On June 22, 1999, the Office of Personnel Management (OPM) published proposed regulations (64 FR 33326) on the Federal Tort Claims Act. The Federal Tort Claims Act provides that the United States may be held liable for property damage, personal injury, or death caused by the negligent or wrongful act or omission of its employees, while they are acting within the scope of their office or employment. The Federal Tort Claims Act authorizes the head of each Federal agency, or his or her designee, the authority to consider, compromise, and settle any claim for money damages against the United States for injury to or loss of property or personal injury or death caused by the negligent or wrongful act or omission of any employee while acting within the scope of their office or employment, under circumstances where the United States, if a private person, would be liable to the claimant in accordance with the law of the place where the act or omission occurred.

The Department of Justice (DOJ) administers the Federal Tort Claims Act for the United States Government. The DOJ has authorized each Federal agency to issue regulations and establish procedures for implementing the Federal Tort Claims Act. The Director of OPM has delegated the responsibility for this function to the General Counsel of OPM. However, any award, compromise, or settlement in excess of $25,000, can be effected only with the prior written approval of the Attorney General.

The final regulations on the Federal Tort Claims Act have been updated and revised in consistency with the DOJ regulations at 28 CFR part 14. In addition, the final regulations will include revisions to reflect the changes for filing administrative claims with OPM and the delegation of authority for this function within OPM by the General Counsel.

During the comment period, OPM did not receive any comments on the proposed regulations.

I certify that this regulation will not have a significant economic impact on a substantial number of small entities (including small businesses, small organizational units, and small governmental jurisdictions), since it only applies to Federal employees and agencies.

On June 20, 2000, we published in the Federal Register a final rule that amended the user fee regulations to replace the hourly rate user fees for the inspection and approval of pet food manufacturing, rendering, blending, digest, and spraying and drying facilities with flat rate user fees that would cover the cost of all inspections required for annual approval.

In the rule portion of the final rule, the flat rate user fee for the renewal of approval of pet food spraying and drying facilities was listed as $162.00 for all inspections required during the year. As explained in the SUPPLEMENTARY INFORMATION section of the final rule, the correct flat rate user fee for this service is $162.50. This document corrects that error.

In Docket No. 98-045-2, published on June 20, 2000 (65 FR 38179-38182), make the following correction: On page 38181, in § 130.11, in the table, under the column User Fee, correct “$162.00” to read “$162.50”.

The Egg Products Inspection Act (EPIA) (21 U.S.C. 1031, et seq. ) provides for the inspection of egg products by Federal inspectors at official plants. Federal inspection protects the health and welfare of consumers by ensuring that egg products are wholesome, not adulterated, and properly labeled and packaged.

The Agricultural Marketing Service (AMS) was responsible for administering the EPIA from its enactment in 1970 until 1995. At that time, the Federal Crop Insurance Reform and Department of Agriculture Reorganization Act of 1994 (Pub. L. 103-354; 7 U.S.C. 6981) delegated food safety responsibilities to the Under Secretary of Agriculture for Food Safety. The Department subsequently revised its regulations to transfer egg product inspection functions under the EPIA to FSIS. AMS retained only those functions related to their shell egg surveillance program. The regulations governing the inspection of eggs and egg products (9 CFR Part 590) were transferred to Part 9 of the Code of Federal Regulations on December 31, 1998 (63 FR 72352).

FSIS bears the cost of mandatory inspection. However, the EPIA specifies that plants pay for overtime and holiday inspection services (21 U.S.C. 1053). There has not been a change in overtime and holiday fees for egg products inspection services since the transfer of program functions from AMS to FSIS in May 1995. AMS established and implemented the current fees in November 1994. These fees reflect only the direct costs of inspection at that time and are insufficient to recover FSIS's current costs for delivery of inspection service.

In order to recover the full cost of inspection, FSIS is increasing its rates to charge overtime and holiday fees for egg products inspection services that are the same as overtime and holiday fees for meat and poultry inspection. The Agency is making the fees for meat, poultry, and egg inspection services the same because these services are indistinguishable from a cost standpoint. Although these fee increases are large, they reflect the total cost of inspection, including national and locality pay raises for Federal employees, inflation, applicable overhead costs, and other inspection costs. The current and new FSIS overtime and holiday inspection services fees for egg products plants are reported in Table 1.

Table 2 shows salary, overhead, and other inspection costs for Fiscal Year (FY) 1998, and the projected added inflation and Federal pay increases for FY 1999 and FY 2000 used to obtain the total amount from which the new rates are derived. These costs are the total costs for meat, poultry, and egg products inspection services. Overhead costs are the indirect costs for administration and management associated with providing inspection services. Other inspection costs include direct costs for travel and laboratory support costs associated with inspection services.

Beginning with the Federal fiscal year 2001, FSIS intends to annually review its fees for overtime and holiday egg products inspection services, as well as fees for meat and poultry inspection services, to allow for necessary adjustments on a fiscal year basis. The fiscal year approach is an accepted accounting principle that will facilitate more consistent and timely proposals to adjust both fees and assist the Agency and affected industry in planning for these fee adjustments. The Agency intends to explore the possibility of publishing a three to five year plan of fee rate adjustments based on estimates of cost escalation.

FSIS loses from $80,000 to $100,000 in revenue for every two-week period that the final rule is delayed in being published. To recover the increased costs in an expeditious manner, the Administrator has determined that these amendments should be effective less than 30 days after publication in the Federal Register . Therefore, the increases in fees will be effective July 30, 2000.

On March 3, 2000, FSIS published a proposed rule (65 FR 11486) to increase the fees that it charges egg products plants for providing overtime and holiday inspection services. FSIS initially provided 60 days for public comment, ending on May 2, 2000. In response to a request for more time to comment to allow for the development of supporting data related to the impact of the proposed rule, FSIS extended the comment period for 30 days, until June 1, 2000. The Agency received no additional comments during the extended comment period.

The Agency received two comments from industry organizations opposing the increase in fees. The Agency addresses their specific objections.

Comment: Commenters opposed the increase in fees because it is a significant increase.

Response: The Agency agrees that the increase in overtime and holiday inspection fees for egg products inspection services is significant. However, as the Agency stated in the proposed rule, the Agency has not increased these fees for several years despite the escalation of the cost of performing inspection. FSIS is required to recover the full costs of overtime and holiday inspection services.

Comment: A commenter stated that the increase in fees would seriously damage the profitability of most egg processing firms operating on a contractual basis of sales with its customers for FY 2000.

Response: The commenter included no data to characterize the extent of the perceived impact. The increase in fees provided for by this final rule will not be effective until late in FY 2000. Therefore, any impact on the profitability of egg processing firms operating on a contractual basis of sales with its customers for FY 2000 should be minimized. Regardless, as was mentioned earlier, FSIS is required to recover the full costs of overtime and holiday inspection services.

Comment: One commenter asserted that nearly half of the fee is administrative expense, which, the commenter stated, is an unacceptable Federal administrative inefficiency.

Response: “Overhead” accounts for 22.05% of the cost of the fees and the “Other Inspection Costs” category makes up 13.19% of the cost of the fees. “Other Inspection Costs” include expenditures for travel and laboratory support, both of which are a necessary expense for inspection services.

Comment: A commenter disagreed with the Agency's assessment that the fee increases will amount to a $0.0003 increase in cost per pound of product. The commenter calculated that costs per pound will be 33% greater than the Agency estimated.

Response: Since the commenter did not submit any data to verify or support its claim, the Agency has no reason to change its original estimate.

Comment: One commenter recommended phasing in the fee increases over a period of a minimum of three to five years.

Response: FSIS cannot phase-in the cost increase because it is obliged by law to recover the full cost of providing overtime and holiday inspection services. The Agency currently charges meat and poultry establishments the same fees for overtime and holiday inspection services that are being required for egg products plants by this rule. The Agency derived its new fee by considering costs for meat, poultry, and egg products inspection services.

Comment: A commenter stated that the yearly increase of costs of $13,700 per firm, “would be devastating to many small, family-owned poultry operations.”

Response: FSIS had estimated in the proposed rule that the proposed overtime and holiday inspection services fee increases would result in an increase in costs per firm of $13,700 for FY 2000. The $13,700 figure is an average cost estimate. As mentioned later in the preamble, small plants in the egg products industry will not be affected adversely by the fee increases because these increases represent only a small increase in the costs currently borne by those plants that elect to use overtime and holiday services. Some firms may not avail themselves of overtime or holiday inspection services or use them only a very limited basis. Therefore, their additional expenses would be negligible.

FSIS is amending § 590.126 of 9 CFR to increase the fee for providing overtime inspection services from $26.16 per hour per program employee to $39.76 per hour per program employee. For holiday services, FSIS is amending § 590.128(a) to increase the fee from $17.44 per hour per program employee to $39.76 per hour per program employee.

The Agricultural Marketing Act of 1946, as amended, provides the authority for collection of fees approximately equal to the cost of voluntary egg grading programs. AMS retains the responsibility of changing the fees set out in the regulations governing the grading of eggs (7 CFR part 55). FSIS is amending 9 CFR 590.130 to delete the reference to regulations governing the collection of fees associated with the voluntary grading of eggs.

Because this final rule has been determined to be not significant, the Office of Management and Budget (OMB) did not review it under Executive Order 12866.

The Administrator, FSIS, has determined that this action will not have a significant economic impact, as defined by the Regulatory Flexibility Act (5 U.S.C. 601), on a substantial number of small entities. There are 73 egg products firms, and all but 5 would be classified as small on the basis of the Small Business Administration size definitions (having under 100 employees in a stand-alone establishment or under 500 employees in an in-line establishment).

Small plants in the egg products industry will not be affected adversely by the fee increases provided for because these increases reflect only a small increase in the costs currently borne by those entities that elect to use overtime and holiday inspection services. These holiday and overtime inspection services are generally sought by plants with larger production volume, greater complexity and diversity in the products they produce, and the need for on time delivery of large volumes of product by their clients—generally large commercial or institutional establishments. Plants with smaller production are unlikely to use a significant amount of overtime and holiday inspection services. Plants seeking FSIS services are likely to have calculated that the incremental costs of overtime and holiday inspection services would be less than the incremental expected benefits of additional revenues they would realize from additional production.

Under the new fees, the Agency would expect to collect nearly $2.5 million in revenues in a year, compared to the $1.5 million under current fees. The total volume of U.S. egg product production in 1998 was 3.2 billion pounds. The increase in cost per pound of product associated with the overtime and holiday fee increase is $0.0003. Even in a competitive industry like egg products, this amount of increase in annual production costs, if firms choose to use the service, would have an insignificant impact on profits and prices. The increase in costs per firm would be about $13,700. On average, this would not be a significant increase in annual production costs given the volume of production. Egg product firms produce an average of 44.3 million pounds of product annually.

The industry is also likely to pass through a significant portion of the fee increase to consumers because of the inelastic nature of the demand curve facing these firms. Research has shown that consumers are unlikely to significantly reduce demand for meat and poultry products, including egg products, when prices increase. Huang estimates that demand would fall by .36 percent for a one percent increase in price (Huang, Kao S., A Complete System of U.S. Demand for Food. USDA/ERS Technical Bulletin No. 1821, 1993, p.24). Because of this inelastic nature of demand and the competitive nature of the industry, individual firms are not likely to experience any change in market share due to an increase in inspection fees.

This final rule has been reviewed under Executive Order 12988, Civil Justice Reform. This rule: (1) Preempts State and local laws and regulations that are inconsistent with this rule; (2) has no retroactive effect; and (3) does not require administrative proceedings before parties may file suit in court challenging this rule. However, the administrative procedures specified in 9 CFR 590.320 through 590.370 must be exhausted prior to any judicial challenge of the application of the provisions of this proposed rule, if the challenge involves any decision of an FSIS employee relating to inspection services provided under the EPIA.

Public awareness of all segments of rulemaking and policy development is important. Consequently, in an effort to better ensure that minorities, women, and persons with disabilities are aware of this proposed rule, FSIS will announce and provide copies of this Federal Register publication in the FSIS Constituent Update. FSIS provides a weekly FSIS Constituent Update via fax to over 300 organizations and individuals. In addition, the update is available on line through the FSIS web page located at http://www.fsis.usda.gov. The update is used to provide information regarding FSIS policies, procedures, regulations, Federal Register notices, FSIS public meetings, recalls, and any other types of information that could affect or would be of interest to our constituents/stakeholders. The constituent fax list consists of industry, trade, and farm groups, consumer interest groups, allied health professionals, scientific professionals, and other individuals that have requested to be included. Through these various channels, FSIS is able to provide information to a much broader, more diverse audience than would be otherwise possible. For more information or to be added to the constituent fax list, fax your request to the Congressional and Public Affairs Office, at (202) 720-5704.

On August 7, 1998, Congress enacted the Credit Union Membership Access Act, Pub. L. No. 105-219, 112 Stat. 913 (1998). Section 301 of the statute added a new section 216 to the Federal Credit Union Act, 12 U.S.C. 1790d (hereinafter referred to as “CUMAA” or “the statute” and cited as “§ 1790d”). Section 1790d requires the NCUA Board to adopt by regulation a system of “prompt corrective action” (“PCA”) to commence when a federally-insured “natural person” credit union becomes undercapitalized. The statute designated three principal components of PCA: (1) a framework of mandatory actions prescribed by statute, § 1790d(c), (e), (f) and (g), and discretionary actions developed by NCUA, which are indexed to five statutory net worth categories and their corresponding net worth ratios, § 1790d(c); (2) an alternative system of PCA to be developed by NCUA for credit unions that CUMAA defines as “new,” § 1790d(a)(2); and (3) a risk-based net worth ratio to apply to credit unions that NCUA defines as “complex.” § 1790d(d). The third component alone is the subject of this final rule.

Following the statutory mandate, the NCUA Board adopted as a final rule (“part 702”) a comprehensive system of PCA consisting of a framework of mandatory and discretionary supervisory actions and an alternative system of PCA to apply to “new” credit unions. 12 C.F.R. 702 et seq. (2000); 65 FR 8560 (February 18, 2000). 1 For credit unions that do not meet the statutory definition of a “new” credit union, part 702 establishes a framework of mandatory and discretionary supervisory actions, indexed to the five net worth categories, and implements statutory conditions triggering conservatorship and liquidation. 12 C.F.R. 702.201—702.206. For credit unions that CUMAA defines as “new”—those having been in operation less than ten years and having $10 million or less in assets, § 1790d(o)(4)—part 702 establishes a similarly-structured alternative system of PCA that recognizes that “new” credit unions initially have no net worth, need reasonable time to accumulate net worth, and must have incentives to ultimately become “adequately capitalized.” § 1790d(b)(2)(B). Under part 702, the net worth ratio and category of a credit union, whether “new” or not, are determined quarterly. 12 C.F.R. 702.101(a)(1), 702.302(a).

In addition to the substantive components of PCA, an independent appeal process is available to affected credit unions and officials to appeal decisions by NCUA staff imposing certain discretionary supervisory actions, and decisions by the NCUA Board reclassifying a credit union to a lower net worth category on safety and soundness grounds. 12 C.F.R. 747.2001 et seq. (2000). Part 702 also prescribes reserving and dividend payment requirements to conform to CUMAA's earnings retention requirement. § 1790d(e); 12 C.F.R. 702.401 et seq.

