12 CFR 702 sub A-D

Pt. 702

12 CFR Ch. VII (1–1–18 Edition)

the term ‘‘Office of Credit Union Resources
and Expansion’’, effective Jan. 6, 2018.
EFFECTIVE DATE NOTES: 2. At 82 FR 60290,
Dec. 20, 2017, appendix B to part 701 was
amended by revising the definition of ‘‘in
danger of insolvency’’ in the glossary, effective Jan. 19, 2018. For the convenience of the
user, the revised text is set forth as follows:

APPENDIX B TO PART 701—CHARTERING
AND FIELD OF MEMBERSHIP MANUAL
*

*

*

*

*

In danger of insolvency—In making the determination that a particular credit union is
in danger of insolvency, NCUA will establish
that the credit union falls into one or more
of the following categories:
1. The credit union’s net worth is declining
at a rate that will render it insolvent within
30 months. In projecting future net worth,
NCUA may rely on data in addition to Call
Report data. The trend must be supported by
at least 12 months of historic data.
2. The credit union’s net worth is declining
at a rate that will take it under two percent
(2%) net worth within 18 months. In projecting future net worth, NCUA may rely on
data in addition to Call Report data. The
trend must be supported by at least 12
months of historic data.
3. The credit union’s net worth, as self-reported on its Call Report, is significantly
undercapitalized, and NCUA determines that
there is no reasonable prospect of the credit
union becoming adequately capitalized in
the succeeding 36 months. In making its determination on the prospect of achieving
adequate capitalization, NCUA will assume
that, if adverse economic conditions are affecting the value of the credit union’s assets
and liabilities, including property values and
loan delinquencies related to unemployment,
these adverse conditions will not further deteriorate.
4. The credit union has been granted or received assistance under section 208 of the
Federal Credit Union Act, 12 U.S.C. 1788, in
the 15 months prior to the Region’s determination that the credit union is in danger
of insolvency.

*

*

*

*

Subpart B—Mandatory and Discretionary
Supervisory Actions
702.201 Prompt corrective action for ‘‘adequately capitalized’’ credit unions.
702.202 Prompt
corrective
action
for
‘‘undercapitalized’’ credit unions.
702.203 Prompt corrective action for ‘‘significantly
undercapitalized’’
credit
unions.
702.204 Prompt corrective action for ‘‘critically undercapitalized’’ credit unions.
702.205 Consultation with State officials on
proposed prompt corrective action.
702.206 Net worth restoration plans.

Subpart C—Alternative Prompt Corrective
Action for New Credit Unions
702.301 Scope and definition.
702.302 Net worth categories for new credit
unions.
702.303 Prompt corrective action for ‘‘adequately capitalized’’ new credit unions.
702.304 Prompt corrective action for ‘‘moderately capitalized,’’ ‘‘marginally capitalized’’ and ‘‘minimally capitalized’’
new credit unions.
702.305 Prompt
corrective
action
for
‘‘uncapitalized’’ new credit unions.
702.306 Revised business plans for new credit
unions.
702.307 Incentives for new credit unions.

Subpart D—Reserves
702.401 Reserves.
702.402 Full and fair disclosure of financial
condition.
702.403 Payment of dividends.

*

Subpart E—Capital Planning and Stress
Testing

PART 702—CAPITAL ADEQUACY
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Subpart A—Net Worth Classification
702.101 Measure and effective date of net
worth classification.
702.102 Statutory net worth categories.
702.103 Applicability of risk-based net worth
requirement.
702.104 Risk portfolios defined.
702.105 Weighted-average life of investments.
702.106 Standard calculation of risk-based
net worth requirement.
702.107 Alternative components for standard
calculation.
702.108 Risk mitigation credit.
APPENDIXES A–H TO SUBPART A OF PART 702

Sec.
702.1 Authority, purpose, scope and other
supervisory authority.
702.2 Definitions.

702.501 Authority, purpose, and reservation
of authority.
702.502 Definitions.
702.503 Capital policy.
702.504 Capital planning.
702.505 NCUA action on capital plans.

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National Credit Union Administration

§ 702.1

702.506 Annual supervisory stress testing.
APPENDIX A TO PART 702—GROSS-UP APPROACH, AND LOOK-THROUGH APPROACHES
AUTHORITY: 12 U.S.C. 1766(a), 1790d.

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SOURCE: 65 FR 8584, Feb. 18, 2000, unless
otherwise noted.

§ 702.1 Authority, purpose, scope and
other supervisory authority.
(a) Authority. Subparts A, B and C of
this part and subpart L of part 747 of
this chapter are issued by the National
Credit Union Administration pursuant
to section 216 of the Federal Credit
Union Act (FCUA), 12 U.S.C. 1790d (section 1790d), as added by section 301 of
the Credit Union Membership Access
Act, Pub. L. No. 105–219, 112 Stat. 913
(1998). Subpart D of this part is issued
pursuant to FCUA section 120, 12 U.S.C.
1766.
(b) Purpose. The express purpose of
prompt corrective action under section
1790d is to resolve the problems of federally-insured credit unions at the
least possible long-term loss to the National Credit Union Share Insurance
Fund. This part carries out the purpose
of prompt corrective action by establishing a framework of mandatory and
discretionary supervisory actions, applicable according to a credit union’s
net worth ratio, designed primarily to
restore and improve the net worth of
federally-insured credit unions.
(c) Scope. This part implements the
provisions of section 1790d as they
apply
to
federally-insured
credit
unions, whether federally- or statechartered; to such credit unions defined as ‘‘new’’ pursuant to section
1790d(b)(2); and to such credit unions
defined as ‘‘complex’’ pursuant to section 1790d(d). Certain of these provisions also apply to officers and directors of federally-insured credit unions.
This part does not apply to corporate
credit unions. Procedures for issuing,
reviewing and enforcing orders and directives issued under this part are set
forth in subpart L of part 747 of this
chapter, 12 CFR 747.2001 et seq.
(d) Other supervisory authority. Neither § 1790d nor this part in any way
limits the authority of the NCUA
Board or appropriate State official
under any other provision of law to
take additional supervisory actions to
address unsafe or unsound practices or

conditions, or violations of applicable
law or regulations. Action taken under
this part may be taken independently
of, in conjunction with, or in addition
to any other enforcement action available to the NCUA Board or appropriate
State official, including issuance of
cease and desist orders, orders of prohibition, suspension and removal, or assessment of civil money penalties, or
any other actions authorized by law.
EFFECTIVE DATE NOTE: At 80 FR 66706, Oct.
29, 2015, § 702.1 was revised, effective Jan. 1,
2019. For the convenience of the user, the revised text is set forth as follows:
§ 702.1 Authority, purpose, scope, and other
supervisory authority.
(a) Authority. Subparts A and B of this part
and subpart L of part 747 of this chapter are
issued by the National Credit Union Administration (NCUA) pursuant to sections 120
and 216 of the Federal Credit Union Act
(FCUA), 12 U.S.C. 1776 and 1790d (section
1790d), as revised by section 301 of the Credit
Union Membership Access Act, Public Law
105–219, 112 Stat. 913 (1998).
(b) Purpose. The express purpose of prompt
corrective action under section 1790d is to resolve the problems of federally insured credit
unions at the least possible long-term loss to
the National Credit Union Share Insurance
Fund. Subparts A and B of this part carry
out the purpose of prompt corrective action
by establishing a framework of minimum
capital requirements, and mandatory and
discretionary supervisory actions applicable
according to a credit union’s capital classification, designed primarily to restore and
improve the capital adequacy of federally insured credit unions.
(c) Scope. Subparts A and B of this part implement the provisions of section 1790d as
they apply to federally insured credit unions,
whether federally- or state-chartered; to
such credit unions defined as ‘‘new’’ pursuant to section 1790d(b)(2); and to such credit
unions defined as ‘‘complex’’ pursuant to section 1790d(d). Certain of these provisions also
apply to officers and directors of federally
insured credit unions. Subpart C applies capital planning and stress testing to credit
unions with $10 billion or more in total assets. This part does not apply to corporate
credit unions. Unless otherwise provided,
procedures for issuing, reviewing and enforcing orders and directives issued under this
part are set forth in subpart L of part 747 of
this chapter.
(d) Other supervisory authority. Neither section 1790d nor this part in any way limits the
authority of the NCUA Board or appropriate
state official under any other provision of
law to take additional supervisory actions to

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§ 702.2

12 CFR Ch. VII (1–1–18 Edition)

address unsafe or unsound practices or conditions, or violations of applicable law or regulations. Action taken under this part may be
taken independently of, in conjunction with,
or in addition to any other enforcement action available to the NCUA Board or appropriate state official, including issuance of
cease and desist orders, orders of prohibition,
suspension and removal, or assessment of
civil money penalties, or any other actions
authorized by law.

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§ 702.2

Definitions.

Except as provided below, the terms
used in this part have the same meanings as set forth in FCUA sections 101
and 216, 12 U.S.C. 1752, 1790d.
(a) Appropriate Regional Director
means the director of the NCUA Regional Office having jurisdiction over
federally insured credit unions in the
state where the affected credit union is
principally located or, for credit unions
with $10 billion or more in assets, the
Director of the Office of National Examinations and Supervision.
(b) Appropriate State official means
the commission, board or other supervisory authority having jurisdiction
over credit unions chartered by the
State which chartered the affected
credit union.
(c) Credit union means a federally-insured, natural person credit union,
whether federally- or State-chartered,
as defined by 12 U.S.C. 1752(6).
(d) CUSO means a credit union service organization as described in 12 CFR
712 et seq. for federally-chartered credit
unions, and as defined under State law
for State-chartered credit unions.
(e) NCUSIF means the National Credit Union Share Insurance Fund as defined by 12 U.S.C. 1783.
(f) Net Worth means (1) The retained
earnings balance of the credit union at
quarter-end as determined under generally accepted accounting principles,
subject to paragraph (f)(3) of this section. Retained earnings consists of undivided earnings, regular reserves, and
any other appropriations designated by
management or regulatory authorities;
(2) For a low income-designated credit union, net worth also includes secondary capital accounts that are uninsured and subordinate to all other
claims, including claims of creditors,
shareholders and the NCUSIF; and

(3) For a credit union that acquires
another credit union in a mutual combination, net worth includes the retained earnings of the acquired credit
union, or of an integrated set of activities and assets, less any bargain purchase gain recognized in either case to
the extent the difference between the
two is greater than zero. The acquired
retained earnings must be determined
at the point of acquisition under generally accepted accounting principles.
A mutual combination is a transaction
in which a credit union acquires another credit union or acquires an integrated set of activities and assets that
is capable of being conducted and managed as a credit union.
(4) The term ‘‘net worth’’ also includes loans to and accounts in an insured credit union established pursuant
to section 208 of the Act [12 U.S.C.
1788], provided such loans and accounts:
(i) Have a remaining maturity of
more than 5 years;
(ii) Are subordinate to all other
claims including those of shareholders,
creditors and the National Credit
Union Share Insurance Fund;
(iii) Are not pledged as security on a
loan to, or other obligation of, any
party;
(iv) Are not insured by the National
Credit Union Share Insurance Fund;
(v) Have non-cumulative dividends;
(vi) Are transferable; and
(vii) Are available to cover operating
losses realized by the insured credit
union that exceed its available retained earnings.
(g) Net worth ratio means the ratio of
the net worth of the credit union (as
defined in paragraph (f) of this section)
to the total assets of the credit union
(as defined by a measure chosen under
paragraph (j) of this section).
(h) New credit union means a federally-insured credit union which both
has been in operation for less than ten
(10) years and has $10,000,000 or less in
total assets.
(i) Senior executive officer means a
senior executive officer as defined by 12
CFR 701.14(b)(2).
(j) Shares means deposits, shares,
share certificates, share drafts, or any
other depository account authorized by
federal or state law.

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National Credit Union Administration

§ 702.2, Nt.

(k) Total assets. (1) Total assets
means a credit union’s total assets as
measured by either—
(i) Average quarterly balance. The average of quarter-end balances of the
current and three preceding calendar
quarters; or
(ii) Average monthly balance. The average of month-end balances over the
three calendar months of the calendar
quarter; or
(iii) Average daily balance. The average daily balance over the calendar
quarter; or
(iv) Quarter-end balance. The quarterend balance of the calendar quarter as
reported on the credit union’s Call Report.
(2) For each quarter, a credit union
must elect a measure of total assets
from paragraph (k)(1) of this section to
apply for all purposes under this part
except §§ 702.103 through 702.108 [riskbased net worth requirement].
(l) Weighted-average life means the
weighted-average time to the return of
a dollar of principal, calculated by
multiplying each portion of principal
received by the time at which it is expected to be received (based on a reasonable and supportable estimate of
that time), and then summing and dividing by the total amount of principal.
[65 FR 8584, Feb. 18, 2000, as amended at 65
FR 44966, July 20, 2000; 67 FR 71087, Nov. 29,
2002; 73 FR 72691, Dec. 1, 2008; 75 FR 34620,
June 18, 2010; 76 FR 60367, Sept. 29, 2011; 78 FR
32544, May 31, 2013]
EFFECTIVE DATE NOTE: At 80 FR 66706, Oct.
29, 2015, § 702.2 was revised, effective Jan. 1,
2019. For the convenience of the user, the revised text is set forth as follows:

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§ 702.2

Definitions.

Unless otherwise provided in this part, the
terms used in this part have the same meanings as set forth in FCUA sections 101 and
216, 12 U.S.C. 1752, 1790d. The following definitions apply to this part:
Allowances for loan and lease losses (ALLL)
means valuation allowances that have been
established through a charge against earnings to cover estimated credit losses on
loans, lease financing receivables or other
extensions of credit as determined in accordance with GAAP.
Amortized cost means the purchase price of
a security adjusted for amortizations of premium or accretion of discount if the security

was purchased at other than par or face
value.
Appropriate state official means the state
commission, board or other supervisory authority that chartered the affected credit
union.
Call Report means the Call Report required
to be filed by all credit unions under
§ 741.6(a)(2) of this chapter.
Carrying value means the value of the asset
or liability on the statement of financial
condition of the credit union, determined in
accordance with GAAP.
Central counterparty (CCP) means a
counterparty (for example, a clearing house)
that facilitates trades between counterparties in one or more financial markets by either guaranteeing trades or novating contracts.
Charitable donation account means an account that satisfies all of the conditions in
§ 721.3(b)(2)(i), (b)(2)(ii), and (b)(2)(v) of this
chapter.
Commercial loan means any loan, line of
credit, or letter of credit (including any unfunded commitments) for commercial, industrial, and professional purposes, but not for
investment or personal expenditure purposes. Commercial loan excludes loans to
CUSOs, first- or junior-lien residential real
estate loans, and consumer loans.
Commitment means any legally binding arrangement that obligates the credit union to
extend credit, purchase or sell assets, enter
into a borrowing agreement, or enter into a
financial transaction.
Consumer loan means a loan for household,
family, or other personal expenditures, including any loans that, at origination, are
wholly or substantially secured by vehicles
generally manufactured for personal, family,
or household use regardless of the purpose of
the loan. Consumer loan excludes commercial loans, loans to CUSOs, first- and juniorlien residential real estate loans, and loans
for the purchase of one or more vehicles to
be part of a fleet of vehicles.
Contractual compensating balance means the
funds a commercial loan borrower must
maintain on deposit at the lender credit
union as security for the loan in accordance
with the loan agreement, subject to a proper
account hold and on deposit as of the measurement date.
Credit conversion factor (CCF) means the
percentage used to assign a credit exposure
equivalent amount for selected off-balance
sheet accounts.
Credit union means a federally insured, natural person credit union, whether federallyor state-chartered.
Current means, with respect to any loan,
that the loan is less than 90 days past due,
not placed on non-accrual status, and not restructured.

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§ 702.2, Nt.

12 CFR Ch. VII (1–1–18 Edition)

CUSO means a credit union service organization as defined in part 712 and 741 of this
chapter.
Custodian means a financial institution
that has legal custody of collateral as part of
a qualifying master netting agreement,
clearing agreement, or other financial agreement.
Depository institution means a financial institution that engages in the business of providing financial services; that is recognized
as a bank or a credit union by the supervisory or monetary authorities of the country of its incorporation and the country of
its principal banking operations; that receives deposits to a substantial extent in the
regular course of business; and that has the
power to accept demand deposits. Depository
institution includes all federally insured offices of commercial banks, mutual and stock
savings banks, savings or building and loan
associations (stock and mutual), cooperative
banks, credit unions and international banking facilities of domestic depository institutions, and all privately insured state chartered credit unions.
Derivatives Clearing Organization (DCO)
means the same as defined by the Commodity Futures Trading Commission in 17
CFR 1.3(d).
Derivative contract means a financial contract whose value is derived from the values
of one or more underlying assets, reference
rates, or indices of asset values or reference
rates. Derivative contracts include interest
rate derivative contracts, exchange rate derivative contracts, equity derivative contracts, commodity derivative contracts, and
credit derivative contracts. Derivative contracts also include unsettled securities, commodities, and foreign exchange transactions
with a contractual settlement or delivery lag
that is longer than the lesser of the market
standard for the particular instrument or
five business days.
Equity investment means investments in equity securities and any other ownership interests, including, for example, investments
in partnerships and limited liability companies.
Equity investment in CUSOs means the
unimpaired value of the credit union’s equity
investments in a CUSO as recorded on the
statement of financial condition in accordance with GAAP.
Exchange means a central financial clearing market where end users can enter into
derivative transactions.
Excluded goodwill means the outstanding
balance, maintained in accordance with
GAAP, of any goodwill originating from a
supervisory merger or combination that was
completed on or before December 28, 2015.
This term and definition expire on January
1, 2029.
Excluded other intangible assets means the
outstanding balance, maintained in accord-

ance with GAAP, of any other intangible assets such as core deposit intangible, member
relationship intangible, or trade name intangible originating from a supervisory merger
or combination that was completed on or before December 28, 2015. This term and definition expire on January 1, 2029.
Exposure amount means:
(1) The amortized cost for investments
classified as held-to-maturity and availablefor-sale, and the fair value for trading securities.
(2) The outstanding balance for Federal Reserve Bank Stock, Central Liquidity Facility
Stock, Federal Home Loan Bank Stock, nonperpetual capital and perpetual contributed
capital at corporate credit unions, and equity investments in CUSOs.
(3) The carrying value for non-CUSO equity
investments, and investment funds.
(4) The carrying value for the credit
union’s holdings of general account permanent insurance, and separate account insurance.
(5) The amount calculated under § 702.105 of
this part for derivative contracts.
Fair value has the same meaning as provided in GAAP.
Financial collateral means collateral approved by both the credit union and the
counterparty as part of the collateral agreement in recognition of credit risk mitigation
for derivative contracts.
First-lien residential real estate loan means a
loan or line of credit primarily secured by a
first-lien on a one-to-four family residential
property where:
(1) The credit union made a reasonable and
good faith determination at or before consummation of the loan that the member will
have a reasonable ability to repay the loan
according to its terms; and
(2) In transactions where the credit union
holds the first-lien and junior lien(s), and no
other party holds an intervening lien, for
purposes of this part the combined balance
will be treated as a single first-lien residential real estate loan.
GAAP means generally accepted accounting principles in the United States as set
forth in the Financial Accounting Standards
Board’s (FASB) Accounting Standards Codification (ASC).
General account permanent insurance means
an account into which all premiums, except
those designated for separate accounts are
deposited, including premiums for life insurance and fixed annuities and the fixed portfolio of variable annuities, whereby the general assets of the insurance company support
the policy.
General obligation means a bond or similar
obligation that is backed by the full faith
and credit of a public sector entity.

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National Credit Union Administration

§ 702.2, Nt.

Goodwill means an intangible asset, maintained in accordance with GAAP, representing the future economic benefits arising from other assets acquired in a business
combination (e.g., merger) that are not individually identified and separately recognized. Goodwill does not include excluded
goodwill.
Government guarantee means a guarantee
provided by the U.S. Government, FDIC,
NCUA or other U.S. Government agency, or
a public sector entity.
Government-sponsored
enterprise
(GSE)
means an entity established or chartered by
the U.S. Government to serve public purposes specified by the U.S. Congress, but
whose debt obligations are not explicitly
guaranteed by the full faith and credit of the
U.S. Government.
Guarantee means a financial guarantee, letter of credit, insurance, or similar financial
instrument that allows one party to transfer
the credit risk of one or more specific exposures to another party.
Identified losses means those items that
have been determined by an evaluation made
by NCUA, or in the case of a state chartered
credit union the appropriate state official, as
measured on the date of examination in accordance with GAAP, to be chargeable
against income, equity or valuation allowances such as the allowances for loan and
lease losses. Examples of identified losses
would be assets classified as losses, off-balance sheet items classified as losses, any provision expenses that are necessary to replenish valuation allowances to an adequate
level, liabilities not shown on the books, estimated losses in contingent liabilities, and
differences in accounts that represent shortages.
Industrial development bond means a security issued under the auspices of a state or
other political subdivision for the benefit of
a private party or enterprise where that
party or enterprise, rather than the government entity, is obligated to pay the principal
and interest on the obligation.
Intangible assets mean assets, maintained
in accordance with GAAP, other than financial assets, that lack physical substance.
Investment fund means an investment with
a pool of underlying investment assets. Investment fund includes an investment company that is registered under section 8 of the
Investment Company Act of 1940, and collective investment funds or common trust investments that are unregistered investment
products that pool fiduciary client assets to
invest in a diversified pool of investments.
Junior-lien residential real estate loan means
a loan or line of credit secured by a subordinate lien on a one-to-four family residential
property.
Loan secured by real estate means a loan
that, at origination, is secured wholly or
substantially by a lien(s) on real property for

which the lien(s) is central to the extension
of the credit. A lien is ‘‘central’’ to the extension of credit if the borrowers would not
have been extended credit in the same
amount or on terms as favorable without the
liens on real property. For a loan to be ‘‘secured wholly or substantially by a lien(s) on
real property,’’ the estimated value of the
real estate collateral at origination (after
deducting any more senior liens held by others) must be greater than 50 percent of the
principal amount of the loan at origination.
Loan to a CUSO means the outstanding balance of any loan from a credit union to a
CUSO as recorded on the statement of financial condition in accordance with GAAP.
Loans transferred with limited recourse
means the total principal balance outstanding of loans transferred, including participations, for which the transfer qualified
for true sale accounting treatment under
GAAP, and for which the transferor credit
union retained some limited recourse (i.e.,
insufficient recourse to preclude true sale
accounting treatment). Loans transferred
with limited recourse excludes transfers that
qualify for true sale accounting treatment
but contain only routine representation and
warranty clauses that are standard for sales
on the secondary market, provided the credit
union is in compliance with all other related
requirements, such as capital requirements.
Mortgage-backed security (MBS) means a security backed by first- or junior-lien mortgages secured by real estate upon which is
located a dwelling, mixed residential and
commercial structure, residential manufactured home, or commercial structure.
Mortgage partnership finance program means
a Federal Home Loan Bank program through
which loans are originated by a depository
institution that are purchased or funded by
the Federal Home Loan Banks, where the depository institution receives fees for managing the credit risk of the loans. The credit
risk must be shared between the depository
institution and the Federal Home Loan
Banks.
Mortgage servicing assets mean those assets,
maintained in accordance with GAAP, resulting from contracts to service loans secured by real estate (that have been
securitized or owned by others) for which the
benefits of servicing are expected to more
than adequately compensate the servicer for
performing the servicing.
NCUSIF means the National Credit Union
Share Insurance Fund as defined by 12 U.S.C.
1783.
Net worth means:
(1) The retained earnings balance of the
credit union at quarter-end as determined
under GAAP, subject to paragraph (3) of this
definition.
(2) For a low income-designated credit
union, net worth also includes secondary

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§ 702.2, Nt.

