[Federal Register Volume 76, Number 249 (Wednesday, December 28, 2011)]
[Proposed Rules]
[Pages 81421-81429]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-33041]
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NATIONAL CREDIT UNION ADMINISTRATION
12 CFR Parts 701, 703, 723, and 742
RIN 3133-AD98
Eligible Obligations, Charitable Contributions, Nonmember
Deposits, Fixed Assets, Investments, Member Business Loans, and
Regulatory Flexibility Program
AGENCY: National Credit Union Administration (NCUA).
ACTION: Proposed rule with request for comments.
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SUMMARY: NCUA proposes to eliminate the Regulatory Flexibility Program
(RegFlex) to provide regulatory relief to Federal credit unions. NCUA
also proposes to remove or amend 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, and member business
loans.
DATES: Send your comments to reach us on or before February 27, 2012.
We may not consider comments received after the above date in making
our decision on the proposed rule.
ADDRESSES: 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.
E-mail: Address to [email protected]. Include ``[Your
name] Comments on Proposed Rule 742, Regulatory Flexibility Program''
in the e-mail subject line.
Fax: (703) 518-6319. Use the subject line described above
for e-mail.
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 e-mail to [email protected].
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. The Rule as Proposed
III. Section-by-Section Analysis
IV. Regulatory Procedures
I. Background
a. Why is NCUA proposing 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.\1\ Consistent with the
spirit of the Executive Order and as part of NCUA's Regulatory
Modernization Initiative, the NCUA Board (Board) has decided to propose
a rule that streamlines its regulatory program by eliminating RegFlex.
The proposed rule would relieve regulatory burden on Federal credit
unions (FCUs) because they would no longer need to engage in any
process for a RegFlex designation. In addition, FCUs that are currently
not RegFlex eligible would receive regulatory relief because the
proposal extends to them most of the flexibilities previously available
only to RegFlex FCUs.
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\1\ President Obama also signed the Plain Writing Act of 2010
(Pub. L. 111-274) into law on October 13, 2010 ``to improve the
effectiveness and accountability of Federal agencies to the public
by promoting clear Government communication that the public can
understand and use.'' This preamble is written to meet plain writing
objectives.
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b. What is RegFlex?
RegFlex relieves FCUs from certain regulatory restrictions and
grants them additional powers if they have demonstrated sustained
superior performance as measured by CAMEL rating and net worth
classification. 12 CFR 742.1. An FCU may qualify for RegFlex treatment
automatically or by application to the appropriate regional director.
12 CFR 742.2. Specifically, an FCU automatically qualifies when it has
received a composite CAMEL rating of ``1'' or ``2'' during its last two
examinations and has maintained a net worth classification of ``well
capitalized'' under part 702 of NCUA's rules for the last six quarters.
If an FCU is subject to a risk-based net worth (RBNW) requirement under
part 702, it also qualifies for RegFlex treatment when it has remained
``well capitalized'' for the last six quarters after applying the
applicable RBNW requirement. An FCU that does not automatically qualify
may apply for a RegFlex designation with the appropriate regional
director. 12 CFR 742.2(a) and (b).
The Board established RegFlex in 2002. 66 FR 58656 (Nov. 23, 2001).
Since then, NCUA has amended RegFlex a number of times to increase
available relief for FCUs from a variety of regulatory restrictions,
reduce the criteria to obtain RegFlex status, or enhance safety and
soundness for FCUs. 71 FR 4039 (Jan. 25, 2006); 72 FR 30247 (May 31,
2007); 74 FR 13083 (Mar. 26, 2009); 75 FR 66298 (Oct. 28, 2010).
The current RegFlex rule provides RegFlex FCUs with 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. It also provides 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.
II. The Rule as Proposed
a. How would this rule change RegFlex and reduce regulatory burden on
FCUs?
NCUA proposes to eliminate RegFlex and the charitable contributions
rule, and amend the rules that apply to eligible obligations, nonmember
deposits, fixed assets, and investments. With this proposal, the Board
intends to enable FCUs to engage in the activities permitted by the
existing RegFlex rule. As of June 30, 2011, there are 4,534 FCUs, 2,764
of which are RegFlex FCUs. The proposed changes would extend regulatory
relief to the remaining 1,770 FCUs that do not currently enjoy a
RegFlex designation. NCUA requests
[[Page 81422]]
your comments on the proposed rulemaking.
