[Federal Register Volume 66, Number 51 (Thursday, March 15, 2001)]
[Proposed Rules]
[Pages 15055-15061]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-6326]


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NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Parts 722 and 742


Regulatory Flexibility Program

AGENCY: National Credit Union Administration.

ACTION: Proposed rule.

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SUMMARY: The NCUA Board is proposing a new rule that would permit 
credit unions with advanced levels of net worth and consistently strong 
supervisory examination ratings to be exempt, in whole or in part, from 
certain NCUA regulations that are not specifically required by statute. 
The NCUA Board is also proposing an amendment to the appraisal 
regulation to increase the dollar threshold from $100,000 to $250,000 
for when an appraisal is required. This proposed rule and proposed 
amendment would reduce regulatory burden.

DATES: Comments must be postmarked or received by May 14, 2001.

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: Michael J. McKenna, Senior Staff 
Attorney, Office of General Counsel, 1775 Duke Street, Alexandria, 
Virginia 22314 or telephone (703) 518-6540; or Lynn K. McLaughlin, 
Program Officer, Office of Examination and Insurance, 1775 Duke Street, 
Alexandria, Virginia, or telephone (703) 518-6360.

SUPPLEMENTARY INFORMATION: On March 16, 2000, the NCUA Board issued an 
advance notice of proposed rulemaking on a regulatory flexibility and 
exemption (RegFlex) program with a sixty-day comment period. 65 FR 
15275 (March 22, 2000). The comment period ended on May 22, 2000. 
Seventy-four comments were received. Comments were received from 42 
federal credit unions, 11 state-chartered credit unions, 13 state 
leagues, five national credit union trade associations, one bank trade 
association, one community action group and one law firm. The 
commenters were generally supportive of the proposal, with most 
commenters suggesting ways they would structure such a regulation.

A. Background

    NCUA is proposing to exempt qualifying credit unions from certain 
regulatory provisions. The proposed regulatory provisions under 
consideration are not specifically required by statute, and an 
exemption from which would permit these credit unions greater 
flexibility in managing their operations. As part of this proposal, the 
NCUA Board has identified five regulations for RegFlex. The identified 
regulations are: fixed assets (section 701.36), investment and deposit 
activities (various provisions of part 703), charitable donations 
(section 701.25), payment on shares by public unit and nonmembers 
(section 701.32(b) and (c)) and the purchase, sale and pledge of 
eligible obligations (section 701.23). It is estimated currently that 
3,999, or 63 percent of credit unions qualify for RegFlex, and of those 
2,203 or 55 percent are less than $10 million in assets.

B. Comments and Analysis

1. The RegFlex Concept

    Last year, the NCUA Board asked for 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 regulatory 
requirements. Seventy commenters supported the general concept of 
RegFlex. Two commenters stated the proposal was unnecessary. Five of 
the supporting commenters stated that RegFlex should apply to all 
federal credit unions.
    Nineteen commenters stated this proposal would not increase risk. 
Some of these commenters believe the eligibility criteria demonstrate 
that a credit union can manage any safety and soundness concerns. One 
commenter explained why this proposal was not, as some critics claimed, 
regulatory forbearance. This commenter states that regulatory 
forbearance lowers the bar for the entire industry without any 
consideration as to whether institutions have the proven ability to 
manage the lower standard. This commenter states further that the 
RegFlex program would not lower the bar for anyone, rather it would 
raise the bar by encouraging excellent performance.
    The NCUA Board also asked for 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. Nine commenters stated that RegFlex would help credit 
unions remain competitive.
    The NCUA Board also asked whether providing additional flexibility 
might result in credit unions reducing service for fear that, with 
additional risk taking, delinquencies might increase and jeopardize its 
maintenance of a CAMEL 1 or 2 rating. Six commenters stated it would 
improve or increase member service. Two commenters stated that the 
proposal might adversely affect service. One commenter stated that it 
would not reduce the level of service.
    The NCUA Board asked whether establishing this special class of 
credit unions to receive different regulatory treatment provides a 
competitive advantage to RegFlex credit unions over ineligible credit 
unions. Twelve commenters stated that there will be no competitive 
advantage for RegFlex credit unions. Some of these commenters believe 
the proposal will provide credit unions incentives to improve and 
enhance safety and soundness. Six commenters stated that RegFlex credit 
unions would have a competitive advantage.

