- (e) Retention or accessibility of notices tion to the consumer and allow the for members. (1) For members only, you consumer to opt out by mailing a form, must provide the initial notice re- calling a toll-free telephone number, or quired by § 716.4 (a)(1), the annual no- any other reasonable means within 30 tice required by § 716.5(a) and the re- days from the date you mailed the no- vised notice required by § 716.8 so that tices. the member can retain them or obtain (ii) By electronic means. A member them later in writing or, if the member opens an on-line account with you and agrees, electronically. agrees to receive the notices required (2) Examples of retention or accessi- in paragraph (a)(1) of this section elec- bility. You provide the privacy notice tronically, and you make the notices to the member so that the member can available to the member on your web retain it or obtain it later if you: site and allow the member to opt out

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by any reasonable means within 30 covered by the exception under which days after the date that the member you received the information. acknowledges receipt of the notices. (2) Example. If you receive a member (iii) Isolated transaction with con- list from a credit union in order to pro- sumer. For an isolated transaction, vide correspondent services under the such as the purchase of a traveler’s exception in § 716.14(a), you may dis- check by a consumer, you provide the close that information under any ex- consumer with a reasonable oppor- ception in § 716.14 or 716.15 in order to tunity to opt out if you provide the no- provide those services. For example, tices required in paragraph (a)(1) of you could disclose the information in this section at the time of the trans- response to a properly authorized sub- action and request that the consumer poena or to your attorneys, account- decide, as a necessary part of the trans- ants, and auditors. You could not dis- action, whether to opt out before com- close that information to a third party pleting the transaction. for marketing purposes or use that in- (b) Application of opt out to all con- formation for your own marketing pur- sumers and all nonpublic personal infor- poses. mation. (1) You must comply with this (b)(1) Information you receive outside of section, regardless of whether you and an exception. If you receive nonpublic the consumer have established a mem- personal information from a non- ber relationship. affiliated financial institution other than under an exception in § 716.14 or (2) Unless you comply with this sec- 716.15 of this part, you may disclose the tion, you may not, directly or through information only: an affiliate, disclose any nonpublic per- (i) To the affiliates of the financial sonal information about a consumer institution from which you received that you have collected, regardless of the information; whether you collected it before or after (ii) To your affiliates, but your affili- receiving the direction to opt out from ates may, in turn, disclose the informa- the consumer. tion only to the extent that you can (c) Partial opt out. You may allow a disclose the information; consumer to select certain nonpublic (iii) To any other person, if the dis- personal information or certain non- closure would be lawful if made di- affiliated third parties with respect to rectly to that person by the financial which the consumer wishes to opt out. institution from which you received the information; and § 716.11 Limits on redisclosure and reuse of information. (iv) Pursuant to an exception in § 716.14 or 716.15. (a)(1) Information you receive under an (2) Example. If you obtain a customer exception. If you receive nonpublic per- list from a nonaffiliated financial insti- sonal information from a nonaffiliated tution outside of the exceptions in financial institution under an excep- §§ 716.14 and 716.15, tion in § 716.14 or 716.15 of this part, (i) You may use the list for your own your disclosure and use of that infor- purposes; mation is limited as follows: (ii) You may disclose that list to an- (i) You may disclose the information other non-affiliated third party only if to the affiliates of the financial insti- the financial institution from which tution from which you received the in- you purchased the list could have dis- formation; and closed the list to that third party, that (ii) You may disclose the information is you may disclose the list in accord- to your affiliates, but your affiliates ance with the privacy policy of the fi- may, in turn, disclose and use the in- nancial institution from which you re- formation only to the extent that you ceived the list, as limited by the opt may disclose and use the information; out direction of each consumer whose and nonpublic personal information you in- (iii) You may disclose and use the intend to disclose; and formation pursuant to an exception in (iii) You may disclose that list as § 716.14 or 716.15 in the ordinary course permitted by § 716.14 or 716.15, such as of business to carry out the activity to your attorneys or accountants.

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(c) Information you disclose under an (1) To your agent or service provider exception. If you disclose nonpublic per- solely in order to perform marketing sonal information to a nonaffiliated for your own products or services, as third party under an exception in long as the agent or service provider § 716.14 or 716.15 of this part, the disclo- cannot directly initiate charges to the sure and use of that information by the account; or third party is limited as follows: (2) To a participant in a private label (1) The third party may disclose the credit card program or an affinity or information to your affiliates; similar program where the participants (2) The third party may disclose the in the program are identified to the information to its affiliates, but its af- member when the member enters into filiates may, in turn, disclose and use the program. the information only to the extent that (c) Examples—(1) Account number. An the third party may disclose and use account number, or similar form of ac- the information; and cess number or access code, does not (3) The third party may disclose and include a number or code in an use the information pursuant to an ex- encrypted form, as long as you do not ception in § 716.14 or 716.15 in the ordi- provide the recipient with a means to nary course of business to carry out decode the number or code. the activity covered by the exception (2) Transaction account. A transaction under which it received the informa- account is an account other than a tion. share or credit card account. A trans- (d) Information you disclose outside of action account does not include an ac- an exception. If you disclose nonpublic count to which a third party cannot personal information to a nonaffiliated initiate a charge. third party other than under an exception in § 716.14 or 716.15 of this part, the Subpart C—Exceptions third party may disclose the information only: § 716.13 Exception to opt out require- (1) To your affiliates; ments for service providers and (2) To its affiliates, but its affiliates, joint marketing. in turn, may disclose the information (a) General rule. (1) The opt out re- only to the extent the third party can quirements in §§ 716.7 and 716.10 do not disclose the information; apply when you provide nonpublic per- (3) To any other person, if the disclo- sonal information to a nonaffiliated sure would be lawful if made directly third party to perform services for you to that person by you; and or functions on your behalf, if you: (4) Pursuant to an exception in (i) Provide the initial notice in ac- § 716.14 or 716.15. cordance with § 716.4; and (ii) Enter into a contractual agree- § 716.12 Limits on sharing of account ment with the third party that pro- number information for marketing hibits the third party from disclosing purposes. or using the information other than to (a) General prohibition on disclosure of carry out the purposes for which you account numbers. You must not, di- disclosed the information, including rectly or through an affiliate, disclose, use under an exception in § 716.14 or other than to a consumer reporting 716.15 in the ordinary course of busi- agency, an account number or similar ness to carry out those purposes. form of access number or access code (2) Example. If you disclose nonpublic for a consumer’s credit card account, personal information under this sec- share account or transaction account tion to a financial institution with to any nonaffiliated third party for use which you perform joint marketing, in telemarketing, direct mail mar- your contractual agreement with that keting or other marketing through institution meets the requirements of electronic mail to the consumer. paragraph (a)(1)(ii) of this section if it (b) Exceptions. Paragraph (a) of this prohibits the institution from dis- section does not apply if you disclose closing or using the nonpublic personal an account number or similar form of information except as necessary to access number or access code: carry out the joint marketing or under

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an exception in § 716.14 or 716.15 in the which the transaction is a part, and ordinary course of business to carry record, service or maintain the con- out that joint marketing. sumer’s account in the ordinary course (b) Service may include joint marketing. of providing the financial service or fi- The services that a nonaffiliated third nancial product; party performs for you under para- (ii) To administer or service benefits graph (a) of this section may include or claims relating to the transaction or marketing of your own products or the product or service business of services or marketing of financial which it is a part; products or services offered pursuant (iii) To provide a confirmation, state- to joint agreements between you and ment or other record of the trans- one or more financial institutions. action, or information on the status or (c) Definition of joint agreement. For value of the financial service or finan- purposes of this section, joint agreement cial product to the consumer or the means a written contract pursuant to consumer’s agent or broker; which you and one or more financial (iv) To accrue or recognize incentives institutions jointly offer, endorse, or or bonuses associated with the trans- sponsor a financial product or service. action that are provided by you or any other party; § 716.14 Exceptions to notice and opt out requirements for processing (v) In connection with: and servicing transactions. (A) The authorization, settlement, billing, processing, clearing, transfer- (a) Exceptions for processing trans- ring, reconciling or collection of actions at consumer’s request. The re- amounts charged, debited, or otherwise quirements for initial notice in paid using a debit, credit or other pay- § 716.4(a)(2), the opt out in §§ 716.7 and ment card, check or account number, 716.10 and service providers and joint or by other payment means; marketing in § 716.13 do not apply if (B) The transfer of receivables, ac- you disclose nonpublic personal infor- counts or interests therein; or mation as necessary to effect, administer, or enforce a transaction that a (C) The audit of debit, credit or other consumer requests or authorizes, or in payment information. connection with: § 716.15 Other exceptions to notice and (1) Servicing or processing a financial opt out requirements. product or service that a consumer requests or authorizes; (a) Exceptions to opt out requirements. (2) Maintaining or servicing the con- The requirements for initial notice to sumer’s account with you, or with an- consumers in § 716.4(a)(2), the opt out in other entity as part of a private label §§ 716.7 and 716.10 and service providers credit card program or other extension and joint marketing in § 716.13 do not of credit on behalf of such entity; or apply when you disclose nonpublic per- (3) A proposed or actual sonal information: securitization, secondary market sale (1) With the consent or at the direc- (including sales of servicing rights) or tion of the consumer, provided that the similar transaction related to a trans- consumer has not revoked the consent action of the consumer. or direction; (b) Necessary to effect, administer, or (2)(i) To protect the confidentiality enforce a transaction means that the or security of your records pertaining disclosure is: to the consumer, service, product or (1) Required, or is one of the lawful transaction; or appropriate methods, to enforce (ii) To protect against or prevent ac- your rights or the rights of other per- tual or potential fraud, unauthorized sons engaged in carrying out the finan- transactions, claims or other liability; cial transaction or providing the prod- (iii) For required institutional risk uct or service; or control or for resolving consumer dis- (2) Required, or is a usual, appro- putes or inquiries; priate or acceptable method: (iv) To persons holding a legal or ben- (i) To carry out the transaction or eficial interest relating to the con- the product or service business of sumer; or

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(v) To persons acting in a fiduciary ance company can offer homeowner’s or representative capacity on behalf of insurance to the consumer. the consumer; (2) A consumer may revoke consent (3) To provide information to insur- by subsequently exercising the right to ance rate advisory organizations, guar- opt out of future disclosures of non- anty funds or agencies, agencies that public personal information as per- are rating you, persons that are assess- mitted under § 716.7(f). ing your compliance with industry standards, and your attorneys, ac- Subpart D—Relation to Other countants, and auditors; Laws; Effective Date (4) To the extent specifically permitted or required under other provi- § 716.16 Protection of Fair Credit Re- sions of law and in accordance with the porting Act. Right to Financial Privacy Act of 1978 Nothing in this part shall be con- (12 U.S.C. 3401 et seq.), to law enforcement agencies (including a federal strued to modify, limit, or supersede functional regulator, the Secretary of the operation of the Fair Credit Re- the Treasury, with respect to 31 U.S.C. porting Act (15 U.S.C. 1681 et seq.), and Chapter 53, Subchapter II (Records and no inference shall be drawn on the Reports on Monetary Instruments and basis of the provisions of this part re- Transactions) and 12 U.S.C. Chapter 21 garding whether information is trans- (Financial Recordkeeping), a state in- action or experience information under surance authority, with respect to any section 603 of that Act. person domiciled in that insurance § 716.17 Relation to state laws. authority’s state that is engaged in providing insurance, and the Federal (a) In general. This part shall not be Trade Commission), self-regulatory or- construed as superseding, altering, or ganizations, or for an investigation on affecting any statute, regulation, order a matter related to public safety; or interpretation in effect in any state, (5)(i) To a consumer reporting agency except to the extent that such state in accordance with the Fair Credit Re- statute, regulation, order or interpre- porting Act (15 U.S.C. 1681 et seq.), or tation is inconsistent with the provi- (ii) From a consumer report reported sions of this part, and then only to the by a consumer reporting agency; extent of the inconsistency. (6) In connection with a proposed or (b) Greater protection under state law. actual sale, merger, transfer, or ex- For purposes of this section, a state change of all or a portion of a business statute, regulation, order or interpre- or operating unit if the disclosure of tation is not inconsistent with the pro- nonpublic personal information con- visions of this part if the protection cerns solely consumers of such business such statute, regulation, order or in- or unit; or terpretation affords any consumer is (7)(i) To comply with federal, state or greater than the protection provided local laws, rules and other applicable under this part, as determined by the legal requirements; Federal Trade Commission, after con- (ii) To comply with a properly au- sultation with the National Credit thorized civil, criminal or regulatory Union Administration, on the Federal investigation, or subpoena or summons Trade Commission’s own motion or by federal, state or local authorities; or upon the petition of any interested (iii) To respond to judicial process or party. government regulatory authorities having jurisdiction over you for exam- § 716.18 Effective date; transition rule. ination, compliance or other purposes (a) Effective date. This part is effec- as authorized by law. tive November 13, 2000. In order to pro- (b) Examples of consent and revocation vide sufficient time for you to establish of consent. (1) A consumer may specifi- policies and systems to comply with cally consent to your disclosure to a the requirements of this part, the Na- nonaffiliated insurance company of the tional Credit Union Administration fact that the consumer has applied to Board has extended the time for com- you for a mortgage so that the insur- pliance with this part until July 1, 2001.

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(b)(1) Notice requirement for consumers tract that you have entered into with a who were your members on the compliance nonaffiliated third party to perform date. By July 1, 2001, you must provide services for you or functions on your an initial notice, as required by § 716.4, behalf satisfies the provisions of to consumers who are your members on § 716.13(a)(2) of this part, even if the July 1, 2001. contract does not include a require- (2) Example. You provide an initial ment that the third party maintain the notice to consumers who are your confidentiality of nonpublic personal members on July 1, 2001, if, by that information, as long as the agreement date, you have established a system for was entered into on or before July 1, providing an initial notice to all new 2000. members and have mailed the initial APPENDIX A TO PART 716—MODEL notice to all your existing members. PRIVACY FORM (c) Two-year grandfathering of service agreements. Until July 1, 2002, a con- A. The Model Privacy Form

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1. How the Model Privacy Form Is Used (a) Page One. The first page consists of the following components: (a) The model form may be used, at the option of a financial institution, including a (1) Date last revised (upper right-hand cor- group of financial institutions that use a ner). common privacy notice, to meet the content (2) Title. requirements of the privacy notice and opt- (3) Key frame (Why?, What?, How?). out notice set forth in §§ 716.6 and 716.7 of (4) Disclosure table (‘‘Reasons we can share this part. your personal information’’). (b) The model form is a standardized form, (5) ‘‘To limit our sharing’’ box, as needed, including page layout, content, format, for the financial institution’s opt-out infor- style, pagination, and shading. Institutions mation. seeking to obtain the safe harbor through (6) ‘‘Questions’’ box, for customer service use of the model form may modify it only as contact information. described in these Instructions. (7) Mail-in opt-out form, as needed. (c) Note that disclosure of certain informa- (b) Page Two. The second page consists of tion, such as assets, income, and information the following components: from a consumer reporting agency, may give (1) Heading (Page 2). rise to obligations under the Fair Credit Re- (2) Frequently Asked Questions (‘‘Who we porting Act [15 U.S.C. 1681—1681x] (FCRA), are’’ and ‘‘What we do’’). such as a requirement to permit a consumer to opt out of disclosures to affiliates or des- (3) Definitions. ignation as a consumer reporting agency if (4) ‘‘Other important information’’ box, as disclosures are made to nonaffiliated third needed. parties. 3. The Format of the Model Privacy Form (d) The word ‘‘customer’’ may be replaced by the word ‘‘member’’ whenever it appears The format of the model form may be in the model form, as appropriate. modified only as described below. (a) Easily readable type font. Financial in- 2. The Contents of the Model Privacy Form stitutions that use the model form must use The model form consists of two pages, an easily readable type font. While a number which may be printed on both sides of a sin- of factors together produce easily readable gle sheet of paper, or may appear on two sep- type font, institutions are required to use a arate pages. Where an institution provides a minimum of 10-point font (unless otherwise long list of institutions at the end of the expressly permitted in these Instructions) model form in accordance with Instruction and sufficient spacing between the lines of C.3(a)(1), or provides additional information type. in accordance with Instruction C.3(c), and (b) Logo. A financial institution may in- such list or additional information exceeds clude a corporate logo on any page of the no- the space available on page two of the model tice, so long as it does not interfere with the form, such list or additional information readability of the model form or the space may extend to a third page. constraints of each page.

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(c) Page size and orientation. Each page of tion. In the middle column, each institution the model form must be printed on paper in must provide a ‘‘Yes’’ or ‘‘No’’ response that portrait orientation, the size of which must accurately reflects its information sharing be sufficient to meet the layout and min- policies and practices with respect to the imum font size requirements, with sufficient reason listed on the left. In the right col- white space on the top, bottom, and sides of umn, each institution must provide in each the content. box one of the following three (3) responses, (d) Color. The model form must be printed as applicable, that reflects whether a con- on white or light color paper (such as cream) sumer can limit such sharing: ‘‘Yes’’ if it is with black or other contrasting ink color. required to or voluntarily provides an opt- Spot color may be used to achieve visual in- out; ‘‘No’’ if it does not provide an opt-out; terest, so long as the color contrast is dis- or ‘‘We don’t share’’ if it answers ‘‘No’’ in the tinctive and the color does not detract from middle column. Only the sixth row (‘‘For our the readability of the model form. Logos affiliates to market to you’’) may be omitted may also be printed in color. at the option of the institution. See para- (e) Languages. The model form may be graph C.2(d)(6) of this Instruction. translated into languages other than (d) Specific disclosures and corresponding English. legal provisions. (1) For our everyday business purposes. This C. Information Required in the Model Privacy reason incorporates sharing information Form under §§ 716.14 and 716.15 and with service The information in the model form may be providers pursuant to § 716.13 of this part modified only as described below: other than the purposes specified in paragraphs C.2(d)(2) or C.2(d)(3) of these Instruc- 1. Name of the Institution or Group of tions. Affiliated Institutions Providing the Notice (2) For our marketing purposes. This reason incorporates sharing information with serv- Insert the name of the financial institution ice providers by an institution for its own providing the notice or a common identity of marketing pursuant to § 716.13 of this part. affiliated institutions jointly providing the An institution that shares for this reason notice on the form wherever [name of finan- may choose to provide an opt-out. cial institution] appears. (3) For joint marketing with other financial companies. This reason incorporates sharing 2. Page One information under joint marketing agree- (a) Last revised date. The financial institu- ments between two or more financial institution must insert in the upper right-hand cor- tions and with any service provider used in ner the date on which the notice was last re- connection with such agreements pursuant vised. The information shall appear in min- to § 716.13 of this part. An institution that imum 8-point font as ‘‘rev. [month/year]’’ shares for this reason may choose to provide using either the name or number of the an opt-out. month, such as ‘‘rev. July 2009’’ or ‘‘rev. 7/ (4) For our affiliates’ everyday business pur- 09’’. poses—information about transactions and ex- (b) General instructions for the ‘‘What?’’ box. periences. This reason incorporates sharing (1) The bulleted list identifies the types of information specified in sections personal information that the institution 603(d)(2)(A)(i) and (ii) of the FCRA. An insti- collects and shares. All institutions must use tution that shares for this reason may the term ‘‘Social Security number’’ in the choose to provide an opt-out. first bullet. (5) For our affiliates’ everyday business pur- (2) Institutions must use five (5) of the fol- poses—information about creditworthiness. This lowing terms to complete the bulleted list: reason incorporates sharing information pur- income; account balances; payment history; suant to section 603(d)(2)(A)(iii) of the FCRA. transaction history; transaction or loss his- An institution that shares for this reason tory; credit history; credit scores; assets; in- must provide an opt-out. vestment experience; credit-based insurance (6) For our affiliates to market to you. This scores; insurance claim history; medical in- reason incorporates sharing information formation; overdraft history; purchase his- specified in section 624 of the FCRA. This tory; account transactions; risk tolerance; reason may be omitted from the disclosure medical-related debts; credit card or other table when: the institution does not have af- debt; mortgage rates and payments; retire- filiates (or does not disclose personal infor- ment assets; checking account information; mation to its affiliates); the institution’s af- employment information; wire transfer in- filiates do not use personal information in a structions. manner that requires an opt-out; or the in- (c) General instructions for the disclosure stitution provides the affiliate marketing table. The left column lists reasons for shar- notice separately. Institutions that include ing or using personal information. Each rea- this reason must provide an opt-out of in- son correlates to a specific legal provision definite duration. An institution that is re- described in paragraph C.2(d) of this Instruc- quired to provide an affiliate marketing opt-

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out, but does not include that opt-out in the address: in the far right of this form (see model form under this part, must comply version 3); or below the form (see version 4). with section 624 of the FCRA and 12 CFR The reverse side of the mail-in opt-out form part 717, subpart C, with respect to the ini- must not include any content of the model tial notice and opt-out and any subsequent form. renewal notice and opt-out. An institution (1) Joint accountholder. Only institutions not required to provide an opt-out under this that provide their joint accountholders the subparagraph may elect to include this rea- choice to opt out for only one accountholder, son in the model form. in accordance with paragraph C.3(a)(5) of (7) For nonaffiliates to market to you. This these Instructions, must include in the far reason incorporates sharing described in left column of the mail-in form the following §§ 716.7 and 716.10(a) of this part. An institu- statement: ‘‘If you have a joint account, tion that shares personal information for your choice(s) will apply to everyone on your this reason must provide an opt-out. account unless you mark below. b Apply my (e) To limit our sharing: A financial institu- choice(s) only to me.’’ The word ‘‘choice’’ tion must include this section of the model may be written in either the singular or plu- form only if it provides an opt-out. The word ral, as appropriate. Financial institutions ‘‘choice’’ may be written in either the sin- that provide insurance products or services, gular or plural, as appropriate. Institutions provide this option, and elect to use the must select one or more of the applicable model form may substitute the word ‘‘pol- opt-out methods described: telephone, such icy’’ for ‘‘account’’ in this statement. Insti- as by a toll-free number; a Web site; or use tutions that do not provide this option may of a mail-in opt-out form. Institutions may eliminate this left column from the mail-in include the words ‘‘toll-free’’ before tele- form. phone, as appropriate. An institution that (2) FCRA Section 603(d)(2)(A)(iii) opt-out. If allows consumers to opt out online must pro- the institution shares personal information vide either a specific Web address that takes pursuant to section 603(d)(2)(A)(iii) of the consumers directly to the opt-out page or a FCRA, it must include in the mail-in opt-out general Web address that provides a clear form the following statement: ‘‘b Do not and conspicuous direct link to the opt-out share information about my creditworthi- page. The opt-out choices made available to ness with your affiliates for their everyday the consumer who contacts the institution business purposes.’’ through these methods must correspond accurately to the ‘‘Yes’’ responses in the third (3) FCRA Section 624 opt-out. If the institu- column of the disclosure table. In the part tition incorporates section 624 of the FCRA in tled ‘‘Please note’’ institutions may insert a accord with paragraph C.2(d)(6) of these In- number that is 30 or greater in the space structions, it must include in the mail-in marked ‘‘[30].’’ Instructions on voluntary or opt-out form the following statement: ‘‘b Do state privacy law opt-out information are in not allow your affiliates to use my personal paragraph C.2(g)(5) of these Instructions. information to market to me.’’ (f) Questions box. Customer service contact (4) Nonaffiliate opt-out. If the financial in- information must be inserted as appropriate, stitution shares personal information pursu- where [phone number] or [Web site] appear. ant to § 716.10(a) of this part, it must include Institutions may elect to provide either a in the mail-in opt-out form the following phone number, such as a toll-free number, or statement: ‘‘b Do not share my personal in- a Web address, or both. Institutions may information with nonaffiliates to market their clude the words ‘‘toll-free’’ before the tele- products and services to me.’’ phone number, as appropriate. (5) Additional opt-outs. Financial institu- (g) Mail-in opt-out form. Financial institutions that use the disclosure table to provide tions must include this mail-in form only if opt-out options beyond those required by they state in the ‘‘To limit our sharing’’ box Federal law must provide those opt-outs in that consumers can opt out by mail. The this section of the model form. A financial mail-in form must provide opt-out options institution that chooses to offer an opt-out that correspond accurately to the ‘‘Yes’’ re- for its own marketing in the mail-in opt-out sponses in the third column in the disclosure form must include one of the two following table. Institutions that require customers to statements: ‘‘b Do not share my personal in- provide only name and address may omit the formation to market to me.’’ or ‘‘b Do not section identified as ‘‘[account #].’’ Institu- use my personal information to market to tions that require additional or different in- me.’’ A financial institution that chooses to formation, such as a random opt-out number offer an opt-out for joint marketing must in- or a truncated account number, to imple- clude the following statement: ‘‘b Do not ment an opt-out election should modify the share my personal information with other fi- ‘‘[account #]’’ reference accordingly. This in- nancial institutions to jointly market to cludes institutions that require customers me.’’ with multiple accounts to identify each ac- (h) Barcodes. A financial institution may count to which the opt-out should apply. An elect to include a barcode and/or ‘‘tagline’’ institution must enter its opt-out mailing (an internal identifier) in 6-point font at the

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bottom of page one, as needed for informa- tions that collect personal information from tion internal to the institution, so long as their affiliates and/or credit bureaus must these do not interfere with the clarity or include after the bulleted list the following text of the form. statement: ‘‘We also collect your personal information from others, such as credit bu- 3. Page Two reaus, affiliates, or other companies.’’ Insti- (a) General Instructions for the Questions. tutions that do not collect personal informa- Certain of the Questions may be customized tion from their affiliates or credit bureaus as follows: but do collect information from other com- (1) ‘‘Who is providing this notice?’’ This ques- panies must include the following statement tion may be omitted where only one finan- instead: ‘‘We also collect your personal infor- cial institution provides the model form and mation from other companies.’’ Only institu- that institution is clearly identified in the tions that do not collect any personal infor- title on page one. Two or more financial in- mation from affiliates, credit bureaus, or stitutions that jointly provide the model other companies can omit both statements. form must use this question to identify (4) ‘‘Why can’t I limit all sharing?’’ Institu- themselves as required by § 716.9(f) of this part. Where the list of institutions exceeds tions that describe state privacy law provi- four (4) lines, the institution must describe sions in the ‘‘Other important information’’ in the response to this question the general box must use the bracketed sentence: ‘‘See types of institutions jointly providing the below for more on your rights under state notice and must separately identify those in- law.’’ Other institutions must omit this sen- stitutions, in minimum 8-point font, directly tence. following the ‘‘Other important informa- (5) ‘‘What happens when I limit sharing for tion’’ box, or, if that box is not included in an account I hold jointly with someone else?’’ the institution’s form, directly following the Only financial institutions that provide opt- ‘‘Definitions.’’ The list may appear in a out options must use this question. Other in- multi-column format. stitutions must omit this question. Institu- (2) ‘‘How does [name of financial institution] tions must choose one of the following two protect my personal information?’’ The finan- statements to respond to this question: cial institution may only provide additional ‘‘Your choices will apply to everyone on your information pertaining to its safeguards account.’’ or ‘‘Your choices will apply to ev- practices following the designated response eryone on your account—unless you tell us to this question. Such information may in- otherwise.’’ Financial institutions that pro- clude information about the institution’s use vide insurance products or services and elect of cookies or other measures it uses to safe- to use the model form may substitute the guard personal information. Institutions are word ‘‘policy’’ for ‘‘account’’ in these state- limited to a maximum of 30 additional ments. words. (b) General Instructions for the Definitions. (3) ‘‘How does [name of financial institution] collect my personal information?’’ Institutions The financial institution must customize must use five (5) of the following terms to the space below the responses to the three complete the bulleted list for this question: definitions in this section. This specific in- open an account; deposit money; pay your formation must be in italicized lettering to bills; apply for a loan; use your credit or set off the information from the standardized debit card; seek financial or tax advice; definitions. apply for insurance; pay insurance pre- (1) Affiliates. As required by § 716.6(a)(3) of miums; file an insurance claim; seek advice this part, where [affiliate information] ap- about your investments; buy securities from pears, the financial institution must: us; sell securities to us; direct us to buy se- (i) If it has no affiliates, state: ‘‘[name of fi- curities; direct us to sell your securities; nancial institution] has no affiliates’’; make deposits or withdrawals from your ac- (ii) If it has affiliates but does not share count; enter into an investment advisory personal information, state: ‘‘[name of finan- contract; give us your income information; cial institution] does not share with our affili- provide employment information; give us ates; or your employment history; tell us about your (iii) If it shares with its affiliates, state, as investment or retirement portfolio; tell us about your investment or retirement earn- applicable: ‘‘Our affiliates include companies ings; apply for financing; apply for a lease; with a [common corporate identity of financial provide account information; give us your institution] name; financial companies such as contact information; pay us by check; give [insert illustrative list of companies]; non- us your wage statements; provide your mort- financial companies, such as [insert illustrative gage information; make a wire transfer; tell list of companies;] and others, such as [insert il- us who receives the money; tell us where to lustrative list].’’ send the money; show your government- (2) Nonaffiliates. As required by § 716.6(c)(3) issued ID; show your driver’s license; order a of this part, where [nonaffiliate information] commodity futures or option trade. Institu- appears, the financial institution must:

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(i) If it does not share with nonaffiliated personal information other than as per- third parties, state: ‘‘[name of financial insti- mitted by the exceptions in §§ 716.13, 716.14, tution] does not share with nonaffiliates so they and 716.15. can market to you’’; or (ii) If it shares with nonaffiliated third par- Sample Clause A–2, Alternative 1: ties, state, as applicable: ‘‘Nonaffiliates we share with can include [list categories of compa- We may disclose the following kinds of nies such as mortgage companies, insurance nonpublic personal information about you: companies, direct marketing companies, and • Information we receive from you on ap- nonprofit organizations].’’ plications or other forms, such as [provide il- (3) Joint Marketing. As required by § 716.13 lustrative examples, such as ‘‘your name, ad- of this part, where [joint marketing] appears, dress, social security number, assets, and in- the financial institution must: come’’]; (i) If it does not engage in joint marketing, • Information about your transactions state: ‘‘[name of financial institution] doesn’t with us, our affiliates, or others, such as jointly market ’’; or [provide illustrative examples, such as ‘‘your ac- (ii) If it shares personal information for count balance, payment history, parties to joint marketing, state, as applicable: ‘‘Our transactions, and credit card usage’’]; and joint marketing partners include [list categories • of companies such as credit card companies].’’ Information we receive from a consumer (c) General instructions for the ‘‘Other impor- reporting agency, such as [provide illustrative tant information’’ box. This box is optional. examples, such as ‘‘your creditworthiness and The space provided for information in this credit history’’]. box is not limited. Only the following types of information can appear in this box. Sample Clause A–2, Alternative 2: (1) State and/or international privacy law We may disclose all of the information information; and/or that we collect, as described [describe location (2) Acknowledgment of receipt form. in the notice, such as ‘‘above’’ or ‘‘below’’]. [74 FR 62956, Dec. 1, 2009] A–3—Categories of information you disclose and APPENDIX B TO PART 716—SAMPLE parties to whom you disclose (credit unions CLAUSES that do not disclose outside of the exceptions) This appendix only applies to privacy notices provided before January 1, 2011. Credit You may use this clause, as applicable, to unions, including a group of affiliates that meet the requirements of § 716.6(a)(2), (3) and use a common privacy notice, may use the (4) to describe the categories of nonpublic following sample clauses, if the clause is ac- personal information about members and curate for each institution that uses the no- former members that you disclose and the tice. categories of affiliates and nonaffiliated third parties to whom you disclose. This A–1—Categories of information you collect (all clause may be used if you do not disclose credit unions) nonpublic personal information to any party, You may use this clause, as applicable, to other than as permitted by the exceptions in meet the requirement of § 716.6(a)(1) to de- §§ 716.14, and 716.15. scribe the categories of nonpublic personal information you collect. Sample Clause A–3: Sample Clause A–1: We do not disclose any nonpublic personal information about our members and former We collect nonpublic personal information members to anyone, except as permitted by about you from the following sources: law. • Information we receive from you on applications or other forms; A–4—Categories of parties to whom you disclose • Information about your transactions (credit unions that disclose outside of the ex- with us, our affiliates, or others; and ceptions) • Information we receive from a consumer reporting agency. You may use this clause, as applicable, to meet the requirement of § 716.6(a)(3) to de- A–2—Categories of information you disclose scribe the categories of affiliates and non- (credit unions that disclose outside of the ex- affiliated third parties to whom you disclose ceptions) nonpublic personal information. This clause You may use one of these clauses, as appli- may be used if you disclose nonpublic per- cable, to meet the requirement of § 716.6(a)(2) sonal information other than as permitted to describe the categories of nonpublic per- by the exceptions in §§ 716.13, 716.14, and sonal information you disclose. These 716.15, as well as when permitted by the ex- clauses may be used if you disclose nonpublic ceptions in §§ 716.14, and 716.15.

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Sample Clause A–4: ties, including the method(s) by which the consumer may exercise that right. This We may disclose nonpublic personal infor- clause may be used if you disclose nonpublic mation about you to the following types of personal information other than as per- third parties: mitted by the exceptions in §§ 716.13, 716.14, • Financial service providers, such as and 716.15. [provide illustrative examples, such as ‘‘mortgage bankers, securities broker-dealers, and in- Sample Clause A–6: surance agents’’]; • Non-financial companies, such as [provide If you prefer that we not disclose non- illustrative examples, such as ‘‘retailers, direct public personal information about you to marketers, airlines, and publishers’’]; and nonaffiliated third parties, you may opt out • Others, such as [provide illustrative exam- of those disclosures, that is, you may direct ples, such as ‘‘non-profit organizations’’]. us not to make those disclosures (other than We may also disclose nonpublic personal disclosures permitted by law). If you wish to information about you to nonaffiliated third opt out of disclosures to nonaffiliated third parties as permitted by law. parties, you may [describe a reasonable means of opting out, such as ‘‘call the following toll- A–5—Service provider/joint marketing exception free number: (insert number)]. You may use one of these clauses, as appli- A–7—Confidentiality and security (all credit cable, to meet the requirements of unions) § 716.6(a)(5) related to the exception for service providers and joint marketers in § 716.13. You may use this clause, as applicable, to If you disclose nonpublic personal informa- meet the requirement of § 716.6(a)(8) to de- tion under this exception, you must describe scribe your policies and practices with re- the categories of nonpublic personal infor- spect to protecting the confidentiality and mation you disclose and the categories of security of nonpublic personal information. third parties with whom you have con- Sample Clause A–7: tracted. We restrict access to nonpublic personal Sample Clause A–5, Alternative 1: information about you to [provide an appro- We may disclose the following information priate description, such as ‘‘those employees to companies that perform marketing serv- who need to know that information to provide ices on our behalf or to other financial insti- products or services to you’’]. We maintain tutions with whom we have joint marketing physical, electronic, and procedural safe- agreements: guards that comply with federal regulations • Information we receive from you on ap- to guard your nonpublic personal informa- plications or other forms, such as [provide il- tion. lustrative examples, such as ‘‘your name, ad- [65 FR 31740, May 18, 2000, as redesignated dress, social security number, assets, and in- and amended at 74 FR 62956, Dec. 1, 2009] come’’]; • Information about your transactions EFFECTIVE DATE NOTE: At 74 FR 62965, Dec. with us, our affiliates, or others, such as 1, 2009, appendix B to part 707 was removed, [provide illustrative examples, such as ‘‘your ac- effective January 1, 2012. count balance, payment history, parties to transactions, and credit card usage’’]; and PART 717—FAIR CREDIT REPORTING • Information we receive from a consumer reporting agency, such as [provide illustrative Subpart A—General Provisions examples, such as ‘‘your creditworthiness and credit history’’]. Sec. 717.1 Purpose, scope, and effective dates. Sample Clause A–5, Alternative 2: 717.2 Examples. We may disclose all of the information we 717.3 Definitions. collect, as described [describe location in the notice, such as ‘‘above’’ or ‘‘below’’] to compa- Subpart B [Reserved] nies that perform marketing services on our behalf or to other financial institutions with Subpart C—Affiliate Marketing whom we have joint marketing agreements. 717.20 Coverage and definitions. A–6—Explanation of opt out right (credit unions 717.21 Affiliate marketing opt-out and ex- that disclose outside of the exceptions) ceptions. 717.22 Scope and duration of opt-out. You may use this clause, as applicable, to 717.23 Contents of opt-out notice; consoli- meet the requirement of § 716.6(a)(6) to pro- dated and equivalent notices. vide an explanation of the consumer’s right 717.24 Reasonable opportunity to opt out. to opt out of the disclosure of nonpublic per- 717.25 Reasonable and simple methods of sonal information to nonaffiliated third par- opting out.

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717.26 Delivery of opt-out notices. 1681w, 6801 and 6805, Public Law 108–159, 117 717.27 Renewal of opt-out. Stat. 1952. 717.28 Effective date, compliance date, and OURCE: 69 FR 69273, Nov. 29, 2004, unless prospective application. S otherwise noted. Subpart D—Medical Information Subpart A—General Provisions 717.30 Obtaining or using medical information in connection with a determination of eligibility for credit. SOURCE: 70 FR 70692, Nov. 22, 2005, unless 717.31 Limits on redisclosure of informa- otherwise noted. tion. 717.32 Sharing medical information with af- § 717.1 Purpose, scope, and effective filiates. dates. (a) Purpose. The purpose of this part Subpart E—Duties of Furnishers of is to implement the provisions of the Information Fair Credit Reporting Act. This part 717.40 Scope. generally applies to federal credit 717.41 Definitions. unions that obtain and use information 717.42 Reasonable policies and procedures about consumers to determine the con- concerning the accuracy and integrity of sumer’s eligibility for products, serv- furnished information. 717.43 Direct disputes. ices, or employment, share such information among affiliates, and furnish Subparts F–H [Reserved] information to consumer reporting agencies. Subpart Subpart I—Duties of Users of Con- (b) Scope. (1) [Reserved] sumer Reports Regarding Address Dis- (2) Institutions covered. (i) Except as crepancies and Records Disposal otherwise provided in this part, the regulations in this part apply to fed- 717.80–717.81 [Reserved] 717.82 Duties of users regarding address dis- eral credit unions. crepancies. [72 FR 62981, Nov. 7, 2007] 717.83 Disposal of consumer information. § 717.2 Examples. Subpart J—Identity Theft Red Flags The examples in this part are not ex- 717.90 Duties regarding the detection, pre- clusive. Compliance with an example, vention, and mitigation of identity theft. to the extent applicable, constitutes 717.91 Duties of card issuers regarding compliance with this part. Examples in changes of address. a paragraph illustrate only the issue APPENDICES A–B TO PART 717 [RESERVED] described in the paragraph and do not APPENDIX C TO PART 717—MODEL FORMS FOR OPT-OUT NOTICES illustrate any other issue that may APPENDIX D TO PART 717 [RESERVED] arise in this part. APPENDIX E TO PART 717—INTERAGENCY GUIDELINES CONCERNING THE ACCURACY § 717.3 Definitions. AND INTEGRITY OF INFORMATION FUR- For purposes of this part, unless ex- NISHED TO CONSUMER REPORTING AGEN- plicitly stated otherwise: CIES APPENDICES F–I TO PART 717 [RESERVED] (a) Act means the Fair Credit Report- APPENDIX J TO PART 717—INTERAGENCY ing Act (15 U.S.C. 1681 et seq.). GUIDELINES ON IDENTITY THEFT DETEC- (b) Affiliate means any company that TION, PREVENTION, AND MITIGATION is related by common ownership or AUTHORITY: 12 U.S.C. 1751 et seq.; 15 U.S.C. common corporate control with an- 1681a, 1681b, 1681c, 1681m, 1681s, 1681s–1, 1681t, other company. For example, an affil- 1681w, 6801 and 6805, Pub. L. 108–159, 117 Stat. iate of a Federal credit union is a cred- 1952. it union service corporation (CUSO), as EFFECTIVE DATE NOTE: At 74 FR 31522, July provided in 12 CFR part 712, that is 1, 2009, the authority citation for part 717 controlled by the Federal credit union. was revised, effective July 1, 2010. For the (c) [Reserved] convenience of the user, the revised author- (d) Company means any corporation, ity citation is set forth below: limited liability company, business AUTHORITY: 12 U.S.C. 1751 et seq.; 15 U.S.C. trust, general or limited partnership, 1681a, 1681b, 1681c, 1681m, 1681s, 1681s–1, 1681t, association, or similar organization.

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(e) Consumer means an individual. (l) Person means any individual, part- (f)–(h) [Reserved] nership, corporation, trust, estate co- (i) Common ownership or common cor- operative, association, government or porate control means a relationship be- governmental subdivision or agency, or tween two companies under which: other entity. (1) One company has, with respect to [70 FR 70692, Nov. 22, 2005, as amended at 72 the other company: FR 63768, Nov. 9, 2007] (i) Ownership, control, or power to vote 25 percent or more of the out- Subpart B [Reserved] standing shares of any class of voting security of a company, directly or indirectly, or acting through one or more Subpart C—Affiliate Marketing other persons; (ii) Control in any manner over the SOURCE: 72 FR 62981, Nov. 7, 2007, unless election of a majority of the directors, otherwise noted. trustees, or general partners (or indi- § 717.20 Coverage and definitions viduals exercising similar functions) of a company; or (a) Coverage. Subpart C of this part (iii) The power to exercise, directly applies to federal credit unions and or indirectly, a controlling influence their affiliates as defined in § 717.3(a) of over the management or policies of a Subpart A. company, as the NCUA determines; or (b) Definitions. For purposes of this (iv) Example. NCUA will presume a subpart: credit union has a controlling influence (1) Clear and conspicuous. The term over the management or policies of a ‘‘clear and conspicuous’’ means reason- CUSO, if the CUSO is 67% owned by ably understandable and designed to credit unions. call attention to the nature and signifi- (2) Any other person has, with re- cance of the information presented. spect to both companies, a relationship (2) Concise. (i) In general. The term described in paragraphs (i)(1)(i) ‘‘concise’’ means a reasonably brief ex- through (i)(1)(iii) of this section. pression or statement. (ii) Combination with other required (j) [Reserved] disclosures. A notice required by this (k) Medical information means: subpart may be concise even if it is (1) Information or data, whether oral combined with other disclosures re- or recorded, in any form or medium, quired or authorized by federal or state created by or derived from a health law. care provider or the consumer, that re- (3) Eligibility information. The term lates to: ‘‘eligibility information’’ means any (i) The past, present, or future phys- information the communication of ical, mental, or behavioral health or which would be a consumer report if condition of an individual; the exclusions from the definition of (ii) The provision of health care to an ‘‘consumer report’’ in section individual; or 603(d)(2)(A) of the Act did not apply. (iii) The payment for the provision of Eligibility information does not in- health care to an individual. clude aggregate or blind data that does (2) The term does not include: not contain personal identifiers such as (i) The age or gender of a consumer; account numbers, names, or addresses. (ii) Demographic information about (4) Pre-existing business relationship. (i) the consumer, including a consumer’s In general. The term ‘‘pre-existing busi- residence address or e-mail address; ness relationship’’ means a relation- (iii) Any other information about a ship between a person, or a person’s li- consumer that does not relate to the censed agent, and a consumer based physical, mental, or behavioral health on— or condition of a consumer, including (A) A financial contract between the the existence or value of any insurance person and the consumer which is in policy; or force on the date on which the con- (iv) Information that does not iden- sumer is sent a solicitation covered by tify a specific consumer. this subpart;

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(B) The purchase, rental, or lease by mortgage lender continues to have a the consumer of the person’s goods or pre-existing business relationship with services, or a financial transaction (in- the consumer, but the investor does cluding holding an active account or a not have a pre-existing business rela- policy in force or having another con- tionship with the consumer. If the tinuing relationship) between the con- mortgage lender retains ownership of sumer and the person, during the 18- the loan, but sells ownership of the month period immediately preceding servicing rights to the consumer’s the date on which the consumer is sent loan, the mortgage lender continues to a solicitation covered by this subpart; have a pre-existing business relation- or ship with the consumer. The purchaser (C) An inquiry or application by the of the servicing rights also has a pre- consumer regarding a product or serv- existing business relationship with the ice offered by that person during the consumer as of the date it purchases three-month period immediately pre- ownership of the servicing rights, but ceding the date on which the consumer only if it collects payments from or is sent a solicitation covered by this otherwise deals directly with the con- subpart. sumer on a continuing basis. (ii) Examples of pre-existing business re- (D) If a consumer applies to a federal lationships. (A) If a consumer has a credit union for a product or service time deposit account, such as a share that it offers, but does not obtain a certificate, at a federal credit union product or service from or enter into a that is currently in force, the federal financial contract or transaction with credit union has a pre-existing business the institution, the federal credit relationship with the consumer and union has a pre-existing business rela- can use eligibility information it re- tionship with the consumer and can ceives from its affiliates to make so- therefore use eligibility information it licitations to the consumer about its receives from an affiliate to make so- products or services. licitations to the consumer about its (B) If a consumer obtained a share products or services for three months certificate from a federal credit union, after the date of the application. but did not renew the certificate at maturity, the federal credit union has (E) If a consumer makes a telephone a pre-existing business relationship inquiry to a federal credit union about with the consumer and can use eligi- its products or services and provides bility information it receives from its contact information to the institution, affiliates to make solicitations to the but does not obtain a product or serv- consumer about its products or service from or enter into a financial con- ices for 18 months after the date of ma- tract or transaction with the institu- turity of the share certificate. tion, the federal credit union has a pre- (C) If a consumer obtains a mortgage, existing business relationship with the the mortgage lender has a pre-existing consumer and can therefore use eligi- business relationship with the con- bility information it receives from an sumer. If the mortgage lender sells the affiliate to make solicitations to the consumer’s entire loan to an investor, consumer about its products or serv- the mortgage lender has a pre-existing ices for three months after the date of business relationship with the con- the inquiry. sumer and can use eligibility informa- (F) If a consumer makes an inquiry tion it receives from its affiliates to to a federal credit union by e-mail make solicitations to the consumer about its products or services, but does about its products or services for 18 not obtain a product or service from or months after the date it sells the loan, enter into a financial contract or and the investor has a pre-existing transaction with the institution, the business relationship with the con- federal credit union has a pre-existing sumer upon purchasing the loan. If, business relationship with the con- however, the mortgage lender sells a sumer and can therefore use eligibility fractional interest in the consumer’s information it receives from an affil- loan to an investor but also retains an iate to make solicitations to the con- ownership interest in the loan, the sumer about its products or services

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for three months after the date of the federal credit union’s products or serv- inquiry. ices will be marketed to consumers (G) If a consumer has an existing re- who call in response, the call does not lationship with a federal credit union create a pre-existing business relation- that is part of a group of affiliated ship between the consumer and the fed- companies, makes a telephone call to eral credit union because the consumer the centralized call center for the has not made an inquiry about a prod- group of affiliated companies to in- uct or service offered by the institu- quire about products or services offered tion, but has merely responded to an by the insurance brokerage affiliate, offer for a free promotional item. and provides contact information to (5) Solicitation. (i) In general. The the call center, the call constitutes an term ‘‘solicitation’’ means the mar- inquiry to the insurance brokerage af- keting of a product or service initiated filiate that offers those products or by a person to a particular consumer services. The insurance brokerage affil- that is— iate has a pre-existing business rela- (A) Based on eligibility information tionship with the consumer and can communicated to that person by its af- therefore use eligibility information it filiate as described in this subpart; and receives from its affiliated federal cred- (B) Intended to encourage the con- it union to make solicitations to the sumer to purchase or obtain such prod- consumer about its products or serv- uct or service. ices for three months after the date of (ii) Exclusion of marketing directed at the inquiry. A solicitation does (iii) Examples where no pre-existing the general public. not include marketing communica- business relationship is created. (A) If a consumer makes a telephone call to a tions that are directed at the general centralized call center for a group of public. For example, television, general affiliated companies to inquire about circulation magazine, and billboard ad- the consumer’s existing account at a vertisements do not constitute solici- federal credit union, the call does not tations, even if those communications constitute an inquiry to any affiliate are intended to encourage consumers other than the federal credit union to purchase products and services from that holds the consumer’s account and the person initiating the communica- does not establish a pre-existing busi- tions. ness relationship between the con- (iii) Examples of solicitations. A solici- sumer and any affiliate of the account- tation would include, for example, a holding federal credit union. telemarketing call, direct mail, e-mail, (B) If a consumer who has a deposit or other form of marketing commu- account with a federal credit union nication directed to a particular con- makes a telephone call to an affiliate sumer that is based on eligibility infor- of the institution to ask about the af- mation received from an affiliate. filiate’s retail locations and hours, but (6) You means a person described in does not make an inquiry about the af- paragraph (a) of this section. filiate’s products or services, the call does not constitute an inquiry and does § 717.21 Affiliate marketing opt-out and exceptions. not establish a pre-existing business relationship between the consumer and (a) Initial notice and opt-out require- the affiliate. Also, the affiliate’s cap- ment. (1) In general. You may not use ture of the consumer’s telephone num- eligibility information about a con- ber does not constitute an inquiry and sumer that you receive from an affil- does not establish a pre-existing busi- iate to make a solicitation for mar- ness relationship between the con- keting purposes to the consumer, un- sumer and the affiliate. less— (C) If a consumer makes a telephone (i) It is clearly and conspicuously dis- call to a federal credit union in re- closed to the consumer in writing or, if sponse to an advertisement that offers the consumer agrees, electronically, in a free promotional item to consumers a concise notice that you may use eli- who call a toll-free number, but the ad- gibility information about that con- vertisement does not indicate that the sumer received from an affiliate to

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make solicitations for marketing pur- (C) Decide which of your products or poses to the consumer; services to market to the consumer or (ii) The consumer is provided a rea- tailor your solicitation to that con- sonable opportunity and a reasonable sumer; and and simple method to ‘‘opt out,’’ or (iii) As a result of your use of the eli- prohibit you from using eligibility in- gibility information, the consumer is formation to make solicitations for provided a solicitation. marketing purposes to the consumer; (2) Receiving eligibility information and from an affiliate, including through a (iii) The consumer has not opted out. common database. You may receive eli- (2) Example. A consumer has a home- gibility information from an affiliate owner’s insurance policy obtained in various ways, including when the af- through an insurance brokerage. The filiate places that information into a insurance brokerage furnishes eligi- common database that you may access. bility information about the consumer (3) Receipt or use of eligibility informa- to its affiliated federal credit union. tion by your service provider. Except as Based on that eligibility information, provided in paragraph (b)(5) of this sec- the federal credit union wants to make tion, you receive or use an affiliate’s a solicitation to the consumer about eligibility information if a service pro- its home equity loan products. The fed- vider acting on your behalf (whether an eral credit union does not have a pre- affiliate or a nonaffiliated third party) existing business relationship with the receives or uses that information in consumer and none of the other excep- the manner described in paragraphs tions apply. The federal credit union is (b)(1)(i) or (b)(1)(ii) of this section. All prohibited from using eligibility infor- relevant facts and circumstances will mation received from its insurance determine whether a person is acting brokerage affiliate to make solicita- as your service provider when it re- tions to the consumer about its home ceives or uses an affiliate’s eligibility equity loan products unless the con- information in connection with mar- sumer is given a notice and oppor- keting your products and services. tunity to opt out and the consumer (4) Use by an affiliate of its own eligi- does not opt out. bility information. Unless you have used (3) Affiliates who may provide the no- eligibility information that you re- tice. The notice required by this para- ceive from an affiliate in the manner graph must be provided: described in paragraph (b)(1)(ii) of this section, you do not make a solicitation (i) By an affiliate that has or has pre- subject to this subpart if your affiliate: viously had a pre-existing business re- (i) Uses its own eligibility informa- lationship with the consumer; or tion that it obtained in connection (ii) As part of a joint notice from two with a pre-existing business relation- or more members of an affiliated group ship it has or had with the consumer to of companies, provided that at least market your products or services to one of the affiliates on the joint notice the consumer; or has or has previously had a pre-exist- (ii) Directs its service provider to use ing business relationship with the con- the affiliate’s own eligibility informa- sumer. tion that it obtained in connection (b) Making solicitations. (1) In general. with a pre-existing business relation- For purposes of this subpart, you make ship it has or had with the consumer to a solicitation for marketing purposes market your products or services to if— the consumer, and you do not commu- (i) You receive eligibility informa- nicate directly with the service pro- tion from an affiliate; vider regarding that use. (ii) You use that eligibility informa- (5) Use of eligibility information by a tion to do one or more of the following: service provider. (i) In general. You do (A) Identify the consumer or type of not make a solicitation subject to Sub- consumer to receive a solicitation; part C of this part if a service provider (B) Establish criteria used to select (including an affiliated or third-party the consumer to receive a solicitation; service provider that maintains or ac- or cesses a common database that you

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may access) receives eligibility infor- (6) Examples of making solicitations. (i) mation from your affiliate that your A consumer has a deposit account with affiliate obtained in connection with a a federal credit union, which is affili- pre-existing business relationship it ated with an insurance brokerage. The has or had with the consumer and uses insurance brokerage receives eligi- that eligibility information to market bility information about the consumer your products or services to the con- from the federal credit union. The in- sumer, so long as— surance brokerage uses that eligibility (A) Your affiliate controls access to information to identify the consumer and use of its eligibility information by to receive a solicitation about insur- the service provider (including the ance brokerage services, and, as a re- right to establish the specific terms sult, the insurance brokerage provides and conditions under which the service a solicitation to the consumer about provider may use such information to its services. Pursuant to paragraph market your products or services); (b)(1) of this section, the insurance bro- (B) Your affiliate establishes specific kerage has made a solicitation to the terms and conditions under which the consumer. service provider may access and use (ii) The same facts as in the example the affiliate’s eligibility information to in paragraph (b)(6)(i) of this section, market your products and services (or except that after using the eligibility those of affiliates generally) to the information to identify the consumer consumer, such as the identity of the to receive a solicitation about insur- affiliated companies whose products or ance brokerage services, the insurance services may be marketed to the con- brokerage asks the federal credit union sumer by the service provider, the to send the solicitation to the con- types of products or services of affili- sumer and the federal credit union does ated companies that may be marketed, so. Pursuant to paragraph (b)(1) of this section, the insurance brokerage has and the number of times the consumer made a solicitation to the consumer may receive marketing materials, and because it used eligibility information periodically evaluates the service pro- about the consumer that it received vider’s compliance with those terms from an affiliate to identify the con- and conditions; sumer to receive a solicitation about (C) Your affiliate requires the service its products or services, and, as a re- provider to implement reasonable poli- sult, a solicitation was provided to the cies and procedures designed to ensure consumer about the insurance that the service provider uses the af- brokerage’s services. filiate’s eligibility information in ac- (iii) The same facts as in the example cordance with the terms and conditions in paragraph (b)(6)(i) of this section, established by the affiliate relating to except that eligibility information the marketing of your products or about consumers that have deposit ac- services; counts with the federal credit union is (D) Your affiliate is identified on or placed into a common database that all with the marketing materials provided members of the affiliated group of com- to the consumer; and panies may independently access and (E) You do not directly use your af- use. Without using the federal credit filiate’s eligibility information in the union’s eligibility information, the in- manner described in paragraph (b)(1)(ii) surance brokerage develops selection of this section. criteria and provides those criteria, (ii) Writing requirements. (A) The re- marketing materials, and related in- quirements of paragraphs (b)(5)(i)(A) structions to the federal credit union. and (C) of this section must be set The federal credit union reviews eligi- forth in a written agreement between bility information about its own con- your affiliate and the service provider; sumers using the selection criteria pro- and vided by the insurance brokerage to de- (B) The specific terms and conditions termine which consumers should re- established by your affiliate as pro- ceive the insurance brokerage’s mar- vided in paragraph (b)(5)(i)(B) of this keting materials and sends marketing section must be set forth in writing. materials about the insurance

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brokerage’s services to those con- federal credit union specifies the terms sumers. Even though the insurance and conditions under which the service brokerage has received eligibility in- provider may use the federal credit formation through the common data- union’s eligibility information to mar- base as provided in paragraph (b)(2) of ket the insurance brokerage’s products this section, it did not use that infor- and services to the federal credit mation to identify consumers or estab- union’s consumers. The specific terms lish selection criteria; instead, the fed- and conditions are: a list of affiliated eral credit union used its own eligi- companies (including the insurance bility information. Therefore, pursuant brokerage) whose products or services to paragraph (b)(4)(i) of this section, may be marketed to the federal credit the insurance brokerage has not made union’s consumers by the service pro- a solicitation to the consumer. vider; the specific products or types of (iv) The same facts as in the example products that may be marketed to the in paragraph (b)(6)(iii) of this section, federal credit union’s consumers by the except that the federal credit union service provider; the categories of eli- provides the insurance brokerage’s cri- gibility information that may be used teria to the federal credit union’s serv- by the service provider in marketing ice provider and directs the service products or services to the federal cred- provider to use the federal credit it union’s consumers; the types or cat- union’s eligibility information to iden- egories of the federal credit union’s tify federal credit union consumers consumers to whom the service pro- who meet the criteria and to send the vider may market products or services insurance brokerage’s marketing mate- of federal credit union affiliates; the rials to those consumers. The insur- number and/or types of marketing com- ance brokerage does not communicate munications that the service provider directly with the service provider regarding the use of the federal credit may send to the federal credit union’s union’s information to market its serv- consumers; and the length of time dur- ices to the federal credit union’s con- ing which the service provider may sumers. Pursuant to paragraph market the products or services of the (b)(4)(ii) of this section, the insurance federal credit union’s affiliates to its brokerage has not made a solicitation consumers. The federal credit union pe- to the consumer. riodically evaluates the service pro- (v) An affiliated group of companies vider’s compliance with these terms includes a federal credit union, an in- and conditions. The insurance broker- surance brokerage, and a service pro- age asks the service provider to market vider. Each affiliate in the group places insurance products to certain con- information about its consumers into a sumers who have deposit accounts with common database. The service provider the federal credit union. Without using has access to all information in the the federal credit union’s eligibility in- common database. The federal credit formation, the insurance brokerage de- union controls access to and use of its velops selection criteria and provides eligibility information by the service those criteria, marketing materials, provider. This control is set forth in a and related instructions to the service written agreement between the federal provider. The service provider uses the credit union and the service provider. federal credit union’s eligibility infor- The written agreement also requires mation from the common database to the service provider to establish rea- identify the federal credit union’s con- sonable policies and procedures de- sumers to whom insurance brokerage signed to ensure that the service pro- services will be marketed. When the in- vider uses the federal credit union’s surance brokerage’s marketing mate- eligibility information in accordance rials are provided to the identified con- with specific terms and conditions es- sumers, the name of the federal credit tablished by the federal credit union union is displayed on the brokerage relating to the marketing of the prod- marketing materials, an introductory ucts and services of all affiliates, in- letter that accompanies the marketing cluding the insurance brokerage. In a materials, an account statement that separate written communication, the accompanies the marketing materials,

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or the envelope containing the mar- crimination in any State in which you keting materials. The requirements of are lawfully doing business. paragraph (b)(5) of this section have (d) Examples of exceptions. (1) Example been satisfied, and the insurance bro- of the pre-existing business relationship kerage has not made a solicitation to exception. A consumer has a deposit ac- the consumer. count with a federal credit union. The (vi) The same facts as in the example consumer also has a relationship with in paragraph (b)(6)(v) of this section, the federal credit union’s securities except that the terms and conditions brokerage affiliate. The federal credit permit the service provider to use the union receives eligibility information federal credit union’s eligibility infor- about the consumer from its securities mation to market the products and brokerage affiliate and uses that infor- services of other affiliates to the fed- mation to make a solicitation to the eral credit union’s consumers whenever consumer about the federal credit the service provider deems it appro- union’s wealth management services. priate to do so. The service provider The federal credit union may make uses the federal credit union’s eligi- this solicitation even if the consumer bility information in accordance with has not been given a notice and oppor- the discretion afforded to it by the tunity to opt out because the federal terms and conditions. Because the credit union has a pre-existing business terms and conditions are not specific, relationship with the consumer. the requirements of paragraph (b)(5) of (2) Examples of service provider excep- this section have not been satisfied. tion. (i) A consumer has an insurance (c) Exceptions. The provisions of this policy obtained through an insurance subpart do not apply to you if you use brokerage. The insurance brokerage eligibility information that you re- furnishes eligibility information about ceive from an affiliate: the consumer to its affiliated federal (1) To make a solicitation for mar- credit union. Based on that eligibility keting purposes to a consumer with information, the federal credit union whom you have a pre-existing business wants to make a solicitation to the relationship; consumer about membership and its (2) To facilitate communications to deposit products. The federal credit an individual for whose benefit you union does not have a pre-existing provide employee benefit or other serv- business relationship with the con- ices pursuant to a contract with an em- sumer and none of the other exceptions ployer related to and arising out of the in paragraph (c) of this section apply. current employment relationship or The consumer has been given an opt- status of the individual as a partici- out notice and has elected to opt out of pant or beneficiary of an employee ben- receiving such solicitations. The fed- efit plan; eral credit union asks a service pro- (3) To perform services on behalf of vider to send the solicitation to the an affiliate, except that this subpara- consumer on its behalf. The service graph shall not be construed as permit- provider may not send the solicitation ting you to send solicitations on behalf on behalf of the federal credit union be- of an affiliate if the affiliate would not cause, as a result of the consumer’s be permitted to send the solicitation as opt-out election, the federal credit a result of the election of the consumer union is not permitted to make the so- to opt out under this subpart; licitation. (4) In response to a communication (ii) The same facts as in paragraph about your products or services initi- (d)(2)(i) of this section, except the con- ated by the consumer; sumer has been given an opt-out no- (5) In response to an authorization or tice, but has not elected to opt out. request by the consumer to receive so- The federal credit union asks a service licitations; or provider to send the solicitation to the (6) If your compliance with this sub- consumer on its behalf. The service part would prevent you from com- provider may send the solicitation on plying with any provision of State in- behalf of the federal credit union be- surance laws pertaining to unfair dis- cause, as a result of the consumer’s not

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opting out, the federal credit union is tion about products or services. The in- permitted to make the solicitation. stitution may not use eligibility infor- (3) Examples of consumer-initiated com- mation it receives from an affiliate to munications. (i) A consumer who has a make solicitations to the consumer deposit account with a federal credit about its products or services because union initiates a communication with the consumer-initiated communication the federal credit union’s credit card does not relate to the federal credit affiliate to request information about a union’s products or services. Thus, the credit card. The credit card affiliate use of eligibility information received may use eligibility information about from an affiliate would not be respon- the consumer it obtains from the fed- sive to the communication and the ex- eral credit union or any other affiliate ception does not apply. to make solicitations regarding credit (v) A consumer calls a federal credit card products in response to the con- union to ask about retail locations and sumer-initiated communication. hours. The customer service represent- (ii) A consumer who has a deposit account with a federal credit union con- ative asks the consumer if there is a tacts the institution to request infor- particular product or service about mation about how to save and invest which the consumer is seeking infor- for a child’s college education without mation. The consumer responds that specifying the type of product in which the consumer wants to stop in and find the consumer may be interested. Infor- out about share certificates. The cus- mation about a range of different prod- tomer service representative offers to ucts or services offered by the federal provide that information by telephone credit union and one or more affiliates and mail additional information and of the institution may be responsive to application materials to the consumer. that communication. Such products or The consumer agrees and provides or services may include the following: confirms contact information for re- Mutual funds offered by the institu- ceipt of the materials to be mailed. tion; section 529 plans offered by the The federal credit union may use eligi- institution or its securities brokerage bility information it receives from an affiliate; or trust services offered by affiliate to make solicitations to the the institution or its trust services af- consumer about share certificates be- filiate. Any affiliate offering invest- cause such solicitations would respond ment counseling services that would be to the consumer-initiated communica- responsive to the consumer’s request tion about products or services. for information about saving and in- (4) Examples of consumer authorization vesting for a child’s college education or request for solicitations. (i) A con- may use eligibility information to sumer who obtains a mortgage from a make solicitations to the consumer in federal credit union authorizes or re- response to this communication. quests information about obtaining (iii) A credit card issuer makes a homeowner’s insurance through the marketing call to the consumer with- federal credit union’s insurance bro- out using eligibility information re- kerage affiliate. Such authorization or ceived from an affiliate. The issuer request, whether given to the federal leaves a voice-mail message that in- vites the consumer to call a toll-free credit union or to the insurance bro- number to apply for the issuer’s credit kerage affiliate, would permit the in- card. If the consumer calls the toll-free surance brokerage to use eligibility in- number to inquire about the credit formation about the consumer it ob- card, the call is a consumer-initiated tains from the federal credit union or communication about a product or any other affiliate to make solicita- service and the credit card issuer may tions to the consumer about its home- now use eligibility information it re- owner’s insurance services. ceives from its affiliates to make so- (ii) A consumer completes an online licitations to the consumer. application to apply for a credit card (iv) A consumer calls a federal credit from a credit card issuer. The issuer’s union to ask about retail locations and online application contains a blank hours, but does not request informa- check box that the consumer may

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check to authorize or request informa- (B) Any other transaction between tion from the credit card issuer’s affili- the consumer and you or your affiliates ates. The consumer checks the box. as described in the notice. The consumer has authorized or re- (ii) Examples of continuing relation- quested solicitations from the card ships. A consumer has a continuing re- issuer’s affiliates. lationship with you or your affiliate if (iii) A consumer completes an online the consumer— application to apply for a credit card (A) Opens a deposit or investment ac- from a credit card issuer. The issuer’s count with you or your affiliate; online application contains a pre-se- (B) Obtains a loan for which you or lected check box indicating that the your affiliate owns the servicing consumer authorizes or requests infor- rights; mation from the issuer’s affiliates. The (C) Purchases an insurance product consumer does not deselect the check from you or your affiliate; box. The consumer has not authorized (D) Holds an investment product or requested solicitations from the through you or your affiliate, such as card issuer’s affiliates. when you act or your affiliate acts as a (iv) The terms and conditions of a custodian for securities or for assets in credit card account agreement contain an individual retirement arrangement; preprinted boilerplate language stating (E) Enters into an agreement or un- that by applying to open an account derstanding with you or your affiliate the consumer authorizes or requests to whereby you or your affiliate under- receive solicitations from the credit takes to arrange or broker a home card issuer’s affiliates. The consumer mortgage loan for the consumer; has not authorized or requested solici- (F) Enters into a lease of personal tations from the card issuer’s affili- property with you or your affiliate; or ates. (G) Obtains financial, investment, or (e) Relation to affiliate-sharing notice economic advisory services from you or and opt-out. Nothing in this subpart your affiliate for a fee. limits the responsibility of a person to (3) No continuing relationship. (i) In comply with the notice and opt-out general. If there is no continuing rela- provisions of section 603(d)(2)(A)(iii) of tionship between a consumer and you the Act where applicable. or your affiliate, and you or your affiliate obtain eligibility information § 717.22 Scope and duration of opt-out. about a consumer in connection with a (a) Scope of opt-out. (1) In general. Ex- transaction with the consumer, such as cept as otherwise provided in this sec- an isolated transaction or a credit ap- tion, the consumer’s election to opt plication that is denied, an opt-out no- out prohibits any affiliate covered by tice provided to the consumer only ap- the opt-out notice from using eligi- plies to eligibility information ob- bility information received from an- tained in connection with that trans- other affiliate as described in the no- action. tice to make solicitations to the con- (ii) Examples of isolated transactions. sumer. An isolated transaction occurs if— (2) Continuing relationship. (i) In gen- (A) The consumer uses your or your eral. If the consumer establishes a con- affiliate’s ATM to withdraw cash from tinuing relationship with you or your an account at another financial insti- affiliate, an opt-out notice may apply tution; or to eligibility information obtained in (B) You or your affiliate sells the connection with— consumer a cashier’s check or money (A) A single continuing relationship order, airline tickets, travel insurance, or multiple continuing relationships or traveler’s checks in isolated trans- that the consumer establishes with you actions. or your affiliates, including continuing (4) Menu of alternatives. A consumer relationships established subsequent to may be given the opportunity to delivery of the opt-out notice, so long choose from a menu of alternatives as the notice adequately describes the when electing to prohibit solicitations, continuing relationships covered by such as by electing to prohibit solicita- the opt-out; or tions from certain types of affiliates

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covered by the opt-out notice but not tive for a period of at least five years other types of affiliates covered by the (the ‘‘opt-out period’’) beginning when notice, electing to prohibit solicita- the consumer’s opt-out election is re- tions based on certain types of eligi- ceived and implemented, unless the bility information but not other types consumer subsequently revokes the of eligibility information, or electing opt-out in writing or, if the consumer to prohibit solicitations by certain agrees, electronically. An opt-out pe- methods of delivery but not other riod of more than five years may be es- methods of delivery. However, one of tablished, including an opt-out period the alternatives must allow the con- that does not expire unless revoked by sumer to prohibit all solicitations from the consumer. all of the affiliates that are covered by (c) Time of opt-out. A consumer may the notice. opt out at any time. (5) Special rule for a notice following termination of all continuing relation- § 717.23 Contents of opt-out notice; ships. (i) In general. A consumer must consolidated and equivalent no- be given a new opt-out notice if, after tices. all continuing relationships with you (a) Contents of opt-out notice. (1) In or your affiliate(s) are terminated, the general. A notice must be clear, con- consumer subsequently establishes an- spicuous, and concise, and must accu- other continuing relationship with you rately disclose: or your affiliate(s) and the consumer’s (i) The name of the affiliate(s) pro- eligibility information is to be used to viding the notice. If the notice is pro- make a solicitation. The new opt-out vided jointly by multiple affiliates and notice must apply, at a minimum, to each affiliate shares a common name, eligibility information obtained in con- such as ‘‘ABC,’’ then the notice may nection with the new continuing rela- indicate that it is being provided by tionship. Consistent with paragraph (b) multiple companies with the ABC of this section, the consumer’s decision name or multiple companies in the not to opt out after receiving the new ABC group or family of companies, for opt-out notice would not override a example, by stating that the notice is prior opt-out election by the consumer provided by ‘‘all of the ABC compa- that applies to eligibility information nies,’’ ‘‘the ABC federal credit union, obtained in connection with a termi- credit card, insurance brokerage, and nated relationship, regardless of securities brokerage companies,’’ or by whether the new opt-out notice applies listing the name of each affiliate pro- to eligibility information obtained in viding the notice. But if the affiliates connection with the terminated rela- providing the joint notice do not all tionship. share a common name, then the notice (ii) Example. A consumer is a member must either separately identify each of a federal credit union that is part of affiliate by name or identify each of an affiliated group. The consumer ter- the common names used by those af- minates his membership. One year filiates, for example, by stating that later, the consumer rejoins and opens a the notice is provided by ‘‘all of the savings account with the same federal ABC and XYZ companies’’ or by ‘‘the credit union. The consumer must be ABC federal credit union and credit given a new notice and opportunity to card companies and the XYZ insurance opt out before the federal credit brokerage company’’ union’s affiliates may make solicita- (ii) A list of the affiliates or types of tions to the consumer using eligibility affiliates whose use of eligibility infor- information obtained by the federal mation is covered by the notice, which credit union in connection with the may include companies that become af- newly established account relationship, filiates after the notice is provided to regardless of whether the consumer the consumer. If each affiliate covered opted out in connection with accounts by the notice shares a common name, held during the previous member rela- such as ‘‘ABC,’’ then the notice may tionship. indicate that it applies to multiple (b) Duration of opt-out. The election companies with the ABC name or mul- of a consumer to opt out must be effec- tiple companies in the ABC group or

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family of companies, for example, by must be permitted to exercise their stating that the notice is provided by separate rights to opt out in a single ‘‘all of the ABC companies,’’ ‘‘the ABC response. federal credit union, credit card, insur- (iii) It is impermissible to require all ance brokerage, and securities broker- joint consumers to opt out before im- age companies,’’ or by listing the name plementing any opt-out direction. of each affiliate providing the notice. (3) Alternative contents. If the con- But if the affiliates covered by the no- sumer is afforded a broader right to opt tice do not all share a common name, out of receiving marketing than is re- then the notice must either separately quired by this subpart, the require- identify each covered affiliate by name ments of this section may be satisfied or identify each of the common names by providing the consumer with a used by those affiliates, for example, clear, conspicuous, and concise notice by stating that the notice applies to that accurately discloses the con- ‘‘all of the ABC and XYZ companies’’ sumer’s opt-out rights. or to ‘‘the ABC federal credit union and (4) Model notices. Model notices are credit card companies and the XYZ in- provided in appendix C of this part. surance brokerage company’’ (b) Coordinated and consolidated no- (iii) A general description of the tices. A notice required by this subpart types of eligibility information that may be coordinated and consolidated may be used to make solicitations to with any other notice or disclosure re- the consumer; quired to be issued under any other (iv) That the consumer may elect to provision of law by the entity pro- limit the use of eligibility information viding the notice, including but not to make solicitations to the consumer; limited to the notice described in sec- (v) That the consumer’s election will tion 603(d)(2)(A)(iii) of the Act and the apply for the specified period of time Gramm-Leach-Bliley Act privacy no- stated in the notice and, if applicable, tice. that the consumer will be allowed to (c) Equivalent notices. A notice or renew the election once that period ex- other disclosure that is equivalent to pires; the notice required by this subpart, (vi) If the notice is provided to con- and that is provided to a consumer to- sumers who may have previously opted gether with disclosures required by any out, such as if a notice is provided to other provision of law, satisfies the re- consumers annually, that the con- quirements of this section. sumer who has chosen to limit solicitations does not need to act again until § 717.24 Reasonable opportunity to opt the consumer receives a renewal no- out. tice; and (a) In general. You must not use eligi- (vii) A reasonable and simple method bility information about a consumer for the consumer to opt out. that you receive from an affiliate to (2) Joint relationships. (i) If two or make a solicitation to the consumer more consumers jointly obtain a prod- about your products or services, unless uct or service, a single opt-out notice the consumer is provided a reasonable may be provided to the joint con- opportunity to opt out, as required by sumers. Any of the joint consumers § 717.21(a)(1)(ii) of this part. may exercise the right to opt out. (b) Examples of a reasonable oppor- (ii) The opt-out notice must explain tunity to opt out. The consumer is given how an opt-out direction by a joint a reasonable opportunity to opt out if: consumer will be treated. An opt-out (1) By mail. The opt-out notice is direction by a joint consumer may be mailed to the consumer. The consumer treated as applying to all of the associ- is given 30 days from the date the no- ated joint consumers, or each joint tice is mailed to elect to opt out by consumer may be permitted to opt-out any reasonable means. separately. If each joint consumer is (2) By electronic means. (i) The opt-out permitted to opt out separately, one of notice is provided electronically to the the joint consumers must be permitted consumer, such as by posting the no- to opt out on behalf of all of the joint tice at an Internet Web site at which consumers and the joint consumers the consumer has obtained a product or

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service. The consumer acknowledges § 717.25 Reasonable and simple meth- receipt of the electronic notice. The ods of opting out. consumer is given 30 days after the (a) In general. You must not use eligi- date the consumer acknowledges re- bility information about a consumer ceipt to elect to opt out by any reason- that you receive from an affiliate to able means. make a solicitation to the consumer (ii) The opt-out notice is provided to about your products or services, unless the consumer by e-mail where the con- the consumer is provided a reasonable sumer has agreed to receive disclosures and simple method to opt out, as re- by e-mail from the person sending the quired by § 717.21(a)(1)(ii) of this part. notice. The consumer is given 30 days (b) Examples. (1) Reasonable and simple after the e-mail is sent to elect to opt opt-out methods. Reasonable and simple out by any reasonable means. methods for exercising the opt-out right include— (3) At the time of an electronic trans- (i) Designating a check-off box in a action. The opt-out notice is provided prominent position on the opt-out to the consumer at the time of an elec- form; tronic transaction, such as a trans- (ii) Including a reply form and a self- action conducted on an Internet Web addressed envelope together with the site. The consumer is required to de- opt-out notice; cide, as a necessary part of proceeding (iii) Providing an electronic means to with the transaction, whether to opt opt out, such as a form that can be out before completing the transaction. electronically mailed or processed at There is a simple process that the con- an Internet Web site, if the consumer sumer may use to opt out at that time agrees to the electronic delivery of in- using the same mechanism through formation; which the transaction is conducted. (iv) Providing a toll-free telephone (4) At the time of an in-person trans- number that consumers may call to opt action. The opt-out notice is provided out; or to the consumer in writing at the time (v) Allowing consumers to exercise of an in-person transaction. The con- all of their opt-out rights described in sumer is required to decide, as a nec- a consolidated opt-out notice that in- essary part of proceeding with the cludes the privacy opt-out under the Gramm-Leach-Bliley Act, 15 U.S.C. 6801 transaction, whether to opt out before et seq., the affiliate sharing opt-out completing the transaction, and is not under the Act, and the affiliate mar- permitted to complete the transaction keting opt-out under the Act, by a sin- without making a choice. There is a gle method, such as by calling a single simple process that the consumer may toll-free telephone number. use during the course of the in-person (2) Opt-out methods that are not rea- transaction to opt out, such as com- sonable and simple. Reasonable and sim- pleting a form that requires consumers ple methods for exercising an opt-out to write a ‘‘yes’’ or ‘‘no’’ to indicate right do not include— their opt-out preference or that re- (i) Requiring the consumer to write quires the consumer to check one of his or her own letter; two blank check boxes—one that al- (ii) Requiring the consumer to call or lows consumers to indicate that they write to obtain a form for opting out, want to opt out and one that allows rather than including the form with consumers to indicate that they do not the opt-out notice; want to opt out. (iii) Requiring the consumer who re- (5) By including in a privacy notice. ceives the opt-out notice in electronic The opt-out notice is included in a form only, such as through posting at Gramm-Leach-Bliley Act privacy no- an Internet Web site, to opt out solely tice. The consumer is allowed to exer- by paper mail or by visiting a different Web site without providing a link to cise the opt-out within a reasonable pe- that site. riod of time and in the same manner as (c) Specific opt-out means. Each con- the opt-out under that privacy notice. sumer may be required to opt out through a specific means, as long as

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that means is reasonable and simple consumer who previously opted out, for that consumer. unless: (i) The consumer has been given a re- § 717.26 Delivery of opt-out notices. newal notice that complies with the re- (a) In general. The opt-out notice quirements of this section and §§ 717.24 must be provided so that each con- through 717.26 of this part, and a rea- sumer can reasonably be expected to sonable opportunity and a reasonable receive actual notice. For opt-out no- and simple method to renew the opt- tices provided electronically, the no- out, and the consumer does not renew tice may be provided in compliance the opt-out; or with either the electronic disclosure (ii) An exception in § 717.21(c) of this provisions in this subpart or the provi- part applies. sions in section 101 of the Electronic (2) Renewal period. Each opt-out re- Signatures in Global and National newal must be effective for a period of Commerce Act, 15 U.S.C. 7001 et seq. at least five years as provided in (b) Examples of reasonable expectation § 717.22(b) of this part. of actual notice. A consumer may rea- (3) Affiliates who may provide the no- sonably be expected to receive actual tice. The notice required by this para- notice if the affiliate providing the no- graph must be provided: tice: (i) By the affiliate that provided the (1) Hand-delivers a printed copy of previous opt-out notice, or its suc- the notice to the consumer; cessor; or (2) Mails a printed copy of the notice (ii) As part of a joint renewal notice to the last known mailing address of from two or more members of an affili- the consumer; ated group of companies, or their suc- (3) Provides a notice by e-mail to a cessors, that jointly provided the pre- consumer who has agreed to receive vious opt-out notice. electronic disclosures by e-mail from (b) Contents of renewal notice. The re- the affiliate providing the notice; or newal notice must be clear, con- (4) Posts the notice on the Internet spicuous, and concise, and must accu- Web site at which the consumer ob- rately disclose: tained a product or service electroni- (1) The name of the affiliate(s) pro- cally and requires the consumer to ac- viding the notice. If the notice is pro- knowledge receipt of the notice. vided jointly by multiple affiliates and (c) Examples of no reasonable expecta- each affiliate shares a common name, tion of actual notice. A consumer may such as ‘‘ABC,’’ then the notice may not reasonably be expected to receive indicate that it is being provided by actual notice if the affiliate providing multiple companies with the ABC the notice: name or multiple companies in the (1) Only posts the notice on a sign in ABC group or family of companies, for a branch or office or generally pub- example, by stating that the notice is lishes the notice in a newspaper; provided by ‘‘all of the ABC compa- (2) Sends the notice via e-mail to a nies,’’ ‘‘the ABC federal credit union, consumer who has not agreed to re- credit card, insurance brokerage, and ceive electronic disclosures by e-mail securities brokerage companies,’’ or by from the affiliate providing the notice; listing the name of each affiliate pro- or viding the notice. But if the affiliates (3) Posts the notice on an Internet providing the joint notice do not all Web site without requiring the con- share a common name, then the notice sumer to acknowledge receipt of the must either separately identify each notice. affiliate by name or identify each of the common names used by those af- § 717.27 Renewal of opt-out. filiates, for example, by stating that (a) Renewal notice and opt-out require- the notice is provided by ‘‘all of the ment. (1) In general. After the opt-out ABC and XYZ companies’’ or by ‘‘the period expires, you may not make so- ABC federal credit union and credit licitations based on eligibility informa- card companies and the XYZ insurance tion you receive from an affiliate to a brokerage company’’;

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(2) A list of the affiliates or types of by the expired opt-out are made to the affiliates whose use of eligibility infor- consumer. mation is covered by the notice, which (2) Combination with annual privacy may include companies that become af- notice. If you provide an annual privacy filiates after the notice is provided to notice under the Gramm-Leach-Bliley the consumer. If each affiliate covered Act, 15 U.S.C. 6801 et seq., providing a by the notice shares a common name, renewal notice with the last annual such as ‘‘ABC,’’ then the notice may privacy notice provided to the con- indicate that it applies to multiple sumer before expiration of the opt-out companies with the ABC name or mul- period is a reasonable period of time tiple companies in the ABC group or before expiration of the opt-out in all family of companies, for example, by cases. stating that the notice is provided by (d) No effect on opt-out period. An opt- ‘‘all of the ABC companies,’’ ‘‘the ABC out period may not be shortened by federal credit union, credit card, insur- sending a renewal notice to the con- ance brokerage, and securities brokerage companies,’’ or by listing the name sumer before expiration of the opt-out of each affiliate providing the notice. period, even if the consumer does not But if the affiliates covered by the no- renew the opt out. tice do not all share a common name, then the notice must either separately § 717.28 Effective date, compliance date, and prospective application. identify each covered affiliate by name or identify each of the common names (a) Effective date. This subpart is ef- used by those affiliates, for example, fective January 1, 2008. by stating that the notice applies to (b) Mandatory compliance date. Com- ‘‘all of the ABC and XYZ companies’’ pliance with this subpart is required or to ‘‘the ABC federal credit union and not later than October 1, 2008. credit card companies and the XYZ in- (c) Prospective application. The provi- surance brokerage company’’; sions of this subpart shall not prohibit (3) A general description of the types you from using eligibility information of eligibility information that may be that you receive from an affiliate to used to make solicitations to the con- make solicitations to a consumer if sumer; you receive such information prior to (4) That the consumer previously October 1, 2008. For purposes of this elected to limit the use of certain in- section, you are deemed to receive eli- formation to make solicitations to the gibility information when such infor- consumer; mation is placed into a common data- (5) That the consumer’s election has base and is accessible by you. expired or is about to expire; (6) That the consumer may elect to renew the consumer’s previous elec- Subpart D—Medical Information tion; (7) If applicable, that the consumer’s SOURCE: 70 FR 70693, Nov. 22, 2005 and 70 FR election to renew will apply for the 75931, Dec. 22, 2005 unless otherwise noted. specified period of time stated in the notice and that the consumer will be § 717.30 Obtaining or using medical in- allowed to renew the election once that formation in connection with a determination of eligibility for credit. period expires; and (8) A reasonable and simple method (a) Scope. This section applies to: for the consumer to opt out. (1) A Federal credit union that par- (c) Timing of the renewal notice. (1) In ticipates as a creditor in a transaction; general. A renewal notice may be pro- or vided to the consumer either— (2) Any other person that partici- (i) A reasonable period of time before pates as a creditor in a transaction in- the expiration of the opt-out period; or volving a person described in paragraph (ii) Any time after the expiration of (a)(1) of this section. the opt-out period but before solicita- (b) General prohibition on obtaining or tions that would have been prohibited using medical information—(1) In general.