The proposed rule places most of the six flexibilities of the
RegFlex rule into the subject-specific rules that apply to all FCUs.
Under the existing rule, RegFlex FCUs do not have to comply with the
charitable contributions rule. The proposed rulemaking, therefore,
removes the charitable contributions rule so that all FCUs may make
donations based on sound judgment and business practices without
regulatory restrictions. At present, RegFlex FCUs do not have to comply
with the limits on nonmember deposits. The NCUA Board has reviewed the
amount of nonmember deposits currently held by FCUs and proposes an
adjustment to the nonmember deposits rule to allow FCUs to accept more
nonmember deposits. Likewise, the proposed rulemaking extends the
amount of time in which FCUs must occupy unimproved property to six
years, as currently permitted for RegFlex FCUs. Finally, the proposed
amendments to the investment rule permit extended maturities for zero-
coupon investments and borrowing repurchase transactions as well as the
ability to purchase commercial mortgage related securities under
similar conditions to the existing RegFlex rule. In addition, the
proposed rule moves the provisions to buy nonmember and other
obligations currently found in the RegFlex rule, into the eligible
obligations rule, Sec. 701.23.
This proposal closely follows the analyses the Board previously
used when it adopted the various flexibilities in the RegFlex rule.
While the proposed rule extends relief to FCUs, the Board recognizes
the relief granted by this proposal may not be appropriate for every
FCU. Only FCUs with the requisite expertise and policies to engage in
the activities addressed in this rulemaking, as well as the financial
condition necessary for particular activities, should avail themselves
of the proposed new authorities. Each FCU's board of directors bears
the ultimate responsibility for its FCU's direction and control. NCUA
may also take appropriate supervisory action to address unsafe and
unsound practices or conditions.
b. Does this rule create greater restrictions than the current rules?
No, although the proposal modifies some of the RegFlex
flexibilities. The Board proposes to establish a maximum maturity of 30
years for zero-coupon investments even though the RegFlex rule does not
currently subject RegFlex FCUs to a maturity limit on these
investments. The Board believes the maturity cap will have no negative
impact on these FCUs. The proposed rule also removes the automatic
exemption from the nonmember deposits limit, but the Board does not
foresee any adverse impact on FCUs with the proposed change.
RegFlex FCUs currently operating under the automatic exemption
criteria for a RegFlex designation will generally continue to be able
to avail themselves of the flexibilities found in part 742. Under the
proposal, FCUs that received a RegFlex designation from a regional
director because they did not meet the standards for automatic
qualification will now, like current non-RegFlex FCUs, have certain
conditions placed on their previous RegFlex flexibilities, unless they
receive approval for additional authority. The Board discusses these
conditions further in the section-by-section analysis.
III. Section-by-Section Analysis
NCUA proposes to remove part 742 in its entirety to eliminate
RegFlex. NCUA also proposes to remove or amend the related rules that
apply to eligible obligations, charitable contributions, nonmember
deposits, fixed assets, investments, and member business loans. As the
Board noted when it first adopted RegFlex, the regulatory provisions
covered in RegFlex are not specifically required by statute. This
proposed rulemaking aims to ease compliance burden and permit greater
flexibility for FCUs in managing their operations, while simultaneously
retaining certain safety and soundness standards.
The Board also intends to delete an FCU's ability to appeal the
revocation of its RegFlex designation to the NCUA's Supervisory Review
Committee. NCUA Interpretive Ruling and Policy Statement (IRPS) 11-1,
76 FR 23871 (Apr. 29, 2011). If the Board eliminates RegFlex
designations as proposed, there will be no need for such an appeal. In
that event, the Board intends to issue a direct final IRPS that would
remove RegFlex revocations from the list of material supervisory
determinations an FCU may appeal under NCUA IRPS 11-1.
a. Charitable Contributions
FCUs make charitable contributions under the provision in the FCU
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 current charitable contributions rule, Sec. 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 in 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 operate primarily to
promote and develop credit unions. The rule requires an FCU's board of
directors to approve charitable contributions based on a determination
that the contributions are in the best interests of the FCU 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), exempts RegFlex FCUs from the entire
charitable contributions rule.