Independently of the general system of PCA in part 702, CUMAA requires NCUA to develop a definition of a “complex” credit union based on the risk level of a credit union's portfolio of assets and liabilities, § 1790d(d)(1), and to formulate a risk-based net worth (“RBNW”) requirement to apply to credit unions meeting that definition. The RBNW requirement must “take account of any material risks against which the net worth ratio required for an insured credit union to be adequately capitalized [6 percent] may not provide adequate protection.” § 1790d(d)(2). NCUA was encouraged to, “for example, consider whether the 6 percent requirement provides adequate protection against interest-rate risk and other market risks, credit risk, and the risks posed by contingent liabilities, as well as other relevant risks. The design of the [RBNW] requirement should reflect a reasoned judgment about the actual risks involved.” S. Rep. No. 193, 105th Cong., 2d Sess. 13 (1998) (S. Rep.).

These specifications reflect the Department of the Treasury's recommendation to Congress to require NCUA to develop a supplemental RBNW requirement “for larger, more complex credit unions * * * to take account of risks * * * that may exist only for a small subset of credit unions.” U.S. Dept. of Treasury, Credit Unions (1997) at 71.

CUMAA demands that a credit union that meets the definition of “complex,” and whose net worth ratio initially places it in either of the “adequately capitalized” or “well capitalized” net worth categories, must satisfy a separate RBNW requirement, which may exceed the minimum net worth ratio corresponding to its initial category (6 percent and 7 percent, respectively), in order to remain classified in that category. 2 § 1790d(c)(1)(A)(ii) and (c)(1)(B)(ii). A “well capitalized” or “adequately capitalized” credit union that fails to meet its RBNW requirement is classified by statute in the “undercapitalized” net worth category, and will be subject to the mandatory and discretionary supervisory actions applicable to that category. § 1790d(c)(1)(c)(ii).

CUMAA set August 7, 2000, as the deadline for issuing the final rule, and January 1, 2001, as its effective date. CUMAA § 301(d)(2)(B) and (e)(2). Accordingly, the RBNW requirement for credit unions meeting the definition of “complex” will first apply on the basis of data in the Call Report due to be filed by quarterly filers on April 23, 2001, reflecting activity in the first quarter of 2001.

As directed by CUMAA, NCUA commenced rulemaking by issuing an Advance Notice of Proposed Rulemaking (“ANPR”) which, among other things, both suggested and invited proposed concepts for an RBNW requirement and criteria for defining “complex.” CUMAA § 301(d)(2)(A). 63 FR 57938 (October 29, 1998). By the comment deadline of January 27, 1999, NCUA received 34 comment letters from 32 commenters, the majority of which addressed the RBNW requirement.

On February 3, 2000, NCUA issued a proposed rule establishing a three-step process. 65 FR 8597 (February 18, 2000). The first step determined whether a credit union meets the definition of “complex.” The second step relied on Call Report data to determine a credit union's RBNW requirement. The final step permitted a credit union to substitute certain alternative calculations that may reduce its RBNW requirement. The proposed rule discussed and reflected comments that NCUA had received in response to the ANPR. 65 FR at 8598-8599.

By the close of the comment period for the proposed rule, April 18, 2000, NCUA received 119 letters submitted by 113 public commenters (a few of whom submitted more than one comment). Comments were received from 42 federal credit unions, 26 state credit unions, 4 corporate credit unions, 21 state credit union leagues, 4 individuals serving as credit union directors, 4 credit union industry trade associations, an association of state credit union supervisors, 2 state financial institution regulators, and a bank which co-sponsors a collective investment fund for credit unions. In addition, comments were received from 2 consultants, 2 accounting firms, and 3 securities dealers and/or advisors, each of which serves credit union clients. A banking industry trade association also commented on the proposed rule.

A preponderance of commenters advocated a minimum asset size as a criterion for defining “complex,” and criticized labeling a credit union “complex” when its RBNW requirement is 6 percent or less. For the various risk portfolios, commenters generally suggested upward adjustments to the threshold levels and downward adjustments to the corresponding risk weightings; however, most provided no justification or empirical evidence to support the suggested adjustment. The unsupported comments are noted but not discussed in the preamble. 3 The handful of comments urging NCUA to abandon or ignore the purpose and criteria that Congress expressly prescribed for the RBNW requirement, and which NCUA lacks discretion to modify, are neither noted nor discussed in the preamble. 4 All other comments are analyzed generally in section C. below, except for the single banking industry trade association comment, which is addressed separately in section D.2. below.

As revised to incorporate public comments and improvements initiated by NCUA staff, the final rule differs from the proposed rule in the following principal respects:

1. Applicability of RBNW requirement. The proposed rule featured a “four-trigger” test defining the term “complex” according to whether any one of four risk portfolios is exceeded by a corresponding threshold percentage of total assets. The final rule abandons that test in favor of a simple standard of applicability—an RBNW requirement is applicable, and must be met, only if a credit union's total assets exceed $10 million and its RBNW requirement exceeds 6 percent. § 702.103.

2. Classification and weighting of “Investments” by weighted-average life. For purposes of defining “complex” and for calculating a credit union's RBNW requirement, the proposed rule generally identified an investment as long-term if its weighted-average life or next rate adjustment period was greater than three years. The final rule expands the proposed “Long-term investments” risk portfolio into a comprehensive “Investments” risk portfolio consisting of all investments permitted by law, regardless whether short- or long-term. § 702.104(c). A weighted-average life is specified for each type of credit union investment. § 702.105. When calculating the RBNW requirement, the contents of the “Investments” risk portfolio is classified among weighted-average life “buckets.” Each bucket then receives a corresponding risk weighting. §§ 702.106(c), 702.107(c). Investments in CUSOs are defined as having a weighted-average life of greater than 1 year, but less than or equal to 3 years, § 702.105(e), and are subsequently risk weighted at 6 percent. § 702.106(c)(2).

3. Redefinition and zero weighting of “Low risk assets.” The proposed “Low-risk assets” risk portfolio consisted of cash and cash equivalents and was risk weighted at 3 percent. The final rule moves cash on deposit in financial institutions and cash equivalents ( e.g., investments with a maturity of 90 days or less)—which carry low risk—to the “Investments” risk portfolio, where they continue to be weighted at 3 percent. § 702.106(c)(1). The “Low risk assets” risk portfolio is left to consist exclusively of cash on hand ( e.g., coin and currency) and the National Credit Union Share Insurance Fund (”NCUSIF”) deposit. § 702.104(d). Because those assets carry virtually no risk, the final rule reduces the risk weighting of that portfolio to zero. § 702.106(d).

4. 5-year maturity and repricing threshold for “Long-term real estate loans.” The proposed “Long-term real estate loans” risk portfolio established a minimum maturity and repricing threshold of 3 years. The final rule increases the maturity and repricing threshold to 5 years in order to achieve general parity between consumer and real estate loans. § 702.104(a). This will ensure a risk-weighting consistent with relative economic value exposure for all real estate loans (other than member business loans) that mature or reprice within 5 years, regardless of underlying real estate-related collateral. The 5-year threshold will omit a significant amount of home equity loans from this risk portfolio, yet still capture the majority of real estate loans with above average interest rate risk.

5. Risk mitigation credit. For credit unions that do not meet their RBNW requirement under the “standard calculation” or by using “alternative components,” the final rule introduces a “risk mitigation credit.” Under guidelines to be adopted by the NCUA Board, a credit union may apply for a credit to reduce the RBNW requirement to reflect mitigation of credit risk and/or interest rate risk. § 702.108. The NCUA Board may, in its discretion, grant a risk mitigation credit based on quantitative evidence of mitigation.

(a) Three-step process. The final rule retains in restructured form a three-step process, applicable to all federally-insured credit unions. 5 The first step, reflected in section 702.103, determines whether an RBNW requirement is applicable. The proposed rule defined a credit union as “complex” if any one of four “risk portfolios” exceed a corresponding “trigger” percentage of total assets. 65 FR at 8609. The final rule replaces the four-trigger test with a simple standard of applicability based on minimum asset size ($10 million) and a minimum RBNW requirement (more than 6 percent).

If an RBNW requirement is applicable, the second step, reflected in section 702.106, prescribes the “standard calculation,” which relies on the eight risk portfolios identified in § 702.104. Under the standard calculation, each of the risk portfolios is multiplied by one or more corresponding risk weightings to produce eight “standard components.” (Risk weightings are applied to credit union investments by weighted-average life category, as specified in section 702.105.) The aggregate of the standard components equals the RBNW requirement a credit union must meet.

The third step, reflected in section 702.107, permits a credit union to substitute any of three specific “standard components” in section 702.106 with a corresponding “alternative component” that may reduce the RBNW requirement against which the credit union's net worth ratio is measured. The alternative components recognize finer increments of risk.

Finally, a “risk mitigation credit” is introduced in section 702.108 to permit a credit union that fails its RBNW requirement under the “standard calculation” (step 2), and as computed using the “alternative components” (optional step 3), to apply for a credit against its RBNW requirement, reflecting mitigation of credit risk or interest rate risk.

When the three-step process is completed, an “adequately capitalized” (6 to 6.99 percent net worth ratio) or “well capitalized” (7 percent or greater net worth ratio) credit union retains its original net worth category classification if its net worth ratio meets or exceeds its RBNW requirement under the standard calculation, or as computed using one or more alternative components, or as reduced by a “risk mitigation credit”. An otherwise “adequately capitalized” or “well capitalized” credit union whose net worth ratio falls short of its RBNW requirement declines by one and two net worth categories, respectively, to the “first tier” of the “undercapitalized” category, § 1790d(c)(1)(A)(ii) and (B)(ii), where it is subject to four mandatory supervisory actions. 12 CFR 702.202(c).

(b) Reliance on Call Report data. For the following reasons, the NCUA Board has decided as a matter of policy to rely primarily on the objective data collected in the Call Report to administer PCA generally, and to implement the RBNW requirement in particular. First, use of the Call Report will minimize any additional recordkeeping burden and intrusion on credit unions because credit unions already file Call Reports either quarterly or semiannually. Second, Call Reporting is an efficient system of measurement that is an appropriate vehicle for implementing minimum risk-based capital requirements on an industry-wide scale. Third, the “PCA Worksheet” that will accompany the Call Report will permit credit unions to readily compare their net worth ratio and corresponding category classification with an applicable RBNW requirement at any time, rather than to depend on notice from NCUA. Fourth, reliance on objective numerical standards will ensure uniformity in measurement and enforcement of the RBNW requirement.

Beginning with the 4th quarter of 2000, the Call Report will be accompanied by a “PCA Worksheet” which extracts data from the Call Report to populate two different schedules. 6 The first will compute a credit union's net worth ratio. The second will perform the “standard calculation” to first determine whether an RBNW requirement is applicable, and if so, to determine whether it is met by the credit union's net worth ratio. Independent of the Call Report, a separate form will be available to calculate the “alternative components” to determine if any reduce the RBNW requirement under the standard calculation.

Numerous commenters have encouraged NCUA to substantially expand and modify the Call Report on the theory that enhanced precision in the collection of PCA-related data would give them a greater opportunity to demonstrate mitigation of balance sheet risk. However, mandating such additional detail in the Call Report would increase the reporting burden for all credit unions while any resulting augmented level of precision would benefit a small minority. For this reason, NCUA plans only incremental expansion and modification of the Call Report as warranted by experience in implementing PCA. To that end, the NCUA Board adopts the practice of occasionally sacrificing precision for some in favor of simplicity for all.

Other commenters have encouraged NCUA to conduct a subjective assessment of credit unions' success, through modeling and other risk management techniques, to mitigate credit and interest rate risk, in spite of what an RBNW requirement may indicate. In this regard, the NCUA Board prefers not to circumvent the final rule's reliance on Call Report data as reflected in the “PCA Worksheet.” However, NCUA will evaluate quantitative evidence of risk mitigation submitted by those credit unions that apply for a risk mitigation credit. § 702.108.

The proposed rule failed to delete part 700's definition of “risk assets” to reflect the repeal of section 116 of the Federal Credit Union Act (“FCUA”), 12 U.S.C. 1762. Current section 700.1(i) defines the term “risk assets” exclusively “[f]or the purpose of establishing the reserves required by section 116 of the [FCUA].” Former section 116 required a credit union to transfer a percentage of gross income to its regular reserve until the reserve equaled a prescribed percentage of the credit union's outstanding loans and risk assets. Former part 702 prescribed rules for implementing the statutory requirement to establish and maintain a regular reserve. CUMAA repealed section 116 of the FCUA. CUMAA § 301(f)(3). Former part 702 is in force under separate statutory authority until August 7, 2000—the effective date of new part 702, 65 FR 8560, which implements CUMAA's earnings retention requirement. See 12 U.S.C. 1790d(e). Under new part 702, neither PCA generally, nor the RBNW requirement specifically, utilizes the concept or the term “risk assets.” Accordingly, the final rule abolishes that term as obsolete.

Both the standard component and the alternative component for “Investments” categorize investments according to weighted-average life for purposes of risk weighting. §§ 702.106(c), 702.107(c). The proposed rule defined “weighted-average life” (“WAL”) as the “time to the return of a dollar of principal, calculated by multiplying each portion of principal received by the time at which it is expected to be received, and then summing and dividing by the total amount of principal.” 65 FR at 8068. See Fabozzi, Frank, and T. Dessa, eds., The Handbook of Fixed Income Securities (5th ed. 1997) (hereinafter “Fabozzi”) at 539.

Twenty-two commenters addressed the proposed definition of WAL. All were content to use WAL to characterize relative interest rate risk, but ten preferred using “effective duration” or “modified duration” instead,  7 reasoning that they are more refined measures of interest rate risk exposure. In contrast, one commenter supported using the remaining term to maturity of the investment.

NCUA concedes that “effective duration,” appropriately calculated, can be a more refined measure of interest rate risk exposure. In contrast, using remaining term to maturity, although simple, can dramatically overstate the risk of certain investments. Examination experience indicates that WAL provides a fair indicator of interest rate risk exposure for typical credit union investments. Furthermore, the current Call Report requires investments to be reported according to WAL. To change the basis for reporting investments in Schedule C of the Call Report would be unduly disruptive to the process of acclimating to PCA.

One commenter urged NCUA to go beyond a general WAL definition and establish approved methodologies and sources for determining WAL. NCUA believes this is unwarranted because the definition as proposed is sufficiently clear. Reliable models, and reasonable and supportable estimates of the time periods for cash flows, are readily available from investment industry sources. In addition, to establish a process for approving WAL sources and methodologies would be burdensome and unnecessarily intrusive.

The final rule retains the general WAL definition as proposed, § 702.2(k); however, to facilitate classification by WAL in the standard and the alternative components for “investments,” the final rule specifies the WAL for certain categories of credit union investments. § 702.105.

To decide which credit unions must comply with “an applicable risk-based net worth requirement,” §§ 702.101(a)(2), 702.102(a), 702.302(a), the proposed rule (in former § 702.104) featured a “four-trigger” test defining a credit union as “complex” if its holdings in any of four “risk portfolios,” representing above-average risk, exceeded a corresponding “trigger” percentage of its total assets. 65 FR at 8609. This provision drew 124 comments—more than all but one other provision of the proposed rule—generally falling into three categories: those seeking to elevate the proposed “trigger” percentages, those critical of the test's methodology; and those preferring entirely different criteria for determining whether an RBNW requirement is applicable.

