[Federal Register Volume 66, Number 226 (Friday, November 23, 2001)]
[Rules and Regulations]
[Pages 58656-58663]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-29152]


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NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Parts 722 and 742


Regulatory Flexibility Program

AGENCY: National Credit Union Administration (NCUA).

ACTION: Final rule.

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SUMMARY: The NCUA Board is issuing a final rule that will 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. The NCUA Board is also issuing a final 
amendment to the appraisal regulation to increase the dollar threshold 
from $100,000 to $250,000 for when an appraisal is required. This final 
rule and final amendment will reduce regulatory burden.

DATES: The rule is effective March 1, 2002.

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. Markgraf, 
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 (ANPR) on a regulatory 
flexibility and exemption (RegFlex) program with a sixty-day comment 
period. 65 FR 15275 (March 22, 2000). The Board received seventy-four 
comments on the RegFlex concept. After reviewing the issues addressed 
by the commenters, the Board issued a Notice of Proposed Rulemaking 
(NPR) on March 8, 2001. 66 FR 15055 (March 15, 2001). Although the 
Board actually received over 1400 letters or e-mail messages, NCUA 
staff credited multiple comment letters from the same credit union as 
one comment, for a total of 1304 comments on the proposed rule. 
Comments were received from 551 federal credit unions, 267 state-
chartered credit unions, 438 credit union volunteers or members, 33 
leagues, six national credit union trade associations, four realtors 
and associations, one bank trade association, one appraisal 
association, one insurance company, one law firm, and one construction 
company.
    In general, 1297 commenters supported the proposed regulation and 
many commenters supported the proposal as written. Many supporters 
encourage the NCUA Board to provide further regulatory flexibility in 
the future. A number of commenters recommended some changes to the 
proposed rule. Many commenters commended the Board for its bold 
initiative and most of them believe this regulatory approach will 
reduce regulatory burden and provide greater flexibility for those 
credit unions that have demonstrated a track record of safe and sound 
operations.
    Seventy-nine commenters believe that RegFlex credit unions will 
have a competitive advantage and fifty-eight of these commenters 
believe that well-managed credit unions deserve this advantage. Thirty-
six commenters stated that RegFlex credit unions would not have a 
competitive advantage.
    Regarding risk to the National Credit Union Share Insurance Fund 
(NCUSIF), 184 commenters stated that the adoption of this proposal will 
not significantly increase risk. Most of these commenters believe no 
increase in risk will occur because healthy credit unions have the 
ability to manage any increased safety and soundness concerns. Two 
commenters believe the proposal will increase risk. Many commenters 
believe the regulation will encourage credit unions to become stronger 
financial institutions.

Discussion

RegFlex Criteria

    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. The second criterion is that a credit union must 
have a net worth ratio of nine percent or greater, and be well-
capitalized under NCUA's prompt corrective action regulations. 12 CFR 
Part 702. The NCUA Board believed the proposed criteria were generally 
sound and did not propose that a CAMEL 1 or 2 in management needs to be 
part of the criteria. One hundred and five commenters specifically 
supported the eligibility requirements as proposed. Twenty-two 
commenters specifically agreed with the NCUA Board that there should 
not be a separate management component for RegFlex eligibility. A few 
commenters stated that a credit union should have a 1 or 2 in 
management to be eligible for RegFlex.
    A few commenters suggested different eligibility requirements to 
obtain the benefits of RegFlex. One of these commenters requested the 
Board not only look at the net worth and CAMEL ratings of credit 
unions, but also look to how well they are serving their members and 
whether those members are satisfied. Almost all of the other 
commenters' suggestions retained some of the Board's proposal of either 
a CAMEL component or net worth ratios. While the Board agrees that 
service to members and member satisfaction are important issues for 
credit unions, these are not generally considered to be safety and 
soundness issues, and would not be easily measured criteria for 
purposes of RegFlex. The Board continues to believe that CAMEL ratings 
and net worth ratios are the best measures of how well a credit union 
is managed and how much risk it presents to the NCUSIF and the credit 
union system. That is, consistent with safety and soundness concerns, 
credit unions with advanced levels of net worth and consistently strong 
supervisory examination ratings have earned exemptions from certain 
NCUA Regulations.

CAMEL Rating

    Thirty-two commenters stated that CAMEL ratings should not be used 
to determine eligibility because they can be used unfairly by examiners 
to keep credit unions out of the program. Many of these commenters 
believe that the CAMEL rating is arbitrary and

[[Page 58657]]

subjective to the individual examiner. Three commenters suggested a 
different time period for maintaining the CAMEL component. Thirteen 
commenters suggested using call report data and financial statements 
instead of a CAMEL rating. As discussed above, the Board is retaining 
the requirement that a credit union must have received a composite 
CAMEL code 1 or code 2 for two consecutive exams. The Board understands 
the commenters' concerns that a credit union may be unfairly kept out 
of the program. However, the application process should help alleviate 
some of these concerns because a credit union that lacks the required 
CAMEL rating can still apply to be part of the program if it has 
sufficient net worth. In addition, if credit union management believes 
its CAMEL rating is being manipulated, it should ask the regional 
director to review the issue.