12 CFR Ch. VII (1–1–18 Edition)

capital accounts that are uninsured and subordinate to all other claims, including
claims of creditors, shareholders, and the
NCUSIF.
(3) For a credit union that acquires another credit union in a mutual combination,
net worth also includes the retained earnings
of the acquired credit union, or of an integrated set of activities and assets, less any
bargain purchase gain recognized in either
case to the extent the difference between the
two is greater than zero. The acquired retained earnings must be determined at the
point of acquisition under GAAP. A mutual
combination, including a supervisory combination, is a transaction in which a credit
union acquires another credit union or acquires an integrated set of activities and assets that is capable of being conducted and
managed as a credit union.
(4) The term ‘‘net worth’’ also includes
loans to and accounts in an insured credit
union, established pursuant to section 208 of
the Act [12 U.S.C. 1788], provided such loans
and accounts:
(i) Have a remaining maturity of more
than 5 years;
(ii) Are subordinate to all other claims including those of shareholders, creditors, and
the NCUSIF;
(iii) Are not pledged as security on a loan
to, or other obligation of, any party;
(iv) Are not insured by the NCUSIF;
(v) Have non-cumulative dividends;
(vi) Are transferable; and
(vii) Are available to cover operating
losses realized by the insured credit union
that exceed its available retained earnings.
Net worth ratio means the ratio of the net
worth of the credit union to the total assets
of the credit union rounded to two decimal
places.
New credit union has the same meaning as
in § 702.201.
Nonperpetual capital has the same meaning
as in § 704.2 of this chapter.
Off-balance sheet exposure means:
(1) For loans transferred under the Federal
Home Loan Bank mortgage partnership finance program, the outstanding loan balance
as of the reporting date, net of any related
valuation allowance.
(2) For all other loans transferred with
limited recourse or other seller-provided
credit enhancements and that qualify for
true sales accounting, the maximum contractual amount the credit union is exposed
to according to the agreement, net of any related valuation allowance.
(3) For unfunded commitments, the remaining unfunded portion of the contractual
agreement.
Off-balance sheet items means items such as
commitments, contingent items, guarantees,
certain repo-style transactions, financial
standby letters of credit, and forward agreements that are not included on the state-

ment of financial condition, but are normally reported in the financial statement
footnotes.
On-balance sheet means a credit union’s assets, liabilities, and equity, as disclosed on
the statement of financial condition at a specific point in time.
Other intangible assets means intangible assets, other than servicing assets and goodwill, maintained in accordance with GAAP.
Other intangible assets does not include excluded other intangible assets.
Over-the-counter (OTC) interest rate derivative contract means a derivative contract that
is not cleared on an exchange.
Part 703 compliant investment fund means an
investment fund that is restricted to holding
only investments that are permissible under
§ 703.14(c) of this chapter.
Perpetual contributed capital has the same
meaning as in § 704.2 of this chapter.
Public sector entity (PSE) means a state,
local authority, or other governmental subdivision of the United States below the sovereign level.
Qualifying master netting agreement means a
written, legally enforceable agreement, provided that:
(1) The agreement creates a single legal obligation for all individual transactions covered by the agreement upon an event of default, including upon an event of conservatorship, receivership, insolvency, liquidation, or similar proceeding, of the
counterparty;
(2) The agreement provides the credit
union the right to accelerate, terminate, and
close out on a net basis all transactions
under the agreement and to liquidate or set
off collateral promptly upon an event of default, including upon an event of conservatorship, receivership, insolvency, liquidation, or similar proceeding, of the
counterparty, provided that, in any such
case, any exercise of rights under the agreement will not be stayed or avoided under applicable law in the relevant jurisdictions,
other than in receivership, conservatorship,
resolution under the Federal Deposit Insurance Act, Title II of the Dodd-Frank Wall
Street Reform and Consumer Protection Act,
or under any similar insolvency law applicable to GSEs;
(3) The agreement does not contain a
walkaway clause (that is, a provision that
permits a non-defaulting counterparty to
make a lower payment than it otherwise
would make under the agreement, or no payment at all, to a defaulter or the estate of a
defaulter, even if the defaulter or the estate
is a net creditor under the agreement); and
(4) In order to recognize an agreement as a
qualifying master netting agreement for purposes of this part, a credit union must conduct sufficient legal review, at origination
and in response to any changes in applicable
law, to conclude with a well-founded basis

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kpayne on DSK54DXVN1OFR with $$_JOB

National Credit Union Administration

§ 702.2, Nt.

(and maintain sufficient written documentation of that legal review) that:
(i) The agreement meets the requirements
of paragraph (2) of this definition; and
(ii) In the event of a legal challenge (including one resulting from default or from
conservatorship, receivership, insolvency,
liquidation, or similar proceeding), the relevant court and administrative authorities
would find the agreement to be legal, valid,
binding, and enforceable under the law of relevant jurisdictions.
Recourse means a credit union’s retention,
in form or in substance, of any credit risk directly or indirectly associated with an asset
it has transferred that exceeds a pro rata
share of that credit union’s claim on the
asset and disclosed in accordance with
GAAP. If a credit union has no claim on an
asset it has transferred, then the retention
of any credit risk is recourse. A recourse obligation typically arises when a credit union
transfers assets in a sale and retains an explicit obligation to repurchase assets or to
absorb losses due to a default on the payment of principal or interest or any other deficiency in the performance of the underlying obligor or some other party. Recourse
may also exist implicitly if the credit union
provides credit enhancement beyond any
contractual obligation to support assets it
has transferred.
Residential mortgage-backed security means a
mortgage-backed security backed by loans
secured by a first-lien on residential property.
Residential property means a house, condominium unit, cooperative unit, manufactured home, or the construction thereof, and
unimproved land zoned for one-to-four family residential use. Residential property excludes boats or motor homes, even if used as
a primary residence, or timeshare property.
Restructured means, with respect to any
loan, a restructuring of the loan in which a
credit union, for economic or legal reasons
related to a borrower’s financial difficulties,
grants a concession to the borrower that it
would not otherwise consider. Restructured
excludes loans modified or restructured solely pursuant to the U.S. Treasury’s Home Affordable Mortgage Program.
Revenue obligation means a bond or similar
obligation that is an obligation of a PSE, but
which the PSE is committed to repay with
revenues from the specific project financed
rather than general tax funds.
Risk-based capital ratio means the percentage, rounded to two decimal places, of the
risk-based capital ratio numerator to riskweighted assets, as calculated in accordance
with § 702.104(a).
Risk-weighted assets means the total riskweighted assets as calculated in accordance
with § 702.104(c).
Secured consumer loan means a consumer
loan associated with collateral or other item

of value to protect against loss where the
creditor has a perfected security interest in
the collateral or other item of value.
Senior executive officer means a senior executive officer as defined by § 701.14(b)(2) of this
chapter.
Separate account insurance means an account into which a policyholder’s cash surrender value is supported by assets segregated from the general assets of the carrier.
Shares means deposits, shares, share certificates, share drafts, or any other depository account authorized by federal or state
law.
Share-secured loan means a loan fully secured by shares, and does not include the imposition of a statutory lien under § 701.39 of
this chapter.
STRIPS means a separately traded registered interest and principal security.
Structured product means an investment
that is linked, via return or loss allocation,
to another investment or reference pool.
Subordinated means, with respect to an investment, that the investment has a junior
claim on the underlying collateral or assets
to other investments in the same issuance.
An investment that does not have a junior
claim to other investments in the same
issuance on the underlying collateral or assets is non-subordinated. A Security that is
junior only to money market eligible securities in the same issuance is also non-subordinated.
Supervisory merger or combination means a
transaction that involved the following:
(1) An assisted merger or purchase and assumption where funds from the NCUSIF were
provided to the continuing credit union;
(2) A merger or purchase and assumption
classified by NCUA as an ‘‘emergency merger’’ where the acquired credit union is either
insolvent or ‘‘in danger of insolvency’’ as defined under appendix B to Part 701 of this
chapter; or
(3) A merger or purchase and assumption
that included NCUA’s or the appropriate
state official’s identification and selection of
the continuing credit union.
Swap dealer has the meaning as defined by
the Commodity Futures Trading Commission
in 17 CFT 1.3(ggg).
Total assets means a credit union’s total assets as measured 1 by either:
(1) Average quarterly balance. The credit
union’s total assets measured by the average
of quarter-end balances of the current and
three preceding calendar quarters;
1 For each quarter, a credit union must
elect one of the measures of total assets listed in paragraph (2) of this definition to apply
for all purposes under this part except
§§ 702.103 through 702.106 (risk-based capital
requirement).

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§ 702.101

12 CFR Ch. VII (1–1–18 Edition)

(2) Average monthly balance. The credit
union’s total assets measured by the average
of month-end balances over the three calendar months of the applicable calendar
quarter;
(3) Average daily balance. The credit union’s
total assets measured by the average daily
balance over the applicable calendar quarter;
or
(4) Quarter-end balance. The credit union’s
total assets measured by the quarter-end
balance of the applicable calendar quarter as
reported on the credit union’s Call Report.
Tranche means one of a number of related
securities offered as part of the same transaction. Tranche includes a structured product if it has a loss allocation based off of an
investment or reference pool.
Unsecured consumer loan means a consumer
loan not secured by collateral.
U.S. Government agency means an instrumentality of the U.S. Government whose obligations are fully and explicitly guaranteed
as to the timely payment of principal and interest by the full faith and credit of the U.S.
Government. U.S. Government agency includes NCUA.

Subpart A—Net Worth
Classification

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EFFECTIVE DATE NOTE: At 80 FR 66706, Oct.
29, 2015, subpart A to part 702 was revised, effective Jan. 1, 2019. For the convenience of
the user, the revised text is set forth at the
end of this subpart.

§ 702.101 Measures and effective date
of net worth classification.
(a) Net worth measures. For purposes
of this part, a credit union must determine its net worth category classification at the end of each calendar quarter using two measures:
(1) The net worth ratio as defined in
§ 702.2(g); and
(2) If determined to be applicable
under § 702.103, a risk-based net worth
requirement.
(b) Effective date of net worth classification. For purposes of this part, the
effective date of a federally-insured
credit union’s net worth category classification shall be the most recent to
occur of:
(1) Quarter-end effective date. The last
day of the calendar month following
the end of the calendar quarter; or
(2) Corrected net worth category. The
date the credit union received subsequent written notice from NCUA or, if
State-chartered, from the appropriate

State official, of a decline in net worth
category due to correction of an error
or misstatement in the credit union’s
most recent Call Report; or
(3) Reclassification to lower category.
The date the credit union received
written notice from NCUA or, if Statechartered, the appropriate State official, of reclassification on safety and
soundness grounds as provided under
§ 702.102(b) or § 702.302(d).
(c) Notice to NCUA by filing Call Report. (1) Other than by filing a Call Report, a federally-insured credit union
need not notify the NCUA Board of a
change in its net worth ratio that
places the credit union in a lower net
worth category;
(2) Failure to timely file a Call Report as required under this section in
no way alters the effective date of a
change in net worth classification
under this paragraph (b) of this section, or the affected credit union’s corresponding legal obligations under this
part.
[65 FR 8584, Feb. 18, 2000; 65 FR 55439, Sept.
14, 2000, as amended at 67 FR 12464, Mar. 19,
2002; 67 FR 71087, Nov. 29, 2002]

§ 702.102 Statutory
egories.

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(a) Net worth categories. Except for
credit unions defined as ‘‘new’’ under
subpart B of this part, a federally-insured credit union shall be classified
(Table 1)—
(1) Well capitalized if it has a net
worth ratio of seven percent (7%) or
greater and also meets any applicable
risk-based net worth requirement
under §§ 702.103 through 702.108; or
(2) Adequately capitalized if it has a
net worth ratio of six percent (6%) or
more but less than seven percent (7%),
and also meets any applicable riskbased net worth requirement under
§§ 702.103 through 702.108 below; or
(3) Undercapitalized if it has a net
worth ratio of four percent (4%) or
more but less than six percent (6%), or
fails to meet any applicable risk-based
net worth requirement under §§ 702.103
through 702.108; or
(4) Significantly undercapitalized if it
(i) Has a net worth ratio of two percent (2%) or more but less than four
percent (4%); or

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§ 702.103

(ii) Has a net worth ratio of four percent (4%) or more but less than five
percent (5%), and either—
(A) Fails to submit an acceptable net
worth restoration plan within the time
prescribed in § 702.206; or

(B) Materially fails to implement a
net worth restoration plan approved by
the NCUA Board; or
(5) Critically undercapitalized if it has
a net worth ratio of less than two percent (2%).

(b) Reclassification based on supervisory criteria other than net worth. The
NCUA Board may reclassify a ‘‘well
capitalized’’ credit union as ‘‘adequately capitalized’’ and may require
an
‘‘adequately
capitalized’’
or
‘‘undercapitalized’’ credit union to
comply with certain mandatory or discretionary supervisory actions as if it
were in the next lower net worth category (each of such actions hereinafter
referred to generally as ‘‘reclassification’’) in the following circumstances:
(1) Unsafe or unsound condition. The
NCUA Board has determined, after notice and opportunity for hearing pursuant to § 747.2003 of this chapter, that
the credit union is in an unsafe or unsound condition; or
(2) Unsafe or unsound practice. The
NCUA Board has determined, after notice and opportunity for hearing pursuant to § 747.2003 of this chapter, that
the credit union has not corrected a
material unsafe or unsound practice of
which it was, or should have been,
aware.
(c) Non-delegation. The NCUA Board
may not delegate its authority to re-

classify a credit union under paragraph
(b) of this section.
(d) Consultation with State officials.
The NCUA Board shall consult and
seek to work cooperatively with the
appropriate State official before reclassifying a federally-insured State-chartered credit union under paragraph (b)
of this section, and shall promptly notify the appropriate State official of its
decision to reclassify.
[65 FR 8584, Feb. 18, 2000, as amended at 65
FR 44966, July 20, 2000; 67 FR 71087, Nov. 29,
2002]

§ 702.103 Applicability of
net worth requirement.

risk-based

For purposes of § 702.102, a credit
union is defined as ‘‘complex’’ and a
risk-based net worth requirement is applicable only if the credit union meets
both of the following criteria as reflected in its most recent Call Report:
(a) Minimum asset size. Its quarter-end
total assets exceed fifty million dollars
($50,000,000); and
(b) Minimum RBNW calculation. Its
risk-based net worth requirement as

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National Credit Union Administration

§ 702.104

12 CFR Ch. VII (1–1–18 Edition)

calculated under § 702.106 exceeds six
percent (6%).
[65 FR 44966, July 20, 2000, as amended at 67
FR 13464, Mar. 19, 2002; 67 FR 71088, Nov. 29,
2002; 75 FR 34620, June 18, 2010; 78 FR 4037,
Jan. 18, 2013]

[65 FR 44966, July 20, 2000, as amended at 67 FR 71088, Nov. 29, 2002; 75 FR 66300, Oct. 28, 2010;
78 FR 32544, May 31, 2013]

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§ 702.104 Risk portfolios defined.
A risk portfolio is a portfolio of assets, liabilities, or contingent liabilities as specified below, each expressed
as a percentage of the credit union’s
quarter-end total assets reflected in its
most recent Call Report, rounded to
two decimal places (Table 2):
(a) Long-term real estate loans. Total
real estate loans and real estate lines
of credit outstanding, exclusive of
those outstanding that will contractually refinance, reprice or mature
within the next five (5) years, and exclusive of all member business loans
(as defined in 12 CFR 723.1 or as approved under 12 CFR 723.20);
(b) Member business loans outstanding.
All member business loans as defined
in 12 CFR 723.1 or as approved under 12
CFR 723.20;
(c) Investments. Investments as defined by 12 CFR 703.2 or applicable

State law, including investments in
CUSOs (as defined by § 702.2(d));
(d) Low-risk assets. Cash on hand (e.g.,
coin and currency, including vault,
ATM and teller cash), the NCUSIF deposit, and debt instruments unconditionally guaranteed by the National
Credit Union Administration;
(e) Average-risk assets. One hundred
percent (100%) of total assets minus
the sum of the risk portfolios in paragraphs (a) through (d) of this section;
(f) Loans sold with recourse. Outstanding balance of loans sold or
swapped with recourse, excluding loans
sold to the secondary mortgage market
that have representations and warranties consistent with those customarily
required by the U.S. Government and
government sponsored enterprises;
(g) Unused member business loan commitments. Unused commitments for
member business loans as defined in 12
CFR 723.1 or as approved under 12 CFR
723.20; and
(h) Allowance. The Allowance for
Loan and Lease Losses not to exceed
the equivalent of one and one-half percent (1.5%) of total loans outstanding.

National Credit Union Administration

§ 702.105

§ 702.105 Weighted-average life of investments.

[65 FR 44966, July 20, 2000, as amended at 67 FR 71088, Nov. 29, 2002; 75 FR 64826, Oct. 20, 2010]

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Except as provided below (Table 3),
the weighted-average life of an investment for purposes of §§ 702.106(c) and
702.107(c) is defined pursuant to
§ 702.2(m):
(a) Registered investment companies
and collective investment funds. (1) For
investments in registered investment
companies (e.g., mutual funds) and collective investment funds, the weightedaverage life is defined as the maximum
weighted-average life disclosed, directly or indirectly, in the prospectus
or trust instrument;
(2) For investments in money market
funds, as defined in 17 CFR 270.2a–7, and
collective investment funds operated in
accordance with short-term investment
fund rules set forth in 12 CFR
9.18(b)(4)(ii)(B)(1)–(3), the weighted-average life is defined as one (1) year or
less; and
(3) For other investments in registered investment companies or collective investment funds, the weightedaverage life is defined as greater than
five (5) years, but less than or equal to
seven (7) years;

(b) Callable fixed-rate debt obligations
and deposits. For fixed-rate debt obligations and deposits that are callable in
whole, the weighted-average life is defined as the period remaining to the
maturity date;
(c) Variable-rate debt obligations and
deposits. For variable-rate debt obligations and deposits, the weighted-average life is defined as the period remaining to the next rate adjustment date;
(d) Capital in mixed-ownership Government corporations and corporate credit
unions. For capital stock in mixed-ownership Government corporations, as defined in 31 U.S.C. 9101(2), and perpetual
and nonperpetual capital in corporate
credit unions, as defined in 12 CFR
704.2, the weighted-average life is defined as greater than one (1) year, but
less than or equal to three years;
(e) Investments in CUSOs. For investments in CUSOs (as defined in
§ 702.2(d)), the weighted-average life is
defined as greater than one (1) year,
but less than or equal to three (3)
years; and
(f) Other equity securities. For other
equity securities, the weighted average
life is defined as greater than ten (10)
years.

§ 702.106

12 CFR Ch. VII (1–1–18 Edition)

§ 702.106 Standard calculation of riskbased net worth requirement.

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A credit union’s risk-based net worth
requirement is the aggregate of the following standard component amounts,
each expressed as a percentage of the
credit union’s quarter-end total assets
as reflected in its most recent Call Report, rounded to two decimal places
(Table 4):
(a) Long-term real estate loans. The
sum of:
(1) Six percent (6%) of the amount of
long-term real estate loans less than or
equal to twenty-five percent (25%) of
total assets; and
(2) Fourteen percent (14%) of the
amount in excess of twenty-five percent
(25%) of total assets;
(b) Member business loans outstanding.
The sum of:
(1) Six percent (6%) of the amount of
member business loans outstanding
less than or equal to fifteen percent
(15%) of total assets;
(2) Eight percent (8%) of the amount
of member business loans outstanding
greater than fifteen percent (15%), but
less than or equal to twenty-five percent (25%), of total assets; and
(3) Fourteen percent (14%) of the
amount in excess of twenty-five percent (25%) of total assets;
(c) Investments. The sum of:

(1) Three percent (3%) of the amount
of investments with a weighted-average life (as specified in § 702.105 above)
of one (1) year or less;
(2) Six percent (6%) of the amount of
investments with a weighted-average
life greater than one (1) year, but less
than or equal to three (3) years;
(3) Twelve percent (12%) of the
amount of investments with a weighted-average life greater than three (3)
years, but less than or equal to ten (10)
years; and
(4) Twenty percent (20%) of the
amount of investments with a weighted-average life greater than ten (10)
years;
(d) Low-risk assets. Zero percent (0%)
of the entire portfolio of low-risk assets;
(e) Average-risk assets. Six percent
(6%) of the entire portfolio of averagerisk assets;
(f) Loans sold with recourse. Six percent (6%) of the entire portfolio of
loans sold with recourse;
(g) Unused member business loan commitments. Six percent (6%) of the entire
portfolio of unused member business
loan commitments; and
(h) Allowance. Negative one hundred
percent (¥100%) of the balance of the
Allowance for Loan and Lease Losses
account, not to exceed the equivalent
of one and one-half percent (1.5%) of
total loans outstanding.

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National Credit Union Administration

§ 702.107

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

A credit union may substitute one or
more alternative components below, in
place of the corresponding standard
components in § 702.106 above, when
any alternative component amount, expressed as a percentage of the credit
union’s quarter-end total assets as reflected in its most recent Call Report,
rounded to two decimal places, is
smaller (Table 5):
(a) Long-term real estate loans. The
sum of:
(1) Non-callable. Non-callable longterm real estate loans as follows:
(i) Eight percent (8%) of the amount
of such loans with a remaining maturity of greater than 5 years, but less
than or equal to 12 years;
(ii) Twelve percent (12%) of the
amount of such loans with a remaining
maturity of greater than 12 years, but
less than or equal to 20 years; and
(iii) Fourteen percent (14%) of the
amount of such loans with a remaining
maturity greater than 20 years;

(2) Callable. Long-term real estate
loans callable in 5 years or less as follows:
(i) Six percent (6%) of the amount of
such loans with a documented call provision of 5 years or less and with a remaining maturity of greater than 5
years, but less than or equal to 12
years;
(ii) Ten percent (10%) of the amount
of such loans with a documented call
provision of 5 years or less and with a
remaining maturity of greater than 12
years, but less than or equal to 20
years; and
(iii) Twelve percent (12%) of the
amount of such loans with a documented call provision of 5 years or less
and with a remaining maturity of
greater than 20 years;
(b) Member business loans outstanding.
The sum of:
(1) Fixed rate. Fixed-rate member
business loans outstanding as follows:
(i) Six percent (6%) of the amount of
such loans with a remaining maturity
of 3 or fewer years;

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§ 702.107 Alternative components for
standard calculation.

