[Federal Register Volume 68, Number 65 (Friday, April 4, 2003)]
[Proposed Rules]
[Pages 16450-16458]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-8040]


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NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Parts 702, 704, 712, and 723


Prompt Corrective Action; Corporate Credit Unions; Credit Union 
Service Organizations; Member Business Loans

AGENCY: National Credit Union Administration (NCUA).

ACTION: Notice of proposed rulemaking.

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SUMMARY: NCUA is proposing to amend its member business loan (MBL) 
regulation by: changing certain requirements for construction and 
development loan equity requirements, personal guarantees by 
principals, and unsecured MBLs; revising and clarifying provisions 
regarding MBL aggregate loan limits, loan-to-value requirements, loans 
to credit unions and credit union service organizations (CUSOs), 
experience requirements, and MBL documentation requirements; and 
simplifying or removing confusing or unnecessary provisions in the MBL 
regulation. In addition, NCUA proposes to amend the prompt corrective 
action (PCA) rule regarding the risk weighting of MBLs and the CUSO 
rule to permit CUSOs to originate business loans.

DATES: Comments must be received on or before June 3, 2003.

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

FOR FURTHER INFORMATION CONTACT: David M. Marquis, Director, Office of 
Examination and Insurance, at the above address or telephone (703) 518-
6360; or Chrisanthy J. Loizos, Staff Attorney, Office of General 
Counsel, at the above address or telephone (703) 518-6540.

SUPPLEMENTARY INFORMATION:

A. Background

    NCUA adopted its first MBL rule in April 1987 and has subsequently 
amended the rule, including the most recent, substantive amendments 
made to conform to the limitations imposed by the Credit Union 
Membership Access Act (CUMAA). 12 U.S.C. 1757a, Pub. L. 105-219, 112 
Stat. 913 (1998). Under the current rule, the Board may exempt 
federally insured, state-chartered credit unions (FISCUs) in a state 
from NCUA's MBL rule if the Board determines the state has developed an 
MBL rule that minimizes risk and accomplishes the overall objectives of 
NCUA's rule. 12 CFR 723.20. The Board has approved seven state MBL 
rules. 7 Tex. Admin. Code Sec.  91.709; Mo. Code Regs. Ann. tit. 4, 
Sec.  100-2.045; Wash. Admin. Code Sec.  208-460-010 to -170; Md. Regs. 
Code tit. 9, Sec.  09.03.01.14; Wis. Admin. Code Sec.  72.01-.18; Conn. 
Agencies Regs. Sec.  59; Or. Admin. R. Sec.  441-720-0300 to -0380.
    In reviewing state rules, the Board has approved some rule 
provisions that relaxed some of NCUA's requirements, concluding that 
they did not create an undue risk to the National Credit Union Share 
Insurance Fund (NCUSIF). The Board believes it should amend NCUA's MBL 
rule in three areas it liberalized in approving state rules: 
construction and development loan equity requirements, personal 
guarantees by principals, and unsecured MBLs. The Board believes that, 
by incorporating these provisions and adopting certain other proposed 
amendments, NCUA's rule will allow credit unions greater opportunities 
to meet the small business loan needs of their members without creating 
undue risk to the NCUSIF. The NCUA Board will continue to be responsive 
to changes in the MBL marketplace, either by approving state specific 
rules or considering future changes to this rule.
    The Board is proposing several amendments to revise and clarify 
certain provisions that have caused confusion or created unnecessary 
regulatory burden. These amendments relate to: the dollar amount that 
triggers compliance with the rule, the loans to one borrower limit, the 
aggregate MBL limit, loan-to-value requirements, MBL documentation 
requirements, and the loan loss reserve requirements. The Board also 
proposes that credit unions that purchase participation interests in 
MBLs made to credit union members need not count the purchase against 
the credit union's own limit.
    In addition, the Board is proposing an amendment to the PCA rule 
related to business lending. The Board proposes to expand the current 
standard risk-based net worth component for MBLs in Part 702.
    Finally, the Board proposes to amend the CUSO rule to permit CUSOs 
to make business loans. During prior rulemakings, commenters asked the 
Board to authorize business loan origination as a permissible CUSO 
activity. 66 FR 40575, Aug. 3, 2001; 63 FR 10743, Mar. 3, 1998. 
Previously, the Board believed that permitting CUSOs to offer business 
loans, a core credit union function, could negatively affect affiliated 
credit union services. The Board has reconsidered its position and 
believes that, by authorizing CUSOs to engage in business loan 
origination,

[[Page 16451]]

credit union members, particularly small businesses, will have a 
greater opportunity to obtain loans that their credit union may not be 
able to grant.

B. Section-by-Section Analysis

Outstanding Loan Balance, Sections 723.1, 723.3, 723.8, 723.16, 723.21

    The Board proposes to adopt the phrase ``outstanding member 
business loan balance'' as a new definition in Sec.  723.21 and use it 
in various sections in the rule, including Sec. Sec.  723.1, 723.3, 
723.8, and 723.16. The proposed definition for ``outstanding member 
business loan balance'' is:

    [T]he outstanding loan balance and any unfunded commitments, 
excluding any portion of the loan that is secured by shares in the 
credit union, or by shares or deposits in other financial 
institutions, or by a lien on the member's primary residence, or 
fully or partially insured or guaranteed by any agency of the 
Federal Government, a State or any political subdivision of such 
state, or subject to an advance commitment to purchase by any agency 
of the federal government, a state or any political subdivision of 
such state, or sold as a participation interest without recourse.

