704.4—Board responsibilities.
(a) General.
A corporate credit union's board of directors must approve comprehensive written strategic plans and policies, review them annually, and provide them upon request to the auditors, supervisory committee, and NCUA.
(b) Policies.
A corporate credit union's policies must be commensurate with the scope and complexity of the corporate credit union.
(c) Other requirements.
The board of directors of a corporate credit union must ensure:
(1)
Senior managers have an in-depth, working knowledge of their direct areas of responsibility and are capable of identifying, hiring, and retaining qualified staff;
(2)
Qualified personnel are employed or under contract for all line support and audit areas, and designated back-up personnel or resources with adequate cross-training are in place;
(3)
GAAP is followed, except where law or regulation has provided for a departure from GAAP;
(4)
Accurate balance sheets, income statements, and internal risk assessments (e.g., risk management measures of liquidity, market, and credit risk associated with current activities) are produced timely in accordance with §§ 704.6, 704.8, and 704.9 ;
(5)
Systems are audited periodically in accordance with industry-established standards;
(6)
Financial performance is evaluated to ensure that the objectives of the corporate credit union and the responsibilities of management are met; and
(7)
Planning addresses the retention of external consultants, as appropriate, to review the adequacy of technical, human, and financial resources dedicated to support major risk areas.
Code of Federal Regulations
[62 FR 12938, Mar. 19, 1997, as amended at 67 FR 65654, Oct. 25, 2002]
Code of Federal Regulations
§ 704.4
, Nt.
Code of Federal Regulations
Effective Date Notes:
1. At 75 FR 64836, Oct. 20, 2010, § 704.4 was redesignated to 704.13, effective Jan. 18, 2011.
2. At 75 FR 64836, Oct. 20, 2010, § 704.4 was added, effective Oct. 20, 2011. For the convenience of the user, the added text is set forth as follows:
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§ 704.4
Prompt corrective action.
(a) Purpose. The principal purpose of this section is to define, for corporate credit unions that are not adequately capitalized, the capital measures and capital levels that are used for determining appropriate supervisory actions. This section establishes procedures for submission and review of capital restoration plans and for issuance and review of capital directives, orders, and other supervisory directives.
(b) Scope. This section applies to corporate credit unions, including officers, directors, and employees.
(1) This section does not limit the authority of NCUA in any way to take supervisory actions to address unsafe or unsound practices, deficient capital levels, violations of law, unsafe or unsound conditions, or other practices. The NCUA may take action under this section independently of, in conjunction with, or in addition to any other enforcement action available to the NCUA, including issuance of cease and desist orders, approval or denial of applications or notices, assessment of civil money penalties, or any other actions authorized by law.
(2) Unless permitted by the NCUA or otherwise required by law, no corporate credit union may state in any advertisement or promotional material its capital category under this part or that the NCUA has assigned the corporate credit union to a particular category.
(3) Any group of credit unions applying for a new corporate credit union charter will submit, as part of the charter application, a detailed draft plan for soliciting contributed capital and building retained earnings. The draft plan will include specific levels of contributed capital and retained earnings and the anticipated timeframes for achieving those levels. The Board will review the draft plan and modify it as necessary. If the Board approves the plan, the Board will include any necessary waivers of this section or part.
(c) Notice of capital category. (1) Effective date of determination of capital category. A corporate credit union will be deemed to be within a given capital category as of the most recent date:
(i) A 5310 Financial Report is required to be filed with the NCUA;
(ii) A final NCUA report of examination is delivered to the corporate credit union; or
(iii) Written notice is provided by the NCUA to the corporate credit union that its capital category has changed as provided in paragraphs (c)(2) or (d)(3) of this section.
(2) Adjustments to reported capital levels and category—
(i) Notice of adjustment by corporate credit union. A corporate credit union must provide the NCUA with written notice that an adjustment to the corporate credit union's capital category may have occurred no later than 15 calendar days following the date that any material event has occurred that would cause the corporate credit union to be placed in a lower capital category from the category assigned to the corporate credit union for purposes of this section on the basis of the corporate credit union's most recent call report or report of examination.