§ 702.107

12 CFR Ch. VII (1–1–18 Edition)

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(ii) Nine percent (9%) of the amount
of such loans with a remaining maturity greater than 3 years, but less than
or equal to 5 years;
(iii) Twelve percent (12%) of the
amount of such loans with a remaining
maturity greater than 5 years, but less
than or equal to 7 years;
(iv) Fourteen percent (14%) of the
amount of such loans with a remaining
maturity greater than 7 years, but less
than or equal to 12 years; and
(v) Sixteen percent (16%) of the
amount of such loans with a remaining
maturity greater than 12 years; and
(2) Variable-rate. Variable-rate member business loans outstanding as follows:
(i) Six percent (6%) of the amount of
such loans with a remaining maturity
of 3 or fewer years;
(ii) Eight percent (8%) of the amount
of such loans with a remaining maturity greater than 3 years, but less than
or equal to 5 years;
(iii) Ten percent (10%) of the amount
of such loans with a remaining maturity greater than 5 years, but less than
or equal to 7 years;
(iv) Twelve percent (12%) of the
amount of such loans with a remaining
maturity greater than 7 years, but less
than or equal to 12 years; and
(v) Fourteen percent (14%) of the
amount of such loans with a remaining
maturity greater than 12 years.
(c) Investments. The sum of:

(1) Three percent (3%) of the amount
of investments with a weighted-average life (as specified in § 702.105 above)
of one (1) year or less;
(2) Six percent (6%) of the amount of
investments with a weighted-average
life greater than one (1) year, but less
than or equal to three (3) years;
(3) Eight percent (8%) of the amount
of investments with a weighted-average life greater than three (3) years,
but less than or equal to five (5) years;
(4) Twelve percent (12%) of the
amount of investments with a weighted-average life greater than five (5)
years, but less than or equal to seven
(7) years;
(5) Sixteen percent (16%) of the
amount of investments with a weighted-average life greater than seven (7)
years, but less than or equal to ten (10)
years; and
(6) Twenty percent (20%) of the
amount of investments with a weighted-average life greater than ten (10)
years.
(d) Loans sold with recourse. The alternative component is the sum of:
(1) Six percent (6%) of the amount of
loans sold with contractual recourse
obligations of six percent (6%) or greater; and
(2) The weighted average recourse
percent of the amount of loans sold
with contractual recourse obligations
of less than six percent (6%), as computed by the credit union.

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National Credit Union Administration

§ 702.107

ER06JA03.006
ER06JA03.005

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TABLE 5—§ 702.107 ALTERNATIVE COMPONENTS FOR STANDARD CALCULATION

§ 702.108

12 CFR Ch. VII (1–1–18 Edition)

[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
of a FISCU seeking a risk mitigation
credit—
(1) Before an application under paragraph (a) above may be submitted to
the NCUA Board, it must be submitted
in duplicate to the appropriate State
official and the appropriate Regional
Director; and
(2) The NCUA Board, when evaluating the application of a FISCU, shall
consult and seek to work cooperatively
with the appropriate State official, and
shall provide prompt notice of its decision to the appropriate State official.
[65 FR 44971, July 20, 2000, as amended at 67
FR 71089, Nov. 29, 2002]

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(a) Who may apply. A credit union
may apply for a risk mitigation credit
if on any of the current or three preceding effective dates of classification
it either failed an applicable RBNW requirement or met it by less than 100
basis points.
(b) Application for credit. Upon application pursuant to guidelines duly
adopted by the NCUA Board, the NCUA
Board may in its discretion grant a
credit to reduce a risk-based net worth
requirement under §§ 702.106 and 702.107
upon proof of mitigation of:
(1) Credit risk; or
(2) Interest rate risk as demonstrated
by economic value exposure measures.

National Credit Union Administration

Pt. 702, Subpt. A, Apps.

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APPENDIXES A–H TO SUBPART A OF PART 702

ER29NO02.067

ER01OC03.057

12 CFR Ch. VII (1–1–18 Edition)

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Pt. 702, Subpt. A, Apps.

ER29NO02.068

ER29NO02.069

Pt. 702, Subpt. A, Apps.

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National Credit Union Administration

Pt. 702, Subpt. A, Nt.

12 CFR Ch. VII (1–1–18 Edition)

[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]

EFFECTIVE DATE NOTE: At 80 FR 66706, Oct.
29, 2015, subpart A to part 702 was revised, effective Jan. 1, 2019. For the convenience of
the user, the revised text is set forth as follows:

Subpart A—Prompt Corrective Action

(a) Capital measures. For purposes of this
part, a credit union must determine its capital classification at the end of each calendar
quarter using the following measures:
(1) The net worth ratio; and
(2) If determined to be applicable under
§ 702.103, the risk-based capital ratio.
(b) Capital adequacy. (1) Notwithstanding
the minimum requirements in this part, a
credit union defined as complex must maintain capital commensurate with the level
and nature of all risks to which the institution is exposed.
(2) A credit union defined as complex must
have a process for assessing its overall capital adequacy in relation to its risk profile
and a comprehensive written strategy for
maintaining an appropriate level of capital.
(c) Effective date of capital classification. For
purposes of this part, the effective date of a
federally insured credit union’s capital classification shall be the most recent to occur
of:

§ 702.102 Capital classification.
(a) Capital categories. Except for credit
unions defined as ‘‘new’’ under subpart B of
this part, a credit union shall be deemed to
be classified (Table 1 of this section)—
(1) Well capitalized if:

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§ 702.101 Capital measures, capital adequacy, effective date of classification, and
notice to NCUA.

(1) Quarter-end effective date. The last day
of the calendar month following the end of
the calendar quarter;
(2) Corrected capital classification. The date
the credit union received subsequent written
notice from NCUA or, if state-chartered,
from the appropriate state official, of a decline in capital classification due to correction of an error or misstatement in the credit union’s most recent Call Report; or
(3) Reclassification to lower category. The
date the credit union received written notice
from NCUA or, if state-chartered, the appropriate state official, of reclassification on
safety and soundness grounds as provided
under §§ 702.102(b) or 702. 202(d).
(d) Notice to NCUA by filing Call Report. (1)
Other than by filing a Call Report, a federally insured credit union need not notify the
NCUA Board of a change in its capital measures that places the credit union in a lower
capital category;
(2) Failure to timely file a Call Report as
required under this section in no way alters
the effective date of a change in capital classification under paragraph (b) of this section,
or the affected credit union’s corresponding
legal obligations under this part.

National Credit Union Administration

Pt. 702, Subpt. A, Nt.

(i) Net worth ratio. The credit union has a
net worth ratio of 7.0 percent or greater; and
(ii) Risk-based capital ratio. The credit
union, if complex, has a risk-based capital
ratio of 10 percent or greater.
(2) Adequately capitalized if:
(i) Net worth ratio. The credit union has a
net worth ratio of 6.0 percent or greater; and
(ii) Risk-based capital ratio. The credit
union, if complex, has a risk-based capital
ratio of 8.0 percent or greater; and
(iii) Does not meet the definition of a well
capitalized credit union.
(3) Undercapitalized if:
(i) Net worth ratio. The credit union has a
net worth ratio of 4.0 percent or more but
less than 6.0 percent; or
(ii) Risk-based capital ratio. The credit
union, if complex, has a risk-based capital
ratio of less than 8.0 percent.

(4) Significantly undercapitalized if:
(i) The credit union has a net worth ratio
of 2.0 percent or more but less than 4.0 percent; or
(ii) The credit union has a net worth ratio
of 4.0 percent or more but less than 5.0 percent, and either—
(A) Fails to submit an acceptable net
worth restoration plan within the time prescribed in § 702.110;
(B) Materially fails to implement a net
worth restoration plan approved by the
NCUA Board; or
(C) Receives notice that a submitted net
worth restoration plan has not been approved.
(5) Critically undercapitalized if it has a net
worth ratio of less than 2.0 percent.

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TABLE 1 TO § 702.102—CAPITAL CATEGORIES
Risk-based capital
ratio also applicable if
complex

A credit union’s capital
classification is . . .

Net worth ratio

Well Capitalized ..........
Adequately Capitalized

7% or greater .............
6% or greater .............

And
And

10.0% or greater
8% or greater .............

Undercapitalized .........
Significantly Undercapitalized.

4% to 5.99% ..............
2% to 3.99% ..............

Or
........

Less than 8%.
N/A .............................

Critically Undercapitalized.

Less than 2% .............

........

N/A

(b) Reclassification based on supervisory criteria other than net worth. The NCUA Board
may reclassify a well capitalized credit
union as adequately capitalized and may require an adequately capitalized or undercapitalized credit union to comply with certain mandatory or discretionary supervisory
actions as if it were classified in the next
lower capital category (each of such actions
hereinafter referred to generally as ‘‘reclassification’’) in the following circumstances:
(1) Unsafe or unsound condition. The NCUA
Board has determined, after providing the
credit union with notice and opportunity for
hearing pursuant to § 747.2003 of this chapter,
that the credit union is in an unsafe or unsound condition; or
(2) Unsafe or unsound practice. The NCUA
Board has determined, after providing the
credit union with notice and opportunity for
hearing pursuant to § 747.2003 of this chapter,
that the credit union has not corrected a material unsafe or unsound practice of which it
was, or should have been, aware.
(c) Non-delegation. The NCUA Board may
not delegate its authority to reclassify a
credit union under paragraph (b) of this section.

And subject to following condition(s) . . .

And does not meet the criteria to be classified as well capitalized.
Or if ‘‘undercapitalized at <5% net worth and
(a) fails to timely submit, (b) fails to materially implement, or (c) receives notice of the
rejection of a net worth restoration plan.

(d) Consultation with state officials. The
NCUA Board shall consult and seek to work
cooperatively with the appropriate state official before reclassifying a federally insured
state-chartered credit union under paragraph
(b) of this section, and shall promptly notify
the appropriate state official of its decision
to reclassify.
§ 702.103 Applicability of the risk-based capital ratio measure.
For purposes of § 702.102, a credit union is
defined as ‘‘complex’’ and the risk-based capital ratio measure is applicable only if the
credit union’s quarter-end total assets exceed
one
hundred
million
dollars
($100,000,000), as reflected in its most recent
Call Report.
§ 702.104

Risk-based capital ratio.

A complex credit union must calculate its
risk-based capital ratio in accordance with
this section.
(a) Calculation of the risk-based capital ratio.
To determine its risk-based capital ratio, a
complex credit union must calculate the percentage, rounded to two decimal places, of
its risk-based capital ratio numerator as described in paragraph (b) of this section, to its

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Pt. 702, Subpt. A, Nt.

12 CFR Ch. VII (1–1–18 Edition)

total risk-weighted assets as described in
paragraph (c) of this section.
(b) Risk-based capital ratio numerator. The
risk-based capital ratio numerator is the
sum of the specific capital elements in paragraph (b)(1) of this section, minus the regulatory adjustments in paragraph (b)(2) of this
section.
(1) Capital elements of the risk-based capital
ratio numerator. The capital elements of the
risk-based capital numerator are:
(i) Undivided earnings;
(ii) Appropriation for non-conforming investments;
(iii) Other reserves;
(iv) Equity acquired in merger;
(v) Net income
(vi) ALLL, maintained in accordance with
GAAP;
(vii) Secondary capital accounts included
in net worth (as defined in § 702.2); and
(viii) Section 208 assistance included in net
worth (as defined in § 702.2).
(2) Risk-based capital ratio numerator deductions. The elements deducted from the sum of
the capital elements of the risk-based capital ratio numerator are:
(i) NCUSIF Capitalization Deposit;
(ii) Goodwill;
(iii) Other intangible assets; and
(iv) Identified losses not reflected in the
risk-based capital ratio numerator.
(c) Risk-weighted assets—(1) General. Riskweighted assets includes risk- weighted onbalance sheet assets as described in paragraphs (c)(2) and (3) of this section, plus the
risk-weighted off-balance sheet assets in
paragraph (c)(4) of this section, plus the riskweighted derivatives in paragraph (c)(5) of
this section, less the risk-based capital ratio
numerator deductions in paragraph (b)(2) of
this section. If a particular asset, derivative
contract, or off balance sheet item has features or characteristics that suggest it could
potentially fit into more than one risk
weight category, then a credit union shall
assign the asset, derivative contract, or off
balance sheet item to the risk weight category that most accurately and appropriately reflects its associated credit risk.
(2) Risk weights for on-balance sheet assets.
The risk categories and weights for assets of
a complex credit union are as follows:
(i) Category 1—zero percent risk weight. A
credit union must assign a zero percent risk
weight to:
(A) The balance of:
(1) Cash, currency and coin, including
vault, automatic teller machine, and teller
cash.
(2) share-secured loans, where the shares
securing the loan are on deposit with the
credit union.
(B) The exposure amount of:
(1) An obligation of the U.S. Government,
its central bank, or a U.S. Government agency that is directly and unconditionally guar-

anteed, excluding detached security coupons,
ex-coupon securities, and interest-only mortgage-backed-security STRIPS.
(2) Federal Reserve Bank stock and Central
Liquidity Facility stock.
(C) Insured balances due from FDIC-insured depositories or federally insured credit
unions.
(ii) Category 2—20 percent risk weight. A
credit union must assign a 20 percent risk
weight to:
(A) The uninsured balances due from FDICinsured depositories, federally insured credit
unions, and all balances due from privatelyinsured credit unions.
(B) The exposure amount of:
(1) A non-subordinated obligation of the
U.S. Government, its central bank, or a U.S.
Government agency that is conditionally
guaranteed, excluding interest-only mortgage-backed-security STRIPS.
(2) A non-subordinated obligation of a GSE
other than an equity exposure or preferred
stock, excluding interest-only GSE mortgage-backed-security STRIPS.
(3) Securities issued by PSEs that represent general obligation securities.
(4) Part 703 compliant investment funds
that are restricted to holding only investments that qualify for a zero or 20 percent
risk-weight under this section.
(5) Federal Home Loan Bank stock.
(C) The balances due from Federal Home
Loan Banks.
(D) The balance of share-secured loans,
where the shares securing the loan are on deposit with another depository institution.
(E) The portions of outstanding loans with
a government guarantee.
(F) The portions of commercial loans secured with contractual compensating balances.
(iii) Category 3—50 percent risk weight. A
credit union must assign a 50 percent risk
weight to:
(A) The outstanding balance (net of government guarantees), including loans held
for sale, of current first-lien residential real
estate loans less than or equal to 35 percent
of assets.
(B) The exposure amount of:
(1) Securities issued by PSEs in the U.S.
that represent non-subordinated revenue obligation securities.
(2) Other non-subordinated, non-U.S. Government agency or non-GSE guaranteed, residential mortgage-backed security, excluding interest-only mortgage-backed security
STRIPS.
(iv) Category 4—75 percent risk weight. A
credit union must assign a 75 percent risk
weight to the outstanding balance (net of
government guarantees), including loans
held for sale, of:
(A) Current first-lien residential real estate loans greater than 35 percent of assets.
(B) Current secured consumer loans.

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National Credit Union Administration

Pt. 702, Subpt. A, Nt.

(v) Category 5—100 percent risk weight. A
credit union must assign a 100 percent risk
weight to:
(A) The outstanding balance (net of government guarantees), including loans held
for sale, of:
(1) First-lien residential real estate loans
that are not current.
(2) Current junior-lien residential real estate loans less than or equal to 20 percent of
assets.
(3) Current unsecured consumer loans.
(4) Current commercial loans, less contractual compensating balances that comprise
less than 50 percent of assets.
(5) Loans to CUSOs.
(B) The exposure amount of:
(1) Industrial development bonds.
(2) Interest-only mortgage-backed security
STRIPS.
(3) Part 703 compliant investment funds,
with the option to use the look-through approaches in paragraph (c)(3)(iii)(B) of this
section.
(4) Corporate debentures and commercial
paper.
(5) Nonperpetual capital at corporate credit unions.
(6) General account permanent insurance.
(7) GSE equity exposure or preferred stock.
(8) Non-subordinated tranches of any investment, with the option to use the grossup approach in paragraph (c)(3)(iii)(A) of this
section.
(C) All other assets listed on the statement
of financial condition not specifically assigned a different risk weight under this subpart.
(vi) Category 6—150 percent risk weight. A
credit union must assign a 150 percent risk
weight to:
(A) The outstanding balance, net of government guarantees and including loans held
for sale, of:
(1) Current junior-lien residential real estate loans that comprise more than 20 percent of assets.
(2) Junior-lien residential real estate loans
that are not current.
(3) Consumer loans that are not current.
(4) Current commercial loans (net of contractual compensating balances), which comprise more than 50 percent of assets.
(5) Commercial loans (net of contractual
compensating balances), which are not current.
(B) The exposure amount of:
(1) Perpetual contributed capital at corporate credit unions.
(2) Equity investments in CUSOs.
(vii) Category 7—250 percent risk weight. A
credit union must assign a 250 percent risk
weight to the carrying value of mortgage
servicing assets.
(viii) Category 8—300 percent risk weight. A
credit union must assign a 300 percent risk
weight to the exposure amount of:

(A) Publicly traded equity investments,
other than a CUSO investment.
(B) Investment funds that do not meet the
requirements under § 703.14(c) of this chapter,
with the option to use the look-through approaches in paragraph (c)(3)(iii)(B) of this
section.
(C) Separate account insurance, with the
option to use the look-through approaches in
paragraph (c)(3)(iii)(B) of this section.
(ix) Category 9—400 percent risk weight. A
credit union must assign a 400 percent risk
weight to the exposure amount of non-publicly traded equity investments, other than
equity investments in CUSOs.
(x) Category 10—1,250 percent risk weight. A
credit union must assign a 1,250 percent risk
weight to the exposure amount of any subordinated tranche of any investment, with the
option to use the gross-up approach in paragraph (c)(3)(iii)(A) of this section.
(3) Alternative risk weights for certain on-balance sheet assets—(i) Non-significant equity exposures.—(A) General. Notwithstanding the
risk weights assigned in paragraph (c)(2) of
this section, a credit union must assign a 100
percent risk weight to non-significant equity
exposures.
(B) Determination of non-significant equity
exposures. A credit union has non-significant
equity exposures if the aggregate amount of
its equity exposures does not exceed 10 percent of the sum of the credit union’s capital
elements of the risk-based capital ratio numerator (as defined under paragraph (b)(1) of
this section).
(C) Determination of the aggregate amount of
equity exposures. When determining the aggregate amount of its equity exposures, a
credit union must include the total amounts
(as recorded on the statement of financial
condition in accordance with GAAP) of the
following:
(1) Equity investments in CUSOs,
(2) Perpetual contributed capital at corporate credit unions,
(3) Nonperpetual capital at corporate credit unions, and
(4) Equity investments subject to a risk
weight in excess of 100 percent.
(ii) Charitable donation accounts. Notwithstanding the risk weights assigned in paragraph (c)(2) of this section, a credit union
may assign a 100 percent risk weight to a
charitable donation account.
(iii)
Alternative
approaches.
Notwithstanding the risk weights assigned in paragraph (c)(2) of this section, a credit union
may determine the risk weight of investment funds, and non-subordinated or subordinated tranches of any investment as follows:
(A) Gross-up approach. A credit union may
use the gross-up approach under appendix A
of this part to determine the risk weight of
the carrying value of non-subordinated or
subordinated tranches of any investment.

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(B) Look-through approaches. A credit union
may use one of the look-through approaches
under appendix A of this part to determine
the risk weight of the exposure amount of
any investment funds, the holdings of separate account insurance, or both.
(4) Risk weights for off-balance sheet activities. The risk weighted amounts for all offbalance sheet items are determined by multiplying the off-balance sheet exposure
amount by the appropriate CCF and the assigned risk weight as follows:
(i) For the outstanding balance of loans
transferred to a Federal Home Loan Bank
under the mortgage partnership finance program, a 20 percent CCF and a 50 percent risk
weight.
(ii) For other loans transferred with limited recourse, a 100 percent CCF applied to
the off-balance sheet exposure and:
(A) For commercial loans, a 100 percent
risk weight.
(B) For first-lien residential real estate
loans, a 50 percent risk weight.
(C) For junior-lien residential real estate
loans, a 100 percent risk weight.
(D) For all secured consumer loans, a 75
percent risk weight.
(E) For all unsecured consumer loans, a 100
percent risk weight.
(iii) For unfunded commitments:
(A) For commercial loans, a 50 percent CCF
with a 100 percent risk weight.
(B) For first-lien residential real estate
loans, a 10 percent CCF with a 50 percent
risk weight.
(C) For junior-lien residential real estate
loans, a 10 percent CCF with a 100 percent
risk weight.
(D) For all secured consumer loans, a 10
percent CCF with a 75 percent risk weight.
(E) For all unsecured consumer loans, a 10
percent CCF with a 100 percent risk weight.
(5) Derivative contracts. A complex credit
union must assign a risk-weighted amount
to any derivative contracts as determined
under § 702.105.
§ 702.105 Derivative contracts.
(a) OTC interest rate derivative contracts—(1)
Exposure amount—(i) Single OTC interest rate
derivative contract. Except as modified by
paragraph (a)(2) of this section, the exposure
amount for a single OTC interest rate derivative contract that is not subject to a qualifying master netting agreement is equal to
the sum of the credit union’s current credit
exposure and potential future credit exposure (PFE) on the OTC interest rate derivative contract.
(A) Current credit exposure. The current
credit exposure for a single OTC interest rate
derivative contract is the greater of the fair
value of the OTC interest rate derivative
contract or zero.
(B) PFE. (1) The PFE for a single OTC interest rate derivative contract, including an

OTC interest rate derivative contract with a
negative fair value, is calculated by multiplying the notional principal amount of the
OTC interest rate derivative contract by the
appropriate conversion factor in Table 1 of
this section.
(2) A credit union must use an OTC interest rate derivative contract’s effective notional principal amount (that is, the apparent or stated notional principal amount multiplied by any multiplier in the OTC interest
rate derivative contract) rather than the apparent or stated notional principal amount
in calculating PFE.

TABLE 1 TO § 702.105—CONVERSION FACTOR
MATRIX FOR INTEREST RATE DERIVATIVE CONTRACTS 2
Conversion
factor

Remaining maturity
One year or less ................................................
Greater than one year and less than or equal
to five years ...................................................
Greater than five years ......................................

(ii) Multiple OTC interest rate derivative contracts subject to a qualifying master netting
agreement. Except as modified by paragraph
(a)(2) of this section, the exposure amount
for multiple OTC interest rate derivative
contracts subject to a qualifying master netting agreement is equal to the sum of the net
current credit exposure and the adjusted sum
of the PFE amounts for all OTC interest rate
derivative contracts subject to the qualifying master netting agreement.
(A) Net current credit exposure. The net current credit exposure is the greater of the net
sum of all positive and negative fair value of
the individual OTC interest rate derivative
contracts subject to the qualifying master
netting agreement or zero.
(B) Adjusted sum of the PFE amounts (Anet).
The adjusted sum of the PFE amounts is calculated as Anet = (0.4 × Agross) + (0.6 × NGR
× Agross), where:
(1) Agross equals the gross PFE (that is,
the sum of the PFE amounts as determined
under paragraph (a)(1)(i)(B) of this section
for each individual derivative contract subject to the qualifying master netting agreement); and
(2) Net-to-gross Ratio (NGR) equals the
ratio of the net current credit exposure to
the gross current credit exposure. In calculating the NGR, the gross current credit exposure equals the sum of the positive current
credit exposures (as determined under paragraph (a)(1)(i) of this section) of all individual derivative contracts subject to the
qualifying master netting agreement.
2 Non-interest rate derivative contracts are
addressed in paragraph (d) of this section.

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Pt. 702, Subpt. A, Nt.

