[Federal Register Volume 65, Number 56 (Wednesday, March 22, 2000)]
[Proposed Rules]
[Pages 15275-15278]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-7040]


=======================================================================
-----------------------------------------------------------------------

NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 742


Regulatory Flexibility and Exemption Program

AGENCY: National Credit Union Administration (NCUA).

ACTION: Advance Notice of proposed rulemaking.

-----------------------------------------------------------------------

SUMMARY: NCUA is soliciting public comment on whether, and under what 
circumstances, NCUA should adopt a regulation that would permit credit 
unions with advanced levels of net worth and consistently strong CAMEL 
ratings to be exempt, in whole or in part, from certain NCUA 
regulations that are not specifically required by statute. Comments are 
also requested on whether the adoption of such a regulation would 
reduce regulatory burden without adversely affecting safety and 
soundness. Information from interested parties will assist NCUA in 
determining whether and in what form to issue a proposed rule on 
regulatory flexibility.

DATES: The NCUA must receive comments on or before May 22, 2000.

ADDRESSES: Direct comments to Becky Baker, Secretary of the Board. Mail 
or hand-deliver comments to: National Credit Union Administration, 1775 
Duke Street, Alexandria, Virginia 22314-3428, or you may fax comments 
to (703) 518-6319. Please send comments by one method only.

FOR FURTHER INFORMATION CONTACT: Michael J. McKenna, Senior Staff 
Attorney, Division of Operations, Office of General Counsel, at the 
above address or telephone: (703) 518-6540 or Herb Yolles, Deputy 
Director, Office of Examination and Insurance, at the above address or 
telephone: (703) 518-6360.

SUPPLEMENTARY INFORMATION:

A. Background

    NCUA is considering a policy for exempting qualifying credit unions 
from certain regulatory provisions. The regulatory provisions under 
consideration are those which are not specifically required by statute 
and the exemption from which would permit these credit unions greater 
flexibility in managing their operations. NCUA staff has reviewed 
agency regulations and has listed, in this advanced notice of proposed 
rulemaking (ANPR), those regulations which the NCUA Board believes may 
meet these criteria. The purpose of this ANPR is to elicit public 
comment on whether the proposed exemptions would in fact be of such 
benefit and to find out if there are any other regulations or NCUA 
requirements which credit unions believe should be considered in this 
proposal.
    The NCUA Board believes that safe and sound credit unions with a 
proven record of effective risk management, as demonstrated by advanced 
levels of net worth and consistently high CAMEL ratings, may be 
reasonable candidates for greater regulatory flexibility from certain 
NCUA regulations which are not specifically required by statute and 
which have minimal safety and soundness ramifications when applied to 
federal credit unions with proven risk management records.
    In considering this advance notice of proposed rulemaking, the NCUA 
Board did not include any current regulation which is statutorily 
imposed and therefore must continue to be implemented by NCUA in a form 
consistent with the manner specified for implementation when passed by 
Congress. Likewise, the NCUA Board did not consider a number of other 
regulations which, although not specifically required by statute, are 
nonetheless rooted in overriding concern for the overall safety and 
soundness of the credit union system and, therefore, would not be 
appropriate for inclusion in a formal regulatory flexibility proposal.
    However, internal agency research and evaluation has produced 
examples of certain specified regulatory restrictions that are not 
specifically required by statute and may be unnecessary to apply 
equally to all credit unions based on their individual safety and 
soundness circumstances, because the regulations, although appropriate 
for some credit unions, have limited safety and soundness ramifications 
when applied to federal credit unions with advanced levels of net worth 
and ongoing strong management performance verified through the 
examination process and resulting high CAMEL ratings.
    The NCUA Board is interested in receiving comments on whether 
credit unions with a proven track record of favorable performance 
should be allowed additional regulatory flexibility since their 
demonstrated ability mitigates the predominance of what limited safety 
and soundness concerns, if any, might arise from a reduction of certain 
specified regulatory requirements. Examples of mitigating factors 
include, but are not limited to, additional capital, strong management 
and consistent earnings. It is believed that a healthy risk management 
infrastructure strengthens capital adequacy and diminishes risk to the 
National Credit Union Share Insurance Fund (NCUSIF).
    The NCUA Board is also interested in receiving comment on whether a 
flexible regulatory approach which results in the removal of selected 
regulatory obstacles for those credit unions with strong records of 
safety and soundness and effective risk management will encourage them 
to strive to maintain and enhance those levels of financial performance 
as well as to better enable them to remain competitive in the financial 
marketplace, foster innovation in member service and extend credit to 
the underserved.
    The NCUA Board is interested in whether providing additional 
flexibility in selected regulatory requirements to credit unions that 
meet RegFlex triggers might result in a reduction in service within a 
credit union's field of membership for fear that with additional risk 
taking, delinquencies might increase and jeopardize the credit union 
maintaining their CAMEL 1 and 2 ratings.
    Would establishing this special class of credit unions to receive 
different regulatory treatment provide a competitive advantage to 
RegFlex credit unions over non RegFlex eligible credit unions.
    The proposal the NCUA Board is considering would involve an 
exemption process for qualifying federal credit unions, rather than a 
regulatory forbearance program available to all federal credit unions. 
Those federal credit unions that qualify must demonstrate, based on 
their CAMEL ratings and strong capital positions, that they are capable 
of managing the additional risks that these regulatory flexibilities 
may pose. NCUA believes that the proposed qualification and exemption 
process will effectively