(ii) Determination by the NCUA to change capital category. After receiving notice pursuant to paragraph (c)(1) of this section, or on its own initiative, the NCUA will determine whether to change the capital category of the corporate credit union and will notify the corporate credit union of the NCUA's determination.
(d) Capital measures and capital category definitions. (1) Capital measures. For purposes of this section, the relevant capital measures are:
(i) The total risk-based capital ratio;
(ii) The Tier 1 risk-based capital ratio; and
(iii) The leverage ratio.
(2) Capital categories. For purposes of this section, a corporate credit union is:
(i) Well capitalized if the corporate credit union:
(A) Has a total risk-based capital ratio of 10.0 percent or greater; and
(B) Has a Tier 1 risk-based capital ratio of 6.0 percent or greater; and
(C) Has a leverage ratio of 5.0 percent or greater; and
(D) Is not subject to any written agreement, order, capital directive, or prompt corrective action directive issued by NCUA to meet and maintain a specific capital level for any capital measure.
(ii) Adequately capitalized if the corporate credit union:
(A) Has a total risk-based capital ratio of 8.0 percent or greater; and
(B) Has a Tier 1 risk-based capital ratio of 4.0 percent or greater; and
(C) Has:
(1) A leverage ratio of 4.0 percent or greater; and
(2) Does not meet the definition of a well capitalized corporate credit union.
(iii) Undercapitalized if the corporate credit union:
(A) Has a total risk-based capital ratio that is less than 8.0 percent; or
(B) Has a Tier 1 risk-based capital ratio that is less than 4.0 percent; or
(C) Has a leverage ratio that is less than 4.0 percent.
(iv) Significantly undercapitalized if the corporate credit union has:
(A) A total risk-based capital ratio that is less than 6.0 percent; or
(B) A Tier 1 risk-based capital ratio that is less than 3.0 percent; or
(C) A leverage ratio that is less than 3.0 percent.
(v) Critically undercapitalized if the corporate credit union has:
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(A) A total risk-based capital ratio that is less than 4.0 percent; or
(B) A Tier 1 risk-based capital ratio that is less than 2.0 percent; or
(C) A leverage ratio that is less than 2.0 percent.
(3) Reclassification based on supervisory criteria other than capital. Notwithstanding the elements of paragraph (d)(2) of this section, the NCUA may reclassify a well capitalized corporate credit union as adequately capitalized, and may require an adequately capitalized or undercapitalized corporate credit union to comply with certain mandatory or discretionary supervisory actions as if the corporate credit union were in the next lower capital category, in the following circumstances:
(i) Unsafe or unsound condition. The NCUA has determined, after notice and opportunity for hearing pursuant to paragraph (h)(1) of this section, that the corporate credit union is in an unsafe or unsound condition; or
(ii) Unsafe or unsound practice. The NCUA has determined, after notice and an opportunity for hearing pursuant to paragraph (h)(1) of this section, that the corporate credit union received a less-than-satisfactory rating (i.e., three or lower) for any rating category (other than in a rating category specifically addressing capital adequacy) under the Corporate Risk Information System (CRIS) rating system and has not corrected the conditions that served as the basis for the less than satisfactory rating. Ratings under this paragraph (d)(3)(ii) refer to the most recent ratings (as determined either on-site or off-site by the most recent examination) of which the corporate credit union has been notified in writing.
(4) The NCUA may, for good cause, modify any of the percentages in paragraph (d)(2) of this section as described in § 704.3(d)
.
(e) Capital restoration plans. (1) Schedule for filing plan—
(i) In general. A corporate credit union must file a written capital restoration plan with the NCUA within 45 days of the date that the corporate credit union receives notice or is deemed to have notice that the corporate credit union is undercapitalized, significantly undercapitalized, or critically undercapitalized, unless the NCUA notifies the corporate credit union in writing that the plan is to be filed within a different period. An adequately capitalized corporate credit union that has been required pursuant to paragraph (d)(3) of this section to comply with supervisory actions as if the corporate credit union were undercapitalized is not required to submit a capital restoration plan solely by virtue of the reclassification.