    This definition reflects NCUA's interpretation of various 
provisions in the MBL rule since the current rule was issued and 
incorporates several exclusions derived from CUMAA. This definition is 
key to determining: whether a loan qualifies as an MBL; which portion 
of an MBL is included in the calculation of the loans to one borrower 
limit; and which portion of an MBL is included in the calculation of a 
credit union's total aggregate MBL limit.
    One example of an interpretation that the Board proposes to include 
in the definition of outstanding MBL balance concerns participation 
interests sold without recourse. The Board addressed this issue during 
the agency's 1999 MBL rulemaking in the final rule's preamble, rather 
than in the regulation's text. In the preamble, the Board agreed with a 
commenter that, when participating out loan interests, an originating 
credit union should count only the amount of the loan it holds towards 
its aggregate loan limit, provided that the loan participation sold is 
without recourse. 64 FR 28721, 28727, May 27, 1999. The Board has 
determined that the proposed rule should include this interpretation, 
as well as other interpretations and CUMAA exclusions, so that credit 
unions can easily ascertain the factors that are involved in 
calculating outstanding MBL balances.
    The Board believes the rule should use outstanding MBL balance 
throughout the rule for uniformity and to avoid confusion. Clarifying 
the use of outstanding MBL balances in the rule incorporates the 
Board's positions stated in past rulemakings and interpretations 
provided in NCUA legal opinions.
    As part of the proposal to adopt the definition of ``outstanding 
MBL balance,'' the Board also proposes to delete and reserve Sec.  
723.9, which addresses calculation of the limit on loans to one 
borrower. The proposed definition of ``outstanding MBL balance'' 
contains all of the rule's exclusions from this calculation, making 
Sec.  723.9 unnecessary.

Loan Participations

    The Board has reconsidered its position regarding the treatment of 
loan participations by purchasing credit unions and proposes to exclude 
participation interests from the calculation of the aggregate MBL 
limit. The Federal Credit Union Act expressly requires a credit union 
to include only MBLs it makes to its members in calculating its 
statutory aggregate MBL limit. 12 U.S.C. 1757a(a). Participation 
interests purchased by a credit union from an originating eligible 
organization are not loans made by the participating credit union. The 
Board, therefore, proposes that these loans need not be included in 
calculating the participating credit union's aggregate loan limits.
    The Board believes CUMAA's legislative history supports this 
interpretation as consistent with the congressional goal that credit 
unions fulfill their mission of meeting the credit and savings needs of 
consumers. Selling MBL participations without recourse permits an 
originating credit union to obtain additional liquidity enabling it to 
meet the demand for both consumer and small business loans to members. 
A credit union that purchases participation interests in loans from 
other originating lenders does so as a means of investing its excess 
funds and bases its participation decision on normal investment 
considerations, including safety and return. As a member-owned and 
controlled lender, a credit union will purchase participation interests 
only after meeting its members' own lending needs. The due diligence 
analysis by the purchasing credit union enhances the overall 
creditworthiness process in credit union business lending. In addition, 
these participations diversify the risk of MBLs within the credit union 
system, ultimately making credit unions safer and better able to meet 
the needs of both consumer and small business members.
    While the Board believes that purchased MBL participation interests 
need not be included in the aggregate loan limit, a purchased 
participation interest is a business loan asset and carries the 
associated risks. A participating credit union, therefore, must 
otherwise comply with part 723 and subject these loans to the PCA risk-
weighting standards under part 702 as though the credit union had 
originated the MBLs. This means that a participating credit union must 
have an MBL policy, employ an individual or use the services of an 
independent third-party with the requisite lending experience, perform 
the appropriate due diligence, and comply with the collateral 
requirements and loans to one borrower limit in part 723, in addition 
to all other provisions of the MBL rule when purchasing a MBL 
participation interest from any eligible organization.
    Finally, the Board notes that, in order for a participating credit 
union to exclude participation interests it has purchased, the purchase 
must be a bona fide transaction to fulfill a business purpose. The sale 
and purchase of participation interests in MBLs among credit unions 
cannot be used as a means to circumvent the regulation's aggregate loan 
limit. For example, credit unions may not enter into participation 
agreements that, in effect, permit them to swap portions or all of 
their MBL portfolios and, thereby, claim that the participation 
interests are excluded from the aggregate loan limit.

Loans to Credit Unions and CUSOs, Section 723.1

    The Board proposes to amend Sec.  723.1 to clarify that loans made 
by Federal, natural person credit unions to other natural person credit 
unions and CUSOs are not MBLs. The Federal Credit Union Act grants 
federal credit unions (FCUs) distinct, express authority to lend to 
credit unions and CUSOs, independent from their authority to make MBLs. 
12 U.S.C. 1757(5)(C), (D). While CUMAA placed limitations on a 
federally insured credit union's authority to make MBLs to members, 12 
U.S.C. 1757a, the law did not alter an FCU's authority to lend to 
credit unions or CUSOs and did not impose limits on the amount an FCU 
could lend to these entities beyond the statutory conditions that pre-
dated CUMAA. 12 U.S.C. 1757(5)(C), (D).
    The proposed rule also permits FISCUs to exclude loans to credit 
unions and CUSOs in calculating their aggregate MBL limit if the state 
supervisory authority determines that state law grants distinct 
authority to lend to credit unions and CUSOs separately from the 
authority to make MBLs. In the absence of authority similar to that in 
the Federal Credit Union Act, a FISCU's loans to credit

[[Page 16452]]

unions and CUSOs are subject to the MBL rule.
    The Board also proposes to amend NCUA's corporate credit union rule 
to conform with the MBL rule regarding loans to corporate CUSOs by 
removing the requirement that a corporate credit union's loans to 
corporate CUSOs comply with the MBL rule's aggregate loan limit. 12 CFR 
704.11(b)(4).