2. The RegFlex Proposal

    The first criterion for eligibility under this proposal, is that 
credit unions must have received a composite CAMEL code 1 or code 2 for 
two consecutive exams, with a CAMEL code 1 or 2 in management. The 
second criterion is that a credit union must have a net worth ratio of 
9% or greater, and be well-capitalized under NCUA's prompt corrective 
action regulations. 12 CFR part 702. Sixteen commenters stated that the 
qualifying criteria appear sound. Seventeen commenters stated that the 
net worth criterion should be lower. One of these commenters suggested 
8.5%. Two of these commenters suggested 8%. Nine of these commenters 
suggested 7%. One commenter stated that the net worth levels should be 
higher. Two commenters stated that the trigger should simply be the 
CAMEL rating. The NCUA Board believes the proposed criterion are 
generally sound but does

[[Page 15056]]

not believe a CAMEL 1 or 2 in management needs to be part of the 
criteria. This belief is principally supported by the ability of the 
regional director to revoke the regflex authority, in whole or in part, 
at any time. Except for this change, the NCUA Board is proposing to 
incorporate the criteria specified in the advanced notice of proposed 
rulemaking into the regulation for credit unions that are not complex 
under prompt corrective action. However, in response to the comments, 
as discussed later in the preamble, the NCUA Board is also proposing an 
application process for credit unions that do not meet both criterion 
and is requesting comment on whether the 9 percent net worth 
requirement is appropriate.
    Eleven commenters requested that the rule state what happens if a 
qualifying credit union takes action under the RegFlex exemption but 
subsequently loses the exemption. That is, what liability is there for 
past actions that are no longer permissible. Most of these commenters 
want past actions grandfathered. The NCUA Board agrees and the proposed 
rule states that if a credit union loses its RegFlex eligibility its 
past actions are grandfathered and no divestiture is required. However, 
this does not diminish NCUA's authority to require a credit union to 
divest its investments or assets for substantive safety and soundness 
reasons.
    The NCUA Board also requested comment on whether the capital 
trigger for complex credit unions should be different and if so, what 
criteria should be used. One commenter stated that the net worth 
criterion for complex and noncomplex credit unions should be 7%. Eight 
commenters stated that the trigger should be the same for complex and 
noncomplex credit unions. One commenter stated that the capital trigger 
for complex credit unions should be the same as for other credit unions 
with higher risk-based net worth (RBNW) requirements. This commenter 
goes on to state that, if a credit union earns a CAMEL 1 or 2 for two 
consecutive years, meets its RBNW requirement, and is considered well-
capitalized, the credit union should be considered to have earned 
RegFlex. One commenter stated the net worth requirement for complex 
credit unions should be 200 basis points higher than other credit 
unions. One commenter stated it should be the greater of 9% or 200 
basis points over the required RBNW calculated for that credit union. 
One commenter recommends that complex credit unions be required to have 
a capital level equal to 200 basis points above their calculated RBNW 
to be eligible for RegFlex.
    The NCUA Board is proposing that the capital requirements for 
complex credit unions be nine percent or 200 basis points over their 
risk based net worth requirements, whichever is greater. This net worth 
requirement is beyond the ``well-capitalized'' threshold established by 
prompt corrective action. A significant margin of safety for complex 
credit unions is afforded by net worth ratios exceeding general 
requirements, especially when combined with stable, high CAMEL ratings. 
The NCUA Board is requesting comments on whether this capital threshold 
is appropriate for complex credit unions.
    The NCUA Board requested comment on two approaches for granting the 
RegFlex authority. The first option is that any credit union that meets 
the criteria would be automatically exempt from all or specified parts 
of the identified regulatory provisions in the proposed 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.
    Thirty-eight commenters requested an automatic exemption. Most of 
these commenters believe an application process would be burdensome and 
contrary to the spirit of the proposal. Three commenters supported an 
automatic exemption and a notification process. Six commenters 
supported requiring formal approval and designation before a credit 
union could engage in these activities. Two of these commenters stated 
that a subsequent change in senior management or a material financial 
event that impacts capital should require a credit union to notify 
NCUA. In addition, one of these commenters stated there should be a 
section added to the call report that shows what, if anything, a credit 
union is doing in the RegFlex areas so that proper supervision is 
exercised.
    The NCUA Board believes that an automatic exemption is within the 
spirit of the RegFlex concept and will not require any application for 
those credit unions that meet the criteria. As credit unions become 
eligible for RegFlex, NCUA will notify credit unions of their 
eligibility, generally, during the examination process. However, in 
response to the commenters that requested this authority be extended to 
more credit unions the NCUA Board is proposing an application process 
for credit unions that meet only one of the two stated criteria. This 
will allow more credit unions to have RegFlex authority while 
maintaining the safety and soundness considerations that are 
fundamental to the program. Therefore, if a credit union is a CAMEL 3 
(or CAMEL 1 or 2 for less than two consecutive cycles) with a net worth 
in excess of 9 percent or if the credit union is a CAMEL 1 or 2 with a 
net worth under 9 percent (or if complex its risk based net worth level 
is lower than nine percent or 200 basis points over their risk based 
net worth requirements), it can apply to the regional director for a 
RegFlex designation. When applying for a RegFlex designation, the 
credit union should justify how entrance into the program will not 
affect the safety and soundness of the institution. The regional 
director will review this response in relation to the criteria that was 
not met for RegFlex, that is, net worth level or safety and soundness 
issues that resulted in a lower CAMEL code.
    The proposal stated 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.
    Eight commenters supported the regional director's authority to 
revoke the exemption although one of these commenters believes the 
regional director should first discuss it with credit union management. 
Six of these commenters believe revocation should only occur after a 
prior written notice and some sort of appeal process. Another commenter 
stated that, if a credit union is determined for ``substantive and 
documented safety and soundness reasons'' to be operating unsafely, the 
regional director should have the ability to rescind the credit union's 
eligibility to participate. One commenter approved of the proposed 
appeal process. One commenter believes the regional director should be 
able to revoke the RegFlex designation if the credit union falls below 
the approval process guidelines. Three commenters objected to the 
regional director having the discretion to revoke RegFlex.
    The NCUA Board believes a regional director's authority to revoke 
the exemption is integral to the success of the program. The revocation 
will be effective as soon as the regional director notifies the credit 
union. However, the credit union may appeal the revocation. The appeal 
process is the same as outlined in the advance notice of proposed 
rulemaking. If this proposal is finalized, NCUA will need to revise

