[Federal Register Volume 77, Number 105 (Thursday, May 31, 2012)]
[Rules and Regulations]
[Pages 31981-31993]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-13212]
=======================================================================
-----------------------------------------------------------------------
NATIONAL CREDIT UNION ADMINISTRATION
12 CFR Parts 701, 703, 713, 721, 723, and 742
RIN 3133-AD98
Eligible Obligations, Charitable Contributions, Nonmember
Deposits, Fixed Assets, Investments, Fidelity Bonds, Incidental Powers,
Member Business Loans, and Regulatory Flexibility Program
AGENCY: National Credit Union Administration (NCUA).
ACTION: Final rule and interim final rule with comment period.
-----------------------------------------------------------------------
SUMMARY: NCUA is removing certain regulations and eliminating the
Regulatory Flexibility Program (RegFlex) to provide regulatory relief
to federal credit unions. NCUA is also removing or amending related
rules to ease compliance burden while retaining certain safety and
soundness standards. Those rules pertain to eligible obligations,
charitable contributions, nonmember deposits, fixed assets,
investments, incidental powers, and member business loans. In addition,
NCUA is issuing an interim final rule with a request for comment to
amend a provision in the fidelity bond rule to remove references to
RegFlex.
DATES: Effective dates: The final rule, as well as the interim final
rule pertaining to the revisions in the fidelity bond rule, Sec.
713.6, will go into effect on July 2, 2012.
Comment date: We will consider comments on the interim final rule
portion (the fidelity bond rule, Sec. 713.6), as discussed in section
IV of the preamble of this rulemaking. Send your comments to reach us
on or before July 30, 2012. We may not consider comments received after
the above date in making any decision whether to amend the interim
final rule.
ADDRESSES: In commenting on the interim final rule, you may submit
comments by any of the following methods (Please send comments by one
method only):
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
NCUA Web Site: http://www.ncua.gov/Legal/Regs/Pages/PropRegs.aspx. Follow the instructions for submitting comments.
Email: Address to regcomments@ncua.gov. Include ``[Your
name] Comments on Interim Final Rule, Section 713.6, Fidelity Bond'' in
the email subject line.
Fax: (703) 518-6319. Use the subject line described above
for email.
Mail: Address to Mary Rupp, Secretary of the Board,
National Credit Union Administration, 1775 Duke Street, Alexandria,
Virginia 22314-3428.
Hand Delivery/Courier: Same as mail address.
Public Inspection: You can view all public comments on NCUA's Web
site at http://www.ncua.gov/Legal/Regs/Pages/PropRegs.aspx as
submitted, except for those we cannot post for technical reasons. NCUA
will not edit or remove any identifying or contact information from the
public comments submitted. You may inspect paper copies of comments in
NCUA's law library at 1775 Duke Street, Alexandria, Virginia 22314, by
appointment weekdays between 9 a.m. and 3 p.m. To make an appointment,
call (703) 518-6546 or send an email to OGCMail@ncua.gov.
FOR FURTHER INFORMATION CONTACT: Chrisanthy Loizos, Staff Attorney,
Office of General Counsel, at the above address or telephone (703) 518-
6540, or Matthew J. Biliouris, Director of Supervision, or J. Owen
Cole, Director, Division of Capital Markets, Office of Examination and
Insurance, at the above address or telephone (703) 518-6360.
SUPPLEMENTARY INFORMATION:
I. Background
II. Summary of Comments on December 2011 Proposed Rule
III. Final Rule
IV. Interim Final Rule and Request for Comment
V. Rule Summary Table
VI. Regulatory Procedures
I. Background
a. Why is NCUA adopting this rule?
On July 11, 2011, President Obama issued Executive Order 13579,
ordering independent agencies, including NCUA, to consider whether they
can modify, streamline, expand, or repeal existing rules to make their
programs more effective and less burdensome. Consistent with the spirit
of the Executive Order and as part of NCUA's Regulatory Modernization
Initiative, the NCUA Board (Board) is adopting this rule to streamline
its regulatory program by eliminating RegFlex. The final rule relieves
regulatory burden on federal credit unions (FCUs) because they will no
longer need to engage in any process for a RegFlex designation. In
addition, the final rule provides regulatory relief to FCUs that are
currently not RegFlex eligible because it extends to them most of the
flexibilities previously available only to RegFlex FCUs.
The Board issued a Notice of Proposed Rulemaking (NPRM) in December
2011. 76 FR 81421 (Dec. 28, 2011). The comment period on the proposed
rule ended on February 27, 2012. NCUA received seventeen comment
letters on the NPRM: Four from FCUs, three from trade associations (1
representing banks, 2 representing credit unions), nine from state
credit union leagues, and one from a law firm. The majority of the
commenters supported the rulemaking generally. Four commenters did not
support the rule as proposed, and the remaining commenters offered
comments on particular provisions but did not take a position on the
initiative as a whole. For the reasons discussed below, the Board is
adopting the amendments almost exactly as proposed. As such, the Board
does not restate the legal analysis it presented in the NPRM's preamble
and incorporates it by reference here in this rulemaking. Id.
b. What was RegFlex?
The Board established RegFlex in 2002. 66 FR 58656 (Nov. 23, 2001).
RegFlex relieved FCUs from certain regulatory restrictions and granted
them additional powers if they demonstrated sustained superior
performance as measured by CAMEL rating and net worth classification.
An FCU could qualify for RegFlex treatment automatically or by
application to the appropriate regional director. Specifically, an FCU
automatically qualified for a RegFlex designation when it received a
composite CAMEL rating of ``1'' or ``2'' for two consecutive
examination cycles and maintained a net worth classification of ``well
capitalized'' under part 702 of NCUA's rules for the last six quarters.
An FCU subject to a risk-based net worth (RBNW) requirement under part
702 could also qualify for RegFlex treatment
[[Page 31982]]
if it remained ``well capitalized'' for the last six quarters after
applying the applicable RBNW requirement. FCUs that did not
automatically qualify for a RegFlex designation could seek one with the
appropriate regional director.
The rule gave RegFlex FCUs relief from restrictions in the
following six areas or ``flexibilities'': (1) Charitable contributions;
(2) nonmember deposits; (3) fixed assets; (4) zero-coupon investments;
(5) borrowing repurchase transactions; and (6) commercial mortgage
related securities (CMRS). It provided an additional flexibility by
specifically authorizing the purchase of obligations from federally
insured credit unions beyond those an FCU may purchase under the NCUA's
eligible obligations rule, Sec. 701.23. RegFlex FCUs were also
permitted a higher maximum allowable deductible for fidelity bond
coverage under Sec. 713.6.
c. What changes did NCUA propose?
The Board proposed to eliminate RegFlex and the charitable
contributions rule, and amend the rules that apply to eligible
obligations, nonmember deposits, fixed assets, and investments, so that
all FCUs could engage in activities previously permitted only for
RegFlex FCUs, subject to some conditions. 76 FR 81421 (Dec. 28, 2011).
The NPRM removed the charitable contributions rule in its entirety
and placed the remaining six flexibilities of the RegFlex rule into the
subject-specific rules that apply to all FCUs. It adjusted the
nonmember deposits rule to allow some FCUs to accept more nonmember
deposits. The proposed rule extended to six years the amount of time in
which all FCUs must occupy unimproved property under NCUA's fixed
assets rule. The proposed amendments to the investment rule permitted
extended maturities for zero-coupon investments and borrowing
repurchase transactions, as well as the purchase of CMRS under similar
conditions allowed for RegFlex FCUs. The NPRM moved the provisions to
buy nonmember and other obligations from the RegFlex rule into the
eligible obligations rule, Sec. 701.23. Lastly, the proposal made a
nonsubstantive change to the member business loan rule that cross-
references RegFlex.
While providing additional regulatory flexibility, the NPRM made a
few modifications to authorities and did not extend the full scope of
every RegFlex authority to all FCUs. The Board proposed to remove the
automatic exemption from the nonmember deposits limit that had been
granted to RegFlex FCUs. In so doing, the Board noted that the change
would not negatively impact those FCUs based on the volume of nonmember
deposits held by them.
With regard to the investment rule amendments, the NPRM created a
``well capitalized standard'' based on the automatic designation
criteria used in RegFlex. An FCU meets the well capitalized standard if
it has received a composite CAMEL rating of ``1'' or ``2'' for two
consecutive full examinations and (1) has maintained a ``well
capitalized'' net worth classification for the immediately preceding
six quarters, or (2) has remained ``well capitalized'' for the
immediately preceding six quarters after applying the applicable RBNW
requirement.