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A creditor may not obtain or use med- (i) In response to a general question ical information pertaining to a con- regarding a consumer’s debts or ex- sumer in connection with any deter- penses, the creditor receives informa- mination of the consumer’s eligibility, tion that the consumer owes a debt to or continued eligibility, for credit, ex- a hospital. cept as provided in this section. (ii) In a conversation with the credi- (2) Definitions. (i) Credit has the same tor’s loan officer, the consumer in- meaning as in section 702 of the Equal forms the creditor that the consumer Credit Opportunity Act, 15 U.S.C. 1691a. has a particular medical condition. (ii) Creditor has the same meaning as (iii) In connection with a consumer’s in section 702 of the Equal Credit Op- application for an extension of credit, portunity Act, 15 U.S.C. 1691a. the creditor requests a consumer re- (iii) Eligibility, or continued eligibility, port from a consumer reporting agency for credit means the consumer’s quali- and receives medical information in fication or fitness to receive, or con- the consumer report furnished by the tinue to receive, credit, including the agency even though the creditor did terms on which credit is offered. The not specifically request medical infor- term does not include: mation from the consumer reporting (A) Any determination of the con- agency. sumer’s qualification or fitness for em- (d) Financial information exception for ployment, insurance (other than a obtaining and using medical informa- credit insurance product), or other tion—(1) In general. A creditor may ob- non-credit products or services; tain and use medical information per- (B) Authorizing, processing, or docu- taining to a consumer in connection menting a payment or transaction on with any determination of the con- behalf of the consumer in a manner sumer’s eligibility, or continued eligi- that does not involve a determination bility, for credit so long as: of the consumer’s eligibility, or contin- (i) The information is the type of in- ued eligibility, for credit; or formation routinely used in making (C) Maintaining or servicing the con- credit eligibility determinations, such sumer’s account in a manner that does as information relating to debts, ex- not involve a determination of the con- penses, income, benefits, assets, collat- sumer’s eligibility, or continued eligi- eral, or the purpose of the loan, includ- bility, for credit. ing the use of proceeds; (c) Rule of construction for obtaining (ii) The creditor uses the medical in- and using unsolicited medical informa- formation in a manner and to an ex- tion—(1) In general. A creditor does not tent that is no less favorable than it obtain medical information in viola- would use comparable information that tion of the prohibition if it receives is not medical information in a credit medical information pertaining to a transaction; and consumer in connection with any de- (iii) The creditor does not take the termination of the consumer’s eligi- consumer’s physical, mental, or behav- bility, or continued eligibility, for ioral health, condition or history, type credit without specifically requesting of treatment, or prognosis into account medical information. as part of any such determination. (2) Use of unsolicited medical informa- (2) Examples. (i) Examples of the types tion. A creditor that receives unsolic- of information routinely used in making ited medical information in the man- credit eligibility determinations. Para- ner described in paragraph (c)(1) of this graph (d)(1)(i) of this section permits a section may use that information in creditor, for example, to obtain and use connection with any determination of information about: the consumer’s eligibility, or contin- (A) The dollar amount, repayment ued eligibility, for credit to the extent terms, repayment history, and similar the creditor can rely on at least one of information regarding medical debts to the exceptions in § 717.30(d) or (e). calculate, measure, or verify the repay- (3) Examples. A creditor does not ob- ment ability of the consumer, the use tain medical information in violation of proceeds, or the terms for granting of the prohibition if, for example: credit;

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(B) The value, condition, and lien itor contacts the medical facility to status of a medical device that may verify the debt and obtain the repay- serve as collateral to secure a loan; ment history and current status of the (C) The dollar amount and continued loan. The creditor learns that the debt eligibility for disability income, work- is current. The applicant meets the iners’ compensation income, or other come and other requirements of the benefits related to health or a medical creditor’s underwriting guidelines. The condition that is relied on as a source creditor grants the application. The of repayment; or creditor has used medical information (D) The identity of creditors to whom in accordance with the exception. outstanding medical debts are owed in (iii) Examples of uses of medical infor- connection with an application for mation inconsistent with the exception. credit, including but not limited to, a (A) A consumer applies for $25,000 of transaction involving the consolidation credit and includes on the application of medical debts. information about a $50,000 debt to a (ii) Examples of uses of medical infor- hospital. The creditor contacts the hos- mation consistent with the exception. (A) pital to verify the amount and pay- A consumer includes on an application ment status of the debt, and learns for credit information about two $20,000 that the debt is current and that the debts. One debt is to a hospital; the consumer has no delinquencies in her other debt is to a retailer. The creditor repayment history. If the existing debt contacts the hospital and the retailer were instead owed to a retail depart- to verify the amount and payment sta- ment store, the creditor would approve tus of the debts. The creditor learns the application and extend credit based that both debts are more than 90 days on the amount and repayment history past due. Any two debts of this size that are more than 90 days past due of the outstanding debt. The creditor, would disqualify the consumer under however, denies the application be- the creditor’s established underwriting cause the consumer is indebted to a criteria. The creditor denies the appli- hospital. The creditor has used medical cation on the basis that the consumer information, here the identity of the has a poor repayment history on out- medical creditor, in a manner and to standing debts. The creditor has used an extent that is less favorable than it medical information in a manner and would use comparable non-medical in- to an extent no less favorable than it formation. would use comparable non-medical in- (B) A consumer meets with a loan of- formation. ficer of a creditor to apply for a mort- (B) A consumer indicates on an appli- gage loan. While filling out the loan cation for a $200,000 mortgage loan that application, the consumer informs the she receives $15,000 in long-term dis- loan officer orally that she has a poten- ability income each year from her tially terminal disease. The consumer former employer and has no other in- meets the creditor’s established re- come. Annual income of $15,000, regard- quirements for the requested mortgage less of source, would not be sufficient loan. The loan officer recommends to to support the requested amount of the credit committee that the con- credit. The creditor denies the applica- sumer be denied credit because the tion on the basis that the projected consumer has that disease. The credit debt-to-income ratio of the consumer committee follows the loan officer’s does not meet the creditor’s under- recommendation and denies the appli- writing criteria. The creditor has used cation because the consumer has a po- medical information in a manner and tentially terminal disease. The cred- to an extent that is no less favorable itor has used medical information in a than it would use comparable non-med- manner inconsistent with the excep- ical information. tion by taking into account the con- (C) A consumer includes on an appli- sumer’s physical, mental, or behavioral cation for a $10,000 home equity loan health, condition, or history, type of that he has a $50,000 debt to a medical treatment, or prognosis as part of a de- facility that specializes in treating a termination of eligibility or continued potentially terminal disease. The cred- eligibility for credit.

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(C) A consumer who has an apparent (iii) To determine, at the consumer’s medical condition, such as a consumer request, whether the consumer quali- who uses a wheelchair or an oxygen fies for a legally permissible special tank, meets with a loan officer to credit program or credit-related assist- apply for a home equity loan. The con- ance program that is: sumer meets the creditor’s established (A) Designed to meet the special requirements for the requested home needs of consumers with medical condi- equity loan and the creditor typically tions; and does not require consumers to obtain a (B) Established and administered debt cancellation contract, debt sus- pursuant to a written plan that: pension agreement, or credit insurance (1) Identifies the class of persons that product in connection with such loans. the program is designed to benefit; and However, based on the consumer’s ap- (2) Sets forth the procedures and parent medical condition, the loan offi- standards for extending credit or pro- cer recommends to the credit com- viding other credit-related assistance mittee that credit be extended to the under the program; consumer only if the consumer obtains (iv) To the extent necessary for pur- a debt cancellation contract, debt sus- poses of fraud prevention or detection; pension agreement, or credit insurance (v) In the case of credit for the pur- product from a nonaffiliated third pose of financing medical products or party. The credit committee agrees services, to determine and verify the with the loan officer’s recommenda- medical purpose of a loan and the use tion. The loan officer informs the con- of proceeds; sumer that the consumer must obtain (vi) Consistent with safe and sound a debt cancellation contract, debt sus- practices, if the consumer or the con- pension agreement, or credit insurance sumer’s legal representative specifi- product from a nonaffiliated third cally requests that the creditor use party to qualify for the loan. The con- medical information in determining sumer obtains one of these products the consumer’s eligibility, or continued eligibility, for credit, to accommo- and the creditor approves the loan. The date the consumer’s particular cir- creditor has used medical information cumstances, and such request is docu- in a manner inconsistent with the ex- mented by the creditor; ception by taking into account the (vii) Consistent with safe and sound consumer’s physical, mental, or behav- practices, to determine whether the ioral health, condition, or history, type provisions of a forbearance practice or of treatment, or prognosis in setting program that is triggered by a medical conditions on the consumer’s eligi- condition or event apply to a con- bility for credit. sumer; (e) Specific exceptions for obtaining and (viii) To determine the consumer’s using medical information—(1) In general. eligibility for, the triggering of, or the A creditor may obtain and use medical reactivation of a debt cancellation con- information pertaining to a consumer tract or debt suspension agreement if a in connection with any determination medical condition or event is a trig- of the consumer’s eligibility, or contin- gering event for the provision of bene- ued eligibility, for credit: fits under the contract or agreement; (i) To determine whether the use of a or power of attorney or legal representa- (ix) To determine the consumer’s eli- tive that is triggered by a medical con- gibility for, the triggering of, or the re- dition or event is necessary and appro- activation of a credit insurance prod- priate or whether the consumer has the uct if a medical condition or event is a legal capacity to contract when a per- triggering event for the provision of son seeks to exercise a power of attor- benefits under the product. ney or act as legal representative for a (2) Example of determining eligibility for consumer based on an asserted medical a special credit program or credit assist- condition or event; ance program. A not-for-profit organiza- (ii) To comply with applicable re- tion establishes a credit assistance pro- quirements of local, state, or Federal gram pursuant to a written plan that is laws; designed to assist disabled veterans in

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purchasing homes by subsidizing the under the guidelines of the established down payment for the home purchase loan program. The creditor may deny mortgage loans of qualifying veterans. the consumer’s application because the The organization works through mort- purpose of the loan is not for a par- gage lenders and requires mortgage ticular procedure funded by the estab- lenders to obtain medical information lished loan program. about the disability of any consumer (4) Examples of obtaining and using that seeks to qualify for the program, medical information at the request of the use that information to verify the con- consumer. (i) If a consumer applies for a sumer’s eligibility for the program, and loan and specifically requests that the forward that information to the orga- creditor consider the consumer’s med- nization. A consumer who is a veteran ical disability at the relevant time as applies to a creditor for a home pur- an explanation for adverse payment chase mortgage loan. The creditor in- history information in his credit re- forms the consumer about the credit port, the creditor may consider such assistance program for disabled veterans and the consumer seeks to qual- medical information in evaluating the ify for the program. Assuming that the consumer’s willingness and ability to program complies with all applicable repay the requested loan to accommo- law, including applicable fair lending date the consumer’s particular cir- laws, the creditor may obtain and use cumstances, consistent with safe and medical information about the medical sound practices. The creditor may also condition and disability, if any, of the decline to consider such medical infor- consumer to determine whether the mation to accommodate the consumer, consumer qualifies for the credit as- but may evaluate the consumer’s appli- sistance program. cation in accordance with its otherwise (3) Examples of verifying the medical applicable underwriting criteria. The purpose of the loan or the use of proceeds. creditor may not deny the consumer’s (i) If a consumer applies for $10,000 of application or otherwise treat the con- credit for the purpose of financing vi- sumer less favorably because the con- sion correction surgery, the creditor sumer specifically requested a medical may verify with the surgeon that the accommodation, if the creditor would procedure will be performed. If the sur- have extended the credit or treated the geon reports that surgery will not be consumer more favorably under the performed on the consumer, the cred- creditor’s otherwise applicable under- itor may use that medical information writing criteria. to deny the consumer’s application for (ii) If a consumer applies for a loan credit, because the loan would not be by telephone and explains that his in- used for the stated purpose. come has been and will continue to be (ii) If a consumer applies for $10,000 of interrupted on account of a medical credit for the purpose of financing cos- condition and that he expects to repay metic surgery, the creditor may con- the loan by liquidating assets, the firm the cost of the procedure with the creditor may, but is not required to, surgeon. If the surgeon reports that the evaluate the application using the sale cost of the procedure is $5,000, the cred- of assets as the primary source of re- itor may use that medical information to offer the consumer only $5,000 of payment, consistent with safe and credit. sound practices, provided that the (iii) A creditor has an established creditor documents the consumer’s re- medical loan program for financing quest by recording the oral conversa- particular elective surgical procedures. tion or making a notation of the re- The creditor receives a loan applica- quest in the consumer’s file. tion from a consumer requesting $10,000 (iii) If a consumer applies for a loan of credit under the established loan and the application form provides a program for an elective surgical proce- space where the consumer may provide dure. The consumer indicates on the any other information or special cir- application that the purpose of the cumstances, whether medical or non- loan is to finance an elective surgical medical, that the consumer would like procedure not eligible for funding the creditor to consider in evaluating

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the consumer’s application, the cred- a credit account with the creditor for itor may use medical information pro- more than one year and has not pre- vided by the consumer in that space on viously been in default. The creditor that application to accommodate the attempts to contact the consumer and consumer’s application for credit, con- speaks with the consumer’s adult child, sistent with safe and sound practices, who is not the consumer’s legal rep- or may disregard that information. resentative. The adult child informs (iv) If a consumer specifically re- the creditor that the consumer is hos- quests that the creditor use medical in- pitalized and is unable to pay the bill formation in determining the con- at that time. The creditor defers pay- sumer’s eligibility, or continued eligi- ments for up to three months, without bility, for credit and provides the cred- penalty, for the hospitalized consumer itor with medical information for that and sends the consumer a letter con- purpose, and the creditor determines firming this practice and the date on that it needs additional information re- which the next payment will be due. garding the consumer’s circumstances, The creditor has obtained and used the creditor may request, obtain, and medical information to determine use additional medical information whether the provisions of a medically- about the consumer as necessary to triggered forbearance practice or pro- verify the information provided by the gram apply to a consumer. consumer or to determine whether to make an accommodation for the con- § 717.31 Limits on redisclosure of in- sumer. The consumer may decline to formation provide additional information, with- (a) Scope. This section applies to Fed- draw the request for an accommoda- eral credit unions. tion, and have the application consid- (b) Limits on redisclosure. If a Federal ered under the creditor’s otherwise ap- credit union receives medical informa- plicable underwriting criteria. tion about a consumer from a con- (v) If a consumer completes and signs sumer reporting agency or its affiliate, a credit application that is not for the person must not disclose that in- medical purpose credit and the applica- formation to any other person, except tion contains boilerplate language that as necessary to carry out the purpose routinely requests medical information for which the information was initially from the consumer or that indicates disclosed, or as otherwise permitted by that by applying for credit the con- statute, regulation, or order. sumer authorizes or consents to the creditor obtaining and using medical § 717.32 Sharing medical information information in connection with a de- with affiliates. termination of the consumer’s eligi- (a) Scope. This section applies to Fed- bility, or continued eligibility, for eral credit unions. credit, the consumer has not specifi- (b) In general. The exclusions from cally requested that the creditor ob- the term ‘‘consumer report’’ in section tain and use medical information to 603(d)(2) of the Act that allow the shar- accommodate the consumer’s paring of information with affiliates do ticular circumstances. not apply if a Federal credit union (5) Example of a forbearance practice or communicates to an affiliate: program. After an appropriate safety (1) Medical information; and soundness review, a creditor insti- (2) An individualized list or descrip- tutes a program that allows consumers tion based on the payment trans- who are or will be hospitalized to defer actions of the consumer for medical payments as needed for up to three products or services; or months, without penalty, if the credit (3) An aggregate list of identified account has been open for more than consumers based on payment trans- one year and has not previously been in actions for medical products or serv- default, and the consumer provides ices. confirming documentation at an appro- (c) Exceptions. A Federal credit union priate time. A consumer is hospitalized may rely on the exclusions from the and does not pay her bill for a par- term ‘‘consumer report’’ in section ticular month. This consumer has had 603(d)(2) of the Act to communicate the

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information in paragraph (b) to an af- (3) Identifies the appropriate con- filiate: sumer. (1) In connection with the business of (b) Direct dispute means a dispute sub- insurance or annuities (including the mitted directly to a furnisher (includ- activities described in section 18B of ing a furnisher that is a debt collector) the model Privacy of Consumer Finan- by a consumer concerning the accuracy cial and Health Information Regula- of any information contained in a con- tion issued by the National Association sumer report and pertaining to an ac- of Insurance Commissioners, as in ef- count or other relationship that the fect on January 1, 2003); furnisher has or had with the con- (2) For any purpose permitted with- sumer. out authorization under the regula- (c) Furnisher means an entity that tions promulgated by the Department furnishes information relating to con- of Health and Human Services pursu- sumers to one or more consumer re- ant to the Health Insurance Port- porting agencies for inclusion in a con- ability and Accountability Act of 1996 sumer report. An entity is not a fur- (HIPAA); nisher when it: (3) For any purpose referred to in sec- (1) Provides information to a con- tion 1179 of HIPAA; sumer reporting agency solely to ob- (4) For any purpose described in sec- tain a consumer report in accordance tion 502(e) of the Gramm-Leach-Bliley with sections 604(a) and (f) of the Fair Act; Credit Reporting Act; (5) In connection with a determina- (2) Is acting as a ‘‘consumer report- tion of the consumer’s eligibility, or ing agency’’ as defined in section 603(f) continued eligibility, for credit con- of the Fair Credit Reporting Act; sistent with § 717.30; or (3) Is a consumer to whom the fur- (6) As otherwise permitted by order nished information pertains; or of the NCUA. (4) Is a neighbor, friend, or associate of the consumer, or another individual Subpart E—Duties of Furnishers of with whom the consumer is acquainted Information or who may have knowledge about the consumer, and who provides informa- SOURCE: 74 FR 31522, July 1, 2009, unless tion about the consumer’s character, otherwise noted. general reputation, personal character- EFFECTIVE DATE NOTE: At 74 FR 31522, July istics, or mode of living in response to 1, 2009, subpart E was added, effective July 1, a specific request from a consumer re- 2010. porting agency. (d) Identity theft has the same mean- § 717.40 Scope. ing as in 16 CFR 603.2(a). This subpart applies to a Federal credit (e) Integrity means that information union that furnishes information to a that a furnisher provides to a consumer consumer reporting agency. reporting agency about an account or other relationship with the consumer: § 717.41 Definitions. (1) Is substantiated by the furnisher’s For purposes of this subpart and ap- records at the time it is furnished; pendix E of this part, the following (2) Is furnished in a form and manner definitions apply: that is designed to minimize the likeli- (a) Accuracy means that information hood that the information may be in- that a furnisher provides to a consumer correctly reflected in a consumer re- reporting agency about an account or port; and other relationship with the consumer (3) Includes the information in the correctly: furnisher’s possession about the ac- (1) Reflects the terms of and liability count or other relationship that the for the account or other relationship; NCUA has: (2) Reflects the consumer’s perform- (i) Determined that the absence of ance and other conduct with respect to which would likely be materially mis- the account or other relationship; and leading in evaluating a consumer’s

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creditworthiness, credit standing, cred- to the current payment status, high it capacity, character, general reputa- balance, date a payment was made, the tion, personal characteristics, or mode amount of a payment made, or the date of living; and an account was opened or closed; or (ii) Listed in section I.(b)(2)(iii) of ap- (4) Any other information contained pendix E of this part. in a consumer report regarding an account or other relationship with the § 717.42 Reasonable policies and pro- furnisher that bears on the consumer’s cedures concerning the accuracy creditworthiness, credit standing, cred- and integrity of furnished informa- it capacity, character, general reputation. tion, personal characteristics, or mode (a) Policies and procedures. Each fur- of living. nisher must establish and implement (b) Exceptions. The requirements of reasonable written policies and proce- paragraph (a) of this section do not dures regarding the accuracy and in- apply to a furnisher if: tegrity of the information relating to (1) The direct dispute relates to: consumers that it furnishes to a con- (i) The consumer’s identifying infor- sumer reporting agency. The policies mation (other than a direct dispute re- and procedures must be appropriate to lating to a consumer’s liability for a the nature, size, complexity, and scope credit account or other debt with the of each furnisher’s activities. furnisher, as provided in paragraph (b) Guidelines. Each furnisher must (a)(1) of this section) such as name(s), consider the guidelines in appendix E date of birth, Social Security number, of this part in developing its policies telephone number(s), or address(es); and procedures required by this sec- (ii) The identity of past or present tion, and incorporate those guidelines employers; that are appropriate. (iii) Inquiries or requests for a con- (c) Reviewing and updating policies and sumer report; procedures. Each furnisher must review (iv) Information derived from public its policies and procedures required by records, such as judgments, bank- this section periodically and update ruptcies, liens, and other legal matters them as necessary to ensure their con- (unless provided by a furnisher with an tinued effectiveness. account or other relationship with the consumer); § 717.43 Direct disputes. (v) Information related to fraud (a) General rule. Except as otherwise alerts or active duty alerts; or provided in this section, a furnisher (vi) Information provided to a con- must conduct a reasonable investiga- sumer reporting agency by another fur- tion of a direct dispute if it relates to: nisher; or (1) The consumer’s liability for a (2) The furnisher has a reasonable be- credit account or other debt with the lief that the direct dispute is submitted furnisher, such as direct disputes relat- by, is prepared on behalf of the con- ing to whether there is or has been sumer by, or is submitted on a form identity theft or fraud against the con- supplied to the consumer by, a credit sumer, whether there is individual or repair organization, as defined in 15 joint liability on an account, or wheth- U.S.C. 1679a(3), or an entity that would er the consumer is an authorized user be a credit repair organization, but for of a credit account; 15 U.S.C. 1679a(3)(B)(i). (2) The terms of a credit account or (c) Direct dispute address. A furnisher other debt with the furnisher, such as is required to investigate a direct dis- direct disputes relating to the type of pute only if a consumer submits a dis- account, principal balance, scheduled pute notice to the furnisher at: payment amount on an account, or the (1) The address of a furnisher pro- amount of the credit limit on an open- vided by a furnisher and set forth on a end account; consumer report relating to the con- (3) The consumer’s performance or sumer; other conduct concerning an account (2) An address clearly and conspicu- or other relationship with the fur- ously specified by the furnisher for sub- nisher, such as direct disputes relating mitting direct disputes that is provided

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to the consumer in writing or elec- to make the information provided by tronically (if the consumer has agreed the furnisher accurate. to the electronic delivery of informa- (f) Frivolous or irrelevant disputes. (1) tion from the furnisher); or A furnisher is not required to inves- (3) Any business address of the fur- tigate a direct dispute if the furnisher nisher if the furnisher has not so speci- has reasonably determined that the fied and provided an address for sub- dispute is frivolous or irrelevant. A dis- mitting direct disputes under para- pute qualifies as frivolous or irrelevant graphs (c)(1) or (2) of this section. if: (d) Direct dispute notice contents. A (i) The consumer did not provide suf- dispute notice must include: ficient information to investigate the (1) Sufficient information to identify the account or other relationship that disputed information as required by is in dispute, such as an account num- paragraph (d) of this section; ber and the name, address, and tele- (ii) The direct dispute is substan- phone number of the consumer, if ap- tially the same as a dispute previously plicable; submitted by or on behalf of the con- (2) The specific information that the sumer, either directly to the furnisher consumer is disputing and an expla- or through a consumer reporting agen- nation of the basis for the dispute; and cy, with respect to which the furnisher (3) All supporting documentation or has already satisfied the applicable re- other information reasonably required quirements of the Act or this section; by the furnisher to substantiate the provided, however, that a direct dis- basis of the dispute. This documenta- pute is not substantially the same as a tion may include, for example: a copy dispute previously submitted if the dis- of the relevant portion of the consumer pute includes information listed in report that contains the allegedly inac- paragraph (d) of this section that had curate information; a police report; a not previously been provided to the fraud or identity theft affidavit; a furnisher; or court order; or account statements. (iii) The furnisher is not required to (e) Duty of furnisher after receiving a investigate the direct dispute because direct dispute notice. After receiving a one or more of the exceptions listed in dispute notice from a consumer pursu- paragraph (b) of this section applies. ant to paragraphs (c) and (d) of this section, the furnisher must: (2) Notice of determination. Upon mak- (1) Conduct a reasonable investiga- ing a determination that a dispute is tion with respect to the disputed infor- frivolous or irrelevant, the furnisher mation; must notify the consumer of the deter- (2) Review all relevant information mination not later than five business provided by the consumer with the dis- days after making the determination, pute notice; by mail or, if authorized by the con- (3) Complete its investigation of the sumer for that purpose, by any other dispute and report the results of the in- means available to the furnisher. vestigation to the consumer before the (3) Contents of notice of determination expiration of the period under section that a dispute is frivolous or irrelevant. A 611(a)(1) of the Fair Credit Reporting notice of determination that a dispute Act (15 U.S.C. 1681i(a)(1)) within which is frivolous or irrelevant must include a consumer reporting agency would be the reasons for such determination and required to complete its action if the identify any information required to consumer had elected to dispute the in- investigate the disputed information, formation under that section; and which notice may consist of a stand- (4) If the investigation finds that the ardized form describing the general na- information reported was inaccurate, ture of such information. promptly notify each consumer reporting agency to which the furnisher provided inaccurate information of that Subparts F–H [Reserved] determination and provide to the consumer reporting agency any correction to that information that is necessary

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Subpart I—Duties of Users of Con- consumer reporting agency. A user must sumer Reports Regarding Ad- develop and implement reasonable poli- dress Discrepancies and cies and procedures for furnishing an address for the consumer that the user Records Disposal has reasonably confirmed is accurate §§ 717.80–717.81 [Reserved] to the consumer reporting agency described in 15 U.S.C. 1681a(p) from whom § 717.82 Duties of users regarding ad- it received the notice of address dis- dress discrepancies. crepancy when the user: (a) Scope. This section applies to a (i) Can form a reasonable belief that user of consumer reports (user) that re- the consumer report relates to the con- ceives a notice of address discrepancy sumer about whom the user requested from a consumer reporting agency de- the report; scribed in 15 U.S.C. 1681a(p), and that is (ii) Establishes a continuing relation- federal credit union. ship with the consumer; and (b) Definition. For purposes of this (iii) Regularly and in the ordinary section, a notice of address discrepancy course of business furnishes informa- means a notice sent to a user by a con- tion to the consumer reporting agency sumer reporting agency described in 15 from which the notice of address dis- U.S.C. 1681a(p) pursuant to 15 U.S.C. crepancy relating to the consumer was 1681c(h)(1), that informs the user of a obtained. substantial difference between the ad- (2) Examples of confirmation methods. dress for the consumer that the user The user may reasonably confirm an provided to request the consumer re- address is accurate by: port and the address(es) in the agency’s (i) Verifying the address with the file for the consumer. consumer about whom it has requested (c) Reasonable belief—(1) Requirement the report; to form a reasonable belief. A user must (ii) Reviewing its own records to develop and implement reasonable poli- verify the address of the consumer; cies and procedures designed to enable (iii) Verifying the address through the user to form a reasonable belief third-party sources; or that a consumer report relates to the (iv) Using other reasonable means. consumer about whom it has requested (3) Timing. The policies and proce- the report, when the user receives a no- dures developed in accordance with tice of address discrepancy. paragraph (d)(1) of this section must (2) Examples of reasonable policies and provide that the user will furnish the procedures. (i) Comparing the informa- consumer’s address that the user has tion in the consumer report provided reasonably confirmed is accurate to by the consumer reporting agency with the consumer reporting agency de- information the user: scribed in 15 U.S.C. 1681a(p) as part of (A) Obtains and uses to verify the the information it regularly furnishes consumer’s identity in accordance with for the reporting period in which it es- the requirements of the Customer Iden- tablishes a relationship with the con- tification Program (CIP) rules imple- sumer. menting 31 U.S.C. 5318(l) (31 CFR [72 FR 63768, Nov. 9, 2007, as amended at 74 103.121); FR 22644, May 14, 2009] (B) Maintains in its own records, such as applications, change of address § 717.83 Disposal of consumer informa- notifications, other member account tion. records, or retained CIP documenta- (a) In general. You must properly dis- tion; or pose of any consumer information that (C) Obtains from third-party sources; you maintain or otherwise possess in a or manner consistent with the Guidelines (ii) Verifying the information in the for Safeguarding Member Information, consumer report provided by the con- in appendix A to part 748 of this chap- sumer reporting agency with the con- ter. sumer. (b) Examples. Appropriate measures (d) Consumer’s address—(1) Require- to properly dispose of consumer infor- ment to furnish consumer’s address to a mation include the following examples.

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These examples are illustrative only (A) Aggregate information, such as and are not exclusive or exhaustive the mean credit score, derived from a methods for complying with this sec- group of consumer reports; or tion. (B) Blind data, such as payment his- (1) Burning, pulverizing, or shredding tory on accounts that are not person- papers containing consumer informa- ally identifiable, you use for devel- tion so that the information cannot oping credit scoring models or for practicably be read or reconstructed. other purposes. (2) Destroying or erasing electronic (2) Consumer report has the same media containing consumer informa- meaning as set forth in the Fair Credit tion so that the information cannot Reporting Act, 15 U.S.C. 1681a(d). The practicably be read or reconstructed. meaning of consumer report is broad (c) Rule of construction. This section and subject to various definitions, con- does not: ditions and exceptions in the Fair (1) Require you to maintain or de- Credit Reporting Act. It includes written or oral communications from a stroy any record pertaining to a con- consumer reporting agency to a third sumer that is not imposed under any party of information used or collected other law; or for use in establishing eligibility for (2) Alter or affect any requirement credit or insurance used primarily for imposed under any other provision of personal, family or household purposes, law to maintain or destroy such a and eligibility for employment pur- record. poses. Examples include credit reports, (d) Definitions. As used in this sec- bad check lists, and tenant screening tion: reports. (1) Consumer information means any record about an individual, whether in Subpart J—Identity Theft Red Flags paper, electronic, or other form, that is a consumer report or is derived from a consumer report and that is main- SOURCE: 72 FR 63768, Nov. 9, 2007, unless otherwise noted. tained or otherwise possessed by or on behalf of the credit union for a business § 717.90 Duties regarding the detec- purpose. Consumer information also tion, prevention, and mitigation of means a compilation of such records. identity theft. The term does not include any record (a) Scope. This section applies to a fi- that does not identify an individual. nancial institution or creditor that is a (i) Consumer information includes: federal credit union. (A) A consumer report that you ob- (b) Definitions. For purposes of this tain; section and appendix J, the following (B) Information from a consumer re- definitions apply: port that you obtain from your affil- (1) Account means a continuing rela- iate after the consumer has been given tionship established by a person with a a notice and has elected not to opt out federal credit union to obtain a product of that sharing; or service for personal, family, house- (C) Information from a consumer re- hold or business purposes. Account in- port that you obtain about an indi- cludes: vidual who applies for but does not re- (i) An extension of credit, such as the ceive a loan, including any loan sought purchase of property or services involv- by an individual for a business purpose; ing a deferred payment; and (D) Information from a consumer re- (ii) A share or deposit account. port that you obtain about an indi- (2) The term board of directors refers vidual who guarantees a loan (includ- to a federal credit union’s board of di- ing a loan to a business entity); or rectors. (E) Information from a consumer re- (3) Covered account means: port that you obtain about an em- (i) An account that a federal credit ployee or prospective employee. union offers or maintains, primarily (ii) Consumer information does not infor personal, family, or household pur- clude: poses, that involves or is designed to

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permit multiple payments or trans- the federal credit union and the nature actions, such as a credit card account, and scope of its activities. mortgage loan, automobile loan, (2) Elements of the Program. The Pro- checking account, or share account; gram must include reasonable policies and and procedures to: (ii) Any other account that the fed- (i) Identify relevant Red Flags for the eral credit union offers or maintains covered accounts that the federal cred- for which there is a reasonably foresee- it union offers or maintains, and incor- able risk to members or to the safety porate those Red Flags into its Pro- and soundness of the federal credit gram; union from identity theft, including fi- (ii) Detect Red Flags that have been nancial, operational, compliance, rep- incorporated into the Program of the utation, or litigation risks. federal credit union; (4) Credit has the same meaning as in (iii) Respond appropriately to any 15 U.S.C. 1681a(r)(5). Red Flags that are detected pursuant (5) Creditor has the same meaning as to paragraph (d)(2)(ii) of this section to in 15 U.S.C. 1681a(r)(5). prevent and mitigate identity theft; (6) Customer means a member that and has a covered account with a federal (iv) Ensure the Program (including credit union. the Red Flags determined to be rel- (7) Financial institution has the same evant) is updated periodically, to re- meaning as in 15 U.S.C. 1681a(t). flect changes in risks to members and (8) Identity theft has the same mean- to the safety and soundness of the fed- ing as in 16 CFR 603.2(a). eral credit union from identity theft. (9) Red Flag means a pattern, prac- (e) Administration of the Program. tice, or specific activity that indicates Each federal credit union that is re- the possible existence of identity theft. quired to implement a Program must (10) Service provider means a person provide for the continued administra- that provides a service directly to the tion of the Program and must: federal credit union. (1) Obtain approval of the initial (c) Periodic Identification of Covered written Program from either its board Accounts. Each federal credit union of directors or an appropriate com- must periodically determine whether it mittee of the board of directors; offers or maintains covered accounts. (2) Involve the board of directors, an As a part of this determination, a fed- appropriate committee thereof, or a eral credit union must conduct a risk designated employee at the level of assessment to determine whether it of- senior management in the oversight, fers or maintains covered accounts de- development, implementation and ad- scribed in paragraph (b)(3)(ii) of this ministration of the Program; section, taking into consideration: (3) Train staff, as necessary, to effec- (1) The methods it provides to open tively implement the Program; and its accounts; (4) Exercise appropriate and effective (2) The methods it provides to access oversight of service provider arrange- its accounts; and ments. (3) Its previous experiences with iden- (f) Guidelines. Each federal credit tity theft. union that is required to implement a (d) Establishment of an Identity Theft Program must consider the guidelines Prevention Program. (1) Program require- in appendix J of this part and include ment. Each federal credit union that of- in its Program those guidelines that fers or maintains one or more covered are appropriate. accounts must develop and implement a written Identity Theft Prevention § 717.91 Duties of card issuers regard- Program (Program) that is designed to ing changes of address. detect, prevent, and mitigate identity (a) Scope. This section applies to an theft in connection with the opening of issuer of a debit or credit card (card a covered account or any existing cov- issuer) that is a federal credit union. ered account. The Program must be ap- (b) Definitions. For purposes of this propriate to the size and complexity of section:

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(1) Cardholder means a member who APPENDICES A–B TO PART 717 has been issued a credit or debit card. [RESERVED] (2) Clear and conspicuous means reasonably understandable and designed APPENDIX C TO PART 717—MODEL FORMS FOR OPT-OUT NOTICES to call attention to the nature and significance of the information presented. a. Although use of the model forms is not (c) Address validation requirements. A required, use of the model forms in this ap- card issuer must establish and imple- pendix (as applicable) complies with the requirement in section 624 of the Act for clear, ment reasonable policies and proce- conspicuous, and concise notices. dures to assess the validity of a change b. Certain changes may be made to the lan- of address if it receives notification of guage or format of the model forms without a change of address for a member’s losing the protection from liability afforded debit or credit card account and, with- by use of the model forms. These changes may not be so extensive as to affect the sub- in a short period of time afterwards stance, clarity, or meaningful sequence of (during at least the first 30 days after the language in the model forms. Persons it receives such notification), the card making such extensive revisions will lose the issuer receives a request for an addi- safe harbor that this appendix provides. Ac- tional or replacement card for the ceptable changes include, for example: 1. Rearranging the order of the references same account. Under these cir- to ‘‘your income,’’ ‘‘your account history,’’ cumstances, the card issuer may not and ‘‘your credit score.’’ issue an additional or replacement 2. Substituting other types of information card, until, in accordance with its rea- for ‘‘income,’’ ‘‘account history,’’ or ‘‘credit sonable policies and procedures and for score’’ for accuracy, such as ‘‘payment his- the purpose of assessing the validity of tory,’’ ‘‘credit history,’’ ‘‘payoff status,’’ or ‘‘claims history.’’ the change of address, the card issuer: 3. Substituting a clearer and more accu- (1)(i) Notifies the cardholder of the rate description of the affiliates providing or request: covered by the notice for phrases such as (A) At the cardholder’s former ad- ‘‘the [ABC] group of companies,’’ including without limitation a statement that the en- dress; or tity providing the notice recently purchased (B) By any other means of commu- the consumer’s account. nication that the card issuer and the 4. Substituting other types of affiliates cardholder have previously agreed to covered by the notice for ‘‘credit card,’’ ‘‘in- use; and surance brokerage,’’ or ‘‘securities brokerage’’ affiliates. (ii) Provides to the cardholder a rea- 5. Omitting items that are not accurate or sonable means of promptly reporting applicable. For example, if a person does not incorrect address changes; or limit the duration of the opt-out period, the (2) Otherwise assesses the validity of notice may omit information about the re- the change of address in accordance newal notice. 6. Adding a statement informing con- with the policies and procedures the sumers how much time they have to opt out card issuer has established pursuant to before shared eligibility information may be § 717.90 of this part. used to make solicitations to them. (d) Alternative timing of address valida- 7. Adding a statement that the consumer tion. A card issuer may satisfy the re- may exercise the right to opt out at any time. quirements of paragraph (c) of this sec- 8. Adding the following statement, if accu- tion if it validates an address pursuant rate: ‘‘If you previously opted out, you do to the methods in paragraph (c)(1) or not need to do so again.’’ (c)(2) of this section when it receives an 9. Providing a place on the form for the address change notification, before it consumer to fill in identifying information, such as his or her name and address: receives a request for an additional or 10. Adding disclosures regarding the treat- replacement card. ment of opt-outs by joint consumers to com- (e) Form of notice. Any written or ply with § 717.23(a)(2) of this part. electronic notice that the card issuer C–1 Model Form for Initial Opt-out Notice provides under this paragraph must be (Single-Affiliate Notice) clear and conspicuous and provided C–2 Model Form for Initial Opt-out Notice (Joint Notice) separately from its regular correspond- C–3 Model Form for Renewal Notice (Sin- ence with the cardholder. gle-Affiliate Notice)

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C–4 Model Form for Renewal Notice (Joint • You may limit the [ABC] companies, Notice) such as the [ABC credit card, insurance bro- C–5 Model Form for Voluntary ‘‘No Mar- kerage, and securities brokerage] affiliates, keting’’ Notice from marketing their products or services to you based on your personal information that C–1—Model Form for Initial Opt-out Notice they receive from other [ABC] companies. (Single-Affiliate Notice)—[Your Choice To This information includes your [income], Limit Marketing]/[Marketing Opt-out] your [account history], and your [credit • [Name of Affiliate] is providing this no- score]. • tice. Your choice to limit marketing offers • [Optional: Federal law gives you the from the [ABC] companies will apply [until right to limit some but not all marketing you tell us to change your choice]/[for x from our affiliates. Federal law also requires years from when you tell us your choice]/[for us to give you this notice to tell you about at least 5 years from when you tell us your your choice to limit marketing from our af- choice]. [Include if the opt-out period ex- filiates.] pires.] Once that period expires, you will re- • You may limit our affiliates in the [ABC] ceive a renewal notice that will allow you to group of companies, such as our [credit card, continue to limit marketing offers from the insurance brokerage, and securities broker- [ABC] companies for [another x years]/[at age] affiliates, from marketing their prod- least another 5 years]. • ucts or services to you based on your per- [Include, if applicable, in a subsequent sonal information that we collect and share notice, including an annual notice, for con- with them. This information includes your sumers who may have previously opted out.] [income], your [account history with us], and If you have already made a choice to limit your [credit score]. marketing offers from the [ABC] companies, you do not need to act again until you re- • Your choice to limit marketing offers ceive the renewal notice. from our affiliates will apply [until you tell To limit marketing offers, contact us [in- us to change your choice]/[for x years from clude all that apply]: when you tell us your choice]/[for at least 5 • By telephone: 1–877–###–#### years from when you tell us your choice]. • On the Web: www.---.com [Include if the opt-out period expires.] Once • By mail: Check the box and complete the that period expires, you will receive a reform below, and send the form to: newal notice that will allow you to continue to limit marketing offers from our affiliates [Company name] for [another x years]/[at least another 5 [Company address] years]. lDo not allow any company [in the ABC • [Include, if applicable, in a subsequent group of companies] to use my personal in- notice, including an annual notice, for con- formation to market to me. sumers who may have previously opted out.] If you have already made a choice to limit C–3—Model Form for Renewal Notice (Single- marketing offers from our affiliates, you do Affiliate Notice)—[Renewing Your Choice To not need to act again until you receive the Limit Marketing]/[Renewing Your Marketing renewal notice. Opt-out] To limit marketing offers, contact us [in- • [Name of Affiliate] is providing this no- clude all that apply]: tice. • By telephone: 1–877–###–#### • [Optional: Federal law gives you the • On the Web: www.---.com right to limit some but not all marketing • By mail: Check the box and complete the from our affiliates. Federal law also requires form below, and send the form to: us to give you this notice to tell you about [Company name] your choice to limit marketing from our af- [Company address] filiates.] • You previously chose to limit our affili- lDo not allow your affiliates to use my ates in the [ABC] group of companies, such personal information to market to me. as our [credit card, insurance brokerage, and C–2—Model Form for Initial Opt-out Notice securities brokerage] affiliates, from mar- (Joint Notice)—[Your Choice To Limit Mar- keting their products or services to you keting]/[Marketing Opt-out] based on your personal information that we share with them. This information includes • The [ABC group of companies] is pro- your [income], your [account history with viding this notice. us], and your [credit score]. • [Optional: Federal law gives you the • Your choice has expired or is about to ex- right to limit some but not all marketing pire. from the [ABC] companies. Federal law also To renew your choice to limit marketing requires us to give you this notice to tell you for [x] more years, contact us [include all about your choice to limit marketing from that apply]: the [ABC] companies.] • By telephone: 1–877–###–####

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• On the Web: www.---.com APPENDIX D TO PART 717 [RESERVED] • By mail: Check the box and complete the form below, and send the form to: APPENDIX E TO PART 717—INTERAGENCY [Company name] GUIDELINES CONCERNING THE ACCU- [Company address] RACY AND INTEGRITY OF INFORMA- lRenew my choice to limit marketing for TION FURNISHED TO CONSUMER RE- [x] more years. PORTING AGENCIES

C–4—Model Form for Renewal Notice (Joint No- The NCUA encourages voluntary fur- tice)—[Renewing Your Choice To Limit Mar- nishing of information to consumer report- keting]/[Renewing Your Marketing Opt-out] ing agencies. Section 717.42 of this part requires each furnisher to establish and imple- • The [ABC group of companies] is pro- ment reasonable written policies and proce- viding this notice. dures concerning the accuracy and integrity • [Optional: Federal law gives you the of the information it furnishes to consumer right to limit some but not all marketing reporting agencies. Under § 717.42(b), a fur- from the [ABC] companies. Federal law also nisher must consider the guidelines set forth requires us to give you this notice to tell you below in developing its policies and proce- about your choice to limit marketing from dures. In establishing these policies and pro- the [ABC] companies.] cedures, a furnisher may include any of its • You previously chose to limit the [ABC] existing policies and procedures that are rel- companies, such as the [ABC credit card, in- evant and appropriate. Section 717.42(c) re- surance brokerage, and securities brokerage] quires each furnisher to review its policies affiliates, from marketing their products or and procedures periodically and update them services to you based on your personal infor- as necessary to ensure their continued effec- mation that they receive from other ABC tiveness. companies. This information includes your [income], your [account history], and your I. NATURE, SCOPE, AND OBJECTIVES OF [credit score]. POLICIES AND PROCEDURES • Your choice has expired or is about to ex- (a) Nature and Scope. Section 717.42(a) of pire. this part requires that a furnisher’s policies To renew your choice to limit marketing and procedures be appropriate to the nature, for [x] more years, contact us [include all size, complexity, and scope of the furnisher’s that apply]: activities. In developing its policies and pro- • By telephone: 1–877–###–#### cedures, a furnisher should consider, for ex- • On the Web: www.---.com • ample: By mail: Check the box and complete the (1) The types of business activities in form below, and send the form to: which the furnisher engages; [Company name] (2) The nature and frequency of the infor- [Company address] mation the furnisher provides to consumer lRenew my choice to limit marketing for reporting agencies; and [x] more years. (3) The technology used by the furnisher to furnish information to consumer reporting C–5—MODEL FORM FOR VOLUNTARY ‘‘NO agencies. MARKETING’’ NOTICE (b) Objectives. A furnisher’s policies and procedures should be reasonably designed to YOUR CHOICE TO STOP MARKETING promote the following objectives: • [Name of Affiliate] is providing this no- (1) To furnish information about accounts tice. or other relationships with a consumer that • You may choose to stop all marketing is accurate, such that the furnished informa- from us and our affiliates. tion: • [Your choice to stop marketing from us (i) Identifies the appropriate consumer; and our affiliates will apply until you tell us (ii) Reflects the terms of and liability for to change your choice.] those accounts or other relationships; and To stop all marketing, contact us [include (iii) Reflects the consumer’s performance all that apply]: and other conduct with respect to the ac- • By telephone: 1–877–###–#### count or other relationship; • On the Web: www.—.com (2) To furnish information about accounts • By mail: Check the box and complete the or other relationships with a consumer that form below, and send the form to: has integrity, such that the furnished infor- [Company name] mation: (i) Is substantiated by the furnisher’s [Company address] records at the time it is furnished; lDo not market to me. (ii) Is furnished in a form and manner that [72 FR 62989, Nov. 7, 2007, as amended at 74 is designed to minimize the likelihood that FR 22644, May 14, 2009] the information may be incorrectly reflected

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in a consumer report; thus, the furnished in- and integrity of information about con- formation should: sumers furnished to consumer reporting (A) Include appropriate identifying infor- agencies. mation about the consumer to whom it per- (c) Evaluate the effectiveness of specific tains; and methods (including technological means) the (B) Be furnished in a standardized and furnisher uses to provide information to con- clearly understandable form and manner and sumer reporting agencies; how those meth- with a date specifying the time period to ods may affect the accuracy and integrity of which the information pertains; and the information it provides to consumer re- (iii) Includes the credit limit, if applicable porting agencies; and whether new, addi- and in the furnisher’s possession; tional, or different methods (including tech- (3) To conduct reasonable investigations of nological means) should be used to provide consumer disputes and take appropriate ac- information to consumer reporting agencies tions based on the outcome of such inves- to enhance the accuracy and integrity of tigations; and that information. (4) To update the information it furnishes as necessary to reflect the current status of III. SPECIFIC COMPONENTS OF POLICIES AND the consumer’s account or other relation- PROCEDURES ship, including, for example: In developing its policies and procedures, a (i) Any transfer of an account (e.g., by sale furnisher should address the following, as ap- or assignment for collection) to a third propriate: party; and (a) Establishing and implementing a sys- (ii) Any cure of the consumer’s failure to tem for furnishing information about con- abide by the terms of the account or other sumers to consumer reporting agencies that relationship. is appropriate to the nature, size, complexity, and scope of the furnisher’s business II. ESTABLISHING AND IMPLEMENTING POLICIES operations. AND PROCEDURES (b) Using standard data reporting formats In establishing and implementing its poli- and standard procedures for compiling and cies and procedures, a furnisher should: furnishing data, where feasible, such as the (a) Identify practices or activities of the electronic transmission of information about furnisher that can compromise the accuracy consumers to consumer reporting agencies. or integrity of information furnished to con- (c) Maintaining records for a reasonable sumer reporting agencies, such as by: period of time, not less than any applicable (1) Reviewing its existing practices and ac- recordkeeping requirement, in order to sub- tivities, including the technological means stantiate the accuracy of any information and other methods it uses to furnish infor- about consumers it furnishes that is subject mation to consumer reporting agencies and to a direct dispute. the frequency and timing of its furnishing of (d) Establishing and implementing appro- information; priate internal controls regarding the accu- (2) Reviewing its historical records relat- racy and integrity of information about con- ing to accuracy or integrity or to disputes; sumers furnished to consumer reporting reviewing other information relating to the agencies, such as by implementing standard accuracy or integrity of information pro- procedures and verifying random samples of vided by the furnisher to consumer reporting information provided to consumer reporting agencies; and considering the types of errors, agencies. omissions, or other problems that may have (e) Training staff that participates in ac- affected the accuracy or integrity of infor- tivities related to the furnishing of informa- mation it has furnished about consumers to tion about consumers to consumer reporting consumer reporting agencies; agencies to implement the policies and pro- (3) Considering any feedback received from cedures. consumer reporting agencies, consumers, or (f) Providing for appropriate and effective other appropriate parties; oversight of relevant service providers whose (4) Obtaining feedback from the furnisher’s activities may affect the accuracy or integ- staff; and rity of information about consumers fur- (5) Considering the potential impact of the nished to consumer reporting agencies to en- furnisher’s policies and procedures on con- sure compliance with the policies and proce- sumers. dures. (b) Evaluate the effectiveness of existing (g) Furnishing information about con- policies and procedures of the furnisher re- sumers to consumer reporting agencies fol- garding the accuracy and integrity of infor- lowing mergers, portfolio acquisitions or mation furnished to consumer reporting sales, or other acquisitions or transfers of agencies; consider whether new, additional, accounts or other obligations in a manner or different policies and procedures are nec- that prevents re-aging of information, dupli- essary; and consider whether implementa- cative reporting, or other problems that may tion of existing policies and procedures similarly affect the accuracy or integrity of should be modified to enhance the accuracy the information furnished.

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(h) Deleting, updating, and correcting in- soundness of the federal credit union from formation in the furnisher’s records, as ap- identity theft. propriate, to avoid furnishing inaccurate information. II. Identifying Relevant Red Flags (i) Conducting reasonable investigations of (a) Risk Factors. A federal credit union disputes. should consider the following factors in iden- (j) Designing technological and other tifying relevant Red Flags for covered ac- means of communication with consumer re- counts, as appropriate: porting agencies to prevent duplicative re- (1) The types of covered accounts it offers porting of accounts, erroneous association of or maintains; information with the wrong consumer(s), and (2) The methods it provides to open its cov- other occurrences that may compromise the ered accounts; accuracy or integrity of information pro- (3) The methods it provides to access its vided to consumer reporting agencies. covered accounts; and (k) Providing consumer reporting agencies (4) Its previous experiences with identity with sufficient identifying information in theft. the furnisher’s possession about each con- (b) Sources of Red Flags. Federal credit sumer about whom information is furnished unions should incorporate relevant Red to enable the consumer reporting agency Flags from sources such as: properly to identify the consumer. (1) Incidents of identity theft that the fed- (l) Conducting a periodic evaluation of its eral credit union has experienced; own practices, consumer reporting agency (2) Methods of identity theft that the fed- practices of which the furnisher is aware, in- eral credit union has identified that reflect vestigations of disputed information, correc- changes in identity theft risks; and tions of inaccurate information, means of (3) Applicable supervisory guidance. communication, and other factors that may (c) Categories of Red Flags. The Program affect the accuracy or integrity of informa- should include relevant Red Flags from the tion furnished to consumer reporting agen- following categories, as appropriate. Exam- cies. ples of Red Flags from each of these cat- (m) Complying with applicable require- egories are appended as Supplement A to ments under the Fair Credit Reporting Act this appendix J. and its implementing regulations. (1) Alerts, notifications, or other warnings [74 FR 31524, July 1, 2009] received from consumer reporting agencies or service providers, such as fraud detection EFFECTIVE DATE NOTE: At 74 FR 31524, July services; 1, 2009, appendix E to part 717 was added, ef- (2) The presentation of suspicious docu- fective July 1, 2010. ments; (3) The presentation of suspicious personal APPENDICES F–I TO PART 717 identifying information, such as a suspicious [RESERVED] address change; (4) The unusual use of, or other suspicious APPENDIX J TO PART 717—INTERAGENCY activity related to, a covered account; and GUIDELINES ON IDENTITY THEFT DE- (5) Notice from members, victims of iden- TECTION, PREVENTION, AND MITIGA- tity theft, law enforcement authorities, or TION other persons regarding possible identity theft in connection with covered accounts Section 717.90 of this part requires each held by the federal credit union. federal credit union that offers or maintains one or more covered accounts, as defined in III. Detecting Red Flags § 717.90(b)(3) of this part, to develop and pro- The Program’s policies and procedures vide for the continued administration of a should address the detection of Red Flags in written Program to detect, prevent, and connection with the opening of covered ac- mitigate identity theft in connection with counts and existing covered accounts, such the opening of a covered account or any ex- as by: isting covered account. These guidelines are (a) Obtaining identifying information intended to assist federal credit unions in about, and verifying the identity of, a person the formulation and maintenance of a Pro- opening a covered account, for example, gram that satisfies the requirements of using the policies and procedures regarding § 717.90 of this part. identification and verification set forth in the Customer Identification Program rules I. The Program implementing 31 U.S.C. 5318(l) (31 CFR In designing its Program, a federal credit 103.121); and union may incorporate, as appropriate, its (b) Authenticating members, monitoring existing policies, procedures, and other ar- transactions, and verifying the validity of rangements that control reasonably foresee- change of address requests, in the case of ex- able risks to members or to the safety and isting covered accounts.

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IV. Preventing and Mitigating Identity Theft (3) Approving material changes to the Pro- gram as necessary to address changing iden- The Program’s policies and procedures should provide for appropriate responses to tity theft risks. the Red Flags the federal credit union has (b) Reports. (1) In general. Staff of the fed- detected that are commensurate with the de- eral credit union responsible for develop- gree of risk posed. In determining an appro- ment, implementation, and administration priate response, a federal credit union should of its Program should report to the board of consider aggravating factors that may directors, an appropriate committee of the heighten the risk of identity theft, such as a board, or a designated employee at the level data security incident that results in unau- of senior management, at least annually, on thorized access to a member’s account compliance by the federal credit union with records held by the federal credit union or a § 717.90 of this part. third party, or notice that a member has (2) Contents of report. The report should ad- provided information related to a covered ac- dress material matters related to the Pro- count held by the federal credit union to gram and evaluate issues such as: the effec- someone fraudulently claiming to represent tiveness of the policies and procedures of the the federal credit union or to a fraudulent federal credit union in addressing the risk of website. Appropriate responses may include identity theft in connection with the open- the following: ing of covered accounts and with respect to (a) Monitoring a covered account for evi- existing covered accounts; service provider dence of identity theft; arrangements; significant incidents involv- (b) Contacting the member; ing identity theft and management’s re- (c) Changing any passwords, security sponse; and recommendations for material codes, or other security devices that permit changes to the Program. access to a covered account; (c) Oversight of service provider arrange- (d) Reopening a covered account with a ments. Whenever a federal credit union en- new account number; gages a service provider to perform an activ- (e) Not opening a new covered account; ity in connection with one or more covered (f) Closing an existing covered account; accounts the federal credit union should (g) Not attempting to collect on a covered take steps to ensure that the activity of the account or not selling a covered account to service provider is conducted in accordance a debt collector; with reasonable policies and procedures de- (h) Notifying law enforcement; or signed to detect, prevent, and mitigate the (i) Determining that no response is war- risk of identity theft. For example, a federal ranted under the particular circumstances. credit union could require the service pro- V. Updating the Program vider by contract to have policies and procedures to detect relevant Red Flags that may Federal credit unions should update the arise in the performance of the service pro- Program (including the Red Flags deter- vider’s activities, and either report the Red mined to be relevant) periodically, to reflect Flags to the federal credit union, or to take changes in risks to members or to the safety appropriate steps to prevent or mitigate and soundness of the federal credit union identity theft. from identity theft, based on factors such as: (a) The experiences of the federal credit VII. Other Applicable Legal Requirements union with identity theft; (b) Changes in methods of identity theft; Federal credit unions should be mindful of (c) Changes in methods to detect, prevent, other related legal requirements that may be and mitigate identity theft; applicable, such as: (d) Changes in the types of accounts that (a) Filing a Suspicious Activity Report the federal credit union offers or maintains; under 31 U.S.C. 5318(g) and 12 CFR 748.1(c); and (b) Implementing any requirements under (e) Changes in the business arrangements 15 U.S.C. 1681c–1(h) regarding the cir- of the federal credit union, including merg- cumstances under which credit may be ex- ers, acquisitions, alliances, joint ventures, tended when the federal credit union detects and service provider arrangements. a fraud or active duty alert; (c) Implementing any requirements for fur- VI. Methods for Administering the Program nishers of information to consumer reporting (a) Oversight of Program. Oversight by the agencies under 15 U.S.C. 1681s–2, for example, board of directors, an appropriate committee to correct or update inaccurate or incom- of the board, or a designated employee at the plete information, and to not report informa- level of senior management should include: tion that the furnisher has reasonable cause (1) Assigning specific responsibility for the to believe is inaccurate; and Program’s implementation; (d) Complying with the prohibitions in 15 (2) Reviewing reports prepared by staff re- U.S.C. 1681m on the sale, transfer, and place- garding compliance by the federal credit ment for collection of certain debts resulting union with § 717.90 of this part; and from identity theft.

