[Federal Register Volume 70, Number 145 (Friday, July 29, 2005)]
[Proposed Rules]
[Pages 43796-43800]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-14805]


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NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 742


Regulatory Flexibility Program

AGENCY: National Credit Union Administration (NCUA).

ACTION: Proposed rule.

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SUMMARY: The National Credit Union Administration (NCUA) seeks public 
comment on a proposal to modify the minimum net worth and CAMEL 
criteria for eligibility for NCUA's Regulatory Flexibility Program. 
Federally-insured credit unions that qualify for the Program are exempt 
in whole or in part from a series of regulatory restrictions and also 
are allowed to purchase and hold an expanded range of eligible 
obligations.

DATES: Comments must be received on or before September 27, 2005.

ADDRESSES: You may submit comments by any one of the following methods 
(Please send comments by one method only):
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     NCUA Web Site: http://www.ncua.gov/RegulationsOpinionsLaws/proposed_regs/proposed_regs.html. Follow the 
instructions for submitting comments.
     E-mail: Address to [email protected]. Include ``[Your 
name] Comments on Proposed Rule 742, RegFlex Program'' in the e-mail 
subject line.
     Fax: (703) 518-6319. Use the subject line described above 
for e-mail.
     Mail: Address to Mary Rupp, Secretary of the Board, 
National Credit Union Administration, 1775 Duke Street, Alexandria, 
Virginia 22314-3428.
     Hand Delivery/Courier: Same as mail address.

FOR FURTHER INFORMATION CONTACT: Steven W. Widerman, Trial Attorney, 
Office of General Counsel, at 703/518-6557; or Lynn K. Markgraf, 
Program Officer, Office of Examination and Insurance, at 703/518-6396.

SUPPLEMENTARY INFORMATION:

A. Background of Existing Part 742

    Effective in 2002, the NCUA Board established a Regulatory 
Flexibility Program (``RegFlex'') that exempts qualifying credit unions 
in whole or in part from a series of regulatory restrictions, and 
grants them additional powers. 12 CFR part 742; 66 FR 58656 (Nov. 23, 
2001). Under existing part 742, a credit union may qualify for RegFlex 
automatically or by application to the appropriate Regional Director.
    RegFlex Designation. To qualify automatically under the existing 
RegFlex Program, a credit union must meet two criteria. First, it must 
have a composite CAMEL rating of ``1'' or ``2'' for two consecutive 
examination cycles. Second, it also must achieve a net worth

[[Page 43797]]