(2) Recognition of credit risk mitigation of
collateralized OTC derivative contracts. A credit union may recognize credit risk mitigation benefits of financial collateral that secures an OTC derivative contract or multiple
OTC derivative contracts subject to a qualifying master netting agreement (netting set)
by following the requirements of paragraph
(c) of this section.
(b) Cleared transactions for interest rate derivatives—(1) General requirements A credit
union must use the methodologies described
in paragraph (b) of this section to calculate
risk-weighted assets for a cleared transaction.
(2) Risk-weighted assets for cleared transactions. (i) To determine the risk weighted
asset amount for a cleared transaction, a
credit union must multiply the trade exposure amount for the cleared transaction, calculated in accordance with paragraph (b)(3)
of this section, by the risk weight appropriate for the cleared transaction, determined in accordance with paragraph (b)(4) of
this section.
(ii) A credit union’s total risk-weighted assets for cleared transactions is the sum of
the risk-weighted asset amounts for all its
cleared transactions.
(3) Trade exposure amount. For a cleared
transaction the trade exposure amount
equals:
(i) The exposure amount for the derivative
contract or netting set of derivative contracts, calculated using the methodology
used to calculate exposure amount for OTC
interest rate derivative contracts under
paragraph (a) of this section; plus
(ii) The fair value of the collateral posted
by the credit union and held by the, clearing
member, or custodian.
(4) Cleared transaction risk weights. A credit
union must apply a risk weight of:
(i) Two percent if the collateral posted by
the credit union to the DCO or clearing
member is subject to an arrangement that
prevents any losses to the credit union due
to the joint default or a concurrent insolvency, liquidation, or receivership proceeding of the clearing member and any
other clearing member clients of the clearing member; and the clearing member credit
union has conducted sufficient legal review
to conclude with a well-founded basis (and
maintains sufficient written documentation
of that legal review) that in the event of a
legal challenge (including one resulting from
an event of default or from liquidation, insolvency, or receivership proceedings) the
relevant court and administrative authorities would find the arrangements to be legal,
valid, binding and enforceable under the law
of the relevant jurisdictions; or
(ii) Four percent if the requirements of
paragraph (b)(4)(i) are not met.
(5) Recognition of credit risk mitigation of
collateralized OTC derivative contracts. A cred-

it union may recognize the credit risk mitigation benefits of financial collateral that
secures a cleared derivative contract by following the requirements of paragraph (c) of
this section.
(c) Recognition of credit risk mitigation of
collateralized interest rate derivative contracts.
(1) A credit union may recognize the credit
risk mitigation benefits of financial collateral that secures an OTC interest rate derivative contract or multiple interest rate derivative contracts subject to a qualifying
master netting agreement (netting set) or
clearing arrangement by using the simple
approach in paragraph (c)(3) of this section.
(2) As an alternative to the simple approach, a credit union may recognize the
credit risk mitigation benefits of financial
collateral that secures such a contract or
netting set if the financial collateral is
marked-to-fair value on a daily basis and
subject to a daily margin maintenance requirement by applying a risk weight to the
exposure as if it were uncollateralized and
adjusting the exposure amount calculated
under paragraph (a) or (b) of this section
using the collateral approach in paragraph
(c)(3) of this section. The credit union must
substitute the exposure amount calculated
under paragraphs (b) or (c) of this section in
the equation in paragraph (c)(3) of this section.
(3) Collateralized transactions—(i) General. A
credit union may use the approach in paragraph (c)(3)(ii) of this section to recognize
the risk-mitigating effects of financial collateral.
(ii) Simple collateralized derivatives approach.
To qualify for the simple approach, the financial collateral must meet the following
requirements:
(A) The collateral must be subject to a collateral agreement for at least the life of the
exposure;
(B) The collateral must be revalued at
least every six months; and
(C) The collateral and the exposure must
be denominated in the same currency.
(iii) Risk weight substitution. (A) A credit
union may apply a risk weight to the portion
of an exposure that is secured by the fair
value of financial collateral (that meets the
requirements for the simple collateralized
approach of this section) based on the risk
weight assigned to the collateral as established under § 702.104(c).
(B) A credit union must apply a risk
weight to the unsecured portion of the exposure based on the risk weight applicable to
the exposure under this subpart.
(iv) Exceptions to the 20 percent risk weight
floor and other requirements. Notwithstanding
the simple collateralized derivatives approach in paragraph (c)(3)(ii) of this section:
(A) A credit union may assign a zero percent risk weight to an exposure to a derivatives contract that is marked-to-market on a

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daily basis and subject to a daily margin
maintenance requirement, to the extent the
contract is collateralized by cash on deposit.
(B) A credit union may assign a 10 percent
risk weight to an exposure to a derivatives
contract that is marked-to-market daily and
subject to a daily margin maintenance requirement, to the extent that the contract is
collateralized by an exposure that qualifies
for a zero percent risk weight under
§ 702.104(c)(2)(i).
(v) A credit union may assign a zero percent risk weight to the collateralized portion
of an exposure where:
(A) The financial collateral is cash on deposit; or
(B) The financial collateral is an exposure
that qualifies for a zero percent risk weight
under § 702.104(c)(2)(i), and the credit union
has discounted the fair value of the collateral by 20 percent.
(4) Collateral haircut approach. (i) A credit
union may recognize the credit risk mitigation benefits of financial collateral that secures a collateralized derivative contract by
using the standard supervisory haircuts in
paragraph (c)(3) of this section.
(ii) The collateral haircut approach applies
to both OTC and cleared interest rate derivatives contracts discussed in this section.
(iii) A credit union must determine the exposure amount for a collateralized derivative
contracts by setting the exposure amount
equal to the max {0,[(exposure amount ¥
value of collateral) + (sum of current fair
value of collateral instruments * market
price volatility haircut of the collateral instruments)]}, where:
(A) The value of the exposure equals the
exposure amount for OTC interest rate derivative contracts (or netting set) calculated
under paragraphs (a)(1)(i) and (ii) of this section.
(B) The value of the exposure equals the
exposure amount for cleared interest rate derivative contracts (or netting set) calculated
under paragraph (b)(3) of this section.
(C) The value of the collateral is the sum
of cash and all instruments under the transaction (or netting set).
(D) The sum of current fair value of collateral instruments as of the measurement
date.
(E) A credit union must use the standard
supervisory haircuts for market price volatility in Table 2 to this section.

TABLE 2 TO § 702.105—STANDARD SUPERVISORY MARKET PRICE VOLATILITY HAIRCUTS
[Based on a 10 business-day holding period]
Haircut (in percent)
assigned based on:
Residual maturity

Collateral risk weight
(in percent)
Zero

Less than or equal to 1 year .............
Greater than 1 year and less than or
equal to 5 years .............................
Greater than 5 years .........................
Cash collateral held ...........................
Other exposure types ........................

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1.0

2.0
4.0

3.0
6.0

Zero
25.0

(d) All other derivative contracts and transactions. Credit unions must follow the requirements of the applicable provisions of 12
CFR part 324, when assigning risk weights to
exposure amounts for derivatives contracts
not addressed in paragraphs (a) or (b) of this
section.
§ 702.106 Prompt corrective action for adequately capitalized credit unions.
(a) Earnings retention. Beginning on the effective date of classification as adequately
capitalized or lower, a federally insured credit union must increase the dollar amount of
its net worth quarterly either in the current
quarter, or on average over the current and
three preceding quarters, by an amount
equivalent to at least 1/10th percent (0.1%) of
its total assets (or more by choice), until it
is well capitalized.
(b) Decrease in retention. Upon written application received no later than 14 days before the quarter end, the NCUA Board, on a
case-by-case basis, may permit a credit
union to increase the dollar amount of its
net worth by an amount that is less than the
amount required under paragraph (a) of this
section, to the extent the NCUA Board determines that such lesser amount:
(1) Is necessary to avoid a significant redemption of shares; and
(2) Would further the purpose of this part.
(c) Decrease by FISCU. The NCUA Board
shall consult and seek to work cooperatively
with the appropriate state official before
permitting a federally insured state-chartered credit union to decrease its earnings
retention under paragraph (b) of this section.
(d) Periodic review. A decision under paragraph (b) of this section to permit a credit
union to decrease its earnings retention is
subject to quarterly review and revocation
except when the credit union is operating
under an approved net worth restoration
plan that provides for decreasing its earnings
retention as provided under paragraph (b) of
this section.

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§ 702.107 Prompt corrective action for
undercapitalized credit unions.
(a) Mandatory supervisory actions by credit
union. A credit union which is undercapitalized must—
(1) Earnings retention. Increase net worth in
accordance with § 702.106;
(2) Submit net worth restoration plan. Submit
a net worth restoration plan pursuant to
§ 702.111, provided however, that a credit union
in this category having a net worth ratio of
less than five percent (5%) which fails to
timely submit such a plan, or which materially fails to implement an approved plan, is
classified significantly undercapitalized pursuant to § 702.102(a)(4)(i);
(3) Restrict increase in assets. Beginning the
effective date of classification as undercapitalized or lower, not permit the credit
union’s assets to increase beyond its total
assets for the preceding quarter unless—
(i) Plan approved. The NCUA Board has approved a net worth restoration plan which
provides for an increase in total assets and—
(A) The assets of the credit union are increasing consistent with the approved plan;
and
(B) The credit union is implementing steps
to increase the net worth ratio consistent
with the approved plan;
(ii) Plan not approved. The NCUA Board has
not approved a net worth restoration plan
and total assets of the credit union are increasing because of increases since quarterend in balances of:
(A) Total accounts receivable and accrued
income on loans and investments; or
(B) Total cash and cash equivalents; or
(C) Total loans outstanding, not to exceed
the sum of total assets plus the quarter-end
balance of unused commitments to lend and
unused lines of credit provided however that
a credit union which increases a balance as
permitted under paragraphs (a)(3)(ii)(A), (B)
or (C) of this section cannot offer rates on
shares in excess of prevailing rates on shares
in its relevant market area, and cannot open
new branches;
(4) Restrict member business loans. Beginning
the effective date of classification as undercapitalized or lower, not increase the total
dollar amount of member business loans (defined as loans outstanding and unused commitments to lend) as of the preceding quarter-end unless it is granted an exception
under 12 U.S.C. 1757a(b).
(b) Second tier discretionary supervisory actions by NCUA. Subject to the applicable procedures for issuing, reviewing and enforcing
directives set forth in subpart L of part 747
of this chapter, the NCUA Board may, by directive, take one or more of the following actions with respect to an undercapitalized
credit union having a net worth ratio of less
than five percent (5%), or a director, officer
or employee of such a credit union, if it de-

termines that those actions are necessary to
carry out the purpose of this part:
(1) Requiring prior approval for acquisitions,
branching, new lines of business. Prohibit a
credit union from, directly or indirectly, acquiring any interest in any business entity
or financial institution, establishing or acquiring any additional branch office, or engaging in any new line of business, unless
the NCUA Board has approved the credit
union’s net worth restoration plan, the credit union is implementing its plan, and the
NCUA Board determines that the proposed
action is consistent with and will further the
objectives of that plan;
(2) Restricting transactions with and ownership of a CUSO. Restrict the credit union’s
transactions with a CUSO, or require the
credit union to reduce or divest its ownership interest in a CUSO;
(3) Restricting dividends paid. Restrict the
dividend rates the credit union pays on
shares to the prevailing rates paid on comparable accounts and maturities in the relevant market area, as determined by the
NCUA Board, except that dividend rates already declared on shares acquired before imposing a restriction under this paragraph
may not be retroactively restricted;
(4) Prohibiting or reducing asset growth. Prohibit any growth in the credit union’s assets
or in a category of assets, or require the
credit union to reduce its assets or a category of assets;
(5) Alter, reduce or terminate activity. Require the credit union or its CUSO to alter,
reduce, or terminate any activity which
poses excessive risk to the credit union;
(6) Prohibiting nonmember deposits. Prohibit
the credit union from accepting all or certain nonmember deposits;
(7) Dismissing director or senior executive officer. Require the credit union to dismiss from
office any director or senior executive officer, provided however, that a dismissal under
this clause shall not be construed to be a formal administrative action for removal under
12 U.S.C. 1786(g);
(8) Employing qualified senior executive officer. Require the credit union to employ
qualified senior executive officers (who, if
the NCUA Board so specifies, shall be subject
to its approval); and
(9) Other action to carry out prompt corrective
action. Restrict or require such other action
by the credit union as the NCUA Board determines will carry out the purpose of this
part better than any of the actions prescribed in paragraphs (b)(1) through (8) of
this section.
(c) First tier application of discretionary supervisory actions. An undercapitalized credit
union having a net worth ratio of five percent (5%) or more, or which is classified
undercapitalized by reason of failing to
maintain a risk-based capital ratio equal to
or greater than 8 percent under § 702.104, is

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subject to the discretionary supervisory actions in paragraph (b) of this section if it
fails to comply with any mandatory supervisory action in paragraph (a) of this section
or fails to timely implement an approved net
worth restoration plan under § 702.111, including meeting its prescribed steps to increase its net worth ratio.
§ 702.108 Prompt corrective action for significantly undercapitalized credit unions.
(a) Mandatory supervisory actions by credit
union. A credit union which is significantly
undercapitalized must—
(1) Earnings retention. Increase net worth in
accordance with § 702.106;
(2) Submit net worth restoration plan. Submit
a net worth restoration plan pursuant to
§ 702.111;
(3) Restrict increase in assets. Not permit the
credit union’s total assets to increase except
as provided in § 702.107(a)(3); and
(4) Restrict member business loans. Not increase the total dollar amount of member
business loans (defined as loans outstanding
and unused commitments to lend) as provided in § 702.107(a)(4).
(b) Discretionary supervisory actions by
NCUA. Subject to the applicable procedures
for issuing, reviewing and enforcing directives set forth in subpart L of part 747 of this
chapter, the NCUA Board may, by directive,
take one or more of the following actions
with respect to any significantly undercapitalized credit union, or a director, officer
or employee of such credit union, if it determines that those actions are necessary to
carry out the purpose of this part:
(1) Requiring prior approval for acquisitions,
branching, new lines of business. Prohibit a
credit union from, directly or indirectly, acquiring any interest in any business entity
or financial institution, establishing or acquiring any additional branch office, or engaging in any new line of business, except as
provided in § 702.107(b)(1);
(2) Restricting transactions with and ownership of CUSO. Restrict the credit union’s
transactions with a CUSO, or require the
credit union to divest or reduce its ownership interest in a CUSO;
(3) Restricting dividends paid. Restrict the
dividend rates that the credit union pays on
shares as provided in § 702.107(b)(3);
(4) Prohibiting or reducing asset growth. Prohibit any growth in the credit union’s assets
or in a category of assets, or require the
credit union to reduce assets or a category of
assets;
(5) Alter, reduce or terminate activity. Require the credit union or its CUSO(s) to
alter, reduce, or terminate any activity
which poses excessive risk to the credit
union;
(6) Prohibiting nonmember deposits. Prohibit
the credit union from accepting all or certain nonmember deposits;

(7) New election of directors. Order a new
election of the credit union’s board of directors;
(8) Dismissing director or senior executive officer. Require the credit union to dismiss from
office any director or senior executive officer, provided however, that a dismissal under
this clause shall not be construed to be a formal administrative action for removal under
12 U.S.C. 1786(g);
(9) Employing qualified senior executive officer. Require the credit union to employ
qualified senior executive officers (who, if
the NCUA Board so specifies, shall be subject
to its approval);
(10) Restricting senior executive officers’ compensation. Except with the prior written approval of the NCUA Board, limit compensation to any senior executive officer to that
officer’s average rate of compensation (excluding bonuses and profit sharing) during
the four (4) calendar quarters preceding the
effective date of classification of the credit
union as significantly undercapitalized, and
prohibit payment of a bonus or profit share
to such officer;
(11) Other actions to carry out prompt corrective action. Restrict or require such other action by the credit union as the NCUA Board
determines will carry out the purpose of this
part better than any of the actions prescribed in paragraphs (b)(1) through (10) of
this section; and
(12) Requiring merger. Require the credit
union to merge with another financial institution if one or more grounds exist for placing the credit union into conservatorship
pursuant to 12 U.S.C. 1786(h)(1)(F), or into
liquidation
pursuant
to
12
U.S.C.
1787(a)(3)(A)(i).
(c) Discretionary conservatorship or liquidation if no prospect of becoming adequately capitalized. Notwithstanding any other actions
required or permitted to be taken under this
section, when a credit union becomes significantly undercapitalized (including by reclassification under § 702.102(b)), the NCUA Board
may place the credit union into conservatorship pursuant to 12 U.S.C. 1786(h)(1)(F), or
into liquidation pursuant to 12 U.S.C.
1787(a)(3)(A)(i), provided that the credit
union has no reasonable prospect of becoming adequately capitalized.
§ 702.109 Prompt corrective action for critically undercapitalized credit unions.
(a) Mandatory supervisory actions by credit
union. A credit union which is critically
undercapitalized must—
(1) Earnings retention. Increase net worth in
accordance with § 702.106;
(2) Submit net worth restoration plan. Submit
a net worth restoration plan pursuant to
§ 702.111;
(3) Restrict increase in assets. Not permit the
credit union’s total assets to increase except
as provided in § 702.107(a)(3); and

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Pt. 702, Subpt. A, Nt.

(4) Restrict member business loans. Not increase the total dollar amount of member
business loans (defined as loans outstanding
and unused commitments to lend) as provided in § 702.107(a)(4).
(b) Discretionary supervisory actions by
NCUA. Subject to the applicable procedures
for issuing, reviewing and enforcing directives set forth in subpart L of part 747 of this
chapter, the NCUA Board may, by directive,
take one or more of the following actions
with respect to any critically undercapitalized credit union, or a director, officer or employee of such credit union, if it determines
that those actions are necessary to carry out
the purpose of this part:
(1) Requiring prior approval for acquisitions,
branching, new lines of business. Prohibit a
credit union from, directly or indirectly, acquiring any interest in any business entity
or financial institution, establishing or acquiring any additional branch office, or engaging in any new line of business, except as
provided by § 702.107(b)(1);
(2) Restricting transactions with and ownership of CUSO. Restrict the credit union’s
transactions with a CUSO, or require the
credit union to divest or reduce its ownership interest in a CUSO;
(3) Restricting dividends paid. Restrict the
dividend rates that the credit union pays on
shares as provided in § 702.107(b)(3);
(4) Prohibiting or reducing asset growth. Prohibit any growth in the credit union’s assets
or in a category of assets, or require the
credit union to reduce assets or a category of
assets;
(5) Alter, reduce or terminate activity. Require the credit union or its CUSO(s) to
alter, reduce, or terminate any activity
which poses excessive risk to the credit
union;
(6) Prohibiting nonmember deposits. Prohibit
the credit union from accepting all or certain nonmember deposits;
(7) New election of directors. Order a new
election of the credit union’s board of directors;
(8) Dismissing director or senior executive officer. Require the credit union to dismiss from
office any director or senior executive officer, provided however, that a dismissal under
this clause shall not be construed to be a formal administrative action for removal under
12 U.S.C. 1786(g);
(9) Employing qualified senior executive officer. Require the credit union to employ
qualified senior executive officers (who, if
the NCUA Board so specifies, shall be subject
to its approval);
(10) Restricting senior executive officers’ compensation. Reduce or, with the prior written
approval of the NCUA Board, limit compensation to any senior executive officer to
that officer’s average rate of compensation
(excluding bonuses and profit sharing) during
the four (4) calendar quarters preceding the

effective date of classification of the credit
union as critically undercapitalized, and prohibit payment of a bonus or profit share to
such officer;
(11) Restrictions on payments on uninsured
secondary capital. Beginning 60 days after the
effective date of classification of a credit
union as critically undercapitalized, prohibit
payments of principal, dividends or interest
on the credit union’s uninsured secondary
capital accounts established after August 7,
2000, except that unpaid dividends or interest
shall continue to accrue under the terms of
the account to the extent permitted by law;
(12) Requiring prior approval. Require a
critically undercapitalized credit union to
obtain the NCUA Board’s prior written approval before doing any of the following:
(i) Entering into any material transaction
not within the scope of an approved net
worth restoration plan (or approved revised
business plan under subpart C of this part);
(ii) Extending credit for transactions
deemed highly leveraged by the NCUA Board
or, if state-chartered, by the appropriate
state official;
(iii) Amending the credit union’s charter
or bylaws, except to the extent necessary to
comply with any law, regulation, or order;
(iv) Making any material change in accounting methods; and
(v) Paying dividends or interest on new
share accounts at a rate exceeding the prevailing rates of interest on insured deposits
in its relevant market area;
(13) Other action to carry out prompt corrective action. Restrict or require such other action by the credit union as the NCUA Board
determines will carry out the purpose of this
part better than any of the actions prescribed in paragraphs (b)(1) through (12) of
this section; and
(14) Requiring merger. Require the credit
union to merge with another financial institution if one or more grounds exist for placing the credit union into conservatorship
pursuant to 12 U.S.C. 1786(h)(1)(F), or into
liquidation
pursuant
to
12
U.S.C.
1787(a)(3)(A)(i).
(c) Mandatory conservatorship, liquidation or
action in lieu thereof—(1) Action within 90
days. Notwithstanding any other actions required or permitted to be taken under this
section (and regardless of a credit union’s
prospect of becoming adequately capitalized), the NCUA Board must, within 90 calendar days after the effective date of classification of a credit union as critically undercapitalized—
(i) Conservatorship. Place the credit union
into conservatorship pursuant to 12 U.S.C.
1786(h)(1)(G); or
(ii) Liquidation. Liquidate the credit union
pursuant to 12 U.S.C. 1787(a)(3)(A)(ii); or
(iii) Other corrective action. Take other corrective action, in lieu of conservatorship or
liquidation, to better achieve the purpose of

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this part, provided that the NCUA Board
documents why such action in lieu of conservatorship or liquidation would do so, provided however, that other corrective action
may consist, in whole or in part, of complying with the quarterly timetable of steps
and meeting the quarterly net worth targets
prescribed in an approved net worth restoration plan.
(2) Renewal of other corrective action. A determination by the NCUA Board to take
other corrective action in lieu of conservatorship or liquidation under paragraph
(c)(1)(iii) of this section shall expire after an
effective period ending no later than 180 calendar days after the determination is made,
and the credit union shall be immediately
placed into conservatorship or liquidation
under paragraphs (c)(1)(i) and (ii) of this section, unless the NCUA Board makes a new
determination under paragraph (c)(1)(iii) of
this section before the end of the effective
period of the prior determination;
(3) Mandatory liquidation after 18 months—
(i) Generally. Notwithstanding paragraphs
(c)(1) and (2) of this section, the NCUA Board
must place a credit union into liquidation if
it remains critically undercapitalized for a
full calendar quarter, on a monthly average
basis, following a period of 18 months from
the effective date the credit union was first
classified critically undercapitalized.
(ii) Exception. Notwithstanding paragraph
(c)(3)(i) of this section, the NCUA Board may
continue to take other corrective action in
lieu of liquidation if it certifies that the
credit union—
(A) Has been in substantial compliance
with an approved net worth restoration plan
requiring consistent improvement in net
worth since the date the net worth restoration plan was approved;
(B) Has positive net income or has an upward trend in earnings that the NCUA Board
projects as sustainable; and
(C) Is viable and not expected to fail.
(iii) Review of exception. The NCUA Board
shall, at least quarterly, review the certification of an exception to liquidation under
paragraph (c)(3)(ii) of this section and shall
either—
(A) Recertify the credit union if it continues to satisfy the criteria of paragraph
(c)(3)(ii) of this section; or
(B) Promptly place the credit union into
liquidation,
pursuant
to
12
U.S.C.
1787(a)(3)(A)(ii), if it fails to satisfy the criteria of paragraph (c)(3)(ii) of this section.
(4) Nondelegation. The NCUA Board may
not delegate its authority under paragraph
(c) of this section, unless the credit union
has less than $5,000,000 in total assets. A
credit union shall have a right of direct appeal to the NCUA Board of any decision
made by delegated authority under this section within ten (10) calendar days of the date
of that decision.