Construction and Development Lending, Section 723.3

    The Board proposes to lower the MBL rule's mandatory equity 
requirements for construction and development loans by requiring a 
borrower to have a minimum of a 25%, rather than a 35%, equity interest 
in any construction or land development project. Currently, the MBL 
rule requires a borrower to have a 35% equity interest or receive a 
waiver from an NCUA regional director. 12 CFR 723.3(b). The Board has 
permitted three states to lower the minimum equity interest required in 
land development loans to 30% and four states to lower the equity 
interest in loans for construction projects and combination land 
development and construction projects to 25%. It found the lowered 
equity requirements were consistent with NCUA's safety and soundness 
considerations. The Board believes an equity interest of 25% should 
provide sufficient collateral for a credit union and adequate incentive 
for a borrower to complete a project.
    The Board also proposes certain other changes related to financing 
the construction of single-family residential properties to lessen the 
regulatory burden for members engaged in this business. First, in the 
case of a loan to finance the construction of a single-family residence 
where a contract already exists between the builder, who is a member-
borrower, and a prospective homeowner, who will purchase and reside in 
the property, the Board proposes that such a loan not be subject to the 
aggregate 15% of net worth limit of Sec.  723.3(a) or the proposed new 
25% equity interest requirement. These loans would instead be subject 
to the normal MBL collateral requirements of Sec.  723.7. Second, the 
Board proposes that this same relief from the aggregate net worth limit 
and the equity interest requirement be provided for one construction or 
development loan per member-borrower or group of associated member-
borrowers for a single-family residence, irrespective of the existence 
of a contract with a prospective homeowner. The Board recognizes that 
losses in credit unions from construction and development lending have 
historically resulted from large development projects, both commercial 
and residential. The Board believes there is minimal risk in removing 
the additional regulatory requirements for those loans where a 
prospective homeowner is contractually obligated to the member-borrower 
or for one construction or development loan for a single-family 
residence per member-borrower. These proposed changes will afford added 
flexibility to insured credit unions in meeting the needs of members 
who own small businesses engaged in building individual residential 
properties.

Direct Experience Requirement, Section 723.5

    The Board proposes to make two amendments to Sec.  723.5 that 
emphasize the need for experienced and impartial individuals to 
evaluate MBLs. The rule requires credit unions to use the services of 
an individual, whether the individual is an employee or third-party 
contractor, with lending experience that is directly related to the 
type of MBLs the credit union offers. The proposed amendment provides 
that this individual must understand the complexity and risk exposure 
of the credit union's MBLs. This requirement is critical to a 
successful MBL program because of the vast array of businesses, types 
of collateral, and underwriting procedures associated with MBLs.
    The second proposed amendment provides that a credit union may 
obtain the services of a third-party to meet the direct experience 
requirements of Sec.  723.5 if the third-party has no interest or 
involvement in the MBL transaction. The independence of the third-party 
is fundamental to ensuring that the credit union performs its due 
diligence before originating an MBL or purchasing an interest in an 
MBL. The proposal provides, therefore, that the third-party may not 
have an interest in the transaction other than providing its impartial 
expertise to the credit union.

Member Business Loan Policy, Section 723.6

    The Board proposes to amend Sec.  723.6 to allow a credit union to 
adopt analysis and documentation requirements in its MBL policy that 
are appropriate for the type or types of MBLs the credit union intends 
to make. Currently, the rule requires the same documentation for every 
MBL regardless of size, business, or loan type. The Board recognizes 
that documentation and underwriting criteria for an MBL may vary 
depending on the type of business requesting the loan and type of loan 
requested.

Loan-to-Value Ratio, Section 723.7

    The Board proposes to make several amendments to this section. 
First, the Board proposes a minor technical amendment in the format of 
Sec.  723.7 by removing the chart used to establish the rule's 
collateral requirements and providing an explanation in plain English. 
Second, the Board proposes to exclude MBLs made for the purchase of 
vehicles from the rule's loan-to-value requirements if the vehicle is a 
car, van, pick-up truck, or sports utility vehicle that is used for 
commercial purposes. The Board proposes to exclude these loans because 
loans a credit union makes to purchase these vehicles for consumer use 
are not subject to the loan-to-value ratios required under the MBL rule 
and this standard represents the current business market. The Board 
believes these MBLs present little or only minimally greater risk than 
a comparable consumer loan and that credit unions should establish 
lending terms, including collateral requirements, for these loans that 
reflect best industry practices. The Board intends that this exclusion 
will be used to finance combined personal/business use vehicles and 
not, for example, to finance fleet purchases.
    The Board also proposes to remove the principal liability and 
guarantee requirement from this section. The MBL rule currently 
requires principals to provide their personal liability or guarantee on 
MBLs unless the credit union receives a waiver from its regional 
office. 12 CFR 723.7(b). The Board has approved six state rules that do 
not require guarantees by principals and NCUA's regional offices have 
approved numerous waivers allowing credit unions to make MBLs without 
requiring principal guarantees. The Board also notes that the Office of 
the Comptroller of the Currency and the Office of Thrift Supervision do 
not require national banks and savings associations to obtain a 
principal's guarantee before extending credit to a business. The Board 
recognizes that some credit unions lend to cooperative entities with 
hundreds of members, making it impractical to obtain personal 
guarantees from every principal. Credit unions may still require loan 
applicants to provide principal guarantees as a risk-reducing business 
practice.
    Finally, the Board proposes to amend this section to permit credit 
unions to make unsecured MBL loans, in addition to credit card line of 
credit programs offered to nonnatural person members, subject to 
certain limits. Under the current rule, all MBLs must be secured by 
collateral in accordance with the