[[Page 15276]]

mitigate any additional risk to the NCUSIF.

B. The Regulatory Flexibility (RegFlex) Proposal

    The first of the two criteria for eligibility under this proposal, 
for which comments are requested, is that credit unions must have been 
rated as CAMEL code 1 or code 2 for two consecutive exams (with a Camel 
code 1 or 2 in management). NCUA has a decreased safety and soundness 
concern for these credit unions because it has been suggested that such 
credit unions are characterized by:
     Performance that consistently provides for safe and sound 
operations;
     Positive historical and projected key performance 
measures; and
     The ability to withstand business fluctuations.
    The second criterion for this proposal is that a credit union must 
have net worth of 9% or greater, and is determined to be well-
capitalized under Part 702 of NCUA's regulations. It has been suggested 
that generally, this indicates that a credit union has both 
demonstrated the ability to build capital and has accumulated at least 
a 200-basis point cushion over the minimum level to be classified as 
well-capitalized under the NCUA's recently adopted prompt corrective 
action regulation. This cushion of 200 basis points or greater 
represents a significant decrease in risk to both the credit union and 
the NCUSIF. The NCUA Board is also requesting comment on whether the 
capital trigger for complex credit unions should be different and if 
so, what criteria should be used.
    It is assumed that credit unions which qualify for this proposal 
clearly represent a reduced safety and soundness risk. They have a 
proven track record that mitigates safety and soundness concerns and 
have capital levels that decrease any minimal additional risk this 
regulatory flexibility proposal may present. Is this an assumption upon 
which the RegFlex proposal should be based?
    For the reasons discussed above, the NCUA Board is requesting 
comment on a proposed regulation that would exempt credit unions that 
have maintained a CAMEL 1 or 2 and a net worth of 9% for two 
consecutive exams from all or part of certain NCUA regulations. The 
NCUA Board is requesting comment on two approaches for granting this 
authority. The first option is that any credit union that meets this 
criteria will automatically be exempt from all or specified parts of 
the identified regulatory provisions in the proposed RegFlex 
regulation. All of the affected NCUA regulations or specific provisions 
of regulations would be set forth in the RegFlex regulation. The second 
option is for a formal approval and designation process by the region 
before the credit union could engage in these RegFlex activities. As 
part of the application process the credit union would need to note if 
there had been any recent changes in senior management. In addition, if 
a credit union is approved for RegFlex it would have to notify the 
region whenever there is a subsequent change in senior management or a 
material financial event that impacts capital.
    It is proposed that a regional director, in his or her sole 
discretion, for substantive and documented safety and soundness 
reasons, would be authorized to revoke the RegFlex authority in whole 
or in part at any time and without advance notice. In such cases, the 
credit union would be able to appeal such a determination to NCUA's 
Supervisory Review Committee within 60 days of the regional director's 
determination. NCUA realizes that if this proposal is adopted it will 
have to modify the interpretive ruling and policy statement regarding 
the Supervisory Review Committee.