The Board proposes to eliminate the entire charitable contributions
rule, Sec. 701.25, so that any FCU can make donations without the
prior approval of its board of directors and without regulatory
restrictions as to recipients. The Board notes that, even in the
absence of a charitable contributions rule, an FCU's authority to make
donations is dictated by its incidental powers authority given in the
FCU Act. 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 that could arise in
the context of making charitable donations.
b. Nonmember Deposits
The FCU Act permits an FCU to receive shares from nonmember public
units, political subdivisions \2\ and credit
[[Page 81423]]
unions, but the FCU is 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. This means that an FCU
holding less than $7.5 million in total shares cannot accept nonmember
deposits in excess of $1.5 million, as 20% of $7.5 million is $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 counts against the nonmember
deposit limit once the FCU has repaid the loan. An FCU may request an
exemption from the appropriate 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 currently
exempts RegFlex FCUs from both paragraphs (b) and (c) of Sec. 701.32.
RegFlex FCUs, therefore, are not subject to the limit on the amount of
deposits they may accept from nonmember public units and credit unions.
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\2\ The terms ``public unit'' and ``political subdivision'' in
the nonmember deposit rule are defined in paragraphs (c) and (d) of
Sec. 745.1. ``Public unit'' means the United States, any state of
the United States, the District of Columbia, the Commonwealth of
Puerto Rico, the Panama Canal Zone, any territory or possession of
the United States, any county, municipality, or political
subdivision thereof, or any Indian tribe as defined in section 3(c)
of the Indian Financing Act of 1974. ``Political subdivision''
includes any subdivision of a public unit or any principal
department of such public unit, (1) The creation of which
subdivision or department has been expressly authorized by state
statute, (2) to which some functions of government have been
delegated by state statute, and (3) to which funds have been
allocated by statute or ordinance for its exclusive use and control.
It also includes drainage, irrigation, navigation improvement,
levee, sanitary, school or power districts and bridge or port
authorities, and other special districts created by state statute or
compacts between the states. Subordinate or nonautonomous divisions,
agencies, or boards within principal departments are not included.
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Currently, only four RegFlex FCUs exceed the limitation in Sec.
701.32(b) of the greater of 20% of total shares or $1.5 million in
nonmember deposits. Each of those FCUs holds more than $1.5 million in
nonmember deposits, but less than $3 million. The Board, therefore,
proposes to raise the dollar threshold on the nonmember deposit limit
in Sec. 701.32(b) to $3 million. The increase in the dollar limit
would permit FCUs with less than $7.5 million in total shares to accept
up to $3 million in nonmember deposits, compared to their current $1.5
million limit. The Board acknowledges that, by eliminating RegFlex,
RegFlex FCUs would lose their blanket exemption from the nonmember
deposit cap. From its review of the nonmember deposits presently held
by RegFlex FCUs, however, the Board believes the proposal provides 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. The Board also continues to
recognize the risks that nonmember shares may present. Nonmember shares
are characteristically more volatile than core member shares. This
additional volatility can pose asset liability management concerns and
liquidity concerns. The proposed adjustment to the dollar threshold in
paragraph (b)(1) maintains the regulatory relief that RegFlex FCUs have
enjoyed, extends relief to FCUs, and remains attentive to safety and
soundness considerations.
c. Fixed Assets
The FCU 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 asset 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 are defined in Sec. 701.36(e) and include
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). Where an FCU is acquiring unimproved land, the
partial occupancy requirement often is more difficult to satisfy than
if the FCU were purchasing premises with an existing branch building.
The existing fixed assets rule and the RegFlex rule extend the three-
year time period to six years for RegFlex FCUs, but only with respect
to the acquisition of unimproved land. 12 CFR 701.36(d), 742.4(a)(3).
The Board proposes to amend the fixed assets rule to extend the
three-year time period to six years for any FCU that is acquiring
unimproved land. This extension would not apply, however, to any other
kind of premises. As it discussed in previous rulemakings, the Board is
aware that the fixed asset rule's three-year partial occupancy
requirement, even with a waiver option, may be burdensome for some
FCUs. NCUA recognizes many real estate transactions are complex and
time consuming. These transactions 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 Board believes it is appropriate to now extend
relief from this compliance burden to all FCUs by allowing an FCU up to
six years to partially occupy some of the space on a full-time basis if
it initially acquired the property as unimproved land. Under the
proposed change to paragraph (b)(2) in Sec. 701.36, all FCUs would
have additional flexibility they need to manage their fixed asset
portfolios, consistent with safe and sound credit union operations.
d. 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. The RegFlex rule exempts RegFlex FCUs from the
maximum maturity length of 10 years in the investment rule. 12 CFR
742.4(a)(4). When creating the exemption for RegFlex FCUs, the Board
determined it would not have a significant adverse impact on safety and
soundness and would increase potential yield with prudent asset
liability management. 66 FR 58656, 58659 (Nov. 23, 2001).