ratio of 9 percent (200 basis points above the net worth ratio to be 
classified ``well capitalized'') for a single Call Reporting period, 
unless it is subject to a risk-based net worth (``RBNW'') requirement. 
12 CFR 742.1. In that case, the credit union's net worth must surpass 
its RBNW requirement by 200 basis points. As of December 31, 2004, 3457 
credit unions automatically qualified for RegFlex.
    Under existing part 742, a credit union that is unable to qualify 
for RegFlex automatically may be eligible to apply to the appropriate 
Regional Director for a RegFlex designation. To be eligible to apply, a 
credit union must have either a CAMEL rating of ``3'' or better or meet 
the 9 percent net worth criterion, but not both. 12 CFR 742.2. A credit 
union that neither has a CAMEL of ``3'' or better nor meets the net 
worth criterion is ineligible for RegFlex. A credit union that is 
eligible may be granted RegFlex relief in whole or in part, at the 
Regional Director's discretion. In 2004, four out of four applications 
for a RegFlex designation were granted.
    Once attained under current part 742, RegFlex authority can be lost 
or revoked. A credit union that qualified for RegFlex automatically is 
disqualified once it fails, as the result of an examination (but not a 
supervision contact), to meet either the CAMEL or net worth criteria in 
Sec.  742.2(a). 12 CFR 742.6. RegFlex authority can be revoked by 
action of the Regional Director for ``substantive and documented safety 
and soundness reasons.'' Sec.  742.2(b). The decision to revoke may be 
appealed to NCUA's Supervisory Review Committee,\1\ and thereafter to 
the NCUA Board. 12 CFR 742.7. In 2004, only one credit union's RegFlex 
authority was revoked, with no appeal.
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    \1\ See Interpretive Ruling and Policy Statement 95-1, 60 FR 
14795 (March 20, 1995).
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    RegFlex authority ceases when that authority is lost or revoked 
(even if an appeal of a revocation is pending). 12 CFR 742.6, 742.7. 
But past actions taken under that authority are ``grandfathered,'' 
i.e., they will not be disturbed or undone.
    RegFlex Relief. As originally adopted, the RegFlex program gave 
qualifying credit unions relief from a variety of regulatory 
restrictions, 12 CFR 742.4(a) and 742.5:
     The maximum limit on fixed assets (5 percent of shares and 
retained earnings), 12 CFR 701.36(c)(1).
     The maximum limit on non-member deposits (20 percent of 
total shares or $1.5 million, whichever is greater), 12 CFR 701.32(b).
     Conditions on making charitable contributions (relating to 
the charity's location, activities and purpose, and whether the 
contribution is in the credit union's best interest and is reasonable 
relative to its size and condition), 12 CFR 701.25.
     The maximum limit on investments over which discretionary 
control can be delegated (100 percent of credit union's net worth), 12 
CFR 703.5(b)(1)(ii) and (2).
     The maximum limit on the maturity length of zero-coupon 
securities (10 years), 12 CFR 703.16(b).
     The mandate to ``stress test'' securities holdings to 
assess the impact of a 300-basis points shift in interest rates, 12 CFR 
703.12(c) (2001).
     Restrictions on the purchase of eligible obligations, 12 
CFR 701.23(b), thus expanding the range of loans RegFlex credit unions 
could purchase and hold as long as they are loans those credit unions 
would be authorized to make (auto, credit card, member business, 
student and mortgage loans, as well as loans of a liquidating credit 
union up to 5 percent of the purchasing credit union's unimpaired 
capital and surplus).
    With the overhaul of parts 703 and 723 in 2003,\2\ RegFlex credit 
unions received further relief from the following restrictions on 
member business lending and investments:
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    \2\ See 68 FR 32960, 32966 (June 3, 2003) and 68 FR 56537, 
56542, 56553 (Oct. 1, 2003).
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     The mandate that principals personally guarantee and 
assume liability for member business loans. 12 CFR 723.7(b).
     The maturity limit on investments purchased with the 
proceeds of a borrowing repurchase transaction. 12 CFR 703.13(d)(3).
     The prohibition on purchasing a commercial mortgage 
related security that is not permitted by the Federal Credit Union Act, 
12 U.S.C. 1757(7)(E). 12 CFR 703.16(d).