The proposed rule provided that well capitalized FCUs could
purchase zero-coupon investments with a maximum maturity of no more
than 30 years, while FCUs not meeting the standard would continue to be
subject to a maturity cap of 10 years unless they received approval
from their regional director. The NPRM permitted FCUs not meeting the
well capitalized standard to enter into borrowing repurchase
transactions in which the security purchased with the proceeds from the
borrowing agreement matured no more than 30 days after the maturity of
the borrowing, unless they received additional approval from their
regional director. Consistent with the RegFlex program, the NPRM did
not impose the 30-day mismatch restriction on FCUs meeting the well
capitalized standard. The proposal limited the amount of securities
that any FCU, whether well capitalized or not, could purchase with
mismatched maturities to 100% of the FCU's net worth. It also permitted
FCUs not meeting the well capitalized standard to purchase private
label CMRS subject to an aggregate limit of 25% of net worth, unless
their regional director granted authority to purchase securities in an
amount up to 50% of net worth, which is the cap for FCUs meeting the
well capitalized standard.
II. Summary of Comments on December 2011 Proposed Rule
A majority of commenters supported the Board's efforts to extend
regulatory flexibility to FCUs. Other commenters felt the proposal did
not provide enough relief and failed to extend similar relief to
federally insured, state-chartered credit unions. One credit union
trade association stated that the proposal removed clear eligibility
standards for FCUs to obtain expanded authorities. It opposed the
elimination of an appeals process to NCUA's Supervisory Review
Committee, similar to the one through which RegFlex FCUs could appeal
RegFlex designation revocations, if an FCU were not permitted to engage
in the full range of flexibilities. The bank trade association stated
that, although it supports efforts to reduce regulatory burdens, NCUA
should not extend such regulatory relief to FCUs that are
undercapitalized or represent supervisory concerns. Another commenter
found that the RegFlex program under part 742 sufficiently accomplished
its goals in its current form. The Board has carefully reviewed and
analyzed the comment letters and describes specific comments on the
NPRM below.
a. Charitable Contributions
In the NPRM, the Board proposed to eliminate the entire charitable
contributions rule, Sec. 701.25. Section 701.25 restricts an FCU's
ability to make donations. It only allows an FCU to make charitable
contributions or donations to nonprofit organizations located or
conducting activities in a community in which the FCU has a place of
business, or to organizations that are tax exempt under Sec. 501(c)(3)
of the Internal Revenue Code and that operate primarily to promote and
develop credit unions. It further requires an FCU's board of directors
to approve charitable contributions based on a determination that the
contributions are in the FCU's best interests and are reasonable given
the FCU's size and financial condition. Under the rule, directors may
establish a budget for charitable donations and authorize FCU officials
to select recipients and disburse funds. The RegFlex rule, Sec.
742.4(a)(1), exempted RegFlex FCUs from the entire charitable
contributions rule. By removing Sec. 701.25, the Board is now allowing
any FCU to make donations without the prior approval of its board of
directors and without regulatory restrictions as to recipients.
In the NPRM, the Board noted that, even in the absence of a
charitable contributions rule, an FCU's authority to make donations is
authorized by incidental powers given in the Federal Credit Union Act
(Act), 12 U.S.C. 1757(17). As such, contributions must be necessary or
requisite to enable the FCU to effectively carry on its business. See
12 CFR 721.2. Furthermore, FCU directors have a fiduciary duty to
direct management to operate within sound business practices and the
best interests of the membership under Sec. 701.4. In addition,
article XVI, section 4 of the FCU Bylaws prohibits FCU directors,
committee members, officers, agents, and employees from conflicts of
interest
[[Page 31983]]
that could arise in the context of making charitable donations.
Two credit union trade associations, four leagues, and three credit
unions supported the elimination of the charitable contributions rule.
Three of these commenters maintained that the limitations on an FCU's
incidental powers, the board's fiduciary duties, and the FCU Bylaws
already set the appropriate standards for charitable contributions. One
commenter stated that the change would eliminate a bureaucratic hurdle
and enable FCUs to further their mission of helping people of modest
means. The bank trade association stated that the charitable
contributions rule protects the interests of members and avoids
conflicts of interest and, therefore, requested that NCUA retain it.
The Board believes the Act, FCU bylaws, part 721, and Sec. 701.4
provide sufficient constraints on an FCU's ability to make charitable
contributions. Accordingly, the final rule removes Sec. 701.25 as
proposed.
One credit union commenter expressed concern that FCUs would need
to seek approval to make donations because NCUA did not propose to
amend Sec. 721.3 to expressly identify charitable contributions as a
preapproved incidental power. Since 1979, NCUA has recognized that FCUs
may make charitable contributions under the provision in the Act that
authorizes an FCU ``to exercise such incidental powers as shall be
necessary or requisite to enable it to carry on effectively the
business for which it is incorporated.'' 44 FR 56691 (Oct. 2, 1979); 64
FR 19441 (Apr. 21, 1999); 12 U.S.C. 1757(17). The Board appreciates the
suggestion to clarify an FCU's authority to make charitable
contributions and donations in the incidental powers rule. The final
rule amends Sec. 721.3 accordingly by adding a new paragraph, derived
from NCUA legal opinions, identifying this authority.
b. Nonmember Deposits
The Act permits an FCU to receive shares from nonmember public
units, political subdivisions, and credit unions, subject to the limits
in the nonmember deposits rule, Sec. 701.32. 12 U.S.C. 1757(6); 12 CFR
701.32. Under paragraph (b) of Sec. 701.32, the maximum amount of all
public unit and nonmember shares that an FCU may hold cannot exceed the
greater of 20% of the FCU's total shares or $1.5 million. Under
paragraph (c) of Sec. 701.32, nonmember share deposits that an FCU has
accepted to meet a matching requirement for a Community Development
Revolving Loan Fund loan count against the nonmember deposit limit once
the FCU has repaid the loan. An FCU may request an exemption from its
regional director to exceed the limit. If the regional director denies
the request for an exemption, the FCU may appeal the decision to the
Board. The RegFlex rule exempted RegFlex FCUs from both paragraphs (b)
and (c) of Sec. 701.32, so RegFlex FCUs have not been subject to the
limit on the amount of public unit and nonmember shares.
The NPRM raised the dollar threshold on the nonmember deposit limit
in Sec. 701.32(b) to $3 million. The Board acknowledged that, by
eliminating RegFlex, RegFlex FCUs would lose their blanket exemption
from the nonmember deposit cap. Based on the amount of nonmember
deposits held by RegFlex FCUs, however, the Board stated that the
proposal provided all of the necessary flexibility and regulatory
relief to all FCUs without adversely affecting any of the RegFlex FCUs
that have accepted nonmember deposits in excess of the cap.
Both credit union trade associations and two leagues objected to
the elimination of the RegFlex blanket exemption from the nonmember
deposit rule's cap because all FCUs would now need a waiver to exceed
the cap. One commenter stated that most FCUs find the waiver process,
in general, to be unduly burdensome, time consuming, and, on occasion,
arbitrary. One commenter characterized the removal of the exemption as
an unfair and inflexible approach, and another stated that the change
does not represent an easing of regulatory compliance burden. Three of
these commenters generally supported raising the dollar threshold, but
one of the trade associations stated it was unclear why NCUA chose the
new level to be $3 million. The league commenters agreed with the $3
million threshold, suggested a higher threshold, or advocated
preservation of the exemption for RegFlex institutions. One commenter
suggested that NCUA eliminate the cap or, at a minimum, increase it to
$5 million.
Two league commenters and one credit union supported the change to
the nonmember deposit dollar threshold. One commenter stated that,
although the rule would eliminate the current exemption, the proposal
provided the appropriate amount of flexibility and regulatory relief to
FCUs without adversely impacting RegFlex FCUs. Another commenter noted
that smaller asset-sized FCUs can enjoy the opportunity to acquire an
increased volume of nonmember deposits.
The bank trade association supported the proposed rule's
requirement that all FCUs be subject to nonmember share limits. It
objected, however, to the proposed increase of the dollar threshold
from $1.5 million to $3 million, citing asset liability management and
liquidity concerns that could be created for some small FCUs with such
an increase. The commenter stated that small FCUs may not have the
necessary plans, practices, and experience to manage such an inflow of
deposits. It, therefore, recommended the rule require small FCUs taking
advantage of the higher threshold of $3 million to adopt policies
managing the risk associated with nonmember deposits. The commenter
further stated that because NCUA's Prompt Corrective Action rule, Sec.
702.202, specifies that the prohibition on accepting nonmember deposits
is a discretionary supervisory action for NCUA, undercapitalized credit
unions should be prohibited from accepting or rolling over nonmember
deposits.
As the Board stated in the NPRM, nonmember shares are
characteristically more volatile than core member shares. This
additional volatility can pose asset liability management concerns and
liquidity concerns. The Board determined it was appropriate to raise
the dollar threshold to $3 million because the agency's data reveals
that only four RegFlex FCUs currently exceed the limitation in Sec.
701.32(b) of the greater of 20% of total shares or $1.5 million in
nonmember deposits, and each of those FCUs holds less than $3 million.