C. Potential Regulations NCUA Has Initially Identified as Part of 
the Proposal

(1) Section 701.36--FCU Ownership of Fixed Assets

    NCUA originally proposed a fixed asset rule in 1979. The regulation 
was intended to ensure that the officials of FCUs had considered all 
relevant factors prior to committing large sums of members' funds to 
the acquisition of fixed assets. The final regulation attempted to 
accomplish this by requiring credit unions to seek the written approval 
of NCUA before investing in fixed assets in excess of 5% of their 
assets. The approval process was established so that the form and 
content of the request would contain sufficient information to 
establish the need for and the feasibility of the request and to 
determine the impact of the proposal on the credit union's operations. 
When the rule was revised in 1984, NCUA cited some ongoing concerns at 
that time about potential credit union losses if credit unions with 
insufficient capital were to invest in fixed assets disproportionate to 
their restricted capital position. Therefore, the requirement that a 
credit union receive NCUA approval if it wishes to invest in an 
aggregate total of fixed assets that exceeds 5 percent of shares and 
retained earnings was incorporated in the 1984 revision.
    Since that time losses have been negligible and credit union 
capital positions have increased from an average capital ratio of 6.8% 
in December 1984 to 11.7% in December 1999. However, many credit unions 
have been required to seek NCUA approval to exceed the regulatory limit 
in order to more effectively serve their field of membership or to 
extend the level of service to underserved areas. Such approvals have 
been granted on a regular basis to credit unions with strong capital 
ratios and proven records of risk management. Although often granted to 
credit unions who are willing to go through the time-consuming advance 
approval process, it is likely that some credit unions may have been 
deterred from extending their service to some within their field of 
membership or to underserved areas because of this advance waiver 
regulatory requirement. Since capital position and CAMEL rating are 
among the key indices used to evaluate a credit union's application in 
making such an advance waiver request, it seems that this regulatory 
requirement would be an ideal candidate to streamline for those credit 
unions who meet the capital and CAMEL based RegFlex criteria. It is the 
view of the NCUA Board that some exemption from the fixed asset rule 
for credit unions who have proven their ability to adequately manage a 
higher level of investment in fixed assets would serve to better enable 
those credit unions to serve their members more effectively and extend 
service to underserved areas.
    Should a credit union not have to apply for a waiver provided for 
in Section 701.36(c) if they meet the requirements of the RegFlex 
proposal? Should a credit union's investment in fixed assets have no 
regulatory cap? Should credit unions as a sound business practice have 
in their written business plan their own fixed asset limit? As an 
impact of such an exemption, it should be noted that, some of the 
restrictions on purchasing a building and leasing a portion of the 
property, until it was fully utilized by the credit union, would also 
be lifted. However, this would not authorize a credit union to engage 
in long-term commercial leasing. For safety and soundness reasons and 
legal reasons the credit union would still need to have a reasonable 
plan to fully utilize the property. Is this a reasonable application of 
the RegFlex exemption?

(2) Part 703--Investment and Deposit Activities

    NCUA is considering whether to include various sections of Part 
703, Investment and Deposit Activities, in

[[Page 15277]]