[[Page 15057]]

IRPS 95-1 on the Supervisory Review Committee to include RegFlex issues 
as an appeal that the Committee is authorized to address.
    Three commenters stated that the RegFlex rule should also extend 
regulatory relief from NCUA regulations to those that apply to state 
credit unions. One commenter requested that state-chartered credit 
unions be exempt from NCUA regulations that only apply to state 
charters, such as Sec. 741.3(a)(3) requiring special reserves for 
nonconforming investments and Sec. 741.9 prohibiting uninsured 
membership shares or deposits. The proposed RegFlex rule does not 
affect state-chartered credit unions. If state-chartered credit unions 
want to seek relief from regulatory burden, they should petition their 
state supervisors.

3. The Regulations

(1) Section 701.36--FCU Ownership of Fixed Assets
    The NCUA Board stated that some exemption from the fixed asset rule 
should be included in RegFlex. The NCUA Board also requested comment on 
whether a credit union's investment in fixed assets should have a 
regulatory cap. Thirty-nine commenters supported including the entire 
fixed asset regulation in RegFlex. A few commenters stated the current 
waiver process is unnecessary and time consuming for credit unions and 
NCUA staff. Three commenters stated the fixed asset rule should be 
eliminated. One commenter would not include the fixed asset rule in 
RegFlex and would instead continue the current waiver process.
    The NCUA Board requests comments on additional options with respect 
to fixed assets, such as, among others, the possibility of 
incorporating a tiered structure based on a percentage of net worth. 
For example, a credit union with a higher net worth would be permitted 
to have a higher fixed asset limit. Finally, the NCUA Board is 
requesting comment on whether the fixed asset regulation itself could 
be structured differently so that there is a tiered limit on fixed 
assets. The NCUA Board also requested comment on whether a credit union 
should have to apply for the waiver provided for in Sec. 701.36(c) if 
it meets the requirements of the RegFlex proposal. Sixteen commenters 
stated there should be no waiver process. The RegFlex proposal does not 
include a waiver process because a credit union would be exempt from 
the investment limits of the fixed asset rule.
    The NCUA Board also asked whether credit unions as a sound business 
practice should have their own fixed asset limit in their written 
business plan. Seven commenters stated a credit union should be 
required to put its fixed asset limit in its business plan. Four 
commenters stated that it should not be required. The NCUA Board 
encourages, but will not mandate, that a RegFlex credit union 
incorporate into its business plan the fixed asset limit it plans on 
establishing.
    The NCUA Board noted that an exemption from 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 and legal 
reasons a credit union still must comply with Sec. 701.36(d) of the 
fixed asset rule and have a plan to utilize the property for its own 
operation. The NCUA Board requested comment on whether a RegFlex credit 
union must still have a reasonable plan to utilize the property for its 
own operation. Two commenters stated that a RegFlex credit union should 
have a plan to fully utilize any fixed assets it leases. One commenter 
stated that a credit union should not have a plan to fully utilize any 
fixed assets it leases. Two commenters stated that long-term commercial 
leasing of credit union property should be permitted. One commenter 
stated that credit unions have the incidental authority to lease 
surplus space. The NCUA Board does not believe that federal credit 
unions have the legal authority to engage in commercial leasing so 
federal credit unions will still have to comply with section 701.36(d) 
of the fixed asset rule.
    Finally, although the ANPR did not request specific comment on the 
deletion of the conflict of interest provision in the fixed asset rule, 
the NCUA Board has determined that RegFlex credit unions should also 
comply with this provision as set forth in Sec. 701.36(e) of the rule. 
The Board believes this conflict of interest provision is sound, 
consistent with the Federal Credit Union Bylaws, and already offers 
more flexibility than other conflict of interest provisions in NCUA's 
regulations. The current fixed asset regulation only requires agency 
approval for long term leases or acquisition of property from insiders. 
Agency approval is not required for the acquisition of other fixed 
assets from insiders but paragraph (e) contains in its last 
subparagraph, (e)(1), the statement that all insider transactions must 
be at ``arms length.'' Essentially, this is a reminder that echoes the 
provision in the Federal Credit Union Bylaws that calls for insiders to 
recuse themselves from any matter in which they have a pecuniary 
interest. FCU Bylaws, Article XVI, section 4. By comparison, other 
conflict of interest provisions entirely prohibit insiders from 
receiving any remuneration in connection with credit union 
transactions.
(2) Part 703--Investment and Deposit Activities
    The NCUA Board requested comment on whether the investment 
requirements should be modified for credit unions that meet the 
criteria in this proposal and demonstrate the ability to manage the 
increased risk, whether part 703 should be modified to allow all credit 
unions the authority to have increased flexibility, or whether NCUA 
should make no regulatory changes. Thirteen commenters supported 
including all of the identified investment provisions in RegFlex. Eight 
commenters request more flexibility in the investment area.
    Section 703.90(c) 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, exceeds 
net capital. For those credit unions that measure the impact of 
interest rate changes on their entire balance sheet as part of its 
asset liability management program, the NCUA Board asked whether NCUA 
should waive or modify this regulatory requirement. Seven commenters 
supported including this section in RegFlex. One of these commenters 
stated that removing stress test requirements for well-capitalized 
credit unions for the more complex investments would remove some burden 
of managing these investments. This commenter also stated that stress 
testing for the whole balance sheet should suffice, rather than 
individual investment stress tests. One commenter requested that stress 
testing be completely eliminated. Seven commenters would not include 
this provision in the regulation. The NCUA Board has decided to include 
this investment provision in the proposed RegFlex regulation because 
this exemption does not pose a significant adverse affect for RegFlex 
credit unions. RegFlex credit unions should continue to measure, at 
least quarterly, the impact of a sustained, parallel shift in interest 
rates of plus and minus 300 basis points on their entire balance sheet 
as part of its asset liability management monitoring.
    Section 703.40(c)(6) limits the discretionary delegation of 
investments to third parties to 100% of net capital. NCUA asked whether 
it should waive or modify the 100% limitation and permit

