[Federal Register Volume 63, Number 151 (Thursday, August 6, 1998)]
[Proposed Rules]
[Pages 41976-41978]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-20952]


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 Proposed Rules
                                                 Federal Register
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 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
 
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 

  Federal Register / Vol. 63, No. 151 / Thursday, August 6, 1998 / 
Proposed Rules  

[[Page 41976]]


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NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 701


Organization and Operations of Federal Credit Unions

AGENCY: National Credit Union Administration (NCUA).

ACTION: Notice of proposed rulemaking and request for comment.

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SUMMARY: The proposed rule clarifies certain provisions in NCUA's 
regulation that sets forth the requirements for the purchase, sale and 
pledge of eligible obligations. Currently, the regulation provides that 
a federal credit union (FCU) may purchase real estate loans from any 
source if it is granting real estate loans on an ongoing basis and the 
purchase will facilitate the packaging of a pool of loans for sale on 
the secondary market. The proposal clarifies that a pool must include a 
substantial portion of the FCU's own loans and must be sold promptly. 
Further, the proposed rule explains when the purchase of a member's 
loan is not the purchase of an eligible obligation, but rather the 
making of a direct loan.

DATES: Comments must be received by October 5, 1998.

ADDRESSES: Comments should be directed to Becky Baker, Secretary of the 
Board. Mail or hand-deliver comments to: National Credit Union 
Administration, 1775 Duke Street, Alexandria, Virginia 22314-3428. Fax 
comments to (703) 518-6319. E-mail comments to [email protected]. 
Please send comments by one method only.

FOR FURTHER INFORMATION CONTACT: Mary F. Rupp, Staff Attorney, Office 
of General Counsel, National Credit Union Administration, 1775 Duke 
Street, Alexandria, Virginia 22314-3428 or telephone: (703) 518-6553.

SUPPLEMENTARY INFORMATION:

Background

    On May 3, 1979, the NCUA Board adopted a final rule that allowed an 
FCU to purchase real estate loans from any source if it is granting 
real estate loans on an ongoing basis and the purchase will facilitate 
the packaging of a pool of loans to be sold on the secondary market. 44 
FR 27068 (May 9, 1979). The rule was based on three sections of the 
Federal Credit Union Act (the Act): Secs. 107(5)(A)(i), 107(13) and 
107(15). Section 107(13) authorizes an FCU to purchase, sell, pledge, 
discount, or otherwise receive or dispose of in whole or in part, any 
eligible obligations of its members. The proposed rule explained that, 
although on its face Sec. 107(13) does not authorize the purchase of 
nonmember real estate loans, ``[c]onsidering the Congressional intent 
to allow credit unions to take advantage of secondary mortgage market 
facilities, the Administration does not believe that Congress intended 
107(13) to be an express prohibition on such purchases provided they 
are authorized by other sections of the Act.'' 44 FR 60, 61 (January 2, 
1979). The Board found this authority in the incidental powers clause, 
Sec. 107(15), and the long term real estate lending power, 
Sec. 107(5)(A)(i) of the Act. The Board believed that an FCU's power to 
purchase nonmember real estate loans was incident to its power to make 
long term real estate loans, because ``[i]n order to operate a 
successful real estate program an FCU must have access to the secondary 
market. This can best be done by pooling loans.'' 44 FR at 61. The 
Board recognized that, for an FCU to pool loans to sell in the 
secondary market, it would sometimes need to purchase nonmember loans 
to complete its pool. The proposed rule restricted the purchase of 
nonmember loans to the loans of other credit unions because the Board 
was mindful of the ``restrictions placed on real estate lending by 
Congress.'' 44 FR at 61. Although the final rule removed the 
restriction that the nonmember loans be purchased from credit unions, 
the Board remained concerned that this incidental power not be 
interpreted too broadly and that the focus remain on making loans to 
members.
    The Board balanced ``the need for efficient access to the secondary 
market against Congressional intent in restricting the real estate 
loans'' of FCUs. 44 FR at 22070. The preamble to the final rule stated 
that the FCU's ``board of directors must have adopted a policy of 
granting long term real estate loans'' and must be granting them ``on 
an on-going basis''; an FCU ``must include a substantial portion of its 
own loans in the pool''; once a particular pool is sold, an FCU must 
``grant more loans before a second pool can be assembled''; and 
``Federal credit unions will be expected to sell or pledge obligations 
purchased to package a pool of loans promptly. Arrangements to dispose 
of such loans should generally be made in advance of their purchase by 
obtaining a commitment from a buyer to purchase the pool of loans 
before the pool is actually assembled.'' 44 FR at 27070.
    Although the preamble to the final rule discusses the requirements 
that a pool must include a substantial portion of the credit union's 
own loans and must be sold promptly, questions on these points have 
arisen from time to time. NCUA has responded, through legal opinion 
letters and provisions in the Accounting Manual for Credit Unions, that 
FCUs must meet these conditions. Accounting Manual for Federal Credit 
Unions, Sec. 6030.4. The Board believes it will be helpful to FCUs to 
clarify these existing requirements by having them set out in the 
regulation, itself. FCUs and persons involved in advising them often 
review regulations pertaining to particular activities and, with this 
amendment, it will be easier for FCUs to be informed about the 
requirements for the purchase of eligible obligations without 
consulting other sources for guidance.
    The Act and NCUA's regulations limit the aggregate unpaid balance 
of eligible obligations purchased to 5% of the unimpaired capital and 
surplus of the purchaser. 12 U.S.C. 1757(13) and 12 CFR 701.23(b)(3). 
The current regulation specifically exempts from the 5% limitation 
student and real estate loans purchased under paragraphs (b)(1)(iii) 
and (iv) and eligible obligations purchased under paragraph (b)(1)(i) 
that are refinanced by the purchasing credit union so that they are 
loans it is empowered to grant. 12 CFR 701.23(b)(3). There has been 
some confusion as to whether FCUs participating in indirect lending and 
leasing must account for these as eligible obligations subject to the 
5% limitation or if they may treat them as loans.