Net Worth Requirement

    Regarding the net worth requirement, 485 commenters believe the 
nine percent net worth requirement should be decreased. Four hundred 
and fifty-six of these commenters stated the net worth requirement 
should be seven percent and sixteen of these commenters stated that the 
net worth requirement should be eight percent. The remaining commenters 
offered varying numbers. As discussed above, the Board is retaining the 
requirement that a credit union must have a net worth ratio of nine 
percent or greater, and be well-capitalized under NCUA's prompt 
corrective action regulations. The ability to build capital, which is 
demonstrated by the cushion of 200 basis points, represents a 
significant decrease in risk to both the credit union and the NCUSIF. 
Some of the reasons for this 200 basis point cushion are to minimize 
the risk of engaging in the expanded authority permitted by the RegFlex 
program as well as to minimize PCA implications. The Board continues to 
believe that the 200 basis point margin provides a sufficient margin of 
safety for RegFlex credit unions to withstand unexpected events and 
normal business fluctuations.

Net Worth Requirement for Complex Credit Unions

    The NCUA Board proposed a different net worth requirement for 
complex credit unions: Nine percent or 200 basis points over their risk 
based net worth (RBNW) requirements, whichever is greater. This net 
worth requirement is beyond the ``well-capitalized'' threshold 
established by prompt corrective action (PCA). The NCUA Board stated 
that 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.
    Thirty-two commenters approved of the higher standard for 
``complex'' credit unions. Nineteen commenters stated that the trigger 
should be the same for all types of credit unions. Three commenters 
stated that a credit union that is 200 basis points over its net worth 
requirement for PCA should qualify for RegFlex, even if they do not 
have nine percent net worth. A few commenters suggested that the 
alternative measure for complex credit unions should be deleted. A few 
other commenters suggested different triggers for complex credit 
unions. One commenter stated that examiners should determine the net 
worth requirement for the purpose of RegFlex eligibility.
    The Board continues to believe that a 200 basis point margin over 
the minimum level required of a non-complex credit union will provide a 
sufficient, but not excessive, safety cushion to keep credit unions 
from ``bouncing'' in and out of RegFlex eligibility. Credit unions that 
meet the definition of ``complex'' under PCA do so because of 
additional balance sheet risk. In order to provide the safety cushion 
and risk mitigation RegFlex contemplates, a higher net worth level is 
needed. Again, as with non-complex credit unions, a 200 basis point 
cushion over the minimum level for a complex credit union to be 
classified as well-capitalized is considered to be a sufficient safety 
cushion to keep these credit union from ``bouncing'' in and out of 
RegFlex eligibility.
    The NCUA Board has made some minor modifications in the language in 
the final rule in Secs. 742.1 and 742.2 to make it consistent with the 
language in NCUA's prompt corrective action regulations.

RegFlex Process

    The NCUA Board proposed an automatic exemption for credit unions 
meeting the eligibility requirements. The Board noted that, as credit 
unions become eligible for RegFlex, NCUA will notify credit unions of 
their eligibility, generally, during the examination process. Four 
hundred and sixty-one commenters believe the exemption should be 
automatic for credit unions that qualify, just as the Board proposed. A 
few commenters believe approval should be automatic with a notification 
to NCUA by the credit union. A few commenters stated that the process 
should not be automatic and that the credit union should apply to NCUA 
for approval. The NCUA Board believes that an automatic exemption is 
consistent with the spirit of the RegFlex concept and will not require 
any application for these credit unions meeting the criteria. As credit 
unions become eligible for RegFlex, NCUA will notify credit unions of 
their eligibility, generally, during the examination process.
    The NCUA Board also proposed an application process for credit 
unions that meet only one of the two stated criteria to allow more 
credit unions to have RegFlex authority while maintaining the safety 
and soundness considerations that are fundamental to the program. The 
NCUA Board proposed that 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 
nine percent or if the credit union is a CAMEL 1 or 2 with a net worth 
under nine 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), a credit union can apply to the regional director 
for a RegFlex designation.
    Twenty-five commenters supported an application process for credit 
unions that meet only one of the two eligibility criteria. A few of 
these commenters would only allow credit unions that meet the CAMEL 
criteria to use the application process. These commenters believe that 
the CAMEL component is a better indicator of safety and soundness than 
the net worth criteria. Two commenters did not support the application 
process. A number of commenters that addressed this issue requested 
that the rule state the criteria the regional director will consider 
when making this determination.
    The NCUA Board continues to believe that the RegFlex authority 
should be extended to as many credit unions as possible while 
maintaining the safety and soundness considerations that are 
fundamental to the program. Therefore, the NCUA Board is retaining in 
the final rule the application process described above. The regional 
director will review the application 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 rating. In the case of 
a credit union not meeting the new worth level, the regional director 
will review past, present and projected future performance, from both a 
managerial and financial perspective, to determine RegFlex approval. 
For those credit unions that meet net worth levels but not CAMEL rating 
requirements, the regional director's review will focus on the 
magnitude and resolution of the