[[Page 15058]]

credit unions to set their own limit in a policy adopted by their board 
of directors. Ten commenters approved of including this in RegFlex. One 
commenter wanted this authority for all credit unions. One commenter 
opposed including this provision in RegFlex. The NCUA Board has decided 
to include this investment provision in the proposed RegFlex regulation 
because it would not have a significant adverse impact on safety and 
soundness.
    Section 703.110(d) limits zero coupon investments to under 10 years 
from settlement date. NCUA asked whether it should extend this 
maturity. Five commenters would extend the maturity. Four commenters 
opposed including this provision in RegFlex. The NCUA Board has decided 
to include this investment provision in the proposed RegFlex regulation 
because it would not have a significant adverse impact on safety and 
soundness.
    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 asked whether this section should be part of the 
proposal or otherwise modified. Six commenters supported this as part 
of the proposal. One of these commenters stated that NCUA should not 
completely remove the limitations on a credit union purchasing 
investment addressed in Sec. 703.110(c). This commenter stated that, 
while investing in these high-risk investments should be permitted, it 
should still be limited to a percentage of undivided earnings. Five 
commenters objected to including this in RegFlex because of the 
increased risk. Because of the risk associated with these types of 
investments, the NCUA Board has decided not to incorporate it into the 
proposed regulation. The NCUA Board has directed the Office of 
Investment Services to continue to review this section to determine if 
regulatory relief can be provided to all credit unions in the context 
of amending part 703.
    The NCUA Board asked, 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. This would permit credit union 
investments in those instruments and transactions specifically 
prohibited in Sec. 703.110. Six commenters would require an application 
for this particular authority. Five commenters believe it should be 
automatic. The NCUA Board does not believe an application process is 
warranted for expanded powers in the investment area because the 
provisions contained in the proposed rule carry less risk than those 
cited in the advanced notice of proposed rulemaking.
    The NCUA Board is only proposing an exemption to Sec. 703.110(d), 
which pertains to zero-coupon investments with a maturity of more than 
10 years and not the entire list of prohibited investments and 
investment activities listed in Sec. 703.110.
    One commenter suggested that NCUA consider eliminating monthly 
reporting requirements for ``change in fair value'' of each individual 
security from month-to-month and, instead, allow a Portfolio Security 
Report showing the cumulative gain or loss at the end of each month. 
One commenter recommended that RegFlex credit unions be allowed to 
increase their discretionary delegation to third party investment 
management firms. One commenter stated that requirements regarding 
specific reports to the board of directors on market changes and/or 
investments considered risky due to prepayment ability or call options 
be included in RegFlex. One commenter requested that NCUA permit 
eligible credit unions to utilize financial futures or interest rate 
swaps to reduce their interest rate risk exposure. The NCUA Board does 
not believe these issues are pertinent for RegFlex but will consider 
these comments in the context of amending part 703.
(3) Section 701.25--Charitable Donations
    The current rule limits recipients of charitable donations to 
nonprofit organizations located in or conducting activities in a 
community in which the FCU has a place of business or to organizations 
that are tax exempt under Sec. 501(c)(3) of the Internal Revenue Code 
and operate primarily to promote and develop credit unions. This rule 
requires the board of directors to approve charitable contributions and 
the approval must be based on a determination 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. Under the rule, directors may establish a budget for charitable 
donations and authorize credit union officials to select recipients and 
disburse funds.
    The NCUA Board asked whether credit unions, meeting the RegFlex 
criteria, should be completely exempt from the requirements of this 
regulation. Thirty-one commenters would include the entire regulation 
in RegFlex. Seven of these commenters believe all credit unions should 
be exempt from the regulation. Two commenters would eliminate all 
requirements except for board of director approval of charitable 
donations. Four commenters believe the current regulation is reasonable 
and would not include it in this proposal.
    In response to some of the comments received in the Advanced Notice 
of Proposed Rulemaking, the NCUA Board is requesting comment of whether 
the charitable donation regulation should be eliminated for all credit 
unions.
(4) Section 722.3(a)(1)--Appraisals
    NCUA's current appraisal regulation is more restrictive than the 
other financial institution regulators. 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, 
the NCUA Board asked whether it should increase the dollar threshold 
for credit unions meeting the RegFlex criteria from $100,000 to 
$250,000 for requiring an appraisal. Such an increase would be 
consistent with the regulatory authority set forth by the agencies 
regulating banks and thrifts. Twenty-nine commenters supported this 
proposal. Nine of these commenters would allow it for all credit 
unions. One commenter recommended only increasing the threshold to 
$200,000. Four commenters objected to increasing the threshold. One of 
these commenters stated that increasing the threshold would pose 
significant risk to the NCUSIF. One commenter would also extend the 
higher dollar threshold to credit unions that have appropriate capital, 
management, and expertise.
    The NCUA Board also proposed increasing the threshold for an 
appraisal for a member business loan to $250,000, if it involves real 
estate. Three commenters specifically supported the increase for member 
business loans.
    The NCUA Board has been persuaded that the increase in the 
appraisal threshold would not significantly increase safety and 
soundness concerns and thus should be applicable to all credit unions 
so it has been eliminated from the RegFlex proposal. The NCUA Board is 
issuing a proposed amendment to Sec. 722.3 to make it available to all 
credit unions.
    Credit unions must still make reasonable determinations of value to 
ensure compliance with loan-to-value requirements. Section 722.3(d) of 
the appraisal rule requires that a real estate related transaction 
under the dollar threshold be supported by a written estimate of market 
value performed by an independent, qualified, and experienced 
individual. In addition, Sec. 722.3(e) allows NCUA to require an