[[Page 16453]]

rule's loan-to-value ratios, except for nonnatural person member credit 
cards. 12 CFR 723.7(a), (c). The Board has approved four state rules 
that permit credit unions with a net worth of at least 7% to make other 
unsecured MBLs under various conditions.
    Under the proposal, a credit union may make unsecured MBLs if: (1) 
The credit union is ``well-capitalized'' as defined in 12 CFR 
702.102(a)(1); (2) the aggregate of unsecured MBLs to one borrower does 
not exceed the lesser of $100,000 or 2.5% of the credit union's net 
worth; (3) the aggregate of all of the credit union's unsecured MBLs 
does not exceed 10% of the credit union's net worth; and (4) the credit 
union addresses unsecured loans in its written MBL policy. The Board 
also proposes that the rule permit a credit union to apply for waivers 
from the unsecured loans to one borrower limitation and the aggregate 
unsecured loan limitation under this section. In connection with adding 
these provisions to Sec.  723.10 on waivers, Sec.  723.10 has been 
reorganized and revised to make it easier to follow.

Reserves for Classified Loans, Sections 723.14 and 723.15

    The Board proposes to delete and reserve Sec. Sec.  723.14 and 
723.15, which address classification of loans for losses and reserving 
requirements. The Board recently adopted the Interpretive Ruling and 
Policy Statement on Allowance for Loan and Lease Losses (ALLL) 
Methodologies and Documentation for Federally-Insured Credit Unions 
(IRPS 02-3). 67 FR 37445, May 29, 2002. IRPS 02-3 supercedes the 
current regulatory provisions.
    IRPS 02-3 provides federally insured credit unions guidance on the 
design and implementation of ALLL methodologies and supporting 
documentation practices consistent with existing GAAP. NCUA requires 
all credit unions to follow GAAP with regard to loan loss estimates to 
meet the requirements of full and fair disclosure. 12 CFR 
702.402(d)(1). IRPS 02-3 recognizes that credit unions should adopt 
methodologies and documentation practices appropriate for their size 
and complexity. Federally insured credit unions should follow IRPS 02-3 
to develop and maintain an appropriate, systematic, and consistently 
applied process to determine the amounts of the ALLL and provisions for 
loan losses, regardless of loan type. These sections in the MBL rule 
about loan loss reserves are no longer applicable.

Standard Risk-Based Net Worth Component for MBLs

    The Board proposes to expand the current standard risk-based net 
worth component for MBLs in Part 702. For purposes of PCA, one of the 
eight risk portfolios used to calculate an applicable risk-based net 
worth (RBNW) requirement consists of a credit union's balance of 
outstanding MBLs. 12 CFR 702.104(b). The standard RBNW component 
presently divides the portfolio of MBLs by a single threshold--12.25% 
of total assets. The amount of MBLs less than or equal to that 
threshold is risk-weighted at 6%; the amount in excess of the threshold 
is risk-weighted at 14%. 12 CFR 702.106(b). To recognize finer 
increments of risk, an alternative RBNW component is available that 
divides MBLs by fixed and variable-rate and then categorizes them by 
remaining maturity among a set of four, corresponding risk-weighting 
buckets. 12 CFR 702.107(b). See Appendix D in rule text below. The 
difference in interest rate risk between variable-rate and fixed-rate 
MBLs is reflected in the two-percentage point risk-weighting discount 
that the alternative component generally gives the former compared with 
the latter.
    Among other factors, credit unions' loss experience with MBLs since 
part 702 was first enacted warrants reconsidering the risk-weighting 
schedule of the standard RBNW component. First, contrary to 
expectations, the loss history of MBLs has remained remarkably 
consistent at 0.1% net charge-offs since 1998. Second, compared to the 
standard component for long-term real estate loans, 12 CFR 702.106(a), 
the risk-weighting for MBLs arguably climbs too prematurely and too 
dramatically. According to December 2001 Call Report data, more than 
half of all MBLs are real estate loans. In view of this fact, the 
disparity in risk of loss is insufficient to justify triggering the 14% 
risk weighting at 12.25% of total assets in the case of MBLs, but at 
25% of assets in the case of long-term real estate loans. Commercial 
real estate is typically more volatile in price than residential real 
estate. In addition, if the member backs the loan with his or her 
primary residence, the loan is not an MBL. Third, it is widely 
recognized that default risk and interest rate risk generally increase 
as maturity increases, all other factors being constant. But field 
staff experience indicates that credit union MBLs generally are 
relatively short-term, maturing in 5 years or less, thereby limiting 
exposure to these risks, as demonstrated by MBLs' low loss history in 
recent years. While both real estate loans and MBLs trigger a 14% risk 
weighting at 25% of assets under this proposal, the risks being 
addressed are somewhat different. The purpose of this risk weighting 
for real estate loans is primarily to target interest rate risk, 
whereas the target for MBLs is credit risk. Finally, recent research 
indicates that credit union MBLs carry less risk, on average, than do 
analogous commercial bank loans, which are risk-weighted at a uniform 
8% regardless of percentage of total assets. 12 U.S.C. 325, Pt. 3, App 
A. See David M. Smith & Stephen A. Woodbury, Differences in Bank and 
Credit Union Capital Needs (Filene Research Institute 2001). Therefore, 
risk-weighting a middle range of the balance of MBLs at less than 14% 
would not present a material risk to the NCUSIF. On balance, these 
factors justify moderating the upward slope of the risk-weighting 
schedule for MBLs.
    Accordingly, the Board proposes to expand the standard component to 
three tiers divided by a 15% and a 25% threshold, respectively. The 
bottom tier, risk-weighted at 6%, would consist of the amount of MBLs 
less than or equal to 15% of total assets. The middle tier, risk-
weighted at 8%, would consist of the amount of MBLs greater than 15%, 
but less than or equal to 25%, of total assets. The top tier, risk-
weighted at 14%, would consist of the amount of MBLs in excess of 25% 
of total assets. This is set out in line (b) in Table 3 and Appendix A 
in rule text below.