Since the adoption of the RegFlex rule, however, NCUA has carefully
reviewed the strategic and risk management considerations for
permitting the use of long-term zero-coupon investments in credit union
portfolios. NCUA has concluded that such long-term investments
generally are not appropriate. Zero-coupon investments with maturities
exceeding 10 years have higher price sensitivity than other securities,
including shorter-term zero-coupon investments. This increased price
sensitivity, together with the lack of interim cash flows, makes long-
term zero-coupon investments inconsistent with the primary portfolio
objectives of safety and liquidity.
The table below shows approximate percentage declines in the price
of zero-coupon investments and coupon-bearing Treasury bonds from a 300
basis point increase in rates. The percentage loss on zero-coupon
investments increases dramatically with maturity and greatly exceeds
that on coupon-bearing Treasury bonds at maturities greater than 10
years. Losses of this magnitude could also make FCUs reluctant to sell
zero-coupon investments and recognize losses during periods of
liquidity stress.
[[Page 81424]]
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% Change in % Change in
Price (from Price (from
Maturity (Years) +300 bps) Zero- +300 bps)
Coupon Coupon
Treasury Treasury
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2................................................................. 4 4
5................................................................. 12 12
10................................................................ 25 21
20................................................................ 44 30
30................................................................ 58 39
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Source: Bloomberg--TRA function, October 7, 2011.
To balance the risk management concerns inherent in zero-coupon
investments with the flexibility previously granted to RegFlex FCUs,
the Board proposes to establish the maximum maturity date of zero-
coupon investments to 30 years for any FCU that meets a ``well
capitalized standard'' for purposes of this rulemaking. An FCU meeting
the ``well capitalized standard'' is an FCU that has received a
composite CAMEL rating of ``1'' or ``2'' during its last two
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 Board
expects that FCUs considering the purchase of zero-coupon investments
will be familiar with the dramatic rise in percentage loss on these
investments with maturity, as demonstrated in the table. Only FCUs with
the appropriate level of expertise positioned to measure the safety and
soundness of purchasing zero-coupons with extended maturities should
consider such investments.
To ensure the proposed rule does not eliminate the flexibility
currently enjoyed by RegFlex FCUs, the proposed rule ``grandfathers''
zero-coupon investments purchased in accordance with current Sec.
742.4(a)(4) before the effective date of the final rule. As such, the
rule would not require an FCU that, under its RegFlex authority,
purchased zero-coupon investments with maturities greater than 10 years
to divest these investments so long as those investments are on the
FCU's books before the effective date of the final rule.
An FCU that does not meet the well capitalized standard will be
held to the requirement currently found in Sec. 703.16(b). It may not
purchase a zero-coupon investment with a maturity date that is more
than 10 years from the related settlement date, unless the FCU has
received approval from its regional director to purchase such an
investment with a greater maturity.
To achieve the Board's objectives, the Board proposes to remove the
current prohibition from Sec. 703.16, amend Sec. Sec. 703.14 and
703.18, and add a new Sec. 703.20. The proposed rule adds the purchase
of zero-coupon investments to Sec. 703.14(i) as a permissible
investment under certain conditions. An FCU may only purchase a zero-
coupon investment with a maturity date of up to 10 years from the
related settlement date, unless it receives written approval from its
regional director to purchase such investment with a longer maturity
under new proposed Sec. 703.20. FCUs meeting the well capitalized
standard may purchase zero-coupon investments with maturity dates no
greater than 30 years. Finally, the proposed rule adds a grandfather
provision to Sec. 703.18 for zero-coupon investments purchased under
RegFlex authority before the effective date of the final rule.
e. Borrowing Repurchase Transactions
A borrowing repurchase transaction is a transaction in which an FCU
agrees to sell a security to a counterparty and to 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
so 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).
As stated, 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. 12 CFR 703.13(d)(3). NCUA adopted this
restriction because FCUs could incur significant interest rate risk by
borrowing funds at short-term interest rates and investing in long-term
fixed rate instruments. Interest rate risk results if an FCU invests
the proceeds of the transaction significantly shorter or longer than
the borrowing transaction.