(d) Mandatory liquidation of insolvent federal
credit union. In lieu of paragraph (c) of this
section, a critically undercapitalized federal
credit union that has a net worth ratio of
less than zero percent (0%) may be placed
into liquidation on grounds of insolvency
pursuant to 12 U.S.C. 1787(a)(1)(A).
§ 702.110 Consultation with state officials on
proposed prompt corrective action.
(a) Consultation on proposed conservatorship
or liquidation. Before placing a federally insured state-chartered credit union into conservatorship
(pursuant
to
12
U.S.C.
1786(h)(1)(F) or (G)) or liquidation (pursuant
to 12 U.S.C. 1787(a)(3)) as permitted or required under subparts A or B of this part to
facilitate prompt corrective action—
(1) The NCUA Board shall seek the views of
the appropriate state official (as defined in
§ 702.2), and give him or her an opportunity
to take the proposed action;
(2) The NCUA Board shall, upon timely request of the appropriate state official,
promptly provide him or her with a written
statement of the reasons for the proposed
conservatorship or liquidation, and reasonable time to respond to that statement; and
(3) If the appropriate state official makes a
timely written response that disagrees with
the proposed conservatorship or liquidation
and gives reasons for that disagreement, the
NCUA Board shall not place the credit union
into conservatorship or liquidation unless it
first considers the views of the appropriate
state official and determines that—
(i) The NCUSIF faces a significant risk of
loss if the credit union is not placed into
conservatorship or liquidation; and
(ii) Conservatorship or liquidation is necessary either to reduce the risk of loss, or to
reduce the expected loss, to the NCUSIF
with respect to the credit union.
(b) Nondelegation. The NCUA Board may
not delegate any determination under paragraph (a)(3) of this section.
(c) Consultation on proposed discretionary action. The NCUA Board shall consult and seek
to work cooperatively with the appropriate
state official before taking any discretionary
supervisory
action
under
§§ 702.107(b),
702.108(b), 702.109(b), 702.204(b) and 702.205(b)
with respect to a federally insured statechartered credit union; shall provide prompt
notice of its decision to the appropriate state
official; and shall allow the appropriate state
official to take the proposed action independently or jointly with NCUA.
§ 702.111 Net
(NWRP).

worth

restoration

(a) Schedule for filing—(1) Generally. A credit union shall file a written net worth restoration plan (NWRP) with the appropriate
Regional Director and, if state-chartered,

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the appropriate state official, within 45 calendar days of the effective date of classification as either undercapitalized, significantly
undercapitalized or critically undercapitalized, unless the NCUA Board notifies the
credit union in writing that its NWRP is to
be filed within a different period.
(2) Exception. An otherwise adequately capitalized credit union that is reclassified
undercapitalized on safety and soundness
grounds under § 702.102(b) is not required to
submit a NWRP solely due to the reclassification, unless the NCUA Board notifies the
credit union that it must submit an NWRP.
(3) Filing of additional plan. Notwithstanding paragraph (a)(1) of this section, a
credit union that has already submitted and
is operating under a NWRP approved under
this section is not required to submit an additional NWRP due to a change in net worth
category (including by reclassification under
§ 702.102(b)), unless the NCUA Board notifies
the credit union that it must submit a new
NWRP. A credit union that is notified to
submit a new or revised NWRP shall file the
NWRP in writing with the appropriate Regional Director within 30 calendar days of receiving such notice, unless the NCUA Board
notifies the credit union in writing that the
NWRP is to be filed within a different period.
(4) Failure to timely file plan. When a credit
union fails to timely file an NWRP pursuant
to this paragraph, the NCUA Board shall
promptly notify the credit union that it has
failed to file an NWRP and that it has 15 calendar days from receipt of that notice within
which to file an NWRP.
(b) Assistance to small credit unions. Upon
timely request by a credit union having total
assets of less than $10 million (regardless
how long it has been in operation), the NCUA
Board shall provide assistance in preparing
an NWRP required to be filed under paragraph (a) of this section.
(c) Contents of NWRP. An NWRP must—
(1) Specify—
(i) A quarterly timetable of steps the credit union will take to increase its net worth
ratio, and risk-based capital ratio if applicable, so that it becomes adequately capitalized by the end of the term of the NWRP, and
to remain so for four (4) consecutive calendar
quarters;
(ii) The projected amount of net worth increases in each quarter of the term of the
NWRP as required under § 702.106(a), or as
permitted under § 702.106(b);
(iii) How the credit union will comply with
the mandatory and any discretionary supervisory actions imposed on it by the NCUA
Board under this subpart;
(iv) The types and levels of activities in
which the credit union will engage; and
(v) If reclassified to a lower category under
§ 702.102(b), the steps the credit union will
take to correct the unsafe or unsound practice(s) or condition(s);

(2) Include pro forma financial statements,
including any off-balance sheet items, covering a minimum of the next two years; and
(3) Contain such other information as the
NCUA Board has required.
(d) Criteria for approval of NWRP. The
NCUA Board shall not accept a NWRP plan
unless it—
(1) Complies with paragraph (c) of this section;
(2) Is based on realistic assumptions, and is
likely to succeed in restoring the credit
union’s net worth; and
(3) Would not unreasonably increase the
credit union’s exposure to risk (including
credit risk, interest-rate risk, and other
types of risk).
(e) Consideration of regulatory capital. To
minimize possible long-term losses to the
NCUSIF while the credit union takes steps
to become adequately capitalized, the NCUA
Board shall, in evaluating an NWRP under
this section, consider the type and amount of
any form of regulatory capital which may
become established by NCUA regulation, or
authorized by state law and recognized by
NCUA, which the credit union holds, but
which is not included in its net worth.
(f) Review of NWRP—(1) Notice of decision.
Within 45 calendar days after receiving an
NWRP under this part, the NCUA Board
shall notify the credit union in writing
whether the NWRP has been approved, and
shall provide reasons for its decision in the
event of disapproval.
(2) Delayed decision. If no decision is made
within the time prescribed in paragraph (f)(1)
of this section, the NWRP is deemed approved.
(3) Consultation with state officials. In the
case of an NWRP submitted by a federally
insured state-chartered credit union (whether an original, new, additional, revised or
amended NWRP), the NCUA Board shall,
when evaluating the NWRP, seek and consider the views of the appropriate state official, and provide prompt notice of its decision to the appropriate state official.
(g) NWRP not approved—(1) Submission of revised NWRP. If an NWRP is rejected by the
NCUA Board, the credit union shall submit a
revised NWRP within 30 calendar days of receiving notice of disapproval, unless it is notified in writing by the NCUA Board that the
revised NWRP is to be filed within a different period.
(2) Notice of decision on revised NWRP. Within 30 calendar days after receiving a revised
NWRP under paragraph (g)(1) of this section,
the NCUA Board shall notify the credit
union in writing whether the revised NWRP
is approved. The Board may extend the time
within which notice of its decision shall be
provided.

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§ 702.201

12 CFR Ch. VII (1–1–18 Edition)

(3) Disapproval of reclassified credit union’s
NWRP. A credit union which has been classified significantly undercapitalized shall remain so classified pending NCUA Board approval of a new or revised NWRP.
(4) Submission of multiple unapproved
NWRPs. The submission of more than two
NWRPs that are not approved is considered
an unsafe and unsound condition and may
subject the credit union to administrative
enforcement actions under section 206 of the
FCUA, 12 U.S.C. 1786 and 1790d.
(h) Amendment of NWRP. A credit union
that is operating under an approved NWRP
may, after prior written notice to, and approval by the NCUA Board, amend its NWRP
to reflect a change in circumstance. Pending
approval of an amended NWRP, the credit
union shall implement the NWRP as originally approved.
(i) Publication. An NWRP need not be published to be enforceable because publication
would be contrary to the public interest.
(j) Termination of NWRP. For purposes of
this part, an NWRP terminates once the
credit union is classified as adequately capitalized and remains so for four consecutive
quarters. For example, if a credit union with
an active NWRP attains the classification as
adequately classified on December 31, 2015
this would be quarter one and the fourth
consecutive quarter would end September 30,
2016.

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§ 702.112 Reserves.
Each credit union shall establish and
maintain such reserves as may be required
by the FCUA, by state law, by regulation, or
in special cases by the NCUA Board or appropriate state official.
§ 702.113 Full and fair disclosure of financial condition.
(a) Full and fair disclosure defined. ‘‘Full
and fair disclosure’’ is the level of disclosure
which a prudent person would provide to a
member of a credit union, to NCUA, or, at
the discretion of the board of directors, to
creditors to fairly inform them of the financial condition and the results of operations
of the credit union.
(b) Full and fair disclosure implemented. The
financial statements of a credit union shall
provide for full and fair disclosure of all assets, liabilities, and members’ equity, including such valuation (allowance) accounts as
may be necessary to present fairly the financial condition; and all income and expenses
necessary to present fairly the statement of
income for the reporting period.
(c) Declaration of officials. The Statement of
Financial Condition, when presented to
members, to creditors or to NCUA, shall contain a dual declaration by the treasurer and
the chief executive officer, or in the latter’s
absence, by any other officer designated by
the board of directors of the reporting credit

union to make such declaration, that the report and related financial statements are
true and correct to the best of their knowledge and belief and present fairly the financial condition and the statement of income
for the period covered.
(d) Charges for loan and lease losses. Full
and fair disclosure demands that a credit
union properly address charges for loan
losses as follows:
(1) Charges for loan and lease losses shall
be made timely and in accordance with
GAAP;
(2) The ALLL must be maintained in accordance with GAAP; and
(3) At a minimum, adjustments to the
ALLL shall be made prior to the distribution
or posting of any dividend to the accounts of
members.
§ 702.114

Payment of dividends.

(a) Restriction on dividends. Dividends shall
be available only from net worth, net of any
special reserves established under § 702.112, if
any.
(b) Payment of dividends and interest refunds. The board of directors must not pay a
dividend or interest refund that will cause
the credit union’s capital classification to
fall below adequately capitalized under this
subpart unless the appropriate Regional Director and, if state-chartered, the appropriate state official, have given prior written
approval (in an NWRP or otherwise). The request for written approval must include the
plan for eliminating any negative retained
earnings balance.

Subpart B—Mandatory and
Discretionary Supervisory Actions
EFFECTIVE DATE NOTE: At 80 FR 66706, Oct.
29, 2015, subpart B to part 702 was revised, effective Jan. 1, 2019. For the convenience of
the user, the revised text is set forth at the
end of this subpart.

§ 702.201 Prompt corrective action for
‘‘adequately
capitalized’’
credit
unions.
(a) Earnings retention. Beginning the
effective date of classification as ‘‘adequately capitalized’’ or lower, a federally-insured credit union must increase
the dollar amount of its net worth
quarterly either in the current quarter,
or on average over the current and
three preceding quarters, by an amount
equivalent to at least 1/10th percent
(0.1%) of its total assets, and must
quarterly transfer that amount (or

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National Credit Union Administration

§ 702.202

more by choice) from undivided earnings to its regular reserve account
until it is ‘‘well capitalized.’’
(b) Decrease in retention. Upon written
application received no later than 14
days before the quarter end, the NCUA
Board, on a case-by-case basis, may
permit a credit union to increase the
dollar amount of its net worth and
quarterly transfer an amount that is
less than the amount required under
paragraph (a) of this section, to the extent the NCUA Board determines that
such lesser amount—
(1) Is necessary to avoid a significant
redemption of shares; and
(2) Would further the purpose of this
part.
(c) Decrease by FISCU. The NCUA
Board shall consult and seek to work
cooperatively with the appropriate
State official before permitting a federally-insured
State-chartered
credit
union to decrease its earnings retention under paragraph (b) of this section.
(d) Periodic review. A decision under
paragraph (b) of this section to permit
a credit union to decrease its earnings
retention is subject to quarterly review
and revocation except when the credit
union is operating under an approved
net worth restoration plan that provides for decreasing its earnings retention as provided under paragraph (b).
[67 FR 71091, Nov. 29, 2002]

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§ 702.202 Prompt corrective action for
‘‘undercapitalized’’ credit unions.
(a) Mandatory supervisory actions by
credit union. A federally-insured credit
union which is ‘‘undercapitalized’’
must—
(1) Earnings retention. Increase net
worth and transfer earnings to its regular reserve account in accordance
with § 702.201;
(2) Submit net worth restoration plan.
Submit a net worth restoration plan
pursuant to § 702.206, provided however,
that a credit union in this category
having a net worth ratio of less than
five percent (5%) which fails to timely
submit such a plan, or which materially fails to implement an approved
plan, is classified ‘‘significantly undercapitalized’’
pursuant
to
§ 702.102(a)(4)(ii) above;

(3) Restrict increase in assets. Beginning the effective date of classification
as ‘‘undercapitalized’’ or lower, not
permit the credit union’s assets to increase beyond its total assets (per
§ 702.2(j)) for the preceding quarter unless—
(i) Plan approved. The NCUA Board
has approved a net worth restoration
plan which provides for an increase in
total assets and—
(A) The assets of the credit union are
increasing consistent with the approved plan; and
(B) The credit union is implementing
steps to increase the net worth ratio
consistent with the approved plan;
(ii) Plan not approved. The NCUA
Board has not approved a net worth
restoration plan and total assets of the
credit union are increasing because of
increases since quarter-end in balances
of:
(A) Total accounts receivable and accrued income on loans and investments; or
(B) Total cash and cash equivalents;
or
(C) Total loans outstanding, not to
exceed the sum of total assets (per
§ 702.2(j)) plus the quarter-end balance
of unused commitments to lend and unused lines of credit provided however
that a credit union which increases a
balance as permitted under paragraphs
(A), (B) or (C) cannot offer rates on
shares in excess of prevailing rates on
shares in its relevant market area, and
cannot open new branches;
(4) Restrict member business loans. Beginning the effective date of classification as ‘‘undercapitalized’’ or lower,
not increase the total dollar amount of
member business loans (defined as
loans outstanding and unused commitments to lend) as of the preceding
quarter-end unless it is granted an exception under 12 U.S.C. 1757a(b).
(b) ‘‘Second tier’’ discretionary supervisory actions by NCUA. Subject to the
applicable procedures for issuing, reviewing and enforcing directives set
forth in subpart L of part 747 of this
chapter, the NCUA Board may, by directive, take one or more of the following actions with respect to an
‘‘undercapitalized’’ credit union having

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§ 702.203

12 CFR Ch. VII (1–1–18 Edition)

a net worth ratio of less than five percent (5%), or a director, officer or employee of such a credit union, if it determines that those actions are necessary to carry out the purpose of this
part:
(1) Requiring prior approval for acquisitions, branching, new lines of business.
Prohibit a credit union from, directly
or indirectly, acquiring any interest in
any business entity or financial institution, establishing or acquiring any
additional branch office, or engaging in
any new line of business, unless the
NCUA Board has approved the credit
union’s net worth restoration plan, the
credit union is implementing its plan,
and the NCUA Board determines that
the proposed action is consistent with
and will further the objectives of that
plan;
(2) Restricting transactions with and
ownership of CUSO. Restrict the credit
union’s transactions with a CUSO, or
require the credit union to reduce or
divest its ownership interest in a
CUSO;
(3) Restricting dividends paid. Restrict
the dividend rates the credit union
pays on shares to the prevailing rates
paid on comparable accounts and maturities in the relevant market area, as
determined by the NCUA Board, except
that dividend rates already declared on
shares acquired before imposing a restriction under this paragraph may not
be retroactively restricted;
(4) Prohibiting or reducing asset
growth. Prohibit any growth in the
credit union’s assets or in a category of
assets, or require the credit union to
reduce its assets or a category of assets;
(5) Alter, reduce or terminate activity.
Require the credit union or its CUSO
to alter, reduce, or terminate any activity which poses excessive risk to the
credit union;
(6) Prohibiting nonmember deposits.
Prohibit the credit union from accepting all or certain nonmember deposits;
(7) Dismissing director or senior executive officer. Require the credit union to
dismiss from office any director or senior executive officer, provided however,
that a dismissal under this clause shall
not be construed to be a formal administrative action for removal under 12
U.S.C. 1786(g);

(8) Employing qualified senior executive
officer. Require the credit union to employ qualified senior executive officers
(who, if the NCUA Board so specifies,
shall be subject to its approval); and
(9) Other action to carry out prompt
corrective action. Restrict or require
such other action by the credit union
as the NCUA Board determines will
carry out the purpose of this part better than any of the actions prescribed
in paragraphs (b)(1) through (8) of this
section.
(c) ‘‘First tier’’ application of discretionary supervisory actions. An ‘‘undercapitalized’’ credit union having a net
worth ratio of five percent (5%) or
more, or which is classified ‘‘undercapitalized’’ by reason of failing to satisfy a risk-based net worth requirement under § 702.105 or § 702.106, is subject to the discretionary supervisory
actions in paragraph (b) of this section
if it fails to comply with any mandatory supervisory action in paragraph
(a) of this section or fails to timely implement an approved net worth restoration plan under § 702.206, including
meeting its prescribed steps to increase
its net worth ratio.
[65 FR 8584, Feb. 18, 2000, as amended at 67
FR 71092, Nov. 29, 2002]

§ 702.203 Prompt corrective action for
‘‘significantly
undercapitalized’’
credit unions.
(a) Mandatory supervisory actions by
credit union. A federally-insured credit
union which is ‘‘significantly undercapitalized’’ must—
(1) Earnings retention. Increase net
worth and transfer earnings to its regular reserve account in accordance
with § 702.201;
(2) Submit net worth restoration plan.
Submit a net worth restoration plan
pursuant to § 702.206;
(3) Restrict increase in assets. Not permit the credit union’s total assets to
increase
except
as
provided
in
§ 702.202(a)(3) and
(4) Restrict member business loans. Not
increase the total dollar amount of
member business loans (defined as
loans outstanding and unused commitments to lend) as provided in
§ 702.202(a)(4).

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§ 702.204

(b) Discretionary supervisory actions by
NCUA. Subject to the applicable procedures for issuing, reviewing and enforcing directives set forth in subpart L of
part 747 of this chapter, the NCUA
Board may, by directive, take one or
more of the following actions with respect to any ‘‘significantly undercapitalized’’ credit union, or a director,
officer or employee of such credit
union, if it determines that those actions are necessary to carry out the
purpose of this part:
(1) Requiring prior approval for acquisitions, branching, new lines of business.
Prohibit a credit union from, directly
or indirectly, acquiring any interest in
any business entity or financial institution, establishing or acquiring any
additional branch office, or engaging in
any new line of business, except as provided in § 702.202(b)(1);
(2) Restricting transactions with and
ownership of CUSO. Restrict the credit
union’s transactions with a CUSO, or
require the credit union to divest or reduce its ownership interest in a CUSO;
(3) Restricting dividends paid. Restrict
the dividend rates that the credit
union pays on shares as provided in
§ 702.202(b)(3);
(4) Prohibiting or reducing asset
growth. Prohibit any growth in the
credit union’s assets or in a category of
assets, or require the credit union to
reduce assets or a category of assets;
(5) Alter, reduce or terminate activity.
Require the credit union or its CUSO(s)
to alter, reduce, or terminate any activity which poses excessive risk to the
credit union;
(6) Prohibiting nonmember deposits.
Prohibit the credit union from accepting all or certain nonmember deposits;
(7) New election of directors. Order a
new election of the credit union’s board
of directors;
(8) Dismissing director or senior executive officer. Require the credit union to
dismiss from office any director or senior executive officer, provided however,
that a dismissal under this clause shall
not be construed to be a formal administrative action for removal under 12
U.S.C. 1786(g);
(9) Employing qualified senior executive
officer. Require the credit union to employ qualified senior executive officers

(who, if the NCUA Board so specifies,
shall be subject to its approval);
(10) Restricting senior executive officers’
compensation. Except with the prior
written approval of the NCUA Board,
limit compensation to any senior executive officer to that officer’s average
rate of compensation (excluding bonuses and profit sharing) during the
four (4) calendar quarters preceding the
effective date of classification of the
credit union as ‘‘significantly undercapitalized,’’ and prohibit payment of a
bonus or profit share to such officer;
(11) Other actions to carry out prompt
corrective action. Restrict or require
such other action by the credit union
as the NCUA Board determines will
carry out the purpose of this part better than any of the actions prescribed
in paragraphs (b)(1) through (10) of this
section; and
(12) Requiring merger. Require the
credit union to merge with another financial institution if one or more
grounds exist for placing the credit
union into conservatorship pursuant to
12 U.S.C. 1786(h)(1)(F), or into liquidation
pursuant
to
12
U.S.C.
1787(a)(3)(A)(i).
(c) Discretionary conservatorship or liquidation if no prospect of becoming ‘‘adequately capitalized.’’ Notwithstanding
any other actions required or permitted to be taken under this section,
when a credit union becomes ‘‘significantly undercapitalized’’ (including by
reclassification under section 702.102(b)
above), the NCUA Board may place the
credit union into conservatorship pursuant to 12 U.S.C. 1786(h)(1)(F), or into
liquidation pursuant to 12 U.S.C.
1787(a)(3)(A)(i), provided that the credit
union has no reasonable prospect of becoming ‘‘adequately capitalized.’’
[65 FR 8584, Feb. 18, 2000, as amended at 67
FR 71092, Nov. 29, 2002]

§ 702.204 Prompt corrective action for
‘‘critically undercapitalized’’ credit
unions
(a) Mandatory supervisory actions by
credit union. A federally-insured credit
union which is ‘‘critically undercapitalized’’ must—
(1) Earnings retention. Increase net
worth and transfer earnings to its regular reserve account in accordance
with § 702.201;

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§ 702.204

12 CFR Ch. VII (1–1–18 Edition)

(2) Submit net worth restoration plan.
Submit a net worth restoration plan
pursuant to § 702.206;
(3) Restrict increase in assets. Not permit the credit union’s total assets to
increase
except
as
provided
in
§ 702.202(a)(3); and
(4) Restrict member business loans. Not
increase the total dollar amount of
member business loans (defined as
loans outstanding and unused commitments to lend) as provided in
§ 702.202(a)(4).
(b) Discretionary supervisory actions by
NCUA. Subject to the applicable procedures for issuing, reviewing and enforcing directives set forth in subpart L of
part 747 of this chapter, the NCUA
Board may, by directive, take one or
more of the following actions with respect to any ‘‘critically undercapitalized’’ credit union, or a director, officer
or employee of such credit union, if it
determines that those actions are necessary to carry out the purpose of this
part:
(1) Requiring prior approval for acquisitions, branching, new lines of business.
Prohibit a credit union from, directly
or indirectly, acquiring any interest in
any business entity or financial institution, establishing or acquiring any
additional branch office, or engaging in
any new line of business, except as provided by § 702.202(b)(1);
(2) Restricting transactions with and
ownership of CUSO. Restrict the credit
union’s transactions with a CUSO, or
require the credit union to divest or reduce its ownership interest in a CUSO;
(3) Restricting dividends paid. Restrict
the dividend rates that the credit
union pays on shares as provided in
§ 702.202(b)(3);
(4) Prohibiting or reducing asset
growth. Prohibit any growth in the
credit union’s assets or in a category of
assets, or require the credit union to
reduce assets or a category of assets;
(5) Alter, reduce or terminate activity.
Require the credit union or its CUSO(s)
to alter, reduce, or terminate any activity which poses excessive risk to the
credit union;
(6) Prohibiting nonmember deposits.
Prohibit the credit union from accepting all or certain nonmember deposits;