[[Page 15059]]

appraisal whenever necessary to address safety and soundness concerns. 
The requirements set forth in Sec. 722.3(d), combined with the ability 
to address safety and soundness issues per Sec. 722.3(e) mitigate 
potential safety and soundness concerns that could be raised by the 
proposed change.
(5) Section 701.32(b) and (c)--Payment on Shares by Public Unit and 
Nonmembers
    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. The NCUA Board asked whether 
credit unions meeting the RegFlex criteria should be exempt from the 
regulatory restrictions on public unit and nonmember shares. Twenty-two 
commenters supported including this regulation in RegFlex. One of these 
commenters would eliminate this regulation for all credit unions. The 
NCUA Board has not been provided any convincing rationale for excluding 
these provisions in the RegFlex proposal and, therefore, it is part of 
the proposed RegFlex rule.
(6) Section 701.23--Purchase, Sale and Pledge of Eligible Obligations
    The NCUA Board requested comment on whether to permit credit unions 
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, the NCUA Board asked 
whether to permit the purchasing credit unions to keep these loans in 
their portfolios. Twenty-seven commenters supported this provision in 
RegFlex. Most of these commenters would allow credit unions to keep 
these loans in their portfolios. Nine of these commenters would also 
allow it for all credit unions. Three commenters requested that this 
authority to purchase credit union loans be extended to loans made by 
CUSOs. However, these commenters were not able to provide a compelling 
legal basis for this extension of authority. One commenter objected to 
this proposal as an attempt to circumvent field of membership rules.
    The authority for this provision is in section 107(14) of the 
Federal Credit Union Act. The plain language of that section authorizes 
a federal credit union ``to sell all or a part of its assets to another 
credit union, [or] to purchase all or part of the assets of another 
credit union.'' 12 U.S.C. 1757(14). The Board acknowledges that this is 
a more expansive interpretation of this provision than it has made 
previously but that it is consistent with the other powers granted to 
federal credit unions in section 107. Specifically, the Board notes 
that the limitation in section 107(13) restricts the authority of 
section 107(14) to the extent a credit union purchases the member loans 
of a liquidating credit union. Under this latter section, the Act 
limits those purchases to five percent of the unpaired capital and 
surplus of the credit union. These two sections recognize that the 
risks involved in the purchase of eligible obligations from a 
liquidating credit union are different than those risks associated with 
a financially healthy credit union, hence, the different statutory 
treatment regarding the purchasing of assets from financially different 
credits unions. The NCUA Board believes this authority expands the 
liquidity options for credit unions and enhances the safety and 
soundness of the credit union system. Therefore, the NCUA Board is 
incorporating this authority into the proposed regulation, with the 
only limitation being the statutory limitation regarding the purchase 
of eligible obligations from liquidating credit unions.