To raise the maximum dollar threshold to $5 million would create a
wider gap for FCUs with lower total shares from the percentage of 20%
of total shares threshold without any need for such an increase. For
instance, an FCU with $7.5 million in total shares has been subject to
the $1.5 million and 20% percent caps of Sec. 701.32. Under this final
rule, however, the FCU will be permitted to accept up to $3 million in
nonmember deposits, representing 40% of total shares. To permit this
FCU to accept up to $5 million in shares would permit the FCU to accept
nonmember deposits amounting to two-thirds or over 66% of its total
shares. As such, the final rule maintains the proposed adjustment to
the dollar threshold in paragraph (b)(1) because it maintains the
regulatory relief that RegFlex FCUs have enjoyed. Furthermore, the
adjustment extends relief to FCUs, particularly those FCUs that have
lower amounts of total shares, and remains attentive to safety and
soundness considerations. The Board also finds it unnecessary to
include a blanket prohibition for undercapitalized FCUs
[[Page 31984]]
to accept nonmember deposits in Sec. 701.32 as suggested by one
commenter. The Prompt Corrective Action rule, Sec. 702.202(b)(6),
offers NCUA the appropriate flexibility in determining whether limiting
or prohibiting an undercapitalized FCU from accepting nonmember
deposits is the appropriate supervisory action under particular facts.
c. Fixed Assets
The Act authorizes an FCU to purchase, hold, and dispose of
property necessary or incidental to its operations. 12 U.S.C. 1757(4).
Generally, the fixed assets rule provides limits on fixed asset
investments, establishes occupancy and other requirements for acquired
and abandoned premises, and prohibits certain transactions. 12 CFR
701.36. ``Fixed assets'' is defined in Sec. 701.36(e) and includes
premises. ``Premises'' means any office, branch office, suboffice,
service center, parking lot, facility, or real estate where a credit
union transacts or will transact business.
When an FCU acquires premises for future expansion and does not
fully occupy the space within one year, the rule requires the FCU's
board of directors to have a resolution in place by the end of that
year with plans for full occupation. 12 CFR 701.36(b)(1). Additionally,
the FCU must partially occupy the premises within three years, unless
the FCU obtains a waiver within 30 months of acquiring the premises. 12
CFR 701.36(b)(1)-(2). RegFlex FCUs have enjoyed more flexibility by
having authority to take up to six years to partially occupy unimproved
land they acquired for future expansion. 12 CFR 701.36(d), 742.4(a)(3).
In the NPRM, the Board proposed to amend the fixed assets rule to
extend the three-year time period to six years for any FCU that
acquires unimproved land.
One credit union trade association, five leagues, and two credit
unions supported the proposed extension of time from three years to six
years. One league noted that, while most FCUs will probably not use the
expanded time frame, the flexibility will assist them in implementing
building plans efficiently. Another league stated that the change
provides relief to FCUs that acquired land during better economic times
or rates. It noted that, under the proposed extension, FCUs will not be
forced to choose between seeking a waiver or selling land because they
could not meet the three-year timeline.
As noted in the NPRM's preamble and discussed in previous
rulemakings, the Board recognizes that many real estate transactions
are complex and time consuming, and they involve a full array of issues
that an FCU must address before it is ready to occupy the premises.
This is especially true in the unimproved land context with its
construction-related issues. The final rule adopts the change to the
fixed assets rule as proposed by permitting any FCU a longer time (up
to six years, rather than only three years) to partially occupy the
premises if it initially acquired the property as unimproved land.
d. Investment Authorities
Some of the commenters provided general comments applicable to most
or all facets of the NPRM's proposed changes to the investment rule.
One credit union generally supported the ability of all FCUs to invest
in zero-coupon investments and CMRS, as well as to engage in borrowing
repurchase transactions. Two leagues stated that, while their members
were generally supportive of giving FCUs expanded investment
authorities, these relatively sophisticated financial instruments
require a baseline of expertise. The commenters stated that the rule
should include requirements for staff to have demonstrated expertise to
handle these transactions. One league argued that the proposal's well
capitalized standard merely eliminates the RegFlex designation while
preserving the same restrictions on eligibility. As such, the commenter
urged NCUA to consider whether the current restrictions on some types
of investments should be removed for more FCUs to allow flexibility in
diversifying investments and to reduce reliance on the ``currently
limited'' investments allowed under NCUA's rules. The Board maintains
the standards and conditions for the various investment authorities set
forth the proposed rule as discussed in the responses to specific
comments below.
1. Zero-coupon Investments
Under Sec. 703.16(b), an FCU may not purchase a zero-coupon
investment with a maturity date that is more than 10 years from the
related settlement date. RegFlex FCUs have been exempt from the maximum
maturity length of 10 years in the investment rule. 12 CFR 742.4(a)(4).
To balance the risk management concerns inherent in zero-coupon
investments with the flexibility previously granted to RegFlex FCUs,
the Board proposed to establish the maximum maturity date of zero-
coupon investments to 30 years for any FCU that meets the NPRM's well
capitalized standard. The Board proposed to grandfather zero-coupon
investments purchased in accordance with Sec. 742.4(a)(4) before the
effective date of the final rule, so FCUs that purchased zero-coupon
investments with maturities greater than 10 years under RegFlex
authority would not be required to divest those investments. The
proposed rule also provided that an FCU not meeting the well
capitalized standard may only purchase a zero-coupon investment with a
maturity date that is no more than 10 years from the related settlement
date, unless it received approval from its regional director to
purchase such an investment with a greater maturity.
Three commenters objected to the proposed rule change for zero-
coupon investments. One credit union trade association encouraged NCUA
to eliminate the 10-year maturity limit for zero-coupon investments.
One credit union stated the current rule is sufficient. Both of these
commenters stated that this issue is more appropriately addressed
within an FCU's investment policy. One league stated that it is more
appropriate to adopt a rule specific to interest rate risk rather than
remove the current flexibility afforded to certain RegFlex FCUs.
Two leagues supported the proposed changes regarding zero-coupon
investments. One commenter stated that it is reasonable to require an
FCU that does not meet the well capitalized standard to obtain approval
from its regional director to purchase a zero-coupon investment with a
maturity greater than ten years. The commenter also supported the
creation of a maximum maturity date of 30 years for well capitalized
FCUs. Another commenter suggested that the proposal include greater
flexibility by permitting well capitalized FCUs to pursue a waiver from
the 30-year maturity limit, as other FCUs would have the option to seek
waivers from their 10-year maturity cap.
As the Board noted in the NPRM's preamble, the percentage loss on
zero-coupon investments increases dramatically with maturity. These
losses could make FCUs reluctant to sell zero-coupon investments and
recognize losses during periods of liquidity stress. Therefore,
consistent with safety and soundness principles, the Board does not
believe it is appropriate to allow FCUs to purchase or hold zero-coupon
investments with maturity dates that exceed 30 years. Accordingly, the
Board adopts the final rule as proposed.
2. Borrowing Repurchase Transactions
A borrowing repurchase transaction is a transaction in which an FCU
agrees to sell a security to a counterparty and to
[[Page 31985]]
repurchase the same or an identical security from that counterparty at
a specified future date and at a specified price. 12 CFR 703.2. Subject
to additional restrictions, an FCU may enter into a borrowing
repurchase transaction as long as any investments the FCU purchases
with borrowed funds mature no later than the maturity of the borrowing
repurchase transaction. 12 CFR 703.13(d).
While the investment rule prohibits an FCU from purchasing a
security with the proceeds from a borrowing repurchase agreement if the
purchased security matures after the maturity of the borrowing
repurchase agreement, NCUA adopted a limited exemption for RegFlex FCUs
from the maturity restriction. 12 CFR 703.13(d)(3); 68 FR 32958, 32959
(June 3, 2003). A RegFlex FCU has been permitted to purchase securities
with maturities exceeding the maturity of the borrowing repurchase
transaction, commonly referred to as having mismatched maturities,
provided the amount of any such purchased securities does not exceed
the FCU's net worth. 12 CFR 742.4(a)(5).
In the NPRM, the Board proposed to continue this flexibility of
mismatched maturities for borrowing repurchase transactions for FCUs
meeting the well capitalized standard. It also proposed to grandfather
borrowing repurchase transactions into which an FCU entered pursuant to
its RegFlex authority before the effective date of the final rule. The
Board also sought to extend relief from the maturity requirement to
FCUs not meeting the well capitalized standard. Under the proposed
rule, these FCUs could enter into borrowing repurchase transactions and
use the proceeds to purchase investments with maturities no more than
30 days later than the transaction's term, so long as the value of the
purchased investments would not exceed the related FCU's net worth. In
addition, under the NPRM, FCUs not meeting the well capitalized
standard would be allowed to request additional authority from their
regional directors to enter transactions whereby the maturity mismatch
would be greater than 30 days. Lastly, the Board sought comment on
whether the final rule should specify minimum experience requirements
for staff involved in the analysis and ongoing risk management of a
repurchase agreement book, especially in cases where maturities of
sources and uses are mismatched.
Two leagues and one credit union supported the revised standards on
maturity matching for borrowing repurchase transactions. One credit
union requested that the final rule permit FCUs that are well
capitalized under part 702 but that do not have a CAMEL rating of 1 or
2 to enter these transactions without a maturity mismatch limitation,
provided the assets pledged are guaranteed by a governmental agency or
government-sponsored enterprise. One credit union trade association did
not support any minimum experience requirements for staff involved in
the analysis and ongoing risk management of borrowing repurchase
transactions, arguing that FCUs should have the flexibility to hire
qualified personnel without comparing the applicant to a predetermined
set of NCUA criteria.