NCUA, however, adopted a limited exemption for RegFlex FCUs from
the maturity restriction. 68 FR 32958, 32959 (June 3, 2003). In so
doing, the Board recognized that NCUA does not impose a similar
prohibition for other borrowing arrangements. The RegFlex rule permits
RegFlex FCUs to purchase securities with maturities exceeding the
maturity of the borrowing repurchase transaction, also commonly
referred to as having mismatched maturities. The amount of any such
purchased securities, however, cannot exceed the credit union's net
worth under Sec. 742.4(a)(5).
The Board proposes to continue this flexibility of mismatched
maturities for borrowing repurchase transactions for FCUs meeting the
well capitalized standard. The Board also proposes extending relief
from the maturity requirement to FCUs that do not meet the well
capitalized standard. The proposal amends paragraph (d)(3) of Sec.
703.13 to permit FCUs to enter into borrowing repurchase transactions
and use the proceeds to purchase securities with maturities no more
than 30 days later than the transaction's term and the value of the
purchased assets does not exceed the FCU's net worth. FCUs that do not
meet the well capitalized standard may also request additional
authority from their regional directors under proposed Sec. 703.20 to
enter transactions whereby the maturity mismatch would be greater than
30 days. The proposed rule also adds a grandfather provision to Sec.
703.18 for borrowing repurchase transactions that an FCU entered under
its RegFlex authority before the effective date of the final rule.
The proposed Sec. 703.13(d)(3), therefore, sets out the three
possible scenarios for borrowing repurchase transactions. 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 later than the borrowing repurchase transaction and
the 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 value of the
investments does not exceed 100 percent of the FCU's net worth.
The Board proposes that an FCU that does not meet the well
capitalized standard enter a borrowing repurchase agreement with a
maturity mismatch between the repurchase agreement and the reinvested
funds not to exceed 30 days. The Board seeks comment on whether the
regulation 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.
f. Commercial Mortgage Related Security
Section 703.16(d) of NCUA's investment rule generally prohibits an
FCU from purchasing commercial
[[Page 81425]]
mortgage related securities (CMRS) of an issuer other than a
government-sponsored enterprise. This prohibition is consistent with
section 107(7)(E) of the FCU Act. 12 U.S.C. 1757(7)(E). Under Sec.
107(15)(B) of the FCU Act, however, FCUs are permitted to purchase
mortgage related securities (as defined in section 3(a)(41) of the
Securities Exchange Act of 1934, as amended). 12 U.S.C. 1757(15)(B).
That definition includes mortgage related securities backed solely by
residential mortgages, solely by CMRS, and by mixed residential and
commercial mortgages. Although section 107(15)(B) and section 107(7)(E)
permit different kinds of investments for FCUs, some overlap exists
between the two. Specifically, some CMRS described in section
107(15)(B) also fit the description of investments permitted by section
107(7)(E). 67 FR 78996, 78997 (Dec. 27, 2002).
Based on its analysis of the interplay of these sections in the FCU
Act and the development of the CMRS market, NCUA permitted RegFlex FCUs
to purchase CMRS that are not otherwise permitted by section 107(7)(E)
of the FCU Act, subject to certain safety and soundness related
restrictions. 68 FR 32958 (June 3, 2003).
Under the existing RegFlex rule, Sec. 742.4(a)(6), RegFlex FCUs
may purchase CMRS that are not otherwise permitted by section 107(7)(E)
if: (i) The security is rated in one of the two highest rating
categories by at least one nationally-recognized statistical rating
organization (NSRO);\3\ (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
Board proposes to permit all FCUs to purchase private label CMRS under
certain conditions.
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\3\ 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 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). If and when a final rule is adopted, a similar conforming
change will be made as necessary for this rulemaking.
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The proposed rule removes the Sec. 703.16 prohibition barring the
purchase of private label CMRS and adds the authority as a permissible
investment in proposed Sec. 703.14(j), with limits based on whether
the FCU meets the well capitalized standard. An FCU that meets the well
capitalized standard may purchase private label CMRS under the same
parameters currently found in Sec. 742.4(a)(6). An FCU that does not
meet the well capitalized standard may purchase private label CMRS if:
(i) The security is rated in one of the two highest rating categories
by at least one NSRO (as amended in accordance with Section 939A of
Dodd-Frank); (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
private label CMRS in excess of 25 percent of its net worth, unless it
receives authority from the applicable regional director to purchase a
higher amount. Proposed Sec. 703.20 provides the approval process so
that an FCU may exceed the aggregate cap on CMRS of 25% net worth up to
a maximum of 50% of 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.