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Supplement A to Appendix J 11. Personal identifying information provided by the member is not consistent with In addition to incorporating Red Flags other personal identifying information pro- from the sources recommended in section vided by the member. For example, there is II.b. of the Guidelines in appendix J of this a lack of correlation between the SSN range part, each federal credit union may consider and date of birth. incorporating into its Program, whether singly or in combination, Red Flags from the 12. Personal identifying information pro- following illustrative examples in connec- vided is associated with known fraudulent tion with covered accounts: activity as indicated by internal or third- party sources used by the federal credit Alerts, Notifications or Warnings From a union. For example: Consumer Reporting Agency a. The address on an application is the same as the address provided on a fraudulent 1. A fraud or active duty alert is included application; or with a consumer report. b. The phone number on an application is 2. A consumer reporting agency provides a the same as the number provided on a fraud- notice of credit freeze in response to a re- ulent application. quest for a consumer report. 13. Personal identifying information pro- 3. A consumer reporting agency provides a vided is of a type commonly associated with notice of address discrepancy, as defined in fraudulent activity as indicated by internal § 717.82(b) of this part. or third-party sources used by the federal 4. A consumer report indicates a pattern of credit union. For example: activity that is inconsistent with the history a. The address on an application is ficti- and usual pattern of activity of an applicant tious, a mail drop, or prison; or or member, such as: a. A recent and significant increase in the b. The phone number is invalid, or is asso- volume of inquiries; ciated with a pager or answering service. b. An unusual number of recently estab- 14. The SSN provided is the same as that lished credit relationships; submitted by other persons opening an ac- c. A material change in the use of credit, count or other members. especially with respect to recently estab- 15. The address or telephone number pro- lished credit relationships; or vided is the same as or similar to the address d. An account that was closed for cause or or telephone number submitted by an unusu- identified for abuse of account privileges by ally large number of other persons opening a financial institution or creditor. accounts or by other members. 16. The person opening the covered account Suspicious Documents or the member fails to provide all required personal identifying information on an appli- 5. Documents provided for identification cation or in response to notification that the appear to have been altered or forged. application is incomplete. 6. The photograph or physical description on the identification is not consistent with 17. Personal identifying information pro- the appearance of the applicant or member vided is not consistent with personal identi- presenting the identification. fying information that is on file with the 7. Other information on the identification federal credit union. is not consistent with information provided 18. For federal credit unions that use chal- by the person opening a new covered account lenge questions, the person opening the cov- or member presenting the identification. ered account or the member cannot provide 8. Other information on the identification authenticating information beyond that is not consistent with readily accessible in- which generally would be available from a formation that is on file with the federal wallet or consumer report. credit union, such as a signature card or a Unusual Use of, or Suspicious Activity Related recent check. to, the Covered Account 9. An application appears to have been altered or forged, or gives the appearance of 19. Shortly following the notice of a change having been destroyed and reassembled. of address for a covered account, the institution or creditor receives a request for a new, Suspicious Personal Identifying Information additional, or replacement card or a cell 10. Personal identifying information pro- phone, or for the addition of authorized users vided is inconsistent when compared against on the account. external information sources used by the fed- 20. A new revolving credit account is used eral credit union. For example: in a manner commonly associated with a. The address does not match any address known patterns of fraud. For example: in the consumer report; or a. The majority of available credit is used b. The Social Security Number (SSN) has for cash advances or merchandise that is eas- not been issued, or is listed on the Social Se- ily convertible to cash (e.g., electronics curity Administration’s Death Master File. equipment or jewelry); or

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b. The member fails to make the first pay- 721.6 May a credit union derive income from ment or makes an initial payment but no activities approved under this part? subsequent payments. 721.7 What are the potential conflicts of in- 21. A covered account is used in a manner terest for officials and employees when that is not consistent with established pat- credit unions engage in activities ap- terns of activity on the account. There is, for proved under this part? example: AUTHORITY: 12 U.S.C. 1757(17), 1766 and 1789. a. Nonpayment when there is no history of late or missed payments; SOURCE: 66 FR 40857, Aug. 6, 2001, unless b. A material increase in the use of avail- otherwise noted. able credit; c. A material change in purchasing or § 721.1 What does this part cover? spending patterns; This part authorizes a federal credit d. A material change in electronic fund union (you) to engage in activities in- transfer patterns in connection with a deposit account; or cidental to your business as set out in e. A material change in telephone call pat- this part. This part also describes how terns in connection with a cellular phone ac- interested parties may request a legal count. opinion on whether an activity is with- 22. A covered account that has been inac- in a federal credit union’s incidental tive for a reasonably lengthy period of time powers or apply to add new activities is used (taking into consideration the type of or categories to the regulation. An ac- account, the expected pattern of usage and tivity approved in a legal opinion to an other relevant factors). interested party or as a result of an ap- 23. Mail sent to the member is returned re- peatedly as undeliverable although trans- plication by an interested party to add actions continue to be conducted in connec- new activities or categories is recog- tion with the member’s covered account. nized as an incidental powers activity 24. The federal credit union is notified that for all federal credit unions. This part the member is not receiving paper account does not apply to the activities of cor- statements. porate credit unions. 25. The federal credit union is notified of unauthorized charges or transactions in con- § 721.2 What is an incidental powers nection with a member’s covered account. activity? Notice From Members, Victims of Identity Theft, An incidental powers activity is one Law Enforcement Authorities, or Other Per- that is necessary or requisite to enable sons Regarding Possible Identity Theft in you to carry on effectively the business Connection With Covered Accounts Held by for which you are incorporated. An ac- the Federal Credit Union tivity meets the definition of an inci- 26. The federal credit union is notified by a dental power activity if the activity: member, a victim of identity theft, a law en- (a) Is convenient or useful in car- forcement authority, or any other person rying out the mission or business of that it has opened a fraudulent account for a credit unions consistent with the Fed- person engaged in identity theft. eral Credit Union Act; [72 FR 63769, Nov. 9, 2007, as amended at 74 (b) Is the functional equivalent or FR 22644, May 14, 2009] logical outgrowth of activities that are part of the mission or business of cred- PART 721—INCIDENTAL POWERS it unions; and (c) Involves risks similar in nature to Sec. those already assumed as part of the 721.1 What does this part cover? business of credit unions. 721.2 What is an incidental powers activity? 721.3 What categories of activities are § 721.3 What categories of activities preapproved as incidental powers nec- are preapproved as incidental pow- essary or requisite to carry on a credit ers necessary or requisite to carry union’s business? on a credit union’s business? 721.4 How may a credit union apply to en- The categories of activities in this gage in an activity that is not section are preapproved as incidental preapproved as within a credit union’s incidental powers? to carrying on your business under 721.5 What limitations apply to a credit § 721.2. The examples of incidental pow- union engaging in activities approved ers activities within each category are under this part? provided in this section as illustrations

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of activities permissible under the par- garding estate and retirement plan- ticular category, not as an exclusive or ning, investment counseling, and debt exhaustive list. and budget counseling. (a) Certification services. Certification (f) Finder activities. Finder activities services are services whereby you at- are activities in which you introduce test or authenticate a fact for your or otherwise bring together outside members’ use. Certification services vendors with your members so that the may include such services as notary two parties may negotiate and consum- services, signature guarantees, certifi- mate transactions and include vendors cation of electronic signatures, and of non-financial products, vendors that share draft certifications. are other financial institutions, and (b) Correspondent services. Cor- vendors of financial products such as respondent services are services you insurance and securities. Finder activi- provide to other credit unions includ- ties may include endorsing a product ing foreign credit unions that you are or service, negotiating group discounts authorized to perform for your mem- on behalf of your members, offering bers or as part of your operation. These third party products and services to services may include loan processing, members through the sale of adver- loan servicing, member check cashing tising space on your Web site, account services, disbursing share withdrawals statements and receipts, and selling and loan proceeds, cashing and selling statistical or consumer financial infor- money orders, performing internal au- mation to outside vendors to facilitate dits, and automated teller machine de- the sale of their products to your mem- posit services. bers. You may perform administrative (c) Electronic financial services. Elec- functions on behalf of vendors to facili- tronic financial services are any serv- tate transactions between your mem- ices, products, functions, or activities bers and another institution. that you are otherwise authorized to (g) Loan-related products. Loan-re- perform, provide, or deliver to your lated products are the products, activi- members but performed through elec- ties or services you provide to your tronic means. Electronic services may members in a lending transaction that include automated teller machines, electronic fund transfers, online trans- protect you against credit-related risks action processing through a web site, or are otherwise incidental to your web site hosting services, account ag- lending authority. These products or gregation services, and Internet access activities may include debt cancella- services to perform or deliver products tion agreements, debt suspension or services to members. agreements, letters of credit and (d) Excess capacity. Excess capacity is leases. the excess use or capacity remaining in (h) Marketing activities. Marketing ac- facilities, equipment, or services that: tivities are the activities or means you You properly invested in or estab- use to promote membership in your lished, in good faith, with the intent of credit union and the products and serv- serving your members; and you reason- ices you offer to your members. Mar- ably anticipate will be taken up by the keting activities may include adver- future expansion of services to your tising and other promotional activities members. You may sell or lease the ex- such as raffles, membership referral cess capacity in facilities, equipment drives, and the purchase or use of ad- or services such as office space, em- vertising. ployees and data processing. (i) Monetary instrument services. Mone- (e) Financial counseling services. Fi- tary instrument services are services nancial counseling services means ad- that enable your members to purchase, vice, guidance or services that you sell, or exchange various currencies. offer to your members to promote These services may include the sale thrift or to otherwise assist members and exchange of foreign currency and on financial matters. Financial coun- U.S. commemorative coins. You may seling services may include income tax also use accounts you have in foreign preparation service, electronic tax fil- financial institutions to facilitate your ing for your members, counseling re- members’ transfer and negotiation of

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checks denominated in foreign cur- tivity, your explanation, consistent rency or engage in monetary transfer with the test provided in paragraph (c) services for your members. of this section, of why this activity is (j) Operational programs. Operational within your incidental powers, your programs are programs that you estab- plan for implementing the proposed ac- lish within your business to establish tivity, any state licenses you must ob- or deliver products and services that tain to conduct the activity, and any enhance member service and promote other information necessary to de- safe and sound operation. Operational scribe the proposed activity ade- programs may include electronic funds quately. Before you engage in the peti- transfers, remote tellers, point of pur- tion process you should seek an advi- chase terminals, debit cards, payroll sory opinion from NCUA’s Office of deduction, payroll services, pre-author- General Counsel, as to whether a pro- ized member transactions, direct deposed activity fits into one of the au- posit, check clearing services, savings thorized categories or is otherwise bond purchases and redemptions, tax within your incidental powers without payment services, wire transfers, safe filing a petition to amend the regula- deposit boxes, loan collection services, tion. and service fees. (b) Processing of application. Your ap- (k) Stored value products. Stored value plication must be filed with the Sec- products are alternate media to cur- retary of the NCUA Board. NCUA will rency in which you transfer monetary review your application for complete- value to the product and create a me- ness and will notify you whether addi- dium of exchange for your members’ tional information is required or use. Examples of stored value products whether the activity requested is per- include stored value cards, public missible under one of the categories transportation tickets, event and at- listed in § 721.3. If the activity falls traction tickets, gift certificates, pre- within a category provided in § 721.3, paid phone cards, postage stamps, elec- NCUA will notify you that the activity tronic benefits transfer script, and is permissible and treat the application similar media. as withdrawn. If the activity does not (l) Trustee or custodial services. Trust- fall within a category provided in ee or custodial services are services in § 721.3, NCUA staff will consider wheth- which you are authorized to act under er the proposed activity is legally per- any written trust instrument or custo- missible. Upon a recommendation by dial agreement created or organized in NCUA staff that the activity is within the United States and forming part of a credit union’s incidental powers, the a tax-advantaged savings plan, as au- NCUA Board may amend § 721.3 and will thorized under the Internal Revenue Code. These services may include act- request public comment on the estab- ing as a trustee or custodian for mem- lishment of a new category of activi- ber retirement, education and health ties within § 721.3. If the activity pro- savings accounts. posed in your application fails to meet the criteria established in paragraph [66 FR 40857, Aug. 6, 2001, as amended at 69 (c) of this section, NCUA will notify FR 45238, July 29, 2004; 73 FR 62856, Oct. 22, you within a reasonable period of time. 2008] (c) Decision on application. In deter- § 721.4 How may a credit union apply mining whether an activity is author- to engage in an activity that is not ized as an appropriate exercise of a fed- preapproved as within a credit eral credit union’s incidental powers, union’s incidental powers? the Board will consider: (a) Application contents. To engage in (1) Whether the activity is conven- an activity that may be within an ient or useful in carrying out the mis- FCU’s incidental powers but that does sion or business of credit unions con- not fall within a preapproved category sistent with the Act; listed in § 721.3, you may submit an ap- (2) Whether the activity is the func- plication by certified mail, return re- tional equivalent or logical outgrowth ceipt requested, to the NCUA Board. of activities that are part of the mis- Your application must describe the ac- sion or business of credit unions; and

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(3) Whether the activity involves compliance with such policies and con- risks similar in nature to those already trols at least annually; and assumed as part of the business of cred- (4) Payment, by a person other than it unions. you, of any compensation or benefit to an employee, other than a senior man- § 721.5 What limitations apply to a agement employee or paid official, in credit union engaging in activities connection with an activity authorized approved under this part? by this part, provided that your board You must comply with any applica- of directors establishes written policies ble NCUA regulations, policies, and and internal controls regarding third- legal opinions, as well as applicable party compensation and determines state and federal law, if an activity au- that the employee’s involvement does thorized under this part is otherwise not present a conflict of interest. regulated or conditioned. (c) Business associates and family members. All transactions with business as- § 721.6 May a credit union derive in- sociates or family members not specifi- come from activities approved cally prohibited by paragraph (a) of under this part? this section must be conducted at You may earn income for those ac- arm’s length and in the interest of the tivities determined to be incidental to credit union. your business. (d) Definitions. For purposes of this part, the following definitions apply. § 721.7 What are the potential conflicts (1) Senior management employee means of interest for officials and employees when credit unions engage in your chief executive officer (typically, activities approved under this part? this individual holds the title of Presi- dent or Treasurer/Manager), any assist- (a) Conflicts. No official, employee, or ant chief executive officers (e.g. Assist- their immediate family member may ant President, Vice President, or As- receive any compensation or benefit, sistant Treasurer/Manager), and the directly or indirectly, in connection chief financial officer (Comptroller). with your engagement in an activity (2) Official means any member of authorized under this part, except as your board of directors, credit com- otherwise provided in paragraph (b) of mittee or supervisory committee. this section. This section does not (3) Immediate family member means a apply if a conflicts of interest provi- spouse or other family member living sion within another section of this in the same household. chapter applies to a particular activity; in such case, the more specific conflicts of interest provision controls. PART 722—APPRAISALS For example: An official or employee that refers loan-related products of- Sec. 722.1 Authority, purpose, and scope. fered by a third-party to a member, in 722.2 Definitions. connection with a loan made by you, is 722.3 Appraisals required; transactions re- subject to the conflicts of interest pro- quiring a State certified or licensed ap- vision in § 701.21(c)(8) of this chapter. praiser. (b) Permissible payments. This section 722.4 Minimum appraisal standards. does not prohibit: 722.5 Appraiser independence. (1) Payment, by you, of salary to 722.6 Professional association membership; competency. your employees; 722.7 Enforcement. (2) Payment, by you, of an incentive or bonus to an employee based on your AUTHORITY: 12 U.S.C. 1766, 1789 and 3339. overall financial performance; SOURCE: 55 FR 30207, July 25, 1990, unless (3) Payment, by you, of an incentive otherwise noted. or bonus to an employee, other than a senior management employee or paid § 722.1 Authority, purpose, and scope. official, in connection with an activity (a) Authority. Part 722 is issued by the authorized by this part, provided that National Credit Union Administration your board of directors establishes (‘‘NCUA’’) under title XI of the Finan- written policies and internal controls cial Institutions Reform, Recovery, for the incentive program and monitors and Enforcement Act of 1989

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(‘‘FIRREA’’) (Pub. L. 101–73, 103 Stat. action entered into on or after August 183, 1989) and 12 U.S.C. 1757 and 1766. 9, 1990 that: (b) Purpose and scope. (1) Title XI pro- (1) The National Credit Union Admin- vides protection for federal financial istration, or any federally insured cred- and public policy interests in real es- it union, engages in or contracts for; tate-related transactions by requiring and real estate appraisals used in connec- (2) Requires the services of an ap- tion with federally related transactions praiser. to be performed in writing, in accord- (f) Market value means the most prob- ance with uniform standards, by ap- able price which a property should praisers whose competency has been bring in a competitive and open mar- demonstrated and whose professional ket under all conditions requisite to a conduct will be subject to effective su- fair sale, the buyer and seller each act- pervision. This part implements the re- ing prudently and knowledgeably and quirements of title XI and applies to assuming the price is not affected by all federally related transactions en- undue stimulus. Implicit in this defini- tered into by the National Credit tion is the consummation of a sale as Union Administration or by federally of a specified date and the passing of insured credit unions (‘‘regulated insti- title from seller to buyer under condi- tutions’’). tions whereby: (2) This part: (i) Identifies which real (1) Buyer and seller are typically mo- estate-related financial transactions tivated; require the services of an appraiser; (2) Both parties are well informed or (ii) Prescribes which categories of well advised; and acting in what they federally related transactions shall be consider their own best interests; appraised by a state-certified appraiser (3) A reasonable time is allowed for and which by a state-licensed ap- exposure in the open market; praiser; and (4) Payment is made in terms of cash (iii) Prescribes minimum standards in U.S. dollars or in terms of financial for the performance of real estate ap- arrangements comparable thereto; and praisals in connection with federally (5) The price represents the normal related transactions under the jurisdic- consideration for the property sold un- tion of the National Credit Union Ad- affected by special or creative financ- ministration. ing or sales concessions granted by anyone associated with the sale. § 722.2 Definitions. (g) Real estate or real property means (a) Appraisal means a written state- an identified parcel or tract of land, in- ment independently and impartially cluding easements, rights of way, undi- prepared by a qualified appraiser set- vided or future interests and similar ting forth an opinion as to the market rights in a parcel or tract of land, but value of an adequately-described prop- does not include mineral rights, timber erty as of a specific date(s), supported rights, and growing crops, water rights by the presentation and analysis of rel- and similar interests severable from evant market information. the land when the transaction does not (b) Appraisal Foundation means the involve the associated parcel or tract Appraisal Foundation established on of land. November 30, 1987, as a not-for-profit (h) Real estate-related financial trans- corporation under the laws of Illinois. action means any transaction involv- (c) Appraisal Subcommittee means the ing: Appraisal Subcommittee of the Federal (1) The sale, lease, purchase, invest- Financial Institutions Examination ment in or exchange of real property, Council. including interests in property, or the (d) Complex 1- to 4-family residential financing thereof; or property appraisal means one in which (2) The refinancing of real property the property to be appraised, the form or interests in real property; or of ownership or market conditions are (3) The use of real property or inter- atypical. ests in property as security for a loan (e) Federally related transaction means or investment, including mortgage- any real estate-related financial trans- backed securities.

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(i) State-certified appraiser means any culated with respect to each such loan individual who has satisfied the re- or interest in real property. quirements for certification in a state [55 FR 30207, July 25, 1990, as amended at 57 or territory whose criteria for certifi- FR 28998, June 30, 1992] cation as a real estate appraiser currently meet the minimum criteria for § 722.3 Appraisals required; trans- certification issued by the Appraiser actions requiring a State certified Qualification Board of the Appraisal or licensed appraiser. Foundation. No individual shall be a (a) Appraisals required. An appraisal state-certified appraiser unless such in- performed by a State certified or li- dividual has achieved a passing grade censed appraiser is required for all real upon a suitable examination adminis- estate-related financial transactions tered by a state or territory that is except those in which: consistent with and equivalent to the (1) The transaction value is $250,000 Uniform State Certification Examina- or less; tion issued or endorsed by the Ap- (2) A lien on real property has been praiser Qualification Board. In addi- taken as collateral through an abun- tion, the Appraisal Subcommittee dance of caution and where the terms must not have issued a finding that the of the transaction as a consequence policies, practices, or procedures of a have not been made more favorable state or territory are inconsistent with than they would have been in the ab- title XI of FIRREA. The National Cred- sence of a lien; it Union Administration may, from (3) A lien on real estate has been time to time, impose additional quali- taken for purposes other than the real fication criteria for certified appraisers estate’s value; performing appraisals in connection (4) A lease of real estate is entered with federally related transactions into, unless the lease is the economic within its jurisdiction. equivalent of a purchase or sale of the (j) State-licensed appraiser means any leased real estate; individual who has satisfied the re- (5) The transaction involves an exist- quirements for licensing in a state or ing extension of credit at the credit territory where the licensing proce- union, provided that: dures comply with title XI of FIRREA (i) There is no advancement of new and where the Appraisal Subcommittee monies, other than funds necessary to has not issued a finding that the poli- cover reasonable closing costs; and cies, practices, or procedures of the (ii) There has been no obvious and State or territory are inconsistent material change in market conditions with title XI. The NCUA may, from or physical aspects of the property that time to time, impose additional quali- threatens the adequacy of the credit fication criteria for licensed appraisers union’s real estate collateral protec- performing appraisals in connection tion after the transaction; with federally related transactions (6) The transaction involves the pur- within its jurisdiction. chase, sale, investment in, exchange of, (k) Tract development means a project or extension of credit secured by, a of five units or more that is con- loan or interest in a loan, pooled loans, structed or is to be constructed as a or interests in real property, including single development. mortgage-backed securities, and each (l) Transaction value means: (1) For loan or interest in a loan, pooled loan, loans or other extensions of credit, the or real property interest met the re- amount of the loan or extension of quirements of this regulation, if appli- credit; and cable, at the time of origination; (2) For sales, leases, purchases, and (7) The transaction is wholly or par- investments in or exchanges of real tially insured or guaranteed by a property, the market value of the real United States government agency or property interest involved; and United States government sponsored (3) For the pooling of loans or interagency; ests in real property for resale or pur- (8) The transaction either: chase, the amount of the loan or mar- (i) Qualifies for sale to a United ket value of the real property cal- States government agency or United

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States government sponsored agency; actions not requiring the services of a or state-certified appraiser shall be pre- (ii) Involves a residential real estate pared by either a state-certified ap- transaction in which the appraisal con- praiser or a state-licensed appraiser. forms to the Federal National Mort- (d) Valuation requirement. Secured gage Association or Federal Home transactions exempted from appraisal Loan Mortgage Corporation appraisal requirements pursuant to paragraphs standards applicable to that category (a)(1) and (a)(5) of this section and not of real estate; or otherwise exempted from this regula- (9) The regional director has granted tion or fully insured shall be supported a waiver from the appraisal require- by a written estimate of market value, ment for a category of loans meeting as defined in this regulation, performed the definition of a member business by an individual having no direct or in- loan. direct interest in the property, and (b) Transactions requiring a State-cer- qualified and experienced to perform tified appraiser. (1) (All transactions of $1,000,000 or more) All federally related such estimates of value for the type transactions having a transaction and amount of credit being considered. value of $1,000,000 or more shall require (e) Appraisals to address safety and an appraisal prepared by a state-cer- soundness concerns. NCUA reserves the tified appraiser. right to require an appraisal under this (2) (Nonresidential transactions) All subpart whenever the agency believes federally related transactions having a it is necessary to address safety and transaction value of more than $250,000, soundness concerns. other than those involving appraisals [55 FR 30207, July 25, 1990, as amended at 60 of 1- to 4-family residential properties, FR 51894, Oct. 4, 1995; 63 FR 51799, Sept. 29, shall require an appraisal prepared by a 1998; 67 FR 67102, Nov. 4, 2002; 72 FR 30247, state-certified appraiser. May 31, 2007] (3) (Complex residential transactions of $250,000 or more) All complex 1- to 4- § 722.4 Minimum appraisal standards. family residential property appraisals For federally related transactions, rendered in connection with federally all appraisals shall, at a minimum: related transactions shall require a state-certified appraiser if the trans- (a) Conform to generally accepted ap- action value is $250,000 or more. A regu- praisal standards as evidenced by the lated institution may presume that ap- Uniform Standards of Professional Ap- praisals of 1- to 4-family residential praisal Practice (USPAP) promulgated properties are not complex unless the by the Appraisal Standards Board of institution has readily available infor- the Appraisal Foundation, 1029 mation that a given appraisal will be Vermont Ave., NW., Washington, DC complex. The regulated institution 20005; shall be responsible for making the (b) Be written and contain sufficient final determination of whether the ap- information and analysis to support praisal is complex. If, during the course the institution’s decision to engage in of the appraisal, a licensed appraiser the transaction; identifies factors that would result in (c) Analyze and report appropriate the property, form of ownership, or deductions and discounts for proposed market conditions being considered construction or renovation, partially atypical, then either: leased buildings, non-market lease (i) The regulated institution may ask terms, and tract developments with the licensed appraiser to complete the unsold units; appraisal and have a certified appraiser (d) Be based upon the definition of approve and cosign the appraisal; or market value as set forth in § 722.2(f); (ii) The institution may engage a cer- and tified appraiser to complete the ap- (e) Be performed by State licensed or praisal. certified appraisers in accordance with (c) Transactions requiring either a requirements set forth in this subpart. State-certified or -licensed appraiser. All appraisals for federally related trans- [60 FR 51894, Oct. 4, 1995]

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§ 722.5 Appraiser independence. state-certified or -licensed appraiser may not be considered competent sole- (a) Staff appraiser. If an appraisal is ly by virtue of being certified or li- prepared by a staff appraiser, that ap- censed. Any determination of com- praiser must be independent of the petency shall be based upon the indi- lending, investment, and collection vidual’s experience and educational functions and not involved, except as background as they relate to the par- an appraiser, in the federally related ticular appraisal assignment for which transaction, and have no direct or indi- he or she is being considered. rect interest, financial or otherwise, in the property. If the only qualified per- § 722.7 Enforcement. sons available to perform an appraisal are involved in the lending, invest- Credit unions and institution-affili- ment, or collection functions of the ated parties, including staff appraisers credit union, the credit union shall and fee appraisers, may be subject to take appropriate steps to ensure that removal and/or prohibition orders, the appraisers exercise independent cease-and-desist orders, and the impo- judgment. Such steps include, but are sition of civil money penalties pursu- not limited to, prohibiting an indi- ant to section 1786 of the Federal Cred- vidual from performing an appraisal in it Union Act, or any other applicable connection with federally related law. transactions in which the appraiser is otherwise involved. PART 723—MEMBER BUSINESS (b) Fee Appraisers. (1) If an appraisal LOANS is prepared by a fee appraiser, the appraiser shall be engaged directly by the Sec. credit union or its agent and have no 723.1 What is a member business loan? direct or indirect interest, financial or 723.2 What are the prohibited activities? otherwise, in the property or the trans- 723.3 What are the requirements for con- action. struction and development lending? (2) A credit union also may accept an 723.4 What other regulations apply to mem- appraisal that was prepared by an ap- ber business lending? praiser engaged directly by another fi- 723.5 How do you implement a member business loan program? nancial services institution; if: 723.6 What must your member business loan (i) The appraiser has no direct or in- policy address? direct interest, financial or otherwise, 723.7 What are the collateral and security in the property or transaction; and requirements? (ii) The credit union determines that 723.8 How much may one member or a group the appraisal conforms to the require- of associated members borrow? ment of this regulation and is other- 723.9 [Reserved] wise acceptable. 723.10 What waivers are available? 723.11 How do you obtain a waiver? [55 FR 30207, July 25, 1990, as amended at 60 723.12 What will NCUA do with my waiver FR 51895, Oct. 4, 1995] request? 723.13 What options are available if the § 722.6 Professional association mem- NCUA Regional Director denies my waiv- bership; competency. er request, or a portion of it? (a) Membership in appraisal organiza- 723.14–723.15 [Reserved] tion. A state-certified appraiser or a 723.16 What is the aggregate member busi- state-licensed appraiser may not be ex- ness loan limit for a credit union? 723.17 Are there any exceptions to the ag- cluded from consideration for an as- gregate loan limit? signment for a federally related trans- 723.18 How do I obtain an exception? action solely by virtue of membership 723.19 What are the recordkeeping require- or lack of membership in any par- ments? ticular appraisal organization. 723.20 How can a state supervisory author- (b) Competency. All staff and fee ap- ity develop and enforce a member busi- praisers performing appraisals in con- ness loan regulation? nection with federally related trans- 723.21 Definitions. actions must be state-certified or -li- AUTHORITY: 12 U.S.C. 1756, 1757, 1757A, 1766, censed as appropriate. However, a 1785, 1789.

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SOURCE: 64 FR 28729, May 27, 1999, unless this chapter to the same extent as if otherwise noted. made directly by the credit union to its member. § 723.1 What is a member business (e) Purchases of nonmember loans and loan? nonmember loan participations. Any in- (a) General rule. A member business terest a credit union obtains in a non- loan includes any loan, line of credit, member loan, pursuant to § 701.22 or or letter of credit (including any un- part 742 of this chapter or other au- funded commitments) where the bor- thority, is treated the same as a mem- rower uses the proceeds for the fol- ber business loan for purposes of this lowing purposes: rule and the risk weighting standards (1) Commercial; under part 702 of this chapter, except (2) Corporate; that the effect of such interest on a (3) Other business investment prop- credit union’s aggregate member busi- erty or venture; or ness loan limit will be as set forth in (4) Agricultural. § 723.16(b) of this part. (b) Exceptions to the general rule. The following are not member business [64 FR 28729, May 27, 1999, as amended at 64 loans: FR 57365, Oct. 25, 1999; 68 FR 56551, Oct. 1, (1) A loan fully secured by a lien on 2003] a 1 to 4 family dwelling that is the § 723.2 What are the prohibited activi- member’s primary residence; ties? (2) A loan fully secured by shares in the credit union making the extension (a) Who is ineligible to receive a member of credit or deposits in other financial business loan? You may not grant a institutions; member business loan to the following: (3) Loan(s) to a member or an associ- (1) Your chief executive officer (typi- ated member which, when the net cally this individual holds the title of member business loan balances are President or Treasurer/Manager); added together, are equal to less than (2) Any assistant chief executive offi- $50,000; cers (e.g., Assistant President, Vice (4) A loan where a federal or state President, or Assistant Treasurer/Man- agency (or its political subdivision) ager); fully insures repayment, or fully guar- (3) Your chief financial officer antees repayment, or provides an ad- (Comptroller); or vance commitment to purchase in full; (4) Any associated member or imme- or diate family member of anyone listed (5) A loan granted by a corporate in paragraphs (a) (1) through (3) of this credit union to another credit union. section. (c) Loans to credit unions and credit (b) Equity agreements/joint ventures. union service organizations. This part You may not grant a member business does not apply to loans made by federal loan if any additional income received credit unions to credit unions and cred- by the credit union or senior manage- it union service organizations. This ment employees is tied to the profit or part does not apply to loans made by a sale of the business or commercial en- federally insured, state-chartered cred- deavor for which the loan is made. it union to credit unions and credit (c) Loans to compensated directors. A union service organizations if the cred- credit union may not grant a member it union’s supervisory authority deter- business loan to a compensated direc- mines that state law grants authority tor unless the board of directors ap- to lend to these entities other than the proves granting the loan and the com- general authority to grant loans to pensated director is recused from the members. decision making process. (d) Purchase of member loans and member loan participations. Any interest a § 723.3 What are the requirements for credit union obtains in a loan that was construction and development lend- made by another lender to the credit ing? union’s member is a member business Except as provided in § 723.4 or unless loan, for purposes of this rule and the your Regional Director grants a waiv- risk weighting standards of part 702 of er, loans granted for the construction

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or development of commercial or resi- federally insured State-chartered cred- dential property are subject to the fol- it unions are not required to comply lowing additional requirements. with the provisions of § 701.21(a) (a) The aggregate of the net member through (g) of this chapter. business loan balances for all construc- (b) If a federal credit union makes a tion and development loans must not member business loan as part of a exceed 15% of net worth. In deter- Small Business Administration guaran- mining the aggregate balances for pur- teed loan program with loan require- poses of this limitation, a credit union ments that are less restrictive than may exclude any loan made to finance those required by NCUA, then the fed- the construction of a single-family residence if a prospective homeowner has eral credit union may follow the loan contracted to purchase the property requirements of the relevant Small and may also exclude a loan to finance Business Administration guaranteed the construction of one single-family loan program to the extent they are residence per member-borrower or consistent with this part. A federally group of associated member-borrowers, insured State-chartered credit union irrespective of the existence of a con- that is subject to this part and makes tractual commitment from a prospec- a member business loan as part of a tive homeowner to purchase the prop- Small Business Administration guaran- erty. teed loan program with loan require- (b) The borrower must have a min- ments that are less restrictive than imum of 25% equity interest in the those required by NCUA may follow project being financed, the value of the loan requirements of the relevant which is determined by the market Small Business Administration guaran- value of the project at the time the teed loan program to the extent they loan is made, except that this require- are consistent with this part if its ment will not apply in the case of a state supervisory authority has deter- loan made to finance the construction mined that the credit union has au- of a single-family residence if a pro- thority to do so under State law. spective homeowner has contracted to (c) The collateral and security repurchase the property and in the case quirements of § 723.3 and § 723.7 do not of one loan to a member-borrower or group of associated member-borrowers apply to member business loans made to finance the construction of a single- as part of a Small Business Adminis- family residence, irrespective of the ex- tration guaranteed loan program. istence of a contractual commitment [69 FR 62565, Oct. 27, 2004] from a prospective homeowner to purchase the property. Instead, the collat- § 723.5 How do you implement a mem- eral requirements of § 723.7 will apply; ber business loan program? and (a) Generally. The board of directors (c) The funds may be released only must adopt specific business loan poli- after on-site, written inspections by cies and review them at least annually. qualified personnel and according to a preapproved draw schedule and any The board must also use the services of other conditions as set forth in the an individual with at least two years loan documentation. direct experience with the type of lending the credit union will be engaging [64 FR 28729, May 27, 1999, as amended at 68 in. The experience must provide the FR 56551, Oct. 1, 2003; 69 FR 62565, Oct. 27, 2004] credit union sufficient expertise given the complexity and risk exposure of § 723.4 What other regulations apply to the loans in which the credit union in- member business lending? tends to engage. Credit unions do not (a) The provisions of § 701.21(a) have to hire staff to meet the require- through (g) and part 702 of this chapter ments of this section but must ensure apply to member business loans grant- that the expertise is available. A credit ed by credit unions to the extent they union can meet the experience require- are consistent with this part. Except as ment through various approaches. For required by part 741 of this chapter, example, a credit union can use the

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services of a credit union service orga- volved in making and administering nization (CUSO), an employee of an- business loans; other credit union, an independent con- (g) A requirement to analyze and doc- tractor, or other third parties. How- ument the ability of the borrower to ever, the actual decision to grant a repay the loan consistent with appro- loan must reside with the credit union. priate underwriting and due diligence (b) Conflicts of Interest. Any third standards, which also addresses the party used by a credit union to meet need for periodic financial statements, the requirements of paragraph (a) of credit reports, and other data when this section must be independent from necessary to analyze future loans and the transaction and is prohibited from lines of credit, such as, borrower’s his- having a participation in the loan or an tory and experience, balance sheet, interest in the collateral securing the cash flow analysis, income statements, loan that the third party is responsible tax data, environmental impact assess- for reviewing, with the following ex- ment, and comparison with industry ceptions: averages, depending upon the loan pur- (1) The third party may provide a pose; service to the credit union related to (h) The collateral requirements must the transaction, such as loan servicing; include: (2) The third party may provide the (1) Loan-to-value ratios; requisite experience to the credit union (2) Determination of value; and purchase a loan or a participation (3) Determination of ownership; interest in a loan originated by the (4) Steps to secure various types of credit union that the third party re- collateral; and viewed; or (5) How often the credit union will re- (3) A credit union may use the serv- evaluate the value and marketability ices of a CUSO that otherwise meets of collateral; the requirements of paragraph (a) of (i) The interest rates and maturities this section even though the CUSO is of business loans; not independent from the transaction, (j) General loan procedures which in- provided the credit union has a con- clude: trolling financial interest in the CUSO (1) Loan monitoring; as determined under Generally Accept- (2) Servicing and follow-up; and ed Accounting Principles. (3) Collection; (k) Identification of those individuals [68 FR 56551, Oct. 1, 2003] prohibited from receiving member business loans. § 723.6 What must your member business loan policy address? [64 FR 28729, May 27, 1999, as amended at 68 FR 56551, Oct. 1, 2003] At a minimum, your policy must address the following: § 723.7 What are the collateral and se- (a) The types of business loans you curity requirements? will make; (a) Except as provided in § 723.3 or un- (b) Your trade area; less your Regional Director grants a (c) The maximum amount of your as- waiver, all member business loans, ex- sets, in relation to net worth, that you cept those made under paragraphs (c), will invest in secured and unsecured (d), and (e) of this section, must be se- business loans; cured by collateral as follows: (d) The maximum amount of your as- (1) The maximum loan-to-value ratio sets, in relation to net worth, that you for all liens must not exceed 80% unless will invest in a given category or type the value in excess of 80% is covered of business loan; through private mortgage insurance or (e) The maximum amount of your as- equivalent type of insurance, or in- sets, in relation to net worth, that you sured, guaranteed, or subject to ad- will loan to any one member or group vance commitment to purchase by an of associated members, subject to agency of the federal government, an § 723.7(c)(2) and § 723.8; agency of a state or any of its political (f) The qualifications and experience subdivisions, but in no case may the of personnel (minimum of 2 years) in- ratio exceed 95%;

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(2) A borrower may not substitute § 723.8 How much may one member or any insurance, guarantee, or advance a group of associated members bor- commitment to purchase by any agen- row? cy of the federal government, a state or Unless your Regional Director grants any political subdivision of such state a waiver for a higher amount, the ag- for the collateral requirements of this gregate amount of net member busi- paragraph. ness loan balances to any one member (b) Principals, other than a not for or group of associated members must profit organization as defined by the not exceed the greater of: Internal Revenue Service Code (26 (a) 15% of the credit union’s net U.S.C. 501) or those where the Regional worth; or Director grants a waiver, must provide (b) $100,000. their personal liability and guarantee. [68 FR 56552, Oct. 1, 2003] Federal credit unions and federally insured state-chartered credit unions § 723.9 [Reserved] that meet RegFlex standards, as determined pursuant to Part 742 of this § 723.10 What waivers are available? Chapter, are exempt from this require- You may seek a waiver for a category ment and may make their own deter- of loans in any of the following areas: mination whether to require the per- (a) Appraisal requirements under sonal liability and guarantee of prin- § 722.3; cipals. (b) Aggregate construction and devel- (c) You may make unsecured member opment loans limits under § 723.3(a); business loans under the following con- (c) Minimum borrower equity re- ditions: quirements for construction and devel- (1) You are a natural person credit opment loans under § 723.3(b); union that is well capitalized as de- (d) Loan-to-value ratio requirements fined by § 702.102(a)(1) of this chapter or for business loans under § 723.7(a); you are a corporate credit union that (e) Requirement for personal liability maintains a minimum capital ratio as and guarantee under § 723.7(b); required by § 704.3(d) of this chapter or (f) Maximum unsecured business a different ratio as permitted under loans to one member or group of asso- § 704.3(e) of this chapter; ciated members under § 723.7(c)(2); (2) The aggregate of the unsecured (g) Maximum aggregate unsecured outstanding member business loans to member business loan limit under any one member or group of associated § 723.7(c)(3); and members does not exceed the lesser of (h) Maximum aggregate net member $100,000 or 2.5% of your net worth; and business loan balance to any one mem- (3) The aggregate of all unsecured ber or group of associated members outstanding member business loans under § 723.8. does not exceed 10% of your net worth. [68 FR 56552, Oct. 1, 2003, as amended at 69 FR (d) You are exempt from the provi- 62565, Oct. 27, 2004] sions of paragraphs (a), (b), and (c) of this section with respect to credit card § 723.11 How do you obtain a waiver? line of credit programs offered to non- To obtain a waiver, a federal credit natural person members that are lim- union must submit a request to the Re- ited to routine purposes normally made gional Director (a corporate federal available under those programs. credit union submits the waiver re- (e) You may make vehicle loans quest to the Director of the Office of under this part without complying Corporate Credit Unions). A state char- with the loan-to-value ratios in this tered federally insured credit union section, provided that the vehicle is a must submit the request to its state car, van, pick-up truck, or sports util- supervisory authority. If the state su- ity vehicle and not part of a fleet of ve- pervisory authority approves the re- hicles. quest, the state regulator will forward [68 FR 56551, Oct. 1, 2003, as amended at 69 FR the request to the Regional Director 62565, Oct. 27, 2004; 70 FR 75722, Dec. 21, 2005; (or if appropriate the Director of the 72 FR 30247, May 31, 2007] Office of Corporate Credit Unions). A

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waiver is not effective until it is ap- § 723.13 What options are available if proved by the Regional Director (or in the NCUA Regional Director denies the case of a corporate federal credit my waiver request, or a portion of union the Director of the Office of Cor- it? porate Credit Unions). The waiver re- You may appeal the Regional Direc- quest must contain the following: tor’s (or the Director of the Office of (a) A copy of your business lending Corporate Credit Unions) decision in policy; writing to the NCUA Board. Your ap- (b) The higher limit sought (if appli- peal must include all information re- cable); quested in § 723.11 and why you disagree (c) An explanation of the need to with your Regional Director’s (or the raise the limit (if applicable); Office of Corporate Credit Union Direc- (d) Documentation supporting your tor’s) decision. ability to manage this activity; and §§ 723.14–723.15 [Reserved] (e) An analysis of the credit union’s prior experience making member busi- § 723.16 What is the aggregate member ness loans, including as a minimum: business loan limit for a credit (1) The history of loan losses and union? loan delinquency; (a) General. The aggregate limit on a (2) Volume and cyclical or seasonal credit union’s net member business patterns; loan balances is the lesser of 1.75 times (3) Diversification; the credit union’s net worth or 12.25% (4) Concentrations of credit to one of the credit union’s total assets. borrower or group of associated bor- Loans that are exempt from the defini- rowers in excess of 15% of net worth; tion of member business loans are not (5) Underwriting standards and prac- counted for the purpose of the aggre- tices; gate loan limit. (6) Types of loans grouped by purpose (b) Effect of nonmember loans and non- and collateral; and member participations. If a credit union (7) The qualifications of personnel re- holds any nonmember loans or non- sponsible for underwriting and admin- member loan participation interests istering member business loans. that would constitute a member business loan if made to a member, those § 723.12 What will NCUA do with my loans will affect the credit union’s ag- waiver request? gregate limit on net member business loan balances as follows: Your Regional Director (or the Direc- (1) The total of the credit union’s net tor of the Office of Corporate Credit member business loan balances and the Unions) will: nonmember loan balances must not ex- (a) Review the information you proceed the lesser of 1.75 times the credit vided in your request; union’s net worth or 12.25% of the cred- (b) Evaluate the level of risk to your it union’s total assets, unless the cred- credit union; it union has first received approval (c) Consider your credit union’s his- from the NCUA regional director. torical CAMEL composite and compo- (2) To request approval from the nent ratings when evaluating your re- NCUA regional director, a credit union quest; and must submit an application that: (d) Notify you whenever your waiver (i) Includes a current copy of the request is deemed complete. Notify you credit union’s member business loan of the action taken within 45 calendar policies; days of receiving a complete request (ii) Confirms that the credit union is from the federal credit union or the in compliance with all other aspects of state supervisory authority. If you do this rule; not receive notification within 45 cal- (iii) States the credit union’s pro- endar days of the date the complete re- posed limit on the total amount of non- quest was received by the regional of- member loans and participation inter- fice, the credit union may assume ap- ests that the credit union may acquire proval of the waiver request. if the application is granted; and

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(iv) Attests that the acquisition of loans, meaning that either member nonmember loans and participations is business loans comprise at least 25% of not being used, in conjunction with one the credit union’s outstanding loans or more other credit unions, to have (as evidenced in any call report filed the effect of trading member business between January 1995 and September loans that would otherwise exceed the 1998 or any equivalent documentation aggregate limit. including financial statements) or (3) A federal credit union must sub- member business loans comprise the mit its request for approval to the re- largest portion of the credit union’s gional director (a corporate federal loan portfolio (as evidenced in any call credit union submits its request to the report filed between January 1995 and Director of the Office of Corporate September 1998 or any equivalent docu- Credit Unions). A state chartered feder- mentation including financial state- ally insured credit union must submit ments). For example, if a credit union the request to its state supervisory au- makes 23% member business loans, 22% thority. If the state supervisory au- first mortgage loans, 22% new auto- thority approves the request, the state mobile loans, 20% credit card loans, regulator will forward the application and 13% total other real estate loans, and its decision to the regional direc- then the credit union meets this excep- tor (or if appropriate, the Director of tion. the Office of Corporate Credit Unions). An approved application is not effec- § 723.18 How do I obtain an exception? tive until it is approved by the regional director (or in the case of a corporate To obtain the exception, a federal federal credit union the Director of the credit union must submit documenta- Office of Corporate Credit Unions). The tion to the Regional Director, dem- regional director will issue a decision onstrating that it meets the criteria of within 30 days of receipt of a federal one of the exceptions. A state char- credit union’s completed application or tered federally insured credit union within 30 days of receipt of a completed must submit documentation to its application and the state supervisory state supervisory authority. The state authority’s approval for a state char- supervisory authority will forward its tered federally insured credit union. decision to NCUA. The exception does not expire unless revoked by the state [68 FR 56552, Oct. 1, 2003, as amended at 70 FR supervisory authority for a state char- 75722, Dec. 21, 2005] tered federally insured credit union or § 723.17 Are there any exceptions to the Regional Director for a federal the aggregate loan limit? credit union. If an exception request is There are three circumstances where denied for a federal credit union, it a credit union qualifies for an excep- may be appealed to the NCUA Board tion from the aggregate limit. Loans within 60 days of the denial by the Re- that are excepted from the definition gional Director. Until the NCUA Board of member business loans are not acts on the appeal, the credit union can counted for the purpose of the excep- continue to make new member busi- tions. The three exceptions are: ness loans. (a) Credit unions that have a low-income designation or participate in the § 723.19 What are the recordkeeping requirements? Community Development Financial In- stitutions program; You must separately identify mem- (b) Credit unions that were chartered ber business loans in your records and for the purpose of making member in the aggregate on your financial re- business loans and can provide docu- ports. mentary evidence (such evidence includes but is not limited to the original § 723.20 How can a state supervisory charter, original bylaws, original busi- authority develop and enforce a ness plan, original field of membership, member business loan regulation? board minutes and loan portfolio); (a) The NCUA Board may exempt fed- (c) Credit unions that have a history erally insured state chartered credit of primarily making member business unions in a given state from NCUA’s

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member business loan rule if NCUA ap- ready owned by the borrower that will proves the state’s rule for use for state convert the property to income pro- chartered federally insured credit ducing property or convert the use of unions. In making this determination, income producing property to a dif- the Board is guided by safety and ferent use from its use before the major soundness considerations and reviews renovation or development or is a whether the state regulation minimizes major expansion of its current use. the risk and accomplishes the overall Construction or development loan does objectives of NCUA’s member business not include loans to finance mainte- loan rule in this part. Specifically, the nance, repairs, or improvements to an Board will focus its review on: existing income producing property (1) The definition of a member busi- that do not change its use. Examples to ness loan; illustrate when a loan is or is not a (2) Loan to one borrower limits; construction or development loan fol- (3) Written loan policies; low. (4) Collateral and security requirements; Example 1. If a member borrows money to repair a roof on a barn on an existing farm- (5) Construction and development ing operation, this is a member business loan lending; and but is not a construction or development (6) Loans to senior management. loan. A construction or development loan (b) To receive NCUA’s approval of a does not include a loan for routine mainte- state’s member business loan rule, the nance of a borrower’s existing business or a state supervisory authority must sub- loan to enhance or expand a borrower’s exist- mit its rule to the NCUA regional of- ing business unless those renovations con- fice. After reviewing the rule, the re- vert the property to a different use or are so major as to be considered the equivalent of gion will forward the request to the converting the use of the property. NCUA Board for a final determination. Example 2. A loan to convert a movie the- (c) A state supervisory authority ater into a restaurant is a construction or that administers a state member busi- development loan. A loan to convert a large ness loans rule, approved by NCUA Victorian home used for residential purposes under §§ 723.20(a) and (b), may rescind into a six-room inn also would be a construc- its rule without NCUA approval. A tion or development loan. In both instances, state supervisory authority should no- the loans are for the purpose of converting the use of the properties. By contrast, a loan tify NCUA if it anticipates rescinding to repair the roof or replace the carpet and its rule to foster regulatory continuity wallpaper of an operating inn would not be a and cooperation. construction or development loan as it nei- [64 FR 28729, May 27, 1999, as amended at 69 ther converts the use of the property, nor is FR 27828, May 17, 2004; 70 FR 75722, Dec. 21, so major a renovation to be considered the 2005] equivalent of converting the use of the property. § 723.21 Definitions. Example 3. A loan to expand the parking lot of a small strip shopping center would not be For purposes of this part, the fol- a construction or development loan, but a lowing definitions apply: loan to renovate the small strip shopping Associated member is any member center into a mega-mall would be a construc- with a shared ownership, investment, tion or development loan as it would be or other pecuniary interest in a busi- viewed as a major renovation that converts ness or commercial endeavor with the the use of the property. Example 4. A hotel with a fair market value borrower. of $10 million borrows $1 million to build an Construction or development loan is a exercise facility in the hotel to enhance the financing arrangement for acquiring property. The loan amount is 10% of the fair property or rights to property, includ- market value of the property. This is not a ing land or structures, with the intent construction or development loan. It is a to convert it to income-producing prop- member business loan to improve or ren- erty such as residential housing for ovate an existing income producing prop- rental or sale; commercial use; indus- erty, but it is not so major a renovation as to be considered the equivalent of converting trial use; or similar uses. Construction the use of the property. In another scenario, or development loan includes a financ- a hotel with a fair market value of $10 mil- ing arrangement for the major renova- lion borrows $5 million to build a luxury tion or development of property al- health spa on the hotel grounds. The loan

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amount is 50% of the fair market value of PART 724—TRUSTEES AND the property. This is a construction or development loan, even if the use of the property CUSTODIANS OF CERTAIN TAX- has not been converted, as the renovation is ADVANTAGED SAVINGS PLANS so major as to be considered the equivalent of converting the use of the property. Sec. Immediate family member is a spouse or 724.1 Federal credit unions acting as trust- other family member living in the ees and custodians of certain tax-advantaged savings plans. same household. 724.2 Self-directed plans. Loan-to-value ratio is the aggregate 724.3 Appointment of successor trustee or amount of all sums borrowed including custodian. outstanding balances plus any unfunded commitment or line of credit AUTHORITY: 12 U.S.C. 1757, 1765, 1766 and from all sources on an item of collat- 1787. eral divided by the market value of the SOURCE: 55 FR 30211, July 25, 1990, unless collateral used to secure the loan. otherwise noted. Net member business loan balance means the outstanding loan balance § 724.1 Federal credit unions acting as plus any unfunded commitments, re- trustees and custodians of certain tax-advantaged savings plans. duced by any portion of the loan that is secured by shares in the credit A federal credit union is authorized union, or by shares or deposits in other to act as trustee or custodian, and may financial institutions, or by a lien on receive reasonable compensation for so the member’s primary residence, or in- acting, under any written trust instru- sured or guaranteed by any agency of ment or custodial agreement created or the federal government, a state or any organized in the United States and political subdivision of such state, or forming part of a tax-advantaged sav- subject to an advance commitment to ings plan which qualifies or qualified purchase by any agency of the federal for specific tax treatment under sec- government, a state or any political tions 223, 401(d), 408, 408A and 530 of the subdivision of such state, or sold as a Internal Revenue Code (26 U.S.C. 223, participation interest without recourse 401(d), 408, 408A and 530), for its mem- and qualifying for true sales account- bers or groups of its members, provided ing under generally accepted account- the funds of such plans are invested in ing principles. share accounts or share certificate ac- Net worth means the retained earn- counts of the Federal credit union. ings balance of the credit union at Federal credit unions located in a ter- quarter end as determined under gen- ritory, including the trust territories, erally accepted accounting principles. or a possession of the United States, or Retained earnings consists of undivided the Commonwealth of Puerto Rico, are earnings, regular reserves, and any also authorized to act as trustee or other appropriations designated by custodian for such plans, if authorized management or regulatory authorities. under sections 223, 401(d), 408, 408A and This means that only undivided earnings and appropriations of undivided 530 of the Internal Revenue Code as ap- earnings are included in net worth. For plied to the territory or possession low-income designated credit unions, under similar provisions of territorial net worth also includes secondary cap- law. All funds held in a trustee or cus- ital accounts that are uninsured and todial capacity must be maintained in subordinate to all other claims, includ- accordance with applicable laws and ing claims of creditors, shareholders rules and regulations as may be pro- and the NCUSIF. For any credit union, mulgated by the Secretary of Labor, net worth does not include the allow- the Secretary of the Treasury, or any ance for loan and lease losses account. other authority exercising jurisdiction over such trust or custodial accounts. [64 FR 28729, May 27, 1999, as amended at 68 The federal credit union shall maintain FR 56552, Oct. 1, 2003; 69 FR 27828, May 17, 2004; 70 FR 75722, Dec. 21, 2005; 73 FR 30478, individual records for each participant May 28, 2008] which show in detail all transactions

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relating to the funds of each partici- 725.6 Termination of membership. pant or beneficiary. 725.7 Special share accounts in federally chartered agent members. [55 FR 30211, July 25, 1990, as amended at 63 725.8–725.16 [Reserved] FR 14026, Mar. 24, 1998; 65 FR 10934, Mar. 1, 725.17 Applications for extensions of credit. 2000; 69 FR 45238, July 29, 2004] 725.18 Creditworthiness. 725.19 Collateral requirements. § 724.2 Self-directed plans. 725.20 Repayment, security and credit re- A federal credit union may facilitate porting agreements; other terms and transfers of plan funds to assets other conditions. 725.21 Modification of agreements. than share and share certificates of the 725.22 Advances to insurance organizations. credit union, provided the conditions of 725.23 Other advances. § 724.1 are met and the following additional conditions are met: AUTHORITY: Secs. 301–307 Federal Credit Union Act, 92 Stat. 3719–3722 (12 U.S.C. 1795– (a) All contributions of funds are ini- 1795f). tially made to a share or share certificate account in the Federal credit SOURCE: 44 FR 49437, Aug. 23, 1979, unless union; otherwise noted. (b) Any subsequent transfer of funds § 725.1 Scope. to other assets is solely at the direction of the member and the Federal This part contains the regulations credit union exercises no investment implementing the National Credit discretion and provides no investment Union Central Liquidity Facility Act, advice with respect to plan assets (i.e., subchapter III of the Federal Credit the credit union performs only custo- Union Act. The National Credit Union dial duties); and Administration Central Liquidity Fa- (c) The member is clearly notified of cility is a mixed-ownership Govern- the fact that National Credit Union ment corporation within the National Share Insurance Fund coverage is lim- Credit Union Administration. It is ited to funds held in share or share cer- managed by the National Credit Union tificate accounts of NCUSIF-insured Administration Board and is owned by credit unions. its member credit unions. The purpose of the Facility is to improve the gen- [55 FR 30211, July 25, 1990, as amended at 69 eral financial stability of credit unions FR 45239, July 29, 2004] by meeting their liquidity needs and § 724.3 Appointment of successor trust- thereby encourage savings, support ee or custodian. consumer and mortgage lending and Any plan operated pursuant to this provide basic financial resources to all part shall provide for the appointment segments of the economy. of a successor trustee or custodian by a § 725.2 Definitions. person, committee, corporation or organization other than the Federal cred- As used in this part: it union or any person acting in his ca- (a) Agent means an Agent member of pacity as a director, employee or agent the Facility. of the Federal credit union upon notice (b) Agent group means an Agent mem- from the Federal credit union or the ber of the Facility consisting of a Board that the Federal credit union is group of central credit unions, one of unwilling or unable to continue to act which is designated as the group’s as trustee or custodian. Agent group representative and authorized to transact business with the Fa- PART 725—NATIONAL CREDIT cility on behalf of the group or any member of the group. UNION ADMINISTRATION CEN- (c) Agent loan means an advance of TRAL LIQUIDITY FACILITY funds by an Agent to a member natural person credit union to meet liquidity Sec. needs which have been the basis for a 725.1 Scope. 725.2 Definitions. Facility advance. 725.3 Regular membership. (d) Central credit union means a Fed- 725.4 Agent membership. eral or state-chartered credit union 725.5 Capital stock. primarily serving other credit unions.

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A credit union is primarily serving 19(b) of the Federal Reserve Act (12 other credit unions when the total dol- U.S.C. 461(b)). lar amount of the shares and deposits (i) Liquidity needs means the needs of received from other credit unions plus credit unions primarily serving natural loans to other credit unions exceeds 50 persons for: percent of the total dollar amount of (1) Short-term adjustment credit all shares and deposits plus loans dur- available to assist in meeting tem- ing the qualifying period, as defined in porary requirements for funds or to paragraph (o) of this section. cushion more persistent outflows of (e) Facility or Central Liquidity Facil- funds pending an orderly adjustment of ity means the National Credit Union credit union assets and liabilities; Administration Central Liquidity Fa- (2) Seasonal credit available for cility. longer periods to assist in meeting sea- (f) Facility advance means an advance sonal needs for funds arising from a of funds by the Facility to a Regular or combination of expected patterns of Agent member. movement in share and deposit ac- (g) Facility lending officer means any counts and loans; and employee of the Facility or the Na- (3) Protracted adjustment credit tional Credit Union Administration available in the event of unusual or who has been designated by the NCUA emergency circumstances of a longer Board as a Facility lending officer. term nature resulting from national, (h) Liquid assets means the following regional or local difficulties. unpledged assets: (j) Management policies means policies of a credit union with respect to mem- (1) Cash on hand; bership, shares, deposits, dividends, in- (2) Share or deposit accounts with re- terest rates, lending, investing, bor- maining maturities of one year or less rowing, safeguarding of assets, hiring, maintained in central credit unions or training and supervision of employees, institutions insured by the Federal De- and general operating and control prac- posit Insurance Corporation or Federal tices and procedures. Savings and Loan Insurance Corpora- (k) Member means a Regular or Agent tion; member of the Facility, unless the con- (3) Investments in obligations of the text indicates otherwise. United States or any agency thereof, or (l) Member natural person credit union securities fully guaranteed as to prin- means a natural person credit union cipal and interest thereby, which are which is a member of an Agent or of authorized under 12 U.S.C. 1757(7) and any central credit union in an Agent which have a remaining maturity of group. Member natural person credit one year or less; unions are not members of the Facility (4) Common trust investments and unless they are also Regular members similar investments in funds or securi- of the Facility. ties authorized for Federal credit (m) Natural person credit union means unions, the objectives of which are to a Federal or state-chartered credit provide daily liquidity for partici- union primarily serving natural per- pating credit unions; sons. A credit union is primarily serv- (5) Shares in the National Credit ing natural persons if it is not a cen- Union Administration Central Liquid- tral credit union as defined in para- ity Facility or in special share ac- graph (d) of this section. counts authorized by § 725.7 of this part; (n) NCUA Board or Board means the (6) In the case of a federally-insured National Credit Union Administration state-chartered credit union, any asset Board. held in satisfaction of liquidity re- (o) Paid-in and unimpaired capital and quirements imposed by applicable state surplus means shares and deposits plus law or regulation; and post-closing, undivided earnings. This (7) Balances maintained by federally- does not include regular reserves or insured credit unions in a Federal Re- special reserves required by law, regu- serve bank, or in a pass-through ac- lation or special agreement between count to a Federal Reserve bank, pur- the credit union and its regulator or suant to the requirements of section share insurer.

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(p) Qualifying Period means: ity at any time within six months prior (1) For initial qualification, any 7 to becoming a Regular member of the months out of the 12 months imme- Facility. diately preceding the month in which application is made to become a mem- [44 FR 49437, Aug. 23, 1979, as amended at 47 FR 1371, Jan. 13, 1982] ber of the Facility; and (2) For qualification during each sub- § 725.4 Agent membership. sequent calendar year, any 7 months out of the previous calendar year. (a) A central credit union or a group (q) Stock subscription means the stock of central credit unions may become an subscription required for membership Agent member of the Facility by (in in the Facility. ‘‘Total subscribed Fa- the case of a group of central credit cility stock’’ is the sum of all mem- unions, each central credit union in the bers’ stock subscriptions. group must do each of the following except for paragraph (a)(2) of this section, [44 FR 49437, Aug. 23, 1979, as amended at 53 which shall be done by the Agent group FR 22472, June 16, 1988; 66 FR 65624, Dec. 20, representative): 2001] (1) Making application on a form ap- § 725.3 Regular membership. proved by the Facility; (2) Subscribing to the capital stock of (a) A natural person credit union the Facility in an amount equal to one- may become a Regular member of the half of 1 percent of the paid-in and Facility by: unimpaired capital and surplus (as de- (1) Making application on a form ap- termined in accordance with § 725.5(b) proved by the Facility; of this part) of all the central credit (2) Subscribing to capital stock of the union’s or central credit union group’s Facility in an amount equal to one-half member natural person credit unions, of 1 percent of the credit union’s paid- except those which are Regular mem- in and unimpaired capital and surplus, bers of the Facility or which have ac- as determined in accordance with cess to the Facility through, and are § 725.5(b) of this part, and forwarding included in the stock subscription of, with its completed application funds another Agent. 2 Upon approval of the equal to one-half of this stock subscrip- application, the Agent shall forward tion;1 and funds equal to one-half of this initial (3) Furnishing the following reports stock subscription to the Facility. 3 and documents with the completed membership application: (3) Furnishing the following reports (i) A copy of the credit union’s finan- and documents with the completed cial and statistical report for the most membership application: recent calendar month; and (i) A copy of the central credit (ii) Copies of the credit union’s char- union’s financial and statistical report ter and bylaws, unless the credit union for the most recent calendar month; is federally chartered. (ii) Copies of the central credit (b) A credit union which becomes a union’s charter and bylaws, unless such Regular member of the Facility after credit union is federally chartered; and February 23, 1980, may not receive Fa- (iii) A list of all the central credit cility advances without approval of the union’s member natural person credit NCUA Board for a period of six months unions. after becoming a member. This subsection shall not apply to any credit 2 A natural person credit union which is a union which becomes a Regular mem- member of more than one Agent member of ber of the Facility within six months the Facility must designate through which after such credit union is chartered, or Agent it will deal with the Facility, and the which has had access to Facility funds designated Agent will be responsible for including the capital and surplus of such credit through an Agent member of the Facil- union in the calculation of its stock subscription. 1 A credit union which submits its applica- 3 If the application is approved prior to Oc- tion for membership prior to October 1, 1979, tober 1, 1979, these funds are not required to is not required to forward these funds to the be forwarded to the Facility until October 1, Facility until October 1, 1979. 1979.

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(4) Agreeing to submit to the super- (2) Submit such reports as may be revision of the NCUA Board and to com- quired by the Facility to determine fi- ply with all regulations and reporting nancial soundness, quality and level of requirements which the NCUA Board service, and conformity with estab- shall prescribe for Agent members; lished guidelines and procedures. (5) Agreeing to submit to periodic un- (d) Each Agent, or in the case of an restricted examinations by the NCUA Agent group, each central credit union Board or its designee; and in the group, must have on an annual (6) Obtaining the written approval of basis a third party independent audit the NCUA Board. of its books and records and provide (b) The NCUA Board may approve a the Facility with copies of the report central credit union or group of central of such audit. The auditor selected credit unions as an Agent member of must be recognized by a State or terri- the Facility, provided the NCUA Board torial licensing authority as possessing is satisfied that such credit union or the requisite knowledge and experience credit union group meets certain cri- to perform audits. teria, including but not limited to the (e) Within 30 days after a natural per- following (in the case of a group of cen- son credit union becomes a member of tral credit unions, each central credit a central credit union which is an union in the group must meet these Agent or a member of an Agent group, criteria): the agent, or in the case of an Agent (1) The management policies are in group, the Agent group representative, writing, approved by the central credit shall subscribe to additional capital union’s board of directors, and re- stock of the Facility in an amount viewed annually by such board; equal to one-half of 1 percent of such credit union’s paid-in and unimpaired (2) Adequate internal controls are in capital and surplus, and shall forward place to assure accurate and timely refunds equal to one-half of this stock porting of transactions and the safe- subscription to the Facility. This sub- guarding of assets; section shall not apply if the natural (3) The financial condition of the cen- person credit union is a Regular mem- tral credit union is sound with ade- ber of the Facility or has access to the quate reserves for losses; Facility through, and is included in the (4) Surety bond coverage provides stock subscription of, another Agent. protection for the central credit union (f) A central credit union or group of while the central credit union is per- central credit unions which becomes an forming the duties of an Agent member Agent member of the Facility after of Facility; February 23, 1980, may not receive a (5) Management has demonstrated its Facility advance without approval of ability to use such techniques as cash the NCUA Board for a period of six flow analysis, budgeting, and projec- months after becoming a member. This tions of sources and uses of funds to subsection shall not apply to any cred- manage the affairs of the central credit it union which becomes an Agent mem- union efficiently and in conformity ber or a member of an Agent group with sound business practices; and within six months after such credit (6) There are no practices, proce- union is chartered within six months dures, policies, or other factors that after such credit union has been an would result in discrimination by the Agent or a member of another Agent central credit union among natural group. person credit unions or inhibit its abil- (g) Agent members will be com- ity to act independently in its role as pensated for the services they perform an Agent member of the Facility. for the Facility in a manner to be spec- (c) Each Agent, or in the case of an ified by the NCUA Board. Agent group, each central credit union in the group, must: § 725.5 Capital stock. (1) Maintain records related to Facil- (a) The capital stock of the Facility ity activity in conformity with re- is divided into nonvoting shares having quirements prescribed by the NCUA a par value of $50 each. The Facility Board from time to time; and issues whole and fractional shares.

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Shares are issued in book entry form than 5 percent of total subscribed Fa- upon receipt of payment for such cility stock may withdraw from mem- shares, and cannot be transferred or bership in the Facility six months after hypothecated except to the Facility. notifying the NCUA Board in writing of (b) The capital stock subscriptions its intention to do so. provided for in §§ 725.3 and 725.4 shall (b) A member of the Facility whose be: stock subscription constitutes 5 per- (1) Based on an arithmetic average of cent or more of total subscribed Facil- paid-in and unimpaired capital and sur- ity stock may withdraw from member- plus over the six months preceding ap- ship in the Facility twenty-four plication for membership, and months after notifying the NCUA (2) Adjusted at the close of each cal- Board in writing of its intention to do endar year in accordance with an arith- so. metic average of paid-in and (c) The NCUA Board may terminate unimpaired capital and surplus over membership in the Facility if, after the the twelve months in such calendar opportunity for a hearing, the NCUA year. Payments for adjustments to the Board determines the member has capital stock subscription must be re- failed to comply with any provision of ceived by the Facility no later than the National Credit Union Central Li- March 31 of the following year. quidity Facility Act or any regulation (c) That part of a member’s stock issued pursuant thereto. If membership subscription which is not paid-in shall is terminated under this subsection, be held by the member on call of the the credit union will be required to ob- NCUA Board and shall be invested in tain the approval of the NCUA Board liquid assets. before becoming a member of the Fa- (d) Any member may at any time cility again. Such approval will be purchase additional shares of capital granted only if the NCUA Board is sat- stock in the Facility. Any shares in ex- isfied that the credit union will comply cess of the member’s required paid-in with such Act and regulations. portion of its stock subscription can be (d)(1) If membership is terminated redeemed by the member as long as the under any provision of this section, the member maintains investments in terminated member’s stock shall be re- other assets sufficient to meet the redeemed upon termination. In such quirement of paragraph (c) of this sec- event, the Facility may retain any tion. The member’s required paid-in amount owed to the Facility by the portion of its stock subscription in- member. cludes one-half of its stock subscrip- (2) When a member natural person tion plus any ‘‘calls’’ that may have credit union withdraws from member- been issued by the NCUA Board against ship in a central credit union which is the ‘‘on-call’’ portion of such stock an Agent or a member of an Agent subscription. group, the stock subscription of the (e) Dividends will be paid on capital Agent, or in the case of an Agent stock at such times and rates as are de- group, the stock subscription of the termined by the NCUA Board. The Agent group representative, will be ad- NCUA Board shall declare such divi- justed after the waiting period which dends no less frequently than annually. would apply under paragraph (a) or (b) All issued (paid for) capital stock shall of this section if the withdrawing cred- share in dividend distributions without it union were a member of the Facility. preference. Payment of dividends will be made by the issuance of capital § 725.7 Special share accounts in feder- stock to the member in the amount of ally chartered agent members. the dividend. (a) A federally chartered Agent mem- [44 FR 49437, Aug. 23, 1979, as amended at 45 ber of the Facility may require its FR 47122, July 14, 1980; 47 FR 1371, Jan. 13, member natural person credit unions 1982; 53 FR 22472, June 16, 1988] to establish and maintain special share accounts in the Agent member to reim- § 725.6 Termination of membership. burse it for the portion of the Agent’s (a) A member of the Facility whose Facility stock subscription which is at- stock subscription constitutes less tributable to the paid-in and

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unimpaired capital and surplus of each (3) An Agent shall not submit an ap- such natural person credit union. plication to the Facility based on the (b) The amount which the Agent liquidity needs of any member natural member requires each member natural person credit union which has not person credit union to maintain in agreed to the repayment, security and such special share accounts shall be credit reporting terms prescribed by based on a uniform percentage of the the Facility for Agent loans; paid-in and unimpaired capital and sur- (4) Any loan to meet liquidity needs plus of such credit unions, and shall which have been or will be the basis for not exceed the amount of the Agent’s an application by the Agent for a Fa- stock subscription which is attrib- cility advance must be applied for on utable to the capital and surplus of an application form approved by the each such credit union. An Agent shall Facility. not permit a member to maintain in a (5) Unless approved by the Facility, special share account any amounts in an Agent shall not submit an applica- excess of the required amount. tion to the Facility based on the li- (c) A natural person credit union quidity needs of any credit union which that withdraws from membership in an became a member natural person cred- Agent member or that becomes a Reg- it union of the Agent after February 2, ular member of the Facility, shall be 1980, unless such credit union has been entitled to the return of all amounts in a member natural person credit union its special share account upon with- of the Agent for six months, was char- drawal from membership in the Agent tered within six months before becom- or upon becoming a Regular member, ing a member natural person credit as applicable. union of the Agent, or had access to the Facility either as a Regular mem- [45 FR 47122, July 14, 1980] ber or through another Agent within six months before becoming a member §§ 725.8–725.16 [Reserved] natural person credit union of the § 725.17 Applications for extensions of Agent. credit. (c) In emergency circumstances, the applications for extensions of credit re- (a) A Regular member may apply for quired under paragraph (a) and para- a Facility advance to meet its liquidity graphs (b)(1) and (b)(4) of this section needs by filing an application on a Fa- may be verbal, but must be confirmed cility-approved form, or by any other within five working days by an applica- method approved by the Facility. tion as required by such subsection or (b)(1) An Agent member may apply paragraphs. for a Facility advance by filing an ap- (d) Applications of Regular and plication on a Facility-approved form, Agent members shall be filed with a or by any other method approved by Facility lending officer. Each applica- 4 the Facility. tion for credit which is completed and (2) The Agent’s application shall be properly filed will be approved or de- based on the following: nied within five working days after the (i) Approved applications to the day of receipt. Agent by its member natural person credit unions for pending loans to meet [44 FR 49437, Aug. 23, 1979, as amended at 47 liquidity needs; or FR 1371, Jan. 13, 1982] (ii) Outstanding loans previously § 725.18 Creditworthiness. made by the Agent to meet liquidity needs of its member natural person (a) Prior to Facility approval of each credit unions; or application of a Regular member for a (iii) Such other demonstrable liquid- Facility advance, the Facility shall ity needs as the NCUA Board may consider the creditworthiness of such specify. member. (b) Prior to an Agent’s approval of 4 If the Agent is an Agent group, the appli- each application of a member natural cation must be filed by the Agent group rep- person credit union for an extension of resentative, and any Facility advance will be credit on which an application by the made to the Agent group representative. Agent to the Facility will be based, an

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Agent shall consider the creditworthi- meets the requirements of paragraph ness of such member natural person (a) of this section. credit union. [62 FR 67550, Dec. 29, 1997] (c) Specific characteristics of an uncreditworthy credit union include, § 725.20 Repayment, security and cred- but are not limited to, insolvency as it reporting agreements; other defined by § 700.2(e)(1) of this chapter, terms and conditions. unsatisfactory practices in extending (a) Regular and Agent members, or in credit, lower than desirable reserve the case of an Agent group, the Agent levels, high expense ratio, failure to group representative, shall sign the re- repay previous Facility advances as payment, security and credit reporting agreed, excessive dependence on bor- agreements prescribed by the Facility, rowed funds, inadequate cash manage- and all Facility advances to Regular ment policies and planning, or any and Agent members shall be governed other relevant characteristics creating by the terms and conditions of such a less than satisfactory condition. The agreements. presence of one or more of these char- (b) All Agent loans shall be made acteristics will not necessarily mean subject to the repayment, security and that a credit union will be considered credit reporting terms prescribed by uncreditworthy. the Facility for Agent loans. (d) A natural person credit union (c) Other terms and conditions appli- (whether a Regular member of the Fa- cable to Facility advances and Agent cility or a member natural person cred- loans will be specified in confirmations it union) which does not meet the Fa- of credit provided in connection with cility’s creditworthiness standards such advances and loans, and/or in op- may be limited in or denied the use of erating circulars of the Facility. advances for its liquidity needs. § 725.21 Modification of agreements. [44 FR 49437, Aug. 23, 1979, as amended at 69 FR 27829, May 17, 2004] The repayment, security, and credit reporting terms under which Facility § 725.19 Collateral requirements. advances and Agent loans will be made, as provided in § 725.20 of this part, shall (a) Each Facility advance and each be subject to modification from time to Agent loan shall be secured by a first time as the NCUA Board may deter- priority security interest in collateral mine. Any change in such terms shall of the credit union with a net book be published in the FEDERAL REGISTER value at least equal to 110% of all and shall apply to all advances dis- amounts due under the applicable Fa- bursed by the Facility after the effec- cility advance or Agent loan, or by tive date of the change. guarantee of the National Credit Union Share Insurance Fund. § 725.22 Advances to insurance organi- (b) The Facility may accept as col- zations. lateral for each Facility advance to a (a) In accordance with policies estab- Regular member, a security interest in lished by the NCUA Board, the Facility all assets of the Regular member; pro- may advance funds to a State credit vided however, that the value of any union share or deposit insurance cor- assets in which any third party has a poration, guaranty credit union, guar- perfected security interest that is supe- anty association, or similar organiza- rior to the security interest of the Fa- tion. Requests for such advances shall cility shall be excluded for purposes of be supported by an application which complying with the requirements of sets forth and supports the need for the paragraph (a) of this section. advance. (c) The Facility may accept as collat- (b) Advances under paragraph (a) eral for each Facility advance to an shall be subject to the approval of the Agent member, a security interest in NCUA Board and shall be made subject the Agent loans for which the Facility to the following terms: advance was made; provided however, (1) The advance shall be fully se- that the collateral for such Agent loan cured,

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(2) The maturity of the advance shall the Board in the case of insured state not exceed 12 months, credit unions) of a member (which in- (3) The advance shall not be renew- cludes other credit unions, public able at maturity, and units, and nonmembers where per- (4) The funds advanced shall not be mitted under the Act) in a credit union relent at an interest rate exceeding of a type approved by the Board which that imposed by the Facility. evidences money or its equivalent received or held by a credit union in the § 725.23 Other advances. usual course of business and for which (a) The NCUA Board may authorize it has given or is obligated to give extensions of credit to members of the credit to the account of the member. Facility for purposes other than liquid- (b) Insured credit union and federally ity needs if the NCUA Board, the Board insured credit union as used in this part of Governors of the Federal Reserve mean a credit union with National System, and the Secretary of the Credit Union Administration share in- Treasury concur in a determination surance. that such extensions of credit are in (c) Nonfederally insured credit union as the national economic interest. used in this part means a credit union (b) Extensions of credit approved with either no account insurance or under the conditions of paragraph (a) of this section shall be subject to such with primary account insurance pro- terms and conditions as shall be estab- vided by some entity other than the lished by the NCUA Board. National Credit Union Administration. [68 FR 23382, May 2, 2003, as amended at 74 PART 740—ACCURACY OF ADVER- FR 9348, Mar. 4, 2009] TISING AND NOTICE OF INSURED STATUS § 740.2 Accuracy of advertising. No insured credit union may use any Sec. advertising (which includes print, elec- 740.0 Scope. tronic, or broadcast media, displays 740.1 Definitions. and signs, stationery, and other pro- 740.2 Accuracy of advertising. motional material) or make any rep- 740.3 Advertising of excess insurance. 740.4 Requirements for the official sign. resentation which is inaccurate or de- 740.5 Requirements for the official adver- ceptive in any particular, or which in tising statement. any way misrepresents its services, AUTHORITY: 12 U.S.C. 1766, 1781, 1785, and contracts, or financial condition, or 1789. which violates the requirements of § 707.8 of this subchapter, if applicable. SOURCE: 68 FR 23382, May 2, 2003, unless otherwise noted. This provision does not prohibit an insured credit union from using a trade § 740.0 Scope. name or a name other than its official This part applies to all federally in- charter name in advertising or signage, sured credit unions. It prescribes the so long as it uses its official charter requirements for the official sign in- name in communications with NCUA sured credit unions must display and and for share certificates or certifi- the requirements with regard to the of- cates of deposit, signature cards, loan ficial advertising statement insured agreements, account statements, credit unions must include in their ad- checks, drafts and other legal docu- vertisements. It requires that all other ments. kinds of advertisements be accurate. It also establishes requirements for ad- § 740.3 Advertising of excess insur- vertisements of excess insurance. ance. Any advertising that mentions share § 740.1 Definitions. or savings account insurance provided (a) Account or accounts as used in this by a party other than the NCUA must part means share, share certificate or clearly explain the type and amount of share draft accounts (or their equiva- such insurance and the identity of the lent under state law, as determined by carrier and must avoid any statement

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or implication that the carrier is affili- of business and in all its branches, 30 ated with the NCUA or the federal gov- days after its first day of operation as ernment. an insured credit union. Each insured credit union must also display the offi- § 740.4 Requirements for the official cial sign on its Internet page, if any, sign. where it accepts deposits or open ac- (a) Each insured credit union must counts, but it may vary the font sizes continuously display the official sign from that depicted in paragraph (b) of described in paragraph (b) of this sec- this section to ensure its legibility. tion at each station or window where (b) The official sign shall be as de- insured account funds or deposits are normally received in its principal place picted below:

(1) NCUA will automatically supply pose provided the altered sign is legible all insured credit unions an initial sup- and otherwise complies with this part. ply of official signs with a blue back- (2) An insured credit union may pur- ground and white lettering at no cost chase signs from commercial suppliers for compliance with paragraph (a) of or develop its own in any color scheme this section. If the initial supply is not so long as they are legible and other- adequate, the insured credit unions wise comply with this part. A credit must immediately request additional union may alter the font size of the of- signs from NCUA. Any credit union ficial sign to make it legible on its that does not have an adequate supply Internet page and on documents it pro- but requests additional signs from vides to its members including adver- NCUA will not be considered to have tisements, but it may not do so on violated paragraph (a) of this section signs to be placed at each station or window where the credit union nor- unless the credit union fails to display mally receives insured funds or depos- the signs after receiving them. To ad- its in its principal place of business and dress the temporary increase through all of its branches. December 31, 2013 in the standard max- (c) To avoid any member confusion imum share insurance amount as de- from the use of the official NCUA sign, fined in § 745.1(e) of this chapter, in- federally insured credit unions are pro- sured credit unions may continue to hibited from receiving account funds at display the official sign depicted in any teller station or window where any paragraph (b) of this section but should nonfederally insured credit union also inform members of the increased cov- receives account funds. As exceptions erage through additional signage indi- to this prohibition: cating the temporary increase in cov- (1) A teller in a branch of a federally erage, display other versions of the of- insured credit union may accept ac- ficial sign distributed or approved by count funds for nonfederally insured NCUA and appearing on NCUA’s offi- credit unions, but only if the teller dis- cial website, or alter by hand or other- plays a conspicuous sign next to the of- wise the official sign depicted in para- ficial sign that states ‘‘This credit graph (b) of this section for that pur- union participates in a shared branch

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network with other credit unions and this section, in all of its advertise- accepts share deposits for members of ments, including on its main Internet those other credit unions. While this page, except as provided in paragraph credit union is federally insured, not (c) of this section. all of these other credit unions are fed- (1) An insured credit union must in- erally insured. If you need information clude the official advertising state- on the insurance status of your credit ment in its advertisements thirty (30) union, please contact your credit union days after its first day of operations as directly.’’ This sign must be similar to an insured credit union unless the Re- the official sign in terms of design, gional Director grants it an extension. color, and font. (2) If advertising copy without the of- (2) A teller in a facility operated by a ficial advertising statement is on hand non-credit union entity may accept ac- on the date the requirements of this count funds for both federally insured section become operative, the insured credit unions and nonfederally insured credit union may use an overstamp or credit unions, but only if the teller dis- other means to include the official ad- plays a conspicuous sign next to the of- vertising statement until the supplies ficial sign stating ‘‘This facility ac- are exhausted. cepts share deposits for multiple credit (b) The official advertising statement unions. Not all of these credit unions is in substance as follows: ‘‘This credit are federally insured. If you need infor- union is federally insured by the Na- mation on the insurance status of your tional Credit Union Administration.’’ credit union, please contact your credit Insured credit unions, at their option, union directly.’’ This sign must be may use the short title ‘‘Federally in- similar to the official sign in terms of sured by NCUA’’ or a reproduction of design, color, and font. the official sign, as described in (3) A teller in a branch of a nonfeder- § 740.4(b), as the official advertising ally insured credit union may accept statement. The official advertising account funds for federally insured statement must be in a size and print credit unions. No teller in a nonfeder- that is clearly legible. If the official ally insured credit union may display sign is used as the official advertising the official NCUA sign. statement, an insured credit union (d) The Board may require any in- may alter the font size to ensure its sured credit union, upon at least 30 legibility as provided in § 740.4(b)(2). days’ written notice, to change the (c) The following advertisements wording of its official signs in a man- need not include the official adver- ner deemed necessary for the protec- tising statement: tion of shareholders or others. (1) Statements of condition and re- (e) For purposes of this section, the ports of condition of an insured credit terms ‘‘branch,’’ ‘‘station,’’ ‘‘teller sta- union which are required to be pub- tion,’’ and ‘‘window’’ do not include lished by state or federal law or regula- automated teller machines or point of tion; sale terminals. (2) Credit union supplies such as sta- (f) An insured credit union that fails tionery (except when used for circular to comply with Section 205(a) of the letters), envelopes, deposit slips, Federal Credit Union Act regarding the checks, drafts, signature cards, ac- official sign, 12 U.S.C. 1785(a), or any count passbooks, and noninsurable cer- requirement in this part is subject to a tificates; penalty of up to $100 per day. (3) Signs or plates in the credit union [68 FR 23382, May 2, 2003, as amended at 71 office or attached to the building or FR 67438, Nov. 22, 2006; 73 FR 62858, Oct. 22, buildings in which the offices are lo- 2008; 74 FR 9348, Mar. 4, 2009; 74 FR 55749, Oct. cated; 29, 2009] (4) Listings in directories; (5) Advertisements not setting forth § 740.5 Requirements for the official the name of the insured credit union; advertising statement. (6) Display advertisements in credit (a) Each insured credit union must union directories, provided the name of include the official advertising state- the credit union is listed on any page ment, prescribed in paragraph (b) of in the directory with a symbol or other

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descriptive matter indicating it is in- 741.4 Insurance premium and one percent sured; deposit. (7) Joint or group advertisements of 741.5 Notice of termination of excess insur- credit union services where the names ance coverage. of insured credit unions and noninsured 741.6 Financial and statistical and other re- credit unions are listed and form a part ports. of such advertisement; 741.7 Conversion to a state-chartered credit union. (8) Advertisements by radio that do 741.8 Purchase of assets and assumption of not exceed thirty (30) seconds in time; liabilities. (9) Advertisements by television, 741.9 Uninsured membership shares. other than display advertisements, 741.10 Disclosure of share insurance. that do not exceed thirty (30) seconds 741.11 Foreign branching. in time; (10) Advertisements that because of Subpart B—Regulations Codified Elsewhere their type or character would be im- in NCUA’s Regulations as Applying to practical to include the official adver- Federal Credit Unions That Also Apply tising statement, including but not to Federally Insured State-Chartered limited to, promotional items such as Credit Unions calendars, matchbooks, pens, pencils, and key chains; 741.201 Minimum fidelity bond require- (11) Advertisements that contain a ments. statement to the effect that the credit 741.202 Audit and verification requirements. union is insured by the National Credit 741.203 Minimum loan policy requirements. Union Administration, or that its ac- 741.204 Maximum public unit and non- counts and shares or members are in- member accounts, and low-income designation. sured by the Administration to the 741.205 Reporting requirements for credit maximum insurance amount for each unions that are newly chartered or in member or shareholder; troubled condition. (12) Advertisements that do not re- 741.206 Corporate credit unions. late to member accounts, including but 741.207 Community development revolving not limited to advertisements relating loan program for credit unions. to loans by the credit union, safe- 741.208 Mergers of federally insured credit keeping box business or services, trav- unions: voluntary termination or conver- eler’s checks on which the credit union sion of insured status. is not primarily liable, and credit life 741.209 Management official interlocks. or disability insurance. 741.210 Central liquidity facility. (d) The non-English equivalent of the 741.211 Advertising. official advertising statement may be 741.212 Share insurance. used in any advertisement provided 741.213 Administrative actions, adjudicative that the Regional Director gives prior hearings, rules of practice and procedure. approval to the translation. 741.214 Report of crime or catastrophic act and Bank Secrecy Act compliance. [68 FR 23382, May 2, 2003, as amended at 71 741.215 Records preservation program. FR 67439, Nov. 22, 2006; 73 FR 56936, Oct. 1, 741.216 Flood insurance. 2008] 741.217 Truth in savings. 741.218 Involuntary liquidation and creditor PART 741—REQUIREMENTS FOR claims. INSURANCE 741.219 Investment requirements. 741.220 Privacy of consumer financial information. Sec. 741.0 Scope. 741.221 Suretyship and guaranty requirements. Subpart A—Regulations That Apply to Both 741.222 Credit union service organizations. Federal Credit Unions and Federally APPENDIX A TO PART 741—EXAMPLES OF PAR- Insured State-Chartered Credit Unions TIAL-YEAR NCUSIF ASSESSMENT AND DIS- and That Are Not Codified Elsewhere TRIBUTION CALCULATIONS UNDER § 741.4 in NCUA’s Regulations AUTHORITY: 12 U.S.C. 1757, 1766(a), 1781–1790, and 1790d; 31 U.S.C. 3717. 741.1 Examination. 741.2 Maximum borrowing authority. SOURCE: 60 FR 58504, Nov. 28, 1995, unless 741.3 Criteria. otherwise noted.