the proposal. Part 703, effective January 1, 1998, recognized that 
advances in modeling and measuring risk factors permitted institutions 
to better understand and manage their risk profile. NCUA shifted the 
regulatory focus from emphasis on specific investments to the 
characteristics that affect risk management of investment activity, 
including credit union board and staff understanding of the potential 
risk associated with the credit union's investment activities. The rule 
established parameters for risk assessment and permits credit union 
operating flexibility within those parameters. At the same time, it 
minimized the regulatory burden on those credit unions that choose to 
maintain a simple portfolio of investments.
    In October, 1998, the NCUA Board approved, as Interpretive Ruling 
and Policy Statement No. 98-2, the FFIEC Policy Statement on Investment 
Securities and End-User Derivative Activities. This statement 
emphasizes sound business practices for managing the risks of 
investment activities. Board and senior management oversight is an 
integral part of an effective risk management program. An effective 
risk management system also includes: (1) Policies, procedures, and 
limits; (2) the identification, measurement, and reporting of risk 
exposures; and (3) a system of internal controls. This policy statement 
eliminated the FFIEC High Risk Security Test for CMOs as a supervision 
tool and recognized that institutions should be valuing the price 
sensitivity of their investments prior to purchase and on an ongoing 
basis.
    Technology continues to improve a credit union's ability to measure 
risk. The regulatory focus continues to migrate toward risk assessment 
of internal controls and evaluation of management processes. Those 
institutions that have developed sound business practices in their risk 
management processes can assume a higher risk profile. The NCUA Board 
is requesting comment on whether the investment requirements should be 
modified for credit unions that meet the criteria set forth in this 
proposal and demonstrate the ability to manage the increased risk, or 
should Part 703 be modified to allow all credit unions the authority to 
have increased flexibility, or should NCUA make no regulatory changes?
    Section 703.90 requires quarterly stress testing (300 basis point 
shock) of individual complex securities if the total sum of complex 
securities, as defined by the investment regulation, exceed net 
capital. For those credit unions that measure the impact of interest 
rate changes on their entire balance sheet, should NCUA waive or modify 
this regulatory requirement?
    Section 703.40(c)(6) limits the discretionary delegation of 
investments to third parties to 100 percent of net capital. Should NCUA 
waive or modify the 100 percent limitation and permit credit unions to 
set the limit by board policy for credit unions?
    Section 703.110(d) limits zero coupon investments to under 10 years 
from settlement date. Should NCUA extend this maturity? If so, what 
limitations should be set, if any? How should credit unions assess this 
risk?
    Section 703.110 prohibits stripped, mortgage-backed securities, 
residual interests in CMOs/REMICS, mortgage servicing rights, 
commercial mortgage-related securities, or small business related 
securities. NCUA is interested in comments on whether this section 
should be part of the proposal or otherwise modified. If so, would 
these vehicles play an active role in your portfolio? Are there 
specific risks that need to be addressed? If authorized, should NCUA 
limit this activity in relation to capital?
    The investment area is of particular concern for safety and 
soundness reasons. If the eligibility for expanded investment authority 
is limited to credit unions meeting the RegFlex criteria, should that 
authority be automatic or should an application and approval process be 
required of those credit unions which desire such expanded investment 
authority? Are there any other provisions of Part 703 that NCUA should 
consider for this proposal?

(3) Section 701.25--Charitable Donations

    The original requirements on charitable donations were set forth in 
Interpretive Ruling and Policy Statement (IRPS) 79-6. The original 
requirements were imposed to provide guidance regarding charitable 
donations since there were many questions about what was permissible. 
In 1999, the NCUA Board incorporated the IRPS into NCUA's regulation 
and substantially deregulated the requirements. The current rule limits 
recipients of charitable donations to organizations located in or 
conducting activities in a community in which the FCU has a place of 
business. Furthermore, the board of directors must approve charitable 
contributions, and the approval must be based on a determination by the 
board of directors that the contributions are in the best interests of 
the federal credit union and are reasonable given the size and 
financial condition of the federal credit union. Should credit unions 
meeting the RegFlex criteria be completely exempt from the requirements 
of this regulation?

(4) Section 722.3(a)(1)--Appraisals

    The appraisal regulation was mandated for all federal financial 
institution regulatory agencies by FIRREA in 1989. NCUA adopted its 
final regulation in 1990. NCUA's current regulation is more restrictive 
than the other financial institution regulators because of the unique 
nature of credit unions. However, experience has demonstrated that 
certain credit unions are able to adequately manage a higher degree of 
risk in making loans without an appraisal. Therefore, should credit 
unions meeting the RegFlex criteria be allowed to increase the dollar 
threshold from $100,000 to $250,000 for when an appraisal is required? 
Such an increase would be consistent with the regulatory authority set 
forth by the appropriate agencies regulating banks and thrifts. 
Furthermore, the threshold for an appraisal for a member business loan 
would be increased to $250,000 if it involves real estate. However, in 
both loan categories, the loan must still be supported by a written 
estimate of market value as set forth in Section 723.3(d) of NCUA's 
regulation. Finally, are there any other provisions in Part 722 that 
NCUA should consider for this proposal?

(5) Section 701.32 (b) and (c)--Payment on Shares by Public Unit and 
Nonmembers

    The limitation on public unit and nonmember shares was adopted by 
the NCUA Board in 1989 because of abuses by certain credit unions and 
significant losses suffered by the NCUSIF. In 1994, the NCUA Board 
increased the dollar thresholds in these types of shares. The current 
regulation limits the maximum amount of all public unit and nonmember 
shares to 20% of total shares of the federal credit union or $1.5 
million, whichever is greater. Recent experience indicates that certain 
credit unions may be able to adequately manage the increased risks 
posed by these type of shares. Therefore, should credit unions meeting 
the RegFlex criteria be exempt from the regulatory restrictions on 
public unit funds and nonmember shares (nonmember shares may be 
accepted by low-income credit unions)?