The final rule makes no substantive change to the proposed rule. It
does clarify, however, that when an FCU purchases investments that have
mismatched maturities under borrowing repurchase agreements, the
aggregate or total value of purchased investments made under these
conditions cannot exceed the FCU's net worth. Therefore, under the
final rule, an FCU may purchase investments with maturities exceeding
the maturity of the borrowing repurchase transaction if the aggregate
amount of all such purchased investments does not exceed its net worth.
The Board notes that the final rule does not create an exception for
purchased investments that are guaranteed by a government agency or
government-sponsored entity because the conditions on maturity
mismatches are intended to address interest rate risk, rather than
default risk. The suggested exception would not further the Board's
goal. In addition, the final rule does not include experience
requirements. The Board again reminds FCUs, however, that they should
position themselves, through in-house or contracted expertise, to
properly engage in the analysis and ongoing risk management of
borrowing repurchase transactions.
3. Commercial Mortgage Related Security (CMRS)
Pursuant to section 107(15)(B) of the Act, a RegFlex FCU had been
permitted to purchase CMRS that are not otherwise permitted by section
107(7)(E) of the Act if: (i) the security is rated in one of the two
highest rating categories by at least one nationally-recognized
statistical rating organization (NRSRO); (ii) the security meets the
definition of mortgage related security as defined in 15 U.S.C.
78c(a)(41) and the definition of CMRS in Sec. 703.2; (iii) the pool of
loans underlying the CMRS contains more than 50 loans with no one loan
representing more than 10 percent of the pool; and (iv) the FCU does
not purchase an aggregate amount of CMRS in excess of 50 percent of its
net worth. 12 CFR 742.4(a)(6). In the NPRM, the Board proposed to
permit FCUs meeting the well capitalized standard to purchase private
label CMRS under these same conditions.
The Board also proposed to permit an FCU not meeting the well
capitalized standard to purchase private label CMRS under the
conditions applicable to well capitalized FCUs, but it limited the
aggregate amount of CMRS to 25 percent of the FCU's net worth. The NPRM
permitted such an FCU to seek authorization from its regional director
to purchase a greater amount of CMRS, up to 50 percent of its net
worth, if it could demonstrate three consecutive years of effective
CMRS portfolio management and the ability to evaluate key risk factors.
The proposed rule also added a grandfather provision for private label
CMRS purchased by an FCU under its RegFlex authority before the
effective date of the final rule. In the NPRM, the Board sought comment
on whether the conditions for purchasing CMRS should be enhanced to
encourage diversity and mitigate risk.
One league and one credit union supported the changes for CMRS as
proposed. One credit union trade association advocated additional
authority for FCUs in this area and supported removal of limitations on
CMRS that are not required by the Act. One credit union stated its
particular concern with the proposal because it believes the failure of
the corporate credit union system was caused by significant
concentrations of private label mortgage related securities. The
commenter stated that the proposed rule lacks sufficient guidance
related to credit risk management. It suggested that, at a minimum, the
rule require: pre-purchase credit analysis, including analysis of
underlying collateral, geographic diversification, cash flows, and
credit structures, as well as identification and general avoidance of
subordinated tranches that represent elevated levels of credit risk in
favor of senior tranches; documentation and retention of credit
analyses for as long as an FCU holds the CMRS; and ongoing credit
monitoring to identify emerging negative trends and potential concerns.
While the Board does not incorporate these conditions in the final
rule, the Board strongly believes the commenter has identified best
practices to which FCUs should adhere if they are to purchase CMRS. The
Board adopts the provisions regarding CMRS in the final rule as
proposed.
[[Page 31986]]
e. Eligible Obligations
The eligible obligations rule permits an FCU to purchase loans from
any source, provided that two conditions are satisfied. 12 CFR 701.23.
First, the borrower is a member of that FCU. Second, the loan is either
of a type the FCU is empowered to grant or the FCU refinances the loan
within 60 days of its purchase so that it meets the empowered to grant
requirement. 12 CFR 701.23(b)(1)(i). The rule also permits an FCU to
purchase student loans and real estate-secured loans, from any source,
if the purchasing FCU grants these loans on an ongoing basis and is
purchasing either type of loan to facilitate the packaging of a pool of
such loans for sale or pledge in the secondary market. 12 CFR
701.23(b)(1)(iii)-(iv). An FCU may also purchase the obligations of a
liquidating credit union's individual members from the liquidating
credit union. 12 CFR 701.23(b)(ii). The eligible obligations rule
restricts the aggregate amount of loans that an FCU may purchase to
five percent of the purchasing FCU's unimpaired capital and surplus. 12
CFR 701.23(b)(3). It excludes certain types of loans from this limit,
including loans purchased to facilitate a sale or pledge in the
secondary market. 12 CFR 701.23(b)(3).
RegFlex FCUs have been permitted to buy loans from other federally
insured credit unions without regard to whether the loans are eligible
obligations of the purchasing FCU's members or the members of a
liquidating credit union. 12 CFR 742.4(b). Loans purchased from a
liquidating credit union, however, are subject to the cap of five
percent of unimpaired capital and surplus. 12 CFR 742.4(b)(4); 66 FR
15055, 15059 (Mar. 15, 2001). RegFlex FCUs also have been able to
purchase student loans and real estate-secured loans without the
requirement that loans be purchased to facilitate a secondary market
pool package. 12 CFR 742.4(b).
The NPRM retained the flexibility currently provided to RegFlex
FCUs for FCUs meeting the well capitalized standard. The proposed rule
also grandfathered all eligible obligations purchased by RegFlex FCUs
before the effective date of the final rule. The proposed rule
similarly amended paragraph (e) in Sec. 723.1 to address nonmember
business loans purchased under RegFlex authority or obligations
purchased under proposed Sec. 701.23(b)(2). The Board requested
specific comment on whether it should extend the flexibility from the
eligible obligations rule to all FCUs or establish an approval process
through regional directors for FCUs not meeting the well capitalized
standard.
One league supported the expansion in the eligible obligations
rule. One credit union trade association recommended, at a minimum, an
expansion of this authority to allow FCUs that are somewhat less than
well capitalized to take advantage of the flexibility afforded to FCUs
meeting the well capitalized standard. Likewise, one league and one
credit union commenter urged NCUA to extend the flexibility for
eligible obligations to all FCUs or provide a waiver process similar to
the process for other expanded authorities. One commenter stated that
eligible obligation purchases that are made after an FCU applies proper
due diligence do not pose a safety and soundness issue for that FCU or
the National Credit Union Share Insurance Fund. The credit union
commenter also urged NCUA to expand the purchasing authority to all
FCUs so they can benefit from the stabilizing effects of purchasing
well-performing obligations from diverse portfolios of other federally
insured credit unions. The commenter further stated that an expansion
would enhance safety and soundness in two ways. First, a purchasing FCU
can increase earnings by deploying excess liquidity into higher
yielding, high quality assets when loan demand from its members may be
low. Second, a purchasing FCU can reduce concentration risk because
selling institutions have different fields of membership. The commenter
also made suggestions to clarify the proposed regulatory text in Sec.
701.23.
The final rule substantively adopts the provisions in the proposed
rule pertaining to eligible obligations with two changes. It includes a
provision that allows FCUs not meeting the well capitalized standard to
seek authority from their regional directors to purchase obligations
from other federally insured credit unions under the same conditions
applicable to FCUs that do meet the well capitalized standard. The
final rule also uses plain language rather than paragraph citations
within Sec. 701.23 for ease of reading.
III. Final Rule
a. RegFlex
The final rule removes part 742 from title 12 to eliminate RegFlex
as the Board proposed in the NPRM. The Board noted in the preamble to
the proposed rule that it would address the appeals process before
NCUA's Supervisory Review Committee for RegFlex designation
revocations. In a separate, contemporaneous rulemaking, the Board is
amending NCUA Interpretive Ruling and Policy Statement 11-1, 76 FR
23871 (Apr. 29, 2011), to remove RegFlex appeals from the purview of
the committee because RegFlex no longer exists as of the effective date
of this rule.
b. Charitable Contributions
The final rule removes the entire charitable contributions rule,
Sec. 701.25, from part 701. With the deletion of this section, an FCU
will no longer be restricted by regulation to make donations only to
certain recipients and will not be required to obtain prior approval
from its board of directors. An FCU's authority to make donations will
continue to be governed by its incidental powers authority under the
Act, the fiduciary duties of its board, and its bylaws. NCUA has long
recognized an FCU's authority to make charitable contributions and
donations because an FCU may ``exercise such incidental powers as shall
be necessary or requisite to enable it to carry on effectively the
business for which it is incorporated.'' 44 FR 56691 (Oct. 2, 1979); 64
FR 19441 (Apr. 21, 1999); 12 U.S.C. 1757(17). Contributions, therefore,
must be necessary or requisite to enable the FCU to effectively carry
on its business. 12 CFR 721.2. Furthermore, FCU directors have a
fiduciary duty to direct management to operate within sound business
practices and the best interests of the membership under Sec. 701.4.