Addressing the trigger percentages of total assets, ten commenters urged raising the proposed 25 percent trigger for the “Long-term real estate loans” portfolio to between 30 and 50 percent, contending that a low percentage trigger would discourage lending. Two commenters disputed the validity of NCUA's reliance on comparable thrift institution data on long-term real estate loans to justify the 25 percent trigger. Nineteen commenters advocated increasing the proposed 12.25 percent trigger for the portfolio combining “Member business loans outstanding” and “Unused member business loan commitments,” generally surmising that the 12.25 percent trigger was arbitrarily borrowed from elsewhere in CUMAA. See 12 U.S.C. § 1757a(a). Thirty-three commenters supported increasing the proposed 15 percent trigger for the “Long-term investments” portfolio to between 20 and 33 percent, citing the importance of investment income to profitability when loan volume is low. One commenter suggested setting the trigger percentages based on the decline in portfolio value based on gradual periodic rate increases, rather than based on a 300 basis point “rate shock.” Six commenters insisted upon raising the proposed 5 percent trigger for the “Loans sold with recourse” portfolio to at least 10 percent of total assets, leaving a single commenter who was content with the 5 percent trigger.

Addressing the methodology of the proposed four-trigger test, seven commenters insisted that a credit union should be deemed to meet the definition of “complex” only if it exceeds one or more of the trigger percentages for a period of consecutive quarters, not just a single quarter. Under this scenario, the RBNW requirement would be a lagging indicator of risk, inconsistent with the purpose of PCA. Ten commenters suggested merging the “Long-term real estate loans” and “Long-term investments” portfolios under a single threshold ranging between 30 and 60 percent of total assets. Going further, another commenter proposed merging all four portfolios representing above-average risk under a single omnibus trigger percentage.

Notably, a substantial number of commenters appealed to the NCUA Board to replace the four-trigger test altogether. Thirty-one commenters sought to establish in its place a minimum asset “floor” as a criterion for defining “complex,” reflecting the minimal level of risk to the NCUSIF posed by the aggregate assets of credit unions below a certain asset size. Commenters suggested setting that floor at amounts ranging from $5 million to $100 million in assets. In contrast, two commenters objected to the exclusion of credit unions based on asset size.

Taking an alternative approach, nineteen commenters suggested defining as “complex” only those credit unions that have an RBNW requirement exceeding 6 percent. This would entail a reversal in sequence—instead of requiring only those credit unions that meet the definition of “complex” to calculate and meet an RBNW requirement, all credit unions would have to review an RBNW calculation to determine if they exceed 6 percent. Those with an RBNW requirement in excess of 6 percent would be deemed “complex” and then must meet that requirement. Departing even further from the four-trigger test, another commenter apparently would have all credit unions calculate an RBNW requirement, but only those which ultimately fail to meet that requirement, whether more or less than 6 percent, would be designated “complex.” Regardless which approach is adopted in the final rule, five commenters implored NCUA to minimize, if not to abandon, use of the statutory term “complex” due to what they perceive as its pejorative connotation.

The difference of opinion among commenters over the appropriate criteria for defining a “complex” credit union has caused the NCUA Board to review the statutory criteria for designing the RBNW requirement, § 1790d(d); to assess the impact of the four trigger-test compared to commenters' suggested alternatives, based on the most recent Call Report data; and to consider which approach will, in the end, most efficiently capture the risks to the NCUSIF that are the intended target of the RBNW requirement. In addition, the NCUA Board shares commenters' concern that a significant number of credit unions that met the definition of “complex” under the four-trigger test had an RBNW requirement of 6 percent or less. This reevaluation has persuaded the NCUA Board to abandon the four-trigger test in favor of a simple standard of applicability that combines minimum asset size and a minimum RBNW requirement.

Accordingly, the final rule provides that “a credit union is defined as 'complex' and an RBNW requirement is applicable” only if its total assets exceed $10 million and its RBNW requirement under the standard calculation exceeds 6 percent. 8 § 702.103. Both measures rely on quarter-end total assets as reflected in a credit union's most recent Call Report filed either quarterly or semiannually. 9 Wherever possible, the final rule uses the statutory term “applicable risk-based net worth requirement,” e.g., § 1790d(c)(1)(B)(ii) instead of the statutory label “complex.” An RBNW is not “applicable” to a credit union that does not meet both criteria; its net worth category classification is decided solely by its net worth ratio.

(a)(1) Minimum asset size. The prerequisite $10 million asset “floor” imposed in the final rule reflects the conclusion that the aggregate assets of credit unions in that asset bracket do not expose the NCUSIF to material risk. CUMAA directed NCUA to develop an RBNW requirement that “take[s] account of any material risks against which the net worth ratio required for an insured credit union to be adequately capitalized [6 percent] may not provide adequate protection.” § 1790d(d)(2) (emphasis added); S. Rep. at 13 (1998). Aggregate insured shares of credit unions with $10 million or less in assets equal $17,269,585,004, or 5.15 percent of all insured shares. Of the 6195 credit unions in this asset bracket, currently 105 would be subject to an RBNW requirement under § 702.103(a)(2), representing $423,344,277 in insured shares. This would be the NCUSIF's maximum exposure in a worst case scenario that assumes all 105 credit unions with assets of $10 million or less fail and the NCUSIF is forced to absorb losses at the rate of 100 cents to the dollar. By comparison, today only 5 of the 105 credit unions meeting the definition of “complex” in that asset group would fail their RBNW requirement under the standard calculation. Under typical circumstances, the NCUSIF's risk exposure from credit unions with $10 million or less in assets is insufficient to be considered material.

With a sacrifice of minimal risk protection, the $10 million asset floor dramatically reduces the burden the RBNW requirement would impose. Credit unions with assets of $10 million or less number 6195, representing 58 percent of all credit unions. Thus, the $10 million asset floor relieves the majority of credit unions of any burden whatsoever associated with an RBNW requirement.

The $10 million asset floor parallels use of a $10 million measure elsewhere in CUMMA to trigger other PCA provisions. A maximum of $10 million in assets is one criterion of the statutory definition of a “new” credit union, which is subject to an alternative system of PCA. § 1790d(o)(4). CUMAA requires NCUA to provide assistance in preparing net worth restoration plans to credit unions having less than $10 million in assets. § 1790d(f)(2). In addition, excluding credit unions beneath the $10 million asset floor is consistent with the Treasury Department recommendation that led Congress to enact an RBNW component of PCA—that it is needed “for larger, more complex credit unions * * * to take account of risks * * * that may exist only for a small subset of credit unions.” U.S. Dept. of Treasury, Credit Unions (1997) at 71.

(a)(2) Minimum RBNW requirement. The minimum 6 percent RBNW “floor” which the final rule imposes on credit unions with assets above $10 million reflects the conclusion that credit unions whose RBNW requirement is 6 percent or less fall outside the intended target of the RBNW requirement. CUMAA is explicit in concentrating the RBNW requirement on “material risks against which the [6 percent] net worth ratio required * * * to be adequately capitalized may not provide adequate protection.” § 1790d(d). Further, NCUA was instructed to “consider whether the 6 percent requirement provides adequate protection against * * * relevant risks.” S. Rep. at 13. The NCUA Board has determined that a 6 percent net worth ratio is sufficient to protect against an average level of risk, but that a measure of additional net worth is needed to compensate for risks which are above average. For this reason, the final rule limits the scope of its RBNW requirement to credit unions that have an above average level of risk exposure.

Under the proposed rule, all credit unions, through the “PCA Worksheet,” were required to conduct the four trigger test, and once meeting the definition of “complex,” were required to calculate and meet an RBNW requirement. 65 FR at 8609. With the minimum 6 percent RBNW floor, that process is reordered as explained above; all credit unions with assets above $10 million will now have to review a standard RBNW calculation reflected in the “PCA Worksheet” to determine whether the result exceeds 6 percent. If so, the RBNW requirement is applicable and must be met; if not, an RBNW requirement is not applicable and the credit union retains its original net worth category classification. Although all credit unions with assets above $10 million now will have to review an RBNW calculation, fewer will be required to meet an RBNW requirement.

Primarily as a result of the final rule's $10 million asset floor, it is estimated that 452 credit unions will be required to meet an RBNW requirement under the final rule—less than one-third the number required to do so under the proposed rule. See section E below.

(b) Optional Call Report filing. The proposed rule required the RBNW requirement to be determined according to a credit union's Call Report schedule—quarterly for quarterly filers, and semiannually for semiannual filers. 65 FR at 8599. Compare 12 CFR 702.101(a) (quarterly determination of net worth and corresponding category). One commenter protested that this would deprive semiannual filers of the means to demonstrate either that an RBNW requirement no longer is applicable, or that their RBNW requirement has declined (and perhaps has been met) in the 1st and 3rd quarters. Another commenter proposed a solution—optional 1st and 3rd quarter Call Report filing for semiannual filers. Another would mandate quarterly Call Report filing by all credit unions that meet the definition of “complex.”

Mandatory quarterly Call Report filing for credit unions that meet the definition of “complex” currently is not warranted; however, NCUA concurs that optional 1st and 3rd quarter Call Report filing would give those credit unions maximum flexibility. The final rule is modified accordingly. § 702.103(b).

The proposed rule (in former § 702.103) established eight “risk portfolios,” representing various levels of risk. 65 FR at 8608. The portfolios consist of assets, liabilities and contingent liabilities, as reflected in Call Report data to be collected in the “PCA Worksheet” accompanying the Call Report. In subsequent sections, the contents of each risk portfolio will be multiplied by one or more corresponding risk weightings. The final rule retains the eight proposed risk portfolios, modified as follows in section 702.104 ( see Table 1 in § 702.104):

(a) Long-term real estate loans. The proposed risk portfolio for “Long-term real estate loans” consisted of all fixed-rate real estate loans and lines of credit that mature or reprice in greater than 3 years. 65 FR at 8608. NCUA examination experience and research confirmed that a vast majority of member loans with above average exposure to interest rate changes are real estate related. 65 FR at 8600. The 124 overlapping comments addressing this provision generally seek either to increase the 3-year maturity and repricing threshold or to narrow the composition of the portfolio by excluding certain types of loans.

Forty-eight commenters urged an increase in the 3-year maturity and repricing threshold to either 5 or 7 years on various grounds. Although careful not to advocate an augmented risk portfolio for consumer loans, the majority of commenters protested that a threshold as low as 3 years discriminates against real estate loans compared with consumer loans, even though they have similar economic value exposure, 10 indicating little difference in interest rate risk. The commenters predicted that this unequal treatment would cause credit unions to migrate to consumer lending at the expense of real estate lending in order to elude this risk portfolio. This would result in an increase in credit risk exposure due to the generally better performance and more stable collateral of real estate loans when compared with consumer loans. On similar grounds, nineteen commenters urged NCUA to exclude home equity loans with maturities of fewer than 6 or 7 years.

Commenters supporting a 5-year maturity and repricing threshold for this portfolio observed that NCUA adopted a 5-year threshold in its pre-PCA definition of “risk assets.” 12 C.F.R. § 700.1(i); but see section C.2. above. Others pointed elsewhere in the proposed rule, observing that the alternative component for “Long-term real estate loans” features a 3-to-5 year remaining maturity bucket that receives the risk weighting designated for average risk assets (6 percent). In contrast, a single commenter was content with the 3-year threshold, and another went even further to boldly suggest applying it to consumer loans as well.

With regard to the composition of the “Long-term real estate loans” portfolio, a commenter suggested excluding loans having a government guarantee against default. While a guarantee against default mitigates credit risk, it does not affect interest rate risk. Because this portfolio measures primarily interest rate risk, it is appropriate that long-term, government guaranteed loans remain in this risk portfolio.

Seeking a means to demonstrate risk mitigation, twenty-three commenters wished to exclude loans, or even the whole portfolio, upon proof that “matching” loans against liabilities or “hedging” through derivatives mitigates corresponding balance sheet risk. Fourteen commenters wanted to adopt WAL instead of contractual maturity to report real estate loans because WAL is more accurate and would reflect anticipated mortgage loan prepayments. If adopted, both suggestions would substantially narrow the scope of this risk portfolio.

NCUA concedes that “matching” and “hedging” are prudent risk management tools, and that WAL is a potentially more accurate measure of risk exposure. As explained in section C.1(b) above, the NCUA Board has decided as a matter of policy to rely on objective data captured in the Call Report and reflected in the “PCA Worksheet” as the most efficient means to implement PCA. For this reason, the final rule neither incorporates WAL in the “Long-term real estate loans” risk portfolio, nor excludes “matched” or “hedged” loans. 11

Two commenters recommended that this portfolio combine mortgage-backed securities with long-term real estate loans. Due to the similarity in risk characteristics, NCUA concurs that this is the preferred business practice to manage balance sheet risk on an aggregate basis ( See NCUA Letter to Credit Unions No. 99-CU-12, “Real Estate Lending and Balance Sheet Risk Management,” August 1999); however, since aggregate measurement is less accurate than measurement of the specific components, and would impose an undue burden on some credit unions to estimate reliable prepayment assumptions, NCUA declines to mandate the practice for all credit unions.

Seeking a fundamental modification, three commenters recommended applying the three-year contractual maturity exclusion to the scheduled principal payments of all real estate loans. This is unnecessary because scheduled principal repayments are already taken into consideration in the risk weighting assigned as a result of NCUA's evaluation of the potential economic value exposure of long-term real estate loans.

To achieve general parity among all types of loans, the final rule increases the maturity and repricing threshold for the “Long-term real estate loans” risk portfolio to 5 years. § 702.104(a). This will ensure a risk-weighting consistent with relative economic value exposure for all types of loans (other than member business loans) that mature or reprice within 5 years, regardless of underlying collateral. The 5-year threshold will omit a significant amount of home equity loans from this risk portfolio, yet still capture the vast majority of real estate loans with above average interest rate risk.

(b) Member business loans outstanding. The proposed risk portfolio for “Member business loans outstanding” consisted of loans outstanding that qualify as member business loans (“MBLs”) under NCUA's definition, 12 CFR 723.1, or under a State's NCUA-approved definition. 65 FR at 8608. Unused MBL commitments were expressly excluded because they are addressed in a separate risk portfolio, § 702.104(g).

NCUA received several comments generally seeking to exclude certain MBLs from this risk portfolio. Eleven commenters sought to exclude portions of MBLs that are government guaranteed, and six urged excluding portions with credit enhancements, such as those secured by shares or deposits in a federally-insured financial institution, or guaranteed by a non-governmental organization. NCUA's rule on MBLs (“Part 723”) already excludes from the loans-to-one-borrower limit, § 723.8, portions of an MBL that are either: “fully or partially” government guaranteed; subject to a government's advanced commitment to purchase; or fully secured by shares or deposits in a federally-insured financial institution. § 723.9(a)(3). See also § 723.1(b)(4), 64 FR 28721, 28722 (May 27, 1999). Consistent with part 723, NCUA declines to exclude MBLs guaranteed by a non-governmental organization from the “Member business loans outstanding” risk portfolio.

Purporting to seek further consistency with part 723, five commenters insisted upon excluding those MBLs having an aggregate remaining balance equal to or less than $50,000. § 723.1(b)(3). However, the NCUA Board has determined that part 723's $50,000 threshold is measured against the original balance of the loan at the time it is originated, not its subsequent remaining balance. If a loan qualifies as an MBL when it is originated, it remains so until it has been repaid in full, sold, or otherwise disposed of.