(ii) Additional capital restoration plans. Notwithstanding paragraph (e)(1)(i) of this section, a corporate credit union that has already submitted and is operating under a capital restoration plan approved under this section is not required to submit an additional capital restoration plan based on a revised calculation of its capital measures or a reclassification of the institution under paragraph (d)(3) of this section unless the NCUA notifies the corporate credit union that it must submit a new or revised capital plan. A corporate credit union that is notified that it must submit a new or revised capital restoration plan must file the plan in writing with the NCUA within 45 days of receiving such notice, unless the NCUA notifies the corporate credit union in writing that the plan is to be filed within a different period.
(2) Contents of plan. All financial data submitted in connection with a capital restoration plan must be prepared in accordance with the instructions provided on the call report, unless the NCUA instructs otherwise. The capital restoration plan must include all of the information required to be filed under paragraph (k)(2)(ii) of this section. A corporate credit union required to submit a capital restoration plan as the result of a reclassification of the corporate credit union pursuant to paragraph (d)(3) of this section must include a description of the steps the corporate credit union will take to correct the unsafe or unsound condition or practice.
(3) Failure to submit a capital restoration plan. A corporate credit union that is undercapitalized and that fails to submit a written capital restoration plan within the period provided in this section will, upon the expiration of that period, be subject to all of the provisions of this section applicable to significantly undercapitalized credit unions.
(4) Review of capital restoration plans. Within 60 days after receiving a capital restoration plan under this section, the NCUA will provide written notice to the corporate credit union of whether it has approved the plan. The NCUA may extend this time period.
(5) Disapproval of capital plan. If the NCUA does not approve a capital restoration plan, the corporate credit union must submit a revised capital restoration plan, when directed to do so, within the time specified by the NCUA. An undercapitalized corporate credit union is subject to the provisions applicable to significantly undercapitalized credit unions until it has submitted, and NCUA has approved, a capital restoration plan. If the NCUA directs that the corporate submit a revised plan, it must do so in time frame specified by the NCUA.
(6) Failure to implement a capital restoration plan. Any undercapitalized corporate credit union that fails in any material respect to implement a capital restoration plan will be subject to all of the provisions of this section applicable to significantly undercapitalized institutions.
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(7) Amendment of capital plan. A corporate credit union that has filed an approved capital restoration plan may, after prior written notice to and approval by the NCUA, amend the plan to reflect a change in circumstance. Until such time as NCUA has approved a proposed amendment, the corporate credit union must implement the capital restoration plan as approved prior to the proposed amendment.
(f) Mandatory and discretionary supervisory actions. (1) Mandatory supervisory actions.—
(i) Provisions applicable to all corporate credit unions. All corporate credit unions are subject to the restrictions contained in paragraph (k)(1) of this section on capital distributions.
(ii) Provisions applicable to undercapitalized, significantly undercapitalized, and critically undercapitalized corporate credit unions. Immediately upon receiving notice or being deemed to have notice, as provided in paragraph (c) or (e) of this section, that the corporate credit union is undercapitalized, significantly undercapitalized, or critically undercapitalized, the corporate credit union will be subject to the following provisions of paragraph (k) of this section:
(A) Restricting capital distributions (paragraph (k)(1));
(B) NCUA monitoring of the condition of the corporate credit union (paragraph (k)(2)(i));
(C) Requiring submission of a capital restoration plan (paragraph (k)(2)(ii));
(D) Restricting the growth of the corporate credit union's assets (paragraph (k)(2)(iii)); and
(E) Requiring prior approval of certain expansion proposals (paragraph (k)(2)(iv)).
(iii) Additional provisions applicable to significantly undercapitalized, and critically undercapitalized corporate credit unions. In addition to the mandatory requirements described in paragraph (f)(1) of this section, immediately upon receiving notice or being deemed to have notice that the corporate credit union is significantly undercapitalized, or critically undercapitalized, or that the corporate credit union is subject to the provisions applicable to corporate credit unions that are significantly undercapitalized because the credit union failed to submit or implement in any material respect an acceptable capital restoration plan, the corporate credit union will become subject to the provisions of paragraph (k)(3)(iii) of this section that restrict compensation paid to senior executive officers of the institution.