(6) Section 701.23--Purchase, Sale and Pledge of Eligible Obligations

    The NCUA Board seeks comment on whether it should permit credit 
unions

[[Page 15278]]

that meet the RegFlex criteria to purchase any auto loan, credit card 
loan, member business loan, student loan or mortgage loan from any 
other credit union as long as they are loans the purchasing credit 
union is empowered to grant. If authorized, should the purchasing 
credit union be permitted to keep these loans in their portfolios? 
Should this change be applicable to all credit unions? Finally, are 
there any other issues in managing a loan portfolio that should be 
addressed in this section or section 701.21?

D. Request for Comment on Related Issues

    Should the asset base of a credit union which expands into a low-
income or underserved area be frozen for the calculation of the 
operating fee. If so, for what amount of time? Should there be some 
minimum threshold on the size of the underserved area in order for the 
credit union to be eligible for this treatment? If the credit union 
subsequently adds another underserved area, after the specified time, 
to its field of membership, should its assets be readjusted and frozen 
for another period of time in the calculation for the credit union's 
operating fee?
    The NCUA Board also seeks comment on whether the regulatory 
flexibility outlined in this proposal should be used as an incentive to 
encourage eligible credit unions to continue serving low-income 
individuals within their field of membership or to add an underserved 
area or low-income groups to their field of membership. This could be 
accomplished by including low-income or underserved area as one of the 
basic eligibility criteria under the proposal. The NCUA Board is also 
requesting comment on whether there are any other incentives or areas 
of regulatory flexibility that may be granted to federal credit unions 
to encourage them to expand into underserved areas.
    The NCUA Board recently issued an advance notice of proposed 
rulemaking at the November Board meeting. 64 FR 66413 (November 26, 
1999). The Board stated that it is considering expanding its view of 
the incidental powers of a federal credit union. Id. at 66414. The 
Board may consider it necessary to limit or restrict some activities 
that may be permissible as an incidental power because of safety and 
soundness concerns. In connection with RegFlex, the Board believes it 
may be appropriate to permit federal credit unions meeting the RegFlex 
criteria to engage in incidental power activities without the 
restrictions that would be generally applicable to other federal credit 
unions. However, since a proposed rule for Part 721 is presently 
scheduled to be issued this summer, further details on how the revised 
rule may be incorporated, if appropriate, into the RegFlex approach 
will be set forth in the proposed RegFlex rule.
    Proposed Part 714 on leasing was issued by the NCUA Board in the 
fall of 1999. 64 FR 55866 (October 15, 1999). The NCUA Board expects a 
final rule will be presented at the May Board meeting. In connection 
with RegFlex, the Board requests comment on whether it may be 
appropriate to permit federal credit unions meeting the RegFlex 
criteria to engage in certain leasing activities without the 
restrictions that would be generally applicable to other federal credit 
unions but that are not legally required.
    The NCUA Board is also requesting comment on what changes, if any, 
might be considered to NCUA's supervision and examination program for 
credit unions meeting the RegFlex criteria. Possible areas of 
consideration are a different type of exam for RegFlex credit unions or 
a revised examination schedule for RegFlex credit unions.
    What guidance should the NCUA Board provide to examiners to ensure 
that credit unions are not discouraged from responsibly managing 
additional risk in an effort to provide credit to a broader range of 
its members? For instance, should peer comparisons be dropped? Should 
delinquency and charge-off rates be more liberally approached during 
examinations? If so, is there a numerical rate that should be 
considered acceptable?
    The NCUA Board is also requesting comment on any other regulatory 
or supervisory issues that might be good candidates for RegFlex. Please 
do not comment on regulations which are statutory or provisions that 
are mandated by statutory requirements. These cannot and will not be 
included in any final RegFlex regulation approved by the NCUA Board. 
Among others, examples of such statutory regulations and provisions 
include Truth-In-Savings (Part 707), the aggregate loan limit in the 
member business loan rule (Part 723) or the 1% loan and investment 
limit in the CUSO rule (Part 712). Furthermore, please do not comment 
on regulations that NCUA does not issue or control such as Regulation B 
or Regulation Z which are issued by the Board of Governors of the 
Federal Reserve System.

    By the National Credit Union Administration Board on March 16, 
2000.
Becky Baker,
Secretary of the Board.
[FR Doc. 00-7040 Filed 3-21-00; 8:45 am]
BILLING CODE 7535-01-P