(7) New election of directors. Order a
new election of the credit union’s board
of directors;
(8) Dismissing director or senior executive officer. Require the credit union to
dismiss from office any director or senior executive officer, provided however,
that a dismissal under this clause shall
not be construed to be a formal administrative action for removal under 12
U.S.C. 1786(g);
(9) Employing qualified senior executive
officer. Require the credit union to employ qualified senior executive officers
(who, if the NCUA Board so specifies,
shall be subject to its approval);
(10) Restricting senior executive officers’
compensation. Reduce or, with the prior
written approval of the NCUA Board,
limit compensation to any senior executive officer to that officer’s average
rate of compensation (excluding bonuses and profit sharing) during the
four (4) calendar quarters preceding the
effective date of classification of the
credit union as ‘‘critically undercapitalized,’’ and prohibit payment of a
bonus or profit share to such officer;
(11) Restrictions on payments on uninsured secondary capital. Beginning 60
days after the effective date of classification of a credit union as ‘‘critically
undercapitalized,’’ prohibit payments
of principal, dividends or interest on
the credit union’s uninsured secondary
capital accounts established after August 7, 2000, except that unpaid dividends or interest shall continue to accrue under the terms of the account to
the extent permitted by law;
(12) Requiring prior approval. Require
a ‘‘critically undercapitalized’’ credit
union to obtain the NCUA Board’s
prior written approval before doing any
of the following:
(i) Entering into any material transaction not within the scope of an approved net worth restoration plan (or
approved revised business plan under
subpart C of this part);
(ii) Extending credit for transactions
deemed highly leveraged by the NCUA
Board or, if State-chartered, by the appropriate State official;
(iii) Amending the credit union’s
charter or bylaws, except to the extent
necessary to comply with any law, regulation, or order;

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§ 702.204

(iv) Making any material change in
accounting methods; and
(v) Paying dividends or interest on
new share accounts at a rate exceeding
the prevailing rates of interest on insured deposits in its relevant market
area;
(13) Other action to carry out prompt
corrective action. Restrict or require
such other action by the credit union
as the NCUA Board determines will
carry out the purpose of this part better than any of the actions prescribed
in paragraphs (b)(1) through (12) of this
section; and
(14) Requiring merger. Require the
credit union to merge with another financial institution if one or more
grounds exist for placing the credit
union into conservatorship pursuant to
12 U.S.C. 1786(h)(1)(F), or into liquidation
pursuant
to
12
U.S.C.
1787(a)(3)(A)(i).
(c) Mandatory conservatorship, liquidation or action in lieu thereof—(1) Action
within 90 days. Notwithstanding any
other actions required or permitted to
be taken under this section (and regardless of a credit union’s prospect of
becoming ‘‘adequately capitalized’’),
the NCUA Board must, within 90 calendar days after the effective date of
classification of a credit union as
‘‘critically undercapitalized’’—
(i) Conservatorship. Place the credit
union into conservatorship pursuant to
12 U.S.C. 1786(h)(1)(G); or
(ii) Liquidation. Liquidate the credit
union
pursuant
to
12
U.S.C.
1787(a)(3)(A)(ii); or
(iii) Other corrective action. Take
other corrective action, in lieu of conservatorship or liquidation, to better
achieve the purpose of this part, provided that the NCUA Board documents
why such action in lieu of conservatorship or liquidation would do so, provided however, that other corrective action may consist, in whole or in part,
of complying with the quarterly timetable of steps and meeting the quarterly net worth targets prescribed in
an approved net worth restoration
plan.
(2) Renewal of other corrective action.
A determination by the NCUA Board to
take other corrective action in lieu of
conservatorship or liquidation under
paragraph (c)(1)(iii) of this section

shall expire after an effective period
ending no later than 180 calendar days
after the determination is made, and
the credit union shall be immediately
placed into conservatorship or liquidation under paragraphs (c)(1)(i) and (ii),
unless the NCUA Board makes a new
determination
under
paragraph
(c)(1)(iii) of this section before the end
of the effective period of the prior determination;
(3) Mandatory liquidation after 18
months—(i) Generally. Notwithstanding
paragraphs (c)(1) and (2) of this section,
the NCUA Board must place a credit
union into liquidation if it remains
‘‘critically undercapitalized’’ for a full
calendar quarter, on a monthly average
basis, following a period of 18 months
from the effective date the credit union
was first classified ‘‘critically undercapitalized.’’
(ii) Exception. Notwithstanding paragraph (c)(3)(i) of this section, the NCUA
Board may continue to take other corrective action in lieu of liquidation if
it certifies that the credit union—
(A) Has been in substantial compliance with an approved net worth restoration plan requiring consistent improvement in net worth since the date
the net worth restoration plan was approved;
(B) Has positive net income or has an
upward trend in earnings that the
NCUA Board projects as sustainable;
and
(C) Is viable and not expected to fail.
(iii) Review of exception. The NCUA
Board shall, at least quarterly, review
the certification of an exception to liquidation under paragraph (c)(3)(ii) of
this section and shall either—
(A) Recertify the credit union if it
continues to satisfy the criteria of
paragraph (c)(3)(ii) of this section; or
(B) Promptly place the credit union
into liquidation, pursuant to 12 U.S.C.
1787(a)(3)(A)(ii), if it fails to satisfy the
criteria of paragraph (c)(3)(ii) of this
section.
(4) Nondelegation. The NCUA Board
may not delegate its authority under
paragraph (c) of this section, unless the
credit union has less than $5,000,000 in
total assets. A credit union shall have
a right of direct appeal to the NCUA
Board of any decision made by delegated authority under this section

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§ 702.205

12 CFR Ch. VII (1–1–18 Edition)

within ten (10) calendar days of the
date of that decision.
(d) Mandatory liquidation of insolvent
federal credit union. In lieu of paragraph
(c) of this section, a ‘‘critically undercapitalized’’ federal credit union that
has a net worth ratio of less than zero
percent (0%) may be placed into liquidation on grounds of insolvency pursuant to 12 U.S.C. 1787(a)(1)(A).
[65 FR 8584, Feb. 18, 2000, as amended at 67
FR 71092, Nov. 29, 2002; 75 FR 34620, June 18,
2010]

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§ 702.205 Consultation with State officials on proposed prompt corrective
action.
(a) Consultation on proposed conservatorship or liquidation. Before placing a federally-insured State-chartered
credit union into conservatorship (pursuant to 12 U.S.C. 1786(h)(1)(F) or (G))
or liquidation (pursuant to 12 U.S.C.
1787(a)(3)) as permitted or required
under subparts B or C of this part to facilitate prompt corrective action—
(1) The NCUA Board shall seek the
views of the appropriate State official
(as defined in § 702.2(b)), and give him
or her an opportunity to take the proposed action;
(2) The NCUA Board shall, upon timely request of the appropriate State official, promptly provide him or her with
a written statement of the reasons for
the proposed conservatorship or liquidation, and reasonable time to respond to that statement; and
(3) If the appropriate State official
makes a timely written response that
disagrees with the proposed conservatorship or liquidation and gives
reasons for that disagreement, the
NCUA Board shall not place the credit
union into conservatorship or liquidation unless it first considers the views
of the appropriate State official and
determines that—
(i) The NCUSIF faces a significant
risk of loss if the credit union is not
placed into conservatorship or liquidation; and
(ii) Conservatorship or liquidation is
necessary either to reduce the risk of
loss, or to reduce the expected loss, to
the NCUSIF with respect to the credit
union.

(b) Nondelegation. The NCUA Board
may not delegate any determination
under paragraph (a)(3) of this section.
(c) Consultation on proposed discretionary action. The NCUA Board shall
consult and seek to work cooperatively
with the appropriate State official before taking any discretionary supervisory
action
under
§§ 702.202(b),
702.203(b), 702.204(b), 702.304(b) and
702.305(b) with respect to a federally-insured State-chartered credit union;
shall provide prompt notice of its decision to the appropriate State official;
and shall allow the appropriate State
official to take the proposed action
independently or jointly with NCUA.
[65 FR 8584, Feb. 18, 2000, as amended at 67
FR 71092, Nov. 29, 2002; 75 FR 34620, June 18,
2010]

§ 702.206 Net worth restoration plans.
(a) Schedule for filing—(1) Generally. A
federally-insured credit union shall file
a written net worth restoration plan
(NWRP) with the appropriate Regional
Director and, if State-chartered, the
appropriate State official, within 45
calendar days of the effective date of
classification as either ‘‘undercapitalized,’’ ‘‘significantly undercapitalized’’
or ‘‘critically undercapitalized,’’ unless
the NCUA Board notifies the credit
union in writing that its NWRP is to be
filed within a different period.
(2) Exception. An otherwise ‘‘adequately capitalized’’ credit union that
is reclassified ‘‘undercapitalized’’ on
safety and soundness grounds under
§ 702.102(b) is not required to submit a
NWRP solely due to the reclassification, unless the NCUA Board notifies
the credit union that it must submit
an NWRP.
(3) Filing of additional plan. Notwithstanding paragraph (a)(1) of this section, a credit union that has already
submitted and is operating under a
NWRP approved under this section is
not required to submit an additional
NWRP due to a change in net worth
category (including by reclassification
under § 702.102(b)), unless the NCUA
Board notifies the credit union that it
must submit a new NWRP. A credit
union that is notified to submit a new
or revised NWRP shall file the NWRP
in writing with the appropriate Regional Director within 30 calendar days

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National Credit Union Administration

§ 702.206

of receiving such notice, unless the
NCUA Board notifies the credit union
in writing that the NWRP is to be filed
within a different period.
(4) Failure to timely file plan. When a
credit union fails to timely file an
NWRP pursuant to this paragraph, the
NCUA Board shall promptly notify the
credit union that it has failed to file an
NWRP and that it has 15 calendar days
from receipt of that notice within
which to file an NWRP.
(b) Assistance to small credit unions.
Upon timely request by a credit union
having total assets of less than $10 million (regardless how long it has been in
operation), the NCUA Board shall provide assistance in preparing an NWRP
required to be filed under paragraph (a)
of this section.
(c) Contents of NWRP. An NWRP
must—
(1) Specify—
(i) A quarterly timetable of steps the
credit union will take to increase its
net worth ratio so that it becomes
‘‘adequately capitalized’’ by the end of
the term of the NWRP, and to remain
so for four (4) consecutive calendar
quarters. If ‘‘complex,’’ the credit
union is subject to a risk-based net
worth requirement that may require a
net worth ratio higher than six percent
(6%) to become ‘‘adequately capitalized’’;
(ii) The projected amount of earnings
to be transferred to the regular reserve
account in each quarter of the term of
the
NWRP
as
required
under
§ 702.201(a), or as permitted under
§ 702.201(b);
(iii) How the credit union will comply
with the mandatory and any discretionary supervisory actions imposed on
it by the NCUA Board under this subpart;
(iv) The types and levels of activities
in which the credit union will engage;
and
(v) If reclassified to a lower category
under § 702.102(b), the steps the credit
union will take to correct the unsafe or
unsound practice(s) or condition(s);
(2) Include pro forma financial statements, including any off-balance sheet
items, covering a minimum of the next
two years; and
(3) Contain such other information as
the NCUA Board has required.

(d) Criteria for approval of NWRP. The
NCUA Board shall not accept a NWRP
plan unless it—
(1) Complies with paragraph (c) of
this section;
(2) Is based on realistic assumptions,
and is likely to succeed in restoring
the credit union’s net worth; and (3)
Would not unreasonably increase the
credit union’s exposure to risk (including credit risk, interest-rate risk, and
other types of risk).
(e) Consideration of regulatory capital.
To minimize possible long-term losses
to the NCUSIF while the credit union
takes steps to become ‘‘adequately capitalized,’’ the NCUA Board shall, in
evaluating an NWRP under this section, consider the type and amount of
any form of regulatory capital which
may become established by NCUA regulation, or authorized by State law and
recognized by NCUA, which the credit
union holds, but which is not included
in its net worth.
(f) Review of NWRP—(1) Notice of decision. Within 45 calendar days after receiving an NWRP under this part, the
NCUA Board shall notify the credit
union in writing whether the NWRP
has been approved, and shall provide
reasons for its decision in the event of
disapproval.
(2) Delayed decision. If no decision is
made within the time prescribed in
paragraph (f)(1) of this section, the
NWRP is deemed approved.
(3) Consultation with State officials. In
the case of an NWRP submitted by a
federally-insured State-chartered credit union (whether an original, new, additional, revised or amended NWRP),
the NCUA Board shall, when evaluating the NWRP, seek and consider the
views of the appropriate State official,
and provide prompt notice of its decision to the appropriate State official.
(g) NWRP not approved—(1) Submission
of revised NWRP. If an NWRP is rejected by the NCUA Board, the credit
union shall submit a revised NWRP
within 30 calendar days of receiving notice of disapproval, unless it is notified
in writing by the NCUA Board that the
revised NWRP is to be filed within a
different period.
(2) Notice of decision on revised NWRP.
Within 30 calendar days after receiving
a revised NWRP under paragraph (g)(1)

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Pt. 702, Subpt. B, Nt.

12 CFR Ch. VII (1–1–18 Edition)

of this section, the NCUA Board shall
notify the credit union in writing
whether the revised NWRP is approved.
The Board may extend the time within
which notice of its decision shall be
provided.
(3) Disapproval of reclassified credit
union’s NWRP. A credit union which
has been classified ‘‘significantly
undercapitalized’’
under
§ 702.102(a)(4)(ii) shall remain so classified pending NCUA Board approval of a
new or revised NWRP.
(h) Amendment of NWRP. A credit
union that is operating under an approved NWRP may, after prior written
notice to, and approval by the NCUA
Board, amend its NWRP to reflect a
change in circumstance. Pending approval of an amended NWRP, the credit
union shall implement the NWRP as
originally approved.
(i) Publication. An NWRP need not be
published to be enforceable because
publication would be contrary to the
public interest.
[65 FR 8584, Feb. 18, 2000, as amended at 67
FR 71092, Nov. 29, 2002]
EFFECTIVE DATE NOTE: At 80 FR 66706, Oct.
29, 2015, subpart B to part 702 was revised, effective Jan. 1, 2019. For the convenience of
the user, the revised text is set forth as follows:

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Subpart B—Alternative Prompt Corrective Action for New Credit
Unions
§ 702.201 Scope and definition.
(a) Scope. This subpart B applies in lieu of
subpart A of this part exclusively to credit
unions defined in paragraph (b) of this section as ‘‘new’’ pursuant to section 216(b)(2) of
the FCUA, 12 U.S.C. 1790d(b)(2).
(b) New credit union defined. A ‘‘new’’ credit
union for purposes of this subpart is a credit
union that both has been in operation for
less than ten (10) years and has total assets
of not more than $10 million. Once a credit
union reports total assets of more than $10
million on a Call Report, the credit union is
no longer new, even if its assets subsequently decline below $10 million.
(c) Effect of spin-offs. A credit union formed
as the result of a ‘‘spin-off’’ of a group from
the field of membership of an existing credit
union is deemed to be in operation since the
effective date of the spin-off. A credit union
whose total assets decline below $10 million
because a group within its field of membership has been spun-off is deemed ‘‘new’’ if it
has been in operation less than 10 years.

(d) Actions to evade prompt corrective action.
If the NCUA Board determines that a credit
union was formed, or was reduced in asset
size as a result of a spin-off, or was merged,
primarily to qualify as ‘‘new’’ under this
subpart, the credit union shall be deemed
subject to prompt corrective action under
subpart A of this part.
§ 702.202 Net worth categories for new credit unions.
(a) Net worth measures. For purposes of this
part, a new credit union must determine its
capital classification quarterly according to
its net worth ratio.
(b) Effective date of net worth classification
of new credit union. For purposes of subpart B
of this part, the effective date of a new credit
union’s classification within a capital category in paragraph (c) of this section shall be
determined as provided in § 702.101(c); and
written notice of a decline in net worth classification in paragraph (c) of this section
shall be given as required by § 702.101(c).
(c) Net worth categories. A credit union defined as ‘‘new’’ under this section shall be
classified—
(1) Well capitalized if it has a net worth
ratio of seven percent (7%) or greater;
(2) Adequately capitalized if it has a net
worth ratio of six percent (6%) or more but
less than seven percent (7%);
(3) Moderately capitalized if it has a net
worth ratio of three and one-half percent
(3.5%) or more but less than six percent (6%);
(4) Marginally capitalized if it has a net
worth ratio of two percent (2%) or more but
less than three and one-half percent (3.5%);
(5) Minimally capitalized if it has a net
worth ratio of zero percent (0%) or greater
but less than two percent (2%); and
(6) Uncapitalized if it has a net worth ratio
of less than zero percent (0%).

TABLE 1 TO § 702.202—CAPITAL CATEGORIES
FOR NEW CREDIT UNIONS
A new credit union’s capital classification is
Well Capitalized .................................
Adequately Capitalized ......................
Moderately Capitalized .......................
Marginally Capitalized ........................
Minimally Capitalized .........................
Uncapitalized ......................................

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7% or above.
6 to 7%.
3.5% to 5.99%.
2% to 3.49%.
0% to 1.99%.
Less than 0%.

(d) Reclassification based on supervisory criteria other than net worth. Subject to
§ 702.102(b), the NCUA Board may reclassify a
well capitalized, adequately capitalized or
moderately capitalized new credit union to
the next lower capital category (each of such
actions is hereinafter referred to generally
as ‘‘reclassification’’) in either of the circumstances prescribed in § 702.102(b).
(e) Consultation with state officials. The
NCUA Board shall consult and seek to work

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National Credit Union Administration

Pt. 702, Subpt. B, Nt.

cooperatively with the appropriate state official before reclassifying a federally insured
state-chartered credit union under paragraph
(d) of this section, and shall promptly notify
the appropriate state official of its decision
to reclassify.

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§ 702.203 Prompt corrective action for adequately capitalized new credit unions.
Beginning on the effective date of classification, an adequately capitalized new credit union must increase the dollar amount of
its net worth by the amount reflected in its
approved initial or revised business plan in
accordance with § 702.204(a)(2), or in the absence of such a plan, in accordance with
§ 702.106 until it is well capitalized.
§ 702.204 Prompt corrective action for moderately capitalized, marginally capitalized, or minimally capitalized new credit
unions.
(a) Mandatory supervisory actions by new
credit union. Beginning on the date of classification as moderately capitalized, marginally capitalized or minimally capitalized (including by reclassification under § 702.202(d)),
a new credit union must—
(1) Earnings retention. Increase the dollar
amount of its net worth by the amount reflected in its approved initial or revised business plan;
(2) Submit revised business plan. Submit a
revised business plan within the time provided by § 702.206 if the credit union either:
(i) Has not increased its net worth ratio
consistent with its then-present approved
business plan;
(ii) Has no then-present approved business
plan; or
(iii) Has failed to comply with paragraph
(a)(3) of this section; and
(3) Restrict member business loans. Not increase the total dollar amount of member
business loans (defined as loans outstanding
and unused commitments to lend) as of the
preceding quarter-end unless it is granted an
exception under 12 U.S.C. 1757a(b).
(b) Discretionary supervisory actions by
NCUA. Subject to the applicable procedures
set forth in subpart L of part 747 of this
chapter for issuing, reviewing and enforcing
directives, the NCUA Board may, by directive, take one or more of the actions prescribed in § 702.109(b) if the credit union’s net
worth ratio has not increased consistent
with its then-present business plan, or the
credit union has failed to undertake any
mandatory supervisory action prescribed in
paragraph (a) of this section.
(c) Discretionary conservatorship or liquidation. Notwithstanding any other actions required or permitted to be taken under this
section, the NCUA Board may place a new
credit union which is moderately capitalized,
marginally capitalized or minimally capitalized (including by reclassification under

§ 702.202(d)) into conservatorship pursuant to
12 U.S.C. 1786(h)(1)(F), or into liquidation
pursuant to 12 U.S.C. 1787(a)(3)(A)(i), provided that the credit union has no reasonable
prospect of becoming adequately capitalized.
§ 702.205 Prompt corrective action for
uncapitalized new credit unions.
(a) Mandatory supervisory actions by new
credit union. Beginning on the effective date
of classification as uncapitalized, a new credit union must—
(1) Earnings retention. Increase the dollar
amount of its net worth by the amount reflected in the credit union’s approved initial
or revised business plan;
(2) Submit revised business plan. Submit a
revised business plan within the time provided by § 702.206, providing for alternative
means of funding the credit union’s earnings
deficit, if the credit union either:
(i) Has not increased its net worth ratio
consistent with its then-present approved
business plan;
(ii) Has no then-present approved business
plan; or
(iii) Has failed to comply with paragraph
(a)(3) of this section; and
(3) Restrict member business loans. Not increase the total dollar amount of member
business loans as provided in § 702.204(a)(3).
(b) Discretionary supervisory actions by
NCUA. Subject to the procedures set forth in
subpart L of part 747 of this chapter for
issuing, reviewing and enforcing directives,
the NCUA Board may, by directive, take one
or more of the actions prescribed in
§ 702.109(b) if the credit union’s net worth
ratio has not increased consistent with its
then-present business plan, or the credit
union has failed to undertake any mandatory supervisory action prescribed in paragraph (a) of this section.
(c) Mandatory liquidation or conservatorship.
Notwithstanding any other actions required
or permitted to be taken under this section,
the NCUA Board—
(1) Plan not submitted. May place into liquidation
pursuant
to
12
U.S.C.
1787(a)(3)(A)(ii), or conservatorship pursuant
to 12 U.S.C. 1786(h)(1)(F), an uncapitalized
new credit union which fails to submit a revised business plan within the time provided
under paragraph (a)(2) of this section; or
(2) Plan rejected, approved, implemented. Except as provided in paragraph (c)(3) of this
section, must place into liquidation pursuant
to 12 U.S.C. 1787(a)(3)(A)(ii), or conservatorship pursuant to 12 U.S.C. 1786(h)(1)(F), an
uncapitalized new credit union that remains
uncapitalized one hundred twenty (120) calendar days after the later of:
(i) The effective date of classification as
uncapitalized; or
(ii) The last day of the calendar month following expiration of the time period provided in the credit union’s initial business