Finally, the proposed 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 the final rule. As such, an FCU
that does not meet the well capitalized standard under the proposal,
but which holds private label CMRS in excess of 25% of its net worth,
would not be required to divest of those holdings on its books when the
final rule takes effect. Such an FCU, however, could not 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 proposed Sec. 703.20.
The Board acknowledges that the proposed authority, as with all of
the flexibilities that would be granted under this proposed rulemaking,
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.
The Board also notes that the proposal does not diminish NCUA's
authority to require an FCU to divest its investments or assets for
substantive safety and soundness reasons. Divestiture is a safety and
soundness remedy imposed on a case-by-case basis.
The Board seeks comment on whether the conditions for purchasing
CMRS in the rule should be enhanced to encourage diversity and mitigate
risk. NCUA is concerned from its recent experience that the current
rule may contain inadequate limitations.
g. 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 to meet that standard. 12 CFR
701.23(b)(1)(i). The phrase ``empowered to grant'' refers to an FCU's
authority to make the type of loans permitted by the FCU Act, NCUA
regulations, FCU Bylaws, and an FCU's own internal policies. NCUA OGC
Op. 04-0713 (Oct. 25, 2004). 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 on 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 imposes restrictions,
including a limit on the aggregate amount of loans that an FCU may
purchase of 5 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 on
the secondary market. 12 CFR 701.23(b)(3).
The current RegFlex rule permits RegFlex FCUs to buy loans from
other federally insured credit unions without regard to whether the
loans are eligible obligations of the purchasing FCU's
[[Page 81426]]
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 eligible obligations cap of 5 percent unimpaired capital and
surplus. 12 CFR Sec. 742.4(b)(4); 66 FR 15055, 15059 (Mar. 15, 2001).
RegFlex FCUs may also purchase student loans and real-estate secured
loans without the need to purchase them in order to facilitate a
secondary market pool package under current Sec. 742.4(b). When the
Board adopted the rule, it relied on its legal analysis of sections
107(13) and 107(14) in the FCU Act to provide the relief to RegFlex
FCUs. Section 107(13) of the FCU Act authorizes the purchase of
eligible obligations of an FCU's members or the members of a
liquidating credit union. 12 U.S.C. 1757(13). Section 107(14) of the
FCU Act allows an FCU to purchase all or part of the assets of another
credit union. 12 U.S.C. 1757(14). In relying on the authority of
Section 107(14) to adopt the eligible obligation provision in the
RegFlex rule, the Board acknowledged that it was taking a more
expansive interpretation than it had in the past, but that the
interpretation was consistent with other FCU powers. 66 FR 58656, 58660
(Nov. 23, 2001); 51 FR 15055, 15059 (Mar. 15, 2001). In adopting this
provision in the RegFlex rule, NCUA intended to expand the liquidity
options for RegFlex FCUs, provide them with enhanced regulatory
flexibility, and enhance the safety and soundness of the credit union
system.
The proposed rule retains the flexibility provided currently in the
RegFlex rule for FCUs meeting the well capitalized standard by
transferring the provisions of current Sec. 742.4(b) to a renumbered
Sec. 701.23 as paragraph (b)(2). The Board also proposes to
grandfather all obligations purchased by RegFlex FCUs under the
existing Sec. 742.4(b) as addressed in the proposed paragraph (b)(5)
of Sec. 701.23. NCUA proposes a similar amendment to paragraph (e) in
Sec. 723.1 to address nonmember business loans purchased under RegFlex
authority or proposed Sec. 701.23(b)(2).
The Board requests specific comment on whether it should extend the
flexibility from the eligible obligations rule as discussed to all
FCUs. Are there safety and soundness concerns that prevent the Board
from extending this authority to all FCUs? Alternatively, should the
final rule permit FCUs that do not meet the well capitalized standard
to request approval from regional directors, similar to the proposed
process for expanded investment authority?
h. Summary of Proposed Sections
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 in following the various proposed authorities for well
capitalized FCUs and FCUs that do not meet the well capitalized
standard. We are providing this table for your reference only. Please
refer to the preamble and proposed regulatory text for specific
information about the proposed rule.