Four commenters urged excluding loans secured by real estate from this risk portfolio, contending that long-term fixed-rate MBLs belong in the “Long-term real estate loans” risk portfolio because not all MBLs are long-term and fixed-rate. This would potentially lead to a higher than necessary risk weighting for shorter-term MBLs. Similarly, four commenters suggested excluding loans secured by automobiles, as well as loans with maturities less than 3 years, asserting that they belong in the “Average risk assets” risk portfolio because such loans present minimal interest rate risk. Part 723 defines an MBL as any loan, line of credit, or letter of credit where the proceeds are used for commercial, corporate or agricultural purposes, or for other business investment property or venture. § 723.1(a). A loan that is fully secured by a lien on a 1 to 4 family dwelling that is the member's primary residence is not an MBL. § 723.1(b)(1). Such a loan would be included in either the “Long-term real estate loans” risk portfolio or the “Average risk assets” risk portfolio depending on its remaining maturity. Part 723 also excludes other loans from its definition of an MBL, § 723.1(b)(2)-(5), which would be included in the “Average risk assets” portfolio.

Finally, a single commenter sought to eliminate the “MBLs outstanding” risk portfolio altogether on ground that CUMAA did not explicitly mandate additional net worth for MBLs. In fact, CUMAA did not identify any particular assets warranting additional net worth; rather, the statute instructed NCUA to generally identify credit unions which meet a definition of “complex” based on their portfolios of assets and liabilities and to design an RBNW requirement that takes account of material risks not addressed by a 6 percent net worth ratio.

The final rule retains the “Member business loans outstanding” risk portfolio without modification. § 702.104(b).

(c) Investments. The proposed risk portfolio for “Long-term investments” (here renamed simply “Investments”) consisted of investments with a WAL greater than 3 years or which reprice more frequently than 3 years, and investments in a collective investment fund or a registered investment company. 65 FR 8608. NCUA research and experience indicated that such investments have greater economic value exposure to interest rate changes than do investments with shorter terms. 65 FR at 8600. Investments which fell below the threshold for this portfolio qualify for either of the proposed “Low risk assets” or “Average risk assets” risk portfolios.

The 46 commenters who addressed this risk portfolio fall into two categories—those challenging the 3-year WAL and repricing threshold, and those who contend that certain investments belong in other risk portfolios. Forty-two insisted upon raising the threshold to between a low of 4 years and a high of 10 years, although few provided any rationale for the adjustment. In contrast, one commenter cited valuation modeling confirming that the 3-year threshold is reasonable. NCUA maintains that the 3-year WAL threshold is valid according to valuation modeling of fixed-rate investments. 65 FR 8600.

In regard to composition of the portfolio, one commenter suggested reducing the dollar balances of investments above the 3-year threshold by the amount of projected amortizations within 3 years. Another would offset that balance by the amount of investments having a WAL of less than one year. Two commenters proposed to exclude investments classified as “available-for-sale” under Statement of Financial Accounting Standards No. 115 (“SFAS 115”) on the theory that marking-to-market takes into account their current market values. NCUA disagrees, however, because these investments have potential interest rate risk and the current mark-to-market is not reflected in net worth, which is generally limited to retained earnings. § 702.2(f); See also 65 FR at 8565. To put different assets in parity with each other, thirteen commenters insisted on putting investments with a WAL of less than one year in the “Low risk assets” portfolio.

NCUA concurs with commenters that the RBNW requirement should treat similar investments similarly in terms of risk, and has determined that the most comprehensive and efficient means to that end is to define investments at the outset by WAL only, as specified in § 702.105, and to subsequently apply the same risk weighting to all investments in the same WAL category. To implement this fundamental modification to the proposed rule, the final rule eliminates altogether the WAL and repricing threshold to distinguish long-term from short-term investments. Instead, the risk portfolio for investments is now expanded to consist of all investments permitted by law for federally-insured credit unions, including investments in CUSOs. § 702.104(c). To reflect this modification, this risk portfolio is renamed simply “Investments.”

(d) Low-risk assets. The proposed risk portfolio for “Low risk assets” consisted of cash and cash equivalents as defined by Generally Accepted Accounting Principles (”GAAP”). 65 FR at 8608. GAAP generally interprets cash equivalents as investments with remaining maturities of 3 months or less. 65 FR at 8600 n.6.

Thirty commenters insisted that cash be treated as a “no risk asset” so that it receives a risk weighting of zero, instead of the 3 percent weighting that the proposed rule applied to this portfolio. Similarly, fourteen commenters inquired why a credit union's NCUSIF deposit was not also treated as a “no risk asset.” Three commenters asserted that mutual funds with portfolios maturing within 90 days constitute cash equivalents and should be classified as “Low risk assets.”

NCUA agrees that cash held by a credit union for normal operations—such as vault cash, ATM cash and teller cash—typically presents no risk because it is protected from loss by a credit union's fidelity bond. However, cash equivalents such as demand deposits and short-term investments at other financial institutions carry some degree of credit risk when they exceed applicable insuring limits. In contrast, the NCUSIF deposit clearly poses no credit risk to the NCUSIF or to the credit union. Further, although the NCUSIF deposit represents 1 percent of insured shares and deposits on a credit union's balance sheet, it typically is augmented by a maximum of 30 basis points in NCUSIF retained earnings. This 30 basis point cushion is available to absorb losses before the NCUSIF deposit would be impaired.

To distinguish no risk assets from low risk assets, the final rule deletes cash on deposit in financial institutions and cash equivalents ( e.g., investments with a maturity of 90 days or less) from the “Low risk assets” portfolio, effectively shifting them to the “Investments” risk portfolio, where they will subsequently be categorized in the one year or less WAL bucket and weighted at 3 percent. See §§ 702.106(c)(1), 702.107(c)(1). Cash on hand and the NCUSIF deposit remain in the “Low risk assets” risk portfolio, § 702.104(d); however, because those assets carry no appreciable risk, the final rule reduces to zero the risk weighting subsequently given to that portfolio in the corresponding standard component. § 702.106(d).

(e) Average-risk assets. The proposed risk portfolio for “Average risk assets” consists of assets which do not fall within the scope of any other risk portfolio because such assets are neither below nor above average in risk. 65 FR at 8608. This portfolio typically includes consumer loans, short-term real estate loans and fixed assets, 65 FR at 8600, and is subsequently weighted at 6 percent to reflect the 6 percent net worth ratio required to be classified “adequately capitalized.”

Two commenters argued that fixed assets should be put in the “Low risk assets” risk portfolio because land and buildings typically increase in value. However, NCUA research shows that credit unions with high levels of fixed assets on average have lower net income.

Addressing investments which had been subject to the proposed rule's 3-year WAL and repricing threshold—since abandoned—sixteen commenters argued that investments having a WAL of less than 1 year appropriately belong in the “Low risk assets” portfolio, where they would be weighted at 3 percent instead of 6 percent. Twenty-three commenters believed that mutual funds with a WAL of less than one year—which had been included in the proposed “Long-term investments” portfolio regardless of WAL or repricing date—also belong in this portfolio. The final rule addresses these suggestions elsewhere by classifying all investments by WAL, as specified in § 702.105, and applying a corresponding risk weighting, §§ 702.106(c), 702.107(c). Because the “Average risk assets” risk portfolio contains only those assets that do not belong in the risk portfolios discussed in sections 5.(a) through (d) above, the final rule retains the “Average risk assets” risk portfolio without modification. § 702.104(e).

(f) Loans sold with recourse. The proposed risk portfolio for “Loans sold with recourse” consisted of a credit union's outstanding balance of loans sold or swapped with recourse. 65 FR at 8608. As contingent liabilities, they are an off-balance sheet item and, therefore, do not fall in any of the other risk portfolios.

To avoid what was perceived as double-counting, seven commenters favored deducting recourse loans from this portfolio to the extent that they already have been reserved for through the provision for loan and lease losses expense in accordance with GAAP. NCUA disagrees because the “Allowance” standard component gives an offsetting credit for the Allowance for Loan and Lease Losses, § 702.106(h); thus, there is no redundant reserving. Loans sold with recourse are treated no differently than on-balance sheet loans that also require GAAP reserving but still receive a minimum 6 percent risk weighting. See 702.106(a)(1).

Two commenters asserted that this risk portfolio should include only the portion of a loan that is subject to recourse against the credit union. The final rule does not recognize partial recourse because the Call Report does not collect data in sufficient detail to distinguish partial from full recourse. See “Risk Based Capital Standards; Recourse and Direct Credit Substitutes,” 65 FR 12320, 12344 (March 8, 2000) (proposal to require banks to maintain capital against full amount of assets supported by a partial recourse obligation).

One commenter requested corroboration on the risk exposure associated with recourse loans. NCUA maintains that examination experience with credit unions' limited activity in this area thus far suggests that the credit risk exposure associated with recourse loans is analogous to that associated with similar loans retained on the balance sheet. See 65 FR at 8601. In this regard six commenters urged NCUA to collect more detailed data to measure incremental levels and conditions of associated risk exposure. NCUA concurs that this information would be useful in developing risk gradations, identifying potential exclusions, and differentiating loans with only partial recourse. At present, however, only 55 credit unions report any recourse loan activity. Until this activity expands significantly, NCUA prefers to keep the burden and level of detail in recourse loan reporting to a minimum.

The proposed rule's silence about loans sold in the secondary mortgage market prompted a commenter to request NCUA to clarify whether such loans are considered loans sold with recourse. In response, the final rule expressly excludes loans sold to the secondary mortgage market that feature representations and warranties customarily required by the U.S. Government ( e.g., Ginnie Mae) and government-sponsored enterprises ( e.g., Fannie Mae, Freddie Mac). § 702.104(f). These include warranties that the credit union has underwritten the loan and appraised the collateral in conformity with identified standards. These warranties provide for the return of assets in instances of incomplete documentation or fraud. However, credit enhancing representations and warranties beyond the usual agency requirements are considered recourse and, therefore, are not excluded from this risk portfolio. The “Loans sold with recourse” risk portfolio is otherwise retained as proposed.

(g) Unused member business loan commitments. The proposed risk portfolio for “Unused member business loan commitments” segregates unused MBL commitments from actual loans because commitments represent off-balance sheet, contingent liabilities. 65 FR at 8608. Large draws on unused MBL commitments may cause liquidity problems and heighten exposure to credit risk. 65 FR at 8601.

Attempting to demonstrate a lower level of credit risk, two commenters wished to discount an unused commitment when it is revocable, e.g., on grounds of a “material adverse condition.” However, examiner experience indicates that MBL commitments typically do not feature a “material adverse conditions” clause as grounds for revocation.

From a different approach, three commenters proposed discounting unused commitments by half due to the unlikelihood that all of a credit union's unused commitments would be drawn upon simultaneously. As explained above, part 723 does not discount or reduce a loan's original balance when aggregating MBLs or unused commitments to apply the $50,000 exclusion under section 723.1(b)(3). To remain consistent with part 723, the final rule retains this risk portfolio as proposed. § 702.104(g). Commenters' observations already are reflected in the lower risk weighting (6 percent) the standard calculation applies to the entire contents of the “Unused member business loan commitment” portfolio, § 702.106(g), compared to the 12 percent risk weighting it applies to the proportion of the “Member business loans” risk portfolio in excess of 12.25 percent of total assets. § 702.106(b)(2).

(h) Allowance. As proposed, the “Allowance “ risk portfolio provides a credit of 100 percent of a credit union's Allowance for Loan and Lease Losses (“ALL”) not to exceed the equivalent of 1.5 percent of total loans. 65 FR at 8609. This credit is given to recognize that a credit union's ALL already mitigates risk.

The commenters were at odds in addressing the composition of the “Allowance” portfolio. One commenter suggested expanding the “Allowance” portfolio to include the “Allowance for investment losses,” apparently unaware that SFAS 115 eliminated the need for that account. In bold contrast, another favored doing away with the portfolio altogether, objecting that it unnecessarily complicates the rule.

A single commenter suggested that the “Allowance” portfolio consist of the equivalent of a fixed 1.5 percent of loans regardless whether a credit union's actual ALL is less than 1.5 percent of total assets. In that event, a credit union would receive a credit to reduce its RBNW requirement for reserves that it does not actually have.

The other commenters challenged the portfolio's maximum of 1.5 percent of total loans. Several predicted that it will be a disincentive to fund the ALL above the equivalent of that ceiling. This claim is not persuasive, however, because credit unions are bound by GAAP and § 702.401(d) to compute the ALL accurately and in good faith, without regard to maximizing the credit derived from the “Allowance” risk portfolio. In any event, NCUA research indicates that two-thirds of all credit unions' ALL does not reach 1.5 percent of total loans.

The “Allowance” risk portfolio recognizes the credit risk mitigation resulting from reserving for losses in the ALL. Yet reserves in excess of 1.5 percent of total loans reflect higher than typical levels of credit exposure. 65 FR at 8601. To capture this higher risk, the ceiling on the “Allowance” risk portfolio remains intact in the final rule. § 702.104(h).

Both the standard component and the alternative component for “Investments” categorize the contents of the corresponding risk portfolio according to weighted-average life for purposes of risk weighting. §§ 702.106(c), 702.107(c). For this purpose, section 702.2(k), discussed above, provides a general definition of WAL. Section 702.105 prescribes rules for determining the WAL of certain investments ( see Table 2 in § 702.105).

(a) Registered investment companies and collective investment funds. The proposed rule made an exception to the general WAL definition only for investments in registered investment companies or collective investment funds (other than money market mutual funds), assigning them a WAL of greater than 5 years, but less than or equal to 7 years. 65 FR at 8608.

Commenters who addressed the single proposed exception for registered investment companies and collective investment funds insisted that the target or maximum WAL disclosed in a prospectus or trust instrument is the most accurate measure of interest rate risk. NCUA concurs in this suggestion, but prefers to use maximum disclosed WAL because a mutual fund's actual WAL may exceed its stated target.

The maximum WAL may be disclosed directly, or indirectly by reference to a maximum duration no greater than that of a bullet security ( i.e., a security with all principal due at maturity). A bullet security is analogous because, by definition, its WAL is equal to the time period until its maturity, since all of its principal cash flow occurs on its maturity date. For example, a mutual fund that limits its duration to that of a two-year Treasury note would be defined as having a WAL of two years, since a Treasury note with a period remaining to maturity of two years has a WAL of two years.

Five commenters insisted that short-term investment funds (“STIFs”) and money market funds be treated equally for purposes of defining WAL because of their similarly low interest rate risk. Indeed, collective investment funds that adhere to STIF rules for national banks must have an average portfolio maturity of 90 days or less. 12 CFR 9.18(b)(4)(ii)(B)(1)-(3). NCUA concurs in this recommendation.

For registered investment companies and collective investment funds, the final rule is revised to incorporate maximum WAL as disclosed in a prospectus or trust instrument. § 702.105(a)(1). If not directly or indirectly disclosed there, however, the final rule retains the proposed WAL of greater than 5 years but less than or equal to 7 years. § 702.105(a)(3). Treating STIFs and money market funds equally, the final rule classifies them as having a WAL of 1 year or less. § 702.105(a)(2). To conform to these WAL classifications, the Call Report instructions will be revised to clearly classify mutual funds and collective investment funds by WAL.

(b) Callable fixed-rate debt obligations and deposits. As determined under the general WAL definition, the WAL of a callable fixed-rate debt obligation or deposit would be its actual maturity date. Five commenters addressed this result—two contending that the rule should take into consideration an option to redeem an investment prior to maturity; another urging use of “effective WAL” since the WAL of callable investments may change; and yet another preferring, without explanation, to rely on the WAL for callable “Agency” investments. One commenter criticized the use of WAL for callable investments as not appropriately recognizing the extent of risk.