[[Page 58658]]

issues that resulted in the lower CAMEL rating.
    The proposal stated that a regional director, in his or her sole 
discretion, for substantive and documented safety and soundness 
reasons, would be able to revoke the RegFlex authority in whole or in 
part at any time and without advance notice. In such cases, a credit 
union would be able to appeal the determination to NCUA's Supervisory 
Review Committee within 60 days of the regional director's 
determination. One hundred and seven commenters support the regional 
directors' ability to revoke a RegFlex designation. A few of these 
commenters suggested allowing a grace period for a credit union if it 
has minimal deviation from the eligibility requirements for one or more 
periods. If a credit union falls below the net worth eligibility 
requirements for a projected short period of time, the credit union 
should apply for a ``grace period'' and the regional director will make 
a determination on whether to revoke, in whole or in part, the RegFlex 
authority. The regional director will review the continued RegFlex 
eligibility in the same manner as stated above for the application 
process. Assessing the issues that cause the deviation will eliminate 
credit unions operating near the minimum net worth requirements from 
making multiple requests to continue RegFlex activities. If a credit 
union's CAMEL rating is lowered so that the credit union meets neither 
eligibility requirement, the regional director will revoke the RegFlex 
designation.
    Sixty-four commenters do not approve of the regional director 
having sole discretion to revoke a RegFlex designation. A few 
commenters believe that a regional director should only have the 
authority to revoke a designation if a credit union no longer meets the 
RegFlex eligibility criteria. A few commenters suggested that only the 
central office should be able to revoke the RegFlex designation. The 
NCUA Board believes a regional director's authority to revoke the 
exemption is integral to success of the program. External events, as 
well as internal events, can produce a dramatic change in a credit 
union's financial condition in a matter of months. The regional 
director should have the discretion to act quickly in regard to RegFlex 
eligibility to maintain the financial health of a credit union when 
certain events or trends exist. The Board also believes that the 
regional director will be able to make a more informed and expedited 
decision than central office staff. Therefore, the final rule retains 
the ability of the regional director to revoke the RegFlex designation.
    Most of the commenters, whether for or against the regional 
directors' discretion, support the proposed rule's requirement that the 
regional director first notify the credit union of the revocation and 
provide the credit union with appeal rights. The NCUA Board is 
retaining the appeal process outlined in the proposed rule. NCUA is in 
the process of revising IRPS 95-1 on the Supervisory Review Committee 
to include RegFlex issues as an appeal that the Committee is authorized 
to address.
    Five commenters agreed with the NCUA Board that, if a credit union 
loses RegFlex eligibility, its past actions will be grandfathered. 
Therefore, the NCUA Board is retaining in the final rule the express 
statement that, if a credit union loses its RegFlex eligibility, its 
past actions are grandfathered and no divesture 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.
(1) Section 701.36--FCU Ownership of Fixed Assets
    The NCUA Board proposed including sections of the fixed asset rule, 
including the five percent limitation, in the RegFlex rule. In the 
proposal, the NCUA Board encouraged, but did not require, that a 
RegFlex credit union incorporate into its business plan the fixed asset 
limit it plans to establish. Four hundred and fifty-one commenters 
supported the Board's inclusion of the fixed asset rule in RegFlex. 
Many of these commenters stated a credit union's board of directors 
should set the fixed asset limit. Fifteen commenters stated that all 
credit unions should be exempt from the fixed asset rule. Three 
commenters did not believe the fixed asset rule should be part of 
RegFlex. A few commenters requested that RegFlex credit unions be 
exempt from all provisions of the fixed asset rule. The NCUA Board 
believes the 5% limitation on fixed assets should be eliminated for 
credit unions that qualify for RegFlex. However, the NCUA Board 
encourages the board of directors of each RegFlex credit union to 
establish a fixed asset limitation and incorporate that limit into its 
written business plan.
    While the NCUA Board noted that an exemption from some of the 
restrictions on purchasing a building and leasing a portion of the 
property would also be lifted under RegFlex, it stated this would not 
authorize a credit union to engage in long-term commercial leasing. For 
safety and soundness and legal reasons, the NCUA Board stated that a 
credit union still must comply with Sec. 701.36(d) of the fixed asset 
rule and have a plan to use the property for its own operation. Seven 
commenters specifically endorsed federal credit unions complying with 
Sec. 701.36(d). Thirty-five commenters would exempt RegFlex credit 
unions from this section. However, for legal and safety and soundness 
reasons, the Board believes that RegFlex credit unions should abide by 
this provision and have a plan to use the property for its own 
operation because federal credit unions do not generally have the 
authority to engage in commercial leasing. One commenter stated that 
NCUA should expand Sec. 701.36(d) from a three-year to a five-year 
period for partial utilization of real property for RegFlex credit 
unions. The agency is evaluating this suggestion and may consider such 
an expansion when the fixed asset rule is next reviewed and revised.
    The NCUA Board stated in the preamble to the proposed rule that 
RegFlex credit unions should also comply with the conflict of interest 
provision in Sec. 701.36(e) of the rule. The Board stated that 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. Only two 
commenters addressed this issue and approved of RegFlex credit unions 
continuing to follow the conflict of interest section of the fixed 
asset rule. The NCUA Board is retaining in the final rule that RegFlex 
credit unions comply with the conflict of interest provision in the 
fixed asset rule.
    Finally, the NCUA Board requested comment on whether the fixed 
asset rule, itself, should be structured differently so that there 
would be a tiered limit on fixed assets. A few commenters requested 
more flexibility on the limit in the fixed asset rule. Seventeen 
commenters supported a tiered structure based on a percentage of net 
worth. Two commenters opposed a tiered structure. A few commenters 
provided different methods for calculating a fixed asset limit. The 
NCUA Board is committed to revising the fixed asset rule and will 
consider the use of some type of a tiered structure, such as the one 
used by the Office of Thrift Supervision, when the rule is revised.
(2) Part 703--Investment and Deposit Activities
    The NCUA Board proposed lifting certain investment requirements for 
RegFlex eligible credit unions. Three hundred and one commenters 
supported including the proposed sections of the investment rule in