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§ 741.0 Scope. pursuant to Title II of the Act, or any The provisions of this part apply to insured credit union, must not borrow, federal credit unions, federally insured from any source, an aggregate amount state-chartered credit unions, and cred- in excess of 50 per centum of its paid- it unions making application for insur- in and unimpaired capital and surplus ance of accounts pursuant to Title II of (shares and undivided earnings, plus the Act, unless the context of a provi- net income or minus net loss). (b) A federally insured state-char- sion indicates its application is other- tered credit union may apply to the re- wise limited. This part prescribes var- gional director for a waiver of para- ious requirements for obtaining and graph (a) of this section up to the maintaining federal insurance and the amount permitted under the applicable payment of insurance premiums and state law or by the state regulator. The capitalization deposit. Subpart A of waiver request must include: this part contains substantive require- (1) Written approval from the state ments that are not codified elsewhere regulator; in this chapter. Subpart B of this part (2) A detailed analysis of the safety lists additional regulations, set forth and soundness implications of the pro- elsewhere in this chapter as applying posed waiver; to federal credit unions, that also (3) A proposed aggregate dollar apply to federally insured state-char- amount or percentage of paid-in and tered credit unions. As used in this unimpaired capital and surplus limita- part, ‘‘insured credit union’’ means a tion; and credit union whose accounts are in- (4) An explanation demonstrating the sured by the National Credit Union need to raise the limit. Share Insurance Fund (NCUSIF). (c) The regional director will approve the waiver request if the proposed bor- Subpart A—Regulations That rowing limit will not adversely affect Apply to Both Federal Credit the safety and soundness of the feder- Unions and Federally Insured ally insured state-chartered credit State-Chartered Credit Unions union. and That Are Not Codified [60 FR 58504, Nov. 28, 1995, as amended at 69 Elsewhere in NCUA’s Regula- FR 8547, Feb. 25, 2004] tions § 741.3 Criteria. § 741.1 Examination. In determining the insurability of a As provided in Sections 201 and 204 of credit union which makes application the Act (12 U.S.C. 1781 and 1784), the for insurance and in continuing the in- NCUA Board is authorized to examine surability of its accounts pursuant to any insured credit union or any credit Title II of the Act, the following cri- union making application for insurance teria shall be applied: of its accounts. Such examination may (a) Reserves—(1) General rule. State- require access to all records, reports, chartered credit unions are subject to contracts to which the credit union is section 216 of the Act, 12 U.S.C. 1790d, a party, and information concerning and to part 702 and subpart L of part the affairs of the credit union. Upon re- 747 of this chapter. quest, such documentation must be (2) Special reserve for nonconforming provided to the NCUA Board or its rep- investments. State-chartered credit resentative. Any credit union which unions (except state-chartered cor- makes application for insurance will be porate credit unions) are required to required to pay the cost of such exam- establish an additional special reserve ination and processing. To the max- for investments if those credit unions imum extent feasible, the NCUA Board are permitted by their respective state will utilize examinations conducted by laws to make investments beyond state regulatory agencies. those authorized in the Act or the NCUA Rules and Regulations. For any § 741.2 Maximum borrowing authority. investment other than loans to mem- (a)Any credit union which makes ap- bers and obligations or securities ex- plication for insurance of its accounts pressly authorized in Title I of the Act

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and part 703 of this chapter, as amend- which the credit union operates for ed, state-chartered credit unions (ex- state-chartered credit unions, except cept state-chartered corporate credit state-chartered corporate credit unions) are required to establish and unions. State-chartered corporate cred- maintain at the end of each accounting it unions are permitted to make only period and prior to payment of any div- those investments that are in conform- idend, an Appropriation for Non-con- ance with part 704 of this chapter and forming Investments in an amount at applicable state laws and regulations; least equal to the net excess of book (4) The presence of any account or se- value over current market value of the curity, the form of which has not been investments. If the market value can- approved by the Board, except for ac- not be determined, an amount equal to counts authorized by state law for the full book value will be established. state-chartered credit unions. When at the end of any dividend period, (c) Fitness of management. The offi- the amount in the Appropriation for cers, directors, and committee mem- Non-conforming Investments exceeds bers of the credit union must have con- the difference between book value and ducted its operations in accordance market value, the board of directors with provisions of applicable law, regu- may authorize the transfer of the ex- lations, its charter and bylaws. No per- cess to Undivided Earnings. son shall serve as a director, officer, (b) Financial condition and policies. committee member, or employee of an The following factors are to be consid- insured credit union who has been con- ered in determining whether the credit victed of any criminal offense involv- union’s financial condition and policies ing dishonesty or breach of trust, ex- are both safe and sound: cept with the written consent of the (1) The existence of unfavorable Board. trends which may include excessive (d) Insurance of member accounts losses on loans (i.e., losses which ex- would not otherwise involve undue risk to ceed the regular reserve or its equiva- the NCUSIF. The credit union must lent [in the case of state-chartered maintain adequate fidelity bond cov- credit unions] plus other irrevocable erage as specified in § 741.201. Any cir- reserves established as a contingency cumstances which may be unique to against losses on loans), the presence the particular credit union concerned of special reserve accounts used specifi- shall also be considered in arriving at cally for charging off loan balances of the determination of whether or not an deceased borrowers, and an expense undue risk to the NCUSIF is or may be ratio so high that the required trans- present. For purposes of this section, fers to reserves create a net operating the term ‘‘undue risk to the NCUSIF’’ loss for the period or that the net gain is defined as a condition which creates after these transfers is not sufficient to a probability of loss in excess of that permit the payment of a nominal divi- normally found in a credit union and dend; which indicates a reasonably foresee- (2) The existence of written lending able probability of the credit union be- policies, including adequate docu- coming insolvent because of such con- mentation of secured loans and the dition, with a resultant claim against protection of security interests by re- the NCUSIF. cording, bond, insurance, or other ade- (e) Powers and purposes. The credit quate means, adequate determination union must not perform services other of the financial capacity of borrowers than those which are consistent with and co-makers for repayment of the the promotion of thrift and the cre- loan, and adequate determination of ation of a source of credit for its mem- value of security on loans to ascertain bers, except as otherwise permitted by that said security is adequate to repay law or regulation. the loan in the event of default; (f) Letter of disapproval. A credit (3) Investment policies which are union whose application for share in- within the provisions of applicable law surance is disapproved shall receive a and regulations, i.e., the Act and part letter indicating the reasons for such 703 of this chapter for federal credit disapproval, a citation of the authority unions and the laws of the state in for such disapproval, and suggested

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methods by which the applying credit ing one percent of its insured shares union may correct its deficiencies and and payment of an insurance premium. thereby qualify for share insurance. (b) Definitions. For purposes of this (g) Nothing in this section shall pre- section: clude the NCUA Board from imposing (1) Available assets ratio means the additional terms or conditions pursu- ratio of: ant to the insurance agreement. (i) The amount determined by subtracting all liabilities of the NCUSIF, [60 FR 58504, Nov. 28, 1995, as amended at 64 including contingent liabilities for FR 41040, July 29, 1999; 65 FR 8593, Feb. 18, which no provision for losses has been 2000; 67 FR 71094, Nov. 29, 2002] made, from the sum of cash and the market value of unencumbered invest- § 741.4 Insurance premium and one ments authorized under 12 U.S.C. percent deposit. 1783(c), to: (a) Scope. This section implements (ii) The aggregate amount of the in- the requirements of Section 202 of the sured shares in all insured credit Act (12 U.S.C. 1782) providing for cap- unions. italization of the NCUSIF through the (iii) Shown as an abbreviated mathe- maintenance of a deposit by each in- matical formula, the available assets sured credit union in an amount equal- ratio is:

(cash + market value of unencumbered investments) − (liabilities + contingent liabilities for which no provision for losses has been made) aggregate amount of all insured shares from final reporting period of calendar year

(2) Equity ratio means the ratio of: for which no provision for losses has (i) The amount of NCUSIF’s capital- been made) to: ization, meaning insured credit unions’ (ii) The aggregate amount of the in- one percent capitalization deposits sured shares in all insured credit plus the retained earnings balance of unions. the NCUSIF (less contingent liabilities (iii) Shown as an abbreviated mathe- matical formula, the equity ratio is:

insured credit unions' 1.0% capitalization deposits + (NCUSIF's retained earnings − contingent liabilities for which no provision for losses has been made) aggregate amount of all insured shares

(3) Insured shares means the total not more than 1.5 percent, as estab- amount of a credit union’s share, share lished by action of the NCUA Board. draft and share certificate accounts, or (5) Reporting period means calendar their equivalent under state law (which year for credit unions with total assets may include deposit accounts), author- of less than $50,000,000 and means semi- ized to be issued to members, other annual period for credit union with credit unions, public units, or nonmem- total assets of $50,000,000 or more. bers (where permitted under the Act or (c) One percent deposit. Each insured credit union shall maintain with the equivalent state law). ‘‘Insured shares’’ NCUSIF during each reporting period a does not include amounts in excess of deposit in an amount equaling one per- insurance coverage as provided in part cent of the total of the credit union’s 745 of this chapter; and insured shares at the close of the pre- (4) Normal operating level means an eq- ceding reporting period. For credit uity ratio not less than 1.2 percent and unions with total assets of less than

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$50,000,000, insured shares will be meas- assets ratio for purposes of this para- ured and adjusted annually based on graph. the insured shares reported in the cred- (f) Invoices. The NCUA provides in- it union’s semiannual 5300 report due voices to all federally insured credit in January of each year. For credit unions stating any change in the unions with total assets of $50,000,000 or amount of a credit union’s one percent more, insured shares will be measured deposit and the computation and fund- and adjusted semiannually based on ing of any premium payment due. In- the insured shares reported in the cred- voices for federal credit unions also in- it union’s quarterly 5300 reports due in clude any annual operating fees that January and July of each year. are due. Invoices are calculated based (d) Insurance premium charges—(1) In on a credit union’s insured shares as of general. Each insured credit union will the most recently ended reporting pe- pay to the NCUSIF, on dates the NCUA riod. The invoices may also provide for Board determines, but not more than any distribution the NCUA Board de- twice in any calendar year, an insur- clares in accordance with paragraph (e) ance premium in an amount stated as a of this section, resulting in a single net percentage of insured shares, which transfer of funds between a credit will be the same for all insured credit union and the NCUA. unions. (g) New charters. A newly-chartered (2) Relation of premium charge to equity credit union that obtains share insur- (i) The NCUA Board ratio of NCUSIF. ance coverage from the NCUSIF during may assess a premium charge only if the calendar year in which it has ob- the NCUSIF’s equity ratio is less than tained its charter shall not be required 1.3 percent and the premium charge to pay an insurance premium for that does not exceed the amount necessary calendar year. The credit union shall to restore the equity ratio to 1.3 per- fund its one percent deposit on a date cent. to be determined by the NCUA Board (ii) If the equity ratio of NCUSIF in the following calendar year, but falls below 1.2 percent, the NCUA shall not participate in any distribu- Board is required to assess a premium tion from NCUSIF equity related to in an amount it determines is necessary to restore the equity ratio to, the period prior to the credit union’s and maintain that ratio at, 1.2 percent. funding of its deposit. (e) Distribution of NCUSIF equity. If, (h) Conversion to Federal insurance. An as of the end of a calendar year, the existing credit union that converts to NCUSIF exceeds its normal operating insurance coverage with the NCUSIF level and its available assets ratio ex- shall immediately fund its one percent ceeds 1.0 percent, the NCUA Board will deposit based on the total of its insured make a proportionate distribution of shares as of the close of the month NCUSIF equity to insured credit prior to conversion and, if any pre- unions. The distribution will be the miums have been assessed in that cal- maximum amount possible that does endar year, will pay a prorated pre- not reduce the NCUSIF’s equity ratio mium amount to reflect the remaining below its normal operating level and number of months in that calendar does not reduce its available assets year. The credit union will be entitled ratio below 1.0 percent. The distribu- to a prorated share of any distribution tion will be after the calendar year and from NCUSIF equity declared subse- in the form determined by the NCUA quent to the credit union’s conversion. Board. The form of the distribution (i) Mergers of nonfederally insured may include a waiver of insurance pre- credit unions. Where a nonfederally in- miums, premium rebates, or distribu- sured credit union merges into a feder- tions from NCUSIF equity in the form ally insured credit union, the con- of dividends. The NCUA Board will use tinuing federally insured credit union the aggregate amount of the insured shall immediately pay to the NCUSIF a shares from all insured credit unions prorated insurance premium (unless from the final reporting period of the waived in whole or in part for all feder- calendar year in calculating the ally insured credit unions), and an ad- NCUSIF’s equity ratio and available ditional one percent deposit based upon

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the increase in insured shares resulting fixed from time to time by the NCUA from the merger. Board based upon the administrative (j) Return of deposit. Any insolvent costs of such delinquent payments to credit union that is closed for involun- the NCUA in the preceding year. tary liquidation will not be entitled to (2) The costs of collection shall be a return of its deposit. Any solvent calculated as the actual hours ex- credit union that is closed due to invol- pended by NCUA personnel multiplied untary liquidation shall be entitled to by the average hourly cost of the sala- a return of its deposit prior to final dis- ries and benefits of such personnel. tribution of member shares. Any other (3) The interest rate charged on any credit union whose insurance coverage delinquent payment shall be the U.S. with the NCUSIF terminates will be Department of the Treasury Tax and entitled to a return of the full amount Loan Rate in effect on the date when of its deposit immediately after the the payment is due as provided in 31 final date on which any shares of the U.S.C. 3717. credit union are insured, except that the NCUA Board reserves the right to [60 FR 58504, Nov. 28, 1995, as amended at 64 delay payment by up to one year if it FR 56150, Oct. 18, 1999] determines that immediate payment EFFECTIVE DATE NOTE: At 74 FR 63279, Dec. would jeopardize the financial condi- 3, 2009, § 741.4 was revised, effective Jan. 4, tion of the NCUSIF. This includes ter- 2010. For the convenience of the user, the re- mination of insurance due to mergers vised text is set forth as follows: and consolidations. A credit union that receives a return of its deposit during a § 741.4 Insurance premium and one percent calendar year shall have the option of deposit. leaving a nominal sum on deposit with (a) Scope. This section implements the re- the NCUSIF until the next distribution quirements of Section 202 of the Act (12 from NCUSIF equity and will thus U.S.C. 1782) providing for capitalization of the NCUSIF through the maintenance of a qualify for a prorated share of the dis- deposit by each insured credit union in an tribution. amount equaling one percent of its insured (k) Assessment of administrative fee and shares and payment of an insurance pre- interest for delinquent payment. Each mium. federally insured credit union shall pay (b) Definitions. For purposes of this section: to the NCUA an administrative fee, the Available assets ratio means the ratio of: costs of collection, and interest on any (i) The amount determined by subtracting delinquent payment of its capitaliza- all liabilities of the NCUSIF, including con- tion deposit or insurance premium. A tingent liabilities for which no provision for payment will be considered delinquent losses has been made, from the sum of cash if it is postmarked later than the date and the market value of unencumbered investments authorized under Section 203(c) of stated in the invoice provided to the the Act (12 U.S.C. 1783(c)), to: credit union. The NCUA may waive or (ii) The aggregate amount of the insured abate charges or collection of interest, shares in all insured credit unions. if circumstances warrant. (iii) Shown as an abbreviated mathe- (1) The administrative fee for a delin- matical formula, the available assets ratio quent payment shall be an amount as is:

(cash + market value of unencum bered investments) − (liabilities + contingent liabilities for which no provision for losses has been made) aggregate am ount of all insured shares from final reporting period of calendar year

Equity ratio means the ratio of: gent liabilities for which no provision for (i) The amount of NCUSIF’s capitalization, losses has been made) to: meaning insured credit unions’ one percent (ii) The aggregate amount of the insured capitalization deposits plus the retained shares in all insured credit unions. earnings balance of the NCUSIF (less contin- (iii) Shown as an abbreviated mathe- matical formula, the equity ratio is:

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(insured credit unions’ 1.0% capitalization deposits + (NCUUSIF’s retained earnings − contingent liabilities for which no provision for losses has been made) aggregate am ount oof all insured shares

Insured shares means the total amount of a premium charge only if the NCUSIF’s equity federally-insured credit union’s share, share ratio is less than 1.3 percent and the pre- draft and share certificate accounts, or their mium charge does not exceed the amount equivalent under state law (which may in- necessary to restore the equity ratio to 1.3 clude deposit accounts), authorized to be percent. issued to members, other credit unions, pub- (ii) If the equity ratio of the NCUSIF falls lic units, or nonmembers (where permitted to between 1.0 and 1.2 percent, the NCUA under the Act or equivalent state law), but Board is required to assess a premium in an does not include amounts in excess of insur- amount it determines is necessary to restore ance coverage as provided in part 745 of this the equity ratio to at least 1.2 percent, as chapter. For a credit union or other entity provided for in the restoration plan adopted that is not federally insured, ‘‘insured under Section 202(c)(2)(D) of the Act (12 shares’’ means, for purposes of this section U.S.C. 1782(c)(20)(D)). If the equity ratio of only, the amount of deposits or shares that the NCUSIF falls below 1.0 percent, the would have been insured by the NCUSIF NCUA Board is required to assess a deposit under part 745 had the institution been feder- replenishment charge in an amount it deter- ally insured on the date of measurement. mines is necessary to restore the equity Modified premium/distribution ratio means ratio to 1.0 percent and to assess a premium one minus the premium/distribution ratio. charge in an amount it determines is nec- Normal operating level means an equity ratio not less than 1.2 percent and not more essary to restore the equity ratio to, at least than 1.5 percent, as established by action of 1.2 percent, as provided for in the restoration the NCUA Board. plan adopted under Section 202(c)(2)(D) of the Premium/distribution ratio means the num- Act (12 U.S.C. 1782(c)(20)(D)). ber of full remaining months in the calendar (e) Distribution of NCUSIF equity. If, as of year following the date of the institution’s the end of a calendar year, the NCUSIF ex- conversion or merger divided by 12. ceeds its normal operating level and its Reporting period means calendar year for available assets ratio exceeds 1.0 percent, the credit unions with total assets of less than NCUA Board will make a proportionate dis- $50,000,000 and means semiannual period for tribution of NCUSIF equity to insured credit credit union with total assets of $50,000,000 or unions. The distribution will be the max- more. imum amount possible that does not reduce (c) One percent deposit. Each insured credit the NCUSIF’s equity ratio below its normal union must maintain with the NCUSIF dur- operating level and does not reduce its avail- ing each reporting period a deposit in an able assets ratio below 1.0 percent. The dis- amount equaling one percent of the total of tribution will be after the calendar year and the credit union’s insured shares at the close in the form determined by the NCUA Board. of the preceding reporting period. For credit The form of the distribution may include a unions with total assets of less than waiver of insurance premiums, premium re- $50,000,000, insured shares will be measured bates, or distributions from NCUSIF equity and adjusted annually based on the insured in the form of dividends. The NCUA Board shares reported in the credit union’s 5300 re- will use the aggregate amount of the insured port for December 31 of each year. For credit shares from all insured credit unions from unions with total assets of $50,000,000 or the final reporting period of the calendar more, insured shares will be measured and year in calculating the NCUSIF’s equity adjusted semiannually based on the insured ratio and available assets ratio for purposes shares reported in the credit union’s 5300 re- of this paragraph. ports for December 31 and June 30 of each (f) Invoices. The NCUA provides invoices to year. all federally insured credit unions stating (d) Insurance premium charges—(1) In gen- any change in the amount of a credit union’s eral. Each insured credit union will pay to one percent deposit and the computation and the NCUSIF, on dates the NCUA Board de- funding of any NCUSIF premium or deposit termines, but not more than twice in any replenishment assessments due. Invoices for calendar year, an insurance premium in an federal credit unions also include any annual amount stated as a percentage of insured operating fees that are due. Invoices are cal- shares, which will be the same percentage for culated based on a credit union’s insured all insured credit unions. shares as of the most recently ended report- (2) Relation of premium charge to equity ratio ing period. The invoices may also provide for of NCUSIF. (i) The NCUA Board may assess a any distribution the NCUA Board declares in

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accordance with paragraph (e) of this sec- federally insured credit union is the con- tion, resulting in a single net transfer of tinuing institution, will: funds between a credit union and the NCUA. (i) Immediately on the date of merger in- (g) New charters. A newly-chartered credit crease the amount of its NCUSIF deposit by union that obtains share insurance coverage an amount equal to one percent of the merg- from the NCUSIF during the calendar year ing institution’s insured shares as of the last in which it has obtained its charter will not day of the merging institution’s most re- be required to pay an insurance premium for cently ended reporting period preceding the that calendar year. The credit union will date of merger; fund its one percent deposit on a date to be (ii) With regard to any NCUSIF premiums determined by the NCUA Board in the fol- assessed in the calendar year of merger, pay lowing calendar year, but will not partici- a two-part premium, with one part cal- pate in any distribution from NCUSIF equity culated on the merging institution’s insured related to the period prior to the credit shares as described in paragraph (i)(1)(ii) of union’s funding of its deposit. this section, and the other part calculated on (h) Depletion of one percent deposit. All or the continuing institution’s insured shares part of the one percent deposit may be used as of the last day of its most recently ended by the NCUSIF if necessary to meet its ex- reporting period preceding the date of merg- penses. The NCUSIF may invoice credit er; and unions in an amount necessary to replenish (iii) If the NCUSIF declares a distribution the one percent deposit at any time fol- in the year following the merger based the lowing the effective date of the depletion. NCUSIF’s equity at the end of the year of (i) Conversion to Federal insurance. (1) A merger, receive a distribution based on the credit union or other institution that con- continuing institution’s insured shares as of verts to insurance coverage with the the end of the year of merger. With regard to NCUSIF will: distributions declared in the calendar year of (i) Immediately fund its one percent deposit based on the total of its insured shares merger but based on the NCUSIF’s equity as of the last day of the most recently ended from the end of the preceding year, the insti- reporting period prior to the date of conver- tution will receive a distribution based on its sion; insured shares as of the end of the preceding (ii) If the NCUSIF assesses a premium in year. the calendar year of conversion, pay a pre- (j) Conversion from, or termination of, Federal mium based on the institution’s insured share insurance. (1) A federally insured credit shares as of the last day of the most recently union whose insurance coverage with the ended reporting period preceding the invoice NCUSIF terminates, including through a date times the institution’s premium/dis- conversion to, or merger into, a nonfederally tribution ratio; insured credit union or a noncredit union en- (iii) If the NCUSIF declares, in the cal- tity, will: endar year of conversion on or before the (i) Receive the full amount of its NCUSIF date of conversion, an assessment to replen- deposit paid, less any amounts applied to ish the one-percent deposit, pay nothing recover NCUSIF losses that exceed NCUSIF related to that assessment; tained earnings, immediately after the final (iv) If the NCUSIF declares, at any time date on which any shares of the credit union after the date of conversion through the end are NCUSIF-insured; of that calendar year, an assessment to re- (ii) If the NCUSIF declares a distribution plenish the one-percent deposit, pay a re- at the end of the calendar year of conversion, plenishment amount based on the institu- receive a distribution based on the institution’s insured shares as of the last day of the tion’s insured shares as of the last day of the most recently ended reporting period pre- most recently ended reporting period preceding the invoice date; and ceding the date of conversion times the insti- (v) If the NCUSIF declares a distribution in tution’s modified premium/distribution the year following conversion based the ratio; and NCUSIF’s equity at the end of the year of (iii) If the NCUSIF assesses a premium in conversion, receive a distribution based on the calendar year of conversion or merger on the institution’s insured shares as of the end or before the day in which the conversion or of the year of conversion times the institu- merger is completed, pay a premium based tion’s premium/distribution ratio. With re- on the institution’s insured shares as of the gard to distributions declared in the cal- last day of the most recently ended reporting endar year of conversion but based on the period preceding the conversion or merger NCUSIF’s equity from the end of the pre- date times the institution’s modified preceding year, the converting institution will mium/distribution ratio. If the institution receive no distribution. has previously paid a premium based on this (2) A federally-insured credit union that same assessment that exceeds this amount, merges with a nonfederally insured credit the institution will receive a refund of the union or other nonfederally insured institu- difference following completion of the con- tion (the ‘‘merging institution’’), where the version or merger.

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(2) Notwithstanding the requirements of shall, upon conviction, be fined not more paragraph (j)(1) of this section: than $1,000 or imprisoned more than one (i) Any insolvent credit union that is year, or both. closed for involuntary liquidation will not be entitled to a return of its deposit; § 741.5 Notice of termination of excess (ii) Any solvent credit union that is closed insurance coverage. due to voluntary or involuntary liquidation In the event of a credit union’s ter- will be entitled to a return of its deposit paid, less any amounts applied to cover mination of share insurance coverage NCUSIF losses that exceed NCUSIF retained other than that provided by the earnings, prior to final distribution of mem- NCUSIF, the credit union must notify ber shares; and all members in writing of such termi- (iii) The Board reserves the right to delay nation at least thirty days prior to the return of the deposit to any credit union effective date of termination. converting from or terminating its federal insurance, or voluntarily liquidating, for up § 741.6 Financial and statistical and to one year if the Board determines that im- other reports. mediate repayment would jeopardize the NCUSIF. (a) Upon written notice from the (k) Assessment of administrative fee and in- Board, Regional Director, or Director terest for delinquent payment. Each federally of the Office of Corporate Credit insured credit union must pay to the NCUA Unions, insured credit unions must file an administrative fee, the costs of collec- financial and other reports in accord- tion, and interest on any delinquent pay- ance with the instructions in the no- ment of its capitalization deposit or insurance premium. A payment will be considered tice. Credit unions with the capacity to delinquent if it is postmarked or electroni- do so must use NCUA’s information cally posted later than the date stated in the management system to submit their invoice provided to the credit union. The data online. If a credit union is unable NCUA may waive or abate charges or collec- to use the information system, it must tion of interest, if circumstances warrant. file written reports in accordance with (1) The administrative fee for a delinquent the instructions. payment shall be an amount as fixed from (1) Credit Union Profile. Insured credit time to time by the NCUA Board based upon the administrative costs of such delinquent unions must submit to NCUA a Credit payments to the NCUA in the preceding Union Profile, NCUA Form 4501 or its year. equivalent, within 10 days after an (2) The costs of collection shall be cal- election or appointment of senior man- culated as the actual hours expended by agement or volunteer officials or with- NCUA personnel multiplied by the average in 30 days of any change of the infor- hourly cost of the salaries and benefits of mation in the profile. such personnel. (2) Financial and statistical report. (3) The interest rate charged on any delin- Natural person credit unions must file quent payment shall be the U.S. Department of the Treasury Tax and loan Rate in effect a Call Report with NCUA quarterly in on the date when the loan payment is due as accordance with the instructions in the provided in 31 U.S.C. 3717. NCUA Form 5300. Corporate credit (4) The Act contains specific penalties and unions must file a Corporate Credit other consequences for delinquent payments, Union Call Report with NCUA monthly including, but not limited to: in accordance with the instructions in (i) Section 202(d)(2)(B) of the Act (12 U.S.C. the NCUA Form 5310. Credit unions 1782(d)(2)(B)) provides that the Board may as- must submit a corrected Call Report sess and collect a penalty from an insured credit union of not more than $20,000 for each upon notification or the discovery of a day the credit union fails or refuses to pay need for correction. any deposit or premium due to the fund; and (b) Consistency with GAAP. The ac- (ii) Section 202(d)(3) of the Act (12 U.S.C. counts of financial statements and re- 1782(d)(3)) provides, generally, that no in- ports required to be filed quarterly sured credit union shall pay any dividends on under paragraph (a) of this section its insured shares or distribute any of its as- must reflect GAAP if the credit union sets while it remains in default in the pay- has total assets of $10 million or great- ment of its deposit or any premium charge er, but may reflect regulatory account- due to the fund. Section 202(d)(3) further provides that any director or officer of any ining principles other than GAAP if the sured credit union who knowingly partici- credit union has total assets of less pates in the declaration or payment of any than $10 million (except that a Feder- such dividend or in any such distribution ally-insured State-chartered credit

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union may be required by its state (1) Purchases of student loans or real credit union supervisor to follow GAAP estate secured loans to facilitate the regardless of asset size). packaging of a pool of loans to be sold (c) GAAP sources. GAAP means gen- or pledged on the secondary market erally accepted accounting principles, under § 701.23(b)(1)(iii) or (iv) of this as defined in § 715.2(e) of this chapter. chapter or comparable state law for GAAP is distinct from GAAS, which state-chartered credit unions, or pur- means generally accepted auditing chases of member loans under standards, as defined in § 715.2(f) of this § 701.23(b)(1)(i) of this chapter or com- chapter. Authoritative sources of parable state law for state-chartered GAAP include, but are not limited to, credit unions; pronouncements of the Financial Ac- (2) Assumption of deposits, shares or counting Standards Board (FASB) and liabilities as rollovers or transfers of its predecessor organizations, the Ac- member retirement accounts or in counting Standards Executive Com- which a federally-insured credit union mittee (AcSEC) of the American Insti- perfects a security interest in connec- tute of Certified Public Accountants tion with an extension of credit to any (AICPA), the FASB’s Emerging Issues member; or Task Force (EITF), and the applicable (3) Purchases of assets, including AICPA Audit and Accounting Guide. loans, or assumptions of deposits, [60 FR 58504, Nov. 28, 1995, as amended at 64 shares, or liabilities by any credit FR 41040, July 29, 1999; 67 FR 12464, Mar. 19, union insured by the NCUSIF from an- 2002; 71 FR 4034, Jan. 25, 2006; 74 FR 35769, other credit union insured by the July 21, 2009] NCUSIF, except a purchase or assumption as a part of a merger under Part § 741.7 Conversion to a state-chartered 708b. credit union. (c) A credit union seeking approval Any federal credit union that peti- under paragraph (a) of this section tions to convert to a state-chartered must submit a letter to the regional of- federally insured credit union is re- fice with jurisdiction for the state quired to apply to the Regional Direc- where the credit union is tor for continued insurance of its ac- headquartered. A corporate credit counts and meet the requirements as union seeking approval under para- stated in the Act and this part. If the graph (a) of this section must submit a application for continued insurance is letter to the Office of Corporate Credit not approved, such insurance will ter- Unions. The letter must request ap- minate subject to the conditions set proval and state the nature of the forth in section 206(d) of the Act. transaction and include copies of relevant transaction documents. The re- § 741.8 Purchase of assets and assump- gional director will make a decision to tion of liabilities. approve or disapprove the request as (a) Any credit union insured by the soon as possible depending on the com- National Credit Union Share Insurance plexity of the proposed transaction. Fund (NCUSIF) must receive approval Credit unions should submit a request from the NCUA before purchasing loans for approval in sufficient time to close or assuming an assignment of deposits, the transaction. shares, or liabilities from: (1) Any credit union that is not in- [70 FR 75725, Dec. 21, 2005] sured by the NCUSIF; (2) Any other financial-type institu- § 741.9 Uninsured membership shares. tion (including depository institutions, Any credit union that is insured pur- mortgage banks, consumer finance suant to Title II of the Act may not companies, insurance companies, loan offer membership shares that, due to brokers, and other loan sellers or li- the terms and conditions of the ac- ability traders); or count, are not eligible for insurance (3) Any successor in interest to any coverage. This prohibition does not institution identified in paragraph apply to shares that are uninsured (a)(1) or (a)(2) of this section. solely because the amount is in excess (b) Approval is not required for: of the maximum insurance coverage

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provided pursuant to part 745 of this (3) Operating facilities, including of- chapter. fice space/equipment and supplies; (4) Safeguarding of assets, bond cov- § 741.10 Disclosure of share insurance. erage, insurance coverage, and records Any credit union which is insured preservation; pursuant to Title II of the Act and is (5) Written policies regarding the permitted by state law to accept non- branch (shares, lending, capital, member shares or deposits from charge-offs, collections); sources other than other credit unions (6) The field of membership or por- and public units (or, for low-income tion of the field of membership to be designated credit unions, any nonmem- served through the foreign branch and bers), shall identify such nonmember accounts as nonmember shares or de- the financial needs of the members to posits on any statement or report re- be served and services and products to quired by the NCUA Board for insur- be provided; ance purposes. Immediately after a (7) Detailed pro forma financial state- state-chartered credit union receives ments for branch operations (balance notice from NCUA that its member ac- sheet and income and expense projec- counts are federally insured, the credit tions) for the first and second year in- union shall advise any present non- cluding assumptions; member share and deposit holders by (8) Internal controls including cash letter that their accounts are not in- disbursal procedures for shares and sured by the NCUSIF. Also, future non- loans at the branch; member share and deposit fund holders (9) Accounting procedures used to will be so advised by letter as they identify branch activity and perform- open accounts. ance; and § 741.11 Foreign branching. (10) Foreign income taxation and employment law. (a) Application and Prior NCUA Ap- (d) Revocation of Approval. A state proval Required. Any credit union in- regulator that revokes approval of the sured under Title II of the Act must branch office must notify NCUA of the apply for and receive approval from the regional director before establishing a action once it issues the notice of rev- credit union branch outside the United ocation. The regional director may re- States unless the foreign branch is lo- voke approval of the branch office for cated on a United States military in- failure to follow the business plan in a stillation or embassy outside the material respect or for substantive and United States. The regional director documented safety and soundness rea- will have 60 days to approve or deny sons. If the regional director revokes the request. the approval, the credit union will have (b) Contents of Application. The appli- six months from the date of the revoca- cation must include a business plan, tion letter to terminate the operations written approval by the state super- of the branch. The credit union can ap- visory agency if the applicant is a peal this revocation directly to the state-chartered credit union, and docu- NCUA Board within 30 days of the date mentation evidencing written permis- of the revocation letter. sion from the host country to establish (e) Insurance Coverage. Accounts at the branch that explicitly recognizes foreign branches are insured by the NCUA’s authority to examine and take NCUSIF only if denominated in U.S. any enforcement action, including con- dollars and only if payable, by the servatorship and liquidation actions. terms of the account agreement, at a (c) Contents of Business Plan. The U.S. office of the credit union. If the written business plan must address the following: host country requires insurance from (1) Analysis of market conditions in its own system, accounts will not be the area where the branch is to be es- insured by the National Credit Union tablished; Share Insurance Fund. (2) The credit union’s plan for ad- [68 FR 23030, Apr. 30, 2003] dressing foreign currency risk;

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Subpart B—Regulations Codified § 741.203 Minimum loan policy re- Elsewhere in NCUA’s Regula- quirements. tions as Applying to Federal Any credit union which is insured Credit Unions That Also Apply pursuant to Title II of the Act must: to Federally Insured State- (a) Adhere to the requirements stated in part 723 of this chapter concerning Chartered Credit Unions member business loans, § 701.21(c)(8) of § 741.201 Minimum fidelity bond re- this chapter concerning prohibited quirements. fees, and § 701.21(d)(5) of this chapter concerning nonpreferential loans. (a) Any credit union which makes ap- State-chartered, NCUSIF-insured cred- plication for insurance of its accounts it unions in a given state are exempt pursuant to Title II of the Act must from these requirements if the state possess the minimum fidelity bond cov- supervisory authority for that state erage stated in part 713 of this chapter adopts substantially equivalent regula- in order for its application for such in- tions as determined by the NCUA surance to be approved and for such in- Board or, in the case of the member surance coverage to continue. A feder- business loan requirements, if the state ally insured credit union whose fidelity supervisory authority adopts member bond coverage is terminated shall mail business loan regulations that are ap- notice of such termination to the Re- proved by the NCUA Board pursuant to gional Director not less than 35 days § 723.20. In nonexempt states, all re- prior to the effective date of such ter- quired NCUA reviews and approvals mination. will be handled in coordination with (b) Corporate credit unions must the state credit union supervisory au- comply with § 704.18 of this chapter in thority; and lieu of part 713 of this chapter. (b) Adhere to the requirements stated in part 722 of this chapter concerning [60 FR 58504, Nov. 28, 1995, as amended at 64 appraisals. FR 28721, May 27, 1999; 70 FR 61716, Oct. 26, (c) Adhere to the requirements stated 2005] in § 701.21(h) of this chapter concerning third-party servicing of indirect vehi- § 741.202 Audit and verification re- cle loans. Before a state-chartered quirements. credit union applies to a regional direc- (a) The supervisory committee of tor for a waiver under § 701.21(h)(2), it each credit union insured pursuant to must first notify its state supervisory Title II of the Act shall make or cause authority. The regional director will to be made an audit of the credit union not grant a waiver unless the appro- at least once every calendar year cov- priate state official concurs in the ering the period elapsed since the last waiver. The 45-day period for the re- audit. The audit must fully meet the gional director to act on a waiver re- applicable requirements set forth in quest, as described § 701.21(h)(3), will part 715 of this chapter or applicable not begin until the regional director state law, whichever requirement is has received the state official’s concur- more stringent. rence and any other necessary information. (b) Each credit union which is insured pursuant to Title II of the Act [60 FR 58504, Nov. 28, 1995, as amended at 63 shall verify or cause to be verified, FR 51802, Sept. 29, 1998; 64 FR 28733, May 27, under controlled conditions, all pass- 1999; 71 FR 36667, June 28, 2006] books and accounts with the records of § 741.204 Maximum public unit and the financial officer not less frequently nonmember accounts, and low-in- than once every 2 years. The come designation. verification must fully meet the re- Any credit union that is insured, or quirements set forth in § 715.8 of this that makes application for insurance, chapter. pursuant to Title II of the Act must: [60 FR 58504, Nov. 28, 1995, as amended at 64 (a) Adhere to the requirements of FR 41040, July 29, 1999] § 701.32 of this chapter regarding public

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unit and nonmember accounts, pro- Regional Director. The state super- vided it has the authority to accept visory authority must grant or deny such accounts. Requests by federally the request with the concurrence of the insured state-chartered credit unions appropriate NCUA Regional Director. for an exemption from the limitation [60 FR 58504, Nov. 28, 1995, as amended at 61 of § 701.32 of this chapter will be made FR 3792, Feb. 2, 1996; 71 FR 4240, Jan. 26, 2006] and reviewed on the same basis as that provided in § 701.32 of this chapter for § 741.205 Reporting requirements for federal credit unions, provided, how- credit unions that are newly char- ever that NCUA will not grant an ex- tered or in troubled condition. emption without the concurrence of Any federally insured credit union the appropriate state regulator. chartered for less than 2 years or any (b) Obtain a low-income designation credit union defined to be in troubled in order to accept nonmember ac- condition as set forth in § 701.14(b)(3) of counts, other than from public units or this chapter must adhere to the re- other credit unions, provided it has the quirements stated in § 701.14(c) of this authority to accept such accounts chapter concerning the prior notice under state law. The state regulator and NCUA review. Federally insured shall make the low-income designation state-chartered credit unions must sub- with the concurrence of the appro- mit required information to both the priate regional director. The designa- appropriate NCUA Regional Director tion will be made and reviewed by the and their state supervisor. NCUA will state regulator on the same basis as consult with the state supervisor be- that provided in § 701.34(a) of this chap- fore making its determination pursu- ter for federal credit unions. Removal ant to § 701.14 (d)(2) and (f) of this chap- of the designation by the state regu- ter. NCUA will notify the state super- lator for such credit unions shall be visor of its approval/disapproval no with the concurrence of NCUA. later than the time that it notifies the (c) Receive secondary capital ac- affected individual pursuant to counts only if the credit has a low-in- § 701.14(d)(1) of this chapter. come designation pursuant to paragraph (b) of this section, and then only § 741.206 Corporate credit unions. in accordance with the terms and con- Any corporate credit union insured ditions authorized for Federal credit pursuant to Title II of the Act shall ad- unions pursuant to § 701.34(b)(1) of this here to the requirements of part 704 of chapter and to the extent not incon- this chapter. sistent with applicable state law and regulation. State chartered federally § 741.207 Community development re- insured credit unions offering sec- volving loan program for credit ondary capital accounts must submit unions. the plan required by § 701.34(b)(1) to Any credit union which is insured both the state supervisory authority pursuant to Title II of the Act and is a and the NCUA Regional Director for ‘‘participating credit union,’’ as de- approval. The state supervisory au- fined in § 705.3 of this chapter, shall ad- thority must approve or disapprove the here to the requirements stated in part plan with the concurrence of the appro- 705 of this chapter. priate NCUA Regional Director. (d) Redeem secondary capital ac- § 741.208 Mergers of federally insured counts only in accordance with the credit unions: voluntary termi- terms and conditions authorized for nation or conversion of insured sta- federal credit unions pursuant to tus. § 701.34(d) of this chapter and to the ex- Any credit union which is insured tent not inconsistent with applicable pursuant to Title II of the Act and state law and regulation. State char- which merges with another credit tered federally insured credit unions union or non-credit union institution, seeking to redeem secondary capital and any state-chartered credit union accounts must submit the request re- which voluntarily terminates its status quired by § 701.34(d)(1) to both the state as a federally-insured credit union, or supervisory authority and the NCUA converts from federal insurance to

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other insurance from a government or part E of part 747 of this chapter ap- private source authorized to insure plies only to federal credit unions. member accounts, shall adhere to the applicable requirements stated in sec- § 741.214 Report of crime or cata- tion 206 of the Act and parts 708a and strophic act and Bank Secrecy Act 708b of this chapter concerning mergers compliance. and voluntary termination or conver- Any credit union which is insured sion of insured status. pursuant to Title II of the Act shall adhere to the requirements stated in part § 741.209 Management official inter- 748 of this chapter. locks. Any credit union which is insured § 741.215 Records preservation pro- pursuant to Title II of the Act shall ad- gram. here to the requirements stated in part Any credit union which is insured 711 of this chapter concerning manage- pursuant to Title II of the Act shall ment official interlocks, issued under maintain a records preservation pro- the provisions of the Depository Insti- gram as prescribed by part 749 of this tution Management Interlocks Act (12 chapter. U.S.C. 3201 et seq.). § 741.216 Flood insurance. § 741.210 Central liquidity facility. Any credit union which is insured Any credit union which is insured pursuant to Title II of the Act shall ad- pursuant to Title II of the Act and is a here to the requirements stated in part member of the Central Liquidity Facil- 760 of this chapter. ity, shall adhere to the requirements stated in part 725 of this chapter. § 741.217 Truth in savings. § 741.211 Advertising. Any credit union which is insured pursuant to Title II of the Act shall ad- Any credit union which is insured here to the requirements stated in part pursuant to Title II of the Act shall ad- 707 of this chapter. here to the requirements prescribed by part 740 of this chapter. § 741.218 Involuntary liquidation and creditor claims. § 741.212 Share insurance. Any credit union which is insured (a) Member share accounts received pursuant to Title II of the Act shall ad- by any credit union which is insured here to the applicable provisions in pursuant to Title II of the Act in its part 709 of this chapter. Section 709.3 of usual course of business, including reg- this chapter applies only to federal ular shares, share certificates, and credit unions. share draft accounts, are insured subject to the limitations and rules in sub- § 741.219 Investment requirements. part A of part 745 of this chapter. (b) The payment of share insurance Any credit union which is insured and the appeal process applicable to pursuant to Title II of the Act must ad- any credit union which is insured pur- here to the requirements stated in part suant to Title II of the Act are ad- 703 of this chapter concerning dressed in subpart B of part 745 of this transacting business with corporate chapter. credit unions. [62 FR 12949, Mar. 19, 1997] § 741.213 Administrative actions, adjudicative hearings, rules of practice § 741.220 Privacy of consumer finan- and procedure. cial information. Any credit union which is insured Any credit union which is insured pursuant to Title II of the Act shall ad- pursuant to Title II of the Act must adhere to the applicable rules of practice here to the requirements stated in part and procedures for administrative ac- 716 of this chapter. tions and adjudicative hearings prescribed by part 747 of this chapter. Sub- [65 FR 31750, May 18, 2000]

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§ 741.221 Suretyship and guaranty re- (b) This section shall have no pre- quirements. emptive effect with respect to the laws Any credit union, which is insured or rules of any state providing for ac- pursuant to Title II of the Act, must cess to CUSO books and records or adhere to the requirements in § 701.20 of CUSO examination by credit union reg- this chapter. State-chartered, NCUSIF- ulatory authorities. insured credit unions may only enter (c) The effective date for compliance into suretyship and guaranty agree- with this section is June 29, 2009. ments to the extent authorized under state law. [73 FR 79313, Dec. 29, 2008] [69 FR 8548, Feb. 25, 2004] APPENDIX A TO PART 741—EXAMPLES OF PARTIAL-YEAR NCUSIF ASSESS- § 741.222 Credit union service organi- MENT AND DISTRIBUTION CALCULA- zations. TIONS UNDER § 741.4 (a) Any credit union that is insured pursuant to Title II of the Act must ad- The following examples illustrate the cal- here to the requirements in §§ 712.3(d)(3) culation of deposit and premium assessments and 712.4 of this chapter concerning under each circumstance addressed in para- agreements between credit unions and graphs (i) and (j) of § 741.4. A. Direct Conversion to NCUSIF Insurance their credit union service organizations 1. Paragraph (i)(1)(i) provides that a credit (CUSOs) and the requirement to main- union or other institution that converts to tain separate corporate identities. For insurance coverage with the NCUSIF will purposes of this section, a CUSO is any immediately fund its one percent deposit entity in which a credit union has an based on the total of its insured shares as of ownership interest or to which a credit the last day of the most recently ended re- union has extended a loan and that is porting period prior to the date of conver- engaged primarily in providing prod- sion. ucts or services to credit unions or i. The following hypothetical illustrates credit union members, or, in the case the application of this provision. Assume of checking and currency services, in- Main Street Credit Union completes its con- cluding check cashing services, sale of version from nonfederal to federal insurance negotiable checks, money orders, and on May 15 of Year One. Assume further that electronic transaction services, includ- Main Street credit union had 1,000 insured shares for the end of month in December of ing international and domestic elec- the previous year (Year zero), 1,100 insured tronic fund transfers, to persons eligi- shares for at the end of May, the month of ble for membership in any credit union conversion, and 1,200 insured shares at the having a loan, investment or contract end of June. This information is presented in with the entity. this Table A:1

TABLE A

End of month, End of month, May, year one December, (month con- End of month, year zero version com- June, year one pleted)

Main Street Credit Union’s Federally Insured Shares ...... 1,000 1,100 1,200

ii. Paragraph (i)(1)(i) requires that on the less than $50,000,000 in assets, its reporting date of its conversion, Main Street fund its period is annual, and ends on December 31. 12 one percent deposit based on ‘‘the total of its CFR 741.4(b)(6) (definition of ‘‘reporting pe- insured shares as of the last day of the most riod’’). Main Street had $1,000 in insured recently ended reporting period prior to the shares on that date, and one percent of that date of conversion.’’ Since Main Street has is $10, and so that is the amount Main Street

1 Although Main Street Credit Union was for purposes of this section only, the amount not federally insured as of December 31 of of deposits or shares that would have been Year Zero, proposed § 741.4(b)(3) provides that insured by the NCUSIF under part 745 had ‘‘For a credit union or other entity that is the institution been federally insured on the not federally insured, ‘insured shares’ means, date of measurement.’’

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must immediately remit to the NCUSIF to thetical A related to the conversion of Main establish its one percent deposit. Street from nonfederal to federal insurance. 2. Paragraph (i)(1)(ii) provides that a credit Now, further assume that on the previous union or other institution that converts to March 15, NCUA had declared a premium as- insurance coverage with the NCUSIF will, if sessment, and on September 15 following the the NCUSIF assesses a premium in the cal- conversion NCUA sent out the invoices for endar year of conversion, pay a premium the March 15 assessment. Also assume that based on the institution’s insured shares as Main Street had grown to 1,300 insured of the last day of the most recently ended re- shares at the end of September, the month porting period preceding the invoice date times the institution’s premium/distribution the invoices were sent to Main Street and ratio * * *. other credit unions. This information is pre- i. To illustrate the application of para- sented in this Table B: graph (i)(1)(ii), take the same facts in hypo-

TABLE B

End of month, End of month, End of month, May, year one September, December, (month con- End of month, year one year zero version com- June, year one (month invoice pleted) sent)

Main Street Credit Union’s Federally Insured Shares ...... 1,000 1,100 1,200 1,300

ii. Paragraph (i)(1)(ii) requires Main Street entity converting to federal insurance to repay a premium based on the institution’s plenish a depleted NCUSIF deposit, as fol- ‘‘insured shares as of the last day of the most lows: A credit union or other institution that recently ended reporting period preceding converts to insurance coverage with the the invoice date times the institution’s pre- NCUSIF will, if the NCUSIF declares, in the mium/distribution ratio.’’ Again, because calendar year of conversion but on or before Main Street is under $50 million in assets, the date of conversion, an assessment to re- the most recently ended reporting period plenish the one-percent deposit, pay nothing preceding the September 15 invoice date is related to that assessment; if the NCUSIF all the way back to December of Year Zero, when Main Street had $1,000 in shares. Main declares, at any time after the date of con- Street’s ‘‘premium/distribution ratio,’’ as de- version through the end of that calendar fined in § 741.4(b)(5), is ‘‘the number of full re- year, an assessment to replenish the one-per- maining months in the calendar year fol- cent deposit, pay a replenishment amount lowing the date of the institution’s conver- based on the institution’s insured shares as sion or merger divided by 12.’’ Since Main of the last day of the most recently ended re- Street completed its conversion in May, porting period preceding the invoice date. there are seven full months remaining in the i. Paragraph (i)(1)(iii) clarifies that a con- calendar year (June through December), and verting credit union has no responsibility to Main Street’s premium/distribution ratio is pay anything toward the replenishment of a seven divided by 12. Accordingly, Main depleted deposit that is declared on or before Street’s premium will be assessed on $1,000 the date of conversion, even if NCUA sends 2 times seven divided by 12, or about $583. out invoices related to the depletion after Note that if Main Street’s assets had exceed- the date of conversion. Paragraph (i)(1)(iv) ed $50 million as of June 30, it would have requires that a converting credit union re- had semiannual reporting periods under § 741.4(b)(6), and its ‘‘insured shares as of the plenish its deposit with regard to a depletion last day of the most recently ended reporting declared after the date of conversion through period preceding the invoice date’’ would the end of the calendar year. Again, assume have been its insured shares as of June 30, the same facts for Main Street as in Table B, Year One, and not as of December 31, Year but that the deposit depletion was an- Zero. nounced in June, after Main Street con- 3. Paragraphs (i)(1)(iii) and (iv) describe verted, and that NCUA sent the invoices in the responsibility of a credit union or other September.

2 Main Street’s actual premium charge will times the aggregate premium for all feder- be this $583 divided by the aggregate insured ally insured credit unions. shares of all federally insured credit unions

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TABLE B

End of month, End of month, End of month, May, year one September, December, (month con- End of month, year one year zero version com- June, year one (month invoice pleted) sent)

Main Street Credit Union’s Federally Insured Shares ...... 1,000 1,100 1,200 1,300

ii. Main Street would receive an invoice tion ratio. Since it converted in May of Year amount ‘‘based on the [Main Street’s] in- One, and there were seven full months re- sured shares as of the last day of the most maining in Year One at on the date of con- recently ended reporting period preceding version, Main Street’s premium/distribution the invoice date.’’ Since Main Street has less ratio under § 741.4(b)(6) equals seven divided than $50 million in shares, the most recently by 12. ended reporting period preceding the Sep- ii. On the other hand, if the NCUA declared tember invoice date was December 31, Year a distribution a year earlier, that is, in Jan- Zero, and it would pay for the replenishment uary of Year One based on the NCUSIF’s eq- based on $1,000 in insured shares. If Main uity ratio as of December 31 in Year Zero, Street, however, had had $50 million or more then under paragraph (i)(1)(v) Main Street in assets on June 30, its most recently ended would receive no part of this distribution. reporting period preceding the invoice date Main Street is not entitled to any part of would have been the semiannual period end- this distribution because Main Street, which ing on June 30, and Main Street would have completed its conversion in Year One, did used its insured shares as of June 30 to cal- not contribute in any way to the excess culate the replenishment amount due to the funds in the NCUSIF as of the end of Year NCUSIF. Zero. 4. Under the Federal Credit Union Act, dis- B. Conversion to NCUSIF Coverage Through tributions, if any, are declared once a year, Merger with a Federally Insured Credit Union. early in the year, based on excess funds in Paragraph (i)(2) addresses the NCUSIF pre- the NCUSIF as of the prior December 31. miums, deposit replenishments, and distribu- Paragraph (i)(1)(v) describes the right of a tion calculations when a nonfederally in- credit union or other entity converting to sured credit union or entity converts to federal insurance to receive a distribution NCUSIF coverage by merging with a feder- from the NCUSIF, specifically: A credit ally insured credit union. union or other institution that converts to 1. Paragraph (i)(2)(i) provides that a feder- insurance coverage with the NCUSIF will, if ally-insured credit union that merges with a the NCUSIF declares a distribution in the nonfederally-insured credit union or other year following conversion based the non-federally insured institution (the NCUSIF’s equity at the end of the year of ‘‘merging institution’’), where the federally- conversion, receive a distribution based on insured credit union is the continuing insti- the institution’s insured shares as of the end tution, will immediately on the date of of the year of conversion times the institu- merger increase the amount of its NCUSIF tion’s premium/distribution ratio. With re- deposit by an amount equal to one percent of gard to distributions declared in the cal- the merging institution’s insured shares as endar year of conversion but based on the of the last day of the merging institution’s NCUSIF’s equity at the end of the preceding most recently ended reporting period pre- year, the converting institution will receive ceding the date of merger. no distribution. i. To illustrate this provision, and the i. To illustrate how paragraph (i)(1)(v) other provisions of paragraph (i)(2) related to works, assume that Main Street Credit mergers of nonfederally insured entities into Union converts to federal insurance in May federally-insured credit unions, consider the of Year One, and that the NCUA declares a following hypothetical. Nonfederally-insured distribution in January of Year Two based Credit Union A merges into federally-insured on the NCUSIF equity as of December 31 of Credit Union B on August 15 of Year One. Year One. Then Main Street will be entitled The relevant insured shares of Credit Union to a pro rata portion of the distribution, cal- A and Credit Union B at various dates before culated on its insured shares as of December and after the merger are reflected in Table 31 of Year One times its premium/distribu- D:

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TABLE D

End of month End of Month End of month August, year September, December, End of month one (month year one year zero June, year one merger (month invoice completed) sent)

Credit Union A Insured shares ...... 1,000 1,100 N/A N/A Credit Union B Insured shares ...... 9,000 9,900 12,900 14,000

ii. Paragraph (i)(2)(i) requires that Credit Then calculate the insured shares of Credit Union B, the continuing credit union, imme- Union B, the continuing credit union, ‘‘as of diately increase the amount of its deposit the last day of its most recently ended re- with the NCUSIF in an amount ‘‘equal to one porting period preceding the merger date.’’ percent of the merging institution’s insured Since Credit Union B is also under $50 mil- shares as of the last day of the merging in- lion in assets, ‘‘the last day of the most re- stitution’s most recently ended reporting pe- cently ended reporting period’’ is also De- riod preceding the date of merger.’’ Since cember 31 of Year Zero. Credit Union B’s in- Credit Union A, the merging institution, has sured shares on that date were $9,000, and so less than $50 million in assets, its reporting the combined insured shares for purposes of period is the calendar year, and its most re- the premium assessment is $9,333. Note that cently ended reporting period preceding the if Credit Union B had $50 million or more in August merger date is December 31 in Year assets on June 30 of Year One, then Credit Zero. Credit Union A had $1,000 in insured Union B’s ‘‘most recently ended reporting shares on that date. Accordingly, Credit period preceding the merger date’’ would Union B, the continuing credit union, must have been June 30 of Year One, and not De- immediately increase the amount of its december 31 of Year Zero. The Board is aware posit with the NCUSIF by one percent of that the NCUA might declare a NCUSIF pre- $1,000, or $10. Note that if Credit Union A had mium, invoice it, and receive the premiums been a larger credit union, with $50 million in Year One from the continuing institution or more in assets on June 30 in Year One, before the continuing institution con- then Credit Union B would have used Credit summates its merger. In that case, the Board Union A’s insured shares as of June 30 in this would invoice the continuing credit union calculation. again after the merger, but only for the dif- 2. Paragraph (i)(2)(ii), relating to NCUSIF ference between the amount previously premium assessments, provides that the con- invoiced and the amount calculated under tinuing institution will, with regard to any paragraph (i)(2)(ii). NCUSIF premiums assessed in the calendar 3. Paragraph (i)(2)(iii) prescribes the proce- year of merger, pay a two-part premium, dures for calculating the NCUSIF distribu- with one part calculated on the merging in- tion when a nonfederally insured credit stitution’s insured shares as described in union or entity merges into a federally in- subparagraph (1)(ii) above, and the other sured credit union. Paragraph (i)(2)(iii) pro- part calculated on the continuing institu- vides that the federally insured credit union tion’s insured shares as of the last day of its will, if the NCUSIF declares a distribution in most recently ended reporting period pre- the year following the merger based on the ceding the date of merger. NCUSIF’s equity at the end of the year of i. Paragraph (i)(2)(ii) provides for a two- merger, receive a distribution based on the part calculation, with the first part relating continuing institution’s insured shares as of to the merging credit union and the second the end of the year of merger. With regard to part relating to the continuing credit union. distributions declared in the calendar year of Assuming the facts as in Table D, and as- merger but based on the NCUSIF’s equity suming the premium is assessed sometime in from the end of the preceding year, the insti- Year One, calculate the insured shares of tution will receive a distribution based on its Credit Union A, the merging credit union, as insured shares as of the end of the preceding in the example for paragraph (i)(1)(ii). Once year. again, because Credit Union A is under $50 i. This formula recognizes that the merg- million in assets, the most recently ended re- ing institution did not contribute to the porting period preceding the invoice date is NCUSIF equity as of the end of the year pre- December of Year Zero, when Credit Union A ceding the merger and so no distribution is had $1,000 in shares. The merger was com- allotted against the merging institution’s pleted in August, leaving four full months in shares. As for distributions based on the the calendar year, so the premium/distribu- NCUSIF equity at the end of the year of tion ratio is four divided by 12. Accordingly, merger, this formula does not include any this part of the premium will be assessed on pro rata reduction for the merging institu- $1,000 times four divided by 12, or about $333. tion’s contribution. The Board determined

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that a pro rata reduction was unnecessary, version times the institution’s modified pre- given the generally small relative size of mium/distribution ratio. merging institutions to continuing institu- i. To illustrate the application of this para- tions, and the fact that the Federal Credit graph (j)(1)(ii), again assume Anytown Credit Union Act does not require any sort of pro Union converts to nonfederal insurance on rata reduction or other pro rata calculation November 15, and in January of the following with regard to distributions. year, the NCUSIF declares a distribution C. Conversion from, or termination of, Federal based on the NCUSIF’s equity ratio as of De- share insurance. cember 31. Anytown would receive a pro rata Paragraph (j)(1) addresses direct insurance distribution calculated as its $20 million in conversions and conversions by merger. insured shares multiplied by the modified Paragraph (j)(2) addresses liquidations and premium/distribution ratio. Anytown’s modi- insurance termination. fied premium/distribution ratio, from the 1. Paragraph (j)(1)(i) provides that a feder- definition in § 741.4(b)(5), is one minus ally insured credit union whose insurance Anytown’s premium/distribution ratio, coverage with the NCUSIF terminates, in- which is one minus the ratio of the full num- cluding through a conversion to, or merger ber of months remaining in the year divided into, a nonfederally insured credit union or a by twelve, which is one minus (one divided noncredit union entity, will receive the full by twelve), which is eleven divided by amount of its NCUSIF deposit paid, less any twelve. So Anytown would receive a pro rata amounts applied to cover NCUSIF losses distribution based on $20 million of insured that exceed NCUSIF retained earnings, im- shares times eleven-twelfths, or based on mediately after the final date on which any about $18.33 million in shares.3 shares of the credit union are NCUSIF-in- 3. Paragraph (j)(1)(iii) provides that a fed- sured. erally insured credit union whose insurance i. To illustrate the application of this para- coverage with the NCUSIF terminates, in- graph (j)(1)(i), consider the following hypo- cluding through a conversion to, or merger thetical. Assume Anytown Credit Union, a into, a nonfederally insured credit union or a credit union with $30 million in assets, con- noncredit union entity, will, if the NCUSIF verts from federal to nonfederal insurance on assesses a premium in the calendar year of November 15. Also assume Anytown Credit conversion or merger on or before the day in Union had $20 million in insured shares as of which the conversion or merger is com- the previous December 31, the end of its most pleted, pay a premium based on the institu- recent reporting period. 12 CFR 741.4(b)(5), tion’s insured shares as of the last day of the (c). The NCUSIF would return one-percent of most recently ended reporting period pre- $20 million, or $200,000 to Anytown Credit ceding the conversion or merger date times Union immediately following the effective the institution’s modified premium/distribu- date of its conversion. Note that, if Anytown tion ratio. If the institution has previously Credit Union had reported $50 million or paid a premium based on this same assess- more in assets on June 30, then June 30 ment that exceeds this amount, the institu- would have been the end of its most recent tion will receive a refund of the difference reporting period. Now further assume that, following completion of the conversion or on July 15 of that same year, the NCUSIF merger. had announced an expense that reduced the i. To illustrate these premium provisions, equity ratio from 1.3 to .75, which would again assume Anytown Credit Union is a have included a write-off (depletion) of 25%, credit union with $30 million in assets that or 25 basis points, of the one-percent deposit. converts from federal to nonfederal insur- The amount of the deposit returned to ance on November 15 of Year One, and that Anytown would be reduced by 25%, from Anytown Credit Union had $20 million in in- $200,000 to $150,000. If the NCUSIF had an- sured shares as of the previous December 31 nounced expenses reducing the equity ratio (of Year Zero), the end of its most recent re- to .75 after the November 15 conversion date, porting period. Further assume that NCUA this announcement would have no effect on declares a premium on February 12 of Year Anytown and it would still receive the full One and invoices the premium on November $200,000 from the NCUSIF. 15. Since the premium was declared ‘‘on or 2. Paragraph (j)(1)(ii) provides that a feder- before the day in which [Anytown’s] conver- ally insured credit union whose insurance sion [was] completed,’’ § 741.4(j)(1)(iii) ap- coverage with the NCUSIF terminates, in- plies. Anytown would then pay a premium cluding through a conversion to, or merger based on $20 million (its ‘‘insured shares as into, a nonfederally insured credit union or a noncredit union entity, will, if the NCUSIF declares a distribution at the end of the cal- 3 Anytown’s actual distribution would be endar year of conversion, receive a distribu- $18.33 million times the aggregate amount of tion based on the institution’s insured shares the distribution divided by the aggregate as of the last day of the most recently ended amount of all insured shares at all federally reporting period preceding the date of con- insured credit unions.