Typical credit union investments in callable securities (such as “Agency” callable securities) are callable at the option of the issuer, not of the credit union. Investments in which credit unions hold an option to redeem prior to maturity typically would be characterized as “putable” investments, 12 rather than callable investments. Examination experience indicates credit unions rarely hold “putable” investment securities. In such rare instances, however, the general WAL definition would permit the WAL of “putable” securities to be computed on the basis of reasonable and supportable estimates of the times for principal cash flow.

To clarify reporting of debt obligations and deposit investments that are callable in whole at the option of the issuer, the final rule explicitly adopts the current Call Report practice of reporting such callable instruments with a WAL equal to the period remaining until the final maturity date, § 702.105(b), instead of the period remaining until a call date. The final rule does not rely on WAL for the entire portfolio of callable instruments because such a dollar-weighted average measure would reduce the accuracy of the risk measure.

(c) Variable-rate debt obligations and deposits. Under the proposed rule, a variable-rate debt obligation or deposit would be categorized by its next rate adjustment period, rather than by its WAL. 65 FR at 8608. NCUA received no comments on this outcome. To clarify reporting of variable-rate investments, the final rule explicitly adopts the current Call Report practice of reporting variable-rate debt obligations and deposits in the WAL category corresponding to the period remaining to the next rate adjustment. § 702.105(c).

(d) Capital in mixed-ownership Government corporations and corporate credit unions. The proposed WAL definition did not explicitly address the determination of WAL of stock in mixed-ownership Government corporations ( e.g., Federal Home Loan banks and NCUA's Central Liquidity Facility) or capital in corporate credit unions. However, a commenter's inquiry about the WAL of Federal Home Loan bank stock that may be redeemed after a notice period led the NCUA Board to examine the WAL of stock in mixed-ownership Government corporations, and member paid-in capital and membership capital in corporate credit unions. While such investments may have credit risk exposure, membership in such entities can provide credit unions with access to substantial sources of liquidity or funding. To better protect the NCUSIF from the risk of losses arising from liquidity events, NCUA encourages credit unions to join such entities that provide contingent liquidity.

To ensure that the WAL of investments in liquidity-enhancing entities does not excessively increase an RBNW requirement, thereby deterring such investments, the final rule explicitly specifies capital stock in mixed-ownership Government corporations, and member paid-in capital and membership capital in corporate credit unions, as having a WAL of greater than 1 year, but less than or equal to 3 years. § 702.105(d).

(e) Investments in CUSOs. The proposed rule did not explicitly address investments in CUSOs. By properly structuring a CUSO, a credit union may limit its losses resulting from such operations to the amount of its investment in, and loans to, the CUSO. NCUA believes that the NCUSIF will be better protected from the risk of losses arising from service operations, and credit union members will be better served, if credit unions are not discouraged from forming and participating in CUSOs. In the absence of a CUSO, balance sheet assets used to support CUSO service operations would be treated as average risk assets and would be risk weighted as such. To ensure that CUSO investments are treated similarly, the final rule defines investments in CUSOs as having a WAL of greater than 1 year, but less than or equal to 3 years, § 702.105(e), and subsequently weights them the same as average risk assets.

(f) Other equity securities. The final rule adds this provision to address equity securities (in which some federally-insured, State-chartered credit unions (“FISCUs”) may be permitted to invest) for which a WAL is not explicitly defined elsewhere in § 702.105, or cannot be determined because they do not have maturity dates (although certain preferred instruments may have conversion dates). Because there is no scheduled time for the return of principal, such securities have an infinite WAL. Accordingly, the final rule defines WAL for “other equity securities” as greater than 10 ten years, § 702.105(f), corresponding to the final rule's maximum WAL category for investments. § 702.106(c)(4).

To implement the second step of the three-step process, called the “standard calculation,” section 702.106 multiplies either the whole or different percentage tiers of each risk portfolio in section 702.104 by a corresponding risk weighting to yield a standard component. The sum of the eight standard components equals the RBNW requirement. See Table 3 in § 702.106, and Appendix A. If a credit union's RBNW requirement under the standard calculation exceeds 6 percent, the credit union “is defined as ‘complex’ and [an RBNW] requirement is applicable.” § 702.103(a)(2). The RBNW requirement is met when it is exceeded by a credit union's net worth ratio (generally, retained earnings as a percentage of total assets). The final rule retains the proposed components (formerly called “RBNW components”), modified as follows in section 702.106:

(a) Long-term real estate loans. The proposed standard component for “Long-term real estate loans” divided the contents of the corresponding risk portfolio into three percentage tiers of total assets—zero to 25 percent, weighted at 6 percent to represent average risk; 25 to 40 percent, weighted at 14 percent to protect against the higher marginal risk; and in excess of 40 percent, weighted at 16 percent to reflect corresponding increases in credit concentration risk and in the ratio of new loans to seasoned loans. 65 FR at 8609.

Twenty-five commenters sought to restructure the tiers and to reduce the corresponding weightings for each, but generally provided no justification for the adjustments. Five were content to apply the 14 percent weighting to the 25 to 40 percent tier, but objected that the 16 percent weighting applied to the tier in excess of 40 percent of total assets was excessive. Their rationale is that a credit union with a 40 percent concentration in long-term real estate loans does not necessarily have a greater percentage of new 30-year mortgages than a credit union with a 25 percent concentration. To acknowledge that credit union liabilities typically do not all reset overnight, NCUA agrees to reduce to 14 percent the proposed 16 percent weighting.

One commenter challenged as too conservative NCUA's reliance on a 300 basis point interest rate “shock test” to corroborate the assigned risk weightings. The 300 basis point shock test is a widely accepted measure of interest rate risk adopted for financial institution investment pre-purchase analysis by the Federal Financial Institutions Examination Council. FFIEC, “Supervisory Policy Statement on Investment Securities and End-User Derivatives Activities,” 63 FR 20191, 20195 (April 23, 1998). For balance sheet-wide application, see Office of Thrift Supervision, “Thrift Bulletin 13a: Management of Interest Rate Risk, Investment Securities, and Derivative Activities,” 63 FR 66351, 66361 (December 1, 1998). Therefore, the 300 basis point “shock test” is a legitimate basis for determining appropriate risk weightings.

In response to criticism of the 16 percent weighting, the final rule modifies the standard component for “Long-term real estate loans” by reducing it from three to two percentage tiers—up to and including 25 percent of total assets, weighted at 6 percent; and in excess of 25 percent of total assets, weighted at 14 percent. § 702.106(a).

(b) Member business loans outstanding. The proposed standard component for “Member business loans outstanding” divided the contents of the corresponding risk portfolio by a single threshold of 12.25 percent of total assets. The tier below was weighted at 6 percent, and the tier in excess was weighted at 14 percent. 65 FR at 8609.

Asserting various justifications, fourteen commenters advocated reducing the proposed weightings to as low as 4 percent and reserving the 14 percent weighting only for MBLs in excess of 20 percent of total assets. Some compared losses for consumer loans against the losses for MBLs over an 8-year period and noted that actual losses for MBLs for that period were only 57 basis points, or 75 percent of the amount for consumer loans. Others pointed to the risk mitigating characteristics of MBLs with low loan-to-value (“LTV”) ratios ( e.g., 60 percent) which typically reprice within 3 to 5 years; and to short-term, seasonal loans secured by land, which are subject to greater regulation and higher reserving.

The commenters focused on credit risk exposure only, overlooking the interest rate risk and other relevant risks associated with MBLs. As the amount of MBLs outstanding increases, interest rate risk also typically increases, as does credit concentration risk. Accordingly, the final rule retains the proposed standard component without modification. § 702.106(b).

(c) Investments. The proposed standard component for “Long-term investments” (since renamed simply “Investments”) divided the contents of the corresponding risk portfolio by a single threshold of 15 percent of total assets. The tier below was weighted at 6 percent, and the tier in excess was weighted at 14 percent. 65 FR at 8609.

Although content with the 6 percent weighting, thirty-four commenters, generally without explanation, advocated increasing the threshold to a higher percentage of total assets. Two commenters suggested introducing an intermediate tier of 15 to 25 percent of total assets, weighted at 8 percent, with the excess over 25 percent weighted at no more than 10 percent.

Other commenters questioned NCUA's reliance on the 300 basis point interest rate “shock test” to develop risk weightings for investments. One commenter preferred using a gradual 1 or 2 percent rate “ramp,” while another supported using a 200 basis point “shock test.” Because the Call Report data does not provide mark-to-market valuation of all investments, the 300 basis point rate shock is appropriate to capture both current and potential mark-to-market loss. As explained above, it is widely accepted as a basis for financial institution investment pre-purchase analysis.

Finally, a commenter observed that the proposed 6 percent and 14 percent weightings for credit union investments exceed the weightings applied to investments under the credit-risk-weighted capital requirements applicable to banks under their system of PCA. See, e.g., 12 CFR 325.103. Indeed, the risk weightings proposed for credit unions are higher because the banks' credit-risk-weighted capital standards consider only credit risk, whereas CUMAA mandates that the RBNW requirement for credit unions take account of material risks, such as market risk, interest rate risk and other relevant risks. See § 1790d(d)(2); S. Rep. at 13.

Consistent with the NCUA Board's determination to treat similar investments similarly in terms of risk, the final rule abandons the proposed 15 percent threshold in favor of uniform classification by WAL—a more refined measure of risk. To implement this fundamental modification, the final rule establishes the following four WAL buckets: 1 year or less; greater than 1 year, but less than or equal to 3 years; greater than 3 years, but less than or equal to 10 years; and greater than 10 years. The four WAL buckets are risk-weighted at 3, 6, 12 and 20 percent, respectively. § 702.106(c). In the Call Report investment schedule, credit unions will now report their investments solely by WAL as specified in section 702.105.

In ascending order, the 3 percent weighting applied to the first WAL bucket, § 702.106(c)(1), is the same weighting originally proposed for the “Low risk assets” risk portfolio, as explained in section C.5(d) above. The 6 percent weighting applied to the second bucket, § 702.106(c)(2), is the same as that applied to the “Average risk assets” risk portfolio, § 702.106(e), and reflects the inclusion of average risk investments in the “Investments” risk portfolio. The 12 percent weighting applied to the third bucket, § 702.106(c)(3), mirrors the weighting that the “Investments” alternative component applies to the WAL bucket for greater than 5 years, but less than 7 years, § 702.107(c)(4), and reflects an average level of risk across the three more refined buckets of that component having a WAL greater than 3 years, but less than 10 years. Finally, the 20 percent weighting for the fourth bucket, § 702.106(c)(4), is based on the weighting that the “Investments” alternative component applies to investments with a WAL greater than 10 years. § 702.107(c)(6).

(d) Low-risk assets. The proposed standard component for “Low risk assets” applied a risk weighting of 3 percent to the entire contents of the corresponding risk portfolio. 65 FR at 8609. As explained in section C.5(d) above, the “Low risk assets” risk portfolio has been modified to consist only of cash on hand and the NCUSIF deposit. § 702.104(d). Because these assets carry virtually no risk, the final rule reduces to zero the risk weighting applied to the standard component for “Low risk assets.” § 702.106(d).

(e) Average-risk assets. The proposed standard component for “Average risk assets” applied a risk weighting of 6 percent to the entire contents of the corresponding risk portfolio. 65 FR at 8609. This weighting corresponds to the 6 percent net worth ratio required by CUMAA to be classified “adequately capitalized.” § 702.102(a)(2). No commenters addressed the risk weighting applied to this component; therefore, it is retained as proposed. § 702.106(e).

(f) Loans sold with recourse. The proposed standard component for “Loans sold with recourse” applies a risk weighting of 6 percent to the entire contents of the corresponding risk portfolio, 65 FR at 8609, to account for retained credit risk and the operational risk of servicing such loans. The 6 percent weighting also parallels the minimum weighting required for on-balance sheet loans that have similar credit risk exposure. See, e.g., § 702.106(a)(1) and (e). Two commenters advocated replacing the fixed 6 percent weighting for this component with a sliding scale of weights based on the loss experience of like assets as measured by, for example, the five-year loan loss ratio. At present, the limited number of credit unions that sell or swap loans with recourse does not justify the increased burden of reporting the data needed to analyze loss experience for this purpose. Accordingly, the final rule retains the fixed 6 percent risk weighting proposed for this component. § 702.106(f).

(g) Unused member business loan commitments. The proposed standard component for “Unused member business loans” applied a risk weighting of 6 percent to the entire contents of the corresponding risk portfolio. 65 FR 8609. Eleven commenters invited NCUA to reduce the weighting for this component to between 3 and 4.5 percent, but generally gave no rationale. Others proposed inserting a threshold to divide the contents of the portfolio according to a minimum percentage of either assets, equity, or an historical rate at which MBL commitments convert to actual loans. The commenters would give the tier below that threshold a zero percent weighting. No empirical evidence was provided to support weighting different portions of the portfolio differently, much less to support weighting any portion of it at zero. Accordingly, the final rule retains the risk weighting for this standard component without modification. § 702.106(g).

(h) Allowance. The proposed standard component for the “Allowance” risk portfolio applies a risk weighting of negative 100 percent to the entire contents of the corresponding risk portfolio (which itself is limited to the equivalent of 1.5 percent of total loans). § 702.106(h). This effectively offsets the RBNW requirement otherwise resulting from the standard calculation, to reflect mitigation of risk through reserving for loan losses in the ALL. No commenters addressed the negative 100 percent risk weighting applied to this component to produce a credit against the RBNW requirement; therefore, it is retained as proposed. § 702.106(h).

The third step of the three-step process gives a credit union the option to reduce the amount of its RBNW requirement under the standard calculation. To implement that step, section 702.107 (formerly section 702.106) multiplies the different remaining maturity or WAL buckets in each of three risk portfolios representing above average risk by a corresponding risk weighting to yield an “alternative component.” See Table 4 in § 702.107, and Appendix F. Compared to the standard components, the alternative components classify real estate loans, member business loans and investments in finer remaining maturity and WAL increments based on additional data provided by the credit union. Each alternative component that produces a smaller percentage than its corresponding standard component may then be substituted for its counterpart in section 702.106 to reduce the RBNW requirement originally determined under the standard calculation.

The sole commenter addressing the structure of section 702.107 insisted upon allowing all or none of the alternative components to be substituted for their counterpart standard components. NCUA disagrees, preferring to give credit unions maximum flexibility in meeting an RBNW requirement. Therefore, the final rule retains the proposed alternative components, modified as follows in section 702.107:

(a) Long-term real estate loans. The proposed alternative component for “Long-term real estate loans “ divided the contents of the corresponding risk portfolio by remaining maturity buckets: greater than 3, but less than or equal to 5 years; greater than 5, but less than or equal to 12 years; greater than 12, but less than or equal to 20 years; and greater than 20 years. The four remaining maturity buckets were weighted at 6, 8, 12 and 16 percent, respectively. 65 FR at 8610-8611. The sum of the weighted buckets equals the “alternative component.”

Seeking wholesale modification, one commenter condemned this alternative component as completely unnecessary, while another praised it as important in aiding credit unions to comply with PCA. Two commenters urged NCUA to require reporting of real estate loan balances by WAL instead of remaining maturity. Due to the inherent difficulty of relying on objective data in the Call Report to validate prepayment assumptions that affect the WAL of long-term real estate loans, NCUA considers remaining maturity to be the most reliable and least burdensome means of reporting real estate loans.

Ten other commenters generally sought to modify the maturity buckets and corresponding risk weightings. Two protested that the weightings were too harsh and should be adjusted downward to account for low LTV ratios. In contrast, a single commenter felt the weightings were too low. Two others indicated that the maturity ranges of the buckets were too broad, while another insisted there were too many buckets. Upon reconsideration, NCUA considers the maturity ranges of the buckets and all but one of the risk weightings to be reasonable based on examiner judgment of credit risk and interest rate risk in typical fixed-rate real estate loans.