[[Page 58659]]

RegFlex. Eight of these supporters stated that NCUA needed to reduce 
investment requirements further for those credit unions with acceptable 
capital ratio levels. A few commenters believe other provisions of the 
investment regulation should be considered, but they did not make 
specific recommendations. One commenter believes that the investment 
changes should apply to all credit unions.
    In response to these comments, the NCUA Board directed the Office 
of Investment Services and the Office of Examination and Insurance to 
review part 703 to determine if regulatory relief can be provided to 
all credit unions in the context of amending part 703. As a result of 
this review, the NCUA Board issued an Advanced Notice of Proposed 
Rulemaking (ANPR) in October of this year, requesting comment from 
credit unions on expanding selected sections of part 703.
    One commenter believes RegFlex credit unions should be able to make 
any investments that banks may. Federal credit unions do not have the 
same statutory investment authority as banks so the Board cannot adopt 
this suggestion. See 12 U.S.C. 1757(15). One commenter would not 
include the investment regulation in RegFlex because the commenter 
perceived an increase in risk. Three commenters stated they did not 
approve of expanding investment powers. The NCUA Board recognizes these 
concerns but believes institutions meeting the RegFlex criteria can 
manage the additional risk.
    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 their 
asset liability management programs, the NCUA Board proposed waiving 
this regulatory requirement for RegFlex credit unions. The NCUA Board 
also stated that 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 their asset liability management monitoring. Fifty-nine 
commenters would waive the 300 point basis point shock test for RegFlex 
credit unions. Twelve commenters opposed waiving the quarterly stress 
testing for RegFlex credit unions. The NCUA Board has decided to 
include this investment provision in the final regulation because it 
does not pose a significant adverse effect for RegFlex credit unions. 
This exemption does not eliminate stress testing, rather it reduces 
duplicative reporting burden for those institutions that have a risk 
management process that measures the impact of interest rate changes on 
the entire balance sheet.
    Section 703.40(c)(6) limits the discretionary delegation of 
investments to third parties to 100% of net capital. NCUA proposed 
waiving the 100% limitation and permitting RegFlex credit unions to set 
their own limit in a policy adopted by their boards of directors. 
Eighty-seven commenters believe it is appropriate for NCUA to waive or 
modify the 100% limitation on discretionary delegation of investments 
and allow the credit union to set a limit via board policy. Five 
commenters did not support waiving the 100% limitation on discretionary 
delegation of investments for RegFlex eligible credit unions. The NCUA 
Board has decided to include this investment provision in the final 
regulation because it offers expanded investment portfolio management 
options for RegFlex institutions and it would not have a significant 
adverse impact on safety and soundness.
    Section 703.110(d) limits zero coupon investments to under ten 
years from settlement date. The NCUA Board proposed removing this 
limitation for RegFlex credit unions. Twelve commenters specifically 
supported the exemption; seven commenters specifically did not. The 
NCUA Board has decided to include this investment provision in the 
final regulation because it would not have a significant adverse impact 
on safety and soundness and would increase potential yield when part of 
a managed ALM.
    The NCUA Board had previously decided not to include Sec. 703.110, 
which prohibits stripped, mortgage-backed securities, residual 
interests in CMOs/REMICS, mortgage servicing tights, commercial 
mortgage-related securities, or small business related securities. 
Nevertheless, a number of commenters discussed this section. Thirty-two 
commenters stated NCUA should permit RegFlex credit unions to make 
these type of investments. Thirteen commenters believe stripped 
mortgage-backed securities and residual interests in CMOs/REMICs are 
not viable investments for credit unions. Twelve commenters stated 
these are high risk investments and suggested that perhaps a percentage 
of total investment could be allowed if credit unions measure risk 
adequately. Because of the risk associated with these types of 
investments, the NCUA Board has decided not to incorporate it into the 
final regulation. However, as discussed earlier, comments on these 
investment activities are requested in the ANPR on part 703.
    Five commenters requested investments in commercial paper for 
RegFlex credit unions. One commenter would permit natural person credit 
unions the same investment powers as corporate credit unions. One 
commenter believes NCUA should allow credit unions to purchase 
principal-only stripped mortgage-based securities to hedge interest 
rate risk as the value of the security moves positively to a rate 
increase. Section 120(a) of the Federal Credit Union Act authorizes the 
NCUA Board to provide expanded investment authority for corporate 