4. Other Regulations Discussed by NCUA But Not Initially Part of 
RegFlex

    In connection with RegFlex, the Board requested comment on whether 
it may be appropriate to permit federal credit unions meeting the 
RegFlex criteria to engage in certain leasing activities without 
restrictions that would be generally applicable to other federal credit 
unions that are not legally required. Six commenters stated that 
leasing should not be part of the RegFlex proposal. Six commenters 
requested that leasing be part of the proposal. Some of these 
commenters requested that RegFlex credit unions be exempt from the 25 
percent residual value limit. One of these commenters requested that 
all credit unions be exempt from the leasing regulation. The NCUA Board 
has determined that the leasing regulation is not currently a good 
candidate for RegFlex because of safety and soundness concerns.
    The NCUA Board requested whether part 721 should be part of 
RegFlex. Four commenters stated that RegFlex credit unions should have 
greater latitude with regard to incidental powers. NCUA is in the 
process of issuing a final regulation on incidental powers for all 
credit unions and therefore, does not believe it should be part of 
RegFlex.

5. Other Regulations Identified by Commenters

    Two commenters requested the requirements of the member business 
loan rule on loan-to-value ratios and maturity limits be part of the 
proposal. One commenter would exempt RegFlex credit unions from the 
member business loan rule requirements on construction and development 
lending, loans to one borrower, personal liability, and appraisals. 
Another commenter requested more flexibility with member business 
loans.
    Two commenters recommended that a RegFlex credit union be given a 
waiver of the credit union service organization (CUSO) CPA requirement 
if the parent credit union wholly owns the CUSO and the parent's CPA 
audited financials are consolidated for effects of CUSO operation. One 
commenter requested that the list of preapproved activities for a CUSO 
be deleted and the regulation merely state that, for a federal credit 
union to participate in a CUSO, the CUSO's activities must be related 
to the routine operations of federal credit unions.
    The NCUA Board does not believe the member business loan regulation 
and the CUSO regulation are good candidates for RegFlex because of 
safety and soundness concerns. However, the NCUA Board is again 
requesting comments on any other regulation that should be part of the 
RegFlex program. Again, the commenters should not address regulations 
that are statutorily required.

6. Miscellaneous Items

    The NCUA Board asked whether the asset base of a credit union that 
expands into a low-income or underserved area should be frozen for the 
calculation of the operating fee, and if so, for what amount of time. 
Nineteen commenters did not support this proposal. Six commenters 
supported freezing the asset base for calculating the operating fee. 
One of these commenters suggested a three-year freeze. One of these 
commenters suggested a ten-year freeze. One commenter proposed that 
shares of low-income and underserved members be set apart from the 
total amount of shares and that those shares be subject to a lesser 
percentage when calculating the operating fee. One commenter stated 
that expansions into a low-income area should not be grounds to freeze 
the operating fee unless the credit union's performance in serving low-
income members can be documented. One commenter stated that expansion 
into an underserved area should be addressed in a separate rule or 
apply to

[[Page 15060]]

all credit unions. Many commenters did not want field of membership 
issues addressed in this rule.
    The NCUA Board issued final amendments to NCUA's Chartering Manual 
that addressed the issue of incentives for credit unions to add 
underserved areas. Although the NCUA Board deferred any action 
regarding incentives to credit union's adding underserved areas, it 
appears that incentives may not be warranted. It appears that the 
changes to streamline the addition of underserved areas is encouraging 
credit unions to add them to their field of membership. The Board will 
continue to monitor this issue and if the increase in service to 
underserved area begins to diminish, it will review the issue again. 
Therefore, the NCUA Board believes that field of membership issues 
should not be part of this RegFlex proposal.
    The NCUA Board also requested comment on whether the regulatory 
flexibility outlined in the advance notice of proposed rulemaking 
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 requiring a credit 
union to have a low-income or underserved area as one of the basic 
eligibility criteria under the proposal. Twenty-two commenters stated 
that service to low-income and underserved areas should not be a 
criterion for participating in RegFlex. In general, these commenters do 
not believe RegFlex relief bears any direct relationship to serving the 
underserved. The NCUA Board has determined that adding an underserved 
area should not be part of the criteria for this proposal.
    The NCUA Board also requested comment on what changes, if any, 
might be considered to NCUA's supervision and examination program for 
credit unions meeting the RegFlex criteria. The NCUA Board noted 
possible areas of consideration including a different type of exam for 
RegFlex credit unions or a revised examination schedule for RegFlex 
credit unions. Eight commenters wanted a longer or different exam cycle 
for RegFlex credit unions but did not specify a type or time frame. 
Nine commenters suggested an eighteen-month exam cycle for RegFlex 
credit unions. Three commenters suggested an 18-24 month cycle. Three 
commenters suggested a two-year exam cycle. Three commenters requested 
that RegFlex credit unions have an abbreviated exam and examiners 
should be allowed to rely on CPA audits for financial analysis, loan 
reviews and investment portfolio verifications and reviews. Three 
commenters recommended a biennial on-site exam and using call report 
data and other specified data for an off-site exam every other year. 
Five commenters stated the exam cycle should remain the same. Although 
the exam cycle is not part of this proposal, the NCUA Board is 
continuing to review how the exam cycle can be streamlined and 
improved.
    Finally, the NCUA Board asked what guidance should be provided 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 their members. Three commenters stated that peer 
comparisons should be dropped. Two commenters stated that peer 
comparisons should not be dropped. Another commenter stated that peer 
comparisons be revised so that they are not based solely on assets but 
reflect genuine similarities, such as level of service, single sponsor 
versus multiple group, and so forth. One commenter believes that 
delinquency and charge-off ratios should be interpreted based on the 
nature of the loan and investment product as it relates to risk and 
pricing for risk. One commenter stated that the delinquencies and 
charge-off rates should be less important in the exam process for 
RegFlex credit unions. One commenter stated that delinquency and 
charge-off ratio levels should be increased for CAMEL calculations. One 
commenter recommended against liberalizing delinquency and charge-off 
rates. One commenter stated that examiners should be provided peer 
ratios for credit unions that serve low-income persons so that they can 
compare and contrast similar institutions. One commenter stated that, 
as credit unions seek to take on more risk, examiners should make sure 
that the policies, procedures and staff address risk measurements, 
similar to the way corporate credit unions are examined. One commenter 
stated that examiners should review specific aspects of a credit 
union's management to ensure that the credit union is not being 
discouraged from managing additional risk. Further, this commenter 
suggested that NCUA develop specific criteria from which examiners 
operate. NCUA is currently reviewing the examiners guide and may 
incorporate some of these ideas in a revised examiners guide.