CUSO Business Loan Origination, Section 712.5

    The Board proposes to add business loan origination to the CUSO 
regulation's list of permissible activities. 12 CFR 712.5. The Board 
believes that by authorizing CUSOs to engage in business loan 
origination, CUSOs will better serve credit union members by offering 
loans to members that their credit unions may be unable to grant. CUSOs 
are a good vehicle for these loans because the MBL rule and safe and 
sound underwriting practices require specialized lending experience.
    The MBL rule requires credit unions to use the services of an 
individual with at least two years direct experience with the type of 
loans the credit union offers. 12 CFR 723.5. The rule permits a credit 
union to use the services of a CUSO with the appropriate lending 
experience to meet this requirement. Id. As the Board noted in 1998, a 
credit union ``using the CUSO for back office business loan functions 
can use the CUSO's staff to fulfill its obligations to

[[Page 16454]]

have an experienced lender on [its] staff. * * * In other words, 
[credit unions] are permitted to leverage their members business loan 
expertise with CUSO business loan personnel.'' 63 FR 10743, 10752, Mar. 
3, 1998. The MBL and CUSO rules, therefore, have allowed CUSOs to 
engage in the mechanics of business loan origination for several years.
    Business loans require specialized lending staff, experienced in 
the due diligence and underwriting standards necessary for originating 
good loans. Many credit unions do not have the lending personnel on 
staff with the experience required to make a variety of MBLs and may 
not find it prudent to outsource this expertise. By authorizing CUSOs 
to originate business loans, credit unions can benefit from economies 
of scale by pooling their investments into a business lending CUSO, 
thus affording their small business members access to MBLs that may 
otherwise be unavailable through the credit union or other lenders. The 
Board notes, however, that credit unions cannot circumvent the intent 
of the statutory limitations placed on credit unions under CUMAA by 
purchasing an unreasonable amount of MBL participation interest from 
their CUSOs. As the Board notes above, in order for a participating 
credit union to exclude participation interests it has purchased, 
including those from a credit union organization as defined in Sec.  
701.22(a)(4), the purchase must be a bona fide transaction to fulfill a 
business purpose.

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 (those under $1 million 
in assets). The proposed amendments to the member business loan rule 
relax some of the rule's existing standards or clarify current 
requirements. In addition, most small credit unions do not grant member 
business loans. The NCUA Board, therefore, has determined and certifies 
that the proposed amendments, if adopted, will not have a significant 
economic impact on a substantial number of small credit unions. 
Accordingly, a regulatory flexibility analysis is not required.

Paperwork Reduction Act

    NCUA has determined that the proposed regulation does not increase 
paperwork requirements under the Paperwork Reduction Act of 1995 and 
regulations of the Office of Management and Budget.

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. This proposed rule 
liberalizes current requirements and standards applicable to all 
federally insured credit unions and will not have substantial direct 
effects 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 proposed rule does not constitute a policy that has 
federalism implications for purposes of the executive order.

The Treasury and General Government Appropriations Act, 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. 
2681 (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 702

    Credit unions, Reporting and recordkeeping requirements.

12 CFR Part 704

    Credit unions, Reporting and recordkeeping requirements.

12 CFR Part 712

    Credit, Credit unions.

12 CFR Part 723

    Credit, Credit unions, Reporting and recordkeeping requirements.

    By the National Credit Union Administration Board on March 27, 
2003.
Becky Baker,
Secretary of the Board.

    For the reasons stated in the preamble, NCUA proposes to amend 12 
CFR chapter VII as set forth below:

PART 702--PROMPT CORRECTIVE ACTION

    1. The authority citation for part 702 continues to read as 
follows:

    Authority: 12 U.S.C. 1766(a), 1790d.

    2. Amend Sec.  702.106 as follows:
    a. Revise paragraph (b) to read as set forth below; and
    b. Revise Table 4 following paragraph (h) to read as set forth 
below:


Sec.  702.106  Standard calculation of risk-based net worth 
requirement.