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of the last day of the most recently ended re- italized’’ for six (6) consecutive pre- porting period preceding the conversion or ceding quarters after applying the ap- merger date’’) times eleven-twelfths (its plicable RBNW requirement. ‘‘modified premium/distribution ratio’’), or (b) Application for designation. A cred- based on about $18.33 million. Note that NCUA might have already have invoiced it union that does not automatically Anytown for the premium sometime between qualify under paragraph (a) of this sec- February 12 and Anytown’s merger on No- tion may apply for a RegFlex designa- vember 15. If so, Anytown will likely receive tion, which may be granted in whole or a refund of some of this earlier premium, as in part upon notification by the appro- provided in the last sentence of priate Regional Director, provided the § 741.1(j)(1)(iii), since it may have overpaid credit union has either: the earlier premium. (1) CAMEL. Received a composite [74 FR 63281, Dec. 3, 2009] CAMEL rating of ‘‘3’’ or better for the EFFECTIVE DATE NOTE: At 74 FR 63281, Dec. preceding examination; or 3, 2009, appendix A to part 741 was added, ef- (2) Net worth. Maintained a net worth fective Jan. 4, 2010. classification of ‘‘well capitalized’’ under part 702 of this chapter for less PART 742—REGULATORY than six (6) consecutive quarters or, if FLEXIBILITY PROGRAM subject to an RBNW requirement under part 702 of this chapter, has remained Sec. ‘‘well capitalized’’ for less than six (6) 742.1 Regulatory Flexibility Program. consecutive preceding quarters after 742.2 Criteria to qualify for RegFlex des- applying the applicable RBNW require- ignation. ment. 742.3 Loss and revocation of RegFlex designation. § 742.3 Loss and revocation of RegFlex 742.4 RegFlex relief. designation. AUTHORITY: 12 U.S.C. 1756, 1766. (a) Loss of authority. RegFlex author- SOURCE: 71 FR 4039, Jan. 25, 2006, unless ity is lost when a credit union that otherwise noted. qualified automatically under the CAMEL and net worth criteria in § 742.1 Regulatory Flexibility Program. § 742.2(a) no longer meets either of NCUA’s Regulatory Flexibility Pro- those criteria. Once the authority is gram (RegFlex) exempts from all or lost, the credit union may no longer part of the NCUA regulatory restric- claim the exemptions and authority set tions identified elsewhere in this part forth in § 742.4. credit unions that demonstrate sus- (b) Revocation of authority. The Re- tained superior performance as meas- gional Director may revoke a credit ured by CAMEL rating and net worth union’s RegFlex authority under § 742.2, classification. RegFlex credit unions in whole or in part, for substantive, also are authorized to purchase and documented safety and soundness rea- hold an expanded range of obligations. sons. When revoking RegFlex authority, the regional director must give § 742.2 Criteria to qualify for RegFlex written notice to the credit union stat- designation. ing the reasons for the revocation. The (a) Automatic qualification. A credit revocation is effective upon the credit union automatically qualifies for union’s receipt of notice from the Re- RegFlex designation, without formal gional Director. notification, when it has: (c) Appeal of revocation. A credit (1) CAMEL. Received a composite union has 60 days from the date of the CAMEL rating of ‘‘1’’ or ‘‘2’’ for the regional director’s determination to re- two (2) preceding examinations; and voke RegFlex authority to appeal the (2) Net worth. Maintained a net worth action, in whole or in part, to NCUA’s classification of ‘‘well capitalized’’ Supervisory Review Committee. The under part 702 of this chapter for six (6) Regional Director’s determination will consecutive preceding quarters or, if remain in effect unless and until the subject to a risk-based net worth Supervisory Review Committee issues (RBNW) requirement under part 702 of a different determination. If the credit this chapter, has remained ‘‘well cap- union is dissatisfied with the decision

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of the Supervisory Review Committee, maximum maturity length of zero-cou- the credit union has 60 days from the pon securities; date of the Committee’s decision to ap- (8) Borrowing repurchase transactions. peal to the NCUA Board. Section 703.13(d)(3) of this chapter, con- (d) Grandfathering of past actions. Any cerning the maturity of investments a action duly taken in reliance upon credit union purchases with the pro- RegFlex authority will not be affected ceeds received in a borrowing repur- or undone by subsequent loss or rev- chase transaction, provided the value ocation of that authority. Any actions of the investments that mature later exercised after RegFlex authority is than the borrowing repurchase trans- lost or revoked must comply with all action does not exceed 100 percent of applicable regulatory requirements and the federal credit union’s net worth; restrictions. Nothing in this part shall (9) Commercial mortgage related secu- affect NCUA’s authority to require a rity. Section 703.16(d) of this chapter credit union to divest its investments prohibiting the purchase of a commer- or assets for substantive safety and cial mortgage related security of an soundness reasons. issuer other than a government-sponsored enterprise enumerated in 12 § 742.4 RegFlex Relief. U.S.C. 1757(7)(E), provided: (a) Exemptions. RegFlex credit unions (i) The security is rated in one of the are exempt from the following regu- two highest rating categories by at latory restrictions: least one nationally-recognized statis- (1) Charitable contributions. Section tical rating organization; 701.25 of this chapter concerning chari- (ii) The security meets the definition table contributions; of mortgage related security as defined (2) Nonmember deposits. Section in 15 U.S.C. 78c(a)(41) and the definition 701.32(b) and (c) of this chapter con- of commercial mortgage related secu- cerning the maximum amount of non- rity as defined in § 703.2 of this chapter; member deposits a credit union can ac- (iii) The security’s underlying pool of cept; and loans contains more than 50 loans with (3) Fixed assets. Section 701.36(a) of no one loan representing more than 10 this chapter concerning the maximum percent of the pool; and amount of fixed assets a credit union (iv) The aggregate total of commer- can acquire. Section 701.36(b)(2) of this cial mortgage related securities pur- chapter concerning the three-year par- chased by the Federal credit union does tial occupancy requirement when ac- not exceed 50 percent of its net worth. quiring unimproved land for future ex- (b) Purchase of obligations from a pansion; RegFlex credit unions are in- FICU. A RegFlex credit union is au- stead subject to a six-year partial occu- thorized to purchase and hold the fol- pancy requirement when acquiring un- lowing obligations, provided that it improved land but remain subject to would be empowered to grant them: all other provisions of that section in- (1) Eligible obligations. Eligible obliga- cluding the waiver provision; tions pursuant to § 701.23(b)(1)(i) of this (4) Member business loans. Section chapter without regard to whether 723.7(b) of this chapter concerning the they are obligations of its members, personal liability and guarantee of provided they are purchased from a fed- principals for member business loans; erally-insured credit union only; (5) Discretionary control of investments. (2) Student loans. Student loans pur- Section 703.5(b)(1)(ii) and (2) of this suant to § 701.23(b)(1)(iii) of this chap- chapter concerning the maximum ter, provided they are purchased from a amount of investments over which dis- federally-insured credit union only; cretionary control can be delegated; (3) Mortgage loans. Real-state secured (6) ‘‘Stress testing’’ of investments. Sec- loans pursuant to 701.23(b)(1)(iv) of this tion 703.12(c) of this chapter concerning chapter, provided they are purchased ‘‘stress testing’’ of securities holdings from a federally-insured credit union to assess the impact of an extreme in- only; terest rate shift; (4) Eligible obligations of a liquidating (7) Zero-coupon securities. Section credit union. Eligible obligations of a 703.16(b) of this chapter concerning the liquidating credit union pursuant to

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§ 701.23(b)(1)(ii) of this chapter without Subpart A—Clarification and Defi- regard to whether they are obligations nition of Account Insurance of the liquidating credit union’s mem- Coverage bers, provided that such purchases do not exceed 5 percent (5%) of the § 745.0 Scope. unimpaired capital and surplus of the The regulation and appendix con- purchasing credit union. tained in this part describe the insur- [71 FR 4039, Jan. 25, 2006, as amended at 72 ance coverage of various types of mem- FR 30247, May 31, 2007; 74 FR 13083, Mar. 26, ber accounts. In general, all types of 2009] member share accounts received by the credit union in its usual course of busi- PART 745—SHARE INSURANCE AND ness, including regular shares, share APPENDIX certificates, and share draft accounts, represent equity and are insured. For the purposes of applying the rules in Subpart A—Clarification and Definition of this part, it is presumed that the owner Account Insurance Coverage of funds in an account is an insured Sec. credit union member or otherwise eli- 745.0 Scope. gible to maintain an insured account in 745.1 Definitions. a credit union. These rules do not ex- 745.2 General principles applicable in deter- tend insurance coverage to persons not mining insurance of accounts. entitled to maintain an insured ac- 745.3 Single ownership accounts. count or to account relationships that 745.4 Revocable trust accounts. have not been approved by the Board as 745.5 Accounts held by executors or admin- an insured account. Where there are istrators. multiple owners of a single account, 745.6 Accounts held by a corporation, part- generally only that part which is allo- nership, or unincorporated association. cable to the member(s) is insured. 745.7 Shares accepted in a foreign currency. 745.8 Joint ownership accounts. § 745.1 Definitions. 745.9–1 Trust accounts. (a) The terms account or accounts as 745.9–2 Retirement and other employee ben- used in this part mean share, share cer- efit plan accounts. 745.10 Accounts held by government deposi- tificate or share draft accounts (or tors. their equivalent under state law, as de- 745.11 Accounts evidenced by negotiable in- termined by the Board in the case of struments. insured state credit unions) of a mem- 745.12 Account obligations for payment of ber (which includes other credit items forwarded for collection by deposi- unions, public units and nonmembers tory institution acting as agent. where permitted under the Act) in a 745.13 Notification to members/share- credit union of a type approved by the holders. Board which evidences money or its equivalent received or held by a credit Subpart B—Payment of Share Insurance union in the usual course of business and Appeals and for which it has given or is obligated to give credit to the account of 745.200 General. the member. 745.201 Processing of insurance claims. 745.202 Appeal. (b) The terms member or members as 745.203 Judicial review. used in this part mean those persons enumerated in the credit union’s field APPENDIX TO PART 745—EXAMPLES OF INSUR- of membership who have been elected ANCE COVERAGE AFFORDED ACCOUNTS IN to membership in accordance with the CREDIT UNIONS INSURED BY THE NATIONAL Act or state law in the case of state CREDIT UNION SHARE INSURANCE FUND credit unions. It also includes those AUTHORITY: 12 U.S.C. 1752(5), 1757, 1765, 1766, nonmembers permitted under the Act 1781, 1782, 1787, 1789; Title V, Pub. L. 109– to maintain accounts in an insured 351;120 Stat. 1966. credit union, including nonmember SOURCE: 51 FR 37560, Oct. 23, 1986, unless credit unions and nonmember public otherwise noted. units and political subdivisions.

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(c) The term public unit means the appendix provides examples of the ap- United States, any state of the United plication of these rules to various fac- States, the District of Columbia, the tual situations. While the provisions of Commonwealth of Puerto Rico, the this part govern in determining share Panama Canal Zone, any territory or insurance coverage, to the extent local possession of the United States, any law enters into a share insurance de- county, municipality, or political sub- termination, the local law of the juris- division thereof, or any Indian tribe as diction in which the insured credit defined in section 3(c) of the Indian Fi- union’s principal office is located will nancing Act of 1974. control over the local law of other ju- (d) The term political subdivision in- risdictions where the insured credit cludes any subdivision of a public unit, union has offices or service facilities. as defined in paragraph (c) of this sec- (b) The regulations in this part in no tion, or any principal department of way are to be interpreted to authorize such public unit, (1) the creation of any type of account that is not author- which subdivision or department has been expressly authorized by state ized by Federal law or regulation or statute, (2) to which some functions of State law or regulation or by the by- government have been delegated by laws of a particular credit union. The state statute, and (3) to which funds purpose is to be as inclusive as possible have been allocated by statute or ordi- of all situations. nance for its exclusive use and control. (c) Records. (1) The account records of It also includes drainage, irrigation, the insured credit union shall be con- navigation improvement, levee, sani- clusive as to the existence of any rela- tary, school or power districts and tionship pursuant to which the funds in bridge or port authorities, and other the account are deposited and on which special districts created by state stat- a claim for insurance coverage is ute or compacts between the states. founded. Examples would be trustee, Excluded from the term are subordi- agent, custodian, or executor. No claim nate or nonautonomous divisions, for insurance based on such a relation- agencies, or boards within principal de- ship will be recognized in the absence partments. of such disclosure. (e) The term ‘‘standard maximum (2) If the account records of an in- share insurance amount,’’ referred to sured credit union disclose the exist- as the ‘‘SMSIA’’ hereafter, means ence of a relationship which may pro- $250,000 from October 3, 2008, until De- vide a basis for additional insurance, cember 31, 2013. Effective January 1, the details of the relationship and the 2014, the SMSIA means $100,000 ad- interest of other parties in the account justed pursuant to subparagraph (F) of must be ascertainable either from the section 11(a)(1) of the Federal Deposit records of the credit union or the Insurance Act (12 U.S.C. 1821(a)(1)(F)). records of the member maintained in All examples in this part use $250,000 as good faith and in the regular course of the SMSIA. business. [51 FR 37560, Oct. 23, 1986, as amended at 71 (3) The account records of an insured FR 14635, Mar. 23, 2006; 73 FR 62858, Oct. 22, credit union in connection with a trust 2008; 74 FR 55749, Oct. 29, 2009] account shall disclose the name of both § 745.2 General principles applicable the settlor (grantor) and the trustee of in determining insurance of ac- the trust and shall contain an account counts. signature card executed by the trustee. (a) General. This part provides for de- (4) The interests of the co-owners of a termination by the Board of the joint account shall be deemed equal, amount of members’ insured accounts. unless otherwise stated on the insured The rules for determining the insur- credit union’s records in the case of a ance coverage of accounts maintained tenancy in common. by members in the same or different (d) Valuation of trust interests. (1) rights and capacities in the same in- Trust interests in the same trust de- sured credit union are set forth in the posited in the same account will be following provisions of this part. The separately insured if the value of the

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trust interest is capable of determina- case of a share certificate, the earliest tion, without evaluation of contin- maturity date after the six-month pe- gencies, except for those covered by the riod. In the case of a share certificate present worth tables and rules of cal- that matures within the six-month culation for their use set forth in grace period that is renewed at the § 20.2031–7 of the Federal Estate Tax same dollar amount, either with or Regulations (26 CFR 20.2031–7). without accrued dividends having been (2) In connection with any trust in added to the principal amount, and for which certain trust interests are not the same term as the original share capable of evaluation in accordance certificate, the separate insurance ap- with the foregoing rule, payment by plies to the renewed share certificate the Board to the trustee with respect until the first maturity date after the to all such trust interests shall not ex- six-month period. A share certificate ceed the SMSIA. that matures within the six-month (3) Each trust interest in any trust grace period that is renewed on any established by two or more settlors other basis, or that is not renewed, is shall be deemed to be derived from separately insured only until the end of each settlor pro rata to his contribu- the six-month grace period. tion to the trust. [51 FR 37560, Oct. 23, 1986, as amended at 65 (4) The term ‘‘trust interest’’ means FR 34924, June 1, 2000; 68 FR 75114, Dec. 30, the interest of a beneficiary in an ir- 2003; 71 FR 14635, Mar. 23, 2006] revocable express trust, whether created by trust instrument or statute, § 745.3 Single ownership accounts. but does not include any interest re- (a) Funds owned by an individual and tained by the settlor. deposited in the manner set forth (e) Continuation of insurance coverage below shall be added together and in- following the death of a member. The sured up to the SMSIA in the aggre- death of a member will not affect the gate. member’s share insurance coverage for (1) Individual accounts. Funds owned a period of six months following death by an individual (or by the husband- unless the member’s share accounts are wife community of which the indi- restructured in that time period. If the vidual is a member) and deposited in accounts are restructured during the one or more accounts in the individ- six-month grace period, or upon the ex- ual’s own name shall be insured up to piration of the six months if not re- the SMSIA in the aggregate. structured, the share insurance cov- (2) Accounts held by agents or nomi- erage will be provided on the basis of nees. Funds owned by a principal and actual ownership of the accounts in ac- deposited in one or more accounts in cordance with the provisions of this the name or names of agents or nomi- part. The operation of this grace pe- nees shall be added to any individual riod, however, will not result in a re- account of the principal and insured up duction of coverage. to the SMSIA in the aggregate. This (f) Continuation of separate share in- applies to interests created in qualified surance coverage after merger of insured tuition savings programs established in credit unions. Whenever the liability to connection with section 529 of the In- pay the member accounts of one or ternal Revenue Code (26 U.S.C. 529). more insured credit unions is assumed (3) Mortgage servicing accounts. Ac- by another insured credit union, counts maintained by a mortgage whether by merger, consolidation, servicer, in a custodial or other fidu- other statutory assumption or con- ciary capacity, which are comprised of tract: The insured status of the credit payments by mortgagors of principal unions whose member account liability and interest, shall be insured for the has been assumed terminates, for pur- cumulative balance paid into the ac- poses of this section, on the date of re- count by the mortgagors, up to the ceipt by NCUA of satisfactory evidence limit of the SMSIA per mortgagor. Ac- of the assumption; and the separate in- counts maintained by a mortgage surance of member accounts assumed servicer, in a custodial or other fidu- continues for six months from the date ciary capacity, which are comprised of the assumption takes effect or, in the payments by mortgagors of taxes and

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insurance premiums shall be added to- credit union, another payable-on-death gether and insured in accordance with account naming the same niece and a paragraph (a)(2) of this section for the friend as beneficiaries. The maximum ownership interest of each mortgagor coverage available to the account in such accounts. This provision is ef- owner would be $750,000. This is because fective as of October 22, 2008, for all ex- the account owner has named only isting and future mortgage servicing three different beneficiaries in the rev- accounts. ocable trust accounts—his niece and (b) Funds held by a guardian, custo- cousin in the first, and the same niece dian, or conservator for the benefit of and a friend in the second. The naming his ward or for the benefit of a minor of the same beneficiary in more than under a Uniform Gifts to Minors Act one revocable trust account, whether it and deposited in one or more accounts be a payable-on-death account or living in the name of the guardian, custodian, trust account, does not increase the or conservator are insured up to the total coverage amount.) (EXAMPLE 3: SMSIA in the aggregate, separately Account Owner ‘‘A’’ establishes a liv- from any other accounts of the guarding trust account with a balance of ian, custodian, conservator, ward, or $300,000, naming his two children ‘‘B’’ minor. and ‘‘C’’ as beneficiaries. A also estab- [51 FR 37560, Oct. 23, 1986, as amended at 71 lishes, at the same NCUA-insured cred- FR 14635, Mar. 23, 2006; 73 FR 62858, Oct. 22, it union, a payable-on-death account, 2008; 74 FR 55749, Oct. 29, 2009] with a balance of $300,000, also naming his children B and C as beneficiaries. § 745.4 Revocable trust accounts. The maximum coverage available to A (a) General rule. Except as provided in is $500,000, determined by multiplying 2 paragraph (e) of this section, the funds times $250,000 (the number of different owned by an individual and deposited beneficiaries times the SMSIA). A is into one or more accounts with respect uninsured in the amount of $100,000. to which the owner evidences an inten- This is because all funds that an owner tion that upon his or her death the holds in both living trust accounts and funds shall belong to one or more bene- payable-on-death accounts, at the same ficiaries shall be separately insured NCUA-insured credit union and naming (from other types of accounts the the same beneficiaries, are aggregated owner has at the same insured credit for insurance purposes and insured to union) in an amount equal to the total the applicable coverage limits.) number of different beneficiaries (b) Required intention and naming of named in the account(s) multiplied by beneficiaries. The required intention in the SMSIA. This section applies to all paragraph (a) of this section that upon accounts held in connection with infor- the owner’s death the funds shall be- mal and formal testamentary rev- long to one or more beneficiaries must ocable trusts. Such informal trusts are be manifested in the title of the ac- commonly referred to as payable-on- count or elsewhere in the account death accounts, in-trust-for accounts records of the credit union using com- or Totten Trust accounts, and such for- monly accepted terms such as, but not mal trusts are commonly referred to as limited to, in trust for, as trustee for, living trusts or family trusts. payable-on-death to, or any acronym (EXAMPLE 1: Account Owner ‘‘A’’ has a therefore, or by listing one or more living trust account with four different beneficiaries in the account records of beneficiaries named in the trust. A has the credit union. In addition, for infor- no other revocable trust accounts at mal revocable trust accounts, the bene- the same NCUA-insured credit union. ficiaries must be specifically named in The maximum insurance coverage the account records of the insured would be $1,000,000, determined by mul- credit union. The settlor of a revocable tiplying 4 times $250,000 (the number of trust shall be presumed to own the beneficiaries times the SMSIA). funds deposited into the account. (EXAMPLE 2: Account Owner ‘‘A’’ has a (c) Definition of beneficiary. For pur- payable-on-death account naming his poses of this section, a beneficiary in- niece and cousin as beneficiaries, and A cludes a natural person as well as a also has, at the same NCUA-insured charitable organization and other non-

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profit entity recognized as such under sured credit union, are aggregated for the Internal Revenue Code of 1986, as insurance purposes. Although A’s ag- amended. gregated balance of $2 million is more (d) Interests of beneficiaries outside the than five times the SMDIA, A names definition of beneficiary in this section. If only four different beneficiaries, and a beneficiary named in a trust covered coverage under this paragraph (e) ap- by this section does not meet the defi- plies only if there are more than five nition of beneficiary in paragraph (c) of different beneficiaries. A is insured in this section, the funds corresponding to the amount of $1 million (4 bene- that beneficiary shall be treated as the ficiaries times the SMSIA), and unin- individually owned (single ownership) sured for the remaining $1 million.) funds of the owner(s). As such, they (EXAMPLE 2: Account Owner ‘‘A’’ has a shall be aggregated with any other sin- living trust account with a balance of gle ownership accounts of such $1,500,000. Under the terms of the trust, owner(s) and insured up to the SMSIA upon A’s death, A’s three children are per owner. (EXAMPLE: Account Owner each entitled to $125,000, A’s friend is ‘‘A’’ establishes a payable-on-death ac- entitled to $15,000, and a designated count naming a pet as beneficiary with charity is entitled to $175,000. The trust a balance of $100,000. A also has an indi- also provides that the remainder of the vidual account at the same NCUA-in- trust assets shall belong to A’s spouse. sured credit union with a balance of In this case, because the balance of the $175,000. Because the pet is not a ‘‘ben- account exceeds $1,250,000 (5 times the eficiary,’’ the two accounts are aggre- SMSIA) and there are more than five gated and treated as a single ownership different beneficiaries named in the account. As a result, A is insured in the trust, the maximum coverage available amount of $250,000, but is uninsured for to A would be the greater of: $1,250,000 the remaining $25,000.) or the aggregate of each different bene- (e) Revocable trust accounts with aggre- ficiary’s interest to a limit of $250,000 gate balances exceeding five times the per beneficiary. The beneficial inter- SMSIA and naming more than five dif- ests in the trust for purposes of deter- ferent beneficiaries. Notwithstanding mining coverage are: $125,000 for each the general coverage provisions in of the children (totaling $375,000), paragraph (a) of this section, for funds $15,000 for the friend, $175,000 for the owned by an individual in one or more charity, and $250,000 for the spouse (be- revocable trust accounts naming more cause the spouse’s $935,000 is subject to than five different beneficiaries and the $250,000 per-beneficiary limitation). whose aggregate balance is more than The aggregate beneficial interests five times the SMSIA, the maximum total $815,000. Thus, the maximum cov- revocable trust account coverage for erage afforded to the account owner the account owner shall be the greater would be $1,250,000, the greater of of either: five times the SMSIA or the $1,250,000 or $815,000.) aggregate amount of the interests of (f) Co-owned revocable trust accounts. each different beneficiary named in the (1) Where an account described in para- trusts, to a limit of the SMSIA per dif- graph (a) of this section is established ferent beneficiary. (EXAMPLE 1: Ac- by more than one owner, the respective count Owner ‘‘A’’ has a living trust interest of each account owner (which with a balance of $1 million and names shall be deemed equal) shall be insured two friends, ‘‘B’’ and ‘‘C’’ as bene- separately, per different beneficiary, ficiaries. At the same NCUA-insured up to the SMSIA, subject to the limita- credit union, A establishes a payable- tion imposed in paragraph (e) of this on-death account, with a balance of $1 section. (EXAMPLE 1: A and B, two indi- million naming his two cousins, ‘‘D’’ viduals, establish a payable-on-death and ‘‘E’’ as beneficiaries. Coverage is account naming their three nieces as determined under the general coverage beneficiaries. Neither A nor B has any provisions in paragraph (a) of this sec- other revocable trust accounts at the tion, and not this paragraph (e). This is same NCUA-insured credit union. The because all funds that A holds in both maximum coverage afforded to A and B living trust accounts and payable-on- would be $1,500,000, determined by mul- death accounts, at the same NCUA-in- tiplying the number of owners (2) times

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the SMSIA ($250,000) times the number which totaled slightly less at $1,225,000. of different beneficiaries (3). In this ex- Because B has equal ownership interest ample, A would be entitled to rev- in the trust, the same analysis and cov- ocable trust coverage of $750,000 and B erage determination also would apply would be entitled to revocable trust to B. Thus, of the total account bal- coverage of $750,000.) (EXAMPLE 2: A and ance of $3.75 million, $2.5 million would B, two individuals, establish a payable- be insured and $1.25 million would be on-death account naming their two uninsured.) children, two cousins, and a charity as (2) Notwithstanding paragraph (f)(1) beneficiaries. The balance in the ac- of this section, where the owners of a count is $1,750,000. Neither A nor B has co-owned revocable trust account are any other revocable trust accounts at themselves the sole beneficiaries of the the same NCUA-insured credit union. corresponding trust, the account shall The maximum coverage would be de- be insured as a joint account under sec- termined under paragraph (a) of this tion 745.8 and shall not be insured section by multiplying the number of under the provisions of this section. account owners (2) times the number of (EXAMPLE: If A and B establish a pay- different beneficiaries (5) times able-on-death account naming them- $250,000, totaling $2,500,000. Because the selves as the sole beneficiaries of the account balance ($1,750,000) is less than account, the account will be insured as the maximum coverage amount a joint account because the account ($2,500,000), the account would be fully does not satisfy the intent requirement insured.) (EXAMPLE 3: A and B, two in- (under paragraph (a) of this section) dividuals, establish a living trust ac- that the funds in the account belong to count with a balance of $3.75 million. the named beneficiaries upon the own- Under the terms of the trust, upon the ers’ death. The beneficiaries are in fact death of both A and B, each of their the actual owners of the funds during three children is entitled to $600,000, the account owners’ lifetimes.) B’s cousin is entitled to $380,000, A’s (g) For deposit accounts held in con- friend is entitled to $70,000, and the re- nection with a living trust that pro- maining amount ($1,500,000) goes to a vides for a life estate interest for des- charity. Under paragraph (e) of this ignated beneficiaries, NCUA shall section, the maximum coverage, as to value each such life estate interest as each co-owned account owner, would be the SMSIA for purposes of determining the greater of $1,250,000 or the aggre- the insurance coverage available to the gate amount (as to each co-owner) of account owner under paragraph (e) of the interest of each different bene- this section. (EXAMPLE: Account Owner ficiary named in the trust, to a limit of ‘‘A’’ has a living trust account with a $250,000 per account owner per bene- balance of $1,500,000. Under the terms ficiary. The beneficial interests in the of the trust, A provides a life estate in- trust considered for purposes of deter- terest for his spouse. Moreover, A’s mining coverage for account owner A three children are each entitled to are: $750,000 for the children (each $275,000, A’s friend is entitled to $15,000, child’s interest attributable to A, and a designated charity is entitled to $300,000, is subject to the $250,000-per- $175,000. The trust also provides that beneficiary limitation), $190,000 for the the remainder of the trust assets shall cousin, $35,000 for the friend, and belong to A’s granddaughter. In this $250,000 for the charity (the charity’s case, because the balance of the ac- interest attributable to A, $750,000, is count exceeds $1,250,000 (5 five times subject to the $250,000 per-beneficiary the SMSIA) and there are more than limitation). As to A, the aggregate five different beneficiaries named in amount of the beneficial interests eli- the trust, the maximum coverage gible for deposit insurance coverage to- available to A would be the greater of: tals $1,225,000. Thus, the maximum cov- $1,250,000 or the aggregate of each dif- erage afforded to account co-owner A ferent beneficiary’s interest to a limit would be $1,250,000, which is the greater of $250,000 per beneficiary. The bene- of $1,250,000 or the aggregate of all the ficial interests in the trust considered beneficial interests attributable to A for purposes of determining coverage (limited to $250,000 per beneficiary), are: $250,000 for the spouse’s life estate,

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$750,000 for the children (because each be insured up to the SMSIA in the ag- child’s $275,000 is subject to the $250,000 gregate. The account of a corporation, per-beneficiary limitation), $15,000 for partnership, or unincorporated associa- the friend, $175,000 for the charity, and tion not engaged in an independent ac- $250,000 for the granddaughter (because tivity shall be deemed to be owned by the granddaughter’s $310,000 remainder the person or persons owning such cor- is limited by the $250,000 per-bene- poration or comprising such partner- ficiary limitation). The aggregate ben- ship or unincorporated association and, eficial interests total $1,440,000. Thus, for account insurance purposes, the in- the maximum coverage afforded to the terest of each person in such an ac- account owner would be $1,440,000, the count shall be added to any other ac- greater of $1,250,000 or $1,440,000.) count individually owned by such per- (h) Revocable trusts that become irrev- son and insured up to the SMSIA in the ocable trusts. Notwithstanding the pro- aggregate. For purposes of this section, visions in section 745.9–1 on the insur- ‘‘independent activity’’ means an ac- ance coverage of irrevocable trust activity other than one directed solely at counts, if a revocable trust account increasing insurance coverage. converts in part or entirely to an irrevocable trust upon the death of one or [51 FR 37560, Oct. 23, 1986, as amended at 71 more of the trust’s owners, the trust FR 14635, Mar. 23, 2006] account shall continue to be insured § 745.7 Shares accepted in a foreign under the provisions of this section. currency. (EXAMPLE: Assume A and B have a trust account in connection with a liv- An insured credit union may accept ing trust, of which they are joint shares denominated in a foreign cur- grantors. If upon the death of either A rency. Shares denominated in a foreign or B the trust transforms into an irrev- currency will be insured in accordance ocable trust as to the deceased with this part to the same extent as grantor’s ownership in the trust, the shares denominated in U.S. dollars. In- account will continue to be insured surance for shares denominated in for- under the provisions of this section.) eign currency will be determined and (i) This section shall apply to all ex- paid in the amount of United States isting and future revocable trust ac- dollars that is equivalent in value to counts and all existing and future ir- the amount of the shares denominated revocable trust accounts resulting in the foreign currency as of close of from formal revocable trust accounts. business on the date of default of the insured credit union. The exchange [74 FR 55749, Oct. 29, 2009] rates to be used for such conversions § 745.5 Accounts held by executors or are the 12 p.m. rates (the ‘‘noon buying administrators. rates for cable transfers’’) quoted for major currencies by the Federal Re- Funds of a decedent held in the name serve Bank of New York on the date of of the decedent or in the name of the default of the insured credit union, un- executor or administrator of the dece- less the share agreement provides that dent’s estate and deposited in one or some other widely recognized exchange more accounts shall be insured up to rates are to be used for all purposes the SMSIA in the aggregate for all under that agreement. such accounts, separately from the individual accounts of the beneficiaries [71 FR 14635, Mar. 23, 2006] of the estate or of the executor or administrator. § 745.8 Joint ownership accounts. [51 FR 37560, Oct. 23, 1986, as amended at 71 (a) Separate insurance coverage. Quali- FR 14635, Mar. 23, 2006] fying joint accounts, whether owned as joint tenants with right of survivor- § 745.6 Accounts held by a corporation, ship, as tenants by the entireties, as partnership, or unincorporated as- tenants in common, or by husband and sociation. wife as community property, shall be Accounts of a corporation, partner- insured separately from accounts indi- ship, or unincorporated association en- vidually owned by any of the co-own- gaged in any independent activity shall ers. The interest of a co-owner in all

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qualifying joint accounts shall be with a member on a joint account with added together and the total for that right of survivorship. The nonmember’s co-owner shall be insured up to the interest in such accounts will be in- SMSIA. sured in the same manner as the mem- (b) Determination of insurance cov- ber joint-owner’s interest. erage. The interests of each co-owner in [64 FR 19687, Apr. 22, 1999, as amended at 71 all qualifying joint accounts shall be FR 14636, Mar. 23, 2006; 74 FR 55751, Oct. 29, added together and the total shall be 2009] insured up to the SMSIA. (EXAMPLE: ‘‘A&B’’ have a qualifying joint account § 745.9–1 Trust accounts. with a balance of $150,000; ‘‘A&C’’ have (a) For purposes of this section, a qualifying joint account with a bal- ‘‘trust’’ refers to an irrevocable trust. ance of $200,000; and ‘‘A&B&C’’ have a qualifying joint account with a balance (b) All trust interests (as defined in of $375,000. A’s combined ownership in- § 745.2(d)(4)), for the same beneficiary, terest in all qualifying joint accounts deposited in an account and established would be $300,000 ($75,000 plus $100,000 pursuant to valid trust agreements cre- plus $125,000); therefore, A’s interest ated by the same settlor (grantor) shall would be insured in the amount of be added together and insured up to the $250,000 and uninsured in the amount of SMSIA in the aggregate, separately $50,000. B’s combined ownership inter- from other accounts of the trustee of est in all qualifying joint accounts such trust funds or the settlor or bene- would be $200,000 ($75,000 plus $125,000); ficiary of such trust arrangements. therefore, B’s interest would be fully (c) This section applies to trust inter- insured. C’s combined ownership interests created in Coverdell Education est in all qualifying joint accounts Savings Accounts, formerly Education would be $225,000 ($100,000 plus $125,000); IRAs, established in connection with therefore, C’s interest would be fully section 530 of the Internal Revenue insured. Code (26 U.S.C. 530). (c) Qualifying joint accounts. A joint [51 FR 37560, Oct. 23, 1986, as amended at 65 account is a qualifying joint account if FR 34924, June 1, 2000; 68 FR 75114, Dec. 30, each of the co-owners has personally 2003; 71 FR 14636, Mar. 23, 2006] signed a membership or account signature card and has a right of withdrawal § 745.9–2 Retirement and other em- on the same basis as the other co-own- ployee benefit plan accounts. ers. The signature requirement does (a) Pass-through share insurance. Any not apply to share certificates, or to shares of an employee benefit plan in any accounts maintained by an agent, an insured credit union shall be insured nominee, guardian, custodian or con- on a ‘‘pass-through’’ basis, in the servator on behalf of two or more per- amount of up to the SMSIA for the sons if the records of the credit union non-contingent interest of each plan properly reflect that the account is so participant, in accordance with § 745.2 maintained. of this part. An insured credit union (d) Failure to qualify. A joint account that is not ‘‘well capitalized’’ or ‘‘ade- that does not meet the requirements quately capitalized’’, as those terms for a qualifying joint account shall be are defined in 12 U.S.C. 1790d(c), may treated as owned by the named persons not accept employee benefit plan de- as individuals and the actual ownership posits. The terms ‘‘employee benefit interest of each such person in such ac- plan’’ and ‘‘pass-through share insur- count shall be added to any other ac- ance’’ are given the same meaning in counts individually owned by such per- this section as in 12 U.S.C. 1787(k)(4). son and insured up to the SMSIA in the (b) Treatment of contingent interests. In aggregate. An account will not fail to the event that participants’ interests qualify as a joint account if a joint in an employee benefit plan are not ca- owner is a minor and applicable state pable of evaluation in accordance with law limits or restricts a minor’s with- the provisions of this section, or an ac- drawal rights. count established for any such plan in- (e) Nonmember joint owners. A non- cludes amounts for future participants member may become a joint owner in the plan, payment by the NCUA with

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respect to all such interests shall not (1) Each official custodian of funds of exceed the SMSIA in the aggregate. the United States lawfully investing (c)(1) Certain retirement accounts. the same in a federally-insured credit Shares in an insured credit union made union will be separately insured in the in connection with the following types amount of: of retirement plans shall be aggregated (i) Up to the SMSIA in the aggregate and insured in the amount of up to for all share draft accounts; and $250,000 (which amount shall be subject (ii) Up to the SMSIA in the aggregate to inflation adjustments as provided for all share certificate and regular under section 11(a)(1)(F) of the Federal share accounts; Deposit Insurance Act, except that (2) Each official custodian of funds of $250,000 shall be substituted for $100,000 any state of the United States or any wherever such term appears in such county, municipality, or political subsection) per account: division thereof lawfully investing the (i) Any individual retirement account same in a federally-insured credit described in section 408(a) (IRA) of the union in the same state will be sepa- Internal Revenue Code (26 U.S.C. 408(a)) rately insured in the amount of: or similar provisions of law applicable (i) Up to the SMSIA in the aggregate to a U.S. territory or possession; for all share draft accounts; and (ii) Any individual retirement ac- (ii) Up to the SMSIA in the aggregate count described in section 408A (Roth for all share certificate and regular IRA) of the Internal Revenue Code (26 share accounts; U.S.C. 408A) or similar provisions of (3) Each official custodian of funds of law applicable to a U.S. territory or the District of Columbia lawfully in- possession; and vesting the same in a federally-insured (iii) Any plan described in section credit union in the District of Colum- 401(d) (Keogh account) of the Internal bia will be separately insured in the Revenue Code (26 U.S.C. 401(d)) or simi- amount of: lar provisions of law applicable to a (i) Up to the SMSIA in the aggregate U.S. territory or possession. for all share draft accounts; and (2) Insurance coverage for the ac- (ii) Up to the SMSIA in the aggregate counts enumerated in paragraph (c)(1) for all share certificate and regular of this section is based on the present share accounts; vested ascertainable interest of a par- (4) Each official custodian of funds of ticipant or designated beneficiary. For the Commonwealth of Puerto Rico, the insurance purposes, IRA and Roth IRA Panama Canal Zone, or any territory accounts will be combined together and or possession of the United States, or insured in the aggregate up to $250,000 any county, municipality, or political (which amount shall be subject to in- subdivision thereof lawfully investing flation adjustments as provided under the same in a federally-insured credit section 11(a)(1)(F) of the Federal De- union in Puerto Rico, the Panama posit Insurance Act, except that Canal Zone, or any such territory or $250,000 shall be substituted for $100,000 possession, respectively, will be sepa- wherever such term appears in such rately insured in the amount of: section). A Keogh account will be sepa- (i) Up to the SMSIA in the aggregate rately insured from an IRA account, for all share draft accounts; and Roth IRA account or, where applicable, (ii) Up to the SMSIA in the aggregate aggregated IRA and Roth IRA ac- for all share certificate and regular counts. share accounts; [71 FR 14636, Mar. 23, 2006] (5) Each official custodian of tribal funds of any Indian tribe (as defined in § 745.10 Accounts held by government section 3(c) of the Indian Financing depositors. Act of 1974) or agency thereof lawfully (a) Public funds invested in Federal investing the same in a federally-in- credit unions and federally-insured sured credit union will be separately state credit unions authorized to ac- insured in the amount of: cept such investments shall be insured (i) Up to the SMSIA in the aggregate as follows: for all share draft accounts; and

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(ii) Up to the SMSIA in the aggregate terest were disclosed on the records of for all share certificate and regular the credit union provided the instru- share accounts; ment was in fact negotiated to such (b) Each official custodian referred to owner prior to the date of the closing in paragraphs (a)(2), (3), and (4) of this of the credit union. Affirmative proof section lawfully investing such funds of such negotiation must be offered in in share accounts in a federally-insured all cases to substantiate the claim. credit union outside of their respective jurisdictions shall be separately in- § 745.12 Account obligations for pay- sured up to the SMSIA in the aggre- ment of items forwarded for collec- gate for all such accounts regardless of tion by depository institution act- whether they are share draft, share ing as agent. certificate or regular share accounts. Where a closed credit union has be- (c) For purposes of this section, if the come obligated for the payment of same person is an official custodian of items forwarded for collection by a de- more than one public unit, he shall be pository institution acting solely as separately insured with respect to the agent, the owner of such items will be public funds held by him for each such recognized for all purposes of a claim unit, but he shall not be separately insured with respect to all public funds of for insured accounts to the same ex- the same public unit by virtue of hold- tent as if his name and interest were ing different offices in such unit or by disclosed on the records of the credit holding such funds for different pur- union when such claim for insured ac- poses. Where an officer, agent or em- counts, if otherwise payable, has been ployee of a public unit has custody of established by the execution and deliv- certain funds which by law or under a ery of prescribed forms. Such deposi- bond indenture are required to be set tory institution forwarding such items aside to discharge a debt owed to the for the owners thereof will be recog- holders of notes or bonds issued by the nized as agent for such owners for the public unit, any investment of such purpose of making an assignment of funds in an account in a federally-in- the rights of such owners against the sured credit union will be deemed to be closed insured credit union to the a share account established by a trust- Board and for the purpose of receiving ee of trust funds of which the payment on behalf of such owners. noteholders or bondholders are pro rata beneficiaries, and the beneficial inter- § 745.13 Notification to members/ est of each noteholder or bondholder in shareholders. the share account will be separately in- Each insured credit union shall pro- sured up to the SMSIA. vide notice to its members concerning (d) For purposes of this section, NCUA insurance coverage of member ‘‘lawfully investing’’ means pursuant accounts. This may be accomplished by to the statutory or regulatory author- placing either a copy of part 745 of ity of the custodian or public unit. these rules, the appendix, or one or [51 FR 37560, Oct. 23, 1986, as amended at 65 more copies of the NCUA brochure FR 34925, June 1, 2000; 71 FR 14636, Mar. 23, ‘‘Your Insured Funds’’ in each branch 2006] office and main office of the credit union. Copies of these materials shall § 745.11 Accounts evidenced by nego- also be made available to members tiable instruments. upon request. For purposes of this sec- If any insured account obligation of a tion, an automated teller machine or credit union is evidenced by a nego- point of sale terminal is not a branch tiable certificate account, negotiable office. draft, negotiable cashier’s or officer’s check, negotiable certified check, or negotiable traveler’s check or letter of Subpart B—Payment of Share credit, the owner of such account obli- Insurance and Appeals gation will be recognized for all purposes of a claim for insured accounts to SOURCE: 55 FR 5586, Feb. 16, 1990, unless the same extent as if his name and in- otherwise noted.

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§ 745.200 General. (c) Multiple accounts. In the event an insured member holds more than one (a) In the event of the liq- Payment. insured account in the same capacity, uidation of an insured credit union, the and the aggregate amount of such ac- Board will promptly determine the in- counts (including share draft accounts sured accountholders thereof and the held in such capacity) exceeds the amount of the insured account or ac- amount of insurance afforded thereon, counts of each such accountholder. the insurance coverage will be prorated Payment may be in cash, or its equiva- among the member’s interest in all ac- lent, or may be made by making avail- counts held in the same capacity. In able to each accountholder a trans- the case of individual accounts, the in- ferred account in a new federally-insurance proceeds shall be paid to the sured credit union in the same commu- holder of the account, whether or not nity or in another federally-insured the holder is the beneficial owner. In credit union or institution in an the case of accounts which are owned amount equal to the accountholder’s jointly, the insurance proceeds shall be insured account. Notwithstanding the paid to the owners jointly. In the case foregoing, the Board may withhold of trust estates, the insurance proceeds payment of such portion of the insured shall be paid to the indicated trustee account of any member as may be re- unless otherwise provided for in the quired to provide for payment of any trust instrument or under state law. In direct or indirect liability to the closed the case of corporations, partnerships credit union or the liquidating agent, and unincorporated associations en- which is not offset against a claim due gaged in an independent activity, the from such credit union, pending the de- insurance proceeds shall be paid to the termination and payment of such li- indicated holder of the account. Where ability by the member of or any person insurance payment is in the form of a liable therefor. transferred account to another insured (b) Amount of insurance. The amount institution, the same rules shall be ap- of insurance on an insured account plied. shall be determined in accordance with (d) Computing time. In computing any the provisions of Subpart A of this part period of time prescribed by this sub- and the Federal Credit Union Act. For part, the provisions of § 747.12(a) shall the purpose of determining insurance apply. coverage, dividends earned in the ordi- [55 FR 5586, Feb. 16, 1990, as amended at 61 nary course of business and posted to FR 60186, Nov. 27, 1996] share accounts for any prior accounting or dividend period shall be deemed § 745.201 Processing of insurance to be principal under this part. Divi- claims. dends earned or accrued in the ordi- (a) Delegations of authority. The Agent nary course of business, but not posted for the Liquidating Agent (‘‘Liqui- to share accounts, may be paid at the dating Agent’’) or his or her designee is discretion of the liquidating agent. In authorized to make initial determina- making such determination, the liqui- tions with respect to insurance claims dating agent will take into consider- pursuant to the principles set forth in ation whether the failure to post divi- this part, and to act on requests for re- dends earned or accrued was due to the consideration of the initial determina- fraud, embezzlement or accounting er- tion. rors of credit union personnel. The liq- (b) Initial determination. In the event uidating agent may require an the Liquidating Agent determines that accountholder to submit documenta- all or a portion of an accountholder’s tion supporting any claim for unposted account is uninsured, the Liquidating dividends not otherwise evidenced in Agent shall so notify the the credit union records. However, in accountholder in writing, stating the no event will dividend amounts be con- reason(s) for such initial determina- sidered as principal for insurance pur- tion, and shall provide the poses pursuant to this section if not accountholder with a certificate of consistent with the amounts paid on claim in liquidation in the amount of similar classes of shares. the uninsured account from the Board

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in its capacity as Liquidating Agent (2) Within 60 days from the date of for the insured credit union to enable the Board’s receipt of an appeal, the the accountholder to share in the pro- accountholder may amend or supple- ceeds of the liquidation of the credit ment the request in writing. In the union, if any, up to the amount of the event that the accountholder does uninsured account. amend or supplement the request, the (c) Request for reconsideration. An provisons of paragraph (c)(1) of this accountholder may, at his or her op- section with respect to requests for ad- tion, request reconsideration from the ditional information and responses to Liquidating Agent of the initial deter- such requests shall apply with equal mination within 30 days of the date of force to any such amendment or sup- the initial determination, or directly plement to a request. appeal the initial determination to the (d) Determination on appeal. (1) Within Board pursuant to § 745.202 of this sub- 180 days from the date of the receipt of part. The Liquidating Agent shall act an appeal by the Board, the Board shall on the request for reconsideration issue a decision determining the extent within 30 days from its receipt. of the accountholder’s insurance pursuant to the rules of this part. § 745.202 Appeal. (2) The determination by the Board (a) Time for filing. Within 60 days on appeal shall be provided to the after issuance of an initial determina- accountholder in writing, stating the tion, or of the determination on a re- reason(s) for the determination, and quest for reconsideration by the liqui- shall constitute a final Agency order dating agent, the accountholder may regarding the accountholder’s claim appeal by filing with the Board a writ- for insurance. ten request for appeal. The appeal may (3) If the Board determines that the be filed with the Secretary of the accountholder is entitled to the Board, National Credit Union Adminis- amount of insurance claimed or a por- tration, 1775 Duke Street, Alexandria, tion thereof, upon payment of such in- VA 22314–3428. surance the accountholder shall (b) Content of request. Any appeal promptly surrender to the Board the must include: certificate of claim in liquidation pro- (1) A statement of the facts on which vided in connection with the initial de- the claim for insurance is based; termination. In the event that the (2) A statement of the basis for the Board determines that the initial determination or determination accountholder is only entitled to a por- on the request for reconsideration to tion of the amount of insurance which the accountholder objects and claimed, upon the accountholder’s sur- the alleged error in such determina- render of such certificate a new certifi- tion, including citations to applicable cate of claim in liquidation will be pro- statutes and regulations; vided which reflects the revised (3) Any other evidence relied upon by amount of the uninsured account. the accountholder which was not pre- (4) Failure by the Board to issue a de- viously provided to the Liquidating termination on appeal of the Agent. accountholder’s claim for insurance (c) Procedures for review of request. (1) within the 180-day period provided for Within 60 days of the date of the under paragraph (d)(1) of this section, Board’s receipt of an appeal, the Board shall be deemed to be a denial of such may request in writing that the claim for purposes of § 745.203 of this accountholder submit additional facts subpart. and records in support of its request. [55 FR 5586, Feb. 16, 1990, as amended at 59 The accountholder shall have 45 days FR 36041, July 15, 1994] from the date of issuance of such written request to provide such additional § 745.203 Judicial review. information. Failure by the (a) For purposes of seeking judicial accountholder to provide additional in- review of actions taken pursuant to formation may, as determined solely this subpart, only a determination on by the Board, result in denial of the appeal issued by the Board pursuant to accountholder’s appeal. § 745.202 of this subpart shall constitute

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a final determination regarding an maintain an insured account or to account accountholder’s claim for insurance. relationships that have not been approved by (b) Failure to file an appeal with re- the NCUA Board as an insured account. gard to an initial determination, or a A. How Are Single Ownership Accounts decision rendered on a request for re- Insured? consideration with the applicable time All funds owned by an individual member periods shall constitute a failure by the (or, in a community property state, by the accountholder to exhaust available ad- husband-wife community of which the indi- ministrative remedies and, due to such vidual is a member) and invested in one or failure, any objections to the initial more individual accounts are added together determination or request for reconsid- and insured to the $250,000 maximum. This is eration shall be deemed to be waived true whether the accounts are maintained in and such determination shall be the name of the individual member owning the funds or in the name of the member’s deemed to have been accepted by, and agent or nominee. (§ 745.3(a)(1) and (2).) All binding upon, the accountholder. such accounts are added together and in- (c) Final determination by the Board sured as one individual account. Funds held is reviewable in accordance with the in one or more accounts in the name of a provisions of chapter 7, title 5, United guardian, custodian, or conservator for the States Code, by the United States dis- benefit of a ward or minor are added to- trict court for the Federal judicial dis- gether and insured up to $250,000. However, such an account or accounts will not be trict where the credit union’s principal added to any other individual accounts of place of business is located. Such ac- the guardian, custodian, conservator, ward, tion must be filed not later than 60 or minor for purposes of determining insur- days after such final determination is ance coverage. (§ 745.3(b).) A mortgage serv- ordered. icing account maintained by a mortgage servicer, in a custodial or other fiduciary ca- [51 FR 37560, Oct. 23, 1986, as amended at 71 pacity, comprised of payments by a mort- FR 67440, Nov. 22, 2006] gagor of principal and interest is insured for the cumulative balance paid into the ac- APPENDIX TO PART 745—EXAMPLES OF count by the mortgagor, up to $250,000 for INSURANCE COVERAGE AFFORDED AC- the mortgagor separately from other indi- COUNTS IN CREDIT UNIONS INSURED vidual accounts of the mortgagor. A mort- BY THE NATIONAL CREDIT UNION gage servicing account maintained by a SHARE INSURANCE FUND mortgage servicer, in a custodial or other fiduciary capacity, comprised of payments by WHAT IS THE PURPOSE OF THIS APPENDIX? a mortgagor of taxes and insurance pre- The following examples illustrate insur- miums shall be added together with the ance coverage on accounts maintained in the mortgagor’s other individual accounts and same federally-insured credit union. They insured up to $250,000. (§ 745.3(a)(3).) are intended to cover various types of owner- Example 1 Question: Members A and B, hus- ship interests and combinations of accounts band and wife, each maintain an individual which may occur in connection with funds account containing $250,000. What is the in- invested in insured credit unions. These ex- surance coverage? amples interpret the rules for insurance of Answer: Each account is separately in- accounts contained in 12 CFR part 745 and sured up to $250,000, for a total coverage of focus on those accounts for which examples $500,000. The coverage would be the same are not provided in the regulatory text. whether the individual accounts contain The examples, as well as the rules which funds owned as community property or as in- they interpret, are predicated upon the as- dividual property of the spouses (§ 745.3(a)(1)). sumption that: (1) Invested funds are actu- Example 2 Question: Members H and W, ally owned in the manner indicated on the husband and wife, reside in a community credit union’s records and (2) the owner of property state. H maintains a $250,000 ac- funds in an account is a credit union member count consisting of his separately-owned or otherwise eligible to maintain an insured funds and invests $250,000 of community account in a credit union. If available evi- property funds in another account, both of dence shows that ownership is different from which are in his name alone. What is the in- that on the institution’s records, the Na- surance coverage? tional Credit Union Share Insurance Fund Answer: The two accounts are added to- may pay claims for insured accounts on the gether and insured to a total of $250,000. basis of actual rather than ostensible owner- $250,000 is uninsured (§ 745.3(a)(1)). ship. Further, the examples and the rules which they interpret do not extend insurance Example 3 Question: Member A has $192,500 coverage to persons otherwise not entitled to invested in an individual account, and his

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agent, Member B, invests $125,000 of A’s insured to $250,000 providing W with $275,000 funds in a properly designated agency ac- in insured funds. G’s individual account is count. B also holds a $250,000 individual ac- also separately insured. (§ 745.3 (a)(1) and (b).) count. What is the insurance coverage? Example 7 Question: Member A has three Answer: A’s individual account and the individual accounts at the same NCUA-in- agency account are added together and insured credit union. Account #1 is a $250,000 sured to the $250,000 maximum, leaving individual account. Account #2 is a mortgage $67,500 uninsured. The investment of funds servicing account maintained by a mortgage through an agent does not result in addi- servicer, in a custodial or other fiduciary ca- tional insurance coverage for the principal pacity, comprised of payments by Member A (§ 745.3(a)(2)). B’s individual account is in- of principal and interest in the amount of sured separately from the agency account $3,000. Account #3 is a mortgage servicing ac- (§ 745.3(a)(1)). However, if the account records count maintained by a mortgage servicer, in of the credit union do not show the agency a custodial or other fiduciary capacity, com- relationship under which the funds in the prised of payments by Member A of taxes $125,000 account are held, the $250,000 in B’s and insurance premiums in the amount of name could, at the option of the NCUSIF, be $1,500. What is the insurance coverage? added to his individual account and insured Answer: Accounts # 1 and #3 are added to- to $250,000 in the aggregate, leaving $125,000 gether and insured up to $250,000, leaving uninsured (§ 745.2(c)). $1,500 uninsured. Account #2 is separately in- Example 4 Question: Member A holds a sured up to $250,000. $250,000 individual account. Member B holds two accounts in his own name, the first con- B. How Are Accounts Held by Executors or taining $125,000 and the second containing Administrators Insured? $192,500. In processing the claims for pay- All funds belonging to a decedent and in- ment of insurance on these accounts, the vested in one or more accounts, whether held NCUSIF discovers that the funds in the in the name of the decedent or in the name $125,000 account actually belong to A and of his executor or administrator, are added that B had invested these funds as agent for together and insured to the $250,000 max- A, his undisclosed principal. What is the in- imum. Such funds are insured separately surance coverage? from the individual accounts of any of the Answer: Since the available evidence shows beneficiaries of the estate or of the executor that A is the actual owner of the funds in the or administrator. $125,000 account, those funds would be added Example 1 Question: Member A, adminis- to the $250,000 individual account held by A trator of Member D’s estate, sells D’s auto- (rather than to B’s $192,500 account) and in- mobile and invests the proceeds of $12,500 in sured to the $250,000 maximum, leaving an account entitled ‘‘A Administrator of the $125,000 uninsured. (§ 745.3(a)(2).) B’s $192,500 estate of D.’’ A has an individual account in individual account would be separately in- that same credit union containing $250,000. sured. Prior to his death, D had opened an indi- Example 5 Question: Member C, a minor, vidual account of $250,000. What is the insur- maintains an individual account of $750. C’s ance coverage? grandfather makes a gift to him of $250,000, Answer: The $12,500 is added to D’s indi- which is invested in another account by C’s vidual account and insured to $250,000, leav- father, designated on the credit union’s ing $12,500 uninsured. A’s individual account records as custodian under a Uniform Gift to is separately insured for $250,000 (§ 745.5). Minors Act. C’s father, also a member, maintains an individual account of $250,000. What C. How Are Accounts Held by a Corporation, is the insurance coverage? Partnership or Unincorporated Association Answer: C’s individual account and the Insured? custodian account held for him by his father are each separately insured: The $250,000 All funds invested in an account or ac- maximum on the custodian account, and $750 counts by a corporation, a partnership or an on his individual account. The individual ac- unincorporated association engaged in any count held by C’s father is also separately in- independent activity are added together and sured to the $250,000 maximum. (§ 745.3 (a)(1) insured to the $250,000 maximum. The term and (b).) ‘‘independent activity’’ means any activity other than the one directed solely at increas- Example 6 Question: Member G, a court-ap- ing coverage. If the corporation, partnership pointed guardian, invests in a properly des- or unincorporated association is not engaged ignated account $250,000 of funds in his cus- in an independent activity, any account held tody which belong to member W, his ward. W by the entity is insured as if owned by the and G each maintain $25,000 individual ac- persons owning or comprising the entity, and counts. What is the insurance coverage? the imputed interest of each such person is Answer: W’s individual account and the added for insurance purposes to any indi- guardianship account in G’s name are each vidual account which he maintains.

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Example 1 Question: Member X Corporation dian in a federally-insured credit union are maintains a $250,000 account. The stock of categorized as either share draft accounts or the corporation is owned by members A, B, share certificate and regular share accounts. C, and D in equal shares. Each of these If these accounts are invested in a federally- stockholders also maintains an individual insured credit union located in the jurisdic- account of $250,000 with the same credit tion from which the official custodian de- union. What is the insurance coverage? rives his authority, then the share draft ac- Answer: Each of the five accounts would be counts will be insured separately from the separately insured to $250,000 if the corpora- share certificate and regular share accounts. tion is engaged in an independent activity Under this circumstance, all share draft ac- and has not been established merely for the counts are added together and insured to the purpose of increasing insurance coverage. $250,000 maximum and all share certificate The same would be true if the business were and regular share accounts are also added to- operated as a bona fide partnership instead gether and separately insured up to the of as a corporation (§ 745.6). However, if X $250,000 maximum. If, however, these ac- corporation was not engaged in an inde- counts are invested in a federally-insured pendent activity, then $62,500 (1⁄4 interest) credit union located outside of the jurisdic- would be added to each account of A, B, C, tion from which the official custodian de- and D. The accounts of A, B, C, and D would rives his authority, then insurance coverage then each be insured to $250,000, leaving is limited to $250,000 for all accounts regard- $62,500 in each account uninsured. less of whether they are share draft, share certificate or regular share accounts. If there Example 2 Question: Member C College is more than one official custodian for the maintains three separate accounts with the same public unit, the funds invested by each same credit union under the titles: ‘‘General custodian are separately insured. If the same Operating Fund,’’ ‘‘Teachers Salaries,’’ and person is custodian of funds for more than ‘‘Building Fund.’’ What is the insurance cov- one public unit, he is separately insured with erage? respect to the funds of each unit held by him Answer: Since all of the funds are the prop- in properly designated accounts. erty of the college, the three accounts are For insurance purposes, a ‘‘political sub- added together and insured only to the division’’ is entitled to the same insurance $250,000 maximum (§ 745.6). coverage as any other public unit. ‘‘Political Example 3 Question: The men’s club of X subdivision’’ includes any subdivision of a Church carries on various social activities in public unit or any principal department of addition to holding several fund-raising cam- such unit: (1) The creation of which has been paigns for the church each year. The club is expressly authorized by state statute, (2) to supported by membership dues. Both the which some functions of government have club and X Church maintain member ac- been allocated by state statute, and (3) to counts in the same credit union. What is the which funds have been allocated by statute insurance coverage? or ordinance for its exclusive use and control. Answer: The men’s club is an unincorporated association engaged in an inde- Example 1 Question: As Comptroller of Y pendent activity. If the club funds are, in Consolidated School District, A maintains a fact, legally owned by the club itself and not $275,000 account in the credit union con- the church, each account is separately in- taining school district funds. He also main- sured to the $250,000 maximum (§ 745.6). tains his own $250,000 member account in the same credit union. What is the insurance Example 4 Question: The PQR Union, a coverage? member of the ABC Federal Credit Union, has three locals in a certain city. Each of the Answer: The two accounts will be sepa- locals maintains an account containing rately insured, assuming the credit union’s funds belonging to the parent organization. records indicate that the account containing All three accounts are in the same insured the school district funds is held by A in a fi- credit union. What is the insurance cov- duciary capacity. Thus, $250,000 of the erage? school’s funds and the entire $250,000 in A’s personal account will be insured (§ 745.10(a)(2) Answer: The three accounts are added to- and § 745.3). gether and insured up to the $250,000 maximum (§ 745.6). Example 2 Question: A, as city treasurer, and B, as chief of the city police department, D. How Are Accounts Held by Government each have $250,000 in city funds invested in Depositors Insured? custodial accounts. What is the insurance For insurance purposes, the official custo- coverage? dian of funds belonging to a public unit, Answer: Assuming that both A and B have rather than the public unit itself, is insured official custody of the city funds, each ac- as the account holder. All funds belonging to count is separately insured to the $250,000 a public unit and invested by the same custo- maximum (§ 745.10(a)(2)).

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Example 3 Question: A is Treasurer of X custodian, those funds qualify for $250,000 County and collects certain tax assessments, share insurance even though A and the pub- a portion of which must be paid to the state lic unit are not within the credit union’s under statutory requirement. A maintains field of membership. Since the beneficiaries an account for general funds of the county are neither public units nor members of the and establishes a separate account for the credit union they are not entitled to sepa- funds which belong to the State Treasurer. rate share insurance. Therefore, $2,250,000 is The credit union’s records indicate that the uninsured (§ 745.10(a)(2)). separate account contains funds held for the State. What is the insurance coverage? Example 7 Question: A county treasurer establishes the following share draft accounts Answer: Since two public units own the in an insured credit union each with $250,000: funds held by A, the accounts would each be ‘‘General Operating Fund’’ separately insured to the $250,000 maximum ‘‘County Roads Department Fund’’ (§ 745.10(a)(2)). ‘‘County Water District Fund’’ Example 4 Question: A city treasurer in- ‘‘County Public Improvement District Fund’’ vests city funds in each of the following ac- ‘‘County Emergency Fund’’ counts: ‘‘General Operating Account,’’ What is the insurance coverage? ‘‘School Transportation Fund,’’ ‘‘Local Maintenance Fund,’’ and ‘‘Payroll Fund.’’ Answer: The ‘‘County Roads Department,’’ Each account is available to the custodian ‘‘County Water District’’ and ‘‘County Pub- upon demand. By administrative direction, lic Improvement District’’ accounts would the city treasurer has allocated the funds for each be separately insured to $250,000 if the the use of and control by separate depart- funds in each such account have been allo- ments of the city. What is the insurance cov- cated by law for the exclusive use of a sepa- erage? rate county department or subdivision expressly authorized by State statute. Funds Answer: All of the accounts are added to- in the ‘‘General Operating’’ and ‘‘Emergency gether and insured in the aggregate to Fund’’ accounts would be added together and $250,000. Because the allocation of the city’s insured in the aggregate to $250,000, if such funds is not by statute or ordinance for the funds are for countywide use and not for the specific use of and control by separate de- exclusive use of any subdivision or principal partments of the city, separate insurance department of the county, expressly author- coverage to the maximum of $250,000 is not ized by State statute (§§ 745.1(d) and afforded to each account (§§ 745.1(d) and 745.10(a)(2)). 745.10(a)(2)). Example 5 Question: A, the custodian of re- Example 8 Question: A, the custodian of In- tirement funds of a military exchange, indian tribal funds, lawfully invests $2,500,000 vests $2,500,000 in an account in an insured in an account in an insured credit union on credit union. The military exchange, a non- behalf of 15 different tribes; the records of appropriated fund instrumentally of the the credit union show that no tribe’s interest United States, is deemed to be a public unit. exceeds $250,000. A, as official custodian, also The employees of the exchange are the bene- invests $2,500,000 in the same credit union on ficiaries of the retirement funds but are not behalf of 100 individual Indians, who are not members of the credit union. What is the in- members; each Indian’s interest is $10,000. surance coverage? What is the insurance coverage? Answer: Because A invested the funds on Answer: Because each tribe is considered a behalf of a public unit, in his capacity as separate public unit, the custodian of each custodian, those funds qualify for $250,000 tribe, even though the same person, is enti- share insurance even though A and the pub- tled to separate insurance for each tribe lic unit are not within the credit union’s (§ 745.10(a)(5)). Since the credit union’s field of membership. Since the beneficiaries records indicate no tribe has more than are neither public units nor members of the $250,000 in the account, the $2,500,000 would credit union they are not entitled to sepa- be fully insured as 15 separate tribal ac- rate share insurance. Therefore, $2,250,000 is counts. If anyone tribe had more than a uninsured (§ 745.10(a)(1)). $250,000 interest in the funds, it would be insured only to $250,000 and any excess would Example 6 Question: A is the custodian of be uninsured. the County’s employee retirement funds. He However, the $2,500,000 invested on behalf deposits $2,500,000 in retirement funds in an of the individual Indians would not be in- account in an insured credit union. The sured since the individual Indians are nei- ‘‘beneficiaries’’ of the retirement fund are ther public units nor, in the example, mem- not themselves public units nor are they bers of the credit union. If A is the custodian within the credit union’s field of member- of the funds in his capacity as an official of ship. What is the insurance coverage? a governmental body that qualified as a pub- Answer: Because A invested the funds on lic unit, then the account would be insured behalf of a public unit, in his capacity as for $250,000, leaving $2,250,000 uninsured.

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Example 9 Question: A, an official custo- foregoing rules, certain recordkeeping re- dian of funds of a state of the United States, quirements must be met. In connection with lawfully invests $500,000 of state funds in a each trust account, the credit union’s federally-insured credit union located in the records must indicate the name of both the state from which he derives his authority as settlor and the trustee of the trust and must an official custodian. What is the insurance contain an account signature card executed coverage? by the trustee indicating the fiduciary ca- Answer: If A invested the entire $500,000 in pacity of the trustee. In addition, the inter- a share draft account, then $250,000 would be ests of the beneficiaries under the trust must insured and $250,000 would be uninsured. If A be ascertainable from the records of either invested $250,000 in share draft accounts and the credit union or the trustee, and the set- another $250,000 in share certificate and reg- tlor or beneficiary must be a member of the ular share accounts, then A would be insured credit union. If there are two or more set- for $250,000 for the share draft accounts and tlors or beneficiaries, then either all the set- $250,000 for the share certificate and regular tlors or all the beneficiaries must be mem- share accounts leaving nothing uninsured bers of the credit union. (§ 745.10(a)(2)). If A had invested the $500,000 Although each ascertainable trust estate is in a federally-insured credit union located separately insured, it should be noted that in outside the state from which he derives his short-term trusts the insurable interest or authority as an official custodian, then interests may be very small, since the inter- $250,000 would be insured for all accounts re- ests are computed only for the duration of gardless of whether they were share draft, the trust. Thus, if a trust is made irrev- share certificate or regular share accounts, ocable for a specified period of time, the ben- leaving $250,000 uninsured (§ 745.10(b)). eficial interest will be calculated in terms of the length of time stated. A reversionary in- E. How Are Trust Accounts and Retirement terest retained by the settlor is treated in Accounts Insured? the same manner as an individual account of the settlor. A trust estate is the interest of a beneficiary in an irrevocable express trust, As stated, the trust must be valid under whether created by trust instrument or stat- local law. A trust which does not meet local ute, which is valid under state law. Thus, requirements, such as one imposing no du- funds invested in an account by a trustee ties on the trustee or conveying no interest under an irrevocable express trust are in- to the beneficiary, is of no effect for insur- sured on the basis of the beneficial interests ance purposes. An account in which such under such trust. The interest of each bene- funds are invested is considered to be an in- ficiary in an account (or accounts) estab- dividual account. lished under such a trust arrangement is in- IRA and Keogh accounts are separately insured to $250,000 separately from other ac- sured, each up to $250,000. Although credit counts held by the trustee, the settlor unions may serve as trustees or custodians (grantor), or the beneficiary. However, in for self-directed IRA, Roth IRA and Keogh cases where a beneficiary has an interest in accounts, once the funds in those accounts more than one trust arrangement created by are taken out of the credit union, they are the same settlor, the interests of the bene- no longer insured. ficiary in all accounts established under such In the case of an employee retirement fund trusts are added together for insurance pur- where only a portion of the fund is placed in poses, and the beneficiary’s aggregate inter- a credit union account, the amount of insur- est derived from the same settlor is sepa- ance available to an individual participant rately insured to the $250,000 maximum. on his interest in the account will be in pro- A beneficiary’s interest in an account es- portion to his interest in the entire em- tablished pursuant to an irrevocable express ployee retirement fund. If, for example, the trust arrangement is insured separately from member’s interest represents 10% of the en- other beneficial interests (trust estates) in- tire plan funds, then he is presumed to have vested in the same account if the value of only a 10% interest in the plan account. Said the beneficiary’s interest (trust estate) can another way, if a member has a vested inter- be determined (as of the date of a credit est of $10,000 in a municipal employees re- union’s insolvency) without evaluation of tirement plan and the trustee invests 25% of contingencies except for those covered by the total plan funds in a credit union, the the present worth tables and rules of calcula- member would be insured for only $2,500 on tion for their use set forth in § 20.2031–10 of that credit union account. There is an excep- the Federal Estate Tax Regulations (26 CFR tion, however. The member would be insured 20.2031–10). If any trust estates in such an ac- for $10,000 if the trustee can document, count cannot be so determined, the insur- through records maintained in the ordinary ance with respect to all such trust estates course of business, that individual bene- together shall not exceed $250,000. ficiary’s interests are segregated and the In order for insurance coverage of trust ac- total vested interest of the member was, in counts to be effective in accordance with the fact, invested in that account.

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Example 1 Question: Member S invests the same credit union and accumulates $250,000 in trust for B, the beneficiary. S also $250,000 in that account. What is the insur- has an individual account containing $250,000 ance coverage? in the same credit union. What is the insur- Answer: Each of A’s accounts would be sep- ance coverage? arately insured as follows: the individual ac- Answer: Both accounts are fully insured. count for $250,000, the maximum for that The trust account is separately insured from type of account; the IRA account for $250,000, the individual account of S (§§ 745.3(a)(1) and the maximum for that type of account; and 745.9–1). the Keogh account for $250,000, the maximum Example 2 Question: S invests funds in for that type of account. (§§ 745.3(a)(1) and trust for A, B, C, D, and E. A, B, and C are 745.9–2). members of the credit union, D, E and S are Example 5 Question: Member A has a self- not. What is the insurance coverage? directed IRA account with $70,000 in it. The Answer: This is an uninsurable account. FCU is the trustee of the account. Member Where there is more than one settlor or more transfers $40,000 into a blue chip stock; than one beneficiary, all the settlors or all $30,000 remains in the FCU. What is the in- the beneficiaries must be members to estab- surance coverage? lish this type of account. Since D, E and S Answer: Originally, the full $70,000 in A’s are not members, this account cannot le- IRA account is insured. The $40,000 is no gally be established or insured. longer insured once it is moved out of the Example 3(a) Question: Member T invests FCU. The $30,000 remaining in the FCU is in- $5,000,000 in trust for ABC Employees Retire- sured (§ 745.9–2). ment Fund. Some of the participants are [74 FR 55751, Oct. 29, 2009] members and some are not. What is the insurance coverage? WHAT IS THE PURPOSE OF THIS APPENDIX? Answer: The account is insured as to the The following examples illustrate insur- determinable interests of each participant to ance coverage on accounts maintained in the a maximum of $250,000 per participant re- same federally-insured credit union. They gardless of credit union member status. T’s are intended to cover various types of owner- member status is also irrelevant. Participant ship interests and combinations of accounts interests not capable of evaluation shall be which may occur in connection with funds added together and insured to a maximum of invested in insured credit unions. These ex- $250,000 in the aggregate (§ 745.9–2). amples interpret the rules for insurance of Example 3(b) Question: T is trustee for the accounts contained in 12 CFR part 745. ABC Employees Retirement Fund containing The examples, as well as the rules which $1,000,000. Fund participant A has a deter- they interpret, are predicated upon the as- minable interest of $90,000 in the Fund (9% of sumption that: (1) Invested funds are actually owned in the manner indicated on the the total). T invests $500,000 of the Fund in credit union’s records and (2) the owner of an insured credit union and the remaining funds in an account is a credit union member $500,000 elsewhere. Some of the participants or otherwise eligible to maintain an insured of the Fund are members of the credit union account in a credit union. If available evi- and some are not. T does not segregate each dence shows that ownership is different from participant’s interest in the Fund. What is that on the institution’s records, the Na- the insurance coverage? tional Credit Union Share Insurance Fund Answer: The account is insured as to the may pay claims for insured accounts on the determinable interest of each participant, basis of actual rather than ostensible owner- adjusted in proportion to the Fund’s invest- ship. Further, the examples and the rules ment in the credit union, regardless of the which they interpret do not extend insurance membership status of the participants or coverage to persons otherwise not entitled to trustee. A’s insured interest in the account maintain an insured account or to account is $45,000, or 9% of $500,000. This reflects the relationships that have not been approved by fact that only 50% of the Fund is in the ac- the Board as an insured account. count and A’s interest in the account is in the same proportion as his interest in the A. How Are Single Ownership Accounts overall plan. All other participants would be Insured? similarly insured. Participants’ interests not All funds owned by an individual member capable of evaluation are added together and (or, in a community property state, by the insured to a maximum of $250,000 in the ag- husband-wife community of which the indi- gregate (§ 745.9–2). vidual is a member) and invested in one or Example 4 Question: Member A has an indi- more individual accounts are added together vidual account of $250,000 and establishes an and insured to the $100,000 maximum. This is IRA account and accumulates $250,000 in that true whether the accounts are maintained in account. Subsequently, A becomes self-em- the name of the individual member owning ployed and establishes a Keogh account in the funds, in the name of the member’s agent

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or nominee, or in a custodial loan account on Example 4 behalf of the member as a borrower. Question: Member A holds a $100,000 indi- (§ 745.3(a) (1), (2) and (3).) All such accounts vidual account. Member B holds two ac- are added together and insured as one indi- counts in his own name, the first containing vidual account. Funds held in one or more $25,000 and the second containing $92,500. In accounts in the name of a guardian, custo- processing the claims for payment of insur- dian, or conservator for the benefit of a ward ance on these accounts, the NCUSIF dis- or minor are added together and insured up covers that the funds in the $25,000 account to $100,000. However, such an account or ac- actually belong to A and that B had invested counts will not be added to any other indi- these funds as agent for A, his undisclosed vidual accounts of the guardian, custodian, principal. What is the insurance coverage? conservator, ward, or minor for purposes of Answer: Since the available evidence shows determining insurance coverage. (§ 745.3(b).) that A is the actual owner of the funds in the $25,000 account, those funds would be added Example 1 to the $100,000 individual account held by A Question: Members A and B, husband and (rather than to B’s $92,500 account) and in- wife, each maintain an individual account sured to the $100,000 maximum, leaving containing $100,000. In addition, they hold a $25,000 uninsured. (§ 745.3(a)(2).) B’s $92,500 in- joint account containing $100,000. What is dividual account would be separately in- the insurance coverage? sured. Answer: Each account is separately in- Example 5 sured up to $100,000, for a total coverage of $300,000. The coverage would be the same Question: Member C, a minor, maintains whether the individual accounts contain an individual account of $750. C’s grandfather funds owned as community property or as in- makes a gift to him of $100,000, which is individual property of the spouses (§ 745.3(a)(1) vested in another account by C’s father, des- and § 745.8(a)). ignated on the credit union’s records as custodian under a Uniform Gift to Minors Act. Example 2 C’s father, also a member, maintains an individual account of $100,000. What is the insur- Question: Members H and W, husband and ance coverage? wife, reside in a community property state. Answer: C’s individual account and the H maintains a $100,000 account consisting of custodian account held for him by his father his separately-owned funds and invests are each separately insured: The $100,000 $100,000 of community property funds in an- maximum on the custodian account, and $750 other account, both of which are in his name on his individual account. The individual ac- alone. What is the insurance coverage? count held by C’s father is also separately in- Answer: The two accounts are added to- sured to the $100,000 maximum. (§ 745.3 (a)(1) gether and insured to a total of $100,000. and (b).) $100,000 is uninsured (§ 745.3(a)(1)). Example 6 Example 3 Question: Member G, a court-appointed Question: Member A has $92,500 invested in guardian, invests in a properly designated an individual account, and his agent, Mem- account $100,000 of funds in his custody ber B, invests $25,000 of A’s funds in a prop- which belong to member W, his ward. W and erly designated agency account. B also holds G each maintain $25,000 individual accounts. a $100,000 individual account. What is the in- What is the insurance coverage? surance coverage? Answer: W’s individual account and the Answer: A’s individual account and the guardianship account in G’s name are each agency account are added together and in- insured to $100,000 providing W with $125,000 sured to the $100,000 maximum, leaving in insured funds. G’s individual account is $17,500 uninsured. The investment of funds also separately insured. (§ 745.3 (a)(1) and (b).) through an agent does not result in additional insurance coverage for the principal Example 7 (§ 745.3(a)(2)). B’s individual account is in- Question: X Credit Union acts as a servicer sured separately from the agency account of FHA, VA, and conventional mortgage (§ 745.3(a)(1)). However, if the account records loans made to its members but sold to other of the credit union do not show the agency parties. Each month X receives loan pay- relationship under which the funds in the ments, for remittance to the other parties, $25,000 account are held, the $25,000 in B’s from approximately 2,000 member mortga- name could, at the option of the NCUSIF, be gors. The monies received each month total added to his individual account and insured $1,000,000 and are maintained in a custodial to $100,000 in the aggregate, leaving $25,000 loan account. What is the insurance cov- uninsured (§ 745.2(c)). erage?