In addition, article XVI, section 4 of the FCU Bylaws prohibits FCU
directors, committee members, officers, agents, and employees from
conflicts of interest that could arise in the context of making
charitable donations.
As noted, the making of charitable contributions has long been
recognized by NCUA as an approved incidental power. The final rule,
therefore, amends Sec. 721.3 by adding a new paragraph (b) to identify
this authority and renumbers the remaining activities in the section.
c. Nonmember Deposits
The final rule raises the dollar threshold on the nonmember deposit
limit in Sec. 701.32(b) from $1.5 million to $3 million. The maximum
amount of all public unit and nonmember shares that any FCU may hold
cannot exceed the greater of 20 percent of the FCU's total shares or $3
million. Unlike the former RegFlex rule, the final rule does not
provide a standardized exemption from the nonmember deposit cap.
Section 701.32, however, continues to permit an FCU to request from its
regional director an exemption to exceed the limit on the maximum
amount of nonmember deposits. 12 CFR 701.32(b)(3)-(5). If the regional
director denies the request for
[[Page 31987]]
an exemption, the FCU may appeal the decision to the Board. 12 CFR
701.32(b)(5).
d. Fixed Assets
The final rule amends Sec. 701.36(b)(2) to permit any FCU a six-
year time frame to partially occupy the premises if the FCU acquired
unimproved land for its future expansion. As in the current rule,
premises are partially occupied when the FCU is using some part of the
space on a full-time basis. An FCU may request a waiver from the
partial occupation requirement. The amendment applies only to
unimproved real property and does not apply to any other kind of
premises.
e. Zero-Coupon Investments
In order to balance the risk management concerns discussed in the
NPRM, the final rule restricts FCUs meeting the well capitalized
standard from purchasing any zero-coupon investment with a maturity
date greater than 30 years. It also provides that an FCU not meeting
the well capitalized standard may not purchase a zero-coupon investment
with a maturity date that is more than 10 years from the related
settlement date, unless it has received approval from its regional
director to purchase such an investment with a greater maturity. In
addition, the final rule grandfathers zero-coupon investments purchased
under RegFlex authority before the effective date of this rule.
FCUs considering the purchase of zero-coupon investments should be
familiar with the dramatic rise in percentage loss on these investments
with maturity. Only FCUs with the appropriate level of expertise
positioned to measure the safety and soundness of purchasing zero-
coupon investments with extended maturities should consider such
investments.
f. Borrowing Repurchase Transactions
Section 703.13(d)(3)(iii) of the final rule permits FCUs meeting
the well capitalized standard to purchase investments with maturities
exceeding the maturity of the borrowing repurchase transaction. Section
703.13(d)(3)(ii) permits FCUs not meeting the well capitalized standard
to enter into borrowing repurchase transactions and use the proceeds to
purchase investments with maturities no more than 30 days later than
the transaction's term. Under Sec. 703.20, these FCUs may request
additional authority from their regional directors to enter
transactions whereby the maturity mismatch would be greater than 30
days. The final rule also clarifies that the total value of investments
that any FCU purchases through transactions with mismatched maturities
cannot exceed its net worth. In addition, the final rule contains a
grandfather provision for borrowing repurchase transactions into which
an FCU entered under its RegFlex authority before the effective date of
this rule.
The final rule, therefore, sets out three possible scenarios for
borrowing repurchase transactions under Sec. 703.13(d)(3). In the
first instance, the borrowing and corresponding investment transactions
must have matched maturities. In the second instance, the matched
maturity requirement would not apply if an FCU buys investments that
mature no more than 30 days after the maturity of the borrowing
repurchase transaction and the aggregate or total value of those
investments does not exceed 100 percent of the FCU's net worth. In the
third instance, an FCU that meets the well capitalized standard may
enter borrowing repurchase transactions with mismatched maturities
greater than 30 days if the total value of investments purchased
through transactions with mismatched maturities does not exceed 100
percent of the FCU's net worth.
g. CMRS
The final rule removes the prohibition in Sec. 703.16 on the
purchase of private label CMRS. The final rule permits an FCU that
meets the well capitalized standard to purchase CMRS that are not
otherwise permitted by section 107(7)(E) of the Act if: (i) the
security is rated in one of the two highest rating categories by at
least one NRSRO; \1\ (ii) the security meets the definition of mortgage
related security as defined in 15 U.S.C. 78c(a)(41) and the definition
of CMRS in Sec. 703.2; (iii) the pool of loans underlying the CMRS
contains more than 50 loans with no one loan representing more than 10
percent of the pool; and (iv) the FCU does not purchase an aggregate
amount of CMRS in excess of 50 percent of its net worth. The final rule
provides that an FCU that does not meet the well capitalized standard
may purchase private label CMRS under conditions (i) through (iii)
above, but limits the aggregate amount of private label CMRS to 25
percent of its net worth. Section 703.20 establishes an approval
process so that such an FCU may seek authorization from its regional
director to purchase a greater amount of CMRS, up to a maximum of 50%
of its net worth. As part of its request for approval, an FCU must
demonstrate three consecutive years of effective CMRS portfolio
management and the ability to evaluate key risk factors.
---------------------------------------------------------------------------
\1\ As required by Section 939A of the Dodd-Frank Wall Street
Reform and Consumer Protection Act (Dodd-Frank), the Board issued a
proposal on March 1, 2011 to change this prong in part 742 with the
following language: ``The issuer has at least a very strong capacity
to meet its financial obligations, even under adverse economic
conditions, for the projected life of the security.'' 76 FR 11164
(Mar. 1, 2011). When NCUA adopts a final rule for the proposed
rulemaking issued in March 2011, the standard will change
accordingly.
---------------------------------------------------------------------------
Finally, the final rule adds a grandfather provision to Sec.
703.18 for private label CMRS purchased by an FCU under its RegFlex
authority before the effective date of this rule. As such, an FCU that
does not meet the well capitalized standard, but which holds private
label CMRS in excess of 25% of its net worth on the effective date of
this rule, is not required to divest those holdings on its books. The
FCU, however, cannot make additional purchases of CMRS while its
aggregate CMRS holdings exceed 25% of its net worth, without the
approval from the appropriate regional director under Sec. 703.20.
The Board notes again that the authority to purchase private label
CMRS, as with all of the flexibilities in the final rule, is not
appropriate for every FCU. Selection of CMRS consistent with safety and
soundness requires careful analysis of the underlying commercial
mortgages and corresponding collateral, as well as analysis of the cash
flow, credit structure, and market performance of the security.
As with all investments, FCUs must understand and be capable of
managing the risks associated with CMRS before purchasing them. The
investment rule's Sec. 703.3 requires an FCU's board of directors to
develop investment policies that address credit, liquidity, interest
rate, and concentration risks. 12 CFR 703.3. The policy must also
identify the characteristics of any investments that are suitable for
the FCU. FCUs that purchase CMRS must develop sound risk management
policies and construct limits that represent the FCU board's risk
tolerance. If necessary, NCUA may require an FCU to divest its
investments or assets for substantive safety and soundness reasons, on
a case-by-case basis.
h. Eligible Obligations
The final rule renumbers Sec. 701.23 and, under paragraph (b)(2),
permits FCUs that meet the well capitalized standard to buy loans from
other federally insured credit unions without regard to whether the
loans are eligible obligations of the purchasing FCU's members or the
members of a liquidating credit union. The final rule
[[Page 31988]]
subjects loans purchased from a liquidating credit union to the
eligible obligations cap of five percent of unimpaired capital and
surplus. FCUs meeting the well capitalized standard may also purchase
student loans and real estate-secured loans without the requirement
that the loans be purchased to facilitate a secondary market pool
package. The final rule also grandfathers all obligations purchased
under RegFlex authority before the effective date of this rule and
makes a similar amendment to paragraph (e) in Sec. 723.1 to address
nonmember business loans purchased under RegFlex authority or
obligations under Sec. 701.23(b)(2).
In addition, the final rule permits FCUs that do not meet the well
capitalized standard to request authority from their regional directors
to engage in this activity through a written request similar to the
process created in paragraph (b) of Sec. 703.20.
IV. The Interim Final Rule and Request for Comment
In issuing the proposed rule, NCUA inadvertently omitted changes to
RegFlex references in its rule setting the permissible deductible for
fidelity bond coverage. 12 CFR 713.6. That rule establishes a formula
for calculating the maximum allowable deductible based on asset size
with a cap of $200,000, but permits RegFlex FCUs a higher maximum
deductible of up to $1 million. 12 CFR 713.6(a)(1), (c). With the
elimination of RegFlex, the Board is issuing an interim final rule to
amend the fidelity bond rule so that it is consistent with the other
subject-specific rules discussed in this preamble. The interim final
rule changes the applicable benchmark for increased deductible limits
in Sec. 713.6 from RegFlex FCUs to FCUs meeting the same well
capitalized standard used in the other rules impacted by the
elimination of RegFlex.