* * * * *
    (a) * * *
    (b) Member business loans outstanding. The sum of:
    (1) Six percent (6%) of the amount of member business loans 
outstanding less than or equal to fifteen percent (15%) of total 
assets;
    (2) Eight percent (8%) of the amount of member business loans 
outstanding greater than fifteen percent (15%), but less than or equal 
to twenty-five percent (25%), of total assets; and
    (3) Fourteen percent (14%) of the amount in excess of twenty-five 
percent (25%) of total assets;
* * * * *

    Table 4.--Sec.   702.106 Standard Calculation of RBNW Requirement
------------------------------------------------------------------------
                                       Amount of risk
                                        portfolio (as
                                     percent of quarter-       Risk
          Risk portfolio            end total assets) to     weighting
                                      be multiplied by
                                       risk weighting
------------------------------------------------------------------------
(a) Long-term real estate loans...  0 to 25.00%.........            .06
                                    over 25.00%.........            .14
(b) MBLs outstanding..............  0 to 15.00%.........            .06
                                    15.00% to            .08
                                     25.00%.                        .14
                                    over 25.00%.........

[[Page 16455]]

 
(c) Investments (by weighted-       0 to 1 year.........            .03
 average life):.                    1 year to            .06
                                     3 years.                       .12
                                    3 years              .20
                                     to 10 years.
                                    10 years.
(d) Low-risk assets...............  All %...............            .00
(e) Average-risk assets...........  All %...............            .06
(f) Loans sold with recourse......  All %...............            .06
(g) Unused MBL commitments........  All %...............            .06
(h) Allowance.....................  Limited to                    (1.00) 
                                     equivalent of 1.50%
                                     of total loans
                                     (expressed as a
                                     percent of total
                                     assets).
------------------------------------------------------------------------
A credit union's RBNW requirement is the sum of eight standard
  components. A standard component is calculated for each of the eight
  risk portfolios, equal to the sum of each amount of a risk portfolio
  times its risk weighting. A credit union is classified
  ``undercapitalized'' if its net worth ratio is less than its
  applicable RBNW requirement.

    3. Revise Appendix A to Subpart A of Part 702 to read as follows:

                                      Appendix A.--Example Standard Components for RBNW Requirement, Sec.   702.106
                                                              [Example calculation in bold]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                           Amount  times
                                                                          Amount as  percent of  quarter-      Risk            risk          Standard
             Risk portfolio                      Dollar  balance                 end  total assets           weighting       weighting       component
                                                                                                                             (percent)       (percent)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Quarter-end total assets...............  200,000,000                      100.0000
----------------------------------------
(a) Long-term real estate loans........  60,000,000                       30.0000=                        ..............  ..............           2.20
    Threshold amount: 0 to 25%           ...............................  25.0000                                   .06           1.5000
    Excess amount: over 25%              ...............................  5.0000                                    .14           0.7000
----------------------------------------
(b) MBLs outstanding...................  35,000,000                       17.5000                         ..............  ..............           1.10
    Threshold amount: 0 to 15%           ...............................  15.0000                                   .06           0.9000
    Intermediate tier: 15% to 25%        ...............................  2,5000                                    .08           0.2000
    Excess amount: over 25%              ...............................  0.0                                       .14           0.0
----------------------------------------
(c) Investments........................  50,000,000=                      25.0000=                        ..............  ..............           1.51
Weighted-average life:
    0 to 1 year                          24,000,000                       12.0000                                   .03           0.3600
    1 year to 3 years         15,000,000                       7.5000                                    .06           0.4500
    3 years to 10 years       10,000,000                       5.0000                                    .12           0.6000
    10 years                  1,000,000                        0.5000                                    .20           0.1000
----------------------------------------
(d) Low-risk assets....................  4,000,000                        2.0000                                    .00   ..............           0
----------------------------------------
Sum of risk portfolios (a) through (d)   149,000,000                      74.5.000                        ..............
 above.
----------------------------------------
(e) Average-risk assets................  51,000,000                       25.5000 \a\                               .06   ..............           1.53
(f) Loans sold with recourse...........  40,000,000                       20.0000                                   .06   ..............           1.20
(g) Unused MBL commitments.............  5,000,000                        2.5000                                    .06   ..............           0.15
----------------------------------------
(h) Allowance..........................  2,040,000.00 \b\                 1.0200                                  (1.00)  ..............          (1.02)
----------------------------------------
Sum of standard components: RBNW         ...............................  ..............................  ..............  ..............           6.67
 requirement \c\
--------------------------------------------------------------------------------------------------------------------------------------------------------
\a\ The Average-risk assets risk portfolio percent of quarter-end total assets equals 100 percent minus the sum of the percentages in the four risk
  portfolios above i.e., Long-term real estate loans, MBLs outstanding, Investments, and Low-risk assets).
\b\ The Allowance risk portfolio is limited to the equivalent of 1.50 percent of total loans. For an example computation of the permitted dollar balance
  of Allowance, see worksheet in Appendix B below.
\c\ A credit union is classified ``undercapitalized'' if its net worth ratio is less than its applicable RBNW requirement. The dollar equivalent of RBNW
  requirement may be computed for informational purposes as the RBNW requirement percent of total assets.