credit unions by regulation. This statutory flexibility does not exist 
for natural person credit unions. The ANPR on part 703 requested 
comments on authorizing principal-only strips as a vehicle to hedge 
interest rate risk.
(3) Section 701.25--Charitable Donations
    The current rule limits recipients of charitable donations to 
organizations located in or conducting activities in a community in 
which the federal credit union 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. The NCUA Board asked whether credit unions 
meeting the RegFlex criteria should be completely exempt from the 
requirements of this regulation. Eighty-three commenters stated that 
the entire charitable donations regulation should be part of RegFlex. 
One hundred and forty-four commenters believe the charitable donations 
regulation should be eliminated for all federal credit unions. Three 
commenters would not include charitable donations as part of RegFlex.
    The NCUA Board is convinced that credit unions qualifying for 
RegFlex have proven their track record of sound management and should 
be exempt from the charitable donations regulation. However, the Board 
is not convinced that this exemption should apply to all credit unions. 
The donation of a credit union's members' money to an outside party is 
a highly sensitive issue. The Board believes the requirements in the 
current regulation are critical for nonqualifying credit unions to 
ensure that the interests of the credit union's members are protected

[[Page 58660]]

and that conflicts of interest are avoided.
(4) Sections 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 a federal credit union 
or $1.5 million, whichever is greater. The NCUA Board proposed that 
these provisions be part of the RegFlex rule. Two hundred and six 
commenters supported including the proposed provisions on public unit 
and nonmember accounts in the final rule. Seven commenters would not 
include these provisions as part of RegFlex. Eight commenters stated 
that low-income credit unions should be exempt from the limits on 
nonmember shares. One commenter stated that RegFlex credit unions 
should be exempt from all of the provisions of Sec. 701.32. Twenty-one 
commenters stated this exemption should apply to all credit unions.
    A number of commenters stated this regulation is unnecessary 
because of PCA. While PCA may serve to discourage excessively rapid 
asset growth in a credit union, it does not mitigate the additional 
risks that may be presented by nonmember shares. These accounts 
frequently are attracted by offering higher than normal dividend rates 
and are characteristically more volatile than core member shares. This 
additional volatility can pose asset-liability management concerns and 
liquidity concerns. The NCUA Board has not been provided any convincing 
rational for exempting all federal credit unions from these provisions 
and has incorporated it in the final rule.
    Two commenters stated this provision should also apply to state-
chartered credit unions due to the language in Sec. 741.204. The NCUA 
Board agrees with this comment. If a state-chartered credit union meets 
the RegFlex criteria, then the credit union need not comply with 
Sec. 701.32(b) and (c). A state-chartered credit union that only meets 
one of the two criteria may also avail itself of the application 
process.
(5) 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. The only limitation to this authority is 
the statutory limitation regarding the purchase of eligible obligations 
from liquidating credit unions. One hundred and sixty-three commenters 
supported expanding the authority for the purchase and sale of eligible 
obligations. Some of the commenters believe this provision would help 
the safety and soundness of the credit union system. Seven commenters 
suggested this section apply to all federal credit unions.
    One commenter stated that, due to the NCUSIF nexus in Sec. 741.8, 
state-chartered credit unions must also be granted this additional 
authority. The NCUA Board is cognizant that it failed to state clearly 
that RegFlex credit unions may purchase eligible obligations from 
federally insured credit unions. The final rule has been amended to 
make this distinction clear. Section 741.8 does not preempt a state's 
rule that grants the same authority as this RegFlex provision.
    One commenter recommended that credit unions be able to purchase 
member loans from other financial institutions and business entities 
but was not able to provide a compelling legal basis for this extension 
of authority. One commenter objected to the inclusion of this section 
and stated that allowing federal credit unions to hold these loans in 
their portfolio is contrary to NCUA's historical position. The 
authority for this provision is in section 107(14) of the Federal 
Credit Union Act. The legal analysis for including this provision in 
RegFlex was addressed in the preamble to the proposed rule and need not 
be repeated here. 66 FR 15055, 15059 (March 15, 2001). 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 
final regulation, with the only limitation being the statutory 
limitation regarding the purchase of eligible obligation from 
liquidating credit unions.

