12 C.F.R. § 701.34 Designation of low income status; Acceptance of secondary capital accounts by low-income designated credit unions.
Title 12 - Banks and Banking
(a) Designation of low-income status. (1) Section 107(6) of the Federal Credit Union Act (12 U.S.C. 1757(6)) authorizes federal credit unions serving predominantly low-income members to receive shares, share drafts and share certificates from nonmembers. In order to utilize this authority, a federal credit union must receive a low-income designation from its Regional Director. The designation may be removed by the Regional Director upon notice to the federal credit union if the definitions set forth in paragraphs (a) (2) and (3) of this section are no longer met. Removals may be appealed to the NCUA Board within 60 days. Appeals should be submitted through the Regional Director. (2) The term low-income members shall mean those members who make less than 80 percent of the average for all wage earners as established by the Bureau of Labor Statistics or those members whose annual household income falls at or below 80 percent of the median household income for the nation as established by the Census Bureau or those members otherwise defined as low-income members as determined by order of the NCUA Board. (i) In documenting its low-income membership, a credit union that serves a geographic area where a majority of residents fall at or below the annual income standard is presumed to be serving predominantly low-income members. In applying the standards, Regional Directors shall make allowances for geographical areas with higher costs of living. The following is the exclusive list of geographic areas with the differentials to be used: (ii) The term low-income member also includes those members who are enrolled as full-time or part-time students in a college, university, high school, or vocational school. (3) The term predominantly is defined as a simple majority. (b) Acceptance of secondary capital accounts by low-income designated credit unions. A federal credit union having a designation of low-income status pursuant to paragraph (a) of this section may accept secondary capital accounts from nonnatural person members and nonnatural person nonmembers subject to the following conditions: (1) Secondary capital plan. Before accepting secondary capital, a low-income credit union (“LICU”) shall adopt, and forward to the appropriate NCUA Regional Director for approval, a written “Secondary Capital Plan” that, at a minimum: (i) States the maximum aggregate amount of uninsured secondary capital the LICU plans to accept; (ii) Identifies the purpose for which the aggregate secondary capital will be used, and how it will be repaid; (iii) Explains how the LICU will provide for liquidity to repay secondary capital upon maturity of the accounts; (iv) Demonstrates that the planned uses of secondary capital conform to the LICU's strategic plan, business plan and budget; and (v) Includes supporting pro forma financial statements, including any off-balance sheet items, covering a minimum of the next two years. (2) Decision on plan. If a LICU is not notified within 45 days of receipt of a Secondary Capital Plan that the plan is approved or disapproved, the LICU may proceed to accept secondary capital accounts pursuant to the plan. (3) Nonshare account. The secondary capital account must be established as an uninsured secondary capital account or other form of non-share account. (4) Minimum maturity. The maturity of the secondary capital account must be a minimum of five years. (5) Uninsured account. The secondary capital account will not be insured by the National Credit Union Share Insurance Fund or any governmental or private entity. (6) Subordination of claim. The secondary capital account investor's claim against the LICU must be subordinate to all other claims including those of shareholders, creditors and the National Credit Union Share Insurance Fund. (7) Availability to cover losses. Funds deposited into a secondary capital account, including interest accrued and paid into the secondary capital account, must be available to cover operating losses realized by the LICU that exceed its net available reserves (exclusive of secondary capital and allowance accounts for loan and lease losses), and to the extent funds are so used, the LICU must not restore or replenish the account under any circumstances. The LICU may, in lieu of paying interest into the secondary capital account, pay accrued interest directly to the investor or into a separate account from which the secondary capital investor may make withdrawals. Losses must be distributed pro-rata among all secondary capital accounts held by the LICU at the time the losses are realized. (8) Security. The secondary capital account may not be pledged or provided by the account investor as security on a loan or other obligation with the LICU or any other party. (9) Merger or dissolution. In the event of merger or other voluntary dissolution of the LICU, other than merger into another LICU, the secondary capital accounts will be closed and paid out to the account investor to the extent they are not needed to cover losses at the time of merger or dissolution. (10) Contract agreement. A secondary capital account contract agreement must be executed by an authorized representative of the account investor and of the LICU reflecting the terms and conditions mandated by this section and any other terms and conditions not inconsistent with this section. (11) Disclosure and acknowledgement. An authorized representative of the LICU and of the secondary capital account investor each must execute a “Disclosure and Acknowledgment” as set forth in the Appendix to this section at the time of entering into the account agreement. The LICU must retain an original of the account agreement and the “Disclosure and Acknowledgment” for the term of the agreement, and a copy must be provided to the account investor. (12) Prompt corrective action. As provided in §§702.204(b)(11), 702.304(b) and 702.305(b) of this chapter, the NCUA Board may prohibit a LICU classified “critically undercapitalized” or, if “new,” as “moderately capitalized”, “marginally capitalized”, “minimally capitalized” or “uncapitalized”, as the case may be, from paying principal, dividends or interest on its uninsured secondary capital accounts established after August 7, 2000, except that unpaid dividends or interest will continue to accrue under the terms of the account to the extent permitted by law. (c) Accounting treatment; Recognition of net worth value of accounts. (1) Equity account. A LICU that issues secondary capital accounts pursuant to paragraph (b) of this section must record the funds on its balance sheet in an equity account entitled “uninsured secondary capital account.” (2) Schedule for recognizing net worth value. For accounts with remaining maturities of less than five years, the LICU must reflect the net worth value of the accounts in its financial statement in accordance with the following schedule: (3) Financial statement. The LICU must reflect the full amount of the secondary capital on deposit in a footnote to its financial statement. (d) Redemption of secondary capital. With the written approval of the appropriate Regional Director, secondary capital that is not recognized as net worth under paragraph (c)(2) of this section (“discounted secondary capital” recategorized as subordinated debt) may be redeemed according to the remaining maturity schedule in paragraph (d)(3) of this section. (1) Request to redeem secondary capital. A request for approval to redeem discounted secondary capital may be submitted in writing at any time, must specify the increment(s) to be redeemed and the schedule for redeeming all any part of each eligible increment, and must demonstrate to the satisfaction of the appropriate Regional Director that: (i) The LICU will have a post-redemption net worth classification of “adequately capitalized” under part 702 of this chapter; (ii) The discounted secondary capital has been on deposit at least two years; (iii) The discounted secondary capital will not be needed to cover losses prior to final maturity of the account; (iv) The LICU's books and records are current and reconciled; (v) The proposed redemption will not jeopardize other current sources of funding, if any, to the LICU; and (vi) The request to redeem is authorized by resolution of the LICU's board of directors. (2) Decision on request. A request to redeem discounted secondary capital may be granted in whole or in part. If a LICU is not notified within 45 days of receipt of a request for approval to redeem secondary capital that its request is either granted or denied, the LICU may proceed to redeem secondary capital accounts as proposed. (3) Schedule for redeeming secondary capital.