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Answer: X Credit Union acts as custodian The same would be true if the business were for the 2,000 individual mortgagors. The in- operated as a bona fide partnership instead terest of each mortgagor is separately in- of as a corporation (§ 745.6). However, if X sured as his individual account (but added to corporation was not engaged in an inde- any other individual accounts which the pendent activity, then $25,000 (1⁄4 interest) mortgagor holds in the Credit Union) would be added to each account of A, B, C, (§ 745.3(a)(3)). and D. The accounts of A, B, C, and D would then each be insured to $100,000, leaving B. How Are Accounts Held by Executors or $25,000 in each account uninsured. Administrators Insured? All funds belonging to a decedent and in- Example 2 vested in one or more accounts, whether held Question: Member C College maintains in the name of the decedent or in the name three separate accounts with the same credit of his executor or administrator, are added union under the titles: ‘‘General Operating together and insured to the $100,000 max- Fund,’’ ‘‘Teachers Salaries,’’ and ‘‘Building imum. Such funds are insured separately Fund.’’ What is the insurance coverage? from the individual accounts of any of the Answer: Since all of the funds are the prop- beneficiaries of the estate or of the executor erty of the college, the three accounts are or administrator. added together and insured only to the Example 1 $100,000 maximum (§ 745.6). Question: Member A, administrator of Example 3 Member D’s estate, sells D’s automobile and Question: The men’s club of X Church car- invests the proceeds of $12,500 in an account ries on various social activities in addition entitled ‘‘A Administrator of the estate of to holding several fund-raising campaigns D.’’ A has an individual account in that same for the church each year. The club is sup- credit union containing $100,000. Prior to his ported by membership dues. Both the club death, D had opened an individual account of $100,000. What is the insurance coverage? and X Church maintain member accounts in Answer: The $12,500 is added to D’s indi- the same credit union. What is the insurance vidual account and insured to $100,000, leav- coverage? ing $12,500 uninsured. A’s individual account Answer: The men’s club is an unincor- is separately insured for $100,000 (§ 745.5). porated association engaged in an independent activity. If the club funds are, in C. How Are Accounts Held by a Corporation, fact, legally owned by the club itself and not Partnership or Unincorporated Association the church, each account is separately in- Insured? sured to the $100,000 maximum (§ 745.6). All funds invested in an account or ac- Example 4 counts by a corporation, a partnership or an unincorporated association engaged in any Question: The PQR Union, a member of the independent activity are added together and ABC Federal Credit Union, has three locals insured to the $100,000 maximum. The term in a certain city. Each of the locals main- ‘‘independent activity’’ means any activity tains an account containing funds belonging other than the one directed solely at increas- to the parent organization. All three ac- ing coverage. If the corporation, partnership counts are in the same insured credit union. or unincorporated association is not engaged What is the insurance coverage? in an independent activity, any account held Answer: The three accounts are added to- by the entity is insured as if owned by the gether and insured up to the $100,000 max- persons owning or comprising the entity, and imum (§ 745.6). the imputed interest of each such person is added for insurance purposes to any indi- D. How Are Accounts Held by Government vidual account which he maintains. Depositors Insured? For insurance purposes, the official custo- Example 1 dian of funds belonging to a public unit, Question: Member X Corporation main- rather than the public unit itself, is insured tains a $100,000 account. The stock of the cor- as the account holder. All funds belonging to poration is owned by members A, B, C, and D a public unit and invested by the same custo- in equal shares. Each of these stockholders dian in a federally-insured credit union are also maintains an individual account of categorized as either share draft accounts or $100,000 with the same credit union. What is share certificate and regular share accounts. the insurance coverage? If these accounts are invested in a federally- Answer: Each of the five accounts would be insured credit union located in the jurisdic- separately insured to $100,000 if the corporation from which the official custodian de- tion is engaged in an independent activity rives his authority, then the share draft ac- and has not been established merely for the counts will be insured separately from the purpose of increasing insurance coverage. share certificate and regular share accounts.

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Under this circumstance, all share draft ac- for general funds of the county and estab- counts are added together and insured to the lishes a separate account for the funds which $100,000 maximum and all share certificate belong to the State Treasurer. The credit and regular share accounts are also added to- union’s records indicate that the separate gether and separately insured up to the account contains funds held for the State. $100,000 maximum. If, however, these ac- What is the insurance coverage? counts are invested in a federally-insured Answer: Since two public units own the credit union located outside of the jurisdic- funds held by A, the accounts would each be tion from which the official custodian de- separately insured to the $100,000 maximum rives his authority, then insurance coverage (§ 745.10(a)(2)). is limited to $100,000 for all accounts regardless of whether they are share draft, share Example 4 certificate or regular share accounts. If there Question: A city treasurer invests city is more than one official custodian for the funds in each of the following accounts: same public unit, the funds invested by each ‘‘General Operating Account,’’ ‘‘School custodian are separately insured. If the same Transportation Fund,’’ ‘‘Local Maintenance person is custodian of funds for more than Fund,’’ and ‘‘Payroll Fund.’’ Each account is one public unit, he is separately insured with available to the custodian upon demand. By respect to the funds of each unit held by him administrative direction, the city treasurer in properly designated accounts. has allocated the funds for the use of and For insurance purposes, a ‘‘political sub- control by separate departments of the city. division’’ is entitled to the same insurance What is the insurance coverage? coverage as any other public unit. ‘‘Political Answer: All of the accounts are added to- subdivision’’ includes any subdivision of a gether and insured in the aggregate to public unit or any principal department of $100,000. Because the allocation of the city’s such unit: (1) The creation of which has been funds is not by statute or ordinance for the expressly authorized by state statute, (2) to specific use of and control by separate de- which some functions of government have partments of the city, separate insurance been allocated by state statute, and (3) to coverage to the maximum of $100,000 is not which funds have been allocated by statute afforded to each account (§§ 745.1(d) and or ordinance for its exclusive use and con- 745.10(a)(2)). trol. Example 5 Example 1 Question: A, the custodian of retirement Question: As Comptroller of Y Consoli- funds of a military exchange, invests dated School District, A maintains a $125,000 $1,000,000 in an account in an insured credit account in the credit union containing union. The military exchange, a non-appro- school district funds. He also maintains his priated fund instrumentally of the United own $100,000 member account in the same States, is deemed to be a public unit. The credit union. What is the insurance cov- employees of the exchange are the bene- erage? ficiaries of the retirement funds but are not Answer: The two accounts will be sepa- members of the credit union. What is the in- rately insured, assuming the credit union’s surance coverage? records indicate that the account containing Answer: Because A invested the funds on the school district funds is held by A in a fi- behalf of a public unit, in his capacity as duciary capacity. Thus, $100,000 of the custodian, those funds qualify for $100,000 school’s funds and the entire $100,000 in A’s share insurance even though A and the pub- personal account will be insured (§ 745.10(a)(2) lic unit are not within the credit union’s and § 745.3). field of membership. Since the beneficiaries are neither public units nor members of the Example 2 credit union they are not entitled to sepa- Question: A, as city treasurer, and B, as rate share insurance. Therefore, $900,000 is chief of the city police department, each uninsured (§ 745.10(a)(1)). have $100,000 in city funds invested in custodial accounts. What is the insurance cov- Example 6 erage? Question: A is the custodian of the Coun- Answer: Assuming that both A and B have ty’s employee retirement funds. He deposits offical custody of the city funds, each ac- $1,000,000 in retirement funds in an account count is separately insured to the $100,000 in an insured credit union. The ‘‘bene- maximum (§ 745.10(a)(2)). ficiaries’’ of the retirement fund are not themselves public units nor are they within Example 3 the credit union’s field of membership. What Question: A is Treasurer of X County and is the insurance coverage? collects certain tax assessments, a portion of Answer: Because A invested the funds on which must be paid to the state under statu- behalf of a public unit, in his capacity as tory requirement. A maintains an account custodian, those funds qualify for $100,000

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share insurance even though A and the pub- unit, then the account would be insured for lic unit are not within the credit union’s $100,000, leaving $900,000 uninsured. field of membership. Since the beneficiaries are neither public units nor members of the Example 9 credit union they are not entitled to sepa- Question: A, an official custodian of funds rate share insurance. Therefore, $900,000 is of a state of the United States, lawfully in- uninsured (§ 745.10(a)(2)). vests $250,000 of state funds in a federally-insured credit union located in the state from Example 7 which he derives his authority as an official Question: A county treasurer establishes custodian. What is the insurance coverage? the following share draft accounts in an in- Answer: If A invested the entire $250,000 in sured credit union each with $100,000: a share draft account, then $100,000 would be ‘‘General Operating Fund’’ insured and $150,000 would be uninsured. If A ‘‘County Roads Department Fund’’ invested $125,000 in share draft accounts and ‘‘County Water District Fund’’ another $125,000 in share certificate and reg- ‘‘County Public Improvement District ular share accounts, then A would be insured Fund’’ for $100,000 for the share draft accounts and ‘‘County Emergency Fund’’ $100,000 for the share certificate and regular What is the insurance coverage? share accounts leaving $50,000 uninsured Answer: The ‘‘County Roads Department,’’ (§ 745.10(a)(2)). If A had invested the $250,000 ‘‘County Water District’’ and ‘‘County Pub- in a federally-insured credit union located lic Improvement District’’ accounts would outside the state from which he derives his each be separately insured to $100,000 if the authority as an official custodian, then funds in each such account have been allo- $100,000 would be insured for all accounts re- cated by law for the exclusive use of a sepa- gardless of whether they were share draft, rate county department or subdivision ex- share certificate or regular share accounts, pressly authorized by State statute. Funds leaving $150,000 uninsured (§ 745.10(b)). in the ‘‘General Operating’’ and ‘‘Emergency Fund’’ accounts would be added together and E. How Are Joint Accounts Insured? insured in the aggregate to $100,000, if such The interest of a co-owner in all accounts funds are for countywide use and not for the held under any form of joint ownership valid exclusive use of any subdivision or principal under state law (whether as joint tenants department of the county, expressly author- with right of survivorship, tenants by the ized by State statute (§§ 745.1(d) and entireties, tenants in common, or by hus- 745.10(a)(2)). band and wife as community property) is insured up to $100,000. This insurance is sepa- Example 8 rate from that afforded individual accounts Question: A, the custodian of Indian tribal held by any of the co-owners. funds, lawfully invests $1,000,000 in an ac- An account is insured as a joint account count in an insured credit union on behalf of only if each of the co-owners has personally 15 different tribes; the records of the credit signed a membership card or an account sig- union show that no tribe’s interest exceeds nature card and possesses the same with- $100,000. A, as official custodian, also invests drawal rights as the other co-owners. (The $1,000,000 in the same credit union on behalf signature requirement does not apply to of 100 individual Indians, who are not mem- share certificates, or to any accounts main- bers; each Indian’s interest is $10,000. What is tained by an agent, nominee, guardian, cus- the insurance coverage? todian or conservator on behalf of two or Answer: Because each tribe is considered a more persons. However, the records of the separate public unit, the custodian of each credit union must show that the account is tribe, even though the same person, is enti- being maintained for joint owners. There is tled to separate insurance for each tribe also another exception in the case of a minor (§ 745.10(a)(5)). Since the credit union’s discussed below.) An account owned jointly records indicate no tribe has more than which does not qualify as a joint account for $100,000 in the account, the $1,000,000 would insurance purposes is insured as if owned by be fully insured as 15 separate tribal ac- the named persons as individuals. In that counts. If any one tribe had more than a case, the actual ownership interest in the ac- $100,000 interest in the funds, it would be in- count of each person is added to any other sured only to $100,000 and any excess would accounts individually owned by such person be uninsured. and insured up to $100,000 in the aggregate. However, the $1,000,000 invested on behalf Any individual, including a minor, may be of the individual indians would not be in- a co-owner of a joint account. Although, gen- sured since the individual indians are neither erally, each co-owner must have signed an public units nor, in the example, members of account signature card and must have the the credit union. If A is the custodian of the same rights of withdrawal as other co-own- funds in his capacity as an official of a gov- ers in order for the account to qualify for ernmental body that qualified as a public separate joint account insurance, there is an

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exception for minors. If state law limits or have a one half interest ($50,000) in each ac- restricts a minor’s withdrawal rights—for count. (§ 745.2(c)(4).) The husband’s interest example, a minimum age requirement to in both accounts would be added together make a withdrawal—the account will still be and insured for $100,000. The wife’s insurance insured as a joint account. coverage would be determined the same way. The interests of a co-owner in all joint ac- (§ 745.8(a).) counts that qualify for separate insurance coverage are insured up to the $100,000 max- Example 4 imum. For insurance purposes, the co-owners Question: The following accounts are held of any joint account are deemed to have by members A, B and C, each of whom has equal interests in the account, except in the personally executed signature cards for the case of a tenancy in common. With a ten- accounts in which he has an interest. Each ancy in common, equal interests are pre- co-owner of a joint account possesses the sumed unless otherwise stated on the records necessary withdrawals rights. of the credit union. 1. A, as an individual—$100,000. Example 1 2. B, as an individual—$100,000. Question: Members A and B maintain an 3. C, as an individual—$100,000. account as joint tenants with right of survi- 4. A and B, as joint tenants w/r/o survivor- vorship and, in addition, each holds an indi- ship—$90,000. vidual account. Is each account separately 5. A and C, as joint tenants w/r/o survivor- insured? ship—$90,000. Answer: If both A and B have signed the 6. B and C, as joint tenants w/r/o survivor- membership or signature card and possess ship—$90,000. equal withdrawal rights with respect to the 7. A, B and C, as joint tenants w/r/o survivor- joint funds, their interests in the joint ac- ship—$90,000. count are separately insured from their in- What is the insurance coverage? terests in the individual accounts. (§ 745.8 (a) Answer: Accounts numbered 1, 2 and 3 are and (b).) If the joint account is represented each separately insured for $100,000 as indi- by a share certificate, their individual signa- vidual accounts held by A, B and C, respec- tures are not required for that account. tively (§ 745.3(a)(1)). The interest of the co- owners of each joint account are deemed Example 2 equal for insurance purposes (§ 745.2(c)(4)). Question: Members H and W, husband and A’s interest in accounts numbered 4, 5, and 7 wife, reside in a community property state. are added together for insurance purposes Each holds an individual account and, in ad- (§ 745.8(e)). Thus, A has an interest of $45,000 dition, they hold a qualifying joint account. in account No. 4, $45,000 in account No. 5 and The funds in all three accounts consist of $30,000 in account No. 7, for a total joint ac- community property. Is each account sepa- count interest of $120,000, of which $100,000 is rately insured? insured. The interest of B and C are simi- Answer: Yes. An account in the individual larly insured. name of a spouse will be insured up to $100,000 whether the funds consist of commu- Example 5(a) nity property or separate property of the Question: A, B and C hold accounts as set spouse. A joint account containing commu- forth in Example 4. Members A and B are nity property is separately insured. Thus, husband and wife; C, their minor child, has community property can be used for indi- failed to sign the signature card for Account vidual accounts in the name of each spouse No. 7. In Account No. 5, according to the and for a joint account in the name of both terms of the account, C cannot make a with- spouses. In this example, each individual ac- drawal without A’s written consent. (This is count is insured up to $100,000 (§ 745.3(a)(1)), not a limitation imposed under state law.) In and the interests of both the husband and Account No. 6, the signatures of both B and wife in the joint account are each insured up C are required for withdrawal. A has pro- to $100,000 (§ 745.8(a)). vided all of the funds for Accounts numbered 5 and 7 and under state law has the entire ac- Example 3 tual ownership interest in these two ac- Question: Two accounts of $100,000 each are counts. What is the insurance coverage? held by a member husband and his wife Answer: If any of the co-owners of a joint under the following names: John Doe and account have failed to meet any of the joint Mary Doe, husband and wife, as joint tenants account requirements, the account is not a with right of survivorship. Mrs. John Doe qualifying joint account. Instead, the ac- and John Q. Doe (community property). How count is treated as if it consisted of commin- much insurance do the husband and wife gled individual accounts of each of the co- have? owners in accordance with his or her actual Answer: They have $200,000 of insurance. ownership interest in the funds, as deter- Both the husband and wife are deemed to mined under applicable state law. (§ 745.8(c).)

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Account No. 5 is not a qualifying joint ac- A beneficiary’s interest in an account es- count because C does not have equal with- tablished pursuant to an irrevocable express drawal rights with A. Based on the terms of trust arrangement is insured separately from the account, C can only make a withdrawal other beneficial interests (trust estates) in- if he has A’s written consent. Account No. 7 vested in the same account if the value of is not a qualifying joint account because C the beneficiary’s interest (trust estate) can did not personally sign the signature card. be determined (as of the date of a credit Therefore, all of the funds in Accounts 5 and union’s insolvency) without evaluation of 7 are treated as individually owned by A and contingencies except for those covered by added to A’s individual account, Account No. the present worth tables and rules of calcula- 1. For insurance purposes then, A has $280,000 tion for their use set forth in § 20.2031–10 of in one individual account that is insured for the Federal Estate Tax Regulations (26 CFR $100,000, leaving $180,000 uninsured. 20.2031–10). If any trust estates in such an ac- Account 6 is a qualifying joint account for count cannot be so determined, the insur- insurance purposes since each co-owner has ance with respect to all such trust estates the right to withdraw funds on the same together shall not exceed $100,000. basis. Account 4 is also a qualifying joint ac- In order for insurance coverage of trust account. A’s interest in Account 4 is insured counts to be effective in accordance with the for $45,000. B’s interest of $45,000 in Account foregoing rules, certain recordkeeping re- 4 is added to her interest of $45,000 in Ac- quirements must be met. In connection with count 6 and insured for $90,000. C’s interest in each trust account, the credit union’s Account 6 is insured for $45,000. records must indicate the name of both the settlor and the trustee of the trust and must Example 5(b) contain an account signature card executed by the trustee indicating the fiduciary ca- Question: Assume the same accounts as pacity of the trustee. In addition, the inter- Example 5(a) except that, on Account No. 5, ests of the beneficiaries under the trust must C’s right to make a withdrawal is limited by be ascertainable from the records of either state law which precludes a minor from mak- the credit union or the trustee, and the set- ing a withdrawal without the co-owner’s tlor or beneficiary must be a member of the written consent. What is the insurance cov- credit union. If there are two or more set- erage? tlors or beneficiaries, then either all the set- Answer: In this situation, Accounts 4, 5, tlors or all the beneficiaries must be mem- and 6 all qualify as joint accounts. A, B, and bers of the credit union. C will each have $90,000 of insured funds Although each ascertainable trust estate is based on: A’s interest in Account 4 ($45,000) separately insured, it should be noted that in and 5 ($45,000), B’s interest in Accounts 4 short-term trusts the insurable interest or ($45,000) and 6 ($45,000), and C’s interest in interests may be very small, since the inter- Accounts 5 ($45,000) and 6 ($45,000). As in Ex- ests are computed only for the duration of ample 5(a), Account No. 7 does not qualify as the trust. Thus, if a trust is made irrev- a joint account and would be added to A’s in- ocable for a specified period of time, the ben- dividual account for insurance purposes. eficial interest will be calculated in terms of the length of time stated. A reversionary in- F. How Are Trust Accounts and Retirement terest retained by the settlor is treated in Accounts Insured? the same manner as an individual account of A trust estate is the interest of a bene- the settlor. ficiary in an irrevocable express trust, As stated, the trust must be valid under whether created by trust instrument or stat- local law. A trust which does not meet local ute, that is valid under state law. Thus, requirements, such as one imposing no du- funds invested in an account by a trustee ties on the trustee or conveying no interest under an irrevocable express trust are in- to the beneficiary, is of no effect for insur- sured on the basis of the beneficial interests ance purposes. An account in which such under such trust. The interest of each bene- funds are invested is considered to be an in- ficiary in an account (or accounts) estab- dividual account. lished under such a trust arrangement is in- An account established pursuant to a rev- sured to $100,000 separately from other ac- ocable trust arrangement is insured as a counts held by the trustee, the settlor form of individual account and is treated (grantor), or the beneficiary. However, in under section B, supra, dealing with Testa- cases where a beneficiary has an interest in mentary Accounts. more than one trust arrangement created by IRA and Keogh accounts are separately in- the same settlor, the interests of the bene- sured, each up to $250,000. Although credit ficiary in all accounts established under such unions may serve as trustees or custodians trusts are added together for insurance pur- for self-directed IRA, Roth IRA and Keogh poses, and the beneficiary’s aggregate inter- accounts, once the funds in those accounts est derived from the same settlor is sepa- are taken out of the credit union, they are rately insured to the $100,000 maximum. no longer insured.

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In the case of an employee retirement fund Fund participant A has a determinable inter- where only a portion of the fund is placed in est of $90,000 in the Fund (9% of the total). T a credit union account, the amount of insur- invests $500,000 of the Fund in an insured ance available to an individual member/bene- credit union and the remaining $500,000 else- ficiary on his interest in the account will be where. Some of the participants of the Fund in proportion to his interest in the entire are members of the credit union and some employee retirement fund. If, for example, are not. T does not segregate each partici- the member’s interest represents 10% of the pant’s interest in the Fund. What is the in- entire plan funds, then he is presumed to surance coverage? have only a 10% interest in the plan account. Said another way, if a member has a vested Answer: The account is insured as to the interest of $10,000 in a municipal employees determinable interest of each participant, retirement plan and the trustee invests 25% adjusted in proportion to the Fund’s invest- of the total plan funds in a credit union, the ment in the credit union, regardless of the member would be insured for only $2,500 on membership status of the participants or that credit union account. There is an excep- trustee. A’s insured interest in the account tion, however. The member would be insured is $45,000, or 9% of $500,000. This reflects the for $10,000 if the trustee can document, fact that only 50% of the Fund is in the ac- through records maintained in the ordinary count and A’s interest in the account is in course of business, that individual bene- the same proportion as his interest in the ficiary’s interests are segregated and the overall plan. All other participants would be total vested interest of the member was, in similarly insured. Participants’ interests not fact, invested in that account. capable of evaluation are added together and Example 1 insured to a maximum of $100,000 in the aggregate (§ 745.9–2). Question: Member S invests $45,000 in trust for B, the beneficiary. S also has an indi- Example 4 vidual account containing $90,000 in the same credit union. What is the insurance cov- Question: Member A has an individual ac- erage? count of $100,000 and establishes an IRA ac- Answer: Both accounts are fully insured. count and accumulates $250,000 in that ac- The trust account is separately insured from count. Subsequently, A becomes self-em- the individual account of S (§§ 745.3(a)(1) and ployed and establishes a Keogh account in 745.9–1). the same credit union and accumulates $250,000 in that account. What is the insur- Example 2 ance coverage? Question: S invests funds in trust for A, B, Answer: Each of A’s accounts would be sep- C, D, and E. A, B, and C are members of the arately insured as follows: The individual ac- credit union, D, E and S are not. What is the count for $100,000, the maximum for that insurance coverage? type of account; the IRA account for $250,000, Answer: This is an uninsurable account. the maximum for that type of account; and Where there is more than one settlor or more the Keogh account for $250,000, the maximum than one beneficiary, all the settlors or all for that type of account. (§§ 745.3(a)(1) and the beneficiaries must be members to estab- 745.9–2). lish this type of account. Since D, E and S are not members, this account cannot le- Example 5 gally be established or insured. Question: Member A has a self-directed Example 3(a) IRA account with $70,000 in it. The FCU is Question: Member T invests $500,000 in the trustee of the account. Member transfers trust for ABC Employees Retirement Fund. $40,000 into a blue chip stock; $30,000 remains Some of the participants are members and in the FCU. What is the insurance coverage? some are not. What is the insurance cov- Answer: Originally, the full $70,000 in A’s erage? IRA account is insured. The $40,000 is no Answer: The account is insured as to the longer insured once it is moved out of the determinable interests of each participant to FCU. The $30,000 remaining in the FCU is in- a maximum of $100,000 per participant re- sured (§ 745.9–2). gardless of credit union member status. T’s member status is also irrelevant. Participant [51 FR 37560, Oct. 23, 1986, as amended at 53 interests not capable of evaluation shall be FR 22473, June 16, 1988; 55 FR 47455, Nov. 14, added together and insured to a maximum of 1990; 64 FR 19687, 19688, Apr. 22, 1999; 65 FR $100,000 in the aggregate (§ 745.9–2). 34925, June 1, 2000; 68 FR 75114, Dec. 30, 2003; 69 FR 8801, Feb. 26, 2004; 71 FR 14636, Mar. 23, Example 3(b) 2006; 71 FR 56004, Sept. 26, 2006; 73 FR 60622, Question: T is trustee for the ABC Employ- Oct. 14, 2008] ees Retirement Fund containing $1,000,000.

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PART 747—ADMINISTRATIVE AC- Subpart B—Local Rules of Practice and TIONS, ADJUDICATIVE HEAR- Procedure INGS, RULES OF PRACTICE AND 747.100 Discovery limitations. PROCEDURE, AND INVESTIGA- TIONS Subpart C—Local Rules and Procedures Applicable to Proceedings for the In- Sec. voluntary Termination of Insured Status 747.0 Scope of part 747. 747.201 Scope. Subpart A—Uniform Rules of Practice and 747.202 Grounds for termination of insur- Procedure ance. 747.203 Notice of charges. 747.1 Scope. 747.204 Notice of intention to terminate in- 747.2 Rules of construction. sured status. 747.3 Definitions. 747.205 Order terminating insured status. 747.4 Authority of NCUA Board. 747.206 Consent to termination of insured 747.5 Authority of the administrative law status. judge. 747.207 Notice of termination of insured sta- 747.6 Appearance and practice in adjudica- tus. tory proceedings. 747.208 Duties after termination. 747.7 Good faith certification. 747.8 Conflicts of interest. Subpart D—Local Rules and Procedures 747.9 Ex parte communications. Applicable to Suspensions and Prohi- 747.10 Filing of papers. bitions Where Felony Charged 747.11 Service of papers. 747.12 Construction of time limits. 747.301 Scope. 747.13 Change of time limits. 747.302 Rules of practice; remainder of board 747.14 Witness fees and expenses. of directors. 747.15 Opportunity for informal settlement. 747.303 Notice of suspension or prohibition. 747.16 NCUA’s right to conduct examina- 747.304 Removal or permanent prohibition. tion. 747.305 Effectiveness of suspension or re- 747.17 Collateral attacks on adjudicatory moval until completion of hearing. proceeding. 747.306 Notice of opportunity for hearing. 747.18 Commencement of proceeding and contents of notice. 747.307 Hearing. 747.19 Answer. 747.308 Waiver of hearing; failure to request 747.20 Amended pleadings. hearing or review based on written sub- 747.21 Failure to appear. missions; failure to appear. 747.22 Consolidation and severance of ac- 747.309 Decision of the NCUA Board. tions. 747.310 Reconsideration by the NCUA Board. 747.23 Motions. 747.311 Relevant considerations. 747.24 Scope of document discovery. 747.25 Request for document discovery from Subpart E—Local Rules and Procedures parties. Applicable to Proceedings Relating to 747.26 Document subpoenas to nonparties. the Suspension or Revocation of Char- 747.27 Deposition of witness unavailable for ters and to Involuntary Liquidations hearing. Under Title I 747.28 Interlocutory review. 747.29 Summary disposition. 747.401 Scope. 747.30 Partial summary disposition. 747.402 Grounds for suspension or revocation 747.31 Scheduling and prehearing con- of charter and for involuntary liquida- ferences. tion. 747.32 Prehearing submissions. 747.403 Notice of intent to suspend or re- 747.33 Public hearings. voke charter; notice of suspension. 747.34 Hearing subpoenas. 747.404 Notice of hearing. 747.35 Conduct of hearings. 747.405 Issuance of order. 747.36 Evidence. 747.406 Cancellation of charter. 747.37 Post-hearing filings. 747.38 Recommended decision and filing of record. Subpart F—Local Rules and Procedures 747.39 Exceptions to recommended decision. Applicable to Proceedings Relating to 747.40 Review by the NCUA Board. 747.41 Stays pending judicial review.

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the Termination of Membership in the Subpart K—Inflation Adjustment of Civil Central Liquidity Facility [Reserved] Monetary Penalties

Subpart G—Local Rules and Procedures 747.1001 Adjustment of civil money penalties by the rate of inflation. Applicable to Recovery of Attorneys Fees and Other Expenses Under the Subpart L—Issuance, Review and Enforce- Equal Access to Justice Act in NCUA ment of Orders Imposing Prompt Cor- Board Adjudications rective Action 747.601 Purpose and scope. 747.2001 Scope. 747.602 Eligibility of applicants. 747.2002 Review of order imposing discre- 747.603 Prevailing party. tionary supervisory action. 747.604 Standards for award. 747.2003 Review of order reclassifying a 747.605 Allowable fees and expenses. credit union on safety and soundness cri- 747.606 Contents of application. teria. 747.2004 Review of order to dismiss a direc- 747.607 Statement of net worth. tor or senior executive officer. 747.608 Documentation of fees and expenses. 747.2005 Enforcement of orders. 747.609 Filing and service of applications. 747.610 Answer to application. AUTHORITY: 12 U.S.C. 1766, 1782, 1784, 1785, 1786, 1787, 1790a, 1790d; 42 U.S.C. 4012a; Pub. L. 747.611 Comments by other parties. 101–410; Pub. L. 104–134; Pub. L. 109–351; 120 747.612 Settlement. Stat. 1966. 747.613 Further proceedings. 747.614 Recommended decision. SOURCE: 56 FR 37767, Aug. 8, 1991, unless 747.615 Decision of the NCUA Board. otherwise noted. 747.616 Payment of award § 747.0 Scope of part 747. Subpart H—Local Rules and Procedures (a) This part describes the various Applicable to Investigations formal and informal adjudicative actions and non-adjudicative proceedings 747.701 Applicability. available to the National Credit Union 747.702 Information obtained in investiga- Administration Board (‘‘NCUA tions. Board’’), the grounds for those actions 747.703 Authority to conduct investigations. and proceedings, and the procedures used in formal and informal hearings Subpart I—Local Rules Applicable to related to each available action. As Formal Investigative Proceedings mandated by section 916 of the Finan- 747.801 Applicability. cial Institutions Reform, Recovery, 747.802 Non-public formal investigative pro- and Enforcement Act of 1989 ceedings. (‘‘FIRREA’’) (12 U.S.C. 1818 note), this 747.803 Subpoenas. part incorporates uniform rules of 747.804 Oath; false statements. practice and procedure governing for- 747.805 Self-incrimination; immunity. mal adjudications generally, as well as 747.806 Transcripts. proceedings involving cease-and-desist 747.807 Rights of witnesses. actions, assessment of civil money penalties, and removal, prohibition and Subpart J—Local Procedures and Stand- suspension actions. In addition, the ards Applicable to a Notice of Uniform Rules are incorporated in Change in Senior Executive Officers, other subparts of this part which pro- Directors of Committee Members Pur- vide for formal adjudications. The ad- suant to Section 212 of the Act ministrative actions and proceedings described herein, as well as the grounds 747.901 Scope. and hearing procedures for each, are 747.902 Grounds for disapproval of notice. 747.903 Procedures where notice of dis- controlled by sections 120(b) (except approval issued; reconsideration. where the Federal credit union is 747.904 Appeal. closed due to insolvency), 202(a)(3) and 747.905 Judicial review. 206 of the Federal Credit Union Act (‘‘the Act’’), 12 U.S.C. 1766(b), 1782(a)(3), 1786. Should any provision of this part be inconsistent with these or any other provisions of the Act, as amended, the

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Act shall control. Judicial enforcement or any order or regulation issued thereof any action or order described in this under; part, as well as judicial review thereof, (d) Remedial action under section shall be as prescribed under the Act (12 102(g) of the Flood Disaster Protection U.S.C. 1751 et seq.) and the Administra- Act of 1973 (42 U.S.C. 4012a(g)); and tive Procedure Act (5 U.S.C. 500 et seq.). (e) This subpart also applies to all (b) As used in this part, the term in- other adjudications required by statute sured credit union means any Federal to be determined on the record after credit union or any state chartered opportunity for an agency hearing, un- credit union insured under subchapter less otherwise specifically provided for II of the Act unless the context indi- in subparts B through J of this part. cates otherwise. [56 FR 37767, Aug. 8, 1991; 57 FR 523, Jan. 7, [56 FR 37767, Aug. 8, 1991; 57 FR 523, Jan. 7, 1992, as amended at 61 FR 28025, June 4, 1996; 1992] 71 FR 67440, Nov. 22, 2006]

Subpart A—Uniform Rules of § 747.2 Rules of construction. Practice and Procedure For purposes of this subpart: (a) Any term in the singular includes § 747.1 Scope. the plural, and the plural includes the This subpart prescribes uniform rules singular, if such use would be appro- of practice and procedure applicable to priate; adjudicatory proceedings required to (b) Any use of a masculine, feminine, be conducted on the record after oppor- or neuter gender encompasses all three, tunity for a hearing under the fol- if such use would be appropriate; lowing statutory provisions: (c) The term counsel includes a non- (a) Cease-and-desist proceedings attorney representative; and under section 206(e) of the Act (12 (d) Unless the context requires other- U.S.C. 1786(e)); wise, a party’s counsel of record, if (b) Removal and prohibition pro- any, may, on behalf of that party, take ceedings under section 206(g) of the Act any action required to be taken by the (12 U.S.C. 1786(g)); party. (c) Assessment of civil money penalties by the NCUA Board against in- § 747.3 Definitions. stitutions and institution-affiliated For purposes of this subpart, unless parties for any violation of: explicitly stated to the contrary: (1) Section 202 of the Act (12 U.S.C. (a) Administrative law judge means one 1782); who presides at an administrative (2) Section 1120 of FIRREA (12 U.S.C. hearing under authority set forth at 5 3349), or any order or regulation issued U.S.C. 556. thereunder; (b) Adjudicatory proceeding means a (3) The terms of any final or tem- proceeding conducted pursuant to this porary order issued under section 206 of subpart and leading to the formulation the Act or any written agreement exe- of a final order other than a regulation. cuted by the National Credit Union Ad- (c) Decisional employee means any ministration (‘‘NCUA’’), any condition member of the NCUA’s or administra- imposed in writing by the NCUA in tive law judge’s staff who has not en- connection with any action on any ap- gaged in an investigative or prosecu- plication, notice, or other request by torial role in a proceeding and who the credit union or institution-affili- may assist the Agency or the adminis- ated party, certain unsafe or unsound trative law judge, respectively, in pre- practices or breaches of fiduciary duty, paring orders, recommended decisions, or any law or regulation not otherwise decisions, and other documents under provided herein, pursuant to 12 U.S.C. the Uniform Rules. 1786(k); and (d) Enforcement Counsel means any in- (4) Any provision of law referenced in dividual who files a notice of appear- section 102(f) of the Flood Disaster Pro- ance as counsel on behalf of the NCUA tection Act of 1973 (42 U.S.C. 4012a(f)) in an adjudicatory proceeding.

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(e) Final order means an order issued § 747.4 Authority of the NCUA Board. by the NCUA with or without the con- The NCUA Board may, at any time sent of the affected institution or the during the pendency of a proceeding institution-affiliated party, that has perform, direct the performance of, or become final, without regard to the waive performance of, any act which pendency of any petition for reconsid- could be done or ordered by the admin- eration or review. istrative law judge. (f) Institution includes: (1) Any Fed- eral credit union as that term is de- § 747.5 Authority of the administrative fined in section 101(1) of the Act (12 law judge. U.S.C. 1752(1)); and (a) General rule. All proceedings gov- (2) Any insured state credit union as erned by this part shall be conducted in that term is defined in section 101(7) of accordance with the provisions of chap- the FCUA (12 U.S.C. 1752(7)). ter 5 of title 5 of the United States Code. The administrative law judge (g) Institution-affiliated party means shall have all powers necessary to con- any institution-affiliated party as that duct a proceeding in a fair and impar- term is defined in section 206(r) of the tial manner and to avoid unnecessary Act (12 U.S.C. 1786(r)). delay. (h) Local Rules means those rules pro- (b) Powers. The administrative law mulgated by the NCUA in the subparts judge shall have all powers necessary of this part other than subpart A of to conduct the proceeding in accord- this part. ance with paragraph (a) of this section, (i) OFIA means the Office of Finan- including the following powers: cial Institution Adjudication, which is (1) To administer oaths and affirma- the executive body charged with over- tions; seeing the administration of adminis- (2) To issue subpoenas, subpoenas trative enforcement proceedings for duces tecum, and protective orders, as the NCUA, the Office of the Comp- authorized by this part, and to quash troller of the Currency (‘‘OCC’’), the or modify any such subpoenas and or- Board of Governors of the Federal Re- ders; serve System (‘‘Board’’), the Federal (3) To receive relevant evidence and Deposit Insurance Corporation to rule upon the admission of evidence (‘‘FDIC’’), and the Office of Thrift Su- and offers of proof; (4) To take or cause depositions to be pervision (‘‘OTS’’). taken as authorized by this subpart; (j) Party means the NCUA and any (5) To regulate the course of the person named as a party in any notice. hearing and the conduct of the parties (k) Person means an individual, sole and their counsel; proprietor, partnership, corporation, (6) To hold scheduling and/or pre- unincorporated association, trust, joint hearing conferences as set forth in venture, pool, syndicate, agency or § 747.31; other entity or organization, including (7) To consider and rule upon all pro- an institution as defined in paragraph cedural and other motions appropriate (f) of this section. in an adjudicatory proceeding, pro- (l) Respondent means any party other vided that only the NCUA Board shall than the NCUA. have the power to grant any motion to (m) Uniform Rules means those rules dismiss the proceeding or to decide any in subpart A of this part that are com- other motion that results in a final de- mon to the NCUA, the OCC, the Board, termination of the merits of the pro- the FDIC and the OTS. ceeding; (n) Violation includes any action (8) To prepare and present to the (alone or with another or others) for or NCUA Board a recommended decision toward causing, bringing about, par- as provided herein; (9) To recuse himself or herself by ticipating in, counseling, or aiding or motion made by a party or on his or abetting a violation. her own motion; [56 FR 37767, Aug. 8, 1991; 57 FR 523, Jan. 7, (10) To establish time, place and 1992] manner limitations on the attendance

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of the public and the media for any any adjudicatory proceeding may be public hearing; and grounds for exclusion or suspension of (11) To do all other things necessary counsel from the proceeding. and appropriate to discharge the duties of a presiding officer. [56 FR 37767, Aug. 8, 1991, as amended at 61 FR 28025, June 4, 1996] § 747.6 Appearance and practice in adjudicatory proceedings. § 747.7 Good faith certification. (a) Appearance before the NCUA or an (a) General requirement. Every filing administrative law judge—(1) By attor- or submission of record following the neys. Any member in good standing of issuance of a notice shall be signed by the bar of the highest court of any at least one counsel of record in his or state, commonwealth, possession, ter- her individual name and shall state ritory of the United States, or the Dis- that counsel’s address and telephone trict of Columbia may represent others number. A party who acts as his or her before the NCUA if such attorney is own counsel sign his or her individual not currently suspended or debarred name and state his or her address and from practice before the NCUA. telephone number on every filing or (2) By non-attorneys. An individual submission of record. may appear on his or her own behalf; a (b) Effect of signature. (1) The signa- member of a partnership may represent ture of counsel or a party shall con- the partnership; a duly authorized offi- stitute a certification that: the counsel cer, director, or employee of any gov- or party has read the filing or submis- ernment unit, agency, institution, cor- sion of record; to the best of his or her poration or authority may represent knowledge, information, and belief that unit, agency, institution, corpora- formed after reasonable inquiry, the tion or authority if such officer, direc- filing or submission of record is well- tor, or employee is not currently sus- grounded in fact and is warranted by pended or debarred from practice be- existing law or a good faith argument fore the NCUA. for the extension, modification, or re- (3) Notice of appearance. Any indi- versal of existing law; and the filing or vidual acting as counsel on behalf of a submission of record is not made for party, including the NCUA Board, shall any improper purpose, such as to har- file a notice of appearance with OFIA ass or to cause unnecessary delay or at or before the time that the indi- needless increase in the cost of litiga- vidual submits papers or otherwise ap- tion. pears on behalf of a party in the adju- (2) If a filing or submission of record dicatory proceeding. The notice of ap- is not signed, the administrative law pearance must include a written declaration that the individual is cur- judge shall strike the filing or submis- rently qualified as provided in para- sion of record, unless it is signed graph (a)(1) or (a)(2) of this section and promptly after the omission is called is authorized to represent the par- to the attention of the pleader or mov- ticular party. By filing a notice of ap- ant. pearance on behalf of a party in an ad- (c) Effect of making oral motion or ar- judicatory proceeding, the counsel gument. The act of making any oral agrees and represents that he or she is motion or oral argument by any coun- authorized to accept service on behalf sel or party constitutes a certification of the represented party and that, in that to the best of his or her knowl- the event of withdrawal from represen- edge, information, and belief formed tation, he or she will, if required by the after reasonable inquiry, his or her administrative law judge, continue to statements are well-grounded in fact accept service until new counsel has and are warranted by existing law or a filed a notice of appearance or until good faith argument for the extension, the represented party indicates that he modification, or reversal of existing or she will proceed on a pro se basis. law, and are not made for any improper (b) Sanctions. Dilatory, obstruc- purpose, such as to harass or to cause tionist, egregious, contemptuous or unnecessary delay or needless increase contumacious conduct at any phase of in the cost of litigation.

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§ 747.8 Conflicts of interest. issued by the NCUA Board until the date that the NCUA Board issues its (a) Conflict of interest in representation. No person shall appear as counsel final decision pursuant to § 747.40(c): for another person in an adjudicatory (1) No interested person outside the proceeding if it reasonably appears NCUA shall make or knowingly cause that such representation may be mate- to be made an ex parte communication rially limited by that counsel’s respon- to any member of the NCUA Board, the sibilities to a third person or by the administrative law judge, or a counsel’s own interests. The adminis- decisional employee; and trative law judge may take corrective (2) No member of the NCUA Board, measures at any stage of a proceeding administrative law judge, or decisional to cure a conflict of interest in rep- employee shall make or knowingly resentation, including the issuance of cause to be made to any interested per- an order limiting the scope of represen- son outside the NCUA any ex parte tation or disqualifying an individual communication. from appearing in a representative ca- (c) Procedure upon occurrence of ex pacity for the duration of the pro- parte communication. If an ex parte ceeding. communication is received by the ad- (b) Certification and waiver. If any per- ministrative law judge, a member of son appearing as counsel represents the NCUA Board or any other person two or more parties to an adjudicatory identified in paragraph (a) of this sec- proceeding or also represents a non- tion, that person shall cause all such party on a matter relevant to an issue written communications (or, if the in the proceeding, counsel must certify communication is oral, a memorandum in writing at the time of filing the no- stating the substance of the commu- tice of appearance required by § 747.6(a): nication) to be placed on the record of (1) That the counsel has personally the proceeding and served on all par- and fully discussed the possibility of ties. All other parties to the proceeding conflicts of interest with each such shall have an opportunity, within ten party and non-party; and days of receipt of service of the ex (2) That each such party and non- parte communication, to file responses party waives any right it might other- thereto and to recommend any sanc- wise have had to assert any known con- tions, in accordance with paragraph (d) flicts of interest or to assert any non- of this section, that they believe to be material conflicts of interest during appropriate under the circumstances. the course of the proceeding. (d) Sanctions. Any party or his or her [56 FR 37767, Aug. 8, 1991, as amended at 61 counsel who makes a prohibited ex FR 28025, June 4, 1996] parte communication, or who encourages or solicits another to make any § 747.9 Ex parte communications. such communication, may be subject (a) Definition—(1) Ex parte communica- to any appropriate sanction or sanction means any material oral or writ- tions imposed by the NCUA Board or ten communication relevant to the the administrative law judge including, merits of an adjudicatory proceeding but not limited to, exclusion from the that was neither on the record nor on proceedings and an adverse ruling on reasonable prior notice to all parties the issue which is the subject of the that takes place between— prohibited communication. (i) An interested person outside the (e) Separation of functions. Except to NCUA (including such person’s coun- the extent required for the disposition sel); and of ex parte matters as authorized by (ii) The administrative law judge law, the administrative law judge may handling that proceeding, the NCUA not consult a person or party on any Board, or a decisional employee. matter relevant to the merits of the (2) Exception. A request for status of adjudication, unless on notice and op- the proceeding does not constitute an portunity for all parties to participate. ex parte communication. An employee or agent engaged in the (b) Prohibition of ex parte communica- performance of investigative or pros- tions. From the time the notice is ecuting functions for the NCUA in a

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case may not, in that or a factually re- pers shall be filed, except that only one lated case, participate or advise in the copy of transcripts of testimony and decision, recommended decision, or exhibits shall be filed. agency review of the recommended decision under section 747.40, except as § 747.11 Service of papers. witness or counsel in public pro- (a) By the parties. Except as otherwise ceedings. provided, a party filing papers shall [56 FR 37767, Aug. 8, 1991; 57 FR 523, Jan. 7, serve a copy upon the counsel of record 1992, as amended at 61 FR 28025, June 4, 1996] for all other parties to the proceeding so represented, and upon any party not § 747.10 Filing of papers. so represented. (a) Filing. Any papers required to be (b) Method of service. Except as pro- filed, excluding documents produced in vided in paragraphs (c)(2) and (d) of response to a discovery request pursu- this section, a serving party shall use ant to §§ 747.25 and 747.26, shall be filed one or more of the following methods with the OFIA, except as otherwise of service: provided. (1) Personal service; (b) Manner of filing. Unless otherwise specified by the NCUA Board or the ad- (2) Delivering the papers to a reliable ministrative law judge, filing may be commercial courier service, overnight accomplished by: delivery service, or to the U.S. Post Of- (1) Personal service; fice for Express Mail delivery; (2) Delivering the papers to a reliable (3) Mailing the papers by first class, commercial courier service, overnight registered, or certified mail; or delivery service, or to the U.S. Post Of- (4) Transmission by electronic media, fice for Express Mail delivery; only if the parties mutually agree. Any (3) Mailing the papers by first class, papers served by electronic media shall registered, or certified mail; or also concurrently be served in accord- (4) Transmission by electronic media, ance with the requirements of only if expressly authorized, and upon § 747.10(c). any conditions specified, by the NCUA (c) By the NCUA Board or the adminis- Board or the administative law judge. trative law judge. (1) All papers required All papers filed by electronic media to be served by the NCUA Board or the shall also concurrently be filed in ac- administrative law judge upon a party cordance with paragraph (c) of this sec- who has appeared in the proceeding in tion. accordance with § 747.6, shall be served (c) Formal requirements as to papers by any means specified in paragraph (b) filed—(1) Form. All papers filed must set of this section. forth the name, address, and telephone (2) If a party has not appeared in the number of the counsel or party making proceeding in accordance with § 747.6, the filing and must be accompanied by the NCUA Board or the administrative a certification setting forth when and law judge shall make service by any of how service has been made on all other the following methods: parties. All papers filed must be double-spaced and printed or typewritten (i) By personal service; on 81⁄2×11 inch paper, and must be clear (ii) If the person to be served is an in- and legible. dividual, by delivery to a person of (2) Signature. All papers must be suitable age and discretion at the phys- dated and signed as provided in § 747.7. ical location where the individual re- (3) Caption. All papers filed must in- sides or works; clude at the head thereof, or on a title (iii) If the person to be served is a page, the name of the NCUA and of the corporation or other association, by de- filing party, the title and docket num- livery to an officer, managing or gen- ber of the processing, and the subject eral agent, or to any other agent au- of the particular paper. thorized by appointment or by law to (4) Number of copies. Unless otherwise receive service and, if the agent is one specified by the NCUA Board, or the authorized by statute to receive service administrative law judge, an original and the statute so requires, by also and one copy of all documents and pa- mailing a copy to the party;

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(iv) By registered or certified mail day, Sunday, or Federal holiday. Inter- addressed to the person’s last known mediate Saturdays, Sundays, and Fed- address; or eral holidays are included in the com- (v) By any other method reasonably putation of time. However, when the calculated to give actual notice. time period within which an act is to (d) Subpoenas. Service of a subpoena be performed is ten days or less, not in- may be made: cluding any additional time allowed for (1) By personal service; in § 747.12(c), intermediate Saturdays, (2) If the person to be served is an in- Sundays, and Federal holidays are not dividual, by delivery to a person of included. suitable age and discretion at the phys- (b) When papers are deemed to be filed ical location where the individual re- or served. (1) Filing and service are sides or works; deemed to be effective: (3) By delivery to an agent, which, in the case of a corporation or other asso- (i) In the case of personal service or ciation, is delivery to an officer, man- same day commercial courier delivery, aging or general agent, or to any other upon actual service; agent authorized by appointment or by (ii) In the case of overnight commer- law to receive service and, if the agent cial delivery service, U.S. Express Mail is one authorized by statute to receive delivery, or first class, registered, or service and the statute so requires, by certified mail, upon deposit in or deliv- also mailing a copy to the party; ery to an appropriate point of collec- (4) By registered or certified mail ad- tion; dressed to the person’s last known ad- (iii) In the case of transmission by dress; or electronic media, as specified by the (5) By any other method reasonably authority receiving the filing, in the calculated to give actual notice. case of filing, and as agreed among the (e) Area of service. Service in any parties, in the case of service. state, territory, possession of the (2) The effective filing and service United States, or the District of Co- dates specified in paragraph (b)(1) of lumbia, on any person or company this section may be modified by the doing business in any state, territory, NCUA Board or administrative law possession of the United States, or the judge in the case of filing or by agree- District of Columbia, or on any person ment of the parties in the case of serv- as otherwise provided by law, is effec- ice. tive without regard to the place where (c) Calculation of time for service and the hearing is held, provided that if filing of responsive papers. Whenever a service is made on a foreign bank in time limit is measured by a prescribed connection with an action or pro- period from the service of any notice or ceeding involving one or more of its paper, the applicable time limits are branches or agencies located in any calculated as follows: state, territory, possession of the United States, or the District of Co- (1) If service is made by first class, lumbia, service shall be made on at registered, or certified mail, add three least one branch or agency so involved. calendar days to the prescribed period; (2) If service is made by express mail [56 FR 37767, Aug. 8, 1991, as amended at 61 or overnight delivery service, add one FR 28025, June 4, 1996] calendar day to the prescribed period; § 747.12 Construction of time limits. or (3) If service is made by electronic (a) General rule. In computing any pe- media transmission, add one calendar riod of time prescribed by this subpart, day to the prescribed period, unless the date of the act or event that com- otherwise determined by the NCUA mences the designated period of time is Board or the administrative law judge not included. The last day so computed in the case of filing, or by agreement is included unless it is a Saturday, Sunday, or Federal holiday. When the among the parties in the case of serv- last day is a Saturday, Sunday, or Fed- ice. eral holiday, the period runs until the [56 FR 37767, Aug. 8, 1991, as amended at 61 end of the next day that is not a Satur- FR 28026, June 4, 1996]

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§ 747.13 Change of time limits. NCUA to conduct any examination, in- Except as otherwise provided by law, spection, or visitation of any institu- the administrative law judge may, for tion or institution-affiliated party, or good cause shown, extend the time lim- the right of the NCUA to conduct or its prescribed by the Uniform Rules or continue any form of investigation au- by any notice or order issued in the thorized by law. proceedings. After the referral of the [56 FR 37767, Aug. 8, 1991; 57 FR 523, Jan. 7, case to the NCUA Board pursuant to 1992] § 747.38, the NCUA Board may grant extensions of the time limits for good § 747.17 Collateral attacks on adjudica- cause shown. Extensions may be grant- tory proceeding. ed upon the motion of a party after no- If an interlocutory appeal or collat- tice and opportunity to respond is af- eral attack is brought in any court forded all non-moving parties, or upon concerning all or any part of an adju- the NCUA Board’s or the administra- dicatory proceeding, the challenged ad- tive law judge’s own motion. judicatory proceeding shall continue without regard to the pendency of that § 747.14 Witness fees and expenses. court proceeding. No default or other Witnesses subpoenaed for testimony failure to act as directed in the adju- or depositions shall be paid the same dicatory proceeding within the times fees for attendance and mileage as are prescribed in this subpart shall be ex- paid in the United States district cused based on the pendency before any courts in proceedings in which the court of any interlocutory appeal or United States is a party, provided that, collateral attack. in the case of a discovery subpoena addressed to a party, no witness fees or § 747.18 Commencement of proceeding mileage need be paid. Fees for wit- and contents of notice. nesses shall be tendered in advance by (a) Commencement of proceeding. (1) A the party requesting the subpoena, ex- proceeding governed by this subpart is cept that fees and mileage need not be commenced by issuance of a notice by tendered in advance where the NCUA is the NCUA Board. the party requesting the subpoena. The (2) The notice must be served by the NCUA shall not be required to pay any NCUA Board upon the respondent and fees to, or expenses of, any witness not given to any other appropriate finan- subpoenaed by the NCUA. cial institution supervisory authority where required by law. § 747.15 Opportunity for informal set- (3) The notice must be filed with the tlement. OFIA. Any respondent may, at any time in (b) Contents of notice. The notice must the proceeding, unilaterally submit to set forth: Enforcement Counsel written offers or (1) The legal authority for the pro- proposals for settlement of a proceeding and for the NCUA’s jurisdic- ceeding, without prejudice to the tion over the proceeding; rights of any of the parties. No such (2) A statement of the matters of fact offer or proposal shall be made to any or law showing that the NCUA is enti- NCUA representative other than En- tled to relief; forcement Counsel. Submission of a (3) A proposed order or prayer for an written settlement offer does not pro- order granting the requested relief; vide a basis for adjourning or otherwise (4) The time, place, and nature of the delaying all or any portion of a pro- hearing as required by law or regula- ceeding under this part. No settlement tion; offer or proposal, or any subsequent ne- (5) The time within which to file an gotiation or resolution, is admissible answer as required by law or regula- as evidence in any proceeding. tion; (6) The time within which to request § 747.16 NCUA’s right to conduct exam- a hearing as required by law or regula- ination. tion; and Nothing contained in this subpart (7) That the answer and/or request for limits in any manner the right of the a hearing shall be filed with OFIA.

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§ 747.19 Answer. tice within the time remaining for the (a) When. Within 20 days of service of respondent’s answer to the original no- the notice, respondent shall file an an- tice, or within ten days after service of swer as designated in the notice. In a the amended notice, whichever period civil money penalty proceeding, re- is longer, unless the NCUA Board or spondent shall also file a request for a administrative law judge orders other- hearing within 20 days of service of the wise for good cause. notice. (b) Amendments to conform to the evi- (b) Content of answer. An answer must dence. When issues not raised in the no- specifically respond to each paragraph tice or answer are tried at the hearing or allegation of fact contained in the by express or implied consent of the notice and must admit, deny, or state parties, they will be treated in all re- that the party lacks sufficient informa- spects as if they had been raised in the tion to admit or deny each allegation notice or answer, and no formal amend- of fact. A statement of lack of informa- ments are required. If evidence is ob- tion has the effect of a denial. Denials jected to at the hearing on the ground must fairly meet the substance of each that it is not within the issues raised allegation of fact denied; general deni- by the notice or answer, the adminis- als are not permitted. When a respond- trative law judge may admit the evi- ent denies part of an allegation, that dence when admission is likely to as- part must be denied and the remainder sist in adjudicating the merits of the specifically admitted. Any allegation action and the objecting party fails to of fact in the notice which is not de- satisfy the administrative law judge nied in the answer must be deemed ad- that the admission of such evidence mitted for purposes of the proceeding. would unfairly prejudice that party’s A respondent is not required to respond action or defense upon the merits. The to the portion of a notice that con- administrative law judge may grant a stitutes the prayer for relief or pro- continuance to enable the objecting posed order. The answer must set forth party to meet such evidence. affirmative defenses, if any, asserted [61 FR 28026, June 4, 1996] by the respondent. (c) Default—(1) Effect of failure to an- § 747.21 Failure to appear. swer. Failure of a respondent to file an answer required by this section within Failure of a respondent to appear in the time provided constitutes a waiver person at the hearing or by a duly au- of his or her right to appear and con- thorized counsel constitutes a waiver test the allegations in the notice. If no of respondent’s right to a hearing and timely answer is filed, the administra- is deemed an admission of the facts as tive law judge, upon motion of the En- alleged and consent to the relief sought forcement Counsel, shall file with the in the notice. Without further pro- NCUA Board a recommended decision ceedings or notice to the respondent, containing the findings and the relief the administrative law judge shall file sought in the notice. Any final order with the NCUA Board a recommended issued by the NCUA Board based upon decision containing the findings and a respondent’s failure to answer is the relief sought in the notice. deemed to be an order issued upon consent. § 747.22 Consolidation and severance (2) Effect of failure to request a hearing of actions. in civil money penalty proceedings. If re- (a) Consolidation. (1) On the motion of spondent fails to request a hearing as any party, or on the administrative required by law within the time pro- law judge’s own motion, the adminis- vided, the notice of assessment con- trative law judge may consolidate, for stitutes a final and unappealable order. some or all purposes, any two or more proceedings, if each such proceeding in- § 747.20 Amended pleadings. volves or arises out of the same trans- (a) Amendments. The notice or answer action, occurrence or series of trans- may be amended or supplemented at actions or occurrences, or involves at any stage of the proceeding. The re- least one common respondent or a ma- spondent must answer an amended no- terial common question of law or fact,

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unless such consolidation would cause (2) The failure of a party to oppose a unreasonable delay or injustice. written motion or an oral motion made (2) In the event of consolidation on the record is deemed a consent by under paragraph (a)(1) of this section, that party to the entry of an order sub- appropriate adjustment to the pre- stantially in the form of the order ac- hearing schedule must be made to companying the motion. avoid unnecessary expense, inconven- (e) Dilatory motions. Frivolous, dila- ience, or delay. tory or repetitive motions are prohib- (b) Severance. The administrative law ited. The filing of such motions may judge may, upon the motion of any form the basis for sanctions. party, sever the proceeding for sepa- (f) Dispositive motions. Dispositive mo- rate resolution of the matter as to any tions are governed by §§ 747.29 and respondent only if the administrative 747.30. law judge finds that: (1) Undue prejudice or injustice to § 747.24 Scope of document discovery. the moving party would result from not severing the proceeding; and (a) Limits on discovery. (1) Subject to (2) Such undue prejudice or injustice the limitations set out in paragraphs would outweigh the interests of judi- (b), (c), and (d) of this section, a party cial economy and expedition in the to a proceeding under this subpart may complete and final resolution of the obtain document discovery by serving proceeding. a written request to produce documents. For purposes of a request to § 747.23 Motions. produce documents, the term ‘‘docu- (a) In writing. (1) Except as otherwise ments’’ may be defined to include provided herein, an application or re- drawings, graphs, charts, photographs, quest for an order or ruling must be recordings, data stored in electronic made by written motion. form, and other data compilations from (2) All written motions must state which information can be obtained, or with particularity the relief sought and translated, if necessary, by the parties must be accompanied by a proposed through detection devices into reason- order. ably usable form, as well as written (3) No oral argument may be held on material of all kinds. written motions except as otherwise di- (2) Discovery by use of deposition is rected by the administrative law judge. governed by subpart I of this part. Written memorandum, briefs, affida- (3) Discovery by use of interrog- vits or other relevant material or docu- atories is not permitted. ments may be filed in support of or in (b) Relevance. A party may obtain opposition to a motion. document discovery regarding any (b) Oral motions. A motion may be matter, not privileged, that has mate- made orally on the record unless the rial relevance to the merits of the administrative law judge directs that pending action. Any request to produce such motion be reduced to writing. documents that calls for irrelevant ma- (c) Filing of motions. Motions must be terial, that is unreasonable, oppressive, filed with the administrative law excessive in scope, unduly burdensome, judge, except that upon the filing of or repetitive of previous requests, or the recommended decision, motions that seeks to obtain privileged docu- must be filed with the NCUA Board. ments will be denied or modified. A re- (d) Responses. (1) Except as otherwise quest is unreasonable, oppressive, ex- provided herein, within ten days after cessive in scope, or unduly burdensome service of any written motion, or with- if, among other things, it fails to in- in such other period of time as may be clude justifiable limitations on the established by the administrative law time period covered and the geographic judge or the NCUA Board, any party locations to be searched, the time pro- may file a written response to a mo- vided to respond in the request is inad- tion. The administrative law judge equate, or the request calls for copies shall not rule on any oral or written of documents to be delivered to the re- motion before each party has had an questing party and fails to include the opportunity to file a response. requester’s written agreement to pay

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in advance for the copying, in accord- 792.5(b) implementing the Freedom of ance with § 747.25. Information Act (5 U.S.C. 552). The (c) Privileged matter. Privileged docu- party to whom the request is addressed ments are not discoverable. Privileges may require payment in advance before include the attorney-client privilege, producing the documents. work-product privilege, any govern- (c) Obligation to update responses. A ment’s or government agency’s delib- party who has responded to a discovery erative-process privilege, and any other request with a response that was com- privileges the Constitution, any appli- plete when made is not required to sup- cable act of Congress, or the principles plement the response to include docu- of common law provide. ments thereafter acquired, unless the (d) Time limits. All discovery, includ- responding party learns that: ing all responses to discovery requests, (1) The response was materially in- shall be completed at least 20 days correct when made; or prior to the date scheduled for the (2) The response, though correct commencement of the hearing, except when made, is no longer true and a fail- as provided in the Local Rules. No ex- ure to amend the response is, in sub- ceptions to this time limit shall be per- stance, a knowing concealment. mitted, unless the administrative law (d) Motions to limit discovery. (1) Any judge finds on the record that good party that objects to a discovery re- cause exists for waiving the require- quest may, within ten days of being ments of this paragraph. served with such request, file a motion [56 FR 37767, Aug. 8, 1991, as amended at 61 in accordance with the provisions of FR 28026, June 4, 1996] § 747.23 to strike or otherwise limit the request. If an objection is made to only § 747.25 Request for document dis- a portion of an item or category in a covery from parties. request, the portion objected to shall (a) General rule. Any party may serve be specified. Any objections not made on any other party a request to in accordance with this paragraph and produce for inspection any discoverable § 747.23 are waived. documents that are in the possession, (2) The party who served the request custody, or control of the party upon that is the subject of a motion to whom the request is served. The re- strike or limit may file a written request must identify the documents to sponse within five days of service of be produced either by individual item the motion. No other party may file a or by category, and must describe each response. item and category with reasonable par- (e) Privilege. At the time other docu- ticularity. Documents must be pro- ments are produced, the producing duced as they are kept in the usual party must reasonably identify all doc- course of business or must be organized uments withheld on the grounds of to correspond with the categories in privilege and must produce a state- the request. ment of the basis for the assertion of (b) Production or copying. The request privilege. When similar documents must specify a reasonable time, place, that are protected by deliberative proc- and manner for production and per- ess, attorney work-product, or attor- forming any related acts. In lieu of in- ney-client privilege are voluminous, specting the documents, the requesting these documents may be identified by party may specify that all or some of category instead of by individual docu- the responsive documents be copied ment. The administrative law judge re- and the copies delivered to the request- tains discretion to determine when the ing party. If copying of fewer than 250 identification by category is insuffi- pages is requested, the party to whom cient. the request is addressed shall bear the (f) Motions to compel production. (1) If cost of copying and shipping charges. If a party withholds any documents as a party requests 250 pages or more of privileged or fails to comply fully with copying, the requesting party shall pay a discovery request, the requesting for the copying and shipping charges. party may, within ten days of the as- Copying charges are the current per- sertion of privilege or of the time the page copying rate imposed by 12 CFR failure to comply becomes known to

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the requesting party, file a motion in law judge against a party who fails to accordance with the provisions of produce subpoenaed documents. § 747.23 for the issuance of a subpoena [56 FR 37767, Aug. 8, 1991, as amended at 61 compelling production. FR 28026, June 4, 1996; 61 FR 45876, Aug. 30, (2) The party who asserted the privi- 1996] lege or failed to comply with the request may file a written response to a § 747.26 Document subpoenas to non- motion to compel within five days of parties. service of the motion. No other party (a) General rules. (1) Any party may may file a response. apply to the administrative law judge (g) Ruling on motions. After the time for the issuance of a document dis- for filing responses pursuant to this covery subpoena addressed to any per- section has expired, the administrative son who is not a party to the pro- law judge shall rule promptly on all ceeding. The application must contain motions filed pursuant to this section. a proposed document subpoena and a If the administrative law judge deter- brief statement showing the general mines that a discovery request, or any relevance and reasonableness of the of its terms, calls for irrelevant mate- scope of documents sought. The sub- rial, is unreasonable, oppressive, exces- poenaing party shall specify a reason- sive in scope, unduly burdensome, or able time, place, and manner for mak- repetitive of previous requests, or ing production in response to the docu- seeks to obtain privileged documents, ment subpoena. he or she may deny or modify the re- (2) A party shall only apply for a doc- quest, and may issue appropriate pro- ument subpoena under this section tective orders, upon such conditions as within the time period during which justice may require. The pendency of a such party could serve a discovery re- motion to strike or limit discovery or quest under § 747.24(d). The party obtaining the document subpoena is re- to compel production is not a basis for sponsible for serving it on the subpoe- staying or continuing the proceeding, naed person and for serving copies on unless otherwise ordered by the admin- all parties. Document subpoenas may istrative law judge. Notwithstanding be served in any state, territory, or any other provision in this part, the possession of the United States, the administrative law judge may not re- District of Columbia, or as otherwise lease, or order a party to produce, doc- provided by law. uments withheld on grounds of privi- (3) The administrative law judge lege if the party has stated to the ad- shall promptly issue any document ministrative law judge its intention to subpoena requested pursuant to this file a timely motion for interlocutory section. If the administrative law judge review of the administrative law determines that the application does judge’s order to produce the docu- not set forth a valid basis for the ments, and until the motion for inter- issuance of the subpoena, or that any locutory review has been decided. of its terms are unreasonable, oppres- (h) Enforcing discovery subpoenas. If sive, excessive in scope, or unduly bur- the administrative law judge issues a densome, he or she may refuse to issue subpoena compelling production of doc- the subpoena or may issue it in a modi- uments by a party, the subpoenaing fied form upon such conditions as may party may, in the event of noncompli- be consistent with the Uniform Rules. ance and to the extent authorized by (b) Motion to quash or modify. (1) Any applicable law, apply to any appro- person to whom a document subpoena priate United States district court for is directed may file a motion to quash an order requiring compliance with the or modify such subpoena, accompanied subpoena. A party’s right to seek court by a statement of the basis for quash- enforcement of a subpoena shall not in ing or modifying the subpoena. The movant shall serve the motion on all any manner limit the sanctions that parties, and any party may respond to may be imposed by the administrative such motion within ten days of service of the motion.

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(2) Any motion to quash or modify a (2) The application must contain a document subpoena must be filed on proposed deposition subpoena and a the same basis, including the assertion brief statement of the reasons for the of privilege, upon which a party could issuance of the subpoena. The subpoena object to a discovery request under must name the witness whose deposi- § 747.25(d), and during the same time tion is to be taken and specify the time limits during which such an objection and place for taking the deposition. A could be filed. deposition subpoena may require the (c) Enforcing document subpoenas. If a witness to be deposed at any place subpoenaed person fails to comply with within the country in which that wit- any subpoena issued pursuant to this ness resides or has a regular place of section or any order of the administra- employment or such other convenient tive law judge which directs compli- place as the administrative law judge ance with all or any portion of a docu- shall fix. ment subpoena, the subpoenaing party (3) Any requested subpoena that sets or any other aggrieved party may, to forth a valid basis for its issuance must the extent authorized by applicable be promptly issued, unless the adminis- law, apply to an appropriate United trative law judge on his or her own mo- States district court for an order re- tion, requires a written response or requiring compliance with so much of the quires attendance at a conference con- document subpoena as the administra- cerning whether the requested sub- tive law judge has not quashed or poena should be issued. modified. A party’s right to seek court (4) The party obtaining a deposition enforcement of a document subpoena subpoena is responsible for serving it shall in no way limit the sanctions on the witness and for serving copies that may be imposed by the adminis- on all parties. Unless the administra- trative law judge on a party who in- tive law judge orders otherwise, no dep- duces a failure to comply with sub- osition under this section shall be poenas issued under this section. taken on fewer than ten days’ notice to the witness and all parties. Deposition § 747.27 Deposition of witness unavail- subpoenas may be served in any state, able for hearing. territory, possession of the United (a) General rules. (1) If a witness will States, or the District of Columbia, on not be available for the hearing, a any person or company doing business party desiring that witness’ testimony in any state, territory, possession of for the record may apply in accordance the United States, or the District of with the procedures set forth in para- Columbia, or as otherwise permitted by graph (a)(2) of this section, to the ad- law. ministrative law judge for the issuance (b) Objections to deposition subpoenas. of a subpoena, including a subpoena (1) The witness and any party who has duces tecum, requiring the attendance not had an opportunity to oppose a of the witness at a deposition. The ad- deposition subpoena issued under this ministrative law judge may issue a section may file a motion with the ad- deposition subpoena under this section ministrative law judge to quash or upon showing that: modify the subpoena prior to the time (i) The witness will be unable to at- for compliance specified in the sub- tend or may be prevented from attend- poena, but not more than ten days ing the hearing because of age, sick- after service of the subpoena. ness or infirmity, or will otherwise be (2) A statement of the basis for the unavailable; motion to quash or modify a subpoena (ii) The witness’ unavailability was issued under this section must accom- not procured or caused by the sub- pany the motion. The motion must be poenaing party; served on all parties. (iii) The testimony is reasonably ex- (c) Procedure upon deposition. (1) Each pected to be material; and witness testifying pursuant to a deposi- (iv) Taking the deposition will not tion subpoena must be duly sworn, and result in any undue burden to any each party shall have the right to ex- other party and will not cause undue amine the witness. Objections to ques- delay of the proceeding. tions or documents must be in short

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form, stating the grounds for the objec- (1) The ruling involves a controlling tion. Failure to object to questions or question of law or policy as to which documents is not deemed a waiver ex- substantial grounds exist for a dif- cept where the ground for the objection ference of opinion; might have been avoided if the objec- (2) Immediate review of the ruling tion had been timely presented. All may materially advance the ultimate questions, answers, and objections termination of the proceeding; must be recorded. (3) Subsequent modification of the (2) Any party may move before the ruling at the conclusion of the pro- administrative law judge for an order ceeding would be an inadequate rem- compelling the witness to answer any edy; or questions the witness has refused to (4) Subsequent modification of the answer or submit any evidence the wit- ruling would cause unusual delay or ex- ness has refused to submit during the pense. deposition. (c) Procedure. Any request for inter- (3) The deposition must be subscribed locutory review shall be filed by a by the witness, unless the parties and party with the administrative law the witness, by stipulation, have judge within ten days of his or her rul- waived the signing, or the witness is ing and shall otherwise comply with ill, cannot be found, or has refused to § 747.23. Any party may file a response sign. If the deposition is not subscribed to a request for interlocutory review in by the witness, the court reporter tak- accordance with § 747.23(d). Upon the ing the deposition shall certify that expiration of the time for filing all responses, the administrative law judge the transcript is a true and complete shall refer the matter to the NCUA transcript of the deposition. Board for final disposition. (d) Enforcing subpoenas. If a subpoe- (d) Suspension of proceeding. Neither a naed person fails to comply with any request for interlocutory review nor order of the administrative law judge any disposition of such a request by which directs compliance with all or the NCUA Board under this section sus- any portion of a deposition subpoena pends or stays the proceeding unless under paragraph (b) or (c)(3) of this sec- otherwise ordered by the administration, the subpoenaing party or other tive law judge or the NCUA Board. aggrieved party may, to the extent authorized by applicable law, apply to an § 747.29 Summary disposition. appropriate United States district (a) In general. The administrative law court for an order requiring compliance judge shall recommend that the NCUA with the portions of the subpoena that Board issue a final order granting a the administrative law judge has or- motion for summary disposition if the dered enforced. A party’s right to seek undisputed pleaded facts, admissions, court enforcement of a deposition sub- affidavits, stipulations, documentary poena in no way limits the sanctions evidence, matters as to which official that may be imposed by the adminis- notice may be taken, and any other trative law judge on a party who fails evidentiary materials properly sub- to comply with, or procures a failure to mitted in connection with a motion for comply with, a subpoena issued under summary disposition show that: this section. (1) There is no genuine issue as to any material fact; and § 747.28 Interlocutory review. (2) The moving part is entitled to a (a) General rule. The NCUA Board decision in its favor as a matter of law. may review a ruling of the administra- (b) Filing of motions and responses. (1) tive law judge prior to the certification Any party who believes that there is no of the record to the NCUA Board only genuine issue of material fact to be de- in accordance with the procedures set termined and that he or she is entitled forth in this section and § 747.23. to a decision as a matter of law may (b) Scope of review. The NCUA Board move at any time for summary disposi- may exercise interlocutory review of a tion in its favor of all or any part of ruling of the administrative law judge the proceeding. Any party, within 20 if the NCUA Board finds that: days after service of such a motion, or

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within such time period as allowed by for which the administrative law judge the administrative law judge, may file has determined that summary disposi- a response to such motion. tion is warranted will be addressed in (2) A motion for summary disposition the recommended decision filed at the must be accompanied by a statement of conclusion of the hearing. the material facts as to which the moving party contends there is no genuine § 747.31 Scheduling and prehearing issue. Such motion must be supported conferences. by documentary evidence, which may (a) Scheduling conference. Within 30 take the form of admissions in plead- days of service of the notice or order ings, stipulations, depositions, inves- commencing a proceeding or such order tigatory depositions, transcripts, affi- time as parties may agree, the admin- davits and any other evidentiary mate- istrative law judge shall direct counsel rials that the moving party contends for all parties to meet with him or her support his or her position. The motion in person at a specified time and place must also be accompanied by a brief prior to the hearing or to confer by containing the points and authorities telephone for the purpose of scheduling in support of the contention of the the recourse and conduct of the pro- moving party. Any party opposing a ceeding. This meeting or telephone motion for summary disposition must conference is called a ‘‘scheduling con- file a statement setting forth those ference.’’ The identification of poten- material facts as to which he or she tial witnesses, the time for and manner contends a genuine dispute exists. Such of discovery, and the exchange of any opposition must be supported by evi- prehearing materials including witness dence of the same type as that sub- lists, statements of issues, stipula- mitted with the motion for summary tions, exhibits and any other materials disposition and a brief containing the may also be determined at the sched- points and authorities in support of the uling conference. contention that summary disposition (b) Prehearing conferences. The admin- would be inappropriate. istrative law judge may, in addition to (c) Hearing on motion. At the request the scheduling conference, on his or of any party or on his or her own mo- her own motion or at the request of tion, the administrative law judge may any party, direct counsel for the par- hear oral argument on the motion for ties to meet with him or her (in person summary disposition. or by telephone) at a prehearing con- (d) Decision on motion. Following reference to address any or all of the fol- ceipt of a motion for summary disposi- lowing: tion and all responses thereto, the ad- (1) Simplification and clarification of ministrative law judge shall determine the issues; whether the moving party is entitled (2) Stipulations, admissions of fact, to summary disposition. If the admin- and the contents, authenticity and ad- istrative law judge determines that missibility into evidence of documents; summary disposition is warranted, the (3) Matters of which official notice administrative law judge shall submit may be taken; a recommended decision to that effect (4) Limitation of the number of wit- to the NCUA Board. If the administra- nesses; tive law judge finds that no party is en- (5) Summary disposition of any or all titled to summary disposition, he or issues; she shall make a ruling denying the (6) Resolution of discovery issues or motion. disputes; (7) Amendments to pleadings; and § 747.30 Partial summary disposition. (8) Such other matters as may aid in If the administrative law judge deter- the orderly disposition of the pro- mines that a party is entitled to sum- ceeding. mary disposition as to certain claims (c) Transcript. The administrative law only, he or she shall defer submitting a judge, in his or her discretion, may re- recommended decision as to those quire that a scheduling or prehearing claims. A hearing on the remaining conference be recorded by a court re- issues must be ordered. Those claims porter. A transcript of the conference

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and any materials filed, including or- tion, may file any document or part of ders, becomes part of the record of the a document under seal if disclosure of proceeding. A party may obtain a copy the document would be contrary to the of the transcript at its expense. public interest. The administrative law (d) Scheduling or prehearing orders. At judge shall take all appropriate steps or within a reasonable time following to preserve the confidentiality of such the conclusion of the scheduling con- documents or parts thereof, including ference or any prehearing conference, closing portions of the hearing to the the administrative law judge shall public. serve on each party an order setting [56 FR 37767, Aug. 8, 1991; 57 FR 523, Jan. 7, forth any agreements reached and any 1992, as amended at 61 FR 28027, June 4, 1996] procedural determinations made. § 747.34 Hearing subpoenas. § 747.32 Prehearing submissions. (a) Issuance. (1) Upon application of a (a) Within the time set by the admin- party showing general relevance and istrative law judge, but in no case later reasonableness of scope of the testi- than 14 days before the start of the mony or other evidence sought, the ad- hearing, each party shall serve on ministrative law judge may issue a every other party, his or her: subpoena or a subpoena duces tecum re- (1) Prehearing statement; quiring the attendance of a witness at (2) Final list of witnesses to be called the hearing or the production of docu- to testify at the hearing, including mentary or physical evidence at the name and address of each witness and a hearing. The application for a hearing short summary of the expected testi- subpoena must also contain a proposed mony of each witness; subpoena specifying the attendance of (3) List of the exhibits to be intro- a witness or the production of evidence duced at the hearing along with a copy from any state, territory, or possession of each exhibit; and of the United States, the District of (4) Stipulations of fact, if any. Columbia, or as otherwise provided by (b) Effect of failure to comply. No wit- law at any designated place where the ness may testify and no exhibits may hearing is being conducted. The party be introduced at the hearing if such making the application shall serve a witness or exhibit is not listed in the copy of the application and the pro- prehearing submissions pursuant to posed subpoena on every other party. paragraph (a) of this section, except for (2) A party may apply for a hearing good cause shown. subpoena at any time before the commencement of a hearing. During a § 747.33 Public hearings. hearing, a party may make an applica- (a) General rule. All hearings shall be tion for a subpoena orally on the open to the public, unless the NCUA record before the administrative law Board, in its discretion, determines judge. that holding an open hearing would be (3) The administrative law judge contrary to the public interest. Within shall promptly issue any hearing sub- 20 days of service of the notice, any re- poena requested pursuant to this sec- spondent may file with the NCUA tion. If the administrative law judge Board a request for a private hearing, determines that the application does and any party may file a reply to such not set forth a valid basis for the a request. A party must serve on the issuance of the subpoena, or that any administrative law judge a copy of any of its terms are unreasonable, oppres- request or reply the party files with sive, excessive in scope, or unduly bur- the NCUA Board. The form of, and pro- densome, he or she may refuse to issue cedure for, these requests and replies the subpoena or may issue it in a modi- are governed by § 747.23. A party’s fail- fied form upon any conditions con- ure to file a request or a reply consistent with this subpart. Upon stitutes a waiver of any objections re- issuance by the administrative law garding whether the hearing will be judge, the party making the applica- public or private. tion shall serve the subpoena on the (b) Filing document under seal. En- person named in the subpoena and on forcement Counsel, in his or her discre- each party.