Comments on Other Regulations

    The NCUA Board requested comment on whether any other regulation 
should be part of the RegFlex program. Numerous comments were received 
on various regulations, most of which the Board previously stated would 
not be part of RegFlex or are statutorily required.

Mortgage Lending--Section 701.21(f) and (g)

    One hundred and seventy commenters recommended easing regulatory 
limits or ``examiner guidelines'' limiting mortgage lending for RegFlex 
credit unions. These commenters mistakenly believe there are examiner 
guidelines or a regulatory limit on how many mortgages a credit union 
may make. Five commenters asked that mortgage lending be liberalized, 
but did not specify how this should be accomplished. The agency will 
continue to review its mortgage lending regulation to determine if it 
can reduce regulatory burden. One hundred and one commenters requested 
that RegFlex credit unions be exempt from loan maturity limits. One 
commenter suggested that RegFlex credit unions have 30 years to finance 
the purchase of vacation or rental properties. One commenter believes 
RegFlex credit unions should have a 30-year maturity on home 
improvement and home equity loans. Most of NCUA's loan maturity limits 
are statutory but the agency will continue to review Sec. 701.21(f) to 
determine if there is a need to expand the 20-year maturity limit for 
those specified types of loans.

Leasing--Part 714

    In the proposal, the NCUA Board stated that the leasing regulation 
is not currently a good candidate for RegFlex because of safety and 
soundness concerns. In any case, seventy-four commenters recommended 
including the leasing regulation as part of RegFlex, but did not 
specify whether it should include the whole regulation or simply 
certain provisions. Six commenters requested an exemption from the 25% 
residual interest requirement imposed by Sec. 714.4. Five commenters 
would not include leasing in RegFlex. One commenter requested that NCUA 
exempt all credit unions from the leasing regulation. The NCUA Board is 
not persuaded that the leasing regulation should be part of RegFlex. 
The NCUA Board has safety and soundness concerns regarding leasing and 
has not been provided any convincing rationale on why the leasing 
regulation is unduly burdensome.

Incidental Powers--Part 721

    The NCUA Board stated that it did not believe the new incidental 
powers activities regulation should be part of RegFlex. Six commenters 
stated that RegFlex credit unions should have greater latitude with 
their incidental powers. One commenter stated that incidental powers 
should not be part of RegFlex. The NCUA Board issued a final rule on 
incidental powers in July that expands a credit union's incidental 
powers activities and is applicable to all federal credit unions.

[[Page 58661]]

Interest Rate Ceiling--Section 701.21(c)(7)

    One commenter requested that the NCUA Board increase the interest 
rate ceiling for RegFlex credit unions. NCUA is statutorily required to 
review its interest rate ceiling every 18 months if the ceiling is 
above 15%. The NCUA Board does not believe RegFlex credit unions should 
have a higher interest rate ceiling than the current 18%.

CUSO Regulation--Part 712

    One commenter recommended that NCUA should exempt RegFlex credit 
unions from unspecified provisions of the CUSO regulation. The NCUA 
Board is not including the regulation in RegFlex because it was updated 
in July of this year and it received no specific recommendation. The 
Board wishes to note that the 1% investment and lending limits are 
statutory. See 12 U.S.C. 1757(5)(D) and (7)(I).

