12 Cfr 741.3

National Credit Union Administration

§ 741.3

Subpart
A—Regulations
That
Apply to Both Federal Credit
Unions and Federally Insured
State-Chartered Credit Unions
and That Are Not Codified
Elsewhere in NCUA’s Regulations

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§ 741.3

Criteria.

In determining the insurability of a
credit union which makes application
for insurance and in continuing the insurability of its accounts pursuant to
title II of the Act, the following criteria shall be applied:
(a) Reserves—(1) General rule. Statechartered credit unions are subject to
section 216 of the Act, 12 U.S.C. 1790d,
and to part 702 and subpart L of part
747 of this chapter.
(2) Special reserve for nonconforming
investments.
State-chartered
credit
unions (except state-chartered corporate credit unions) are required to
establish an additional special reserve
for investments if those credit unions
are permitted by their respective state
laws to make investments beyond
those authorized in the Act or the

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§ 741.3

12 CFR Ch. VII (1–1–18 Edition)

NCUA Rules and Regulations. For purposes of this paragraph, if a state-chartered credit union conducts and documents an analysis that reasonably concludes an investment is at least investment grade, as defined in § 703.2 of this
chapter, and the investment is otherwise permissible for Federal credit
unions, that investment is not considered to be beyond those authorized by
the Act or the NCUA Rules and Regulations. For any investment other than
loans to members and obligations or
securities expressly authorized in title
I of the Act and part 703 of this chapter, as amended, state-chartered credit
unions (except state-chartered corporate credit unions) are required to
establish and maintain at the end of
each accounting period and prior to
payment of any dividend, an Appropriation for Non-conforming Investments in an amount at least equal to
the net excess of book value over current market value of the investments.
If the market value cannot be determined, an amount equal to the full
book value will be established. When at
the end of any dividend period, the
amount in the Appropriation for Nonconforming Investments exceeds the
difference between book value and
market value, the board of directors
may authorize the transfer of the excess to Undivided Earnings.
(b) Financial condition and policies.
The following factors are to be considered in determining whether the credit
union’s financial condition and policies
are both safe and sound:
(1) The existence of unfavorable
trends which may include excessive
losses on loans (i.e., losses which exceed the regular reserve or its equivalent [in the case of state-chartered
credit unions] plus other irrevocable
reserves established as a contingency
against losses on loans), the presence
of special reserve accounts used specifically for charging off loan balances of
deceased borrowers, and an expense
ratio so high that the required transfers to reserves create a net operating
loss for the period or that the net gain
after these transfers is not sufficient to
permit the payment of a nominal dividend;
(2) The existence of written lending
policies, including adequate docu-

mentation of secured loans and the
protection of security interests by recording, bond, insurance or other adequate means, adequate determination
of the financial capacity of borrowers
and co-makers for repayment of the
loan, adequate determination of value
of security on loans to ascertain that
said security is adequate to repay the
loan in the event of default, loan workout arrangements, and nonaccrual
standards that include the discontinuance of interest accrual on loans past
due by 90 days or more and requirements for returning such loans, including member business loans, to accrual
status.
(3) Investment policies which are
within the provisions of applicable law
and regulations, i.e., the Act and part
703 of this chapter for federal credit
unions and the laws of the state in
which the credit union operates for
state-chartered credit unions, except
state-chartered
corporate
credit
unions. State-chartered corporate credit unions are permitted to make only
those investments that are in conformance with part 704 of this chapter and
applicable state laws and regulations;
(4) The presence of any account or security, the form of which has not been
approved by the Board, except for accounts authorized by state law for
state-chartered credit unions.
(5) The existence of a written interest
rate risk policy (‘‘IRR policy’’) and an
effective interest rate risk management program (‘‘effective IRR program’’) as part of asset liability management. Federally insured credit
unions (‘‘FICUs’’) with assets of more
than $50 million, as measured by the
most recent Call Report filing, must
adopt a written IRR policy and implement an effective IRR program. Appendix B to this part 741 provides guidance
on how to develop an IRR policy and an
effective IRR program. The guidance
describes widely accepted best practices in the management of interest
rate risk for the benefit of all FICUs.
(c) Fitness of management. The officers, directors, and committee members of the credit union must have conducted its operations in accordance
with provisions of applicable law, regulations, its charter and bylaws. No person shall serve as a director, officer,

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National Credit Union Administration

§ 741.4
union may correct its deficiencies and
thereby qualify for share insurance.
(g) Nothing in this section shall preclude the NCUA Board from imposing
additional terms or conditions pursuant to the insurance agreement.
[60 FR 58504, Nov. 28, 1995, as amended at 64
FR 41040, July 29, 1999; 65 FR 8593, Feb. 18,
2000; 67 FR 71094, Nov. 29, 2002; 77 FR 32001,
May 31, 2012; 77 FR 5162, Feb. 2, 2012; 77 FR
74112, Dec. 13, 2012; 78 FR 4037, Jan. 18, 2013]

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ER03DE09.000

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committee member, or employee of an
insured credit union who has been convicted of any criminal offense involving dishonesty or breach of trust, except with the written consent of the
Board.
(d) Insurance of member accounts
would not otherwise involve undue risk to
the NCUSIF. The credit union must
maintain adequate fidelity bond coverage as specified in § 741.201. Any circumstances which may be unique to
the particular credit union concerned
shall also be considered in arriving at
the determination of whether or not an
undue risk to the NCUSIF is or may be
present. For purposes of this section,
the term ‘‘undue risk to the NCUSIF’’
is defined as a condition which creates
a probability of loss in excess of that
normally found in a credit union and
which indicates a reasonably foreseeable probability of the credit union becoming insolvent because of such condition, with a resultant claim against
the NCUSIF.
(e) Powers and purposes. The credit
union must not perform services other
than those which are consistent with
the promotion of thrift and the creation of a source of credit for its members, except as otherwise permitted by
law or regulation.
(f) Letter of disapproval. A credit
union whose application for share insurance is disapproved shall receive a
letter indicating the reasons for such
disapproval, a citation of the authority
for such disapproval, and suggested
methods by which the applying credit