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(b) Motion to quash or modify. (1) Any in the case of extensive direct exam- person to whom a hearing subpoena is ination, the administrative law judge directed or any party may file a mo- may permit more than one counsel for tion to quash or modify the subpoena, the party presenting the witness to accompanied by a statement of the conduct the examination. A party may basis for quashing or modifying the have one counsel conduct the direct ex- subpoena. The movant must serve the amination and another counsel conduct motion on each party and on the per- re-direct examination of a witness, or son named in the subpoena. Any party may have one counsel conduct the may respond to the motion within ten cross examination of a witness and an- days of service of the motion. other counsel conduct the re-cross ex- (2) Any motion to quash or modify a amination of a witness. hearing subpoena must be filed prior to (4) Stipulations. Unless the adminis- the time specified in the subpoena for trative law judge directs otherwise, all compliance, but not more than ten stipulations of fact and law previously days after the date of service of the agreed upon by the parties, and all doc- subpoena upon the movant. uments, the admissibility of which (c) Enforcing subpoenas. If a subpoe- have been previously stipulated, will be naed person fails to comply with any admitted into evidence upon com- subpoena issued pursuant to this sec- mencement of the hearing. tion or any order of the administrative (b) Transcript. The hearing must be law judge which directs compliance recorded and transcribed. The reporter with all or any portion of a document will make the transcript available to subpoena, the subpoenaing party or any party upon payment by that party any other aggrieved party may seek to the reporter of the cost of the tran- enforcement of the subpoena pursuant script. The administrative law judge to § 747.26(c). may order the record corrected, either [56 FR 37767, Aug. 8, 1991, as amended at 61 upon motion to correct, upon stipula- FR 28027, June 4, 1996] tion of the parties, or following notice to the parties upon the administrative § 747.35 Conduct of hearings. law judge’s own motion. (a) General rules. (1) Hearings shall be conducted so as to provide a fair and [56 FR 37767, Aug. 8, 1991, as amended at 61 FR 28027, June 4, 1996] expeditious presentation of the relevant disputed issues. Each party has § 747.36 Evidence. the right to present its case or defense by oral and documentary evidence and (a) Admissibility. (1) Except as is oth- to conduct such cross examination as erwise set forth in this section, rel- may be required for full disclosure of evant, material, and reliable evidence the facts. that is not unduly repetitive is admis- (2) Order of hearing. Enforcement sible to the fullest extent authorized Counsel shall present its case-in-chief by the Administrative Procedure Act first, unless otherwise ordered by the and other applicable law. administrative law judge, or unless (2) Evidence that would be admissible otherwise expressly specified by law or under the Federal Rules of Evidence is regulation. Enforcement Counsel shall admissible in a proceeding conducted be the first party to present an opening pursuant to this subpart. statement and a closing statement, and (3) Evidence that would be inadmis- may make a rebuttal statement after sible under the Federal Rules of Evi- the respondent’s closing statement. If dence may not be deemed or ruled to be there are multiple respondents, re- inadmissible in a proceeding conducted spondents may agree among them- pursuant to this subpart if such evi- selves as to their order of presentation dence is relevant, material, reliable of their cases, but if they do not agree and not unduly repetitive. the administrative law judge shall fix (b) Official notice. (1) Official notice the order. may be taken of any material fact (3) Examination of witnesses. Only one which may be judicially noticed by a counsel for each party may conduct an United States district court and any examination of a witness, except that material information in the official

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public records of any Federal or state are binding on the parties with respect government agency. to the matters therein stipulated. (2) All matters officially noticed by (f) Depositions of unavailable witnesses. the administrative law judge or NCUA (1) If a witness is unavailable to testify Board shall appear on the record. at a hearing, and that witness has tes- (3) If official notice is requested or tified in a deposition to which all par- taken of any material fact, the parties, ties in a proceeding had notice and an upon timely request, shall be afforded opportunity to participate, a party an opportunity to object. may offer as evidence all or any part of (c) Documents. (1) A duplicate copy of the transcript of the deposition, includ- a document is admissible to the same ing deposition exhibits, if any. extent as the original, unless a genuine (2) Such deposition transcript is ad- issue is raised as to whether the copy is missible to the same extent that testi- in some material respect not a true and mony would have been admissible had legible copy of the original. that person testified at the hearing, (2) Subject to the requirements of provided that if a witness refused to paragraph (a) of this section, any docu- answer proper questions during the ment, including a report of examina- depositions, the administrative law tion, supervisory activity, inspection judge may, on that basis, limit the ad- or visitation, prepared by an appro- missibility of the deposition in any priate Federal financial institution manner that justice requires. regulatory agency or by a state regu- (3) Only those portions of a deposi- latory agency, is admissible either tion received in evidence at the hear- with or without a sponsoring witness. ing constitute a part of the record. (3) Witnesses may use existing or newly created charts, exhibits, cal- § 747.37 Post-hearing filings. endars, calculations, outlines or other (a) Proposed findings and conclusions graphic material to summarize, illus- and supporting briefs. (1) Using the same trate, or simplify the presentation of method of service for each party, the testimony. Such materials may, sub- administrative law judge shall serve ject to the administrative law judge’s notice upon each party that the cer- discretion, be used with or without tified transcript, together with all being admitted into evidence. hearing exhibits and exhibits intro- (d) Objections. (1) Objections to the duced but not admitted into evidence admissibility of evidence must be time- at the hearing, has been filed. Any ly made and rulings on all objections party may file with the administrative must appear on the record. law judge proposed findings of fact, (2) When an objection to a question proposed conclusions of law, and a pro- or line of questioning propounded to a posed order within 30 days following witness is sustained, the examining service of this notice by the adminis- counsel may make a specific proffer on trative law judge or within such longer the record of what he or she expected period as may be ordered by the admin- to prove by the expected testimony of istrative law judge. the witness, either by representation of (2) Proposed findings and conclusions counsel or by direct interrogation of must be supported by citation to any the witness. relevant portions of the record. A post- (3) The administrative law judge hearing brief may be filed in support of shall retain rejected exhibits, ade- proposed findings and conclusions, ei- quately marked for identification, for ther as part of the same document or the record, and transmit such exhibits in a separate document. Any party who to the NCUA Board. fails to file timely with the adminis- (4) Failure to object to admission of trative law judge any proposed finding evidence or to any ruling constitutes a or conclusion is deemed to have waived waiver of the objection. the right to raise in any subsequent fil- (e) Stipulations. The parties may stip- ing or submission any issue not ad- ulate as to any relevant matters of fact dressed in such party’s proposed find- or the authentication of any relevant ing or conclusion. documents. Such stipulations must be (b) Reply briefs. Reply briefs may be received in evidence at a hearing, and filed within 15 days after the date on

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which the parties’ proposed findings, troduced and admitted into evidence conclusions, and order are due. Reply after the completion of the hearing; briefs must be strictly limited to re- and each exhibit introduced but not ad- sponding to new matters, issues, or ar- mitted into evidence after the comple- guments raised in another party’s pation of the hearing. pers. A party who has not filed pro- [61 FR 28027, June 4, 1996] posed findings of fact and conclusions of law or a post-hearing brief may not § 747.39 Exceptions to recommended file a reply brief. decision. (c) Simultaneous filing required. The (a) Filing exceptions. Within 30 days administrative law judge shall not after service of the recommended deci- order the filing by any party of any sion, findings, conclusions, and pro- brief or reply brief in advance of the posed order under § 747.38, a party may other party’s filing of its brief. file with the NCUA Board written ex- [56 FR 37767, Aug. 8, 1991, as amended at 61 ceptions to the administrative law FR 28027, June 4, 1996] judge’s recommended decision, findings, conclusions or proposed order, to § 747.38 Recommended decision and the admission or exclusion of evidence, filing of record. or to the failure of the administrative (a) Filing of recommended decision and law judge to make a ruling proposed by record. Within 45 days after expiration a party. A supporting brief may be filed of the time allowed for filing reply at the time the exceptions are filed, ei- briefs under § 747.37(b), the administra- ther as part of the same document or tive law judge shall file with and cer- in a separate document. tify to the NCUA Board, for decision, (b) Effect of failure to file or raise ex- the record of the proceeding. The ceptions. (1) Failure of a party to file record must include the administrative exceptions to those matters specified law judge’s recommended decision, rec- in paragraph (a) of this section within ommended findings of fact, rec- the time prescribed is deemed a waiver ommended conclusions of law, and proof objection thereto. posed order; all prehearing and hearing (2) No exception need be considered transcripts, exhibits, and rulings; and by the NCUA Board if the party taking the motions, briefs, memoranda, and exception had an opportunity to raise other supporting papers filed in con- the same objection, issue, or argument nection with the hearing. The adminis- before the administrative law judge trative law judge shall serve upon each and failure to do so. party the recommended decision, find- (c) Contents. (1) All exceptions and ings, conclusions, and proposed order. briefs in support of such exceptions (b) Filing of index. At the same time must be confined to the particular the administrative law judge files with matters in, or omissions from, the ad- and certifies to the NCUA Board for ministrative law judge’s recommenda- final determination the record of the tions to which that party takes excep- proceeding, the administrative law tion. judge shall furnish to the NCUA Board (2) All exceptions and briefs in sup- a certified index of the entire record of port of exceptions must set forth page the proceeding. The certified index or paragraph references to the specific shall include, at a minimum, an entry parts of the administrative law judge’s for each paper, document or motion recommendations to which exception is filed with the administrative law judge taken, the page or paragraph ref- in the proceeding, the date of the fil- erences to those portions of the record ing, and the identity of the filer. The relied upon to support each exception, certified index shall also include an ex- and the legal authority relied upon to hibit index containing, at a minimum, support each exception. an entry consisting of exhibit number and title or description for: Each ex- § 747.40 Review by the NCUA Board. hibit introduced and admitted into evi- (a) Notice of submission to NCUA dence at the hearing; each exhibit in- Board. When the NCUA Board deter- troduced but not admitted into evi- mines that the record in the proceeding dence at the hearing; each exhibit in- is complete, the NCUA Board shall

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serve notice upon the parties that the tiveness of all or any part of its order proceedings has been submitted to the pending a final decision on a petition NCUA Board for final decision. for review of that order. (b) Oral argument before NCUA Board. Upon the initiative of the NCUA Board Subpart B—Local Rules of Practice or on the written request of any party and Procedure filed with the NCUA Board within the time for filing exceptions, the NCUA § 747.100 Discovery limitations. Board may order and hear oral argu- (a) Parties to a proceeding set forth ment on the recommended findings, either at § 747.1 of subpart A or in sub- conclusions, decision, and order of the part C, E or G of this part may obtain administrative law judge. A written re- discovery only through the production quest by a party must show good cause of documents. No other form of dis- for oral argument and state reasons covery shall be allowed. why arguments cannot be presented (b) In the event that a person pro- adequately in writing. A denial of a reducing documents pursuant to a docu- quest for oral argument may be set ment subpoena is permitted to be de- forth in the NCUA Board’s final deci- posed, all questioning shall be strictly sion. Oral argument before the NCUA limited to the identification of docu- Board must be on the record. ments produced by that person and a (c) Final Decision of NCUA Board. (1) reasonable examination to determine Decisional employees may advise and whether the subpoenaed person made assist the NCUA Board in the consider- an adequate search for, and has pro- ation and disposition of the case. The duced, all subpoenaed documents. final decision of the NCUA Board will be based upon review of the entire Subpart C—Local Rules and Pro- record of the proceeding, except that the NCUA Board may limit the issues cedures Applicable to Pro- to be reviewed to those findings and ceedings for the Involuntary conclusions to which opposing argu- Termination of Insured Status ments or exceptions have been filed by § 747.201 Scope. the parties. (2) The NCUA Board shall render a Under the authority of section 206(b) final decision within 90 days after noti- of the Act (12 U.S.C. 1786(b)), the NCUA fication of the parties that the case has Board may terminate the insured sta- been submitted for final decision, or 90 tus of an insured credit union upon the days after oral argument, whichever is grounds set forth therein and enumer- later, unless the NCUA Board orders ated in § 747.202. The procedure for ter- that the action or any aspect thereof minating the insured status of an in- be remanded to the administrative law sured credit union as therein pre- judge for further proceedings. Copies of scribed will be followed and hearings the final decision and order of the required thereunder will be conducted NCUA Board shall be served upon each in accordance with the rules and proce- party to the proceeding, upon other dures set forth in this subpart and sub- persons required by statute, and, if di- part A of this part. To the extent any rected by the NCUA Board or required rule or procedure of subpart A is incon- by statute, upon any appropriate state sistent with a rule or procedure pre- or Federal supervisory authority. scribed in this subpart C, subpart C shall control. § 747.41 Stays pending judicial review. [56 FR 37767, Aug. 8, 1991; 57 FR 523, Jan. 7, The commencement of proceedings 1992] for judicial review of a final decision and order of the NCUA Board may not, § 747.202 Grounds for termination of unless specifically ordered by the insurance. NCUA Board or a reviewing court, op- The NCUA Board may institute pro- erate as a stay of any order issued by ceedings to terminate the insured sta- the NCUA Board. The NCUA Board tus of an insured credit union whenever may, in its discretion, and on such it determines that an insured credit terms as it finds just, stay the effec- union is:

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(a) Engaging or has engaged in unsafe hearing will be held. Such hearing shall or unsound practices in conducting its commence not earlier than 30 days nor business; later than 60 days after the date of (b) In unsafe or unsound condition to service of such notice upon the credit continue as an insured credit union; or union, unless an earlier or later date is (c) Violating or has violated any ap- set by the NCUA Board at the request plicable law, rule, regulation, order, of the credit union. written condition imposed by the NCUA Board in response to any action § 747.205 Order terminating insured on any application, notice, or other re- status. quest by the credit union or institu- If, upon the record of the hearing tion-affiliated party, or any written agreement entered into with the NCUA held pursuant to § 747.204, the NCUA Board. Board finds that any unsafe or unsound practice or condition or violation spec- [56 FR 37767, Aug. 8, 1991, as amended at 71 ified in the notice has been established FR 67440, Nov. 22, 2006] and has not been corrected within the § 747.203 Notice of charges. time prescribed under § 747.204, the NCUA Board may issue and serve upon (a) Whenever the NCUA Board deter- the credit union an order terminating mines that grounds for termination of its status as an insured credit union on insured status exists, it will, for the purpose of securing correction of er- a date subsequent to the date of such rant or illegal conditions, serve a no- finding and subsequent to the expira- tice of charges upon the concerned tion of the time specified in the Notice. credit union. This notice will contain a statement describing the unsafe or un- § 747.206 Consent to termination of insured status. sound practices, condition or the relevant violations. Unless the credit union appears at (b) In the case of an insured State- the hearing designated in the notice of chartered credit union, the NCUA hearing by a duly authorized represent- Board shall send a copy of the Notice of ative, it will be deemed to have con- Charges to the appropriate State au- sented to the termination of its status thority, if any, having supervision over as an insured credit union. In the event the credit union. the credit union fails to so appear at such hearing, the administrative law § 747.204 Notice of intention to termi- judge shall forthwith report the matter nate insured status. to the NCUA Board and the NCUA Unless correction of the practices, Board may thereupon issue an order condition, or violations set forth in the terminating the credit union’s insured Notice of Charges is made within 120 status. days after service of such statement, or within a shorter period of not less than § 747.207 Notice of termination of in- 20 days after such service as the NCUA sured status. Board may require in any case where it determines that the insurance risk Prior to the effective date of the ter- with respect to such credit union could mination of the insured status of an in- be unduly jeopardized by further delay sured credit union under section 206(b) or as the appropriate State supervisory of the Act (12 U.S.C. 1786(b)) and at authority shall require in the case of such time as the Board shall specify, an insured State-chartered credit the credit union shall mail to each union, the Board, if it determines to member at his or her last address of proceed further, shall give to the credit record on the books of the credit union, union not less than 30 days written no- and publish in not less than two issues tice of its intent to terminate the sta- of a local newspaper of general circula- tus of the credit union as an insured tion, notices of the termination of its credit union. The notice shall contain a insured status, and the credit union statement of the facts constituting the shall furnish the NCUA Board with alleged unsafe or unsound practices or proof of publication of such notice. The conditions or violations on which a notice shall be as follows:

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NOTICE Subpart D—Local Rules and Pro- (Date) cedures Applicable to Sus- 1. The status of the lll as an insured pensions and Prohibitions credit union under the provisions of the Fed- Where Felony Charged eral Credit Union Act, will terminate as of the close of business on the ll day of ll; § 747.301 Scope. 2. Any deposits made by you after that The rules and procedures set forth in date, either new deposits or additions to ex- this subpart are applicable to informal isting accounts, will not be insured by the proceedings conducted by the NCUA National Credit Union Administration; Board, or a Presiding Officer des- 3. Accounts in the credit union on the ll day of ll, ll up to a maximum of $100,000 ignated by the Board, pursuant to sec- for each member, will continue to be insured, tion 206(i) of the Act (12 U.S.C. 1786(i)), as provided by the Federal Credit Union Act, to suspend, remove and/or prohibit for one (1) years after the close of business from office or from further participa- on the ll day of ll, ll: Provided, how- tion any institution-affiliated party of ever, That any withdrawals after the close of an insured credit union who: business on the day of ll, ll; will reduce (a) Is charged in a state, Federal or the insurance coverage by the amount of territorial information or indictment such withdrawals. or complaint with committing or par- (Name of Credit Union) ticipating in a crime involving dishon- (Address) esty or breach of trust, which crime is punishable by imprisonment for a term [56 FR 37767, Aug. 8, 1991; 57 FR 523, Jan. 7, exceeding one year under state or Fed- 1992] eral law; or (b) Enters a pretrial diversion or § 747.208 Duties after termination. other similar program as result of (a) After the termination of the in- being charged in such information or sured status of any credit union under indictment or complaint with partici- section 206(b) of the Act (12 U.S.C. pating or committing such crime; or 1786(b)), insurance of its member ac- (c) Is convicted of such crime. counts to the extent they were insured Subpart A of this part does not apply on the effective date of such termi- to proceedings under this subpart. nation, less any amounts thereafter [56 FR 37767, Aug. 8, 1991; 57 FR 523, Jan. 7, withdrawn which reduce the accounts 1992] below the amount covered by insurance on the effective date of such termi- § 747.302 Rules of practice; remainder nation, shall continue for a period of of board of directors. one year, but no shares issued by the Except as otherwise specifically pro- credit union or deposits made after the vided in this subpart, the following date of such termination shall be in- provisions shall apply to proceedings sured by the NCUA Board. conducted under this subpart: (b) The credit union shall continue to (a)(1) Power of attorney and notice of pay premiums to the NCUA Board dur- appearance. Any person who is a mem- ing such period and the Board shall ber in good standing of the bar of the have the right to examine the credit highest court of any State, possession, union from time to time during the pe- territory, Commonwealth, or the Dis- riod. The credit union shall, in all trict of Columbia may represent others other respects, be subject to the duties before the NCUA Board or Presiding and obligations of an insured credit Officer designated by the NCUA Board union during the one year period. If the upon filing with the NCUA Board a credit union is closed for liquidation written declaration that he or she is currently qualified as provided by this within this period, the Board shall paragraph, and is authorized to rep- have the same powers and rights with resent the particular party or whose respect to such credit union as in the behalf he acts. Any other person desir- case of an insured credit union. ing to appear before or transact busi- [56 FR 37767, Aug. 8, 1991; 57 FR 523, Jan. 7, ness with the NCUA Board in a rep- 1992] resentative capacity may be required

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to file with the NCUA Board a power of days or less in which event Saturdays, attorney showing his or her authority Sundays, and legal holidays shall not to act in such capacity, and he or she be included. may be required to show to the satis- (2) Service by mail. Whenever any faction of the NCUA Board the he or party has the right or is required to do she has the requisite qualifications. At- some act or take some proceeding, torneys and representatives of parties within a period of time prescribed in to proceedings shall file a written no- this subpart, after the service upon tice of appearance with the NCUA him of any document or other paper of Board or with the Presiding Officer any kind, and such service is made by designated by the NCUA Board. mail, three days shall be added to the (2) Summary suspension. Contemp- prescribed period from the date when tuous conduct by any person at an ar- the matter served is deposited in the gument before the NCUA Board or at U.S. mail. the hearing before a Presiding Officer (d) Nonpublication of submissions. Un- shall be grounds for exclusion there- less and until otherwise ordered by the from and suspension for the duration of NCUA Board, the notice of hearing, the the argument or hearing. transcript, written materials sub- (b)(1) Notice of hearing. Whenever a mitted during the hearing, the Pre- hearing within the scope of this sub- siding Officer’s recommendation to the part is ordered by the NCUA Board, a NCUA Board and any other papers filed notice of hearing shall be given by the in connection with a hearing under this NCUA Board to the party afforded the subpart, shall not be made public, and hearing and to any appropriate state shall be for the confidential use only of supervisory authority. The notice shall the NCUA Board, the Presiding Officer, state the time, place, and nature of the the parties and appropriate authori- hearing and the legal authority and ju- ties. risdiction under which the hearing is (e) Remainder of board of directors. (1) to be held, and shall contain a state- If at any time, because of the suspen- ment of the matters of fact or law con- sion of one or more directors pursuant stituting the grounds for the hearing. to this subpart, there shall be on the It shall be delivered by personal serv- board of directors of an insured credit ice, by registered or certified mail to union less than a quorum of directors the last known address, or by other ap- not so suspended, all powers and func- propriate means, not later than 30 nor tions vested in or exercisable by such earlier than 60 days before the hearing. board shall vest in and be exercisable (2) Party. The term ‘‘party’’ means a by the director or directors on the person or agency named or admitted as board not so suspended, until such time a party, or any person or agency who as there shall be a quorum on the board has filed a written request and is enti- of directors. tled as of right to be admitted as a (2) In the event all of the directors of party; but a person or agency may be an insured credit union are suspended admitted for a limited purpose. pursuant to this subpart, the NCUA (c)(1) Computation of time. In com- Board shall appoint persons to serve puting any period of time prescribed or temporarily as directors in their place allowed by this subpart, the date of the pending the termination of such sus- act, event or default from which the pensions, or until such time as those designated period of time begins to run who have been suspended cease to be is not to be included. The last day so directors of the credit union and their computed shall be included, unless it is respective successors have been elected a Saturday, Sunday or legal holiday in by the members at an annual or special the District of Columbia, in which meeting and have taken office. event the period shall run until the end (3) Directors appointed temporarily of the next day which is neither a Sat- by the NCUA Board pursuant to para- urday, Sunday, nor such legal holiday. graph (e)(2) of this section, shall, with- Intermediate Saturdays, Sundays, and in 30 days following their appointment, legal holidays shall be included in the call a special meeting for the election computation unless the time within of new directors, unless during such 30- which the act is to be performed is ten day period—

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(i) The regular annual meeting is is, or most recently was, an institu- convened; or tion-affiliated party. (ii) The suspensions giving rise to the (b) The NCUA Board may issue such appointment of temporary directors order with respect to an individual who are terminated. is an institution-affiliated party at a credit union at the time of the offense § 747.303 Notice of suspension or pro- without regard to whether such indi- hibition. vidual is an institution-affiliated party Whenever an institution-affiliated at any credit union at the time the party of an insured credit union is order is considered or issued by the charged in any state, Federal or terri- Board or whether the credit union at torial information or indictment or which the individual was an institu- complaint with the commission of or tion-affiliated party at the time of the offense remains in existence at the participation in a crime involving dis- time the order is considered or issued honesty or breach of trust, which crime by the board. is punishable by imprisonment for a (c) A finding of not guilty or other term exceeding one year under state or disposition of the charge will not pre- Federal law, the NCUA Board may, if clude the Board from thereafter insti- continued service or participation by tuting proceedings, pursuant to the the concerned party may pose a threat provisions of section 206(g) of the Act to the interests of any credit union’s (12 U.S.C. 1786(g)) and subpart A of this members or may threaten to impair part, to remove such director, com- public confidence in any credit union, mittee member, officer, or other person by written notice served upon such from office or to prohibit his or her fur- party, suspend him or her from office, ther participation in the affairs of the or prohibit him or her from further credit union. participation in any manner in the affairs of any credit union, or both. A [71 FR 67441, Nov. 22, 2006] copy of the notice of suspension or prohibition shall also be served upon the § 747.305 Effectiveness of suspension or removal until completion of credit union of which the subject of the hearing. order is, or most recently was, an institution-affiliated party. Any notice of suspension or prohibition issued under § 747.303 and any order [71 FR 67440, Nov. 22, 2006] of removal or prohibition issued under § 747.304 will be effective upon service § 747.304 Removal or permanent prohi- on the concerned party and will remain bition. effective and outstanding until the (a) In the event that a judgment of completion of any hearing or appeal conviction or an agreement to enter a authorized under section 206(i) of the pretrial diversion or other similar pro- Act (12 U.S.C. 1786(i)) and this subpart, gram is entered against the institu- unless such notice of suspension or tion-affiliated party, and at such time order of removal is terminated by the as the judgment, if any, is not subject NCUA Board. to further appellate review, the NCUA [56 FR 37767, Aug. 8, 1991; 57 FR 523, Jan. 7, Board may, if continued service or par- 1992] ticipation by such party may pose a threat to the interests of any credit § 747.306 Notice of opportunity for union’s members or may threaten to hearing. impair public confidence in any credit (a) Any notice of suspension or prohi- union, issue and serve upon the indi- bition issued pursuant to § 747.303, and vidual an order removing him or her any order of removal or prohibition from office or prohibiting him or her issued pursuant to § 747.304, shall be ac- from further participation in any man- companied by a further notice to the ner in the conduct of the affairs of any concerned individual that he or she credit union except with the consent of may, within 30 says of service of such the NCUA Board. A copy of such order notice, request in writing an informal will also be served upon the credit hearing at which he or she may present union of which the subject of the order evidence and argument that his or her

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continued service to or participation in U.S.C. 554–557), nor subpart A of this the conduct of the affairs of the credit part shall apply to the hearing. The union does not, or is not likely to, pose proceedings shall be recorded and a a threat to the interests of the credit transcript furnished to the individual union’s members or threaten to impair upon request and after the payment of confidence in the credit union. Any no- the cost thereof. The NCUA Board shall tice of the opportunity for such a hear- have the discretion to permit the pres- ing shall be accompanied by a descrip- entation of witnesses, within specified tion of the hearing procedure and the time limits, so long as a list of such criteria to be considered. witnesses is furnished to the Presiding (b) A request for a hearing filed pur- Officer at least ten days prior to the suant to paragraph (a) of this section hearing. Witnesses shall not be sworn, shall state with particularly the relief unless specifically requested by either desired, the grounds thereof, and shall party or directed by the Presiding Offi- include, when available, supporting cer. The Presiding Officer may examine evidence. The request and supporting any witnesses and each party shall evidence shall be filed in writing with have the opportunity to cross-examine the Secretary of the Board, National any witness presented by an opposing Credit Union Administration, 1775 party. Upon the request of either the Duke Street, Alexandria, VA 22314–3428. subject individual or the representa- [56 FR 37767, Aug. 8, 1991; 57 FR 523, Jan. 7, tive of the Office of General Counsel, 1992, as amended at 59 FR 36041, July 15, 1994] the record shall remain open for a period of five business days following the § 747.307 Hearing. hearing, during which time the parties (a) Upon receipt of a request for a may make any additional submissions hearing which complies with § 747.306, to the record. Thereafter, the record the NCUA Board will order an informal shall be closed. hearing to commence within the fol- (d) In the course of or in connection lowing 30 days in the Washington, DC with any proceeding under this sub- metropolitan area or at such other part, the NCUA Board and the Pre- place as the NCUA Board designates siding Officer will have the power to before a Presiding Officer designated administer oaths and affirmations, to by the NCUA Board to conduct the take or cause depositions to be taken, hearing. At the request of the con- and to issue, revoke, quash, or modify cerned party, the NCUA Board may subpoenas and subpoenas duces tecum. order the hearing to commence at a If the NCUA Board permits the presen- time more than 30 days after the re- tation of witnesses, the NCUA Board or ceipt of the request for such hearing. the Presiding Officer may require the (b) The notice of hearing shall be attendance of witnesses from any place served by the NCUA Board upon the in any state or in any territory or party or parties afforded the hearing other place subject to the jurisdiction and shall set forth the time and place of the United States at any designated of the hearing and the name and ad- place where such proceeding is being dress of the Presiding Officer. conducted. Witnesses subpoenaed shall (c) The subject individual may ap- be paid the same fees and mileage as pear at the hearing personally, through are paid witnesses in the District counsel, or personally with counsel. Courts of the United States. The NCUA The individual shall have the right to Board or the Presiding Officer may re- introduce relevant and material writ- quire the production of documents ten materials (or, at the discretion of from any place in any such state, terri- the NCUA Board, oral testimony), and tory, or other place. to present an oral argument before the Presiding Officer. A member of the en- (e) The Presiding Officer will make forcement staff of the Office of General his or her recommendations to the Counsel of the NCUA may attend the Board, where possible, within ten busi- hearing and may participate as a ness days following the close of the party. Neither the formal rules of evi- record. dence nor the adjudicative procedures [56 FR 37767, Aug. 8, 1991, as amended at 59 of the Administrative Procedure Act (5 FR 36042, July 15, 1994]

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§ 747.308 Waiver of hearing; failure to (c) Any petition shall state with par- request hearing or review based on ticularity the basis for reconsideration, written submissions; failure to ap- the relief sought, and any exceptions pear. the individual has to the NCUA Board’s (a) The subject individual may, in findings. An individual’s petition may writing, waive an oral hearing and in- be accompanied by a memorandum of stead elect to have the matter deter- points and authorities in support of his mined by the NCUA Board on the basis or her petition and any supporting doc- of written submissions alone. umentation the individual may wish to (b) Should any concerned party fail have considered. to request in writing an oral hearing or (d) No hearing need be granted on consideration based on written submis- such petition for reconsideration. sions alone within 30 days of service of Promptly following receipt of the peti- the notice described in § 747.306, he or tion, the Board shall render its deci- she will be deemed to have consented sion. to the NCUA Board’s action. (c) Unless the concerned party ap- § 747.311 Relevant considerations. pears at the hearing personally or by In deciding the question of suspen- duly appointed representative, he or sion, prohibition, or removal under this she will be deemed to have consented subpart, the NCUA Board will consider to the NCUA Board’s action. the following: (a) Whether the alleged offense is a § 747.309 Decision of the NCUA Board. crime which is punishable by imprison- Within 60 days following the hearing, ment for a term exceeding one year or receipt of the subject individual’s under state or Federal law, and which written submissions where hearing has involves dishonesty or breach of trust; been waived pursuant to § 747.308, the (b) Whether the continued presence NCUA Board shall notify the institu- of the subject individual in his or her tion-affiliated party whether the sus- position may pose a threat to the in- pension or prohibition will be contin- terests of the credit union’s members ued, terminated, or otherwise modified, because of the nature and extent of the or whether the order of removal or pro- individual’s participation in the affairs hibition will be rescinded or otherwise of the insured credit union and/or the modified. Such notification shall con- nature of the offense with the commis- tain a statement of the basis for the sion of or participation in which the in- decision of the NCUA Board, if that de- dividual has been charged; cision is adverse to the respondent (c) Whether there is cause to believe party. In the case of a decision favor- that there may be an erosion of public able to the respondent on the subject of confidence in the integrity, safety, or a prior order of removal or prohibition, soundness of a particular credit union the NCUA Board shall take prompt ac- (either generally or in the particular tion to rescind or otherwise modify the locality in which the credit union is order of removal or prohibition. situated) if the subject individual is permitted to remain in his or her posi- § 747.310 Reconsideration by the tion in an insured credit union; NCUA Board. (d) Whether the individual is covered (a) The subject individual shall have by the credit union’s fidelity bond and, ten business days following receipt of if so, whether the bond is likely to be the decision of the NCUA Board in revoked, or whether coverage under the which to petition the NCUA Board for bond will be affected adversely as a re- initial reconsideration. sult of the information, indictment, (b) The subject individual also shall complaint, judgment of conviction or be entitled to petition the NCUA Board entry into a pretrial diversion or other for reconsideration of its decision any similar program; and time after the expiration of a 12-month (e) The NCUA Board may consider period from the date of the NCUA any other factors which, in the specific Board’s decision, but no petition for re- case, appear relevant to the decision to consideration may be made within 12 continue in effect, rescind, terminate, months of a previous petition. or modify a suspension, prohibition, or

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removal order, except that it shall not possession of all books, records, assets, consider the ultimate question of the and property of every description of guilt or innocence of the subject indi- such credit union. vidual with regard to the crime with which he or she has been charged. § 747.403 Notice of intent to suspend or revoke charter; notice of suspension. Subpart E—Local Rules and Pro- cedures Applicable to Pro- (a) Upon its determination that one or more of the grounds listed in ceedings Relating to the Sus- § 747.402(a) exists, or that because of pension or Revocation of conditions described in § 747.402(b) im- Charters and to Involuntary mediate suspension of charter is nec- Liquidations Under Title I essary, the NCUA Board shall cause to be served upon that credit union a no- § 747.401 Scope. tice of intent to suspend or revoke The rules and procedures set forth in charter and of intent to place into in- this subpart and subpart A of this part voluntary liquidation, or a notice of are applicable to proceedings by the suspension. Such notice shall contain a NCUA Board pursuant to section statement of the facts which constitute 120(b)(1) of the Act (12 U.S.C. 1766(b)(1)) the grounds for this action, a recita- to suspend or revoke the charter of a tion of the options available to the solvent Federal credit union, and to credit union under paragraph (b) of this place a solvent Federal credit union section, and an explanation of the re- into involuntary liquidation. To the sults that will occur if the credit union extent a rule or procedure set forth in fails to exercise said options. subpart A of this part is inconsistent (b) Not later than 40 days after the with a rule or procedure set forth in receipt of the notice provided for in this subpart E, subpart E shall control. paragraph (a) of this section, the Fed- [56 FR 37767, Aug. 8, 1991; 57 FR 523, Jan. 7, eral credit union may file with the 1992] NCUA Board a statement in writing setting forth the grounds and reasons § 747.402 Grounds for suspension or why its charter should not be sus- revocation of charter and for invol- pended or revoked and why it should untary liquidation. not be placed into involuntary liquida- (a) Grounds in general. The NCUA tion; or in lieu of a written statement, Board may suspend or revoke the char- request an oral hearing which shall be ter of any Federal credit union, and conducted in accordance with the pro- place such credit union into involun- cedures set forth in this subpart. This tary liquidation and appoint a liqui- statement or request shall be accom- dating agent therefor, upon its finding panied by a certified copy of a resolu- that the credit union has violated any tion of the board of directors of the provision of its charter or bylaws or of Federal credit union concerned author- the FCUA or regulations issued there- izing such statement or request, such under. certification to be made by the presi- (b) Immediate suspension. In any case dent and secretary of the board of di- where the Board determines that the rectors. grounds set forth in paragraph (a) of (c) If the Federal credit union con- this section exist and that immediate cerned does not exercise either alter- action is necessary in order to prevent native available in paragraph (b) of further dissipation or credit union as- this section within the time required, sets or earnings, or further weakening it shall be deemed to have admitted the of the credit union’s condition, or to facts alleged in the notice and may be otherwise protect the interest of the deemed to have consented to the relief credit union’s insured members or the sought. National Credit Union Share Insurance Fund, it may order without prior no- § 747.404 Notice of hearing. tice the immediate suspension of the (a) Upon receipt of a request for hear- charter of such credit union, and if the ing which complies with § 747.403(b), the circumstances so warrant, may take NCUA Board shall transmit the request

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to the Office of Financial Institution the agent for the liquidating agent Adjudication (‘‘OFIA’’). Such hearing shall proceed to convert said assets to shall commence no earlier than 30 days cash, collect all debts due to said Fed- nor later than 60 days after the date eral credit union and to wind up its af- the OFIA receives the request for a fairs in accordance with the provisions hearing, unless an earlier or later date of the Act. is requested by the Federal credit [56 FR 37767, Aug. 8, 1991; 57 FR 523, Jan. 7, union concerned and is granted by the 1992] NCUA Board in its discretion. (b) Except as provided in § 747.405(b), § 747.406 Cancellation of charter. the procedures of the Administrative Upon the completion of the liquida- Procedure Act (5 U.S.C. 554–557) and tion and certification by the agent for subpart A of this part will apply to the the liquidating agent that the distribu- hearing. tion of the assets of the Federal credit (c) Unless the Federal credit union union has been completed, the NCUA shall appear at such hearing by a duly Board shall cancel the charter of the authorized representative it shall be Federal credit union concerned. deemed to have consented to the suspension or revocation of its charter and to the placing of said credit union into Subpart F—Local Rules and Proce- involuntary liquidation. dures Applicable to Pro- ceedings Relating to the Ter- § 747.405 Issuance of order. mination of Membership in (a) In the event of such consent as re- the Central Liquidity Facility ferred to in § 747.403(c) or § 747.404(c), or [Reserved] if upon the record made at any such hearing as referred to in § 747.403(b), the Subpart G—Local Rules and Pro- NCUA Board finds that the charter of cedures Applicable to Recov- the Federal credit union concerned should be suspended or revoked and the ery of Attorneys Fees and credit union closed and placed into in- Other Expenses Under the voluntary liquidation, it shall cause to Equal Access to Justice Act in be served on such credit union an order NCUA Board Adjudications directing the suspension or revocation of its charter and directing that it be § 747.601 Purpose and scope. closed and placed into involuntary liq- This subpart contains the regulations uidation. Such order shall contain a of the NCUA implementing the Equal statement of the findings upon which Access to Justice Act (5 U.S.C. 504), as the order is based. Additionally, the amended (‘‘EAJA’’). The EAJA pro- NCUA Board shall appoint a liqui- vides for the award of attorneys fees dating agent or agents. and other expenses to eligible individ- (b) The NCUA Board shall render its uals and entities who are parties to decision and cause such order to be proceedings conducted under this part. served not later than 45 days after re- An eligible party may receive an award ceipt of consent, or written submis- when it prevails over NCUA in a pro- sions as the case may be, or in the case ceeding, or in a significant and discrete of a formal hearing after service or the substantive portion of the proceeding, notice of submission referred to in unless the position of the NCUA was § 747.40(a). substantially justified or special cir- (c) Upon the receipt of a copy of the cumstances make an award unjust. The order which provides that the Federal rules in this subpart describe the par- credit union concerned be placed into ties eligible for fee awards, explain how involuntary liquidation, the officers to apply for awards and the procedures and directors of that Federal credit and standards that NCUA will use to union shall immediately deliver to the make them. To the extent a rule or agent for the liquidating agent posses- procedure set forth in subpart A of this sion and control of all books, records, part is inconsistent with a rule or pro- assets, and property of every descrip- cedure set forth in this subpart G, sub- tion of the Federal credit union, and part G will control.

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§ 747.602 Eligibility of applicants. affiliates shall be aggregated to deter- (a) To be eligible for an award of at- mine eligibility. Any individual, cor- torneys fees and expenses, an applicant poration or other entity that directly must be a prevailing party in the pro- or indirectly controls or owns a major- ceeding for which it seeks an award ity of the voting shares or other inter- and must be: est of the applicant, or any corporation (1) An individual with a net worth of or other entity of which the applicant not more than $2 million; directly or indirectly owns or controls (2) The sole owner of an unincor- a majority of the voting shares or porated business who has a net worth other interest, will be considered an af- of not more than $7 million, including filiate for purposes of this subpart, un- both personal and business interests less the NCUA Board determines that and not more than 500 employees at the such treatment would be unjust and time the proceeding was commenced contrary to the purposes of the EAJA (an applicant who owns an unincor- in light of the actual relationship be- porated business will be considered as tween the affiliated entities. In addi- an ‘‘individual’’ rather than a ‘‘sole tion, the NCUA board may determine owner of an unincorporated business’’ that financial relationships of the ap- if the issues on which the applicant plicant other than those described in prevails are related primarily to per- this paragraph constitute special cir- sonal interests rather than to business cumstances that would make an award interests); unjust. (3) A charitable or other tax-exempt organization described in section (f) An applicant that participates in a 501(c)(3) of the Internal Revenue Code proceeding primarily on behalf of one (26 U.S.C. 501(c)(3)) with not more than or more other persons or entities that 500 employees; would be ineligible is not itself eligible (4) A cooperative association as de- for an award. fined in section 15(a) of the Agricul- tural Marketing Act (12 U.S.C. 1141j(a)) § 747.603 Prevailing party. with not more than 500 employees; or An eligible applicant may be a ‘‘pre- (5) Any other partnership, corpora- vailing party’’ if the applicant wins an tion, association, or public or private action after a full hearing or trial on organization with a net worth of not the merits, if a settlement of the pro- more than $7 million and not more ceeding was effected on terms favor- than 500 employees. able to it, or if the proceeding against (b) For the purpose of determining it has been dismissed. In appropriate eligibility, the net worth of an appli- situations an applicant may also have cant and the number of employees of prevailed if the outcome of the pro- an applicant shall be determined as of ceeding has substantially vindicated the date the proceeding was initiated. the applicant’s position on the signifi- (c) The applicant’s net worth in- cant substantive matters at issue, even cludes the value of any assets disposed though the applicant has not totally of for the purpose of meeting an eligi- avoided adverse final action. bility standard and excludes any obligations incurred for this purpose. § 747.604 Standards for award. Transfers of assets or obligations incurred for less than reasonably equiva- (a) A prevailing party may receive an lent value will be presumed to have award for fees and expenses incurred in been made for this purpose. connection with a proceeding, or in a (d) The employees of an applicant in- significant and discrete substantive clude all persons who regularly per- portion of the proceeding, by or against form services for remuneration for the NCUA unless the position of NCUA dur- applicant, under the applicant’s direc- ing the proceeding was substantially tion and control; part-time employees justified. The burden of proving that an shall be included on a proportional award should not be made is on counsel basis. for NCUA. To avoid an award, counsel (e) The net worth and number of em- for NCUA must show that its position ployees of the applicant and all of its was reasonable in law and in fact.

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(b) An award will be reduced or de- cant, the fully allocated cost of the nied if the applicant has unduly or un- services; reasonably protracted the proceeding (2) The prevailing rate for similar or if special circumstances make the services in the community in which the award sought unjust. attorney, agent, or expert witness ordi- (c) Where an applicant has prevailed narily performs services; on one or more discrete substantive (3) The time actually spent in the issues in a proceeding, even though all representation of the applicant; the issues were not resolved in its (4) Such other factors as may bear on favor, any award shall be based on the the value of the services provided. fees and expenses incurred in connec- (d) The reasonable cost of any study, tion with the discrete significant sub- analysis, report, test, project, or simi- stantive issue or issues on which the lar matter prepared on behalf of the applicant’s position has been upheld. If party may be awarded to the extent such segregation of costs is not prac- that the charge for the service does not ticable, the award may be based on a exceed the prevailing rate for similar fair proration of those fees and ex- services, and the study or other matter penses incurred in the entire pro- was necessary for preparation of the ceeding which would be recoverable applicant’s case. under this section if proration were not performed. § 747.606 Contents of application. (d) Whether separate or prorated (a) A prevailing eligible party, as de- treatment under the preceding para- fined in §§ 747.602, 747.603, and 747.604, graph, including the applicable prora- seeking an award under this section, tion percentage, is appropriate shall be must file an application for an award of determined on the facts of the par- fees and expenses with the Secretary of ticular case. Attention shall be given the NCUA Board. The application shall to the significance and nature of the include the following information: respective issues and their separability (1) The identity of the applicant and and interrelationship. the proceeding for which an award is sought; § 747.605 Allowable fees and expenses. (2) A showing that the applicant has (a) Except as provided by § 747.604(b), prevailed and an identification of the awards will be based on rates custom- issues in the proceeding on which the arily charged by persons engaged in the applicant believes that the position of business of acting as attorneys, agents NCUA was not substantially justified; and expert witnesses, even if the serv- (3) A statement, with supporting doc- ices were made available without umentation, that the applicant is an charge or at a reduced rate. eligible party, as defined by § 747.602. If (b) No award under this subpart for the applicant is an individual, he or she the fee of an attorney or agent may ex- must state that his or her net worth ceed $75.00 per hour. No award to com- does not exceed $2 million. If the appli- pensate an expert witness may exceed cant is not an individual, it shall state the highest rate at which NCUA is per- the number of its employees and that mitted to pay expert witnesses. How- its net worth does not exceed $7 million ever, an award may also include the as of the date the proceeding was initi- reasonable expenses of the attorney, ated. However, an applicant may omit agent or witness as a separate item, if a statement of net worth if: the attorney, agent or witness ordi- (i) It attaches a copy of a ruling by narily charges clients separately for the Internal Revenue Service that it such expenses. qualifies as an organization described (c) In determining the reasonableness in section 501(c)(3) of the Internal Rev- of the fee sought for an attorney, enue Code (26 U.S.C. 501(c)(3)) or, in the agent, or expert witness, the NCUA case of a tax-exempt organization not Board shall consider the following: required to obtain a ruling from the In- (1) If the attorney, agent, or expert ternal Revenue Service on its exempt witness is in private practice, his or status, a statement that describes the her customary fee for like services, or, basis for the applicant’s belief that it if he or she is an employee of the appli- qualifies under such section; or

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(ii) It states that it is a cooperative (c) All statements of net worth shall association as defined in section 15(a) describe any transfers of assets from or of the Agricultural Marketing Act (12 obligations incurred by the applicant U.S.C. 1141j(a)); or any affiliate, occurring in the six- (4) A Statement of the amount of fees month period prior to the date on and expenses for which an award is which the proceeding was initiated, sought; and which reduced the net worth of the ap- (5) Any other matters that the appli- plicant and its affiliates below the ap- cant believes may assist or wishes the plicable net-worth ceiling. If there NCUA Board to consider in deter- were none, the applicant shall so state. mining whether and in what amount an award should be made. § 747.608 Documentation of fees and (b) The application shall be signed by expenses. the applicant or an authorized officer The application shall be accompanied or attorney of the applicant. It shall by full documentation of the fees and also contain or be accompanied by a expenses, including the cost of any written verification under oath or study, analysis, audit, test, project or under penalty of perjury that the infor- similar matter, for which an award is mation provided in the application is sought. A separate itemized statement true and correct. shall be submitted for each profes- (c) The application and documenta- sional firm or individual whose serv- tion requirements of this subpart are ices are covered by the application, required by law as a prerequisite to ob- showing hours spent in connection taining a benefit under the EAJA and with the proceeding by each individual, this subpart. a description of the specific services [56 FR 37767, Aug. 8, 1991; 57 FR 523, Jan. 7, performed, the rate at which each fee 1992] has been computed, any expenses for which reimbursement is sought, the § 747.607 Statement of net worth. total amount claimed, and the total (a) Each applicant (other than a amount paid or payable by the appli- qualified tax exempt organization or cant or by any other person or entity cooperative association) must provide for the services provided. The adminis- a detailed statement showing the net trative law judge or the NCUA Board worth of the applicant and any affili- may require the applicant to provide ates, as defined in § 747.602(a), when the vouchers, receipts, or other substan- proceeding was initiated. The exhibit tiation for any expenses claimed. may be in any form convenient to the applicant that provides full disclosure § 747.609 Filing and service of applica- of the applicant’s and its affiliates’ as- tions. sets and liabilities and is sufficient to (a) An application may be filed when- determine whether the applicant is an ever the applicant has prevailed in the eligible party. The administrative law proceeding or in a significant and dis- judge or the NCUA Board may require crete substantive portion of the pro- additional information from the appli- ceeding, but in no case later than 30 cant to determine eligibility. Unless days after the Board’s final disposition otherwise ordered by the Board or re- of the proceeding. quired by law, the statement shall be (b) If review or reconsideration is kept confidential and used by the sought or taken of a decision on which NCUA Board only in making its deter- an applicant believes it has prevailed, mination of an award. proceedings for the award of fees shall (b) If the applicant or any of its af- be stayed pending final disposition of filiates is a Federal credit union, the the underlying controversy. portion of the statement of net worth (c) As used in this subpart, final dis- which relates to the Federal credit position means the issuance of a final union shall consist of a copy of the order or any other final resolution of a Federal credit union’s last Statement proceeding, such as a settlement or of Financial Condition filed before the voluntary dismissal. initiation of the underlying pro- (d) Any application for an award of ceeding. fees and expenses shall be filed with

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the Secretary of the Board, National reply a request for further proceedings Credit Union Administration, 1775 under § 747.613. Duke Street, Alexandria, VA 22314–3428. Any application for an award and any § 747.611 Comments by other parties. other pleading or document related to Any party to a proceeding other than an application, shall be filed and served the applicant and counsel for NCUA on all parties to the proceeding in the may file comments on an application same manner as other pleadings in the within 30 days after service of the ap- proceeding, except as provided in plication or on an answer within 15 § 747.607(a) for statements of net worth. days after service of the answer. A [56 FR 37767, Aug. 8, 1991, as amended at 59 commenting party may not participate FR 36041, July 15, 1994] further in proceedings on the application unless the administrative law § 747.610 Answer to application. judge or the NCUA Board determines (a) Within 30 days after service of an that the public interest requires such application, counsel for NCUA may file participation in order to permit full ex- an answer to the application. Unless ploration of matters raised in the com- counsel for NCUA requests and is ment. granted an extension of time for filing or files a statement of intent to nego- § 747.612 Settlement. tiate under paragraph (b) of this sec- The applicant and counsel for NCUA tion, failure to file an answer within may agree on a proposed settlement of the 30-day period will be treated as a the award before final action on the ap- consent to the award requested. (b) If counsel for NCUA and the appli- plication, either in connection with a cant believe that the issues in the fee settlement of the underlying pro- application can be settled, they may ceeding, or after the underlying pro- jointly file a statement of their intent ceeding has been concluded, in accord- to negotiate a settlement. The filing of ance with NCUA’s standard settlement this statement shall extend the time procedure. If a prevailing party and for filing an answer for an additional 30 counsel for NCUA agree on a proposed days, and further extensions may be settlement of an award before an appli- granted by the NCUA Board upon the cation has been filed, the application joint request of counsel for NCUA and shall be filed with the proposed settle- the applicant. ment. (c) The answer shall explain in detail § 747.613 Further proceedings. any objections to the award requested and identify the facts relied on in sup- (a) After the expiration of the time port of counsel’s position. If the answer allowed for the filing of all documents is based on any alleged facts not al- necessary for the determination of a ready in the record of the proceeding, recommended fee award, the NCUA counsel shall include with the answer a Board shall transmit the entire record request for further proceedings under to the administrative law judge who § 747.613. presided at the underlying proceeding. (d)(1) The applicant may file a reply Ordinarily, the determination of an if counsel for NCUA has addressed in award will be made on the basis of the his or her answer any of the following written record. However, on request of issues: either the applicant or counsel for (i) That the position of NCUA in the NCUA, or on its own initiative, the ad- proceeding was substantially justified; ministrative law judge or the NCUA (ii) That the applicant unduly pro- Board may order further proceedings, tracted the proceedings; or such as an informal conference, oral ar- (iii) That special circumstances gument, additional written submis- make an award unjust. sions or an evidentiary hearing. Such (2) The reply shall be filed within 15 further proceedings shall be held only days after service of the answer. If the when necessary for full and fair resolu- reply is based on any alleged facts not tion of the issues arising from the ap- already in the record of the proceeding, plication, and shall be conducted as the applicant shall include with the promptly as possible.

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(b) A request that the administrative shall furnish copies of its decision and law judge or the NCUA Board order fur- order to the parties. Judicial review of ther proceedings under this section the NCUA Board’s final decision and shall specifically identify the informa- order may be obtained as provided in 5 tion sought or the disputed issues and U.S.C. 504(c)(2). shall explain why the additional proceedings are necessary to resolve the § 747.616 Payment of award. issues. An applicant seeking payment of an § 747.614 Recommended decision. award granted by the NCUA Board shall submit to the NCUA’s Office of The administrative law judge shall the Controller a copy of the NCUA file a recommended decision on the ap- Board’s Final Decision and Order plication with the NCUA Board within granting the award, accompanied by a 60 days after completion of the pro- statement that it will not seek review ceedings on the application. The rec- of the decision and order in the United ommended decision shall include writ- States court. All submissions shall be ten findings and conclusions on the ap- addressed to the Office of the Con- plicant’s eligibility and status as a pre- troller, National Credit Union Admin- vailing party, and an explanation of istration, 1775 Duke Street, Alexandria, the reasons for any difference between VA 22314–3428. The NCUA will pay the the amount requested and the amount amount awarded within 60 days after awarded. The recommended decision shall also include, if at issue, findings receiving the applicant’s statement, on whether NCUA’s position was sub- unless judicial review of the award or stantially justified, whether the appli- of the underlying decision of the adver- cant unduly protracted the pro- sary adjudication has been sought by ceedings, or whether special cir- the applicant or any other party to the cumstances make an award unjust. If proceeding. the applicant has sought an award [56 FR 37767, Aug. 8, 1991, as amended at 59 against more than one agency, the rec- FR 36041, July 15, 1994] ommended decision shall allocate responsibility for payment of any award Subpart H—Local Rules and Pro- made among the agencies, and shall ex- cedures Applicable to Inves- plain the reasons for the allocation made. The administrative law judge tigations shall file with and certify to the NCUA § 747.701 Applicability. Board the record of the proceeding on the fee application, the recommended The rules in this subpart apply only decision and proposed order. Promptly to informal and formal investigations upon such filing, the NCUA Board shall conducted by the NCUA Board itself or serve upon each party to the pro- its delegates. They do not apply to ad- ceeding a copy of the administrative judicative or rulemaking proceedings law judge’s recommended decision, or to routine, periodic or special ex- findings, conclusions and proposed aminations conducted by the NCUA order. The provisions of this section Board’s staff. and § 747.613 shall not apply, however, in any case where the hearing was held § 747.702 Information obtained in in- before the NCUA Board. vestigations. Information and documents obtained § 747.615 Decision of the NCUA Board. by the Board in the course of any in- Within 15 days after service of the vestigation, unless made a matter of recommended decision, findings, con- public record by the NCUA Board, shall clusions, and proposed order, the appli- be deemed non-public, but the NCUA cant or counsel for NCUA may file with Board approves the practice whereby the NCUA Board written exceptions the General Counsel may engage in, thereto. A supporting brief may also be and may authorize any person acting filed. The NCUA Board shall render its on his or her behalf or at his or her di- decision within 60 days after the mat- rection to engage in, discussions with ter is submitted to it. The NCUA Board representatives of domestic or foreign

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governmental authorities, self-regu- (c) The NCUA Board has delegated latory organizations, and with receiv- authority to the General Counsel, or ers, trustees, masters and special coun- designee thereof, to institute formal sels or special agents appointed by and investigative proceedings by the entry subject to the supervision of the courts of an order indicating the purpose of of the United States, concerning infor- the investigation and the designation mation obtained in individual inves- of persons to conduct that investiga- tigations, including investigations con- tion on his or her behalf and at his or ducted pursuant to any order entered her direction. This delegation also ex- by the NCUA Board or its General tends to the NCUA Board’s role as liq- Counsel pursuant to delegated author- uidator and conservator of insured ity. credit unions. The power to issue a subpoena may not be delegated outside the § 747.703 Authority to conduct inves- agency. The General Counsel may tigations. amend such order as he deems appro- (a) The General Counsel and persons priate. acting on his or her behalf and at his or her direction may conduct such inves- [56 FR 37767, Aug. 8, 1991; 57 FR 523, Jan. 7, tigations into the affairs of any insured 1992] credit union or institution-affiliated parties as deemed appropriate to deter- Subpart I—Local Rules Applicable mine whether such credit union or to Formal Investigative Pro- party has violated, is violating or is ceedings about to violate any provision of the Act, the NCUA Board’s regulations or § 747.801 Applicability. other relevant statutes or regulations The rules in this subpart are applica- that may bear on a party’s fitness to ble to a witness who is sworn in a for- participate in the affairs of a credit mal investigative proceeding. Formal union. The General Counsel and per- investigative proceedings may be held sons acting on his or her behalf may in- before the NCUA Board, before one or vestigate whether any party is unfit to more of its members, or before any of- participate in the affairs of a credit ficer designated by the NCUA Board or union, whether formal enforcement its General Counsel, as described in proceedings are warranted, or such subpart H of this part, and with or other matters as the General Counsel without the assistance of such other or his or her designee, in his or her dis- counsel as the NCUA Board deems ap- cretion, shall deem appropriate. Such propriate, for the purpose of taking investigations may be conducted either testimony of witnesses, conducting an informally or formally. investigation and receiving other evi- (b) Formal investigations involve the dence. The term ‘‘officer conducting exercise of the NCUA Board’s subpoena the investigation’’ shall mean any of power and are referred to here as for- the foregoing. mal investigative proceedings. In formal investigative proceedings, the § 747.802 Non-public formal investiga- General Counsel and those to whom he tive proceedings. or she delegates authority to act on his or her behalf and at his or her direction Unless otherwise ordered by the have augmented investigatory powers NCUA Board, all formal investigative and need not rely on the powers avail- proceedings shall be non-public. able to them in informal investigations, and they may gather evidence § 747.803 Subpoenas. through the issuance of subpoenas (a) Issuance. In the course of a formal compelling the production of docu- investigative proceeding the officer ments or testimony as well. In infor- conducting the investigation may issue mal investigations evidence may be a subpoena directing the party named gathered ordinarily through the use of therein to appear before the officer investigatory procedures or credit conducting the investigation at a spec- union examinations and through vol- ified time and place to testify or to untary statements and submissions. produce documentary evidence, or

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both, relating to any matter under in- to the courts of the United States for vestigation. enforcement of such subpoena. (b) Service. Service of subpoenas shall [56 FR 37767, Aug. 8, 1991; 57 FR 523, Jan. 7, be effected in the following manner: 1992] (1) Service upon a natural party. Deliv- ery of a copy of a subpoena to a natural § 747.804 Oath; false statements. person may be effected by— At the discretion of the officer con- (i) Handling it to the person; ducting the investigation, testimony of (ii) Leaving it at his or her office a witness may be taken under oath and with the person in charge thereof or, if administered by the officer. Any person there is no one in charge, by leaving it making false statements under oath at a conspicuous place there; during the course of a formal investigative proceeding is subject to the crimi- (iii) Leaving it at his or her dwelling nal penalties for perjury in 18 U.S.C. place or usual place of abode with some 1621. Any person who knowingly and person of suitable age and discretion willfully makes false and fraudulent who is found there; or statements, whether under oath or oth- (iv) Mailing it be registered or cer- erwise, or who falsifies, conceals or tified mail to him or her at his or her covers up any material fact, or submits last known address. In the event that any false, fictitious or fraudulent infor- personal service as described in this mation in connection with such a pro- paragraph is impracticable, any other ceeding, is subject to the criminal pen- method whereby actual notice is given alties set forth in 18 U.S.C. 1001. to the respondent may be employed. (2) Service upon other persons. When § 747.805 Self-incrimination; immunity. the person to be served is not a natural (a) Self-incrimination. Except as pro- person, delivery of a copy of the sub- vided in paragraph (b) of this section, a poena may be effected by— witness testifying or otherwise giving (i) Handing it to a registered agent information in a formal investigative for service, or to any officer, director, proceeding may refuse to answer questions on the basis of his or her right or agent in charge of any office of such against self-incrimination granted by person; the Fifth Amendment of the Constitu- (ii) Mailing it by registered or cer- tion of the United States. tified mail to any such representative (b) Immunity. (1) No officer con- at his or her last known address; or ducting any formal investigative pro- (iii) Any other method whereby ac- ceeding (or any other informal inves- tual notice is given to any such rep- tigation or examination) shall have the resentative. power to grant or promise any party (c) Witness fees and mileage. Witnesses any immunity from criminal prosecu- appearing pursuant to subpoena shall tion under the laws of the United be paid the same fees and mileage that States or of any other jurisdiction. are paid to witnesses in the United (2) If the NCUA Board believes that States district courts. Any such fees the testimony or other information and mileage payments need be paid sought to be obtained from any party only upon submission of a properly may be necessary to the public interest completed application for reimburse- and that party has refused or is likely to refuse to testify or provide other in- ment and in no event need they be paid formation on the basis of his or her sooner than 30 days after the appear- privilege against self-incrimination, ance of the witness pursuant to sub- the NCUA Board, with the approval of poena. the Attorney General, may issue an (d) Enforcement. Whenever it appears order requiring the party to give testi- to the General Counsel that any person mony or provide other information upon whom a subpoena was properly that he or she has previously refused to served pursuant to these Rules is refus- provide on the basis of self-incrimina- ing to fully comply with the terms of tion. that subpoena, then the General Coun- (3) Whenever a witness refuses, on sel, in his or her discretion, may apply the basis of his privilege against self-

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incrimination, to testify or provide the sole discretion of the General other information in a formal inves- Counsel or his designee. tigative proceeding, and the officer (b) Any party compelled to appear, or conducting the investigation commu- who appears by request or permission nicates to that person an order of the of the officer conducting the investiga- NCUA Board requiring him or her to tion, in person at a formal investiga- testify or provide other information, tive proceeding may be accompanied, the witness may not refuse to comply represented and advised by counsel who with the order on the basis of his or her is a member of the bar of the highest privilege against self-incrimination; court of any state; provided however, but no testimony or other information that all witnesses in such proceeding compelled under the order (or any in- shall be sequestered, and unless per- formation directly or indirectly de- mitted in the discretion of the officer rived from such testimony or other in- conducting the investigation, no wit- formation) may be used against the ness or the counsel accompanying any witness in any criminal case, except a such witness shall be permitted to be prosecution for perjury, giving a false present during the examination of any statement, or otherwise failing to com- other witness called in such pro- ply with the order. ceeding. (c)(1) The right of a witness to be ac- § 747.806 Transcripts. companied, represented and advised by counsel shall mean the right to have an Transcripts, if any, of formal inves- attorney present during any formal in- tigative proceedings shall be recorded vestigative proceeding and to have the solely by the official reporter, or by attorney— any other person or means designated (i) Advise such person before, during by the officer conducting the investiga- and after such testimony; tion. A party who has submitted docu- (ii) Question such person briefly at mentary evidence or testimony in a the conclusion of his testimony to clar- formal investigative proceeding shall ify any answers such person has given; be entitled, upon written request, to and procure a copy of his or her documen- (iii) Make summary notes during tary evidence or a transcript of his or such testimony solely for the use of her testimony on payment of the ap- such person. propriate fees; provided, however, that (2) From time to time, in the discre- in a non-public formal investigative tion of the officer, it shall be necessary proceeding the NCUA Board may for for persons other than the witness and good cause deny such request or the his or her counsel to attend non-public NCUA Board may place reasonable lim- investigative proceedings. For exam- itations upon the use of the documen- ple, the officer may deem it appro- tary evidence and transcript. In any priate that outside counsel to the event, any witness, upon proper identi- NCUA Board attend and advise him or fication, shall have the right to inspect her concerning the proceeding includ- the official transcript of the witness’s ing the examination of a particular own testimony. witness. In these circumstances, outside counsel would not be an officer as § 747.807 Rights of witnesses. that term is used. In other cir- (a) In the event that a formal inves- cumstances, it may be appropriate that tigative proceeding is conducted pursu- a technical expert (such as an accountant to a specific order entered by the ant) accompany the witness and his or NCUA Board or by its General Counsel, her counsel in order to assist counsel then any party who is compelled or re- in understanding technical issues. quested to provide documentary evi- These latter circumstances should be dence or testimony as part of such pro- rare, are left to the discretion of the of- ceeding shall, upon request, be shown a ficer conducting the investigation, and copy of the NCUA Board’s or its dele- shall not in any event be allowed to gate’s order. Copies of such orders shall serve as a ruse to coordinate testimony not be provided for their retention to between witnesses, to oversee or super- such persons requesting same except in vise the testimony of any witnesses, or

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otherwise defeat the beneficial effects tice is submitted indicates that it of the witness sequestration rule. would not be in the best interest of the (d) The officer conducting the inves- members of the credit union or the tigation may report to the NCUA public to permit the individual to be Board any instances where any witness employed by or associated with, such or counsel has been guilty of dilatory, credit union. obstructionist or contumacious con- [56 FR 37767, Aug. 8, 1991; 57 FR 523, Jan. 7, duct during the course of a formal in- 1992, as amended at 60 FR 31911, June 19, 1995] vestigative proceeding or any other instance of violations of these rules. The § 747.903 Procedures where notice of NCUA Board will thereupon take such disapproval issued; reconsideration. further action as the circumstance (a) The notice of disapproval shall be may warrant including barring the of- served upon the federally insured cred- fending person from further participa- it union and the candidate for director, tion in the particular formal investiga- committee member or senior executive tive proceeding or even from further officer. The notice of disapproval shall: practice before the Board. (1) Summarize or cite the relevant consideration specified in § 747.902; Subpart J—Local Procedures and (2) Inform the individual and the Standards Applicable to a credit union that, within 15 days of re- Notice of Change in Senior ceipt of the notice of disapproval, they Executive Officers, Directors can request reconsideration by the Re- of Committee Members Pur- gional Director of the initial determination, or can appeal the determina- suant to Section 212 of the tion directly to the NCUA Board; Act (3) Specify what additional information, if any, must be considered in the § 747.901 Scope. reconsideration. The rules and procedures set forth in (b) The request for reconsideration this subpart shall apply to the notice by the Regional Director must be filed filed by a credit union pursuant to sec- at the appropriate Regional Office. tion 212 of the Act (12 U.S.C. 1790a) and (c) The Regional Director shall act § 701.14 of this chapter, for the consent on a request for reconsideration within of the NCUA to add to or replace an in- 30 days of its receipt. dividual on the board of directors or supervisory or credit committee, or to [56 FR 37767, Aug. 8, 1991; 57 FR 523, Jan. 7, 1992] employ any individual as a senior executive officer or change the responsibil- § 747.904 Appeal. ities of any individual to a position of (a) Time for filing. Within 15 days senior executive officer where the cred- after issuance of a Notice of Dis- it union either has been chartered less approval or a determination on a re- than 2 years; or is in ‘‘troubled condi- quest for reconsideration by the Re- tion,’’ as defined in § 701.14 of this chap- gional Director, the individual or cred- ter. Subpart A of this part shall not it union (henceforth petitioner) may apply to any proceeding under this sub- appeal by filing with the NCUA Board part. a written request for appeal. [56 FR 37767, Aug. 8, 1991; 57 FR 523, Jan. 7, (b) Contents of request. Any appeal 1992, as amended at 60 FR 31911, June 19, 1995] must be in writing and include: (1) The reasons why the NCUA Board § 747.902 Grounds for disapproval of should review the disapproval; and notice. (2) Relevant, substantive and mate- The NCUA Board or its designee may rial facts that for good cause were not issue a notice of disapproval with re- previously set forth in the notice respect to a notice submitted by a credit quired to be filed pursuant to section union pursuant to section 212 of the 212 of the Act (12 U.S.C. 1790a) and Act (12 U.S.C. 1790a) and § 701.14 of this § 701.14 of this chapter. chapter, where the competence, experi- (c) Procedures for review of request. ence character or integrity of the indi- Within 30 days of the NCUA Board’s re- vidual with respect to whom such no- ceipt of an appeal, the NCUA Board