    4. Revise Appendix D to Subpart A of Part 702 to read as follows:

[[Page 16456]]



              Appendix D--Example of Member Business Loans Alternative Component, Sec.   702.107(b)
                                          [Example calculation in bold]
----------------------------------------------------------------------------------------------------------------
                                                                 Dollar     Percent of
                                                               balance of     total     Alternative  Alternative
                     Remaining maturity                         MBLs by     assets by       risk      component
                                                               remaining    remaining    weighting    (percent)
                                                                maturity     maturity
----------------------------------------------------------------------------------------------------------------
Fixed-rate MLBs 0 to 3 years................................    6,000,000       3.0000          .06       0.1800
 3 years to 5 years..............................    4,000,000       2.0000          .09       0.1800
 5 years to 7 years..............................    2,000,000       1.0000          .12       0.1200
 7 years to 12 years.............................            0       0.0000          .14       0.0000
 12 years........................................            0       0.0000          .16       0.0000
Variable-rate MBLs 0 to 3 years.............................   17,000,000       8.5000          .06       0.5100
 3 years to 5 years..............................    4,000,000       2.0000          .08       0.1600
 5 years to 7 years..............................    2,000,000       1.0000          .10       0.1000
 7 years to 12 years.............................            0       0.0000          .12       0.0000
12 years.........................................            0       0.0000          .14       0.0000
Sum of above equals Alternative component*..................  ...........  ...........  ...........        1.25
----------------------------------------------------------------------------------------------------------------
* Substitute for standard component if lower.

    5. Revise Appendix H to Subpart A of Part 702 to read as follows:

                       Appendix H.--Example RBNW Requirement Using Alternative Components
                                          [Example calculation in bold]
----------------------------------------------------------------------------------------------------------------
                                                                                            In percent
                                                                                 -------------------------------
                                                                     Standard                        Lower of
                         Risk portfolio                              component      Alternative     standard or
                                                                                     component      alternative
                                                                                                     component
----------------------------------------------------------------------------------------------------------------
(a) Long-term real estate loans.................................            2.20            2.85           2.20
(b) MBLs outstanding............................................            1.10            1.25           1.10
(c) Investments.................................................            1.51            1.37           1.37
(f) Loans sold with recourse....................................            1.20            1.03           1.03
(d) Low-risk assets.............................................  ..............  ..............       \1\ 0
(e) Average-risk assets.........................................  ..............  ..............       \1\ 1.53
(g) Unused MBL commitments......................................  ..............  ..............       \1\ 0.15
(h) Allowance...................................................  ..............  ..............      \1\ (1.02)
RBNW requirement \2\ Compare to Net Worth Ratio.................  ..............  ..............       \1\ 6.53
----------------------------------------------------------------------------------------------------------------
\1\ Standard components.
\2\ A credit union is ``undercapitalized'' if its net worth ration is less than its applicable RBNW requirement.

PART 704--CORPORATE CREDIT UNIONS

    6. The authority citation for part 704 is revised to read as 
follows:

    Authority: 12 U.S.C. 1766(a), 1781, 1789.

    7. Amend Sec.  704.7 paragraph (e)(2) by revising the sentence as 
follows:


Sec.  704.7  Lending.

* * * * *
    (e) * * *
    (2) Corporate CUSOs are not subject to part 723 of this chapter.
* * * * *
    8. Amend Sec.  704.11 by removing paragraph (b)(4).

PART 712--CREDIT UNION SERVICE ORGANIZATIONS (CUSOs)

    9. The authority citation for part 712 continues to read as 
follows:

    Authority: 12 U.S.C. 1756, 1757(5)(D) and (7)(I), 1766, 1782, 
1784, 1785, and 1786.

    10. In Sec.  712.5, redesignate paragraphs (c) to (q) as paragraphs 
(d) to (r) and add new paragraph (c) to read as follows:
    (c) Business loan origination;

PART 723--MEMBER BUSINESS LOANS

    11. The authority citation for part 723 continues to read as 
follows:

    Authority: 12 U.S.C. 1756, 1757, 1757A, 1766, 1785, 1789.

    12. Amend Sec.  723.1 as follows:
    a. Add the phrase ``the outstanding member business loan balances 
are'' after the word ``when'' in paragraph (b)(3);
    b. Add paragraphs (c) and (d).


Sec.  723.1  What is a member business loan?

* * * * *
    (c) Loans to credit unions and credit union service organizations. 
This part does not apply to loans made by federal credit unions to 
credit unions and credit union service organizations. This part does 
not apply to loans made by a federally insured, state-chartered credit 
union to credit unions and credit union service organizations if the 
credit union's state supervisory authority determines that state law 
grants independent authority to lend to these entities.
    (d) Loan participations. Any interest obtained in participation 
loans is excluded from a purchasing credit union's aggregate member 
business loan limit, but the purchasing credit union must otherwise 
comply, as if it had originated the loan, with both the requirements of 
this part and the risk-weighting standards under part 702 of this 
chapter.

[[Page 16457]]

    13. Amend Sec.  723.3 by revising paragraph (a) and paragraph (b) 
to read as follows:


Sec.  723.3  What are the requirements for construction and development 
lending?