------------------------------------------------------------------------
FCUs not meeting
Proposed rule authority FCUs meeting well well capitalized
capitalized standard standard
------------------------------------------------------------------------
Charitable Contributions.... Well capitalized This flexibility
FCUs may make would be extended
donations to all FCUs.
consistent with
their incidental
powers authority
and board's
fiduciary duties.
Non-member Deposits......... May accept up to the This flexibility
greater of 20% would be extended
total shares or $3 to all FCUs. (The
million. May proposed rule
request exemption raises the dollar
from regional threshold from $1.5
director for million to $3
greater amount. million. An FCU
with less than $15
million in total
shares may now
accept up to $3
million in
nonmember
deposits.)
Unimproved Property for May take up to six This flexibility
Future Expansion. years to partially would be extended
occupy unimproved to all FCUs.
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.
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, up to days after the
100 percent of net borrowing, up to
worth. 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 would
(CMRS)*. CMRS issued by be extended to all
Fannie Mae or FCUs, under the
Freddie Mac. May following
purchase Private conditions:
Label CMRS if: Requirements (i)-
(i) the security is (iii) would be the
rated in one of the same as for Well
two highest rating Capitalized FCUs.
categories by at The limit in
least one NSRO;. requirement (iv)
(ii) it is a would be 25 percent
``mortgage related of net worth. May
security'' under request approval
the Securities from the regional
Exchange Act of director for higher
1934 and Sec. limit, up to 50
703.2;. percent of net
(iii) the pool of worth, if FCU has 3
loans underlying consecutive years
the CMRS contains of effective CMRS
more than 50 loans portfolio
with no one loan management and the
representing more ability to evaluate
than 10 percent of key risk factors.
the pool; and.
(iv) the FCU does
not purchase an
aggregate amount in
excess of 50
percent of net
worth..
[[Page 81427]]
Purchase of Eligible In addition to the May purchase EOs
Obligations (EOs)*. authority in the under the
current Sec. conditions in the
701.23, may buy current Sec.
loans from other 701.23 (subject to
federally insured membership or
credit unions pooling
without regard to requirements).
whether the loans
are EOs of the
purchasing FCU's
members. May also
purchase nonmember
student loans and
real estate loans
without the need to
purchase them in
order 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.
------------------------------------------------------------------------
\*\ All authorized activity entered into before effective date is
grandfathered.
i. Request for Comment
The Board asks for your comment on whether the proposed rulemaking
accomplishes the following: (1) Reduces compliance burden for FCUs; (2)
assists them in improving financial performance; and (3) better enables
them to provide member services, including extensions of credit. The
Board also asks for your comment as to whether FCUs without
consistently strong examination ratings and levels of net worth have
the ability to manage the risks of the proposed expanded authorities.
For instance, if NCUA grants additional authority regarding the
maturity limit restrictions on zero-coupon investments or borrowing
repurchase transactions for FCUs, that either do not meet the well
capitalized standard or lack demonstrated expertise in managing
particular investment risk, does it raise significant liquidity or
safety and soundness concerns?
IV. Regulatory Procedures
a. Regulatory Flexibility Act
The Regulatory Flexibility Act requires NCUA to prepare an analysis
to describe any significant economic impact a proposed rule may have on
a substantial number of small entities (primarily those under ten
million dollars in assets). This proposed rule reduces compliance
burden and extends regulatory relief while maintaining existing safety
and soundness standards. NCUA has determined this proposed rule will
not have a significant economic impact on a substantial number of small
credit unions, so NCUA is not required to conduct a regulatory
flexibility analysis.
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 USC 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.
The proposed 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. 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 proposed 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, and (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. An FCU meets the ``well capitalized''
standard if the FCU has received a composite CAMEL rating of ``1'' or
``2'' during its last two 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 Board estimates 1,770 FCUs may apply for an additional
authority under Sec. 703.20. The cumulative total annual paperwork
burden is estimated to be approximately 1,770 hours.
NCUA considers comments by the public on this proposed collection
of information in:
Evaluating whether the proposed collection of information
is necessary for the proper performance of the functions of the NCUA,
including whether the information will have a practical use;
Evaluating the accuracy of the NCUA's estimate of the
burden of the proposed collection of information, including the
validity of the methodology and assumptions used;
Enhancing the quality, usefulness, and clarity of the
information to be collected; and
Minimizing the burden of collection of information on
those who are required to respond, including through the use of
appropriate automated, electronic, mechanical, or other technological
collection techniques or other forms of information technology, e.g.,
permitting electronic submission of responses.