The amendments track those that the Board makes in the final rule,
as well as the Sec. 713.6 provisions the Board adopted in 2005 for
FCUs that automatically qualified for a RegFlex designation. 70 FR
61713 (Oct. 26, 2005)
The interim final rule permits a maximum deductible for fidelity
bond coverage of $1 million if the FCU has: (1) Received a composite
CAMEL rating of ``1'' or ``2'' during its last two full examinations
and (2) maintained a ``well capitalized'' net worth classification for
the immediately preceding six quarters or has remained ``well
capitalized'' for the immediately preceding six quarters after applying
the applicable RBNW requirement.
Once a year, an FCU meeting the interim final rule's well
capitalized standard must review its continued eligibility for a higher
deductible under the rule, which is the same approach applied by the
Board when it adopted the fidelity bond RegFlex provisions in 2005. Id.
at 61714. An FCU's continued eligibility will be based on its asset
size as reflected in its most recent year-end 5300 call report and its
net worth as reflected in that same report. If an FCU that previously
qualified for the higher deductible has a decrease in assets based on
its most recent year-end 5300 call report or its net worth has
decreased so that it would no longer qualify under the well capitalized
standard in the rule, then it must obtain the coverage otherwise
required by Sec. 713.6. Likewise, if an FCU meets the assets threshold
and its net worth would otherwise continue to qualify it for the well
capitalized standard, but it failed to receive either a CAMEL rating of
1 or 2 during its most recent examination report, it must obtain the
required coverage with a deductible of no more than $200,000.
The Board is adopting this rulemaking as an interim final rule
because it meets the good cause exception to the procedures under the
Administrative Procedure Act (APA), 5 U.S.C. 553(b)(3). Notice and
public procedures are impracticable and contrary to the public interest
in this matter because the final rule eliminates RegFlex. To maintain
cross-references to RegFlex in the fidelity bond coverage rule would
cause confusion in implementation by FCUs, as well as undue and
untimely execution of NCUA's functions in monitoring compliance with
Sec. 713.6. The interim final rule complements the final rule, and it
is appropriate for the Board to synchronize its adoption of all of the
rule changes made in this document. The Board finds these reasons are
good cause to dispense with the APA's notice and comment period and the
procedures in NCUA's Interpretive Ruling and Policy Statement 87-2. 5
U.S.C. 553(b)(3)(B); 52 FR 35213 (Sept. 18, 1987), as amended by 68 FR
31949 (May 29, 2003). The interim final rule has an effective date 30
days after publication in the Federal Register, which coincides with
the final rule's effective date. Although the rule is being issued as
an interim final rule, the Board encourages interested parties to
submit comments within 60 days so the Board can consider any amendments
to the rule.
V. Rule Summary Table
In a further effort to comply with the Plain Writing Act of 2010
(Pub. L. 111-274), the Board includes the following table to assist
readers by distinguishing the authorities for FCUs that meet the well
capitalized standard and FCUs that do not. We are providing this table
for your reference only. Please refer to regulatory text, as well as
the preambles for the NPRM and the final rule, for specific
information.
------------------------------------------------------------------------
FCUs not meeting
Final rule authority FCUs meeting well well capitalized
capitalized standard standard
------------------------------------------------------------------------
Charitable Contributions.... Well capitalized This flexibility
FCUs may make applies to all
donations FCUs.
consistent with
their incidental
powers authority
and board's
fiduciary duties.
Nonmember Deposits.......... May accept up to the This flexibility
greater of 20% applies to all
total shares or $3 FCUs.
million. May
request exemption
from regional
director for
greater amount.
Unimproved Property for May take up to six This flexibility
Future Expansion. years to partially applies to all
occupy unimproved FCUs.
real property
purchased for
future expansion.
Zero-coupon Investments*.... May purchase zero- May purchase zero-
coupon investments coupon investments
with maturity dates with maturity dates
up to 30 years. up to 10 years. May
request authority
from regional
director for
maturities up to 30
years.
[[Page 31989]]
Borrowing Repurchase May enter into May enter into
Transaction*. Borrowing Borrowing
Repurchase Repurchase
Transactions where Transactions where
the underlying the underlying
investments mature investments mature
later than the no later than 30
borrowing, provided days after the
the total amount of borrowing, provided
investments the total amount of
purchased do not investments
exceed 100 percent purchased do not
of net worth. exceed 100 percent
of net worth. May
request authority
from regional
director for longer
maturity mismatch.
Private Label Commercial Not restricted to Similar
Mortgage Related Security purchasing only flexibilities apply
(CMRS)*. CMRS issued by to all FCUs, under
Fannie Mae or the following
Freddie Mac. May conditions:
purchase Private Requirements (i)-
Label CMRS if: (iii) would be the
(i) the security is same as for Well
rated in one of the Capitalized FCUs.
two highest rating The limit in
categories by at requirement (iv) is
least one NRSRO;. 25 percent of net
(ii) it is a worth. May request
``mortgage related approval from the
security'' under regional director
the Securities for higher limit,
Exchange Act of up to 50 percent of
1934 and Sec. net worth, if FCU
703.2;. has 3 consecutive
years of effective
CMRS portfolio
management and the
ability to evaluate
key risk factors.
(iii) the pool of
loans underlying
the CMRS contains
more than 50 loans
with no one loan
representing more
than 10 percent of
the pool; and
(iv) the FCU does
not purchase an
aggregate amount in
excess of 50
percent of net
worth.
Purchase of Eligible In addition to the These flexibilities
Obligations *. authority in the may be extended if
current Sec. approved by
701.23, may buy regional director,
loans from other otherwise limited
federally insured to the other
credit unions provisions of Sec.
without regard to 701.23 for
whether the loans purchasing eligible
are obligations of obligations
the purchasing (subject to
FCU's members. May membership or
also purchase pooling
nonmember student requirements)
loans and real
estate loans
without the need
for purchase to
facilitate a
secondary market
pool package. Also
may purchase loans
from a liquidating
credit union
regardless of
whether the loans
were made to
liquidating CU's
members, subject to
the aggregate cap
on eligible
obligations of 5
percent of
unimpaired capital
and surplus.
Fidelity Bond Coverage-- $2,000 plus 1/1000 $2,000 plus 1/1000
Maximum Deductible for FCUs of total assets up of total assets up
with Over $1 million in to a maximum of to a maximum of
Assets. $1,000,000. $200,000.
------------------------------------------------------------------------
* All authorized activity entered into before the effective date of the
final rule is grandfathered.
VI. Regulatory Procedures
a. Regulatory Flexibility Act
The Regulatory Flexibility Act requires NCUA to prepare an analysis
to describe any significant economic impact a rule may have on a
substantial number of small entities (primarily those under ten million
dollars in assets). This rule reduces compliance burden and extends
regulatory relief while maintaining existing safety and soundness
standards. NCUA has determined and certifies that this rule will not
have a significant economic impact on a substantial number of small
credit unions.
b. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (PRA) applies to rulemakings in
which an agency by rule creates a new paperwork burden on regulated
entities or modifies an existing burden. 44 U.S.C. 3507(d); 5 CFR part
1320. For purposes of the PRA, a paperwork burden may take the form of
either a reporting or a recordkeeping requirement, both referred to as
information collections. As required, NCUA has applied to the Office of
Management and Budget (OMB) for approval of the information collection
requirement described below.
The final rule contains an information collection in the form of a
voluntary written request for additional authorities from a regional
director under proposed Sec. 703.20 and Sec. 701.23(h). An FCU that
does not meet the well capitalized standard may submit a written
request to its regional director to request expanded authority above
any or all of the following provisions in the rule: (1) The borrowing
repurchase transaction maximum maturity mismatch of 30 days under
proposed Sec. 703.13(d)(3)(ii), (2) the zero-coupon investment 10-year
maximum maturity under proposed Sec. 703.14(i), up to a maturity of no
more than 30 years, (3) the aggregate commercial mortgage related
security limit of 25% of net worth under proposed Sec. 703.14(j), up
to no more than 50% of net worth, and (4) the membership and pooling
limitations in Sec. 701.23(b)(1) when purchasing loans under Sec.
701.23(b)(2). An FCU meets the well capitalized standard if the FCU has
received a composite CAMEL rating of ``1'' or ``2'' during its last two
full examinations and (1) has maintained a ``well capitalized'' net
worth classification for the immediately preceding six quarters, or (2)
has remained ``well capitalized'' for the immediately preceding six
quarters after applying the applicable RBNW requirement. In the
proposed rule, the Board estimated 1,770 FCUs may apply for an
additional authority. The cumulative total annual paperwork burden is
estimated to be approximately 1,770 hours.
[[Page 31990]]
OMB is currently reviewing NCUA's submission and NCUA will publish
the OMB number assigned to this rulemaking once issued.
c. Executive Order 13132
Executive Order 13132 encourages independent regulatory agencies to
consider the impact of their actions on state and local interests.