Member Business Loans--Part 723

    One commenter recommended that NCUA exclude the member business 
loan regulation from RegFlex. Thirty-four commenters requested 
exemptions from member business loan requirements that are not 
statutory in nature. Seven other commenters requested more flexibility 
in member business loans. Seventy commenters stated RegFlex credit 
unions should be exempt from the loan-to-value requirements in the 
member business loan regulation. One commenter requested an exemption 
from the staff experience requirement in the member business loan 
regulation. Four commenters would lift the statutory cap on member 
business loans for RegFlex credit unions. Two commenters requested that 
RegFlex credit unions have the ability to offer unsecured business 
loans that are not credit cards or lines of credit up to a present 
limit of $50,000. One commenter requested the amount of the aggregate 
loan limit on business loans to one individual or group should be 
increased to 25% of net worth for RegFlex credit unions. The NCUA Board 
does not believe the member business loan regulation is a good 
candidate for RegFlex because of statutory requirements and safety and 
soundness concerns. See 12 U.S.C. 1757a. However, as a part of the 
agency's ongoing regulatory review process, the entire member business 
regulation is scheduled for review in 2003. The NCUA Board will 
continue with its efforts to reduce, where appropriate, regulatory 
burden.

Fidelity Bond Coverage--Part 713

    Four commenters stated RegFlex credit unions should be exempt from 
unidentified provisions of part 713 on fidelity bond coverage. The NCUA 
Board believes this regulation is minimally burdensome for credit 
unions and, due to safety and soundness concerns, will not be part of 
RegFlex.

Field of Membership Issues

    In the proposal, the NCUA Board stated that field of membership 
issues should not be part of RegFlex. Nevertheless, numerous commenters 
addressed this issue. Sixteen commenters did not believe field of 
membership issues should be part of RegFlex. One commenter stated field 
of membership issues should be part of RegFlex.
    One hundred and forty-eight commenters supported freezing the asset 
base for purposes of calculating the operating fee as an incentive for 
expanding into the low-income area. Four commenters disagreed with this 
provision being part of RegFlex. One hundred and twenty commenters 
supported the use of incentives to encourage credit unions to expand 
into low-income or underserved communities. Four commenters did not 
approve of any incentives for credit unions to add underserved areas.
    Last year, the NCUA Board issued final amendments to NCUA's 
Chartering Manual that addressed the addition of underserved areas. 
Although the NCUA Board deferred any action regarding incentives, it 
did streamline the application process. As a result, over one hundred 
and twenty-seven federal credit unions have added underserved areas 
this year. It appears that no incentives are warranted since credit 
unions are rapidly expanding into underserved areas. The Board will 
continue to monitor this issue and, if the increase in service to 
underserved areas begins to diminish significantly, it will review the 
issue again.

Examination Issues

    Although the NCUA Board did not request comment on changes to 
NCUA's supervision and examination program for credit unions meeting 
the RegFlex criteria, many commenters addressed this issue. Five 
hundred and one commenters stated that a different exam cycle or more 
favorable examination treatment should be offered to RegFlex credit 
unions. Many of these commenters requested a streamlined examination 
process for RegFlex credit unions. Most of these commenters suggested 
an 18 to 24 month cycle. Many of these commenters also stated that 
outside auditors should perform audits in lieu of on-site examinations 
to save time and avoid duplication. Three commenters stated that 
RegFlex credit unions should not have more favorable treatment than 
other credit unions. The NCUA Board recently adopted a risk-based 
examination scheduling policy, that will result in many credit unions 
being examined twice over a three-year period. The agency's intent is 
to move toward a more risk-focused examination approach to place 
greater reliance on outside audits. This approach, however, will not 
relieve NCUA of its responsibility to evaluate safety and soundness. 
The role of an audit is to evaluate the adequacy of internal controls 
and to attest to the fairness of financial statement presentation, but 
not to evaluate risk to the NCUSIF. The NCUA Board will continue to 
review the examination process to determine if it can be further 
streamlined and improved.
    Four commenters suggested that NCUA should revise peer comparisons 
for RegFlex credit unions. Four other commenters stated that NCUA 
should eliminate peer comparisons for RegFlex credit unions. Two 
commenters were not in favor of eliminating peer comparisons and do not 
believe that delinquency and charge-off ratios should be less important 
to examiners. NCUA provides peer comparisons primarily for use by 
credit union management. Generally, the agency finds that credit unions 
appreciate receiving this information and, in fact, some have requested 
that NCUA provide a more detailed presentation of the data. The peer 
information is used by NCUA examiners as a frame of reference, rather 
than a determination of a CAMEL rating. Two commenters requested more 
flexibility on delinquency and charge-offs for RegFlex credit unions. 
One commenter perceives a tendency for examiners to recommend that 
credit unions develop written policy statements to replace current 
documented operating procedures. Since these comments primarily relate 
to examination issues affecting all credit unions, they will be 
addressed separately from this rule. NCUA is currently reviewing these 
issues and may incorporate some of these ideas in the revised examiners 
guide.