The PRA requires the Office of Management and Budget (OMB) to make
a decision concerning the collection of information contained in the
proposed regulation between 30 and 60 days after publication of this
document in the Federal Register. Therefore, a comment to OMB is best
assured of having its full effect if OMB receives it within 30 days of
publication. This does not affect the deadline for the public to
comment to NCUA on the proposed regulation.
Comments on the proposed information collection requirements should
be sent to: Office of Information and Regulatory Affairs, OMB, New
Executive Office Building, 725 17th Street NW., Washington, DC 20503;
Attention: NCUA Desk Officer, with a copy to Mary Rupp, Secretary of
the Board, National Credit Union Administration, 1775 Duke Street,
Alexandria, Virginia 22314-3428.
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 proposed rule would
[[Page 81428]]
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 proposed rule does not constitute a
policy that has federalism implications for purposes of the executive
order.
e. Agency Regulatory Goal
NCUA's goal is to promulgate clear and understandable regulations
that impose minimal regulatory burden. We request your comments on
whether this proposed rule is understandable and minimally intrusive if
implemented as proposed.
List of Subjects
12 CFR part 701
Credit unions.
12 CFR part 703
Credit unions, Investments.
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 December
15, 2011.
Mary Rupp,
Secretary of the Board.
For the reasons discussed above, NCUA proposes to amend 12 CFR
parts 701, 703, 723, and 742 as follows:
PART 701--ORGANIZATION AND OPERATIONS OF FEDERAL CREDIT UNIONS
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.
2. In Sec. 701.23:
a. Redesignate paragraphs (b)(2) and (3) as paragraphs (b)(3) and
(4);
b. Add new paragraph (b)(2);
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'';
d. Add paragraph (b)(5) to read as follows:
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) 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 pursuant to
paragraph (b)(1)(i) of this section without regard to whether they are
obligations of its members, provided they are purchased from a
federally-insured credit union only;
(ii) Eligible obligations of a liquidating credit union. Eligible
obligations of a liquidating credit union pursuant to paragraph
(b)(1)(ii) of this section without regard to whether they are
obligations of the liquidating credit union's members.
(iii) Student loans. Student loans pursuant to paragraph
(b)(1)(iii) of this section, provided they are purchased from a
federally-insured credit union only;
(iv) Mortgage loans. Real-estate secured loans pursuant to
paragraph (b)(1)(iv) of this section, 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
[EFFECTIVE DATE OF FINAL RULE].
* * * * *
Sec. 701.25 [Removed and Reserved]
3. Remove and reserve Sec. 701.25.
Sec. 701.32 [Amended]
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''.
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. 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.
If the 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.
* * * * *
PART 703--INVESTMENTS AND DEPOSIT ACTIVITIES
6. The authority citation for part 703 continues to read as
follows:
Authority: 12 U.S.C. 1757(7), 1757(8), 1757(15).
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 the investments 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 the investments 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) 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.
* * * * *
8. Amend Sec. 703.14 by adding paragraphs (i) and (j) to read as
follows:
[[Page 81429]]
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) 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) 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]
9. In Sec. 703.16, remove paragraph (b) and paragraph (d) and
redesignate paragraphs (c), (e), and (f) as paragraphs (b), (c), and
(d), respectively.
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
[EFFECTIVE DATE OF FINAL RULE].
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:
(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 your investment policy;
(2) The higher limit sought;
(3) An explanation of the need for additional authority;
(4) Documentation supporting your 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
might require 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 723--MEMBER BUSINESS LOANS
12. The authority citation for part 723 continues to read as
follows:
Authority: 12 U.S.C. 1756, 1757, 1757A, 1766, 1785, 1789.
13. 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. 701.22, Sec. 701.23(b)(2), under a Regulatory Flexibility
Program designation before [EFFECTIVE DATE OF FINAL RULE] 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]
16. Under the authority of 12 U.S.C. 1756 and 1766, the National
Credit Union Administration removes part 742.
[FR Doc. 2011-33041 Filed 12-27-11; 8:45 am]
BILLING CODE 7535-01-P