Appendix to §701.34 A LICU that is authorized to accept uninsured secondary capital accounts and each investor in such an account shall execute and date the following “Disclosure and Acknowledgment” form, a signed original of which must be retained by the credit union: Disclosure and Acknowledgment [Name of CU] and [Name of investor] hereby acknowledge and agree that [Name of investor] has committed [amount of funds] to a secondary capital account with [name of credit union] under the following terms and conditions: 1. Term. The funds committed to the secondary capital account are committed for a period of __ years. 2. Redemption prior to maturity. Subject to the conditions set forth in 12 CFR 701.34, the funds committed to the secondary capital account are redeemable prior to maturity only at the option of the LICU and only with the prior approval of the appropriate regional director. 3. Uninsured, non-share account. The secondary capital account is not a share account and the funds committed to the secondary capital account are not insured by the National Credit Union Share Insurance Fund or any other governmental or private entity. 4. Prepayment risk. Redemption of U.S.C. prior to the account's original maturity date may expose the account investor to the risk of being unable to reinvest the repaid funds at the same rate of interest for the balance of the period remaining until the original maturity date. The investor acknowledges that it understands and assumes responsibility for prepayment risk associated with the [name of credit union]'s redemption of the investor's U.S.C. account prior to the original maturity date. 5. Availability to cover losses. The funds committed to the secondary capital account and any interest paid into the account may be used by [name of credit union] to cover any and all operating losses that exceed the credit union's net worth exclusive of allowance accounts for loan losses, and in the event the funds are so used, (name of credit union) will under no circumstances restore or replenish those funds to [name of institutional investor]. Dividends are not considered operating losses and are not eligible to be paid out of secondary capital. 6. Accrued interest. By initialing below, [name of credit union] and [name of institutional investor] agree that accrued interest will be: __Paid into and become part of the secondary capital account; __Paid directly to the investor; __Paid into a separate account from which the investor may make withdrawals; or __Any combination of the above provided the details are specified and agreed to in writing. 7. Subordination of claims. In the event of liquidation of [name of credit union], the funds committed to the secondary capital account will be subordinate to all other claims on the assets of the credit union, including claims of member shareholders, creditors and the National Credit Union Share Insurance Fund. 8. Prompt Corrective Action. Under certain net worth classifications (see 12 CFR 702.204(b)(11), 702.304(b) and 702.305(b), as the case may be), the NCUA Board may prohibit [name of credit union] from paying principal, dividends or interest on its uninsured secondary capital accounts established after August 7, 2000, except that unpaid dividends or interest will continue to accrue under the terms of the account to the extent permitted by law. ACKNOWLEDGED AND AGREED TO this __ day of [month and year] by: [name of investor's official] [title of official] [name of investor] [address and phone number of investor] [investor's tax identification number] [name of credit union official] [title of official] [61 FR 3790, Feb. 2, 1996, as amended at 61 FR 50695, 50697, Sept. 27, 1996; 64 FR 72270, Dec. 27, 1999; 65 FR 21131, Apr. 20, 2000; 71 FR 4238, Jan. 26, 2006]
Title 12: Banks and Banking
PART 701—ORGANIZATION AND OPERATION OF FEDERAL CREDIT UNIONS
§ 701.34 Designation of low income status; Acceptance of secondary capital accounts by low-income designated credit unions.
Percent Hawaii......................................................... 40Alaska......................................................... 36Washington, DC................................................. 19Boston......................................................... 17San Diego...................................................... 15Los Angeles.................................................... 14New York....................................................... 13San Francisco.................................................. 13Seattle........................................................ 10Chicago........................................................ 7Philadelphia................................................... 7
------------------------------------------------------------------------ Net worth value of Remaining maturity original balance (percent)------------------------------------------------------------------------Four to less than five years............................... 80Three to less than four years.............................. 60Two to less than three years............................... 40One to less than two years................................. 20Less than one year......................................... 0------------------------------------------------------------------------
------------------------------------------------------------------------ Redemption limit as Remaining maturity percent of original balance------------------------------------------------------------------------Four to less than five years............................... 20Three to less than four years.............................. 40Two to less than three years............................... 60One to less than two years................................. 80------------------------------------------------------------------------