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may request in writing that the peti- district where the requester resides, for tioner submit additional facts and the district where the credit union’s records to support the appeal. The peti- principal place of business is located, tioner shall have 15 days from the date or for the District of Columbia. of issuance of such written request to [56 FR 37767, Aug. 8, 1991; 57 FR 524, Jan. 7, provide such additional information. 1992] Failure by the petitioner to provide additional information may, as determined solely by the NCUA Board or its Subpart K—Inflation Adjustment of designee, result in denial of the peti- Civil Monetary Penalties tioner’s appeal. (d) Determination on appeal by NCUA § 747.1001 Adjustment of civil money penalties by the rate of inflation. Board or its designee. (1) Within 90 days from the date of the receipt of an ap- (a) NCUA is required by the Federal peal by the NCUA Board or its designee Civil Penalties Inflation Adjustment or of its receipt of additional informa- Act of 1990 (Pub. L. 101–410, 104 Stat. tion requested under paragraph (c) of 890, as amended (28 U.S.C. 2461 note)) to this section, the NCUA Board or its adjust the maximum amount of each designee shall notify the petitioner civil money penalty within its jurisdic- whether the disapproval will be contin- tion by the rate of inflation. The fol- ued, terminated, or otherwise modified. lowing chart displays those adjust- The NCUA Board or its designee shall ments, as calculated pursuant to the promptly rescind or modify the notice statute: of disapproval where the decision is fa- New maximum vorable to the petitioner. U.S. code citation CMP description amount (2) The determination by the NCUA Board on the appeal shall be provided (1) 12 U.S.C. Inadvertent failure $2,200. 1782(a)(3). to submit a re- to the petitioner in writing, stating the port or the inad- basis for any decision of the NCUA vertent submis- Board or its designee that is adverse to sion of a false or misleading re- the petitioner, and shall constitute a port. final order of the NCUA Board. (2) 12 U.S.C. Non-inadvertent $22,000. (3) Failure by the NCUA Board to 1782(a)(3). failure to submit issue a determination on the peti- a report or the non-inadvertent tioner’s appeal within the 90-day period submission of a prescribed under paragraph (d)(1) of false or mis- this section shall be deemed a denial of leading report. (3) 12 U.S.C. Failure to submit a $1,300,000 or 1 the appeal for purpose of § 747.905. 1782(a)(3). report or the percent of the [56 FR 37767, Aug. 8, 1991; 57 FR 523, Jan. 7, submission of a total assets of 1992, as amended at 60 FR 31911, June 19, 1995] false or mis- the credit union, leading report whichever is done knowingly less. § 747.905 Judicial review. or with reckless (a) Failure to file an appeal within disregard. (4) 12 U.S.C. First tier ...... $2,200. the applicable time periods, either to 1782(d)(2)(A). the initial determination or to the de- (5) 12 U.S.C. Second tier ...... $22,000. cision on a request for reconsideration, 1782(d)(2)(B). (6) 12 U.S.C. Third tier ...... $1,300,000 or 1 shall constitute a failure by the peti- 1782(d)(2)(C). percent of the tioner to exhaust available administra- total assets of tive remedies and, due to such failure, the credit union, any objections to the initial deter- whichever is less. mination or request for reconsideration (7) 12 U.S.C. Non-compliance $110. shall be deemed to be waived and such 1785(e)(3). with NCUA se- determination shall be deemed to have curity regulations. (8) 12 U.S.C. First tier ...... $7,500. been accepted by, and shall be binding 1786(k)(2)(A). upon, the petitioner. (9) 12 U.S.C. Second tier ...... $37,500. (b) For purposes of seeking judicial 1786(k)(2)(B). review of actions taken pursuant to (10) 12 U.S.C. Third tier ...... For a person other 1786(k)(2)(C). than an insured this section, suit may be filed in the credit union: United States District Court for the $1,375,000;

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upon the appropriate State official. Re- U.S. code citation CMP description New maximum amount sponses, requests for a hearing and to For an insured present witnesses, requests to modify credit union: or rescind a discretionary supervisory $1,375,000 or 1 action and requests for reinstatement percent of the total assets of served upon the NCUA Board by a cred- the credit union, it union, or dismissed director or offi- whichever is cer thereof, shall also be served upon less. the appropriate State official. (11) 42 U.S.C. Per violation ...... $385. 4012a(f). Per calendar year $130,000. § 747.2002 Review of orders imposing discretionary supervisory action. (b) The adjustments displayed in (a) Notice of intent to issue directive— paragraph (a) of this section apply to (1) Generally. Whenever the NCUA acts occurring after the date of publi- Board intends to issue a directive im- cation in the FEDERAL REGISTER. posing a discretionary supervisory ac- [74 FR 9351, Mar. 4, 2009] tion under §§ 702.202(b), 702.203(b) and 702.204(b) of this chapter on a credit union classified ‘‘undercapitalized’’ or Subpart L—Issuance, Review and lower, or under §§ 702.304(b) or 702.305(b) Enforcement of Orders Impos- of this chapter on a new credit union ing Prompt Corrective Action classified ‘‘moderately capitalized’’ or lower, it must give the credit union SOURCE: 65 FR 8594, Feb. 18, 2000, unless prior notice of the proposed action and otherwise noted. an opportunity to respond. (2) Immediate issuance of directive with- § 747.2001 Scope. out notice. The NCUA Board may issue (a) Independent review process. The a directive to take effect immediately rules and procedures set forth in this under paragraph (a)(1) of this section subpart apply to federally-insured cred- without notice to the credit union if it unions, whether federally- or state- the NCUA Board finds it necessary in chartered (other than corporate credit order to carry out the purposes of part unions), which are subject to discre- 702 of this chapter. A credit union that tionary supervisory actions under part is subject to a directive which takes ef- 702 of this chapter, and to reclassifica- fect immediately may appeal the direction under §§ 702.102(b) and 702.302(d) of tive in writing to the NCUA Board. this chapter, to facilitate prompt cor- Such an appeal must be received by the rective action under section 216 of the NCUA Board within 14 calendar days Federal Credit Union Act, 12 U.S.C. after the directive was issued, unless 1790d; and to senior executive officers the NCUA Board permits a longer pe- and directors of such credit unions who riod. Unless ordered by the NCUA are dismissed pursuant to a discre- Board, the directive shall remain in ef- tionary supervisory action imposed fect pending a decision on the appeal. under part 702. NCUA staff decisions to The NCUA Board shall consider any impose discretionary supervisory ac- such appeal, if timely filed, within 60 tions under part 702 shall be considered calendar days of receiving it. material supervisory determinations (b) Contents of notice. The NCUA for purposes of 12 U.S.C. 1790d(k). Sec- Board’s notice to a credit union of its tion 747.2002 of this subpart provides an intention to issue a directive imposing independent appellate process to chal- a discretionary supervisory action lenge such decisions. must state: (b) Notice to State officials. With re- (1) The credit union’s net worth ratio spect to a federally-insured State-char- and net worth category classification; tered credit union under §§ 747.2002, (2) The specific restrictions or re- 747.2003 and 747.2004 of this subpart, no- quirements that the NCUA Board in- tices, directives and decisions on ap- tends to impose, and the reasons there- peal served upon a credit union, or a for; dismissed director or officer thereof, by (3) The proposed date when the dis- the NCUA Board shall also be served cretionary supervisory action would

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take effect and the proposed date for sider the terms of the directive, or re- completing the required action or ter- scind or modify it, due to changed cir- minating the action; and cumstances. Unless otherwise ordered (4) That a credit union must file a by the NCUA Board, the directive shall written response to a notice within 14 remain in effect while such request is calendar days from the date of the no- pending. A request under this para- tice, or within such shorter period as graph which remains pending 60 days the NCUA Board determines is appro- following receipt by the NCUA Board is priate in light of the financial condi- deemed granted. tion of the credit union or other rel- (g) Ombudsman. A credit union may evant circumstances. request in writing the recommendation (c) Contents of response to notice. A of NCUA’s ombudsman to modify or to credit union’s response to a notice not issue a proposed directive under under paragraph (b) of this section paragraph (b) of this section, or to must: modify or rescind an existing directive (1) Explain why it contends that the due to changed circumstances under proposed discretionary supervisory ac- paragraph (f) of this section. A credit tion is not an appropriate exercise of union which fails to request the om- discretion under this part; budsman’s recommendation in a re- (2) Request the NCUA Board to mod- sponse under paragraph (c) of this sec- ify or to not issue the proposed direction, or in a request under paragraph tive; (f) of this section, shall be deemed to (3) Include other relevant informa- have waived the opportunity to do so. tion, mitigating circumstances, docu- The ombudsman shall promptly notify mentation, or other evidence in sup- the credit union and the NCUA Board port of the credit union’s position re- of his or her recommendation. garding the proposed directive; and (4) If desired, request the rec- § 747.2003 Review of order reclassi- ommendation of NCUA’s ombudsman fying a credit union on safety and pursuant to paragraph (g) of this sec- soundness criteria. tion. (a) Notice of proposed reclassification (d) NCUA Board consideration of re- based on unsafe or unsound condition or sponse. The NCUA Board, or an inde- practice. When the NCUA Board pro- pendent person designated by the poses to reclassify a credit union or NCUA Board to act on its behalf, after subject it to the supervisory actions considering a response under paragraph applicable to the next lower net worth (c) of this section, may: category pursuant to §§ 702.102(b) and (1) Issue the directive as originally 702.302(d) of this chapter (each such ac- proposed or as modified; tion hereinafter referred to as ‘‘reclas- (2) Determine not to issue the direc- sification’’), the NCUA Board shall tive and to so notify the credit union; issue and serve on the credit union rea- or sonable prior notice of the proposed re- (3) Seek additional information or classification. clarification from the credit union or (b) Contents of notice. A notice of in- any other relevant source. tention to reclassify a credit union (e) Failure to file response. A credit based on unsafe or unsound condition union which fails to file a written re- or practice shall state: sponse to a notice of the NCUA Board’s (1) The credit union’s net worth intention to issue a directive imposing ratio, current net worth category clas- a discretionary supervisory action, sification, and the net worth category within the specified time period, shall to which the credit union would be re- be deemed to have waived the oppor- classified; tunity to respond, and to have con- (2) The unsafe or unsound practice(s) sented to the issuance of the directive. and/or condition(s) justifying reasons (f) Request to modify or rescind direc- for reclassification of the credit union; tive. A credit union that is subject to (3) The date by which the credit an existing directive imposing a discre- union must file a written response to tionary supervisory action may request the notice (including a request for a in writing that the NCUA Board recon- hearing), which date shall be no less

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than 14 calendar days from the date of ment at the hearing. The credit union service of the notice unless the NCUA may introduce witness testimony only Board determines that a shorter period if expressly authorized by the NCUA is appropriate in light of the financial Board or the presiding officer. Neither condition of the credit union or other the provisions of the Administrative relevant circumstances; and Procedure Act (5 U.S.C. 554–557) gov- (4) That a credit union which fails erning adjudications required by stat- to— ute to be determined on the record nor (i) File a written response to the no- the Uniform Rules of Practice and Pro- tice of reclassification, within the cedure (12 CFR part 747) shall apply to specified time period, shall be deemed an informal hearing under this section to have waived the opportunity to re- unless the NCUA Board orders other- spond, and to have consented to reclas- wise. sification; (2) The informal hearing shall be re- (ii) Request a hearing shall be corded, and a transcript shall be fur- deemed to have waived any right to a nished to the credit union upon request hearing; and and payment of the cost thereof. Wit- (iii) Request the opportunity to nesses need not be sworn, unless spe- present witness testimony shall be cifically requested by a party or by the deemed have waived any right to presiding officer. The presiding officer present such testimony. may ask questions of any witness. (c) Contents of response to notice. A (3) The presiding officer may order credit union’s response to a notice that the hearing be continued for a rea- under paragraph (b) of this section sonable period following completion of must: witness testimony or oral argument to (1) Explain why it contends that the allow additional written submissions credit union should not be reclassified; to the hearing record. (2) Include any relevant information, (4) Within 20 calendar days following mitigating circumstances, documenta- the closing of the hearing and the tion, or other evidence in support of record, the presiding officer shall make the credit union’s position; a recommendation to the NCUA Board (3) If desired, request an informal on the proposed reclassification. hearing before the NCUA Board under (f) Time for final decision. Not later this section; and than 60 calendar days after the date (4) If a hearing is requested, identify the record is closed, or the date of re- any witness whose testimony the cred- ceipt of the credit union’s response in a it union wishes to present and the gen- case where no hearing was requested, eral nature of each witness’s expected the NCUA Board will decide whether to testimony. reclassify the credit union, and will no- (d) Order to hold informal hearing. tify the credit union of its decision. Upon timely receipt of a written re- The decision of the NCUA Board shall sponse that includes a request for a be final. hearing, the NCUA Board shall issue an (g) Request to rescind reclassification. order commencing an informal hearing Any credit union that has been reclas- no later than 30 days after receipt of sified under this section may file a the request, unless the credit union re- written request to the NCUA Board to quests a later date. The hearing shall reconsider or rescind the reclassifica- be held in Alexandria, Virginia, or at tion, or to modify, rescind or remove such other place as may be designated any directives issued as a result of the by the NCUA Board, before a presiding reclassification. Unless otherwise or- officer designated by the NCUA Board dered by the NCUA Board, the credit to conduct the hearing and to rec- union shall remain reclassified, and ommend a decision. subject to any directives issued as a re- (e) Procedures for informal hearing. (1) sult, while such request is pending. The credit union may appear at the (h) Non-delegation. The NCUA Board hearing through a representative or may not delegate its authority to re- through counsel. The credit union shall classify a credit union into a lower net have the right to introduce relevant worth category or to treat a credit documents and to present oral argu- union as if it were in a lower net worth

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category pursuant to §§ 702.102(b) or spondent wishes to present and the 702.302(d) of this chapter. general nature of each witness’s expected testimony. § 747.2004 Review of order to dismiss a (d) Order to hold informal hearing. director or senior executive officer. Upon receipt of a timely written re- (a) Service of directive to dismiss and quest from a Respondent for an infor- notice. When the NCUA Board issues mal hearing on the portion of a direc- and serves a directive on a credit union tive requiring a credit union to dismiss requiring it to dismiss from office any from office any director or senior exec- director or senior executive officer utive officer, the NCUA Board shall under §§ 702.202(b)(7), 702.203(b)(8), issue an order directing an informal 702.204(b)(8), 702.304(b) or 702.305(b) of hearing to commence no later than 30 this chapter, the NCUA Board shall days after receipt of the request, unless also serve upon the person the credit the Respondent requests a later date. union is directed to dismiss (Respond- The hearing shall be held in Alexan- ent) a copy of the directive (or the rel- dria, Virginia, or at such other place as evant portions, where appropriate) and may be designated by the NCUA Board, notice of the Respondent’s right to before a presiding officer designated by seek reinstatement. the NCUA Board to conduct the hear- (b) Contents of notice of right to seek ing and recommend a decision. reinstatement. A notice of a Respond- (e) Procedures for informal hearing. (1) ent’s right to seek reinstatement shall A Respondent may appear at the hear- state: ing personally or through counsel. A (1) That a request for reinstatement Respondent shall have the right to in- (including a request for a hearing) shall troduce relevant documents and to be filed with the NCUA Board within 14 present oral argument at the hearing. calendar days after the Respondent re- A Respondent may introduce witness ceives the directive and notice under testimony only if expressly authorized paragraph (a) of this section, unless the by the NCUA Board or by the presiding NCUA Board grants the Respondent’s officer. Neither the provisions of the request for further time; Administrative Procedure Act (5 U.S.C. (2) The reasons for dismissal of the 554–557) governing adjudications re- Respondent; and quired by statute to be determined on (3) That the Respondent’s failure to— the record nor the Uniform Rules of (i) Request reinstatement shall be Practice and Procedure (12 CFR part deemed a waiver of any right to seek 747) apply to an informal hearing under reinstatement; (ii) Request a hearing shall be this section unless the NCUA Board or- deemed a waiver of any right to a hear- ders otherwise. ing; and (2) The informal hearing shall be re- (iii) Request the opportunity to corded, and a transcript shall be fur- present witness testimony shall be nished to the Respondent upon request deemed a waiver of the right to present and payment of the cost thereof. Wit- such testimony. nesses need not be sworn, unless spe- (c) Contents of request for reinstate- cifically requested by a party or the ment. A request for reinstatement in presiding officer. The presiding officer response to a notice under paragraph may ask questions of any witness. (b) of this section must: (3) The presiding officer may order (1) Explain why the Respondent that the hearing be continued for a rea- should be reinstated; sonable period following completion of (2) Include any relevant information, witness testimony or oral argument to mitigating circumstances, documenta- allow additional written submissions tion, or other evidence in support of to the hearing record. the Respondent’s position; (4) A Respondent shall bear the bur- (3) If desired, request an informal den of demonstrating that his or her hearing before the NCUA Board under continued employment by or service this section; and with the credit union would materially (4) If a hearing is requested, identify strengthen the credit union’s ability any witness whose testimony the Re- to—

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(i) Become ‘‘adequately capitalized,’’ (per 12 U.S.C. 1786(r)) who participates to the extent that the directive was in such violation or noncompliance. issued as a result of the credit union’s (2) Failure to implement plan. Pursuant net worth category classification or its to 12 U.S.C. 1786(k)(2)(A), the NCUA failure to submit or implement a net Board may assess a civil money pen- worth restoration plan or revised busi- alty against a credit union which fails ness plan; and to implement a net worth restoration (ii) Correct the unsafe or unsound plan under subpart B of part 702 of this condition or unsafe or unsound prac- chapter or a revised business plan tice, to the extent that the directive under subpart C of part 702, regardless was issued as a result of reclassifica- whether the plan was published. tion of the credit union pursuant to (c) Other enforcement action. In addi- §§ 702.102(b) and 702.302(d) of this chap- tion to the actions described in para- ter. graphs (a) and (b) of this section, the (5) Within 20 calendar days following NCUA Board may seek enforcement of the date of closing of the hearing and the directives issued under part 702 of the record, the presiding officer shall this chapter through any other judicial make a recommendation to the NCUA or administrative proceeding author- Board concerning the Respondent’s re- ized by law. quest for reinstatement with the credit [65 FR 8594, Feb. 18, 2000, as amended at 67 union. FR 71094, Nov. 29, 2002] (f) Time for final decision. Not later than 60 calendar days after the date PART 748—SECURITY PROGRAM, the record is closed, or the date of the REPORT OF SUSPECTED CRIMES, response in a case where no hearing SUSPICIOUS TRANSACTIONS, was requested, the NCUA Board shall CATASTROPHIC ACTS AND BANK grant or deny the request for reinstate- SECRECY ACT COMPLIANCE ment and shall notify the Respondent of its decision. If the NCUA Board de- Sec. nies the request for reinstatement, it 748.0 Security program. shall set forth in the notification the 748.1 Filing of reports. reasons for its decision. The decision of 748.2 Procedures for monitoring Bank Se- the NCUA Board shall be final. crecy Act (BSA) compliance. (g) Effective date. Unless otherwise or- APPENDIX A TO PART 748—GUIDELINES FOR dered by the NCUA Board, the Re- SAFEGUARDING MEMBER INFORMATION spondent’s dismissal shall take and re- APPENDIX B TO PART 748 GUIDANCE ON RE- SPONSE PROGRAMS FOR UNAUTHORIZED AC- main in effect pending a final decision CESS TO MEMBER INFORMATION AND MEM- on the request for reinstatement. BER NOTICE § 747.2005 Enforcement of orders. AUTHORITY: 12 U.S.C. 1766(a), 1786(Q); 15 U.S.C. 6801 and 6805(b); 31 U.S.C. 5311 and (a) Judicial remedies. Whenever a cred- 5318. it union fails to comply with a directive imposing a discretionary super- § 748.0 Security program. visory action, or enforcing a manda- (a) Each federally insured credit tory supervisory action under part 702 union will develop a written security of this chapter, the NCUA Board may program within 90 days of the effective seek enforcement of the directive in date of insurance. the appropriate United States District (b) The security program will be de- Court pursuant to 12 U.S.C. 1786(k)(1). signed to: (b) Administrative remedies—(1) Failure (1) Protect each credit union office to comply with directive. Pursuant to 12 from robberies, burglaries, larcenies, U.S.C. 1786(k)(2)(A), the NCUA Board and embezzlement; may assess a civil money penalty (2) Ensure the security and confiden- against any credit union that violates tiality of member records, protect or otherwise fails to comply with any against the anticipated threats or haz- final directive issued under part 702 of ards to the security or integrity of this chapter, or against any institu- such records, and protect against unau- tion-affiliated party of a credit union thorized access to or use of such

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records that could result in substantial mechanical deficiency(ies) might have harm or serious inconvenience to a contributed to the catastrophic act; member; and what has been done or is planned (3) Respond to incidents of unauthor- to be done to correct the defi- ized access to or use of member infor- ciency(ies). mation that could result in substantial (c) Suspicious Activity Report. A credit harm or serious inconvenience to a union must file a report if it knows, member; suspects, or has reason to suspect that (4) Assist in the identification of per- any crime or any suspicious trans- sons who commit or attempt such ac- action related to money laundering actions and crimes, and tivity or a violation of the Bank Se- (5) Prevent destruction of vital crecy Act has occurred. For the pur- records, as defined in 12 CFR part 749. poses of this paragraph (c) credit union (c) Each Federal credit union, as part means a federally-insured credit union of its information security program, and official means any member of the must properly dispose of any consumer board of directors or a volunteer com- information the Federal credit union mittee. maintains or otherwise possesses, as (1) Reportable activity. Transaction for required under § 717.83 of this chapter. purposes of this paragraph means a de- [50 FR 53295, Dec. 31, 1985, as amended at 53 posit, withdrawal, transfer between ac- FR 4845, Feb. 18, 1988; 66 FR 8161, Jan. 30, counts, exchange of currency, loan, ex- 2001; 69 FR 69274, Nov. 29, 2004; 70 FR 22778, tension of credit, purchase or sale of May 2, 2005] any stock, bond, share certificate, or other monetary instrument or invest- § 748.1 Filing of reports. ment security, or any other payment, (a) The president or managing offi- transfer, or delivery by, through, or to cial of each federally-insured credit a financial institution, by whatever union must certify compliance with means effected. A credit union must re- the requirements of this part in its port any known or suspected crime or Credit Union Profile annually. Credit any suspicious transaction related to unions that cannot update their profile money laundering or other illegal ac- online must certify compliance in writ- tivity, for example, terrorism financing in accordance with the instructions ing, loan fraud, or embezzlement, or a on NCUA Form 4501 or its equivalent. violation of the Bank Secrecy Act by The credit union president or man- sending a completed suspicious activ- aging official must sign and date the ity report (SAR) to the Financial written certification. Crimes Enforcement Network (b) Catastrophic act report. Each feder- (FinCEN) in the following cir- ally insured credit union will notify cumstances: the regional director within 5 business (i) Insider abuse involving any amount. days of any catastrophic act that oc- Whenever the credit union detects any curs at its office(s). A catastrophic act known or suspected Federal criminal is any disaster, natural or otherwise, violations, or pattern of criminal viola- resulting in physical destruction or tions, committed or attempted against damage to the credit union or causing the credit union or involving a trans- an interruption in vital member serv- action or transactions conducted ices, as defined in § 749.1 of this chap- through the credit union, where the ter, projected to last more than two credit union believes it was either an consecutive business days. Within a actual or potential victim of a criminal reasonable time after a catastrophic violation, or series of criminal viola- act occurs, the credit union shall en- tions, or that the credit union was used sure that a record of the incident is to facilitate a criminal transaction, prepared and filed at its main office. In and the credit union has a substantial the preparation of such record, the basis for identifying one of the credit credit union should include informa- union’s officials, employees, or agents tion sufficient to indicate the office as having committed or aided in the where the catastrophic act occurred; commission of the criminal violation, when it took place; the amount of the regardless of the amount involved in loss, if any; whether any operational or the violation;

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(ii) Transactions aggregating $5,000 or legal activities (including, without more where a suspect can be identified. limitation, the ownership, nature, Whenever the credit union detects any source, location, or control of such known or suspected Federal criminal funds or assets) as part of a plan to vio- violation, or pattern of criminal viola- late or evade any Federal law or regu- tions, committed or attempted against lation or to avoid any transaction re- the credit union or involving a trans- porting requirement under Federal law; action or transactions conducted (B) The transaction is designed to through the credit union, and involving evade any regulations promulgated or aggregating $5,000 or more in funds under the Bank Secrecy Act; or or other assets, where the credit union (C) The transaction has no business believes it was either an actual or po- or apparent lawful purpose or is not tential victim of a criminal violation, the sort of transaction in which the or series of criminal violations, or that particular member would normally be the credit union was used to facilitate expected to engage, and the credit a criminal transaction, and the credit union knows of no reasonable expla- union has a substantial basis for iden- nation for the transaction after exam- tifying a possible suspect or group of ining the available facts, including the suspects. If it is determined before fil- background and possible purpose of the ing this report that the identified sus- transaction. pect or group of suspects has used an (v) Exceptions. A credit union is not alias, then information regarding the required to file a SAR for a robbery or true identity of the suspect or group of burglary committed or attempted that suspects, as well as alias identifiers, is reported to appropriate law enforce- such as drivers’ licenses or social secu- ment authorities, or for lost, missing, rity numbers, addresses and telephone counterfeit, or stolen securities and numbers, must be reported; the credit union files a report pursuant (iii) Transactions aggregating $25,000 or to the reporting requirements of 17 more regardless of potential suspects. CFR 240.17f–1. Whenever the credit union detects any (2) Filing Procedures. (i) Timing. A known or suspected Federal criminal credit union must file a SAR with violation, or pattern of criminal viola- FinCEN no later than 30 calendar days tions, committed or attempted against from the date the suspicious activity is the credit union or involving a trans- initially detected, unless there is no action or transactions conducted identified suspect on the date of detec- through the credit union, involving or tion. If no suspect is identified on the aggregating $25,000 or more in funds or date of detection, a credit union may other assets, where the credit union be- use an additional 30 calendar days to lieves it was either an actual or poten- identify a suspect before filing a SAR. tial victim of a criminal violation, or In no case may a credit union take series of criminal violations, or that more than 60 days from the date it ini- the credit union was used to facilitate tially detects a reportable transaction a criminal transaction, even though to file a SAR. In situations involving the credit union has no substantial violations requiring immediate atten- basis for identifying a possible suspect tion, such as ongoing money laun- or group of suspects; or dering schemes, a credit union must (iv) Transactions aggregating $5,000 or immediately notify, by telephone, an more that involve potential money laun- appropriate law enforcement authority dering or violations of the Bank Secrecy and its supervisory authority, in addi- Act. Any transaction conducted or at- tion to filing a SAR. tempted by, at or through the credit (ii) Content. A credit union must union and involving or aggregating complete, fully and accurately, SAR $5,000 or more in funds or other assets, form TDF 90–22.47, Suspicious Activity if the credit union knows, suspects, or Report (also known as NCUA Form has reason to suspect: 2362) in accordance with the form’s in- (A) The transaction involves funds structions and 31 CFR Part 103.18. A derived from illegal activities or is in- copy of the SAR form may be obtained tended or conducted in order to hide or from the credit union resources section disguise funds or assets derived from il- of NCUA’s Web site, http://

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www.ncua.gov, or the regulatory sec- quest. A credit union must make the tion of FinCEN’s Web site, http:// filed report and all supporting docu- www.fincen.gov. These sites include mentation available to appropriate law other useful guidance on SARs, for ex- enforcement authorities and its regu- ample, forms and filing instructions, latory supervisory authority upon re- Frequently Asked Questions, and the quest. FFIEC Bank Secrecy Act/Anti-Money (6) Safe Harbor. Any credit union, in- Laundering Examination Manual. cluding its officials, employees, and (iii) Compliance. Failure to file a SAR agents, that makes a report of sus- as required by the form’s instructions pected or known criminal violations and 31 CFR Part 103.18 may subject the and suspicious activities to law en- credit union, its officials, employees, forcement and financial institution su- and agents to the assessment of civil pervisory authorities, including sup- money penalties or other administra- porting documentation, are protected tive actions. from liability for any disclosure in the (3) Retention of Records. A credit union must maintain a copy of any report, or for failure to disclose the ex- SAR that it files and the original or istence of the report, or both, to the business record equivalent of all sup- full extent provided by 31 U.S.C. porting documentation to the report 5318(g)(3). This protection applies if the for a period of five years from the date report is filed pursuant to this part or of the report. Supporting documenta- is filed on a voluntary basis. tion must be identified and maintained [50 FR 53295, Dec. 31, 1985, as amended at 53 by the credit union as such. Supporting FR 26232, July 12, 1988; 58 FR 17492, Apr. 5, documentation is considered a part of 1993; 61 FR 11527, Mar. 21, 1996; 71 FR 62878, the filed report even though it should Oct. 27, 2006; 72 FR 42273, Aug. 2, 2007; 74 FR not be actually filed with the sub- 35769, July 21, 2009] mitted report. A credit union must make all supporting documentation § 748.2 Procedures for monitoring available to appropriate law enforce- Bank Secrecy Act (BSA) compli- ment authorities and its regulatory su- ance. pervisory authority upon request. (a) Purpose. This section is issued to (4) Notification to board of directors. (i) ensure that all federally-insured credit Generally. The management of the cred- unions establish and maintain proce- it union must promptly notify its dures reasonably designed to assure board of directors, or a committee des- and monitor compliance with the re- ignated by the board of directors to requirements of subchapter II of chapter ceive such notice, of any SAR filed. 53 of title 31, United States Code, the (ii) Suspect is a director or committee Financial Recordkeeping and Report- member. If a credit union files a SAR ing of Currency and Foreign Trans- and the suspect is a director or member actions Act, and the implementing reg- of a committee designated by the board ulations promulgated thereunder by of directors to receive notice of SAR the Department of Treasury, 31 CFR filings, the credit union may not notify part 103. the suspect, pursuant to 31 U.S.C. 5318(g)(2), but must notify the remain- (b) Establishment of a BSA compliance ing directors, or designated committee program—(1) Program requirement. Each members, who are not suspects. federally-insured credit union shall de- (5) Confidentiality of reports. SARs are velop and provide for the continued ad- confidential. Any credit union, includ- ministration of a program reasonably ing its officials, employees, and agents, designed to assure and monitor compli- subpoenaed or otherwise requested to ance with the recordkeeping and redisclose a SAR or the information in a cording requirements set forth in sub- SAR must decline to produce the SAR chapter II of chapter 53 of title 31, or to provide any information that United States Code and the imple- would disclose that a SAR was pre- menting regulations issued by the De- pared or filed, citing this part, applica- partment of the Treasury at 31 CFR ble law, for example, 31 U.S.C. 5318(g), part 103. The compliance program must or both, and notify NCUA of the re- be written, approved by the credit

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union’s board of directors, and re- Leach-Bliley Act. These Guidelines provide flected in the minutes of the credit guidance standards for developing and imple- union. menting administrative, technical, and phys- (2) Customer identification program. ical safeguards to protect the security, confidentiality, and integrity of member infor- Each federally-insured credit union is mation. These Guidelines also address stand- subject to the requirements of 31 U.S.C. ards with respect to the proper disposal of 5318(l) and the implementing regula- consumer information pursuant to sections tion jointly promulgated by the NCUA 621(b) and 628 of the Fair Credit Reporting and the Department of the Treasury at Act (15 U.S.C. 1681s(b) and 1681w). 31 CFR 103.121, which require a cus- A. Scope. The Guidelines apply to member tomer identification program to be im- information maintained by or on behalf of plemented as part of the BSA compli- federally-insured credit unions. Such enti- ance program required under this sec- ties are referred to in this appendix as ‘‘the tion. credit union.’’ These Guidelines also apply to the proper disposal of consumer information (c) Contents of compliance program. by such entities. Such compliance program shall at a B. Definitions. 1. In general. Except as modi- minimum— fied in the Guidelines or unless the context (1) Provide for a system of internal otherwise requires, the terms used in these controls to assure ongoing compliance; Guidelines have the same meanings as set (2) Provide for independent testing forth in 12 CFR part 716. for compliance to be conducted by 2. For purposes of the Guidelines, the fol- credit union personnel or outside par- lowing definitions apply: ties; a. Consumer information means any record (3) Designate an individual respon- about an individual, whether in paper, elec- sible for coordinating and monitoring tronic, or other form, that is a consumer report or is derived from a consumer report day-to-day compliance; and and that is maintained or otherwise pos- (4) Provide training for appropriate sessed by or on behalf of the credit union for personnel. a business purpose. Consumer information (Approved by the Office of Management and also means a compilation of such records. Budget under control number 3133–0094) The term does not include any record that does not identify an individual. [52 FR 2861, Jan. 27, 1987, as amended at 52 b. Consumer report has the same meaning as FR 8062, Mar. 16, 1987; 68 FR 25112, May 9, set forth in the Fair Credit Reporting Act, 15 2003] U.S.C. 1681a(d). The meaning of consumer report is broad and subject to various defini- APPENDIX A TO PART 748—GUIDELINES tions, conditions and exceptions in the Fair FOR SAFEGUARDING MEMBER INFOR- Credit Reporting Act. It includes written or MATION oral communications from a consumer reporting agency to a third party of informa- TABLE OF CONTENTS tion used or collected for use in establishing I. Introduction eligibility for credit or insurance used pri- A. Scope marily for personal, family or household pur- B. Definitions poses, and eligibility for employment pur- II. Guidelines for Safeguarding Member In- poses. Examples include credit reports, bad formation check lists, and tenant screening reports. A. Information Security Program c. Member means any member of the credit B. Objectives union as defined in 12 CFR 716.3(n). III. Development and Implementation of d. Member information means any records Member Information Security Program containing nonpublic personal information, A. Involve the Board of Directors as defined in 12 CFR 716.3(q), about a mem- B. Assess Risk ber, whether in paper, electronic, or other C. Manage and Control Risk form, that is maintained by or on behalf of D. Oversee Service Provider Arrangements the credit union. E. Adjust the Program e. Member information system means any F. Report to the Board method used to access, collect, store, use, G. Implement the Standards transmit, protect, or dispose of member information. I. INTRODUCTION f. Service provider means any person or enti- The Guidelines for Safeguarding Member ty that maintains, processes, or otherwise is Information (Guidelines) set forth standards permitted access to member information pursuant to sections 501 and 505(b), codified through its provision of services directly to at 15 U.S.C. 6801 and 6805(b), of the Gramm- the credit union.

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II. STANDARDS FOR SAFEGUARDING MEMBER a. Access controls on member information INFORMATION systems, including controls to authenticate and permit access only to authorized individ- A. Information Security Program. A com- uals and controls to prevent employees from prehensive written information security pro- providing member information to unauthor- gram includes administrative, technical, and ized individuals who may seek to obtain this physical safeguards appropriate to the size information through fraudulent means; and complexity of the credit union and the b. Access restrictions at physical locations nature and scope of its activities. While all containing member information, such as parts of the credit union are not required to buildings, computer facilities, and records implement a uniform set of policies, all ele- storage facilities to permit access only to ments of the information security program authorized individuals; must be coordinated. c. Encryption of electronic member infor- B. Objectives. A credit union’s information mation, including while in transit or in stor- security program should be designed to: en- age on networks or systems to which unau- sure the security and confidentiality of thorized individuals may have access; member information; protect against any an- d. Procedures designed to ensure that ticipated threats or hazards to the security member information system modifications or integrity of such information; protect are consistent with the credit union’s infor- against unauthorized access to or use of such mation security program; information that could result in substantial e. Dual controls procedures, segregation of harm or inconvenience to any member; and duties, and employee background checks for ensure the proper disposal of member infor- employees with responsibilities for or access mation and consumer information. Pro- to member information; tecting confidentiality includes honoring f. Monitoring systems and procedures to members’ requests to opt out of disclosures detect actual and attempted attacks on or to nonaffiliated third parties, as described in intrusions into member information sys- 12 CFR 716.1(a)(3). tems; g. Response programs that specify actions III. DEVELOPMENT AND IMPLEMENTATION OF to be taken when the credit union suspects MEMBER INFORMATION SECURITY PROGRAM or detects that unauthorized individuals A. Involve the Board of Directors. The board have gained access to member information of directors or an appropriate committee of systems, including appropriate reports to the board of each credit union should: regulatory and law enforcement agencies; and 1. Approve the credit union’s written infor- h. Measures to protect against destruction, mation security policy and program; and loss, or damage of member information due 2. Oversee the development, implementa- to potential environmental hazards, such as tion, and maintenance of the credit union’s fire and water damage or technical failures. information security program, including as- 2. Train staff to implement the credit signing specific responsibility for its imple- union’s information security program. mentation and reviewing reports from man- 3. Regularly test the key controls, systems agement. and procedures of the information security B. Assess Risk. Each credit union should: program. The frequency and nature of such 1. Identify reasonably foreseeable internal tests should be determined by the credit and external threats that could result in un- union’s risk assessment. Tests should be con- authorized disclosure, misuse, alteration, or ducted or reviewed by independent third par- destruction of member information or mem- ties or staff independent of those that de- ber information systems; velop or maintain the security programs. 2. Assess the likelihood and potential dam- 4. Develop, implement, and maintain, as age of these threats, taking into consider- part of its information security program, ap- ation the sensitivity of member information; propriate measures to properly dispose of and member information and consumer informa- 3. Assess the sufficiency of policies, proce- tion in accordance with the provisions in dures, member information systems, and paragraph III. other arrangements in place to control risks. D. Oversee Service Provider Arrangements. C. Manage and Control Risk. Each credit Each credit union should: union should: 1. Exercise appropriate due diligence in se- 1. Design its information security program lecting its service providers; to control the identified risks, commensu- 2. Require its service providers by contract rate with the sensitivity of the information to implement appropriate measures designed as well as the complexity and scope of the to meet the objectives of these guidelines; credit union’s activities. Each credit union and must consider whether the following secu- 3. Where indicated by the credit union’s rity measures are appropriate for the credit risk assessment, monitor its service pro- union and, if so, adopt those measures the viders to confirm that they have satisfied credit union concludes are appropriate: their obligations as required by paragraph

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D.2. As part of this monitoring, a credit APPENDIX B TO PART 748—GUIDANCE ON union should review audits, summaries of RESPONSE PROGRAMS FOR UNAU- test results, or other equivalent evaluations THORIZED ACCESS TO MEMBER INFOR- of its service providers. MATION AND MEMBER NOTICE E. Adjust the Program. Each credit union should monitor, evaluate, and adjust, as ap- I. BACKGROUND propriate, the information security program This Guidance in the form of appendix B to in light of any relevant changes in tech- NCUA’s Security Program, Report of Crime nology, the sensitivity of its member infor- and Catastrophic Act and Bank Secrecy Act mation, internal or external threats to infor- Compliance regulation, 29 interprets section mation, and the credit union’s own changing 501(b) of the Gramm-Leach-Bliley Act business arrangements, such as mergers and (‘‘GLBA’’) and describes response programs, acquisitions, alliances and joint ventures, including member notification procedures, outsourcing arrangements, and changes to that a federally insured credit union should member information systems. develop and implement to address unauthor- F. Report to the Board. Each credit union ized access to or use of member information should report to its board or an appropriate that could result in substantial harm or in- committee of the board at least annually. convenience to a member. The scope of, and This report should describe the overall sta- definitions of terms used in, this Guidance tus of the information security program and are identical to those of appendix A to Part the credit union’s compliance with these 748 (appendix A). For example, the term guidelines. The report should discuss mate- ‘‘member information’’ is the same term rial matters related to its program, address- used in appendix A, and means any record ing issues such as: risk assessment; risk containing nonpublic personal information about a member, whether in paper, elec- management and control decisions; service tronic, or other form, maintained by or on provider arrangements; results of testing; se- behalf of the credit union. curity breaches or violations and management’s responses; and recommendations for A. Security Guidelines changes in the information security program. Section 501(b) of the GLBA required the NCUA to establish appropriate standards for G. Implement the Standards. credit unions subject to its jurisdiction that 1. Effective date. Each credit union must include administrative, technical, and phys- implement an information security program ical safeguards to protect the security and pursuant to the objectives of these Guide- confidentiality of member information. Ac- lines by July 1, 2001. cordingly, the NCUA amended Part 748 of its 2. Two-year grandfathering of agreements rules to require credit unions to develop ap- with service providers. Until July 1, 2003, a propriate security programs, and issued ap- contract that a credit union has entered into pendix A, reflecting its expectation that with a service provider to perform services every federally insured credit union would for it or functions on its behalf satisfies the develop an information security program de- provisions of paragraph III.D., even if the signed to: contract does not include a requirement that 1. Ensure the security and confidentiality the servicer maintain the security and con- of member information; fidentiality of member information, as long 2. Protect against any anticipated threats as the credit union entered into the contract or hazards to the security or integrity of on or before March 1, 2001. such information; and 3. Effective date for measures relating to the 3. Protect against unauthorized access to disposal of consumer information. Each Federal or use of such information that could result credit union must properly dispose of con- in substantial harm or inconvenience to any sumer information in a manner consistent member. with these Guidelines by July 1, 2005. B. Risk Assessment and Controls 4. Exception for existing agreements with service providers relating to the disposal of con- 1. Appendix A directs every credit union to sumer information. Notwithstanding the re- assess the following risks, among others, quirement in paragraph III.G.3., a Federal when developing its information security credit union’s existing contracts with its program: service providers with regard to any service a. Reasonably foreseeable internal and external threats that could result in unauthor- involving the disposal of consumer informa- ized disclosure, misuse, alteration, or de- tion should implement the objectives of struction of member information or member these Guidelines by July 1, 2006. information systems; [66 FR 8161, Jan. 30, 2001, as amended at 69 FR 69274, Nov. 29, 2004] 29 12 CFR Part 748.

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b. The likelihood and potential damage of formation they obtain from a number of threats, taking into consideration the sensi- sources, including credit unions, to per- tivity of member information; and petrate identity theft. Therefore, credit c. The sufficiency of policies, procedures, unions should take preventative measures to member information systems, and other ar- safeguard member information against such rangements in place to control risks. 30 attempts to gain unauthorized access to the 2. Following the assessment of these risks, information. For example, credit unions appendix A directs a credit union to design a should place access controls on member in- program to address the identified risks. The formation systems and conduct background particular security measures a credit union checks for employees who are authorized to should adopt will depend upon the risks pre- access member information. 35 However, sented by the complexity and scope of its every credit union should also develop and business. At a minimum, the credit union implement a risk-based response program to should consider the specific security meas- address incidents of unauthorized access to ures enumerated in appendix A, 31 and adopt member information in member information those that are appropriate for the credit systems that occur nonetheless. 36 A response union, including: program should be a key part of a credit a. Access controls on member information union’s information security program. 37 The systems, including controls to authenticate program should be appropriate to the size and permit access only to authorized individ- and complexity of the credit union and the uals and controls to prevent employees from nature and scope of its activities. providing member information to unauthor- ii. In addition, each credit union should be ized individuals who may seek to obtain this able to address incidents of unauthorized ac- information through fraudulent means; cess to member information in member in- b. Background checks for employees with formation systems maintained by its domes- responsibilities for access to member infor- tic and foreign service providers. Therefore, mation; and consistent with the obligations in this Guid- c. Response programs that specify actions ance that relate to these arrangements, and to be taken when the credit union suspects with existing guidance on this topic issued or detects that unauthorized individuals by the NCUA, 38 a credit union’s contract have gained access to member information with its service provider should require the systems, including appropriate reports to service provider to take appropriate actions regulatory and law enforcement agencies. 32 to address incidents of unauthorized access

C. Service Providers Survey Report, (September 2003), available at Appendix A advises every credit union to http://www.ftc.gov/os/2003/09synovatereport.pdf. require its service providers by contract to 35 Credit unions should also conduct back- implement appropriate measures designed to ground checks of employees to ensure that protect against unauthorized access to or use the credit union does not violate 12 U.S.C. of member information that could result in 1785(d), which prohibits a credit union from substantial harm or inconvenience to any hiring an individual convicted of certain member. 33 criminal offenses or who is subject to a prohibition order under 12 U.S.C. 1786(g). II. RESPONSE PROGRAM 36 Under 12 CFR Part 748, appendix A, a credit union’s member information systems i. Millions of Americans, throughout the consists of all of the methods used to access, country, have been victims of identity collect, store, use, transmit, protect, or dis- 34 theft. Identity thieves misuse personal in- pose of member information, including the systems maintained by its service providers. 30 See 12 CFR Part 748, appendix A, Para- See 12 CFR Part 748, appendix A, Paragraph graph III.B. I.C.2.d. 31 See appendix A, paragraph III.C. 37 See FFIEC Information Technology Ex- 32 See appendix A, Paragraph III.C. amination Handbook, Information Security 33 See appendix A, Paragraph III.B. and Booklet, (December, 2002), available at http:// III.D. Further, the NCUA notes that, in addi- www.ffiec.gov/ffiecinfobase/htmllpages/ tion to contractual obligations to a credit itl01.htm1#infosec, for additional guidance union, a service provider may be required to on preventing, detecting, and responding to implement its own comprehensive informa- intrusions into financial institution com- tion security program in accordance with puter systems. the Safeguards Rule promulgated by the 38 See FFIEC Information Technology Ex- Federal Trade Commission (‘‘FTC’’), 12 CFR amination Handbook, Outsourcing Tech- Part 314. nology Services Booklet, (June 2004), avail- 34 The FTC estimates that nearly 10 million able at http://www.ffiec.gov/ffiecinfobase/ Americans discovered they were victims of htmllpages/itl01.htm1#outscouring for addi- some form of identify theft in 2002. See The tional guidance on managing outsourced re- Federal Trade Commission, Identity Theft lationships.

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to or use of the credit union’s member infor- member’s information in accordance with mation, including notification of the credit the standard set forth below is a key part of union as soon as possible of any such inci- that duty. dent, to enable the institution to expedi- ii. Timely notification of members is im- tiously implement its response program. portant to manage a credit union’s reputation risk. Effective notice also may reduce a A. Components of a Response Program credit union’s legal risk, assist in maintain- 1. At a minimum, a credit union’s response ing good member relations, and enable the program should contain procedures for the credit union’s members to take steps to pro- following: tect themselves against the consequences of a. Assessing the nature and scope of an in- identity theft. When member notification is cident, and identifying what member infor- warranted, a credit union may not forgo no- mation systems and types of member infor- tifying its customers of an incident because mation have been accessed or misused; the credit union believes that it may be po- b. Notifying the appropriate NCUA Re- tentially embarrassed or inconvenienced by gional Director, and, in the case of state- doing so. chartered credit unions, its applicable state A. Standard for Providing Notice supervisory authority, as soon as possible when the credit union becomes aware of an When a credit union becomes aware of an incident involving unauthorized access to or incident of unauthorized access to sensitive use of sensitive member information as de- member information, the credit union should fined below. conduct a reasonable investigation to c. Consistent with the NCUA’s Suspicious promptly determine the likelihood that the Activity Report (‘‘SAR’’) regulations, 39 noti- information has been or will be misused. If fying appropriate law enforcement authori- the credit union determines that misuse of ties, in addition to filing a timely SAR in its information about a member has occurred situations involving Federal criminal viola- or is reasonably possible, it should notify the tions requiring immediate attention, such as affected member as soon as possible. Member when a reportable violation is ongoing; notice may be delayed if an appropriate law d. Taking appropriate steps to contain and enforcement agency determines that notifi- control the incident to prevent further unau- cation will interfere with a criminal inves- thorized access to or use of member informa- tigation and provides the credit union with a tion, for example, by monitoring, freezing, or written request for the delay. However, the closing affected accounts, while preserving credit union should notify its members as records and other evidence; 40 and soon as notification will no longer interfere e. Notifying members when warranted. with the investigation. 2. Where an incident of unauthorized access to member information involves mem- 1. Sensitive Member Information ber information systems maintained by a Under Part 748.0, a credit union must pro- credit union’s service providers, it is the re- tect against unauthorized access to or use of sponsibility of the credit union to notify the member information that could result in credit union’s members and regulator. How- substantial harm or inconvenience to any ever, a credit union may authorize or con- member. Substantial harm or inconvenience tract with its service provider to notify the is most likely to result from improper access credit union’s members or regulators on its to sensitive member information because this behalf. type of information is most likely to be mis- III. MEMBER NOTICE used, as in the commission of identity theft. For purposes of this Guidance, sensitive i. Credit unions have an affirmative duty member information means a member’s to protect their members’ information name, address, or telephone number, in con- against unauthorized access or use. Noti- junction with the member’s social security fying members of a security incident involv- number, driver’s license number, account ing the unauthorized access or use of the number, credit or debit card number, or a personal identification number or password 39 A credit union’s obligation to file a SAR that would permit access to the member’s is set out in the NCUA’s SAR regulations account. Sensitive member information also in- and guidance. See 12 CFR Part 748.1(c); NCUA cludes any combination of components of Letter to Credit Unions No. 04–CU–03, member information that would allow some- Suspiciouis Activity Reports, March 2004; one to log onto or access the member’s ac- NCUA Regulatory Alert No. 04–RA–01, The count, such as user name and password or Suspicious Activity Report (SAR) Activity password and account number. Review—Trends, Tips, & Isues, Issue 6, No- 2. Affected Members vember 2003, February 2004. 40 See FFIEC Information Technology Ex- If a credit union, based upon its investiga- amination Handbook, Information Security tion, can determine from its logs or other Booklet, (December 2002), pp. 68–74. data precisely which members’ information

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has been improperly accessed, it may limit identity theft guidance and report suspected notification to those members with regard to incidents of identity theft. 42 whom the credit union determines that mis- 2. NCUA encourages credit unions to notify use of their information has occurred or is the nationwide consumer reporting agencies reasonably possible. However, there may be prior to sending notices to a large number of situations where the credit union determines members that include contact information that a group of files has been accessed im- for the reporting agencies. properly, but is unable to identify which spe- C. Delivery of Member Notice cific member’s information has been accessed. If the circumstances of the unau- Member notice should be delivered in any thorized access lead the credit union to de- manner designed to ensure that a member termine that misuse of the information is can reasonably be expected to receive it. For reasonably possible, it should notify all example, the credit union may choose to members in the group. contact all members affected by telephone or by mail, or by electronic mail for those B. Content of Member Notice members for whom it has a valid e-mail address and who have agreed to receive com- 1. Member notice should be given in a clear munications electronically. and conspicuous manner. The notice should describe the incident in general terms and [70 FR 22778, May 2, 2005] the type of member information that was the subject of unauthorized access or use. It also PART 749—RECORDS PRESERVA- should generally describe what the credit union has done to protect the members’ in- TION PROGRAM AND APPEN- formation from further unauthorized access. DICES—RECORD RETENTION In addition, it should include a telephone GUIDELINES; CATASTROPHIC ACT number that members can call for further in- PREPAREDNESS GUIDELINES formation and assistance. 41 The notice also should remind members of the need to re- Sec. main vigilant over the next twelve to twen- 749.0 Purpose and scope. ty-four months, and to promptly report inci- 749.1 Definitions. dents of suspected identity theft to the cred- 749.2 Vital records preservation program. it union. The notice should include the fol- 749.3 Vital records center. lowing additional items, when appropriate: 749.4 Format for vital records preservation. a. A recommendation that the member re- 749.5 Format for records required by other view account statements and immediately NCUA regulations. report any suspicious activity to the credit union; APPENDIX A TO PART 749—RECORD RETENTION GUIDELINES b. A description of fraud alerts and an ex- APPENDIX B TO PART 749—CATASTROPHIC ACT planation of how the member may place a PREPAREDNESS GUIDELINES fraud alert in the member’s consumer reports to put the member’s creditors on no- AUTHORITY: 12 U.S.C. 1766, 1783 and 1789, 15 tice that the member may be a victim of U.S.C. 7001(d). fraud; SOURCE: 66 FR 40579, Aug. 3, 2001, unless c. A recommendation that the member pe- otherwise noted. riodically obtain credit reports from each nationwide credit reporting agency and have § 749.0 Purpose and scope. information relating to fraudulent transactions deleted; (a) This part describes the obliga- d. An explanation of how the member may tions of all federally-insured credit obtain a credit report free of charge; and unions to maintain a records preserva- e. Information about the availability of the tion program to identify, store and re- FTC’s online guidance regarding steps a con- construct vital records in the event sumer can take to protect against identity that the credit union’s records are de- theft. The notice should encourage the mem- stroyed and provides recommendations ber to report any incidents of identity theft to the FTC, and should provide the FTC’s 42 Web site address and toll-free telephone Currently, the FTC Web site for the ID number that members may use to obtain the Theft brochure and the FTC Hotline phone number are http://www.ftc.gov/idtheft and 1– 877–IDTHEFT. The credit union may also 41 The credit union should, therefore, en- refer members to any materials developed sure that it has reasonable policies and pro- pursuant to section 15(1)(b) of the FACT Act cedures in place, including trained per- (educational materials developed by the FTC sonnel, to respond appropriately to member to teach the public how to prevent identity inquiries and requests for assistance. theft).

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for restoring vital member services. All fices, and vendors used to support vital credit unions must have a written pro- records. gram that includes plans for safe- [72 FR 42273, Aug. 2, 2007] guarding records and reconstructing vital records. To complement these § 749.2 Vital records preservation pro- plans, it is recommended a credit union gram. develop a method for restoring vital The board of directors of a credit member services in the event of a cata- union is responsible for establishing a strophic act as defined in § 748.1(b) of vital records preservation program this chapter. Additionally, the regula- within 6 months after its insurance tion establishes flexibility in the for- certificate is issued. The program must mat credit unions may use for main- be in writing and contain procedures taining writings, records or informa- for maintaining duplicate vital records tion required by other NCUA regula- at a vital records center. The proce- tions. dures must include: designated staff re- (b) Appendix A to this part provides sponsible for vital records preserva- guidance concerning the appropriate tion, a schedule for the storage and de- length of time credit unions should re- struction of records, and a records tain various types of operational preservation log detailing for each records. Appendix B to this part also record stored, its name, storage loca- provides guidance for developing a pro- tion, storage date, and name of the per- gram for responding to a catastrophic son sending the record for storage. It is act to ensure duplicate vital records recommended credit unions include in can be used for restoration of vital these procedures a method for using member services. duplicate records to restore vital mem- [72 FR 42273, Aug. 2, 2007] ber services in the event of catastrophic act. Credit unions which have § 749.1 Definitions. some or all of their records maintained For purposes of this part: by an off-site data processor are con- Vital member services mean informa- sidered to be in compliance for the tional account inquiries, share with- storage of those records if the service drawals and deposits, and loan pay- agreement specifies the data processor ments and disbursements. safeguards against the simultaneous Vital records refer to the following destruction of production and back-up records: information. (a) A list of share, deposit, and loan [72 FR 42273, Aug. 2, 2007] balances for each member’s account as of the close of the most recent business § 749.3 Vital records center. day that: A vital records center is defined as a (1) Shows each balance individually storage facility, which may include an- identified by a name or number; other federally-insured credit union, at (2) Lists multiple loans of one ac- any location far enough from the credit count separately; and union’s offices to avoid the simulta- (3) Contains information sufficient to neous loss of both sets of records in the enable the credit union to locate each event of a catastrophic act. A credit member, such as address and telephone union must maintain or contract with number. (b) A financial report, which lists all a third party to maintain any equip- of the credit union’s asset and liability ment or software for its vital records accounts and bank reconcilements, center necessary to access records. current as of the most recent month- [72 FR 42273, Aug. 2, 2007] end. (c) A list of the credit union’s ac- § 749.4 Format for vital records preser- counts at financial institutions, insur- vation. ance policies, and investments along Preserved records may be in any for- with related contact information, cur- mat that can be used to reconstruct rent as of the most recent month-end. the credit union’s records. The format (d) Emergency contact information used must accurately reflect the infor- for employees, officials, regulatory of- mation in the record, remain accessible

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to all persons entitled to access by acceptable for submission as evidence in a statute, regulation or rule of law, and legal proceeding. be capable of reproduction by trans- B. Who Is Responsible for Establishing a System mission, printing, or otherwise. for Record Disposal? [72 FR 42273, Aug. 2, 2007] The credit union’s board of directors may approve a schedule authorizing the disposal § 749.5 Format for records required by of certain records on a continuing basis upon other NCUA regulations. expiration of specified retention periods. A Where NCUA regulations require schedule provides a system for disposal of credit unions to retain certain records and eliminates the need for board ap- writings, records or information, credit proval each time the credit union wants to unions may use any format that accu- dispose of the same types of records created at different times. rately reflects the information in the record, is accessible to all persons enti- C. What Procedures Should a Credit Union tled to access by statute, regulation or Follow When Destroying Records? rule of law, and is capable of being re- The credit union should prepare an index produced by transmission, printing, or of any records destroyed and retain the index otherwise. The credit union must permanently. Destruction of records should maintain the necessary equipment or ordinarily be carried out by at least two per- software to permit an examiner to ac- sons whose signatures, attesting to the fact cess the records during the examina- that records were actually destroyed, should tion process. be affixed to the listing. [72 FR 42273, Aug. 2, 2007] D. What Are the Recommended Minimum Retention Times? APPENDIX A TO PART 749—RECORD Record destruction may impact the credit RETENTION GUIDELINES union’s legal standing to collect on loans or defend itself in court. Since each state can Credit unions often look to NCUA for guidance on the appropriate length of time to re- impose its own rules, it is prudent for a cred- tain various types of operational records. it union to consider consulting with local NCUA does not regulate in this area, but as counsel when setting minimum retention pe- an aid to credit unions it is publishing this riods. A record pertaining to a member’s ac- appendix of suggested guidelines for record count that is not considered a vital record retention. NCUA recognizes that credit may be destroyed once it is verified by the unions must strike a balance between the supervisory committee. Individual Share and competing demands of space, resource allo- Loan Ledgers should be retained perma- cation and the desire to retain all the nently. Records, for a particular period, records that they may need to conduct their should not be destroyed until both a com- business successfully. Efficiency requires prehensive annual audit by the supervisory that all records that are no longer useful be committee and a supervisory examination by discarded, just as both efficiency and safety the NCUA have been made for that period. require that useful records be preserved and E. What Records Should Be Retained kept readily available. Permanently? A. What Format Should the Credit Union Use 1. Official records of the credit union that for Retaining Records? should be retained permanently are: NCUA does not recommend a particular (a) Charter, bylaws, and amendments. format for record retention. If the credit (b) Certificates or licenses to operate under union stores records on microfilm, micro- programs of various government agencies, fiche, or in an electronic format, the stored such as a certificate to act as issuing agent records must be accurate, reproducible and for the sale of U.S. savings bonds. accessible to an NCUA examiner. If records (c) Current manuals, circular letters and are stored on the credit union premises, they other official instructions of a permanent should be immediately accessible upon the character received from the NCUA and other examiner’s request; if records are stored by a governmental agencies. third party or off-site, then they should be 2. Key operational records that should be made available to the examiner within a rea- retained permanently are: sonable time after the examiner’s request. (a) Minutes of meetings of the member- The credit union must maintain the nec- ship, board of directors, credit committee, essary equipment or software to permit an and supervisory committee. examiner to review and reproduce stored (b) One copy of each financial report, records upon request. The credit union NCUA Form 5300 or 5310, or their equivalent, should also ensure that the reproduction is and the Credit Union Profile report, NCUA

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Form 4501, or its equivalent as submitted to board of directors. It is recommended the NCUA at the end of each quarter. program address the following five elements: (c) One copy of each supervisory com- (1) A business impact analysis to evaluate mittee comprehensive annual audit report potential threats; and attachments. (2) A risk assessment to determine critical (d) Supervisory committee records of ac- systems and necessary resources; count verification. (3) A written plan addressing: (e) Applications for membership and joint i. Persons with authority to enact the share account agreements. plan; (f) Journal and cash record. ii. Preservation and ability to restore vital (g) General ledger. records; (h) Copies of the periodic statements of iii. A method for restoring vital member members, or the individual share and loan services through identification of alternate ledger. (A complete record of the account operating location(s) or mediums to provide should be kept permanently.) services, such as telephone centers, shared (i) Bank reconcilements. service centers, agreements with other credit (j) Listing of records destroyed. unions, or other appropriate methods; F. What Records Should a Credit Union iv. Communication methods for employees Designate for Periodic Destruction? and members; v. Notification of regulators as addressed Any record not described above is appro- in 12 CFR 748.1(b); priate for periodic destruction unless it must vi. Training and documentation of training be retained to comply with the requirements to ensure all employees and volunteer offi- of consumer protection regulations. Periodic cials are aware of procedures to follow in the destruction should be scheduled so that the event of destruction of vital records or loss most recent of the following records are of vital member services; and available for the annual supervisory com- vii. Testing procedures, including a means mittee audit and the NCUA examination. for documenting the testing results. Records that may be periodically destroyed (4) Internal controls for reviewing the plan include: at least annually and for revising the plan as (a) Applications of paid off loans. circumstances warrant, for example, to ad- (b) Paid notes. dress changes in the credit union’s oper- (c) Various consumer disclosure forms, un- ations; and less retention is required by law. (5) Annual testing. (d) Cash received vouchers. (e) Journal vouchers. [72 FR 42274, Aug. 2, 2007] (f) Canceled checks. (g) Bank statements. (h) Outdated manuals, canceled instruc- PART 760—LOANS IN AREAS tions, and nonpayment correspondence from HAVING SPECIAL FLOOD HAZARDS the NCUA and other governmental agencies. [66 FR 40579, Aug. 3, 2001, as amended at 74 Sec. FR 35769, July 21, 2009] 760.1 Authority, purpose, and scope. 760.2 Definitions. APPENDIX B TO PART 749—CATA- 760.3 Requirement to purchase flood insur- STROPHIC ACT PREPAREDNESS ance where available. GUIDELINES 760.4 Exemptions. 760.5 Escrow requirement. Credit unions often look to NCUA for guid- 760.6 Required use of standard flood hazard ance on preparing for a catastrophic act. determination form. While NCUA has minimal regulation in this 760.7 Forced placement of flood insurance. area, 1 as an aid to credit unions it is pub- 760.8 Determination fees. lishing this appendix of suggested guidelines. 760.9 Notice of special flood hazards and It is recommended that all credit unions de- availability of Federal disaster relief as- velop a program to prepare for a cata- sistance. strophic act. The program should be devel- 760.10 Notice of servicer’s identity. oped with oversight and approval of the APPENDIX TO PART 760—SAMPLE FORM OF NO- TICE OF SPECIAL FLOOD HAZARDS AND 1 See 12 CFR 748.1(b) concerning a FICU’s AVAILABILITY OF FEDERAL DISASTER RE- reporting of any catastrophic act that occurs LIEF ASSISTANCE at its office to its regional director and 12 AUTHORITY: 12 U.S.C. 1757, 1789; 42 U.S.C. CFR 749.3 concerning the location of a 4012a, 4104a, 4104b, 4106, and 4128. FICU’s vital records center to avoid the simultaneous loss of both sets of records in the SOURCE: 61 FR 45713, Aug. 29, 1996, unless event of disaster. otherwise noted.

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§ 760.1 Authority, purpose, and scope. factured home as that term is used in (a) Authority. This part is issued pur- the NFIP. suant to 12 U.S.C. 1757, 1789 and 42 (h) NFIP means the National Flood U.S.C. 4012a, 4104a, 4104b, 4106, 4128. Insurance Program authorized under (b) Purpose. The purpose of this part the Act. is to implement the requirements of (i) Residential improved real estate the National Flood Insurance Act of means real estate upon which a home 1968 and the Flood Disaster Protection or other residential building is located Act of 1973, as amended (42 U.S.C. 4001– or to be located. 4129). (j) Servicer means the person respon- (c) Scope. This part, except for §§ 760.6 sible for: and 760.8, applies to loans secured by (1) Receiving any scheduled, periodic buildings or mobile homes located or payments from a borrower under the to be located in areas determined by terms of a loan, including amounts for the Director of the Federal Emergency taxes, insurance premiums, and other Management Agency to have special charges with respect to the property flood hazards. Sections 760.6 and 760.8 securing the loan; and apply to loans secured by buildings or (2) Making payments of principal and mobile homes, regardless of location. interest and any other payments from the amounts received from the bor- § 760.2 Definitions. rower as may be required under the (a) Act means the National Flood In- terms of the loan. surance Act of 1968, as amended (42 (k) Special flood hazard area means U.S.C. 4001–4129). the land in the flood plain within a (b) Credit union means a Federal or community having at least a one per- State-chartered credit union that is in- cent chance of flooding in any given sured by the National Credit Union year, as designated by the Director of Share Insurance Fund. FEMA. (c) Building means a walled and roofed structure, other than a gas or (l) Table funding means a settlement liquid storage tank, that is principally at which a loan is funded by a contem- above ground and affixed to a perma- poraneous advance of loan funds and an nent site, and a walled and roofed assignment of the loan to the person structure while in the course of con- advancing the funds. struction, alteration, or repair. (d) Community means a State or a po- § 760.3 Requirement to purchase flood insurance where available. litical subdivision of a State that has zoning and building code jurisdiction (a) In general. A credit union shall over a particular area having special not make, increase, extend, or renew flood hazards. any designated loan unless the building (e) Designated loan means a loan se- or mobile home and any personal prop- cured by a building or mobile home erty securing the loan is covered by that is located or to be located in a flood insurance for the term of the special flood hazard area in which flood loan. The amount of insurance must be insurance is available under the Act. at least equal to the lesser of the out- (f) Director of FEMA means the Direc- standing principal balance of the des- tor of the Federal Emergency Manage- ignated loan or the maximum limit of ment Agency. coverage available for the particular (g) Mobile home means a structure, type of property under the Act. Flood transportable in one or more sections, insurance coverage under the Act is that is built on a permanent chassis limited to the overall value of the and designed for use with or without a property securing the designated loan permanent foundation when attached minus the value of the land on which to the required utilities. The term mo- the property is located. bile home does not include a rec- (b) Table funded loan. A credit union reational vehicle. For purposes of this that acquires a loan from a mortgage part, the term mobile home means a mo- broker or other entity through table bile home on a permanent foundation. funding shall be considered to be mak- The term mobile home means a manu- ing a loan for the purposes of this part.

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§ 760.4 Exemptions. which flood insurance is available The flood insurance requirement pre- under the Act. The standard flood haz- scribed by § 760.3 does not apply with ard determination form may be used in respect to: a printed, computerized, or electronic (a) Any State-owned property cov- manner. A credit union may obtain the ered under a policy of self-insurance standard flood hazard determination satisfactory to the Director of FEMA, form from FEMA, P.O. Box 2012, who publishes and periodically revises Jessup, MD 20794–2012. the list of States falling within this ex- (b) Retention of form. A credit union emption; or shall retain a copy of the completed (b) Property securing any loan with standard flood hazard determination an original principal balance of $5,000 form, in either hard copy or electronic or less and a repayment term of one form, for the period of time the credit year or less. union owns the loan. § 760.5 Escrow requirement. [61 FR 45713, Aug. 29, 1996, as amended at 64 FR 71274, Dec. 21, 1999] If a credit union requires the escrow of taxes, insurance premiums, fees, or § 760.7 Forced placement of flood in- any other charges for a loan secured by surance. residential improved real estate or a mobile home that is made, increased, If a credit union, or a servicer acting extended, or renewed on or after No- on behalf of the credit union, deter- vember 1, 1996, the credit union shall mines at any time during the term of a also require the escrow of all premiums designated loan that the building or and fees for any flood insurance re- mobile home and any personal property quired under § 760.3. The credit union, securing the designated loan is not cov- or a servicer acting on behalf of the ered by flood insurance, or is covered credit union, shall deposit the flood in- by flood insurance in an amount less surance premiums on behalf of the bor- than the amount required under § 760.3, rower in an escrow account. This es- then the credit union or its servicer crow account will be subject to escrow shall notify the borrower that the bor- requirements adopted pursuant to sec- rower should obtain flood insurance, at tion 10 of the Real Estate Settlement the borrower’s expense, in an amount Procedures Act of 1974 (12 U.S.C. 2609) at least equal to the amount required (RESPA), which generally limits the under § 760.3, for the remaining term of amount that may be maintained in es- the loan. If the borrower fails to obtain crow accounts for certain types of flood insurance within 45 days after no- loans and requires escrow account tification, then the credit union or its statements for those accounts, only if servicer shall purchase insurance on the loan is otherwise subject to the borrower’s behalf. The credit union RESPA. Following receipt of a notice or its servicer may charge the borrower from the Director of FEMA or other for the cost of premiums and fees in- provider of flood insurance that pre- curred in purchasing the insurance. miums are due, the credit union, or a servicer acting on behalf of the credit [61 FR 45713, Aug. 29, 1996, as amended at 73 union, shall pay the amount owed to FR 30478, May 28, 2008] the insurance provider from the escrow § 760.8 Determination fees. account by the date when such premiums are due. (a) General. Notwithstanding any Federal or State law other than the § 760.6 Required use of standard flood Flood Disaster Protection Act of 1973, hazard determination form. as amended (42 U.S.C. 4001–4129), any (a) Use of form. A credit union shall credit union, or a servicer acting on be- use the standard flood hazard deter- half of the credit union, may charge a mination form developed by the Direc- reasonable fee for determining whether tor when determining whether the the building or mobile home securing building or mobile home offered as col- the loan is located or will be located in lateral security for a loan is or will be a special flood hazard area. A deter- located in a special flood hazard area in mination fee may also include, but is

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not limited to, a fee for life-of-loan Protection Act of 1973, as amended (42 monitoring. U.S.C. 4012a(b)); (b) Borrower fee. The determination (3) A statement, where applicable, fee authorized by paragraph (a) of this that flood insurance coverage is avail- section may be charged to the borrower able under the NFIP and may also be if the determination: available from private insurers; and (1) Is made in connection with a mak- (4) A statement whether Federal dis- ing, increasing, extending, or renewing aster relief assistance may be available of the loan that is initiated by the bor- in the event of damage to the building rower; or mobile home caused by flooding in a (2) Reflects the Director of FEMA’s Federally-declared disaster. revision or updating of floodplain areas (c) Timing of notice. The credit union or flood-risk zones; shall provide the notice required by (3) Reflects the Director of FEMA’s publication of a notice or compendium paragraph (a) of this section to the bor- that: rower within a reasonable time before (i) Affects the area in which the the completion of the transaction and building or mobile home securing the to the servicer as promptly as prac- loan is located; or ticable after the credit union provides (ii) By determination of the Director notice to the borrower and in any of FEMA, may reasonably require a de- event no later than the time the credit termination whether the building or union provides other similar notices to mobile home securing the loan is lo- the servicer concerning hazard insur- cated in a special flood hazard area; or ance and taxes. Notice to the servicer (4) Results in the purchase of flood may be made electronically or may insurance coverage by the credit union take the form of a copy of the notice to or its servicer on behalf of the bor- the borrower. rower under § 760.7. (d) Record of receipt. The credit union (c) Purchaser or transferee fee. The de- shall retain a record of the receipt of termination fee authorized by para- the notices by the borrower and the graph (a) of this section may be servicer for the period of time the cred- charged to the purchaser or transferee it union owns the loan. of a loan in the case of the sale or (e) Alternate method of notice. Instead transfer of the loan. of providing the notice to the borrower required by paragraph (a) of this sec- § 760.9 Notice of special flood hazards and availability of Federal disaster tion, a credit union may obtain satis- relief assistance. factory written assurance from a seller or lessor that, within a reasonable time (a) Notice requirement. When a credit before the completion of the sale or union makes, increases, extends, or release transaction, the seller or lessor news a loan secured by a building or a mobile home located or to be located in has provided such notice to the pur- a special flood hazard area, the credit chaser or lessee. The credit union shall union shall mail or deliver a written retain a record of the written assur- notice to the borrower and to the ance from the seller or lessor for the servicer in all cases whether or not period of time the credit union owns flood insurance is available under the the loan. Act for the collateral securing the (f) Use of prescribed form of notice. A loan. credit union will be considered to be in (b) Contents of notice. The written no- compliance with the requirement for tice must include the following infor- notice to the borrower of this section mation: providing written notice to the bor- (1) A warning, in a form approved by rower containing the language pre- the Director of FEMA, that the build- sented in the appendix to this part ing or the mobile home is or will be lo- within a reasonable time before the cated in a special flood hazard area; completion of the transaction. The no- (2) A description of the flood insur- tice presented in the appendix to this ance purchase requirements set forth part satisfies the borrower notice re- in section 102(b) of the Flood Disaster quirements of the Act.

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§ 760.10 Notice of servicer’s identity. gage loan, the risk of a 100-year flood in a special flood hazard area is 26 percent (26%). (a) Notice requirement. When a credit Federal law allows a lender and borrower union makes, increases, extends, re- jointly to request the Director of FEMA to news, sells, or transfers a loan secured review the determination of whether the by a building or mobile home located property securing the loan is located in a or to be located in a special flood haz- special flood hazard area. If you would like ard area, the credit union shall notify to make such a request, please contact us for the Director of FEMA (or the Direc- further information. tor’s designee) in writing of the iden- lll The community in which the property securing the loan is located participates tity of the servicer of the loan. The Di- in the National Flood Insurance Program rector of FEMA has designated the in- (NFIP). Federal law will not allow us to surance provider to receive the credit make you the loan that you have applied for union’s notice of the servicer’s iden- if you do not purchase flood insurance. The tity. This notice may be provided elec- flood insurance must be maintained for the tronically if electronic transmission is life of the loan. If you fail to purchase or satisfactory to the Director of FEMA’s renew flood insurance on the property, Fed- designee. eral law authorizes and requires us to pur- (b) Transfer of servicing rights. The chase the flood insurance for you at your expense. credit union shall notify the Director • Flood insurance coverage under the NFIP of FEMA (or the Director’s designee) of may be purchased through an insurance any change in the servicer of a loan de- agent who will obtain the policy either di- scribed in paragraph (a) of this section rectly through the NFIP or through an in- within 60 days after the effective date surance company that participates in the of the change. This notice may be pro- NFIP. Flood insurance also may be available vided electronically if electronic trans- from private insurers that do not participate mission is satisfactory to the Director in the NFIP. • of FEMA’s designee. Upon any change At a minimum, flood insurance purchased must cover the lesser of: in the servicing of a loan described in (1) the outstanding principal balance of the paragraph (a) of this section, the duty loan; or to provide notice under this paragraph (2) the maximum amount of coverage al- (b) shall transfer to the transferee lowed for the type of property under the servicer. NFIP. Flood insurance coverage under the NFIP APPENDIX TO PART 760—SAMPLE FORM is limited to the overall value of the prop- OF NOTICE OF SPECIAL FLOOD HAZ- erty securing the loan minus the value of the ARDS AND AVAILABILITY OF FEDERAL land on which the property is located. • DISASTER RELIEF ASSISTANCE Federal disaster relief assistance (usually in the form of a low-interest loan) may We are giving you this notice to inform be available for damages incurred in excess you that: of your flood insurance if your community’s The building or mobile home securing the participation in the NFIP is in accordance loan for which you have applied is or will be with NFIP requirements. located in an area with special flood hazards. lll Flood insurance coverage under the The area has been identified by the Direc- NFIP is not available for the property secur- tor of the Federal Emergency Management ing the loan because the community in Agency (FEMA) as a special flood hazard which the property is located does not par- area using FEMA’s Flood Insurance Rate Map ticipate in the NFIP. In addition, if the non- or the Flood Hazard Boundary Map for the participating community has been identified following community: lllllll. This for at least one year as containing a special area has at least a one percent (1%) chance flood hazard area, properties located in the of a flood equal to or exceeding the base community will not be eligible for Federal flood elevation (a 100-year flood) in any disaster relief assistance in the event of a given year. During the life of a 30-year mort- Federally-declared flood disaster.

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