NCUA, an independent regulatory agency as defined in 44 U.S.C. 3502(5),
voluntarily complies with the executive order to adhere to fundamental
federalism principles. This final rule will not have a substantial
direct effect on the states, on the relationship between the national
government and the states, or on the distribution of power and
responsibilities among the various levels of government. NCUA has
determined that this rule does not constitute a policy that has
federalism implications for purposes of the executive order.
d. Small Business Regulatory Enforcement Fairness Act
The Small Business Regulatory Enforcement Fairness Act of 1996
(Pub. L. 104-121) provides generally for congressional review of agency
rules. A reporting requirement is triggered in instances where NCUA
issues a final rule as defined by Section 551 of the Administrative
Procedure Act. 5 U.S.C. 551. The Office of Management and Budget has
determined that this rule is not a major rule for purposes of the Small
Business Regulatory Enforcement Fairness Act of 1996.
e. Assessment of Federal Regulations and Policies on Families
NCUA has determined that this final IRPS will not affect family
well-being within the meaning of Section 654 of the Treasury and
General Government Appropriations Act, 1999, Public Law 105-277, 112
Stat. 2681 (1998).
List of Subjects
12 CFR Part 701
Credit unions.
12 CFR Part 703
Credit unions, Investments.
12 CFR Part 713
Credit unions, Insurance, Reporting and recordkeeping requirements.
12 CFR Part 721
Credit unions.
12 CFR Part 723
Credit, Credit unions, Reporting and recordkeeping requirements.
12 CFR Part 742
Credit unions, reporting and recordkeeping requirements.
By the National Credit Union Administration Board on May 24,
2012.
Mary Rupp,
Secretary of the Board.
For the reasons discussed above, NCUA amends 12 CFR parts 701, 703,
713, 721, 723, and 742 as follows:
PART 701--ORGANIZATION AND OPERATIONS OF FEDERAL CREDIT UNIONS
0
1. The authority citation for part 701 continues to read as follows:
Authority: 12 U.S.C. 1752(5), 1755, 1756, 1757, 1759, 1761a,
1761b, 1766, 1767, 1782, 1784, 1787, and 1789. Section 701.6 is also
authorized by 31 U.S.C. 3717. Section 701.31 is also authorized by
15 U.S.C. 1601 et seq., 42 U.S.C. 1861 and 42 U.S.C. 3601-3610.
Section 701.35 is also authorized by 42 U.S.C. 4311-4312.
0
2. In Sec. 701.23:
0
a. Redesignate paragraphs (b)(2) and (3) as paragraphs (b)(3) and (4);
0
b. Add new paragraph (b)(2):
0
c. In newly redesignated paragraph (b)(4) introductory text, remove the
phrase ``under paragraph (b) of this section'' and add in its place
``under paragraphs (b)(1) and (b)(2)(ii) of this section'';
0
d. Add paragraph (b)(5);
0
e. Add paragraph (h).
The additions read as follows:
Sec. 701.23 Purchase, sale, and pledge of eligible obligations.
* * * * *
(b) * * *
(2) Purchase of obligations from a FICU. A federal credit union
that received a composite CAMEL rating of ``1'' or ``2'' for the last
two (2) full examinations and maintained a net worth classification of
``well capitalized'' under Part 702 of this chapter for the six (6)
immediately preceding quarters or, if subject to a risk-based net worth
(RBNW) requirement under Part 702 of this chapter, has remained ``well
capitalized'' for the six (6) immediately preceding quarters after
applying the applicable RBNW requirement may purchase and hold the
following obligations, provided that it would be empowered to grant
them:
(i) Eligible obligations. Eligible obligations without regard to
whether they are obligations of its members, provided they are
purchased from a federally-insured credit union and the obligations are
either:
(A) Loans the purchasing credit union is empowered to grant; or
(B) Loans refinanced with the consent of the borrowers, within 60
days after they are purchased, so that they are loans the purchasing
credit union is empowered to grant;
(ii) Eligible obligations of a liquidating credit union. Eligible
obligations of a liquidating credit union without regard to whether
they are obligations of the liquidating credit union's members.
(iii) Student loans. Student loans provided they are purchased from
a federally-insured credit union only;
(iv) Real estate-secured loans. Real estate-secured loans provided
they are purchased from a federally-insured credit union only;
* * * * *
(5) Grandfathered purchases. Subject to safety and soundness
considerations, a federal credit union may hold any of the loans
described in paragraph (b)(2) of this section provided it was
authorized to purchase the loan and purchased the loan before July 2,
2012.
* * * * *
(h) Additional authority. (1) A federal credit union may submit a
written request to its regional director seeking expanded authority to
purchase loans described in paragraph (b)(2) of this section, if it is
not otherwise authorized by this section. The written request must
include the following:
(i) A copy of the credit union's purchase policy;
(ii) The types of eligible obligations under paragraph (b)(2) of
this section that the credit union seeks to purchase;
(iii) An explanation of the need for additional authority; and
(iv) An analysis of the credit union's prior experience with the
purchase of eligible obligations.
(2) Approval process. A regional director will provide a written
determination on a request for expanded authority within 60 calendar
days after receipt of the request; however, the 60-day period will not
begin until the requesting credit union has submitted all necessary
information to the regional director. The regional director will inform
the requesting credit union, in writing, of the date the request was
received and of any additional documentation that the regional director
requires in support of the request. If the regional director approves
the request, the regional director will establish a limit on loan
purchases as appropriate and subject to the limitations in this
section. If the regional director does not notify the credit union of
the action taken on its request within 60 calendar days of the receipt
of the request or the receipt of additional requested supporting
information, whichever
[[Page 31991]]
occurs later, the credit union may purchase loans it requested under
paragraph (b)(2) of this section.
(3) Appeal to NCUA Board. A federal credit union may appeal any
part of the determination made under this paragraph to the NCUA Board
by submitting its appeal through the regional director within 30 days
of the date of the determination.
Sec. 701.25 [Removed and Reserved]
0
3. Remove and reserve Sec. 701.25.
Sec. 701.32 [Amended]
0
4. In Sec. 701.32 amend paragraph (b)(1) by removing ``$1.5 million''
after the words ``federal credit union'' and adding in its place ``$3
million''.
0
5. Amend Sec. 701.36 by revising paragraph (b)(2) and removing
paragraph (d) and redesignating paragraph (e) as paragraph (d):
The revision reads as follows:
Sec. 701.36 FCU ownership of fixed assets.
* * * * *
(b) * * *
(2) When a federal credit union acquires premises for future
expansion, it must partially occupy the premises within a reasonable
period, not to exceed three years, unless the credit union has acquired
unimproved real property for future expansion. If a federal credit
union has acquired unimproved real property to develop for future
expansion, it must partially occupy the premises within a reasonable
period, not to exceed six years. Premises are partially occupied when
the credit union is using some part of the space on a full-time basis.
The NCUA may waive this partial occupation requirement in writing upon
written request. The request must be made within 30 months after the
property is acquired.
* * * * *
PART 703--INVESTMENTS AND DEPOSIT ACTIVITIES
0
6. The authority citation for part 703 continues to read as follows:
Authority: 12 U.S.C. 1757(7), 1757(8), 1757(15).
0
7. In Sec. 703.13, revise paragraph (d)(3) to read as follows:
Sec. 703.13 Permissible investment activities.
* * * * *
(d) * * *
(3) The investments referenced in paragraph (d)(2) of this section
must mature under the following conditions:
(i) No later than the maturity of the borrowing repurchase
transaction;
(ii) No later than thirty days after the borrowing repurchase
transaction, unless authorized under Sec. 703.20, provided the value
of all investments purchased with maturities later than borrowing
repurchase transactions does not exceed 100 percent of the federal
credit union's net worth; or
(iii) At any time later than the maturity of the borrowing
repurchase transaction, provided the value of all investments purchased
with maturities later than borrowing repurchase transactions does not
exceed 100 percent of the federal credit union's net worth and the
credit union received a composite CAMEL rating of ``1'' or ``2'' for
the last two (2) full examinations and maintained a net worth
classification of ``well capitalized'' under part 702 of this chapter
for the six (6) immediately preceding quarters or, if subject to a
risk-based net worth (RBNW) requirement under part 702 of this chapter,
has remained ``well capitalized'' for the six (6) immediately preceding
quarters after applying the applicable RBNW requirement.
* * * * *
0
8. Amend Sec. 703.14 by adding paragraphs (i) and (j) to read as
follows:
Sec. 703.14 Permissible investments.
* * * * *
(i) Zero-coupon investments. A federal credit union may only
purchase a zero-coupon investment with a maturity date that is no
greater than 10 years from the related settlement date, unless
authorized under Sec. 703.20 or otherwise provided in this paragraph.