The final rule modifies this alternative component in two respects. First, to parallel the 5-year maturity threshold adopted in the corresponding risk portfolio, § 702.104(a), the 3-to-5 year remaining maturity bucket is deleted altogether from the “Long-term real estate loans” alternative component. Second, to parallel the 14 percent weighting adopted for loans above the 25 percent threshold in the corresponding standard component, § 702.106(a)(2), the weighting applied in the alternative component to the remaining maturity bucket for loans in excess of 20 years is reduced from 16 to 14 percent. § 702.107(a)(3); see Appendix C. The final rule otherwise retains the proposed alternative component without modification.

(b) Member business loans outstanding. The proposed alternative component for “Member business loans outstanding” categorized the contents of the corresponding risk portfolio first by fixed-versus variable-rate MBLs, and then by remaining maturity in five buckets for each category—3 years or less; greater than 3, but less than or equal to 5 years; greater than 5, but less than or equal to 7 years; greater than 7, but less than or equal to 12 years; and greater than 12 years. 13 65 FR at 8610-8611. The five maturity buckets for fixed-rate MBLs were weighted at 6, 9, 12, 14 and 16 percent, respectively. The five maturity buckets for variable-rate MBLs were weighted at 6, 8, 10, 12 and 14 percent, respectively. The sum of the weighted buckets equals the “alternative component.”

Two commenters addressed this alternative component, suggesting structural modifications. The first argued that fixed-rate MBLs should be classified by WAL to take account of the interest rate premium, but that variable-rate MBLs should be weighted at a static 6 percent, regardless of WAL or remaining maturity, since it is unrealistic to require reserves equivalent to the decline in market value. The second commenter proposed weighting MBLs on a sliding scale to take account of the LTV ratios, e.g., 6 percent for an LTV ratio of less than 60 percent, and a 7 percent weighting for an LTV ratio between 60 and 70 percent.

NCUA declines to depart from the proposed rule for the following reasons. First, as explained in the preceding section, due to the inherent difficulty of relying on objective Call Report data to validate prepayment assumptions, NCUA considers remaining maturity to be the most reliable and least burdensome means of reporting MBLs. Second, while the value of a variable-rate MBL may decline less in value than a similar fixed-rate MBL as a result of a given interest rate change, credit risk of a variable-rate MBL typically increases in a higher rate environment, as the borrower is forced to meet increased interest expense burden. Third, the proposed rule already recognized the inherent variation in risk between fixed-rate and variable-rate MBLs; in the 3-to-5 year remaining maturity bucket, the weighting applied to fixed-rate MBLs is 100 basis points higher than that applied to variable-rate MBLs; in the three buckets for remaining maturities greater than 5 years, the weighting applied to fixed-rate MBLs is 200 basis points higher than that applied to variable-rate MBLs. 65 FR at 8611 (Table 4.b.).

For these reasons, the final rule retains this alternative component without modification. § 702.107(b) and Appendix D.

(c) Investments. The proposed alternative component for “Long-term investments” (here renamed simply “Investments”) classified the contents of the corresponding risk portfolio into four WAL buckets: greater than 3, but less than or equal to 5 years; greater than 5, but less than or equal to 7 years; greater than 7, but less than or equal to 10 years; and greater than 10 years. The four WAL buckets are weighted at 8, 12, 16 and 20 percent, respectively. 65 FR 8604. The sum of the weighted buckets yields the alternative component.

According to one commenter, NCUA did not select representative securities with sufficient interest rate risk, resulting in inadequate weightings. Although the representative securities reflect the shorter end of each WAL bucket, NCUA's research indicates that the proposed weighting applied to each WAL bucket approximates the economic value exposure. 65 FR at 8605. In addition, these securities implicitly acknowledge that credit union liabilities typically do not all reset overnight. As a result, the proposed weightings are adequate to protect the NCUSIF from material risk, and do not need to be increased.

Protesting that the proposed WAL buckets do not adequately recognize WAL differences within buckets, another commenter compared the U.S. Securities and Exchange Commission's (“SEC”) use of smaller “haircuts” ( i.e., percentage deductions) in computing net capital requirements for broker-dealers. 17 C.F.R. 240.15c3-1(c)(2)(vi). However, the SEC uses haircuts in what is generally a marked-to-market environment, and broker-dealers subject to its requirements are able to issue equity to increase net worth. In contrast, investments by credit unions generally are not marked-to-market. Even a credit union's gain or loss on “available-for-sale” securities is not reflected in net worth. See § 702.2(f); 65 FR at 8565. Further, credit unions typically cannot issue equity instruments to increase net worth.

Principally to capture cash on deposit and cash equivalents (formerly within the “Low risk assets” risk portfolio) and other investments (formerly in the “Average risk assets” risk portfolio), the final rule modifies the alternative component for “Investments” by adding two buckets at the bottom of the WAL scale: one for investments having a WAL of one year or less, and another for investments with a WAL of greater than one year but less than or equal to 3 years. These buckets are weighted at 3 percent and 6 percent, respectively. § 702.107(c)(1) and (2), and Appendix E. This alternative component is otherwise unchanged from the proposed rule.

Sixty-four commenters appealed to the NCUA Board to adopt a subjective or quantitative means for credit unions to demonstrate that the actual level of risk exposure to the NCUSIF is less than that indicated by the RBNW requirement resulting from the standard calculation, § 702.106, or alternative components, § 702.107.

To recognize mitigation of interest rate risk, forty-four commenters suggested considering the structure of funding liabilities and the results of “hedging” strategies. Commenters generally advocated flexibility toward sophisticated credit unions that implement internal modeling of an economic value exposure measure such as net economic value (“NEV”). A few commenters urged NCUA to consider a maturity gap, a “matched book,” or an earnings exposure measure such as income simulation. For example, one commenter argued for an adjustment to the RBNW requirement in response to internal modeling that demonstrates limited interest rate risk through an NEV fluctuation calculation, with the calculation to be certified by NCUA. More subjectively, another commenter proposed an RBNW adjustment in consideration of a credit union's history, policies, practices, and risk management techniques.

To recognize mitigation of credit risk, fourteen commenters recommended considering the impact of such quantitative factors as low LTV ratio and private mortgage insurance. Ten advocated evaluating the quality of loan underwriting and standards.

Upon consideration of the comments, the NCUA Board is persuaded to permit credit unions to demonstrate interest rate risk mitigation through internal modeling of an economic value exposure measure such as NEV, and to demonstrate credit risk mitigation through quantitative indicators of below average credit risk in loan portfolios. To this end, the final rule introduces a “risk mitigation credit” (“RMC”) to offset a credit union's applicable RBNW requirement.

Under section 702.108, a credit union which fails to meet its applicable RBNW requirement under both the standard calculation, § 702.106, and the alternative components, § 702.107, may apply to the NCUA Board for an RMC to reduce that requirement. The NCUA Board may, in its discretion, grant an RMC upon proof of mitigation of credit risk, or interest rate risk as demonstrated by economic value exposure measures. To ensure uniformity, an RMC request will be evaluated according to guidelines to be duly adopted by the NCUA Board. § 702.108(a).

In the case of a FISCU seeking an RMC, the request must first be submitted to the appropriate State official (as defined in 12 C.F.R. 702.2(b) and appropriate Regional Director having jurisdiction over the FISCU. § 702.108(b)(1). When evaluating a FISCU's request, the NCUA Board is required to “consult and seek to work cooperatively” with the appropriate State official and to provide prompt notice to him or her of its decision on the request. § 702.108(b)(2).

The RMC is available only to credit unions which otherwise fail an RBNW requirement, because of the substantial commitment of NCUA resources required to administer the process of evaluating and deciding RMC applications. NCUA will be responsible for ensuring the validity and reliability of the quantitative measures used to demonstrate mitigation of risk through individual qualitative assessment of each applicant credit union. Under guidelines to be adopted before the effective date of the final rule, NCUA envisions a process for evaluating RMC applications which resembles the process used to consider requests for expanded authority by corporate credit unions under Appendix B to part 704, 12 C.F.R. 704.

1. Regulatory capital. Numerous commenters reiterated the call for new forms of “regulatory capital” to play a role in PCA. NCUA may have the statutory authority to permit new sources of capital for federally-chartered credit unions. 12 U.S.C. 1757(7), 1757(9) (permitting NCUA to authorize regulatory capital in the form of shares and subordinated debt). However, CUMAA's express, limited definition of net worth—retained earnings under GAAP—clearly precludes all but low income-designated credit unions from classifying such regulatory capital as net worth for PCA purposes. § 1790d(o)(2). Nevertheless, NCUA recognizes that, if established, regulatory capital would be available to absorb losses, thereby insulating the NCUSIF from such losses. See § 702.206(e) (criterion in evaluating net worth restoration plans). Depending on how it is structured, regulatory capital on the balance sheet of a credit union that meets the definition of “complex” could conceivably reduce the risk for which the RBNW requirement is designed to compensate. In the future, therefore, NCUA may consider proposals to amend part 702 to allow regulatory capital to offset an RBNW requirement. See, e.g., § 702.106(h) (“Allowance” component).

2. Banking industry trade association comments. In its comment letter, a trade association of the banking industry made four principal comments on the proposed rule. First, that the final rule should exempt credit unions having assets of $10 million or less. This proposal to establish a minimum asset floor, made by many commenters, is adopted. Second, that a credit union should be deemed “complex” if it has either $50 million or more in assets, any MBLs in its asset portfolio, or any investments for which it is required to submit a quarterly monitoring report to NCUA. See 12 C.F.R. 703.70(a), 703.90(b). These three sweeping criteria, while simple, are overwhelmingly overinclusive; NCUA's objective is to develop an RBNW requirement that is tailored to a credit union's individual risk profile. Third, that CUMAA and the Treasury Department intended that NCUA model the RBNW requirement on the banks' risk-based capital framework. On the contrary, neither CUMAA nor the Treasury Department envisioned a clone of the banks' risk-based capital standards; rather, Congress instructed NCUA to develop a credit union-specific RBNW requirement, § 1790d(i), which takes account of a full range of relevant risks. S. Rep. at 13. As explained in section C.7(d) above, the banks' approach addresses credit risk only. Third, that the proposed rule fails to take account of differences in credit quality among assets. The banks' risk-based capital standards create many broad categories of assets and do not further distinguish credit quality within a category. The final rule establishes fewer categories ( i.e., risk portfolios, § 702.104) and designates risk weightings to account for a broader range of risks ( e.g., credit and interest rate risk). As explained in section C.4. above, NCUA's approach efficiently captures the risks to the NCUSIF that are the intended target of the RBNW requirement.

3. Recognition of unrealized gains and losses. Five commenters inquired about treatment of unrealized gains and losses on “available-for-sale” securities under SFAS 115. NCUA research indicated that failure to adjust net worth to reflect such gains and losses would rarely result in artificially misstating a credit union's net worth category classification. 65 FR at 8565. Thus, neither part 702 nor this final rule recognizes such gains and losses. NCUA reiterates that unrealized gains and losses are not reflected in net worth, the numerator of the net worth ratio, but do affect the denominator, total assets. § 702.2(f).

4. “ PCA Oversight Task Force. ” Ten commenters requested NCUA to periodically review implementation of the final rule and to revise it as needed. Another commenter was concerned that NCUA would modify the final rule in response to changing economic conditions, without giving credit unions sufficient notice and opportunity to comply. In response to these concerns, the NCUA Board in February 2000 established a “PCA Oversight Task Force” and directed its members to review at least a full year of implementation of PCA and to recommend modifications in the Fall of 2001. Any such modifications (apart from RMC guidelines) will be made by formal rulemaking, including public notice and an opportunity to comment.

5. Method of calculating total assets. Several commenters inquired why a credit union is required to use its calendar quarter-end account balances to calculate an RBNW requirement, but may elect among four methods to calculate total assets in determining its net worth ratio. See § 702.2(j). Similarly, another proposed calculating the RBNW requirement using average assets. The RBNW requirement must rely on quarter-end balances, rather than average balances, for consistency; because Call Report asset accounts are reported as of calendar quarter-end, the denominator for the eight “risk portfolios” also must be calendar quarter-end total assets. Otherwise, the sum of the balances in asset accounts (reported on a calendar quarter-end basis) would not necessarily equal the total assets (on other than a calendar quarter-end basis). To reconstruct the Call Report so that asset accounts are reported on an average basis does not appear to be cost justified for NCUA or for credit unions at this time.

Under the proposed rule's four-trigger test, December 1999 Call Report data indicates that an estimated 1408 credit unions, or 13.2 percent of all credit unions, met the definition of “complex” and would be required to meet an RBNW requirement. Compare 65 FR at 8605 (6/99 data). As a result, an estimated twelve credit unions—representing 2.3 percent of credit unions defined as “complex” and .08 percent of all credit unions—would have failed their RBNW requirement under the proposed standard calculation.

By contrast, December 1999 Call Report data indicates the final rule's minimum asset “floor” would exempt 6195 credit unions having assets of $10 million or less. Of the remaining 4434 credit unions, 3982 would fall below the minimum 6 percent RBNW “floor.” Thus, a total of 96 percent of all credit unions would be exempt from meeting an RBNW requirement at the outset.

The remaining 452 credit unions, by virtue of having an RBNW requirement in excess of 6 percent, would meet the definition of “complex” and be required to meet an “applicable risk-based net worth requirement.” § 702.103(a). Among these, the average RBNW requirement is estimated at 6.8 percent. Seventy-five percent of these credit unions have an RBNW requirement of 7.02 percent or less. For 90 percent of them, the RBNW requirement is 7.83 percent or less.

In contrast, the average net worth ratio is an estimated 12.16 percent—more than 500 basis points higher than the average RBNW requirement. As a result, only an estimated 17 credit unions—representing 3.7 percent of the 452 credit unions meeting the definition of “complex,” and .0015 percent of all credit unions—would have failed their RBNW requirement under the standard calculation. § 702.106. Some of these undoubtedly would meet that requirement by substituting alternative components, § 702.107, or by obtaining an offsetting RMC. § 702.108.

As Table 1 below indicates, as asset size increases toward $500 million, it becomes more likely that an RBNW requirement will be applicable.

The estimates in Table 1 above are based on December 1999 Call Report data as indicated in Table 2 below. The line item references are subject to change when the Call Report is revised to conform with part 702 and to incorporate the “PCA Worksheet.”

The Regulatory Flexibility Act requires NCUA to prepare an analysis describing any significant economic impact a final regulation may have on a substantial number of small credit unions (primarily those under $1 million in assets). The final rule establishes an RBNW requirement to apply to federally-insured credit unions which meet the definition of “complex.” The RBNW requirement is expressly mandated by CUMAA as a component of NCUA's system of prompt corrective action. § 1790d(d).

For the purpose of this analysis, credit unions under $1 million in assets will be considered small entities. As of June 30, 1999, there were 1,690 such entities with a total of $807.3 million in assets, with an average asset size of $0.5 million. These small entities make up 15.6 percent of all credit unions, but only 0.2 percent of all credit union assets.