(iv) Additional provisions applicable to critically undercapitalized corporate credit unions. In addition to the provisions described in paragraphs (f)(1)(ii) and (f)(1)(iii) of this section, immediately upon receiving notice or being deemed to have notice that the corporate credit union is critically undercapitalized, the corporate credit union will become subject to these additional provisions of paragraph (k) of this section:
(A) Restricting the activities of the corporate credit union ((k)(5)(i)); and
(B) Restricting payments on subordinated debt of the corporate credit union ((k)(5)(ii)).
(2) Discretionary supervisory actions.
(i) All PCA actions listed in paragraph (k) of this section that are not discussed in paragraph (f)(1) of this section are discretionary.
(ii) All discretionary actions available to NCUA in the case of an undercapitalized corporate credit union are available to NCUA in the case of a significantly undercapitalized credit union. All discretionary actions available to NCUA in the case of an undercapitalized corporate credit union or a significantly undercapitalized corporate credit union are available to NCUA in the case of a critically undercapitalized corporate credit union.
(iii) In taking any discretionary PCA actions with a corporate credit union that is deemed to be undercapitalized, significantly undercapitalized or critically undercapitalized, or has been reclassified as undercapitalized, or significantly undercapitalized; or an action in connection with an officer or director of such corporate credit union; the NCUA will follow the procedures for issuing directives under paragraphs (g) and (i) of this section.
(iv) NCUA will consult and seek to work cooperatively with the appropriate state supervisory authority (SSA) before taking any discretionary supervisory action with respect to a state-chartered corporate credit union; will provide notice of its decision to the SSA; and will allow the appropriate SSA an opportunity to take the proposed action independently or jointly with NCUA.
(g) Directives to take prompt corrective action. The NCUA will provide an undercapitalized, significantly undercapitalized, or critically undercapitalized corporate credit union prior written notice of the NCUA's intention to issue a directive requiring such corporate credit union to take actions or to follow proscriptions described in this part. Section 747.3002 of this chapter prescribes the notice content and associated process.
(h) Procedures for reclassifying a corporate credit union based on criteria other than capital. When the NCUA intends to reclassify a corporate credit union or subject it to the supervisory actions applicable to the next lower capitalization category based on an unsafe or unsound condition or practice, the NCUA will provide the credit union with prior written notice of such intent. Section 747.3003 of this chapter prescribes the notice content and associated process.
(i) Order to dismiss a Director or senior executive officer. When the NCUA issues and serves a directive on a corporate credit union requiring it to dismiss from office any director or senior executive officer under paragraphs (k)(3) of this section, the NCUA will also serve upon the person the corporate credit union is directed to dismiss (Respondent) a copy of the directive (or the relevant portions, where appropriate) and notice of the Respondent's right to seek reinstatement. Section 747.3004 of this chapter prescribes the content of the notice of right to seek reinstatement and the associated process.
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(j) Enforcement of directives.
Section 747.3005 of this chapter prescribes the process for enforcement of directives.
(k) Remedial actions towards undercapitalized, significantly undercapitalized, and critically undercapitalized corporate credit unions. (1) Provision applicable to all corporate credit unions. A corporate credit union is prohibited from making any capital distribution, including payment of dividends on perpetual and nonperpetual capital accounts, if, after making the distribution, the credit union would be undercapitalized.
(2) Provisions applicable to undercapitalized corporate credit unions.
(i) Monitoring required. The NCUA will—
(A) Closely monitor the condition of any undercapitalized corporate credit union;
(B) Closely monitor compliance with capital restoration plans, restrictions, and requirements imposed under this section; and
(C) Periodically review the plan, restrictions, and requirements applicable to any undercapitalized corporate credit union to determine whether the plan, restrictions, and requirements are achieving the purpose of this section.
(ii) Capital restoration plan required.
(A) Any undercapitalized corporate credit union must submit an acceptable capital restoration plan to the NCUA.