C. Regulatory Procedures

Regulatory Flexibility Act

    The Regulatory Flexibility Act requires NCUA to prepare an analysis 
to describe any significant economic impact any proposed regulation may 
have on a substantial number of small entities (primarily those under 1 
million in assets). The NCUA Board has determined and certifies that 
the proposed rule will not have a significant economic impact on a 
substantial number of small credit unions. The reason for this 
determination is that the proposed rule reduces regulatory burden. 
Accordingly, the NCUA Board has determined that a Regulatory 
Flexibility Analysis is not required.

Paperwork Reduction Act

    The proposed regulation contains a voluntary application. An FCU 
may apply to the regional director for designation under the Regulatory 
Flexibility Program if: (1) It is a CAMEL code 3; and (2) has a current 
net worth ratio of nine percent or higher or meets its applicable risk-
based net worth requirement plus 200 basis points, whichever is higher. 
An FCU may also apply to the regional director for designation under 
the Regulatory Flexibility Program if: (1) It has received a CAMEL 
rating of 1 or 2 for the two most recent examinations, and (2) has a 
current net worth ratio of less than nine percent or does not meet its 
applicable risk-based net worth requirement plus 200 basis points, 
whichever is higher. 12 CFR 742.2(b).
    The Board estimates it will take an average of 1 hour for an FCU to 
prepare a voluntary application. The Board also estimates 1,241 FCUs 
may apply annually for designation under the program. The cumulative 
total annual paperwork burden is estimated to be approximately 1,241 
hours.
    NCUA will submit the collection of information requirements 
contained in the regulation to the OMB in accordance with the Paperwork 
Reduction Act of 1995. 44 U.S.C. 3507. The NCUA will use any comments 
received to develop its new burden estimates. Comments on the 
collection of information should be sent to: Office of Management and 
Budget, Reports Management Branch, New Executive Office Building, Room 
10202, Washington, DC 20503; Attention: Alex T. Hunt, Desk Officer for 
NCUA. Please send NCUA a copy of any comments you submit to OMB.

Executive Order 13132

    Executive Order 13132 encourages independent regulatory agencies to 
consider the impact of their regulatory

[[Page 15061]]

actions on state and local interests. 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 only applies to only federal credit unions, NCUA has 
determined that this rule does not constitute a policy that has 
federalism implications for purposes of the executive order.

The Treasury and General Government Appropriations Act of 1999--
Assessment of Federal Regulations and Policies on Families

    The NCUA has determined that this proposed 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. 
26821 (1998).

Agency Regulatory Goal

    NCUA's goal is to promulgate clear and understandable regulations 
that impose minimal regulatory burden. We request your comments on 
whether the proposed rule is understandable and minimally intrusive if 
implemented as proposed.

List of Subjects

12 CFR Part 722

    Credit unions, Mortgages, Reporting and recordkeeping requirements.

12 CFR Part 742

    Credit unions, Reporting and recordkeeping requirements.

    By the National Credit Union Administration Board on March 8, 
2001.
Becky Baker,
Secretary of the Board.