The proposed rule implements a three-step process involving eight “risk portfolios.” The first step is to determine whether a credit union meets the definition of “complex” and an RBNW requirement is applicable, based on a minimum asset size of $10 million and minimum RBNW requirement of 6 percent. The second step uses eight standard components (which multiply the “risk portfolios” by corresponding risk weightings) to determine the applicable RBNW requirement. The third step provides a credit union the opportunity to substitute any of three specific standard components with a corresponding alternative component that may reduce the RBNW requirement against which the credit union's quarterly net worth ratio is measured. Credit unions that do not meet an applicable RBNW requirement under both the standard calculation and the alternative components may apply for a risk mitigation credit to reduce that requirement to reflect mitigation of credit risk or interest rate risk.

The NCUA Board does not believe that the final rule would impose reporting or recordkeeping burdens that require specialized professional skills not available to small entities. Further, NCUA estimates that, due to the $10 million asset minimum, none of these small entities will be subject to an applicable RBNW requirement under the additional requirements of the final rule. There are no other relevant federal rules that duplicate, overlap, or conflict with the final rule.

The reporting requirements in this rule have been submitted to the Office of Management and Budget. Under the Paperwork Reduction Act of 1995, no person is required to respond to a collection of information unless it displays a valid OMB number. Control number 3133-0161 has been issued and will be displayed in the table at 12 CFR part 795.

Executive Order 13132 encourages independent regulatory agencies to consider the impact of their regulatory actions on state and local interests. NCUA, an independent regulatory agency as defined in 44 U.S.C. 3502(5), voluntarily adheres to the fundamental federalism principles addressed by the executive order. This final rule will apply to all federally-insured credit unions, including federally-insured, State-chartered credit unions. Accordingly, it may have a 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. This impact is an unavoidable consequence of carrying out the statutory mandate to adopt a system of prompt corrective action to apply to all federally-insured credit unions. Throughout the rulemaking process, NCUA staff has consulted with a committee of representative state regulators regarding the impact of the RBNW requirement on state-chartered credit unions. The committee's comments and suggestions are reflected in the final rule.

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.

Public Law 96-221, enacted in 1979, raised the loan interest rate ceiling for federal credit unions from one percent per month (12 percent per year) to 15 percent per year. It also authorized the Board to set a higher limit, after consulting with the Congress, the Department of Treasury and other federal financial agencies, for a period not to exceed 18 months, if the Board determined that: (1) money market interest rates have risen over the preceding six months; and (2) prevailing interest rate levels threaten the safety and soundness of individual credit unions as evidenced by adverse trends in growth, liquidity, capital, and earnings.

On December 3, 1980, the Board determined that the foregoing conditions had been met. Accordingly, the Board raised the loan ceiling for nine months to 21 percent. In the unstable environment of the first-half of the 1980s, the Board lowered the loan rate ceiling from 21 percent to 18 percent, effective May 18, 1987. This action was taken in an environment of falling market interest rates from 1980 to early 1987. The ceiling has remained at 18 percent to the present.

The Board believes that the 18 percent ceiling will permit credit unions to continue to meet their current lending programs, permit flexibility so that credit unions can react to any adverse economic developments, and ensure that any increase in the cost of funds would not affect the safety and soundness of federal credit unions.

The Board would prefer not to set loan interest rate ceilings for federal credit unions. Credit unions are cooperatives and balance loan and share rates consistent with the needs of their members and prevailing market interest rates. The Board supports free lending markets and the ability of federal credit union boards of directors to establish loan rates that reflect current market conditions and the interests of their members. Congress has, however, imposed loan rate ceilings since 1934. In 1979, Congress set the ceiling at 15 percent but authorized the Board to set a ceiling in excess of 15 percent, if conditions warrant. The following analysis justifies a ceiling above 15 percent, but at the same time does not support a ceiling above the current 18 percent. The Board is prepared to reconsider this action at any time should changes in economic conditions warrant.

A number of measures of inflation continue to reflect price pressures on the economy. The Gross Domestic Price Deflator, a broad measure of inflation, rose at a three percent annual rate in the first quarter, the largest increase since a similar rise in the first quarter of 1995. The Consumer Price Index rose 3.1 percent from May 1999 through May 2000, compared to 2.7 percent for all of last year. The personal consumption expenditure price index, a separate measure tied to Gross Domestic Product, rose at a 3.1 percent annual pace in the first quarter, above the 2.5 percent rate of increase in the last three months of 1999.

The economy is continuing to expand at a rapid rate increasing inflationary concerns. Gross Domestic Product grew at a very strong 5.5 percent annual rate in the first three months of this year, after a 7.3 percent increase in the fourth quarter of 1999 and a 5.7 percent rise in the third quarter of 1999. Consumer spending, which has been the engine of this long-term expansion, soared at 7.7 percent annual rate in the first quarter of 2000, the largest increase in 17 years. The University of Michigan's measure of consumer confidence remains close to the level reached last year, suggesting high consumer spending will be sustained.

Inflationary concerns and expectations about the future level of economic activity have led to a substantial tightening by the Federal Reserve. Table 1 indicates that the Federal Reserve has raised its target fed funds rate six times between June 1999, when the target rate was increased from 4.75 percent to 5.00 percent, and June 2000, when the target rate was increased 50 basis points from 6.00 to 6.50 percent. In choosing to raise rates in May 2000, the Federal Reserve concluded that gains in worker productivity “could no longer” offset the impact of higher costs.

The 6.50 percent target rate is the highest such target in nine years. Although the Federal Reserve chose not to raise the target rate again last month, its accompanying statement suggested inflation is still of substantial concern. In its official statement, the Federal Reserve indicated that “the risks continue to be weighted mainly toward conditions that may generate heightened inflation pressures in the foreseeable future * * * [s]igns that growth in demand is moving to a sustainable pace are still tentative and preliminary.”

Individual Federal Reserve officials have elaborated on the Federal Reserve's official statement. For example, the President of the Chicago Federal Reserve, Moskow, said, “we still are in a period where aggregate demand is growing at a pace that is exceeding potential supply. * * * I haven't seen any significant adjustment up to this point.” Richmond Federal Reserve President Broaddus said that core prices, excluding food and energy prices, “have shown signs of acceleration.”

The implied rate on futures contracts for September is 6.70 percent, suggesting financial markets anticipate another increase in the fed funds target rate at the August Federal Reserve Open Market Committee meeting.

Table 2 shows that that in the last six months there has been an increase in interest rates in the three-month to two-year maturities, of greatest relevance to a credit union's cost of funds.

For at least 731 credit unions, representing 11 1 percent of the reporting federal credit unions, the most common rate on unsecured loans was above 15 percent. While the bulk of credit union lending is below 15 percent, small credit unions and credit unions that have instituted risk-based lending programs require interest rates above 15 percent to maintain liquidity, capital, earnings, and growth. Loans to members who have not yet established a credit history or have weak credit histories have more credit risk. Credit unions must charge rates to cover the potential of higher than usual losses for such loans. There are undoubtedly more than 731 federal credit unions charging over 15 percent for unsecured loans to such members. Many credit unions have “Credit Builder” or “Credit Rebuilder” loans, but only report the “most common rate” on the Call report for unsecured loans. Lowering the interest rate ceilng for federal credit unions would discourage these credit unions from making these loans. Credit seekers' options would be reduced and most of the affected members would have no alternative but to turn to other lenders who will charge much higher rates.

Small credit unions would be particularly affected by lower loan rate ceilings since they tend to have a higher level of unsecured loans, typically with lower loan balances. Thus small credit unions making small loans to members with poor or no credit histories are struggling with far higher costs than the typical credit union. Both young people and lower-income households have limited access to credit and, absent a credit union, often pay rates of 24 to 30 percent to other lenders. Rates between 15 and 18 percent are attractive to such members.

Table 3 shows the number of credit unions in each asset group where the most common rate is more than 15 percent for unsecured loans.

Among the 731 credit unions where the most common rate is more than 15 percent for unsecured loans, 121 have 20 percent or more of their assets (Table 4) in this category. For these credit unions, lowering the rates would damage their liquidity, capital, earnings, and growth.

In conclusion, the Board has continued the federal credit union loan interest rate ceiling of 18 percent per year for the period September 9, 2000 to March 8, 2002. Loans and line of credit balances existing on May 16, 1987, may continue to bear interest at their contractual rate, not to exceed 21 percent. Finally, the Board is prepared to reconsider the 18 percent ceiling at any time during the extension period should changes in economic conditions warrant.

The Board has determined that notification and public comment on this rule are impractical and not in the public interest. 5 U.S.C. 553(b)(3)(B). Due to the need for a planning period prior to the September 9, 2000, expiration date of the current rule, and the threat to the safety and soundness of individual credit unions with insufficient flexibility to determine loan rates, final action on the loan rate ceiling is necessary.

The Regulatory Flexibility Act requires NCUA to prepare an analysis to describe any significant economic impact a regulation may have on a substantial number of small credit unions (those under one million dollars in assets). This final rule provides added flexibility to all federal credit unions regarding the permissible interest rate that may be used in connection with lending. The NCUA Board has determined and certifies that this rule will not have a significant economic impact on a substantial number of small credit unions.

NCUA has determined that this rule does not increase paperwork requirements under the Paperwork Reduction Act of 1995 and regulations of the Office of Management and Budget.

Executive Order 13132 encourages independent regulatory agencies to consider the impact of their regulatory actions on state and local interest. In adherence to fundamental federalism principles, NCUA, an independent regulatory agency as defined in 44 U.S.C. 3502(5), voluntarily complies with the executive order. This rule applies only to federal credit unions and, thus, will not have substantial direct effects on the states, on the relationship between the national government and the states, nor materially affect state interests. The NCUA has determined that the rule does not constitute a policy that has any federalism implication for purposes of the executive order.

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. NCUA has recommended to the Office of Management and Budget that it determine that this is not a major rule and is awaiting its determination.

NCUA has determined that this rule will not affect family well-being within the meaning of Section 654 of the Treasury and General Government Appropriations Act, 1999, Pub. L. 105-277, 112 Stat. 2681 (1998).

On July 3, 2000, the FAA issued emergency AD 2000-13-51, which is applicable to all Boeing Model 737-200 and -300 series airplanes equipped with a main deck cargo door installed in accordance with Supplemental Type Certificate (STC) SA2969SO.

That action was prompted by a report indicating that three of the subject airplanes had multiple cracks in the lower portion of the main deck cargo door frames and, in some cases, the reinforcing angles. The exact cause of the cracking is unknown at this time. The area of the cracking is between frame station (FS) 361.87 and FS 498.12 where the latch fittings attach to the main deck cargo door frames. Such cracking in the lower portion of the main deck cargo door frames could cause reduced structural integrity of the main deck cargo door. This condition, if not corrected, could result in sudden depressurization, loss or opening of the main deck cargo door during flight, and loss of control of the airplane.

Since the unsafe condition described is likely to exist or develop on other airplanes of the same type design, the FAA issued emergency AD 2000-13-51 to detect and correct cracking of the lower portion of the main deck cargo door frames, which could result in sudden depressurization, loss or opening of the main deck cargo door during flight, and loss of control of the airplane. The AD requires repetitive special detailed inspections to detect cracking of the main deck cargo door frames, their existing reinforcing angles (where applicable), and the attach holes of the latch fittings between FS 361.87 and FS 498.12, and between WL 202.35 and WL 213.00, in the area where the main deck cargo door latch fittings attach to the frames, and corrective actions, if necessary.

Since it was found that immediate corrective action was required, notice and opportunity for prior public comment thereon were impracticable and contrary to the public interest, and good cause existed to make the AD effective immediately by individual notices issued on July 3, 2000 to all known U.S. owners and operators of Boeing Model 737-200 and -300 series airplanes equipped with a main deck cargo door installed in accordance with STC SA2969SO. These conditions still exist, and the AD is hereby published in the Federal Register as an amendment to section 39.13 of the Federal Aviation Regulations (14 CFR 39.13) to make it effective to all persons.

This AD also requires that operators report the results of the special detailed inspection to the FAA. Because the cause of the addressed cracking is not currently known, the intent of these required inspection reports is to enable the FAA to determine how widespread such cracking problems may be in the affected fleet.

This is considered to be interim action until final action is identified, at which time the FAA may consider further rulemaking.

Although this action is in the form of a final rule that involves requirements affecting flight safety and, thus, was not preceded by notice and an opportunity for public comment, comments are invited on this rule. Interested persons are invited to comment on this rule by submitting such written data, views, or arguments as they may desire. Communications shall identify the Rules Docket number and be submitted in triplicate to the address specified under the caption ADDRESSES . All communications received on or before the closing date for comments will be considered, and this rule may be amended in light of the comments received. Factual information that supports the commenter's ideas and suggestions is extremely helpful in evaluating the effectiveness of the AD action and determining whether additional rulemaking action would be needed.

Comments are specifically invited on the overall regulatory, economic, environmental, and energy aspects of the rule that might suggest a need to modify the rule. All comments submitted will be available, both before and after the closing date for comments, in the Rules Docket for examination by interested persons. A report that summarizes each FAA-public contact concerned with the substance of this AD will be filed in the Rules Docket.

Commenters wishing the FAA to acknowledge receipt of their comments submitted in response to this rule must submit a self-addressed, stamped postcard on which the following statement is made: “Comments to Docket Number 2000-NM-216-AD.” The postcard will be date stamped and returned to the commenter.

The regulations adopted herein 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. Therefore, it is determined that this final rule does not have federalism implications under Executive Order 13132.

The FAA has determined that this regulation is an emergency regulation that must be issued immediately to correct an unsafe condition in aircraft, and that it is not a “significant regulatory action” under Executive Order 12866. It has been determined further that this action involves an emergency regulation under DOT Regulatory Policies and Procedures (44 FR 11034, February 26, 1979). If it is determined that this emergency regulation otherwise would be significant under DOT Regulatory Policies and Procedures, a final regulatory evaluation will be prepared and placed in the Rules Docket.

A copy of it, if filed, may be obtained from the Rules Docket at the location provided under the caption ADDRESSES .

Under the formula mandated by 38 U.S.C. 3015(g) for fiscal year 2000, the rates of basic educational assistance under the Montgomery GI Bill—Active Duty payable to students pursuing a program of education full time must be increased by 1.6%, which is the percentage by which the total of the monthly Consumer Price Index-W for July 1, 1998, through June 30, 1999, exceeds the total of the monthly Consumer Price Index-W for July 1, 1997, through June 30, 1998.

It should be noted that some veterans will receive an increase in monthly payments that will be less than 1.6%. The increase does not apply to additional amounts payable by the Secretary of Defense to individuals with skills or a specialty in which there is a critical shortage of personnel (so-called “kickers”). It does not apply to amounts payable for dependents. Veterans who previously had eligibility under the Vietnam Era GI Bill receive monthly payments that are in part based upon basic educational assistance and in part based upon the rates payable under the Vietnam Era GI Bill. Only that portion attributable to basic educational assistance is increased by 1.6%.

38 U.S.C. 3015(a) and (b) require that the Department of Veterans Affairs (VA) pay part-time students at appropriately reduced rates. Since the first student became eligible for assistance under the Montgomery GI Bill—Active Duty in 1985, VA has paid three-quarter-time students and one-half-time students at 75% and 50% of the full-time institutional rate, respectively. Students pursuing a program of education at less than one-half but more than one-quarter-time have had their payments limited to 50% or less of the full-time institutional rate. Similarly, students pursuing a program of education at one-quarter-time or less have had their payments limited to 25% or less of the full-time institutional rate. Changes are made consistent with the authority and formula described in this paragraph.

In addition, 38 U.S.C. 3032(c) requires that monthly rates payable to veterans in apprenticeship or other on-the-job training must be set at a given percentage of the full-time rate. Hence, there is a 1.6% raise for such training as well.