[[Page 41977]]

    General Counsel opinion letters have stated that indirect lending 
and indirect leasing arrangements may be treated as loans if certain 
conditions are met. The proposed rule lists the conditions, so that 
FCUs can determine if a transaction qualifies as a loan or the purchase 
of an eligible obligation.

Proposal

    The Board proposes to amend Sec. 701.23(b)(1)(iv) by clarifying 
that a pool of loans, as used in that subsection, must include a 
substantial portion of the FCU's own loans and must be sold promptly. 
This clarification mirrors what is currently stated in the Accounting 
Manual. Accounting Manual for Federal Credit Unions, Sec. 6030.4. To 
provide a more concrete measure for compliance, the Board has 
considered substituting specific numbers to measure what is meant by 
``substantial'' and ``promptly'' in the proposed rule. Agency staff 
with expertise in the secondary market has suggested that, in order for 
an FCU's pool of loans to be considered to contain a ``substantial 
portion of its own loans,'' a reasonable measure would be at least 75%. 
Staff believes this figure represents current practice amongst FCUs 
participating in the secondary market. FCUs participating in the 
secondary market normally only need a small percentage of nonmember 
loans to complete the pool. Further, because FCUs do not have the 
express statutory authority to purchase nonmember loans, the Board 
continues to interpret this provision narrowly. It should only be used 
by an FCU that is granting member real estate loans on an ongoing 
basis, pooling the loans and selling them on the secondary market, as a 
mechanism to complete a pool. It should not be a mechanism for FCUs to 
circumvent the lending restrictions on loans to nonmembers.
    Regarding the period that FCUs can hold the pool of loans, FCUs 
will be expected to sell them ``promptly'' because they will be 
purchasing loans of nonmembers, loans they could not grant. The 1979 
preamble states that ``[a]rrangements should generally be made in 
advance of their purchase by obtaining a commitment from a buyer to 
purchase the pool of loans before the pool is actually assembled.'' 44 
FR at 27070. Agency staff has suggested that 120 days is adequate time 
given the commitment period from purchasers in the secondary market.
    Although specific numbers provide a more definitive measure, they 
remove flexibility which may be useful in certain circumstances. The 
Board is interested in receiving comments on whether specific numbers 
should be used and, if so, what numbers are reasonable.
    The Board proposes amending Sec. 701.23(b)(3) by reorganizing it so 
that the current exceptions to the 5% limit are listed in separate 
subsections and the indirect lending and leasing exception is added to 
the list. The new provision sets forth the conditions for classifying 
an indirect lending or leasing arrangement as a loan. First, the FCU 
must make the final underwriting decision. This means that the FCU must 
actually review the application and determine that the transaction 
conforms to its lending or leasing policies. Second, the sales or lease 
contract must be assigned to the FCU very soon after it is signed by 
the member and the dealer or leasing company. In some programs, the 
assignment will occur immediately. In others, the assignment will occur 
the next business day. The longer the time between the formation of the 
contract and its assignment, the more likely the program will be viewed 
as involving the purchase of an eligible obligation rather than the 
making of a loan. The NCUA Board is interested in receiving comment on 
whether a specific number of days should be substituted for ``very 
soon'' and, if so, what number is reasonable.