A federal credit union that received a composite CAMEL rating of ``1''
or ``2'' for the last two (2) full examinations and maintained a net
worth classification of ``well capitalized'' under part 702 of this
chapter for the six (6) immediately preceding quarters or, if subject
to a risk-based net worth (RBNW) requirement under part 702 of this
chapter, has remained ``well capitalized'' for the six (6) immediately
preceding quarters after applying the applicable RBNW requirement, may
purchase a zero-coupon investment with a maturity date that is no
greater than 30 years from the related settlement date.
(j) Commercial mortgage related security (CMRS). A federal credit
union may purchase a CMRS permitted by Section 107(7)(E) of the Act;
and, pursuant to Section 107(15)(B) of the Act, a CMRS of an issuer
other than a government-sponsored enterprise enumerated in Section
107(7)(E) of the Act, provided:
(1) The CMRS is rated in one of the two highest rating categories
by at least one nationally-recognized statistical rating organization;
(2) The CMRS meets the definition of mortgage related security as
defined in 15 U.S.C. 78c(a)(41) and the definition of commercial
mortgage related security as defined in Sec. 703.2 of this part;
(3) The CMRS's underlying pool of loans contains more than 50 loans
with no one loan representing more than 10 percent of the pool; and
(4) The aggregate amount of private label CMRS purchased by the
federal credit union does not exceed 25 percent of its net worth,
unless authorized under Sec. 703.20 or as otherwise provided in this
subparagraph. A federal credit union that has received a composite
CAMEL rating of ``1'' or ``2'' for the last two (2) full examinations
and maintained a net worth classification of ``well capitalized'' under
part 702 of this chapter for the six (6) immediately preceding quarters
or, if subject to a risk-based net worth (RBNW) requirement under part
702 of this chapter, has remained ``well capitalized'' for the six (6)
immediately preceding quarters after applying the applicable RBNW
requirement, may hold private label CMRS in an aggregate amount not to
exceed 50% of its net worth.
Sec. 703.16 [Amended]
0
9. In Sec. 703.16, remove paragraphs (b) and (d) and redesignate
paragraphs (c), (e), and (f) as paragraphs (b), (c), and (d)
respectively.
0
10. In Sec. 703.18, redesignate paragraph (b) as paragraph (c) and add
new paragraph (b) read as follows:
Sec. 703.18 Grandfathered investments.
* * * * *
(b) A federal credit union may hold a zero-coupon investment with a
maturity greater than 10 years, a borrowing repurchase transaction in
which the investment matures at any time later than the maturity of the
borrowing, or CMRS that cause the credit union's aggregate amount of
CMRS from issuers other than government-sponsored enterprises to exceed
25% of its net worth, in each case if it purchased the investment or
entered the transaction under the Regulatory Flexibility Program before
July 2, 2012.
0
11. Add Sec. 703.20 to read as follows:
Sec. 703.20 Request for additional authority.
(a) Additional authority. A federal credit union may submit a
written request to its regional director seeking expanded authority
above the following limits in this part:
[[Page 31992]]
(1) Borrowing repurchase transaction maximum maturity mismatch of
30 days under Sec. 703.13(d)(3)(ii).
(2) Zero-coupon investment 10-year maximum maturity under Sec.
703.14(i), up to a maturity of no more than 30 years.
(3) CMRS aggregate limit of 25% of net worth under Sec. 703.14(j),
up to no more than 50% of net worth. To obtain approval for additional
authority, the federal credit union must demonstrate three consecutive
years of effective CMRS portfolio management and the ability to
evaluate key risk factors.
(b) Written request. A federal credit union desiring additional
authority must submit a written request to the NCUA regional office
having jurisdiction over the geographical area in which the credit
union's main office is located, that includes the following:
(1) A copy of the credit union's investment policy;
(2) The higher limit sought;
(3) An explanation of the need for additional authority;
(4) Documentation supporting the credit union's ability to manage
the investment or activity; and
(5) An analysis of the credit union's prior experience with the
investment or activity.
(c) Approval process. A regional director will provide a written
determination on a request for expanded authority within 60 calendar
days after receipt of the request; however, the 60-day period will not
begin until the requesting credit union has submitted all necessary
information to the regional director. The regional director will inform
the requesting credit union, in writing, of the date the request was
received and of any additional documentation that the regional director
requires in support of the request. If the regional director approves
the request, the regional director will establish a limit on the
investment or activity as appropriate and subject to the limitations in
this part. If the regional director does not notify the credit union of
the action taken on its request within 60 calendar days of the receipt
of the request or the receipt of additional requested supporting
information, whichever occurs later, the credit union may proceed with
its proposed investment or investment activity.
(d) Appeal to NCUA Board. A federal credit union may appeal any
part of the determination made under paragraph (c) to the NCUA Board by
submitting its appeal through the regional director within 30 days of
the date of the determination.
PART 713--FIDELITY BONDS AND INSURANCE COVERAGE FOR FEDERAL CREDIT
UNIONS
0
12. The authority citation for part 713 continues to read as follows:
Authority: 12 U.S.C. 1761a, 1761b, 1766(a), 1766(h),
1789(a)(11).
0
13. In Sec. 713.6, revise paragraphs (a)(1) and (c) to read as
follows:
Sec. 713.6 What is the permissible deductible?
(a)(1) The maximum amount of allowable deductible is computed based
on a federal credit union's asset size and capital level, as follows:
----------------------------------------------------------------------------------------------------------------
Assets Maximum deductible
----------------------------------------------------------------------------------------------------------------
$0 to $100,000.............................. No deductible allowed.
$100,001 to $250,000........................ $1,000.
$250,000 to $1,000,000...................... $2,000.
Over $1,000,000............................. $2,000 plus 1/1000 of total assets up to a maximum of $200,000;
for credit unions that have received a composite CAMEL rating of
``1'' or ``2'' for the last two (2) full examinations and
maintained a net worth classification of ``well capitalized''
under part 702 of this chapter for the six (6) immediately
preceding quarters or, if subject to a risk-based net worth
(RBNW) requirement under part 702 of this chapter, has remained
``well capitalized'' for the six (6) immediately preceding
quarters after applying the applicable RBNW requirement, the
maximum deductible is $1,000,000.
----------------------------------------------------------------------------------------------------------------
* * * * *
(c) A federal credit union that has received a composite CAMEL
rating of ``1'' or ``2'' for the last two (2) full examinations and
maintained a net worth classification of ``well capitalized'' under
part 702 of this chapter for the six (6) immediately preceding quarters
or, if subject to a risk-based net worth (RBNW) requirement under part
702 of this chapter, has remained ``well capitalized'' for the six (6)
immediately preceding quarters after applying the applicable RBNW
requirement is eligible to qualify for a deductible in excess of
$200,000. The credit union's eligibility is determined based on it
having assets in excess of $1 million as reflected in its most recent
year-end 5300 call report. A federal credit union that previously
qualified for a deductible in excess of $200,000, but that subsequently
fails to qualify based on its most recent year-end 5300 call report
because either its assets have decreased or it no longer meets the net
worth requirements of this paragraph or fails to meet the CAMEL rating
requirements of this paragraph as determined by its most recent
examination report, must obtain the coverage otherwise required by
paragraph (b) of this section within 30 days of filing its year-end
call report and must notify the appropriate NCUA regional office in
writing of its changed status and confirm that it has obtained the
required coverage.
PART 721--INCIDENTAL POWERS
0
14. The authority citation for part 721 continues to read as follows:
Authority: 12 U.S.C. 1757(17), 1766, 1789.
0
15. In Sec. 721.3, redesignate paragraphs (b) through (l) as
paragraphs (c) through (m) and add new paragraph (b) to read as
follows:
Sec. 721.3 What categories of activities are preapproved incidental
powers necessary or requisite to carry on a credit union's business?
* * * * *
(b) Charitable contributions and donations. Charitable
contributions and donations are gifts you provide to assist others
through contributions of staff, equipment, money, or other resources.
Examples of charitable contributions include donations to community
groups, nonprofit organizations, other credit unions or credit union
affiliated causes, political donations, as well as donations to create
charitable foundations.
* * * * *
PART 723--MEMBER BUSINESS LOANS
0
16. The authority citation for part 723 continues to read as follows:
Authority: 12 U.S.C. 1756, 1757, 1757A, 1766, 1785, 1789.
[[Page 31993]]
0
17. In Sec. 723.1 revise paragraph (e) to read as follows:
Sec. 723.1 What is a member business loan?
* * * * *
(e) Purchases of nonmember loans and nonmember loan participations.
Any interest a credit union obtains in a nonmember loan, pursuant to
Sec. Sec. 701.22 and 701.23(b)(2), under a Regulatory Flexibility
Program designation before July 2, 2012 or other authority, is treated
the same as a member business loan for purposes of this rule and the
risk weighting standards under part 702 of this chapter, except that
the effect of such interest on a credit union's aggregate member
business loan limit will be as set forth in Sec. 723.16(b) of this
part.
PART 742--[REMOVED]
0
18. Under the authority of 12 U.S.C. 1756 and 1766, the National Credit
Union Administration removes part 742.
[FR Doc. 2012-13212 Filed 5-30-12; 8:45 am]
BILLING CODE 7535-01-P