B. Proposal To Modify Reg Flex Qualifying Criteria

    The NCUA Board is reassessing the RegFlex program to ensure that it 
is available to credit unions that are least likely to encounter safety 
and soundness problems, thus minimizing the risk of loss to the Share 
Insurance Fund. Experience indicates that such credit unions 
consistently maintain a high net worth ratio and a high CAMEL rating. 
Accordingly, the proposed rule modifies the RegFlex eligibility 
criteria to fully reflect sustained superior performance as measured by 
net worth and CAMEL rating.
    Net worth level. To qualify for RegFlex automatically or by 
application, existing part 742 requires a credit union to achieve a net 
worth of 9 percent--200 basis points in excess of the 7 percent net 
currently needed to be classified ``well capitalized.'' \3\ The 
proposed rule brings the net worth criterion for RegFlex into alignment 
with the ``well capitalized'' net worth category under NCUA's system of 
prompt corrective action (``PCA''). 12 U.S.C. 1790d(c)(1)(A). Congress 
determined that it is unnecessary for credit unions in that category--
the highest of the five net worth categories--to undertake any PCA 
whatsoever. The NCUA Board believes there is no reason to set a higher 
net worth standard to qualify for RegFlex than Congress has set for 
credit unions to be free of PCA. Accordingly, the proposed rule reduces 
the qualifying minimum net worth classification to ``well 
capitalized,'' requiring a minimum net worth of 7 percent under 
existing part 702.\4\ Credit unions that are subject to an RBNW 
requirement would qualify for RegFlex if they remained ``well 
capitalized'' after applying any RBNW requirement applicable under part 
702.
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    \3\ December 2004 Call Report data indicates that 73 percent of 
all RegFlex credit unions have a net worth in excess of 11 percent--
fully 200 basis points above the qualifying minimum net worth. In 
contrast, only 8.9 percent of RegFlex credit unions have a net worth 
of 9.5 percent or less--within fifty basis points of the qualifying 
minimum net worth.
    \4\ Should the minimum net worth to be classified ``well 
capitalized'' under PCA be adjusted by law, or as permitted by law, 
12 U.S.C. 1790d(c)(2), the minimum net worth to qualify for RegFlex 
would change accordingly.
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    Net worth duration. To qualify for RegFlex, existing part 742 
requires a credit union to achieve the minimum net worth for just a 
single quarter. This momentary ``snapshot'' of net worth is too 
fleeting to be evidence of sustained superior performance; only 
successive ``snapshots'' of net worth would suffice to demonstrate such 
performance. To that end, the proposed rule requires a credit union to 
meet a dual standard: to be ``well capitalized'' and to maintain that 
level for six consecutive quarters. The six-quarter period coincides 
with the eighteen-month examination schedule that applies to most 
RegFlex qualifying credit unions. A credit union that is unable to 
maintain the minimum net worth for six consecutive quarters still would 
be eligible to apply to the appropriate Regional Director for a RegFlex 
designation provided the credit union is rated a CAMEL ``2'' or better.
    The proposed rule strikes a balance--decreasing the minimum net 
worth while compensating for the relative increase in risk exposure by 
extending

[[Page 43798]]

the number of quarters that the minimum net worth must be maintained to 
qualify for RegFlex. For example, there is no limit on the amount of 
fixed assets a RegFlex credit union can acquire. 12 CFR 742.4(a). Thus, 
a RegFlex credit union is entitled to build or purchase a new building 
that increases its aggregate fixed assets to an inordinate proportion 
of total assets. If the credit union no longer qualifies for RegFlex in 
the next quarter due to a decline in net worth, the ``grandfather'' 
provision in both the existing and the proposed rule would leave intact 
all actions formerly taken under RegFlex authority. 12 CFR 742.8. That 
provision would entitle the ex-RegFlex credit union to keep the 
building, provided that it absorbs the expenses of maintenance, debt 
service and depreciation, etc., potentially having a negative affect on 
its profitability and net worth.
    Under the existing rule, the ex-RegFlex credit union would have a 
net worth cushion of at least 300 basis points against possible losses 
due to expenses of maintaining its fixed assets.\5\ But under the 
proposed rule, the net worth cushion against such losses dwindles to 
zero. Credit unions that demonstrate sustained superior performance as 
evidenced by a qualifying net worth ratio lasting over a series of 
quarters, instead of just one, are better able to prepare for and 
manage the risks to profitability and net worth. The NCUA Board invites 
public comment on what is the appropriate number of quarters the 
minimum net worth should be required to last before a credit union 
qualifies for RegFlex.
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    \5\ A net worth ratio of 6.99 percent or lower triggers the PCA 
requirement to make quarterly transfers of earnings to net worth. 12 
U.S.C. 1790d(e); 12 CFR 702.201(a). A net worth ratio of 5.99 
percent or below triggers all four PCA mandatory supervisory 
actions. 12 U.S.C. 1790d(f)-(g); 12 CFR 702.202(a).
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    Notification. Existing part 742 requires NCUA to notify a credit 
union on three occasions: when it first qualifies automatically for 
RegFlex; during an examination to confirm whether it still qualifies or 
has become ineligible; and after it applies to the appropriate Regional 
Director for a RegFlex designation. These notification requirements are 
redundant in the case of credit unions that qualify automatically for 
RegFlex. Part 742's net worth and CAMEL criteria are discrete and as 
apparent to credit unions themselves as to NCUA, making it unnecessary 
for NCUA to notify each credit union that it has qualified for RegFlex, 
and then to notify it again during successive examinations that it 
still qualifies. Accordingly, the proposed rule eliminates the 
requirement that NCUA notify credit unions that qualify automatically 
for RegFlex. But left intact is the requirement for a Regional Director 
to notify a credit union that has applied for RegFlex designation 
whether or not it has been granted.
    Other modifications. The substantive modifications to part 742 are 
limited to reducing the level and extending the duration of the minimum 
qualifying net worth, and eliminating the notification requirement for 
credit unions that qualify automatically for RegFlex. No substantive 
revisions at all are proposed for the RegFlex relief (fully described 
in section A. above) that existing part 742 provides qualifying credit 
unions. 12 CFR 742.4. However, the NCUA Board invites public comment on 
whether RegFlex credit unions should be exempt from any additional 
regulations.
    To make part 742 more user-friendly, the proposed rule makes 
several fundamental changes to the existing format. First, the proposed 
rule abandons the question-and-answer format in favor of organizing the 
rule by stated subjects. Second, in several provisions of the rule, 
items listed within narrative text have been broken out into numbered 
and subtitled lists that make individual items more accessible. E.g., 
12 CFR 742.2. Finally, in the section on RegFlex relief, instead of 
incorporating the affected regulations simply by reference to other 
sections of chapter VII, the proposed rule lists and describes the 
regulatory requirements and restrictions that RegFlex credit unions are 
exempt from, as well as the obligations they are authorized to purchase 
and hold. 12 CFR 742.4.
    Impact on Credit Unions. Were the NCUA Board to adopt the proposed 
substantive modifications, December 2004 Call Report data shows that 
3,919 credit unions would qualify for RegFlex automatically--a 13.36 
percent increase over the number of credit unions that qualify under 
existing part 742. Further, the proposed modifications would make an 
additional 462 credit unions that do not automatically qualify eligible 
to apply for a RegFlex designation.