Request for Additional Comment

    Section 701.23(b)(1)(iii) and (iv), with certain restrictions, 
allows an FCU to purchase student and real estate loans from any source 
if the FCU is pooling them for sale on the secondary market. The NCUA 
Board is also interested in receiving comment on whether the types of 
loans that can be purchased from any source for purposes of creating 
pools for sale should be expanded to include auto and credit card 
loans. Comments on this issue will assist the Board in determining 
whether to propose regulatory changes to include auto and credit card 
loans.

REGULATORY PROCEDURES

Regulatory Flexibility Act

    The Regulatory Flexibility Act requires the NCUA to prepare an 
analysis to describe any significant economic effect any regulation may 
have on a substantial number of small credit unions, meaning those 
under $1 million in assets. The NCUA Board has determined and certifies 
that the proposed rule if adopted will not have a significant economic 
impact on a substantial number of small credit unions. The reason for 
this determination is that it is highly unlikely that small credit 
unions would be engaged in pooling real estate loans for sale on the 
secondary market. Accordingly, the NCUA Board has determined that a 
Regulatory Flexibility Analysis is not required.

Executive Order 12612

    Executive Order 12612 requires NCUA to consider the effect of its 
actions on state interests. The proposed amendments will only apply to 
federal credit unions. Section 741.8(b)(1) specifically exempts state 
chartered federally insured credit unions from 701.23(b)(1)(iv). 
Proposed Sec. 701.23(b)(v) only applies to FCUs.

Paperwork Reduction Act

    The proposal does not impose any additional paperwork requirements 
on FCUs.

List of Subjects in 12 CFR Part 701

    Credit unions, Eligible obligations.

    By the National Credit Union Administration Board on July 30, 
1998.
Becky Baker,
Secretary of the Board.

    Accordingly, NCUA proposes to amend 12 CFR part 701 as follows:

PART 701--ORGANIZATION AND OPERATIONS OF FEDERALLY-INSURED CREDIT 
UNIONS

    1. The authority citation for part 701 continues to read as 
follows:

    Authority: 12 U.S.C. 1752(5), 1755, 1756, 1757, 1759, 1761a, 
1761b, 1766, 1767, 1782, 1784, 1787, 1789 and 1798. Section 701.6 is 
also authorized by 31 U.S.C. 3717. Section 701.31 is also authorized 
by 15 U.S.C. 1601 et seq.; 42 U.S.C. 1981 and 3601-3610. Section 
701.35 is also authorized by 42 U.S.C. 4311-4312.

    2. Amend Sec. 701.23 by adding a sentence to the end of paragraph 
(b)(1)(iv) and by revising paragraph (b)(3) to read as follows:


Sec. 701.23  Purchase, sale and pledge of eligible obligations.

* * * * *
    (b) * * *
    (1) * * *
    (iv) * * * A pool must include a substantial portion of the credit 
union's own loans and must be sold promptly.
* * * * *
    (3) The aggregate of the unpaid balance of eligible obligations 
purchased under paragraph (b) of this section cannot exceed 5% of the 
unimpaired capital and surplus of the purchaser. The following can be 
excluded in calculating this 5% limitation:
    (i) Student loans purchased in accordance with paragraph 
(b)(1)(iii) of this section;

[[Page 41978]]

    (ii) Real estate loans purchased in accordance with paragraph 
(b)(1)(iv) of this section;
    (iii) Eligible obligations purchased in accordance with paragraph 
(b)(1)(i) of this section that are refinanced by the purchaser so that 
it is a loan it is empowered to grant; and
    (iv) An indirect lending or indirect leasing arrangement that is 
classified as a loan and not the purchase of an eligible obligation 
because the federal credit union makes the final underwriting decision 
and the sales or lease contract is assigned to the federal credit union 
very soon after it is signed by the member and the dealer or leasing 
company.
* * * * *
[FR Doc. 98-20952 Filed 8-5-98; 8:45 am]
BILLING CODE 7535-01-P