Prompt Corrective Action--Part 702

    One hundred and fifty-three commenters believe NCUA should grant 
RegFlex credit unions more favorable treatment under PCA. The basic net 
worth criteria contained in the PCA were established by Congress, and

[[Page 58662]]

NCUA does not have the ability to change them. More importantly, to be 
eligible for RegFlex, a credit union's net worth must exceed, by 200 
basis points, the minimum level for it to be well capitalized under 
PCA. By virtue of being well capitalized, the credit union is not 
affected by PCA, and there is no more favorable treatment that could be 
offered under PCA.

State Charters

    Twenty-two commenters stated that NCUA should expand the rules to 
make RegFlex applicable to state-chartered credit unions. The NCUA 
Board recognizes and is committed to the dual chartering system. 
Likewise, as the regulator of federal credit unions, the NCUA Board is 
committed to reducing regulatory burden, where appropriate, on federal 
credit unions. On those occasions when a regulation applies to state-
chartered credit the NCUA Board will expand RegFlex to them.

Section 722.3(a)(1)--Proposed Amendment to the Appraisal Regulation

    NCUA's current appraisal regulation is more restrictive than the 
regulations of other financial institution regulators. Because 
experience has demonstrated that most credit unions are able to manage 
a higher degree of risk in making loans without an appraisal, the NCUA 
Board proposed an amendment to Sec. 722.3(a)(2) to increase the 
threshold for an appraisal from $100,000 to $250,000. The NCUA Board 
also proposed to increase the threshold for an appraisal for a member 
business loan to $250,000 if it involves real estate. The increase 
would be consistent with the regulatory provisions of the agencies 
regulating banks and thrifts. Two hundred and eighty-two commenters 
fully supported the proposed dollar threshold for an appraisal. Twenty 
commenters objected to increasing the appraisal threshold. One 
commenter opposed increasing the threshold for business lending because 
this commenter believes this type of lending is riskier. One commenter 
suggested that NCUA modernize appraisal requirements for agricultural 
lending.
    The NCUA Board has not been persuaded that the increase in the 
appraisal threshold would significantly increase safety and soundness 
concerns so the proposed amendment is adopted in the final rule. 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 appraisal whenever 
necessary to address safety and soundness concerns. These two sections 
of the appraisal rule mitigate any potential safety and soundness 
concerns raised by increasing the dollar threshold.

Regulatory Procedures

Regulatory Flexibility Act

    The Regulatory Flexibility Act requires NCUA to prepare an analysis 
to describe any significant economic impact any 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 final rule will not have a significant economic impact on a 
substantial number of small credit unions. The reason for this 
determination is that the final rule reduces regulatory burden. 
Accordingly, the NCUA Board has determined that a Regulatory 
Flexibility Analysis is not required.

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 
determined that this is not a major rule.

Paperwork Reduction Act

    The application requirements in part 742 have been submitted to the 
Office of Management and Budget. Under the Paperwork Reduction Act of 
1995, no person is required to respond to a collection of information 
unless it displays a valid OMB Number. The control number will be 
displayed in the table at 12 CFR part 795.

Executive Order 13132

    Executive Order 13132 encourages independent regulatory agencies to 
consider the impact of their regulatory 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. One section of this 
final rule will lift a regulatory requirement for some federally-
insured state-chartered credit unions. However, this final rule will 
not have a substantial direct effect on the states, on the relationship 
between the national government and the states, or on the distribution 
of power and responsibilities among the various levels of government. 
NCUA has determined that the 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 final 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).

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 November 
15, 2001.
Becky Baker,
Secretary of the Board.

    For the reasons stated in the preamble, 12 CFR chapter VII is 
amended as follows:

PART 722--APPRAISALS

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

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


Sec. 722.3  [Amended]

    2. Section 722.3(a)((1) is amended by replacing the number 
``100,000'' with ``250,000'' and removing the words ``except if it is a 
business loan and then the transaction value is $50,000 or less.''

    3. 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   From what NCUA Regulations will I be exempt?
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?


[[Page 58663]]


    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 (or if a credit union 
is subject to a risk-based net worth requirement under Sec. 702.103 of 
this chapter, 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 subject to a risk-based net worth 
requirement under Sec. 702.103 of this chapter, and it does not exceed 
200 basis points over its risk based net worth level), 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  From what NCUA Regulations will I be exempt?

    RegFlex credit unions are exempt from the provisions of the 
following NCUA Regulations: Sec. 701.25, Sec. 701.32(b) and (c), 
Sec. 701.36(a), (b) and (c), Sec. 703.40(c)(6), Sec. 703.90(c), 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 federally insured 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 dissatisfied 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.
[FR Doc. 01-29152 Filed 11-21-01; 8:45 am]
BILLING CODE 7535-01-U