Nonsubstantive changes also are made for the purpose of clarity.

The changes set forth in this final rule are effective from the date of publication, but the changes in rates are applied retroactively from October 1, 1999 in accordance with the applicable statutory provisions discussed above.

Changes made by this final rule merely reflect statutory requirements and adjustments made based on previously established formulas. Accordingly, there is a basis for dispensing with prior notice and comment and delayed effective date provisions of 5 U.S.C. 552 and 553.

The Office of Management and Budget has reviewed this final rule under Executive Order 12866.

The Secretary of Veterans Affairs hereby certifies that this final rule will not have a significant economic impact on a substantial number of small entities as they are defined in the Regulatory Flexibility Act, 5 U.S.C. 601-612. This final rule directly affects only individuals and does not directly affect small entities. Pursuant to 5 U.S.C. 605(b), this final rule, therefore, is exempt from the initial and final regulatory flexibility analyses requirements of sections 603 and 604.

The Unfunded Mandates Reform Act requires (in section 202) that agencies prepare an assessment of anticipated costs and benefits before developing any rule that may result in an expenditure by State, local, or tribal governments, in the aggregate, or by the private sector of $100 million or more in any given year. This rule would have no consequential effect on State, local, or tribal governments.

The Catalog of Federal Domestic Assistance number for the program affected by this final rule is 64.124.

The National Low Emission Vehicle (National LEV) program is a voluntary, nationwide clean car program, designed to reduce ground level ozone (or smog) and other air pollution produced by emissions from newly manufactured motor vehicles. On June 6, 1997 (62 FR 31192) and on January 7, 1998 (63 FR 926), the Environmental Protection Agency (EPA) promulgated rules outlining the framework for the National LEV program. These National LEV regulations allow auto manufacturers to commit to meet tailpipe standards for cars and light-duty trucks that are more stringent than EPA could otherwise mandate under the authority of the Clean Air Act in that time frame. The regulations provided that the program would come into effect only if Northeast states and auto manufacturers agreed to participate. On March 9, 1998 (63 FR 11374), EPA published a finding that the program was in effect. Nine northeastern states (Connecticut, Delaware, Maryland, New Hampshire, New Jersey, Pennsylvania, Rhode Island, Virginia, and the District of Columbia) and 23 auto manufacturers (BMW, Chrysler, Fiat, Ford, General Motors, Honda, Hyundai, Isuzu, Jaguar, Kia, Land Rover, Mazda, Mercedes-Benz, Mitsubishi, Nissan, Porsche, Rolls-Royce, Saab, Subaru, Suzuki, Toyota, Volkswagen, and Volvo) opted to participate in the National LEV program. Once in effect, the National LEV Program became enforceable in the same manner as any other Federal new motor vehicle emission control program.

The National LEV Program will achieve significant air pollution reductions nationwide. In addition, the program provides substantial harmonization of Federal and California standards for new motor vehicles and new motor vehicle test procedures. This program enables manufacturers to move towards the design and testing of vehicles to satisfy one set of nationwide standards. The National LEV Program demonstrates how cooperative partnership efforts can produce a smarter, cheaper emissions control program that reduces regulatory burden while increasing protection of the environment and public health.

The National LEV Program will result in substantial reductions in non-methane organic gases (NMOG) and nitrous oxides (NO X ), which contribute to unhealthy levels of smog in many areas across the country. National LEV vehicles are 70% cleaner than today's model requirements under the Clean Air Act. This voluntary program provides auto manufacturers flexibility in meeting the associated standards as well as the opportunity to harmonize their production lines and make vehicles more efficiently. National LEV vehicles were estimated to cost an additional $76 above the price of vehicles otherwise required today, but the actual per vehicle cost is now expected to be even lower, due to factors such as economies of scale and historical trends related to emission control costs. This predicted incremental cost is less than 0.5% of the price of an average new car. In addition, the National LEV Program will help ozone nonattainment areas across the country improve their air quality, as well as reduce pressure to make further, more costly emission reductions from stationary industrial sources.

Because it is a voluntary program, National LEV was set up to take effect, and will remain in effect, only if the participating auto manufacturers and Northeastern States commit to the program and abide by their commitments. The states and manufacturers initially committed to the program through opt-in notifications to EPA, which were sufficient for EPA to find that National LEV had come into effect. The National LEV regulations provide that the second stage of the state commitments are to be made through SIP revisions that incorporate those state commitments to National LEV into state regulations. EPA will then take rulemaking action to approve each state's regulation into its respective federally-enforceable SIP. The National LEV regulations laid out the elements to be incorporated in the SIP revisions, the timing for such revisions, and the language (or substantively similar language) that needs to be included in a SIP revision to allow EPA to approve that revision as adequately committing the state to the National LEV Program. In today's action, EPA is approving the National LEV SIP revision for the District of Columbia as adequately committing the District to the program. With this rulemaking action, EPA will have completed rulemaking action to approve commitments to the National LEV program by all the Northeast states that have elected to join the National LEV Program.

At present, the District of Columbia has not exercised the option, pursuant to section 177 of the Clean Air Act, to adopt state standards to regulate new motor vehicles identical to California's LEV program. Rather, the District adopted regulations that provide for the National LEV Program to be in place. These provide that for the duration of the District's participation in the National LEV program, manufacturers may comply with National LEV standards or equally stringent mandatory Federal standards in lieu of compliance with any state-adopted California LEV program pursuant to section 177 of the Clean Air Act. The District has adopted regulations that accept National LEV as a compliance alternative for requirements applicable to passenger cars, light-duty trucks, and medium-duty trucks designed to operate on gasoline. The District's regulation provides for participation in the National LEV program until model year 2006. Through its regulations, which were submitted to EPA as a SIP revision, the District of Columbia has adequately committed to the National LEV Program, as provided in the final National LEV rule.

EPA's final National LEV rule stated that if a state submits a SIP revision containing regulatory language substantively identical to the language in EPA's regulation without additional conditions, and if such a submission otherwise meets the Clean Air Act requirements for approvable SIP submissions, EPA would not need to conduct notice-and-comment rulemaking to approve that SIP revisions. In its National LEV rulemaking, EPA provided full opportunity for public comment on the language to be contained in each state's subsequent SIP revision. Thus, as discussed in more detail in the EPA National LEV final rule, the requirements for EPA SIP approval are easily verified objective criteria (see 63 FR 936, January 7, 1998). While we could appropriately approve the submission from the District of Columbia without providing for additional notice and requesting comments, we have nonetheless decided to take this action in the form of a direct final rulemaking, which allows an opportunity for further public comment. In this instance, EPA is not under a timing constraint that would support a shorter rulemaking process, and thus we have decided there is no need to deviate from the Agency's usual procedures for SIP approvals.

EPA has evaluated the SIP revision submitted by the District of Columbia. The Agency has determined that this SIP revision is consistent with the EPA National LEV regulations and satisfies the general SIP approval requirements of section 110 of the Clean Air Act. Therefore, EPA is approving the District of Columbia low emission vehicle rule submitted on February 16, 2000 into the District's SIP.

EPA is publishing this rule without prior proposal because the Agency views this as a noncontroversial amendment and anticipates no adverse comments. However, in the “Proposed Rules” section of this Federal Register publication, EPA is publishing a separate document that will serve as the proposal to approve the SIP revision if adverse comments are filed. This rule will be effective September 18, 2000 without further notice, unless the Agency receives adverse comment by August 21, 2000.

If EPA receives adverse comment, we will publish a timely withdrawal in the Federal Register informing the public that the rule will not take effect. EPA will address all public comments received in a subsequent final rule based on the proposed rule. EPA will not institute a second comment period on this action. Any parties interested in commenting must do so at this time.

Nothing in this action should be construed as permitting or establishing a precedent for any future request for revision to any State implementation plan. Each request for revision to the State implementation plan shall be considered separately in light of specific technical, economic, and environmental factors and in relation to relevant statutory and regulatory requirements.

Under Executive Order 12866 (58 FR 51735, October 4, 1993), this action is not a “significant regulatory action” and therefore is not subject to review by the Office of Management and Budget. This action merely approves state law as meeting federal requirements and imposes no additional requirements beyond those imposed by state law. Accordingly, the Administrator certifies that this rule will not have a significant economic impact on a substantial number of small entities under the Regulatory Flexibility Act (5 U.S.C. 601 et seq. ). Because this rule approves pre-existing requirements under state law and does not impose any additional enforceable duty beyond that required by state law, it does not contain any unfunded mandate or significantly or uniquely affect small governments, as described in the Unfunded Mandates Reform Act of 1995 (Public Law 104-4). For the same reason, this rule also does not significantly or uniquely affect the communities of tribal governments, as specified by Executive Order 13084 (63 FR 27655, May 10, 1998). This rule will not have substantial direct effects 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, as specified in Executive Order 13132 (64 FR 43255, August 10, 1999), because it merely approves a state rule implementing a federal standard, and does not alter the relationship or the distribution of power and responsibilities established in the Clean Air Act. This rule also is not subject to Executive Order 13045 (62 FR 19885, April 23, 1997), because it is not economically significant.

In reviewing SIP submissions, EPA's role is to approve state choices, provided that they meet the criteria of the Clean Air Act. In this context, in the absence of a prior existing requirement for the State to use voluntary consensus standards (VCS), EPA has no authority to disapprove a SIP submission for failure to use VCS. It would thus be inconsistent with applicable law for EPA, when it reviews a SIP submission, to use VCS in place of a SIP submission that otherwise satisfies the provisions of the Clean Air Act. Thus, the requirements of section 12(d) of the National Technology Transfer and Advancement Act of 1995 (15 U.S.C. 272 note) do not apply. As required by section 3 of Executive Order 12988 (61 FR 4729, February 7, 1996), in issuing this rule, EPA has taken the necessary steps to eliminate drafting errors and ambiguity, minimize potential litigation, and provide a clear legal standard for affected conduct. EPA has complied with Executive Order 12630 (53 FR 8859, March 15, 1988) by examining the takings implications of the rule in accordance with the “Attorney General's Supplemental Guidelines for the Evaluation of Risk and Avoidance of Unanticipated Takings” issued under the executive order. This rule does not impose an information collection burden under the provisions of the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq. ).

The Congressional Review Act, 5 U.S.C. 801 et seq. , as added by the Small Business Regulatory Enforcement Fairness Act of 1996, generally provides that before a rule may take effect, the agency promulgating the rule must submit a rule report, which includes a copy of the rule, to each House of the Congress and to the Comptroller General of the United States. EPA will submit a report containing this rule and other required information to the U.S. Senate, the U.S. House of Representatives, and the Comptroller General of the United States prior to publication of the rule in the Federal Register . This rule is not a “major rule” as defined by 5 U.S.C. 804(2).

Under section 307(b)(1) of the Clean Air Act, petitions for judicial review of this action to approve the District of Columbia's National LEV Program SIP revision must be filed in the United States Court of Appeals for the appropriate circuit by September 18, 2000. Filing a petition for reconsideration by the Administrator of this final rule does not affect the finality of this rule for the purposes of judicial review nor does it extend the time within which a petition for judicial review may be filed, and shall not postpone the effectiveness of such rule or action. This action may not be challenged later in proceedings to enforce its requirements. (See section 307(b)(2).)

This is a synopsis of the Commission's Report and Order, MM Docket No. 99-271, adopted June 7, 2000, and released June 16, 2000. The full text of this Commission decision is available for inspection and copying during normal business hours in the FCC Reference Center (Room 239), 445 12th Street, SW, Washington, DC. The complete text of this decision may also be purchased from the Commission's copy contractor, International Transcription Services, Inc., (202) 857-3800, 1231 20th Street, NW, Washington, DC 20036.

Channel 274C can be allotted to Boulder City in compliance with the Commission's minimum distance separation requirements at Station KSTJ's presently licensed transmitter site, 35-59-45 North Latitude; 114-51-51 West Longitude. Channel 289C can be allotted to Dolan Springs with a site restriction of 27 kilometers (17 miles) north, at coordinates 35-50-00 NL; 114-19-00 WL, to accommodate Mag Mile's desired transmitter site. Channel 272C2 can be allotted to Lake Havasu City at Station KJJJ's licensed transmitter site, at coordinates 34-33-06 NL; 114-11-37 WL. Channel 224C1 can be allotted to Kingman at Station KRCY's licensed transmitter site, at coordinates 35-01-58 NL; 114-21-57 WL. Channel 240A can be allotted to Mohave Valley without the imposition of a site restriction, at coordinates 34-55-40 NL; 114-35-51 WL. Channel 273A can be allotted to Ludlow at Station KDUQ's licensed transmitter site, at coordinates 34-43-21 NL; 116-10-04 WL. Mexican concurrence in the allotments at Kingman, Lake Havasu City and Ludlow have been obtained since they are located within 320 kilometers (199 miles) of the U.S.-Mexican border. Concurrence in the allotment at Mohave Valley has been requested but not yet received. Therefore, if a construction permit is granted prior to receipt of formal concurrence in the allotment by the Mexican Government, the construction permit will include the following condition: “Operation with the facilities specified herein is subject to modification, suspension or termination without right to a hearing, if found by the Commission to be necessary in order to conform to the USA-Mexico FM Broadcasting Agreement.”

This is a synopsis of the Commission's Report and Order, MM Docket No. 99-351, adopted June 14, 2000, and released June 23, 2000. The full text of this Commission decision is available for inspection and copying during normal business hours in the FCC's Reference Information Center (Room CY-A257), 445 Twelfth Street, SW., Washington, DC. The complete text of this decision may also be purchased from the Commission's copy contractor, International Transcription Service, Inc., 1231 20th Street, NW., Washington, DC 20036, (202) 857-3800.

This is a synopsis of the Commission's Report and Order, MM Docket No. 99-349, adopted June 7, 2000, and released June 16, 2000. The full text of this Commission decision is available for inspection and copying during normal business hours in the FCC's Reference Information Center (Room CY-A257), 445 Twelfth Street, SW., Washington, DC. The complete text of this decision may also be purchased from the Commission's copy contractor, International Transcription Service, Inc., 1231 20th Street, NW., Washington, DC 20036, (202) 857-3800.

This is a synopsis of the Commission's Report and Order, MM Docket No. 99-285, adopted June 21, 2000, and released June 30, 2000. The full text of this Commission decision is available for inspection and copying during normal business hours in the FCC Reference Center (Room 239), 445 12th Street, SW., Washington, DC. The complete text of this decision may also be purchased from the Commission's copy contractor, International Transcription Services, Inc., (202) 857-3800, 1231 20th Street, NW., Washington, DC 20036.

This is a summary of the Commission's Report and Order, MM Docket No. 00-23, adopted June 21, 2000, and released June 30, 2000. The full text of this Commission decision is available for inspection and copying during normal business hours in the Commission's Reference Center, Washington, DC. The complete text of this decision may also be purchased from the Commission's copy contractors, International Transcription Services, Inc., 1231 20th Street, NW., Washington, DC. 20036, (202) 857-3800, facsimile (202) 857-3805.

This is a synopsis of the Commission's Memorandum Opinion and Order, MM Docket No. 95-88, adopted June 9, 2000 and released June 16, 2000. The full text of this Commission decision is available for inspection and copying during normal business hours in the FCC Reference Information Center (Room CY-A257), at its headquarters, 445 12th Street, S.W. Washington, D.C. The complete text of this decision may also be purchased from the Commission's copy contractors, International Transcription Service, Inc., (202) 857-3800, 1231 20th, N.W. Washington, D.C. 20036.