[Federal Register Volume 63, Number 246 (Wednesday, December 23, 1998)]
[Rules and Regulations]
[Pages 70997-70998]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-33946]


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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: Final rule.

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SUMMARY: The final 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 final rule clarifies that a pool must include 
a substantial portion of the FCU's members' loans and must be sold 
promptly. Further, the final 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: The rule is effective January 1, 1999.

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 July 30, 1998, the NCUA Board requested comments on proposed 
changes to Sec. 701.23 of its regulations. 63 FR 41976 (August 6, 
1998). Section 701.23 sets forth the requirements for FCUs' purchase, 
sale and pledge of eligible obligations.
    Section 701.23(b)(1)(iv) allows an FCU to purchase real estate 
loans from any source if it is granting them on an ongoing basis and 
the purchase will facilitate the packaging of a pool of loans to be 
sold on the secondary market. The proposal clarified 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 is 
taken from the Accounting Manual. Accounting Manual for Federal Credit 
Unions, Sec. 6030.4.
    Section 701.23(b)(3) sets forth the exceptions to the 5% limit on 
the purchase of eligible obligations. The proposal adds to the list of 
exceptions, an indirect lending or leasing arrangement if it is 
classified as a loan. The conditions for classifying it as a loan are 
that the FCU must make the final underwriting decision and that the 
sale or lease contract must be assigned to the FCU very soon after it 
is signed by the member and the dealer or leasing company.

Summary of Comments

    The NCUA Board received ten comments on the proposal: two from 
credit union trade groups; one from a state league; five from credit 
unions; one from a bank trade group; and one from a private insurer. Of 
the six commenters that addressed the proposed changes, five generally 
supported them.

Section 701.23(b)(1)(iv)

    The five commenters that supported the proposed changes to this 
provision noted that the amendments give sufficient guidance while 
allowing flexibility. One commenter noted that the amendment has the 
beneficial effect of preserving credit unions' focus on making loans to 
members while avoiding the imposition of a barrier if certain 
timeframes and amounts were required.
    The negative commenter was concerned that the language in the 
proposal requiring ``a substantial portion of its own loans'' would 
preclude it from having a pool composed substantially of member loans 
it had purchased from its CUSO. An FCU has the express authority to 
purchase its member loans from any source without any pooling 
requirements. 12 U.S.C. 1757(13); 12 CFR 701.23(b)(i). Since the intent 
of the limitation in Sec. 701.23(b)(iv) is to limit the purchase of 
nonmember loans, the final rule has been clarified to indicate that a 
substantial portion of the pool must be composed of ``member loans.''
    The Board asked for comment on whether specific numbers should be 
used instead of the terms ``substantial'' and ``promptly.'' Six of the 
seven commenters that responded opposed using specific numbers. The 
reasons cited in opposition were that: setting a fixed ceiling and 
specific time may make it difficult for an FCU in certain 
circumstances; placing specific limitations, which remove all 
flexibility for dealing with unforeseen circumstances, is unnecessary; 
setting a specific ceiling and using specific dates may make it 
difficult for large credit unions to assist small credit unions with 
access to the secondary market; and using specific numbers and dates 
does not recognize the realities of the secondary marketplace. The 
Board agrees that it is important for FCUs to have flexibility in this 
area and so, it will not define ``substantial'' and ``promptly'' with 
specific numbers.
    One commenter, a bank trade group, does not address the proposal, 
but rather takes exception to Sec. 701.23(b)(1)(iv) since its 
promulgation in 1979. The bank trade group ``believes that the 
purchasing of nonmember loans even for the purpose of pooling these 
loans to be sold on the secondary market is an attempt by federal 
credit unions to circumvent the restrictions on loans to nonmembers.'' 
The proposed rule explained in detail the statutory authority for this 
provision. 63 FR at 41976.

Section 701.23(b)(3).

    The two commenters that addressed the issue of clarifying in the 
rule that indirect lending is considered a loan rather than the 
purchase of an eligible obligation supported the proposed changes. 
Three commenters suggested that the preamble to the final rule clarify 
that credit or electronic scoring by a third party vendor using the 
credit union's criteria is consistent with the FCU making the final 
underwriting decision. The NCUA Board agrees with this interpretation 
which follows General Counsel opinion letters.
    Two commenters asked for clarification that assignment of the loan 
means acceptance of the loan and not necessarily, physical receipt of 
the loan documentation. The NCUA Board concurs. In today's marketplace, 
acceptance and payment are often done electronically. However, physical

[[Page 70998]]

receipt of the loan documents by the credit union should occur within a 
reasonable time following acceptance of the loan.
    The two commenters that responded to the question of whether a 
specific number of days should be substituted for the language 
requiring assignment of the contract ``very soon'' after it is signed 
by the member, opposed specific numbers. The commenters noted that 
using specific numbers could reduce flexibility and is not necessary. 
The NCUA Board agrees and will not use specific numbers.
    Finally, the NCUA Board asked for 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. Five of the six commenters that responded supported the Board 
pursuing this option for FCUs. Those commenters noted that it would 
provide credit unions with an important asset and liability management 
tool for use as an alternative means of creating liquidity.
    The one negative commenter did not see the need for a regulation 
permitting this practice, because there is no major secondary market 
for auto and credit card loans.
    The NCUA Board is aware that there is a growing secondary market 
for auto and credit card loans and intends to look at whether this is 
appropriate for FCUs. Currently, the Financial Accounting Standards 
Board (FASB) is reviewing the accounting standards governing these 
transactions. Once FASB states its position and there is stability in 
this area, the NCUA Board will make a decision on whether to expand its 
regulations to permit FCUs to purchase nonmember auto and credit card 
loans for sale on the secondary market.

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 final rule 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 final rule will only apply to federal 
credit unions. Section 741.8(b)(1) specifically exempts state chartered 
federally insured credit unions from Sec. 701.23(b)(1)(iv). Section 
701.23(b)(v) only applies to FCUs.

Paperwork Reduction Act

    The final rule does not impose any additional paperwork 
requirements on FCUs.

Small Business Regulatory Enforcement Fairness Act

    The Small Business Regulatory Enforcement Fairness Act of 1996 
(Pub. L. 104-121) provides generally for congressional review of agency 
rules. A reporting requirement is triggered in instances where NCUA 
issues a final rule as defined by Section 551 of the Administrative 
Procedures Act. 5 U.S.C. 551. The Office of Management and Budget has 
reviewed this rule and determined that, for purposes of the Small 
Business Regulatory Enforcement Act Fairness Act of 1996, this is not a 
major rule.

List of Subjects in 12 CFR Part 701

    Credit unions; Eligible obligations.

    By the National Credit Union Administration Board on December 
17, 1998.
Becky Baker,
Secretary of the Board.
    Accordingly, NCUA amends 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 members' 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;
    (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. 98-33946 Filed 12-22-98; 8:45 am]
BILLING CODE 7535-01-U