    For the reasons stated in the preamble, it is proposed that 12 CFR 
chapter VII be amended as follows:
    1. Add part 742 to read as follows:

PART 742--REGULATORY FLEXIBILITY PROGRAM

Sec.
742.1   What is NCUA's Regulatory Flexibility Program?
742.2   How do I become eligible for the Regulatory Flexibility 
Program?
742.3   Will NCUA notify me when I am eligible for the Regulatory 
Flexibility Program?
742.4   What NCUA Regulations will I be exempt from?
742.5   What additional authority will I be granted?
742.6   How can I lose my RegFlex eligibility?
742.7   What is the appeaI process?
742.8   If I lose my RegFlex authority will my past actions be 
grandfathered?

    Authority: 12 U.S.C 1756 and 1766.


Sec. 742.1  What is NCUA's Regulatory Flexibility Program?

    NCUA's Regulatory Flexibility Program (RegFlex) exempts credit 
unions with a current net worth of nine percent (if a credit union is 
deemed complex under section 216(d) of the Federal Credit Union Act (12 
U.S.C. 1790d(d)), it must be 200 basis points over its risked based net 
worth level or nine percent, whichever is higher) and a CAMEL rating of 
1 or 2, for two consecutive examinations, from all or part of 
identified NCUA regulations. The Regulatory Flexibility Program also 
grants eligible credit unions additional powers.


Sec. 742.2  How do I become eligible for the Regulatory Flexibility 
Program?

    Eligibility is automatic as soon as the credit union meets the net 
worth and CAMEL criteria. If a credit union is a CAMEL 3 (or CAMEL 1 or 
2 for less than two consecutive cycles) with a net worth in excess of 9 
percent or if the credit union is a CAMEL 1 or 2 with a net worth under 
9 percent (or if a credit union is deemed complex under section 216(d) 
of the Federal Credit Union Act (12 U.S.C. 1790d(d)), it must be 200 
basis points over its risk based net worth level or nine percent, 
whichever is higher), it can apply to the regional director for a 
RegFlex designation, in whole or in part.


Sec. 742.3  Will NCUA notify me when I am eligible for the Regulatory 
Flexibility Program?

    Yes. Once this rule is effective, NCUA will notify all RegFlex 
eligible credit unions. Subsequent notifications of eligibility will 
occur after an application for a RegFlex designation or as part of the 
examination process.


Sec. 742.4  What NCUA Regulations will I be exempt from?

    RegFlex credit unions are exempt from the following NCUA 
Regulations: Sec. 701.25, Sec. 701.32(b) and (c), Sec. 701.36(a), (b) 
and (c), Sec. 703.90(c), Sec. 703.40(c)(6), and Sec. 703.110(d) of this 
chapter.


Sec. 742.5  What additional authority will I be granted?

    Notwithstanding the general limitations in Sec. 701.23 of this 
chapter, RegFlex credit unions are eligible to purchase any auto loan, 
credit card loan, member business loan, student loan or mortgage loan 
from any credit union as long as the loans are loans that the 
purchasing credit union is empowered to grant. RegFlex credit unions 
are authorized to keep these loans in their portfolio. If a RegFlex 
credit union is purchasing the eligible obligations of a liquidating 
credit union, the loans purchased cannot exceed 5% of the unimpaired 
capital and surplus of the purchasing credit union.


Sec. 742.6  How can I lose my RegFlex eligibility?

    Eligibility may be lost in two ways. First, the credit union no 
longer meets the RegFlex criteria set forth in Sec. 742.1. When this 
event occurs, the credit union must cease using the additional 
authority granted by this rule. Second, the regional director for 
substantive and documented safety and soundness reasons may revoke a 
credit union's RegFlex authority in whole or in part. The regional 
director must give a credit union written notice stating the reasons 
for this action. The revocation is effective as soon as the regional 
director's determination has been received by the credit union.


Sec. 742.7  What is the appeaI process?

    A credit union has 60 days from the date of the regional director's 
determination to revoke a credit union's RegFlex authority (in whole or 
in part) to appeal the action to NCUA's Supervisory Review Committee. 
The regional director's determination will remain in effect unless the 
Supervisory Review Committee issues a different determination. If the 
credit union is unsatisfied with the decision of the Supervisory Review 
Committee, the credit union has 60 days from the issuance of this 
decision to appeal to the NCUA Board.


Sec. 742.8  If I lose my RegFlex authority will my past actions be 
grandfathered?

    Any action by the credit union under the RegFlex authority will be 
grandfathered. Any actions subsequent to losing the RegFlex authority 
must meet NCUA's regulatory requirements. This does not diminish NCUA's 
authority to require a credit union to divest its investments or assets 
for substantive safety and soundness reasons.

PART 722--APPRAISALS

    2. The authority citation for part 722 continues to read as 
follows:

    Authority: 12 U.S.C 1766, 1789 and 3339.


Sec. 722.3  [Amended]

    3. Section 722.3(a)(1) is revised by removing the number 
``$100,000'' and adding in its place ``$250,000'' and removing the 
words ``except if it is a business loan and then the transaction value 
is $50,000 or less.''

[FR Doc. 01-6326 Filed 3-14-01; 8:45 am]
BILLING CODE 7535-01-U