* * * * *
    (a) The aggregate of the outstanding member business loan balances 
for all construction and development loans must not exceed 15% of net 
worth. In determining the aggregate balances for purposes of this 
limitation, a credit union may exclude any loan made to finance the 
construction of a single-family residence if a prospective homeowner 
has contracted to purchase and reside in the property and may also 
exclude a loan to finance the construction of one single-family 
residence per member-borrower or group of associated member-borrowers, 
irrespective of the existence of a contractual commitment from a 
prospective homeowner to purchase and reside in the property.
    (b) The borrower must have a minimum of 25% equity interest in the 
project being financed, except that this requirement shall not apply in 
the case of a loan made to finance the construction of a single-family 
residence if a prospective homeowner has contracted to purchase and 
reside in the property and in the case of one loan to a member-borrower 
or group of associated member-borrowers to finance the construction of 
a single-family residence, irrespective of the existence of a 
contractual commitment from a prospective homeowner to purchase and 
reside in the property. Instead, the collateral requirements of Sec.  
723.7 shall apply; and
* * * * *


Sec.  723.5  [Amended]

    14. Amend Sec.  723.5 as follows:
    a. Add the following sentence after the word ``in'':
    The experience should provide the credit union sufficient expertise 
given the complexity and risk exposure of the loans in which the credit 
union intends to engage.
    b. Add the following sentence after the word ``parties'':
    Any third-party used by a credit union to meet the requirements of 
this section must be independent from the transaction and may not 
benefit from the making of the loan or the sale of a participation 
interest which the third-party is hired to review, except to the extent 
of providing a service to the credit union.


Sec.  723.6  [Amended]

    15. Amend Sec.  723.6 as follows:
    a. Add the phrase ``secured and unsecured'' before the word 
``business'' in paragraph (c);
    b. Add ``Sec.  723.7(b)(2) and'' after the words ``subject to'' in 
paragraph (e);
    c. Add the phrase ``consistent with appropriate underwriting and 
due diligence standards, which also addresses the need for periodic 
financial statements, credit reports, and other data when necessary to 
analyze future lines of credit, such as, borrower's history and 
experience, balance sheet, cash flow analysis, income statements, tax 
data, environmental impact assessment, and comparison with industry 
averages, depending upon the loan purpose'' after the word ``loan'' in 
paragraph (g);
    d. Remove paragraphs (h) and (i) and redesignate paragraphs (j) to 
(m) as (h) to (k).
    16. Amend Sec.  723.7 by revising paragraph (a) and paragraph (b), 
and by adding paragraph (d) to read as follows:


Sec.  723.7  What are the collateral and security requirements?

    (a) Unless your Regional Director grants a waiver, all member 
business loans, except those made under paragraphs (b), (c), and (d), 
must be secured by collateral as follows:
    (1) The minimum loan-to-value ratio for all liens must not exceed 
80% unless the value in excess of 80% is covered through private 
mortgage insurance or equivalent type of insurance, or insured, 
guaranteed, or subject to advance commitment to purchase by an agency 
of the federal government, an agency of a state or any of its political 
subdivisions, but in no case may the ratio exceed 95%;
    (2) A borrower may not substitute any insurance, guarantee, or 
advance commitment to purchase by any agency of the federal government, 
a state or any political subdivision of such state for the collateral 
requirements of this paragraph.
    (b) You may make unsecured member business loans under the 
following conditions:
    (1) You are well-capitalized as defined by Sec.  702.102(a)(1) of 
this chapter;
    (2) The aggregate of the unsecured outstanding member business 
loans to any one member or group of associated members does not exceed 
the lesser of $100,000 or 2.5% of your net worth; and
    (3) The aggregate of all unsecured outstanding member business 
loans does not exceed 10% of your net worth.
* * * * *
    (d) Federally insured credit unions may make vehicle loans under 
this part without complying with the loan-to-value ratios in this 
section, provided that the vehicle is a car, van, pick-up truck, or 
sports utility vehicle.
    17. Amend Sec.  723.8 by adding the words ``loan balances'' after 
the word ``business'' and removing the word ``loans (including any 
unfunded commitments).''
    18. Remove and reserve Sec.  723.9.
    19. Revise Sec.  723.10 to read as follows:


Sec.  723.10  What waivers are available?

    You may seek a waiver for a category of loans in any of the 
following areas:
    (a) Appraisal requirements under Sec.  722.3;
    (b) Aggregate construction and development loans limits under Sec.  
723.3(a);
    (c) Minimum borrower equity requirements for construction and 
development loans under Sec.  723.3(b);
    (d) Loan-to-value ratio requirements for business loans under Sec.  
723.7(a);
    (e) Maximum unsecured business loans to one member or group of 
associated members under Sec.  723.7(b)(2);
    (f) Maximum aggregate unsecured member business loan limit under 
Sec.  723.7(b)(3); and
    (g) Maximum aggregate outstanding member business loan balance to 
any one member or group of associated members under Sec.  723.8.
    20. Remove and reserve Sec.  723.14.
    21. Remove and reserve Sec.  723.15.
    22. Revise the first sentence of Sec.  723.16 as follows:


Sec.  723.16  What is the aggregate member business loan limit for a 
credit union?

    The aggregate limit on a credit union's outstanding member business 
loan balances, excluding any interest obtained in participation loans, 
is the lesser of 1.75 times the credit union's net worth or 12.25% of 
the credit union's total assets. * * *
    23. Add the following definition to Sec.  723.21:


Sec.  723.21  Definitions.

* * * * *
    Outstanding Member Business Loan Balance means the outstanding loan 
balance and any unfunded commitments, excluding any portion of the loan 
that is secured by shares in the credit union, or by shares or deposits 
in other financial institutions, or by a lien in the member's primary 
residence, or fully or partially insured or guaranteed by any agency of 
the Federal Government, a state or any political subdivision of such 
state, or subject to an advance commitment to purchase by any agency of 
the federal government, a state or any political subdivision of such

[[Page 16458]]

state, or sold as a participation interest without recourse.

[FR Doc. 03-8040 Filed 4-3-03; 8:45 am]
BILLING CODE 7535-01-P