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plan (approved at the time its charter was
granted) to remain uncapitalized, regardless
whether a revised business plan was rejected,
approved or implemented.
(3) Exception. The NCUA Board may decline
to place a new credit union into liquidation
or conservatorship as provided in paragraph
(c)(2) of this section if the credit union documents to the NCUA Board why it is viable
and has a reasonable prospect of becoming
adequately capitalized.
(d) Mandatory liquidation of uncapitalized
federal credit union. In lieu of paragraph (c) of
this section, an uncapitalized federal credit
union may be placed into liquidation on
grounds of insolvency pursuant to 12 U.S.C.
1787(a)(1)(A).
§ 702.206 Revised business plans (RBP) for
new credit unions.
(a) Schedule for filing—(1) Generally. Except
as provided in paragraph (a)(2) of this section, a new credit union classified moderately capitalized or lower must file a written revised business plan (RBP) with the appropriate Regional Director and, if statechartered, with the appropriate state official, within 30 calendar days of either:
(i) The last of the calendar month following the end of the calendar quarter that
the credit union’s net worth ratio has not increased consistent with the-present approved
business plan;
(ii) The effective date of classification as
less than adequately capitalized if the credit
union has no then-present approved business
plan; or
(iii) The effective date of classification as
less than adequately capitalized if the credit
union has increased the total amount of
member business loans in violation of
§ 702.204(a)(3).
(2) Exception. The NCUA Board may notify
the credit union in writing that its RBP is to
be filed within a different period or that it is
not necessary to file an RBP.
(3) Failure to timely file plan. When a new
credit union fails to file an RBP as provided
under paragraphs (a)(1) or (a)(2) of this section, the NCUA Board shall promptly notify
the credit union that it has failed to file an
RBP and that it has 15 calendar days from
receipt of that notice within which to do so.
(b) Contents of revised business plan. A new
credit union’s RBP must, at a minimum—
(1) Address changes, since the new credit
union’s current business plan was approved,
in any of the business plan elements required
for charter approval under chapter 1, section
IV.D. of appendix B to part 701 of this chapter, or for state-chartered credit unions
under applicable state law;
(2) Establish a timetable of quarterly targets for net worth during each year in which
the RBP is in effect so that the credit union
becomes adequately capitalized by the time
it no longer qualifies as ‘‘new’’ per § 702.201;

(3) Specify the projected amount of earnings of net worth increases as provided under
§ 702.204(a)(1) or 702.205(a)(1);
(4) Explain how the new credit union will
comply with the mandatory and discretionary supervisory actions imposed on it by
the NCUA Board under this subpart;
(5) Specify the types and levels of activities in which the new credit union will engage;
(6) In the case of a new credit union reclassified to a lower category under § 702.202(d),
specify the steps the credit union will take
to correct the unsafe or unsound condition
or practice; and
(7) Include such other information as the
NCUA Board may require.
(c) Criteria for approval. The NCUA Board
shall not approve a new credit union’s RBP
unless it—
(1) Addresses the items enumerated in
paragraph (b) of this section;
(2) Is based on realistic assumptions, and is
likely to succeed in building the credit
union’s net worth; and
(3) Would not unreasonably increase the
credit union’s exposure to risk (including
credit risk, interest-rate risk, and other
types of risk).
(d) Consideration of regulatory capital. To
minimize possible long-term losses to the
NCUSIF while the credit union takes steps
to become adequately capitalized, the NCUA
Board shall, in evaluating an RBP under this
section, consider the type and amount of any
form of regulatory capital which may become established by NCUA regulation, or authorized by state law and recognized by
NCUA, which the credit union holds, but
which is not included in its net worth.
(e) Review of revised business plan—(1) Notice
of decision. Within 30 calendar days after receiving an RBP under this section, the NCUA
Board shall notify the credit union in writing whether its RBP is approved, and shall
provide reasons for its decision in the event
of disapproval. The NCUA Board may extend
the time within which notice of its decision
shall be provided.
(2) Delayed decision. If no decision is made
within the time prescribed in paragraph
(e)(1) of this section, the RBP is deemed approved.
(3) Consultation with state officials. When
evaluating an RBP submitted by a federally
insured state-chartered new credit union
(whether an original, new or additional
RBP), the NCUA Board shall seek and consider the views of the appropriate state official, and provide prompt notice of its decision to the appropriate state official.
(f) Plan not approved—(1) Submission of new
revised plan. If an RBP is rejected by the
NCUA Board, the new credit union shall submit a new RBP within 30 calendar days of receiving notice of disapproval of its initial
RBP, unless it is notified in writing by the

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§ 702.301

NCUA Board that the new RBP is to be filed
within a different period.
(2) Notice of decision on revised plan. Within
30 calendar days after receiving an RBP
under paragraph (f)(1) of this section, the
NCUA Board shall notify the credit union in
writing whether the new RBP is approved.
The Board may extend the time within
which notice of its decision shall be provided.
(3) Submission of multiple unapproved RBPs.
The submission of more than two RBPs that
are not approved is considered an unsafe and
unsound condition and may subject the credit union to administrative enforcement action pursuant to section 206 of the FCUA, 12
U.S.C. 1786 and 1790d.
(g) Amendment of plan. A credit union that
has filed an approved RBP may, after prior
written notice to and approval by the NCUA
Board, amend it to reflect a change in circumstance. Pending approval of an amended
RBP, the new credit union shall implement
its existing RBP as originally approved.
(h) Publication. An RBP need not be published to be enforceable because publication
would be contrary to the public interest.
§ 702.207 Incentives for new credit unions.
(a) Assistance in revising business plans.
Upon timely request by a credit union having total assets of less than $10 million (regardless how long it has been in operation),
the NCUA Board shall provide assistance in
preparing a revised business plan required to
be filed under § 702.206.
(b) Assistance. Management training and
other assistance to new credit unions will be
provided in accordance with policies approved by the NCUA Board.
(c) Small credit union program. A new credit
union is eligible to join and receive comprehensive benefits and assistance under
NCUA’s Small Credit Union Program.

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§ 702.208 Reserves.
Each new credit union shall establish and
maintain such reserves as may be required
by the FCUA, by state law, by regulation, or
in special cases by the NCUA Board or appropriate state official.
§ 702.209 Full and fair disclosure of financial condition.
(a) Full and fair disclosure defined. ‘‘Full
and fair disclosure’’ is the level of disclosure
which a prudent person would provide to a
member of a new credit union, to NCUA, or,
at the discretion of the board of directors, to
creditors to fairly inform them of the financial condition and the results of operations
of the credit union.
(b) Full and fair disclosure implemented. The
financial statements of a new credit union
shall provide for full and fair disclosure of
all assets, liabilities, and members’ equity,
including such valuation (allowance) ac-

counts as may be necessary to present fairly
the financial condition; and all income and
expenses necessary to present fairly the
statement of income for the reporting period.
(c) Declaration of officials. The Statement of
Financial Condition, when presented to
members, to creditors or to NCUA, shall contain a dual declaration by the treasurer and
the chief executive officer, or in the latter’s
absence, by any other officer designated by
the board of directors of the reporting credit
union to make such declaration, that the report and related financial statements are
true and correct to the best of their knowledge and belief and present fairly the financial condition and the statement of income
for the period covered.
(d) Charges for loan and lease losses. Full
and fair disclosure demands that a new credit union properly address charges for loan
losses as follows:
(1) Charges for loan and lease losses shall
be made timely in accordance with generally
accepted accounting principles (GAAP);
(2) The ALLL must be maintained in accordance with GAAP; and
(3) At a minimum, adjustments to the
ALLL shall be made prior to the distribution
or posting of any dividend to the accounts of
members.
§ 702.210 Payment of dividends.
(a) Restriction on dividends. Dividends shall
be available only from net worth, net of any
special reserves established under § 702.208, if
any.
(b) Payment of dividends and interest refunds. The board of directors may not pay a
dividend or interest refund that will cause
the credit union’s capital classification to
fall below adequately capitalized under subpart A of this part unless the appropriate regional director and, if state-chartered, the
appropriate state official, have given prior
written approval (in an RBP or otherwise).
The request for written approval must include the plan for eliminating any negative
retained earnings balance.

Subpart C—Alternative Prompt
Corrective Action for New
Credit Unions
EFFECTIVE DATE NOTE: At 80 FR 66722, Oct.
29, 2015, subpart C to part 702 was removed,
effective Jan. 1, 2019.

§ 702.301 Scope and definition.
(a) Scope. This subpart C applies in
lieu of subpart B of this part exclusively to credit unions defined in paragraph (b) of this section as ‘‘new’’ pursuant to 12 U.S.C. 1790d(b)(2).

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§ 702.302

12 CFR Ch. VII (1–1–18 Edition)

(b) New credit union defined. A ‘‘new’’
credit union for purposes of this subpart is a federally-insured credit union
that both has been in operation for less
than ten (10) years and has total assets
of not more than $10 million. A credit
union which exceeds $10 million in
total assets may become ‘‘new’’ if its
total assets subsequently decline below
$10 million while it is still in operation
for less than 10 years.
(c) Effect of spin-offs. A credit union
formed as the result of a ‘‘spin-off’’ of
a group from the field of membership
of an existing credit union is deemed to
be in operation since the effective date
of the ‘‘spin-off.’’ A credit union whose
total assets decline below $10 million
because a group within its field of
membership has been ‘‘spun-off’’ is
deemed ‘‘new’’ if it has been in operation less than 10 years.
(d) Actions to evade prompt corrective
action. If the NCUA Board determines
that a credit union was formed, or was
reduced in asset size as a result of a
‘‘spin-off,’’ or was merged, primarily to
qualify as ‘‘new’’ under this subpart,
the credit union shall be deemed subject to prompt corrective action under
subpart A of this part.

(d) Reclassification based on supervisory criteria other than net worth. Subject to § 702.102(b) and (c), the NCUA
Board may reclassify a ‘‘well capital-

ized,’’ ‘‘adequately capitalized’’ or
‘‘moderately capitalized’’ new credit

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ER29NO02.071

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§ 702.302 Net worth categories for new
credit unions.
(a) Net worth measures. For purposes
of this part, a new credit union must
determine its net worth category classification quarterly according to its
net worth ratio as defined in § 702.2(g).

(b) Effective date of net worth classification of new credit union. For purposes of subpart C, the effective date of
a new federally-insured credit union’s
classification within a net worth category in paragraph (c) of this section
shall be determined as provided in
§ 702.101(b); and written notice to the
NCUA Board of a decline in net worth
category in paragraph (c) of this section shall be given as required by section 702.101(c).
(c) Net worth categories. A federallyinsured credit union defined as ‘‘new’’
under this section shall be classified
(Table 6)—
(1) Well capitalized if it has a net
worth ratio of seven percent (7%) or
greater;
(2) Adequately capitalized if it has a
net worth ratio of six percent (6%) or
more but less than seven percent (7%);
(3) Moderately capitalized if it has a
net worth ratio of three and one-half
percent (3.5%) or more but less than six
percent (6%);
(4) Marginally capitalized if it has a
net worth ratio of two percent (2%) or
more but less than three and one-half
percent (3.5%);
(5) Minimally capitalized if it has a net
worth ratio of zero percent (0%) or
greater but less than two percent (2%);
and
(6) Uncapitalized if it has a net worth
ratio of less than zero percent (0%)
(e.g., a deficit in retained earnings).

National Credit Union Administration

§ 702.305

union to the next lower net worth category (each of such actions is hereinafter referred to generally as ‘‘reclassification’’) in either of the circumstances prescribed in § 702.102(b).
(e) Consultation with State officials.
The NCUA Board shall consult and
seek to work cooperatively with the
appropriate State official before reclassifying a federally-insured State-chartered credit union under paragraph (d)
of this section, and shall promptly notify the appropriate State official of its
decision to reclassify.
[65 FR 8584, Feb. 18, 2000, as amended at 65
FR 44974, July 20, 2000; 65 FR 55439, Sept. 14,
2000; 67 FR 71092, Nov. 29, 2002]

§ 702.303 Prompt corrective action for
‘‘adequately capitalized’’ new credit
unions.
Beginning on the effective date of
classification, an ‘‘adequately capitalized’’ new credit union must increase
the dollar amount of its net worth by
the amount reflected in its approved
initial or revised business plan in accordance with § 702.304(a)(2), or in the
absence of such a plan, in accordance
with § 702.201, and quarterly transfer
that amount from undivided earnings
to its regular reserve account, until it
is ‘‘well capitalized.’’

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[67 FR 71092, Nov. 29, 2002]

§ 702.304 Prompt corrective action for
‘‘moderately capitalized,’’ ‘‘marginally capitalized’’ or ‘‘minimally capitalized’’ new credit unions.
(a) Mandatory supervisory actions by
new credit union. Beginning on the date
of classification as ‘‘moderately capitalized,’’ ‘‘marginally capitalized’’ or
minimally capitalized’’ (including by
reclassification under § 702.302(d)), a
new credit union must—
(1) Earnings retention. Increase the
dollar amount of its net worth by the
amount reflected in its approved initial
or revised business plan and quarterly
transfer that amount from undivided
earnings to its regular reserve account;
(2) Submit revised business plan. Submit a revised business plan within the
time provided by § 702.306 if the credit
union either:
(i) Has not increased its net worth
ratio consistent with its then-present
approved business plan;

(ii) Has no then-present approved
business plan; or
(iii) Has failed to comply with paragraph (a)(3) of this section; and
(3) Restrict member business loans. Not
increase the total dollar amount of
member business loans (defined as
loans outstanding and unused commitments to lend) as of the preceding
quarter-end unless it is granted an exception under 12 U.S.C. 1757a(b).
(b) Discretionary supervisory actions by
NCUA. Subject to the applicable procedures set forth in subpart L of part 747
of this chapter for issuing, reviewing
and enforcing directives, the NCUA
Board may, by directive, take one or
more of the actions prescribed in
§ 702.204(b) if the credit union’s net
worth ratio has not increased consistent with its then-present business
plan, or the credit union has failed to
undertake any mandatory supervisory
action prescribed in paragraph (a) of
this section.
(c) Discretionary conservatorship or liquidation. Notwithstanding any other
actions required or permitted to be
taken under this section, the NCUA
Board may place a new credit union
which is ‘‘moderately capitalized,’’
‘‘marginally capitalized’’ or ‘‘minimally capitalized’’ (including by reclassification under § 702.302(d)) into
conservatorship pursuant to 12 U.S.C.
1786(h)(1)(F), or into liquidation pursuant to 12 U.S.C. 1787(a)(3)(A)(i), provided that the credit union has no reasonable prospect of becoming ‘‘adequately capitalized.’’
[65 FR 8584, Feb. 18, 2000, as amended at 67
FR 71093, Nov. 29, 2002]

§ 702.305 Prompt corrective action for
‘‘uncapitalized’’ new credit unions.
(a) Mandatory supervisory actions by
new credit union. Beginning on the effective date of classification as
‘‘uncapitalized,’’ a new credit union
must—
(1) Earnings retention. Increase the
dollar amount of its net worth by the
amount reflected in the credit union’s
approved initial or revised business
plan;
(2) Submit revised business plan. Submit a revised business plan within the
time provided by § 702.306, providing for
alternative means of funding the credit

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§ 702.306

12 CFR Ch. VII (1–1–18 Edition)

union’s earnings deficit, if the credit
union either:
(i) Has not increased its net worth
ratio consistent with its then-present
approved business plan;
(ii) Has no then-present approved
business plan; or
(iii) Has failed to comply with paragraph (a)(3) of this section; and
(3) Restrict member business loans. Not
increase the total dollar amount of
member business loans as provided in
§ 702.304(a)(3).
(b) Discretionary supervisory actions by
NCUA. Subject to the procedures set
forth in subpart L of part 747 of this
chapter for issuing, reviewing and enforcing directives, the NCUA Board
may, by directive, take one or more of
the actions prescribed in § 702.204(b) if
the credit union’s net worth ratio has
not increased consistent with its thenpresent business plan, or the credit
union has failed to undertake any mandatory supervisory action prescribed in
paragraph (a) of this section.
(c) Mandatory liquidation or conservatorship.
Notwithstanding
any
other actions required or permitted to
be taken under this section, the NCUA
Board—
(1) Plan not submitted. May place into
liquidation pursuant to 12 U.S.C.
1787(a)(3)(A)(ii), or conservatorship pursuant to 12 U.S.C. 1786(h)(1)(F), an
‘‘uncapitalized’’ new credit union
which fails to submit a revised business
plan within the time provided under
paragraph (a)(2) of this section; or
(2) Plan rejected, approved, implemented. Except as provided in paragraph (c)(3) of this section, must place
into liquidation pursuant to 12 U.S.C.
1787(a)(3)(A)(ii), or conservatorship pursuant to 12 U.S.C. 1786(h)(1)(F), an
‘‘uncapitalized’’ new credit union that
remains ‘‘uncapitalized’’ one hundred
twenty (120) calendar days after the
later of:
(i) The effective date of classification
as ‘‘uncapitalized’’; or
(ii) The last day of the calendar
month following expiration of the time
period provided in the credit union’s
initial business plan (approved at the
time its charter was granted) to remain
‘‘uncapitalized,’’
regardless
whether a revised business plan was rejected, approved or implemented.

(3) Exception. The NCUA Board may
decline to place a new credit union into
liquidation or conservatorship as provided in paragraph (c)(2) of this section
if the credit union documents to the
NCUA Board why it is viable and has a
reasonable prospect of becoming ‘‘adequately capitalized.’’
(d)
Mandatory
liquidation
of
‘‘uncapitalized’’ federal credit union. In
lieu of paragraph (c) of this section, an
‘‘uncapitalized’’ federal credit union
may be placed into liquidation on
grounds of insolvency pursuant to 12
U.S.C. 1787(a)(1)(A).
[65 FR 8584, Feb. 18, 2000, as amended at 67
FR 71093, Nov. 29, 2002]

§ 702.306 Revised business plans for
new credit unions.
(a) Schedule for filing—(1) Generally.
Except as provided in paragraph (a)(2)
of this section, a new credit union classified ‘‘moderately capitalized’’ or
lower must file a written revised business plan (RBP) with the appropriate
Regional Director and, if State-chartered, with the appropriate State official, within 30 calendar days of either:
(i) The last of the calendar month
following the end of the calendar quarter that the credit union’s net worth
ratio has not increased consistent with
its the-present approved business plan;
(ii) The effective date of classification as less than ‘‘adequately capitalized’’ if the credit union has no thenpresent approved business plan; or
(iii) The effective date of classification as less than ‘‘adequately capitalized’’ if the credit union has increased
the total amount of member business
loans in violation of § 702.304(a)(3).
(2) Exception. The NCUA Board may
notify the credit union in writing that
its RBP is to be filed within a different
period or that it is not necessary to file
an RBP.
(3) Failure to timely file plan. When a
new credit union fails to file an RBP as
provided under paragraphs (a)(1) or
(a)(2) of this section, the NCUA Board
shall promptly notify the credit union
that it has failed to file an RBP and
that it has 15 calendar days from receipt of that notice within which to do
so.

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National Credit Union Administration

§ 702.306

(b) Contents of revised business plan. A
new credit union’s RBP must, at a minimum—
(1) Address changes, since the new
credit union’s current business plan
was approved, in any of the business
plan elements required for charter approval under Chapter 1, section IV.D. of
NCUA’s Chartering and Field of Membership Manual (IRPS 99–1), 63 FR 71998,
72019 (Dec. 30, 1998), or its successor(s),
or for State-chartered credit unions
under applicable State law;
(2) Establish a timetable of quarterly
targets for net worth during each year
in which the RBP is in effect so that
the credit union becomes ‘‘adequately
capitalized’’ by the time it no longer
qualifies as ‘‘new’’ per § 702.301(b);
(3) Specify the projected amount of
earnings to be transferred quarterly to
its regular reserve as provided under
§ 702.304(a)(1) or 702.305(a)(1);
(4) Explain how the new credit union
will comply with the mandatory and
discretionary supervisory actions imposed on it by the NCUA Board under
this subpart;
(5) Specify the types and levels of activities in which the new credit union
will engage;
(6) In the case of a new credit union
reclassified to a lower category under
§ 702.302(d), specify the steps the credit
union will take to correct the unsafe or
unsound condition or practice; and
(7) Include such other information as
the NCUA Board may require.
(c) Criteria for approval. The NCUA
Board shall not approve a new credit
union’s RBP unless it—
(1) Addresses the items enumerated
in paragraph (b) of this section;
(2) Is based on realistic assumptions,
and is likely to succeed in building the
credit union’s net worth; and
(3) Would not unreasonably increase
the credit union’s exposure to risk (including credit risk, interest-rate risk,
and other types of risk).
(d) Consideration of regulatory capital.
To minimize possible long-term losses
to the NCUSIF while the credit union
takes steps to become ‘‘adequately capitalized,’’ the NCUA Board shall, in
evaluating an RBP under this section,
consider the type and amount of any
form of regulatory capital which may
become established by NCUA regula-

tion, or authorized by State law and
recognized by NCUA, which the credit
union holds, but which is not included
in its net worth.
(e) Review of revised business plan—(1)
Notice of decision. Within 30 calendar
days after receiving an RBP under this
section, the NCUA Board shall notify
the credit union in writing whether its
RBP is approved, and shall provide reasons for its decision in the event of disapproval. The NCUA Board may extend
the time within which notice of its decision shall be provided.
(2) Delayed decision. If no decision is
made within the time prescribed in
paragraph (e)(1) of this section, the
RBP is deemed approved.
(3) Consultation with State officials.
When evaluating an RBP submitted by
a federally-insured State-chartered
new credit union (whether an original,
new or additional RBP), the NCUA
Board shall seek and consider the views
of the appropriate State official, and
provide prompt notice of its decision to
the appropriate State official.
(f) Plan not approved—(1) Submission
of new revised plan. If an RBP is rejected by the NCUA Board, the new
credit union shall submit a new RBP
within 30 calendar days of receiving notice of disapproval of its initial RBP,
unless it is notified in writing by the
NCUA Board that the new RBP is to be
filed within a different period.
(2) Notice of decision on revised plan.
Within 30 calendar days after receiving
an RBP under paragraph (f)(1) of this
section, the NCUA Board shall notify
the credit union in writing whether the
new RBP is approved. The Board may
extend the time within which notice of
its decision shall be provided.
(g) Amendment of plan. A credit union
that has filed an approved RBP may,
after prior written notice to and approval by the NCUA Board, amend it to
reflect a change in circumstance. Pending approval of an amended RBP, the
new credit union shall implement its
existing RBP as originally approved.
(h) Publication. An RBP need not be
published to be enforceable because
publication would be contrary to the
public interest.
[65 FR 8584, Feb. 18, 2000, as amended at 67
FR 71093, Nov. 29, 2002]

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§ 702.307

12 CFR Ch. VII (1–1–18 Edition)

§ 702.307 Incentives for new credit
unions.
(a) Assistance in revising business
plans. Upon timely request by a credit
union having total assets of less than
$10 million (regardless how long it has
been in operation), the NCUA Board
shall provide assistance in preparing a
revised business plan required to be
filed under § 702.306.
(b) Assistance. Management training
and other assistance to new credit
unions will be provided in accordance
with policies approved by the NCUA
Board.
(c) Small credit union program. A new
credit union is eligible to join and receive comprehensive benefits and assistance under NCUA’s Small Credit
Union Program.

Subpart D—Reserves

[65 FR 8584, Feb. 18, 2000, as amended at 67
FR 71093, Nov. 29, 2002]

§ 702.402 Full and fair disclosure of financial condition.

EFFECTIVE DATE NOTE: At 80 FR 66722, Oct.
29, 2015, subpart D to part 702 was removed,
effective Jan. 1, 2019.

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to fall below ‘‘adequately capitalized’’
under subparts B or C of this part; or
(2) If the charge will cause the net
worth classification to fall below
‘‘adequately capitalized,’’ the appropriate Regional Director and, if Statechartered, the appropriate State official, have given written approval (in an
NWRP or otherwise) for the charge.
(d) Transfers to regular reserve. The
transfer of earnings to a federally-insured credit union’s regular reserve account when required under subparts B
or C of this part must occur after
charges for loan or other losses are addressed as provided in paragraph (c) of
this section and § 702.402(d), but before
payment of any dividends to members.