(B) The capital restoration plan will—
(1) Specify—
(i) The steps the corporate credit union will take to become adequately capitalized;
(ii) The levels of capital to be attained during each year in which the plan will be in effect;
(iii) How the corporate credit union will comply with the restrictions or requirements then in effect under this section; and
(iv) The types and levels of activities in which the corporate credit union will engage; and
(2) Contain such other information as the NCUA may require.
(C) The NCUA will not accept a capital restoration plan unless the NCUA determines that the plan—
(1) Complies with paragraph (k)(2)(ii)(B) of this section;
(2) Is based on realistic assumptions, and is likely to succeed in restoring the corporate credit union's capital; and
(3) Would not appreciably increase the risk (including credit risk, interest-rate risk, and other types of risk) to which the corporate credit union is exposed.
(iii) Asset growth restricted. An undercapitalized corporate credit union must not permit its daily average net assets during any calendar month to exceed its moving daily average net assets unless—
(A) The NCUA has accepted the corporate credit union's capital restoration plan; and
(B) Any increase in total assets is consistent with the plan.
(iv) Prior approval required for acquisitions, branching, and new lines of business. An undercapitalized corporate credit union must not, directly or indirectly, acquire any interest in any entity, establish or acquire any additional branch office, or engage in any new line of business unless the NCUA has accepted the corporate credit union's capital restoration plan, the corporate credit union is implementing the plan, and the NCUA determines that the proposed action is consistent with and will further the achievement of the plan.
(3) Provisions applicable to significantly undercapitalized corporate credit unions and undercapitalized corporate credit unions that fail to submit and implement capital restoration plans.
(i) In general. This paragraph applies with respect to any corporate credit union that—
(A) Is significantly undercapitalized; or
(B) Is undercapitalized and—
(1) Fails to submit an acceptable capital restoration plan within the time allowed by the NCUA under paragraph (e)(1) of this section; or
(2) Fails in any material respect to implement a plan accepted by the NCUA.
(ii) Specific actions authorized. The NCUA may take one or more of the following actions:
(A) Requiring recapitalization.
(1) Requiring the corporate credit union to seek and obtain additional contributed capital.
(2) Requiring the corporate credit union to increase its rate of earnings retention.
(3) Requiring the corporate credit union to combine, in whole or part, with another insured depository institution, if one or more grounds exist under this section or the Federal Credit Union Act for appointing a conservator or liquidating agent.
(B) Restricting any ongoing or future transactions with affiliates.
(C) Restricting interest rates paid.
(1) In general. Restricting the rates of dividends and interest that the corporate credit union pays on shares and deposits to the prevailing rates on shares and deposits of comparable amounts and maturities in the region where the institution is located, as determined by the NCUA.
(2) Retroactive restrictions prohibited. Paragraph (k)(3)(ii)(c) of this section does not authorize the NCUA to restrict interest rates paid on time deposits or shares made before (and not renewed or renegotiated after) the date the NCUA announced this restriction.
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(D) Restricting asset growth. Restricting the corporate credit union's asset growth more stringently than in paragraph (k)(2)(iii) of this section, or requiring the corporate credit union to reduce its total assets.
(E) Restricting activities. Requiring the corporate credit union or any of its CUSOs to alter, reduce, or terminate any activity that the NCUA determines poses excessive risk to the corporate credit union.
(F) Improving management. Doing one or more of the following:
(1) New election of directors. Ordering a new election for the corporate credit union's board of directors.
(2) Dismissing directors or senior executive officers. Requiring the corporate credit union to dismiss from office any director or senior executive officer who had held office for more than 180 days immediately before the corporate credit union became undercapitalized.
(3) Employing qualified senior executive officers. Requiring the corporate credit union to employ qualified senior executive officers (who, if the NCUA so specifies, will be subject to approval by the NCUA).
(G) Requiring divestiture. Requiring the corporate credit union to divest itself of or liquidate any interest in any entity if the NCUA determines that the entity is in danger of becoming insolvent or otherwise poses a significant risk to the corporate credit union;
(H) Conserve or liquidate the corporate credit union if NCUA determines the credit union has no reasonable prospect of becoming adequately capitalized; and
(I) Requiring other action. Requiring the corporate credit union to take any other action that the NCUA determines will better carry out the purpose of this section than any of the actions described in this paragraph.
(iii) Senior executive officers' compensation restricted.
(A) In general. The corporate credit union is prohibited from doing any of the following without the prior written approval of the NCUA:
(1) Pay any bonus or profit-sharing to any senior executive officer.
(2) Provide compensation to any senior executive officer at a rate exceeding that officer's average rate of compensation (excluding bonuses and profit-sharing) during the 12 calendar months preceding the calendar month in which the corporate credit union became undercapitalized.
(B) Failing to submit plan. The NCUA will not grant approval with respect to a corporate credit union that has failed to submit an acceptable capital restoration plan.
(iv) Discretion to impose certain additional restrictions. The NCUA may impose one or more of the restrictions prescribed by regulation under paragraph (k)(5) of this section if the NCUA determines that those restrictions are necessary to carry out the purpose of this section.
(4) More stringent treatment based on other supervisory criteria.
(i) In general. If the NCUA determines, after notice and an opportunity for hearing as described in subpart M of part 747 of this chapter
, that a corporate credit union is in an unsafe or unsound condition or deems the corporate credit union to be engaging in an unsafe or unsound practice, the NCUA may—
(A) If the corporate credit union is well capitalized, reclassify the corporate credit union as adequately capitalized;
(B) If the corporate credit union is adequately capitalized (but not well capitalized), require the corporate credit union to comply with one or more provisions of paragraphs (k)(1) and (k)(2) of this section, as if the corporate credit union were undercapitalized; or
(C) If the corporate credit union is undercapitalized, take any one or more actions authorized under paragraph (k)(3)(ii) of this section as if the corporate credit union were significantly undercapitalized.
(ii) Contents of plan. Any plan required under paragraph (k)(4)(i) of this section will specify the steps that the corporate credit union will take to correct the unsafe or unsound condition or practice. Capital restoration plans, however, will not be required under paragraph (k)(4)(i)(B) of this section.
(5) Provisions applicable to critically undercapitalized corporate credit unions.
(i) Activities restricted. Any critically undercapitalized corporate credit union must comply with restrictions prescribed by the NCUA under paragraph (k)(6) of this section.
(ii) Payments on contributed capital and subordinated debt prohibited. A critically undercapitalized corporate credit union must not, beginning no later than 60 days after becoming critically undercapitalized, make any payment of dividends on contributed capital or any payment of principal or interest on the corporate credit union's subordinated debt unless the NCUA determines that an exception would further the purpose of this section. Interest, although not payable, may continue to accrue under the terms of any subordinated debt to the extent otherwise permitted by law. Dividends on contributed capital do not, however, continue to accrue.
(iii) Conservatorship, liquidation, or other action. The NCUA may, at any time, conserve or liquidate any critically undercapitalized corporate credit union or require the credit union to combine, in whole or part, with another institution. NCUA will consider, not later than 90 days after a corporate credit union becomes critically undercapitalized, whether NCUA should liquidate, conserve, or combine the institution.
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(6) Restricting activities of critically undercapitalized corporate credit unions. To carry out the purpose of this section, the NCUA will, by order—
(i) Restrict the activities of any critically undercapitalized corporate credit union; and
(ii) At a minimum, prohibit any such corporate credit union from doing any of the following without the NCUA's prior written approval:
(A) Entering into any material transaction other than in the usual course of business, including any investment, expansion, acquisition, sale of assets, or other similar action.
(B) Extending credit for any transaction NCUA determines to be highly leveraged.
(C) Amending the corporate credit union's charter or bylaws, except to the extent necessary to carry out any other requirement of any law, regulation, or order.
(D) Making any material change in accounting methods.
(E) Paying compensation or bonuses NCUA determines to be excessive.
(F) Paying interest on new or renewed liabilities at a rate that would increase the corporate credit union's weighted average cost of funds to a level significantly exceeding the prevailing rates of interest on insured deposits in the corporate credit union's normal market areas.