§ 702.401 Reserves.
(a) Special reserve. Each federally-insured credit union shall establish and
maintain such reserves as may be required by the FCUA, by state law, by
regulation, or in special cases by the
NCUA Board or appropriate State official.
(b) Regular reserve. Each federally-insured credit union shall establish and
maintain a regular reserve account for
the purpose of absorbing losses that exceed undivided earnings and other appropriations of undivided earnings,
subject to paragraph (c) of this section.
Earnings required to be transferred annually to a credit union’s regular reserve under subparts B or C of this part
shall be held in this account.
(c) Charges to regular reserve after depleting undivided earnings. The board of
directors of a federally-insured credit
union may authorize losses to be
charged to the regular reserve after
first depleting the balance of the undivided earnings account and other reserves, provided that the authorization
states the amount and provides an explanation of the need for the charge,
and either—
(1) The charge will not cause the
credit union’s net worth classification

(a) Full and fair disclosure defined.
‘‘Full and fair disclosure’’ is the level
of disclosure which a prudent person
would provide to a member of a federally-insured credit union, to NCUA, or,
at the discretion of the board of directors, to creditors to fairly inform them
of the financial condition and the results of operations of the credit union.
(b) Full and fair disclosure implemented. The financial statements of a
federally-insured credit union shall
provide for full and fair disclosure of
all assets, liabilities, and members’ equity, including such valuation (allowance) accounts as may be necessary to
present fairly the financial condition;
and all income and expenses necessary
to present fairly the statement of income for the reporting period.
(c) Declaration of officials. The Statement of Financial Condition, when presented to members, to creditors or to
the NCUA, shall contain a dual declaration by the treasurer and the chief
executive officer, or in the latter’s absence, by any other officer designated
by the board of directors of the reporting credit union to make such declaration, that the report and related financial statements are true and correct to
the best of their knowledge and belief
and present fairly the financial condition and the statement of income for
the period covered.

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National Credit Union Administration

§ 702.502

(d) Charges for loan losses. Full and
fair disclosure demands that a credit
union properly address charges for loan
losses as follows:
(1) Charges for loan losses shall be
made in accordance with generally accepted accounting principles (GAAP);
(2) The allowance for loan and lease
losses (ALL) established for loans must
fairly present the probable losses for
all categories of loans and the proper
valuation of loans. The valuation allowance must encompass specifically
identified loans, as well as estimated
losses inherent in the loan portfolio,
such as loans and pools of loans for
which losses have been incurred but are
not identifiable on a specific loan-byloan basis;
(3) Adjustments to the valuation
ALL will be recorded in the expense account ‘‘Provision for Loan and Lease
Losses’’;
(4) The maintenance of an ALL shall
not affect the requirement to transfer
earnings to a credit union’s regular reserve when required under subparts B
or C of this part; and
(5) At a minimum, adjustments to
the ALL shall be made prior to the distribution or posting of any dividend to
the accounts of members.

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§ 702.403

Payment of dividends.

(a) Restriction on dividends. Dividends
shall be available only from undivided
earnings, if any.
(b) Payment of dividends if undivided
earnings depleted. The board of directors of a ‘‘well capitalized’’ federallyinsured credit union that has depleted
the balance of its undivided earnings
account may authorize a transfer of
funds from the credit union’s regular
reserve account to undivided earnings
to pay dividends, provided that either—
(1) The payment of dividends will not
cause the credit union’s net worth classification to fall below ‘‘adequately
capitalized’’ under subpart B or C of
this part; or
(2) If the payment of dividends will
cause the net worth classification to
fall below ‘‘adequately capitalized,’’
the appropriate Regional Director and,
if State-chartered, the appropriate
State official, have given prior written

approval (in an NWRP or otherwise) to
pay a dividend.
[65 FR 8584, Feb. 18, 2000, as amended at 67
FR 71093, Nov. 29, 2002]

Subpart E—Capital Planning and
Stress Testing
SOURCE: 79 FR 24315, Apr. 30, 2014, unless
otherwise noted.
EFFECTIVE DATE NOTE: At 80 FR 66722, Oct.
29, 2015, subpart E to part 702 was redesignated as subpart C, effective Jan. 1, 2019.

§ 702.501 Authority, purpose, and reservation of authority.
(a) Authority. This subpart is issued
by the National Credit Union Administration (NCUA).
(b) Purpose. This subpart requires
covered credit unions to develop and
maintain capital plans and describes
stress testing requirements and actions
on covered credit union capital plans.
(c) Reservation of authority. Notwithstanding any other provisions of this
subpart, NCUA may modify some or all
of the requirements of this subpart.
Any exercise of authority under this
section by NCUA will be in writing and
will consider the financial condition,
size, complexity, risk profile, scope of
operations, and level of capital of the
covered credit union, in addition to
any other relevant factors. Nothing in
this subpart limits the authority of
NCUA under any other provision of law
or regulation to take supervisory or
enforcement action, including action
to address unsafe and unsound practices or conditions, or violations of law
or regulation.
§ 702.502

Definitions.

For purposes of this subpart—
Adverse scenario means a scenario
that is more adverse than that associated with the baseline scenario.
Baseline scenario means a scenario
that reflects the consensus views of the
economic and financial outlook.
Capital plan means a written presentation of a covered credit union’s capital planning strategies and capital
adequacy process that includes the
mandatory elements set forth in this
subpart.

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§ 702.503

12 CFR Ch. VII (1–1–18 Edition)

Capital planning process means development of a capital policy and formulation of a capital plan that conforms
to this part.
Covered credit union means a federally
insured credit union whose assets are
$10 billion or more. A credit union that
crosses the asset threshold as of March
31 of a given calendar year is subject to
the capital planning and stress testing
requirements of this subpart in the following calendar year.
Planning horizon means the period of
3 years over which capital planning
projections extend.
Pre-provision net revenue means the
sum of net interest income and non-interest income, less expenses, before adjusting for loss provisions.
Provision for loan and lease losses
means the provision for loan and lease
losses as reported by the covered credit
union on its Call Report.
Reverse stress test means a test that
defines severely unfavorable outcomes
and then identifies events or scenarios
that lead to these outcomes. Examples
of severely unfavorable outcomes are
breaching regulatory capital, failing to
meet obligations, or being unable to
continue independent operations.
Scenarios are those sets of conditions
that affect the U.S. economy or the financial condition of a covered credit
union that serve as the basis for stress
testing, including, but not limited to,
NCUA-established baseline, adverse,
and severely adverse scenarios.
Sensitivity testing means testing the
relationship between specific variables,
parameters, and inputs and their impacts on analytical results.
Severely adverse scenario means a scenario that overall is more severe than
that associated with the adverse scenario.
Stress test means the process to assess
the potential impact of expected and
stressed economic conditions on the
consolidated earnings, losses, and capital of a covered credit union over the
planning horizon, taking into account
the current state of the covered credit
union and the covered credit union’s
risks, exposures, strategies, and activities.
Stress test capital means net worth
(less assistance provided under Section
208 of the Federal Credit Union Act,

subordinated debt included in net
worth, and NCUSIF deposit) under
stress test scenarios.
Stress test capital ratio means a covered credit union’s stress test capital
divided by its total consolidated assets
less NCUSIF deposit.
[79 FR 24315, Apr. 30, 2014, as amended at 80
FR 48012, Aug. 11, 2015]

§ 702.503

Capital policy.

(a) General requirements. The extent
and sophistication of a covered credit
union’s governance over its capital
planning and analysis process must
align with the extent and sophistication of that process. The process must
be consistent with the financial condition, size, complexity, risk profile,
scope of operations, and level of capital
of the covered credit union. The ultimate responsibility for governance
over a covered credit union’s capital
planning and analysis process rests
with the credit union’s board of directors. Senior management must establish a comprehensive, integrated, and
effective process that fits into the
broader risk management of the credit
union. Senior management responsible
for capital planning and analysis must
provide regular reports on capital planning and analysis to the credit union’s
board of directors (or a designated
committee of the board).
(b) Mandatory elements. A covered
credit union’s board of directors (or a
designated committee of the board)
must review and approve a capital policy, along with procedures to implement it. The capital policy must:
(1) State goals and limits for capital
levels and risk exposure.
(2) Establish requirements for reviewing and reporting capital levels and
breaches of capital limits, with contingency
plans
for
remedying
any
breaches.
(3) State the governance over the
capital analysis process, including all
the activities that contribute to the
analysis;
(4) Specify capital analysis roles and
responsibilities,
including
controls
over external resources used for any
part of capital analysis (such as vendors and data providers);

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§ 702.504

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(5) Specify the internal controls that
govern capital planning, including review by internal audit, control of
changes in capital planning procedures,
and required documentation;
(6) Describe the frequency with which
capital analyses will be conducted;
(7) State how capital analysis results
are used and by whom; and
(8) Be reviewed at least annually and
updated as necessary to ensure that it
remains current with changes in market conditions, credit union products
and strategies, credit union risk exposures and activities, the credit union’s
established risk appetite, and industry
practices.
§ 702.504 Capital planning.
(a) Annual capital planning. (1) A covered credit union must develop and
maintain a capital plan. It must submit this plan and its capital policy to
NCUA by May 31 each year, or such
later date as directed by NCUA. The
plan must be based on the credit
union’s financial data as of December
31 of the preceding calendar year, or
such other date as directed by NCUA.
NCUA will assess whether the capital
planning and analysis process is sufficiently robust in determining whether
to accept a credit union’s capital plan.
(2) A covered credit union’s board of
directors (or a designated committee of
the board) must at least annually, and
prior to the submission of the capital
plan under paragraph (a)(1) of this section:
(i) Review the credit union’s process
for assessing capital adequacy;
(ii) Ensure that any deficiencies in
the credit union’s process for assessing
capital adequacy are appropriately
remedied; and
(iii) Approve the credit union’s capital plan.
(b) Mandatory elements. A capital plan
must contain at least the following elements:
(1) A quarterly assessment of the expected sources and levels of stress test
capital over the planning horizon that
reflects the covered credit union’s financial state, size, complexity, risk
profile, scope of operations, and existing level of capital, assuming both expected and unfavorable conditions, including:

(i) Estimates of projected revenues,
losses, reserves, and pro forma capital
levels, over each quarter of the planning horizon under expected and unfavorable conditions; and
(ii) A detailed description of the credit union’s process for assessing capital
adequacy;
(2) A discussion of how the credit
union will, under expected and unfavorable conditions, maintain stress test
capital commensurate with all of its
risks, including reputational, strategic,
legal, and compliance risks;
(3) A discussion of how the credit
union will, under expected and unfavorable conditions, maintain ready access
to funding, meet its obligations to all
creditors and other counterparties, and
continue to serve as an intermediary
for its members;
(4) If the credit union conducts its
own stress test under § 702.506(c), a discussion of how the credit union will
maintain a stress test capital ratio of 5
percent or more under baseline, adverse, and severely adverse conditions
in each quarter of the 9-quarter horizon;
(5) A discussion of any expected
changes to the credit union’s business
plan that are likely to have a material
impact on the credit union’s capital
adequacy and liquidity; and
(6) A program to:
(i) Conduct sensitivity testing to
analyze the effect on the credit union’s
stress test capital of changes in variables, parameters, and inputs used by
the credit union in preparing its capital plan;
(ii) Conduct reverse stress testing to
identify events and circumstances that
cause severely unfavorable outcomes
for the credit union; and
(iii) Analyze the impact of credit risk
and interest rate risk to capital under
unfavorable economic conditions, both
separately and in combination with
each other.
[79 FR 24315, Apr. 30, 2014, as amended at 80
FR 48012, Aug. 11, 2015; 81 FR 7198, Feb. 11,
2016]
EFFECTIVE DATE NOTE: At 80 FR 66722, Oct.
29, 2015, § 702.504 was amended in paragraph
(b)(4) by removing the citation ‘‘§ 702.506(c)’’
and adding in its place ‘‘§ 702.306(c)’’, effective Jan. 1, 2019.

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§ 702.505

12 CFR Ch. VII (1–1–18 Edition)

§ 702.505 NCUA action on capital
plans.
(a) Timing. NCUA will notify the covered credit union of the acceptance or
rejection of its capital plan by August
31 of the year in which the credit union
submitted its plan.
(b) Grounds for rejection of capital
plan. NCUA may reject a capital plan if
it determines that:
(1) The covered credit union has material unresolved supervisory issues associated with its capital planning process;
(2) The capital analysis underlying
the covered credit union’s capital plan,
or the covered credit union’s methodologies for reviewing the robustness
of its capital adequacy, are not reasonable or appropriate;
(3) Data utilized for the capital analysis is insufficiently detailed to capture the risks of the covered credit
union, or the data lacks integrity;
(4) The plan does not meet all of the
requirements of § 702.504;
(5) Unacceptable weakness in the capital plan or policy, the capital planning
analysis, or any critical system or
process supporting capital analysis;
(6) The covered credit union’s capital
planning process constitutes an unsafe
or unsound practice, or would violate
any law, regulation, NCUA order, directive, or any condition imposed by,
or written agreement with, NCUA. In
determining whether a capital plan
would constitute an unsafe or unsound
practice, NCUA considers whether the
covered credit union is and would remain in sound financial condition after
giving effect to the capital plan.
(c) Notification in writing. NCUA will
notify the credit union in writing of
the reasons for a decision to reject a
capital plan.
(d) Resubmission of a capital plan. If
NCUA rejects a credit union’s capital
plan, the credit union must update and
resubmit an acceptable capital plan to
NCUA by November 30 of the year in
which the credit union submitted its
plan. The resubmitted capital plan
must, at a minimum, address:
(1) NCUA-noted deficiencies in the
credit union’s original capital plan or
policy; and
(2) Remediation plans for unresolved
supervisory issues contributing to the

rejection of the credit union’s original
capital plan.
(e) Supervisory actions. Any covered
credit union operating without a capital plan accepted by NCUA may be
subject to supervisory actions on the
part of NCUA.
(f) Consultation on proposed action. Before taking any action under this section on the capital plan of a federally
insured, state-chartered credit union,
NCUA will consult and work cooperatively with the appropriate State official.
[79 FR 24315, Apr. 30, 2014, as amended at 80
FR 48012, Aug. 11, 2015]
EFFECTIVE DATE NOTE: At 80 FR 66722, Oct.
29, 2015, § 702.505 was amended in paragraph
(b)(4) by removing the citation ‘‘§ 702.504’’
and adding in its place ‘‘§ 702.304’’, effective
Jan. 1, 2019.

§ 702.506 Annual supervisory stress
testing.
(a) General requirements. The supervisory stress tests consist of baseline,
adverse, and severely adverse scenarios, which NCUA will provide by
February 28 of each year. The tests will
be based on the credit union’s financial
data as of December 31 of the preceding
calendar year, or such other date as directed by NCUA. The tests will take
into account all relevant exposures and
activities of a credit union to evaluate
its ability to absorb losses in specified
scenarios over a 9-quarter horizon. The
minimum stress test capital ratio is 5
percent.
(b) NCUA-run tests. Except as provided in paragraph (c) of this section,
NCUA will conduct the tests described
in this section.
(c) Credit union-run tests under NCUA
supervision. After NCUA has completed
three consecutive supervisory stress
tests of a covered credit union, the covered credit union may, with NCUA approval, conduct the tests described in
this subpart. A covered credit union
must submit its request to NCUA to
conduct its own stress test by November 30 for the following annual cycle.
NCUA will approve or decline the credit union’s request by December 31 of
the year in which the credit union submitted its request. NCUA reserves the
right to conduct the tests described in
this section on any covered credit

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National Credit Union Administration

Pt. 702, App. A

union at any time. Where both NCUA
and a covered credit union have conducted the tests, the results of NCUA’s
tests will determine whether the covered credit union has met the requirements of this subpart.
(d) Potential impact on capital. In conducting stress tests under this subpart,
NCUA or the covered credit union will
estimate the following for each scenario during each quarter of the stress
test horizon:
(1) Losses, pre-provision net revenues, loan and lease loss provisions,
and net income; and
(2) The potential impact on the stress
test capital ratio, incorporating the effects of any capital action over the 9quarter stress test horizon and maintenance of an allowance for loan losses
appropriate
for
credit
exposures
throughout the horizon. NCUA or the
covered credit union will conduct the
stress tests without assuming any risk
mitigation actions on the part of the
covered credit union, except those existing and identified as part of the covered credit union’s balance sheet, or
off-balance sheet positions, such as
asset sales or derivatives positions, on
the date of the stress test.
(e) Information collection. Upon request, the covered credit union must
provide NCUA with any relevant qualitative or quantitative information requested by NCUA pertinent to the
stress tests under this subpart.
(f) Stress test results. NCUA will provide each covered credit union with the
results of the stress tests by August 31
of the year in which it conducted the
tests. A credit union conducting its
own stress tests must incorporate the
test results in its capital plan.
(g) Supervisory actions. If NCUA-run
stress tests show that a covered credit
union does not have the ability to
maintain a stress test capital ratio of 5
percent or more under expected and
stressed conditions in each quarter of
the 9-quarter horizon, the credit union
must provide NCUA, by November 30 of
the calendar year in which NCUA conducted the tests, a stress test capital
enhancement plan showing how it will
meet that target. If credit union-run
stress tests show that a covered credit
union does not have the ability to
maintain a stress test capital ratio of 5

percent or more under expected and
stressed conditions in each quarter of
the 9-quarter horizon, the credit union
must incorporate a stress test capital
enhancement plan into its capital plan.
Any affected credit union operating
without a stress test capital enhancement plan accepted by NCUA may be
subject to supervisory actions.
(h) Consultation on proposed action.
Before taking any action under this
section against a federally insured,
state-chartered credit union, NCUA
will consult and work cooperatively
with the appropriate State official.
[79 FR 24315, Apr. 30, 2014, as amended at 80
FR 48012, Aug. 11, 2015]

APPENDIX A TO PART 702—GROSS-UP
APPROACH, AND LOOK-THROUGH APPROACHES

Instead of using the risk weights assigned
in § 702.104(c)(2) a credit union may determine the risk weight of certain investment
funds, and the risk weight of a non-subordinated or subordinated tranche of any investment as follows:
(a) Gross-up approach—(1) Applicability. Section 702.104(c)(3)(iii)(A) of this part provides
that, a credit union may use the gross-up approach in this appendix to determine the
risk weight of the carrying value of non-subordinated or subordinated tranches of any
investment.
(2) Calculation. To use the gross-up approach, a credit union must calculate the
following four inputs:
(i) Pro rata share, which is the par value of
the credit union’s exposure as a percent of
the par value of the tranche in which the
securitization exposure resides;
(ii) Enhanced amount, which is the par
value of tranches that are more senior to the
tranche in which the credit union’s
securitization resides;
(iii) Exposure amount, which is the amortized cost for investments classified as heldto-maturity and available-for-sale, and the
fair value for trading securities; and
(iv) Risk weight, which is the weighted-average risk weight of underlying exposures of
the securitization as calculated under this
appendix.
(3) Credit equivalent amount. The ‘‘credit
equivalent amount’’ of a securitization exposure under this part equals the sum of:
(i) The exposure amount of the credit
union’s exposure; and
(ii) The pro rata share multiplied by the
enhanced amount, each calculated in accordance with paragraph (a)(2) of this appendix.
(4) Risk-weighted assets. To calculate riskweighted assets for a securitization exposure

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Pt. 703

12 CFR Ch. VII (1–1–18 Edition)

under the gross-up approach, a credit union
must apply the risk weight required under
paragraph (a)(2) of this appendix to the credit equivalent amount calculated in paragraph (a)(3) of this appendix.
(5) Securitization exposure defined. For purposes
of
this
this
paragraph
(a),
‘‘securitization exposure’’ means:
(i) A credit exposure that arises from a
securitization; or
(ii) An exposure that directly or indirectly
references a securitization exposure described in paragraph (a)(5)(i) of this appendix.
(6) Securitization defined. For purposes of
this paragraph (a), ‘‘securitization’’ means a
transaction in which:
(i) The credit risk associated with the underlying exposures has been separated into
at least two tranches reflecting different levels of seniority;
(ii) Performance of the securitization exposures depends upon the performance of the
underlying exposures; and
(iii) All or substantially all of the underlying exposures are financial exposures (such
as loans, receivables, asset-backed securities, mortgage-backed securities, or other
debt securities).
(b) Look-through approaches.—(1) Applicability. Section 702.104(c)(3)(iii)(B) provides
that, a credit union may use one of the lookthrough approaches in this appendix to determine the risk weight of the exposure
amount of any investment fund, or the holding of separate account insurance.
(2) Full look-through approach. (i) General. A
credit union that is able to calculate a riskweighted asset amount for its proportional
ownership share of each exposure held by the
investment fund may set the risk-weighted
asset amount of the credit union’s exposure
to the fund equal to the product of:
(A) The aggregate risk-weighted asset
amounts of the exposures held by the fund as
if they were held directly by the credit
union; and
(B) The credit union’s proportional ownership share of the fund.
(ii) Holding report. To calculate the riskweighted amount under paragraph (b)(2)(i) of
this appendix, a credit union should:
(A) Use the most recently issued investment fund holding report; and
(B) Use an investment fund holding report
that reflects holding that are not older than
6-months from the quarter-end effective date
(as defined in § 702.101(c)(1).
(3) Simple modified look-through approach.
Under the simple modified look-through approach, the risk-weighted asset amount for a
credit union’s exposure to an investment
fund equals the exposure amount multiplied
by the highest risk weight that applies to
any exposure the fund is permitted to hold
under the prospectus, partnership agreement, or similar agreement that defines the

fund’s permissible investments (excluding
derivative contracts that are used for hedging rather than speculative purposes and
that do not constitute a material portion of
the fund’s exposures).
(4) Alternative modified look-through approach. Under the alternative modified lookthrough approach, a credit union may assign
the credit union’s exposure amount to an investment fund on a pro rata basis to different risk weight categories under subpart
A of this part based on the investment limits
in the fund’s prospectus, partnership agreement, or similar contract that defines the
fund’s permissible investments. The riskweighted asset amount for the credit union’s
exposure to the investment fund equals the
sum of each portion of the exposure amount
assigned to an exposure type multiplied by
the applicable risk weight under subpart A of
this part. If the sum of the investment limits
for all exposure types within the fund exceeds 100 percent, the credit union must assume that the fund invests to the maximum
extent permitted under its investment limits
in the exposure type with the highest applicable risk weight under subpart A of this
part and continues to make investments in
order of the exposure type with the next
highest applicable risk weight under subpart
A of this part until the maximum total investment level is reached. If more than one
exposure type applies to an exposure, the
credit union must use the highest applicable
risk weight. A credit union may exclude derivative contracts held by the fund that are
used for hedging rather than for speculative
purposes and do not constitute a material
portion of the fund’s exposures.
EFFECTIVE DATE NOTE: At 80 FR 66722, Oct.
29, 2015, appendix A to part 702 was added, effective Jan. 1, 2019.

PART 703—INVESTMENT AND
DEPOSIT ACTIVITIES
Subpart A—General Investment and
Deposit Activities
Sec.
703.1 Purpose and scope.
703.2 Definitions.
703.3 Investment policies.
703.4 Recordkeeping and documentation requirements.
703.5 Discretionary control over investments and investment advisers.
703.6 Credit analysis.
703.7 Notice of non-compliant investments.
703.8 Broker-dealers.
703.9 Safekeeping of investments.
703.10 Monitoring non-security investments.
703.11 Valuing securities.
703.12 Monitoring securities.
703.13 Permissible investment activities.

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