Regulatory Procedures

Regulatory Flexibility Act

    The Regulatory Flexibility Act requires NCUA to prepare an analysis 
describing any significant economic impact a proposed regulation may 
have on a substantial number of small credit unions (those having under 
$10 million in assets). The proposed rule reduces the level and 
increases the duration of the minimum net worth required to qualify for 
RegFlex, without imposing any additional regulatory burden. If adopted, 
the proposed rule will not have a significant economic impact on a 
substantial number of small credit unions. Thus, a Regulatory 
Flexibility Analysis is not required.

Paperwork Reduction Act

    NCUA has determined that the proposed rule would 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. NCUA, an independent regulatory agency as defined in 44 
U.S.C. 3502(5), voluntarily adheres to the fundamental federalism 
principles addressed by the executive order. This proposed rule would 
not have would 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. Accordingly, this proposed rule does not constitute a 
policy that has federalism implications for purposes of the Executive 
Order.

Treasury and General Government Appropriations Act, 1999

    NCUA has determined that the proposed rule will not affect family 
well-being within the meaning of section 654 of the Treasury and 
General Appropriations Act, 1999, Pub. L. 105-277, 112 Stat. 2681 
(1998).

Agency Regulatory Goal

    NCUA's goal is to promulgate clear, understandable regulations that 
impose a minimal regulatory burden. The proposed rule seeks to improve 
and simplify the existing RegFlex Program. We request your comments on 
whether the proposed rule would be understandable and minimally 
intrusive if implemented as proposed.

List of Subjects in 12 CFR Part 742

    Credit unions, Reporting and recordkeeping requirements.

    By the National Credit Union Administration Board on July 21, 
2005.
Mary F. Rupp,
Secretary of the Board.
    For the reasons set forth above, 12 CFR part 742 is proposed to be 
revised to read as follows:

[[Page 43799]]

PART 742--REGULATORY FLEXIBILITY PROGRAM

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


Sec.  742.1  Regulatory Flexibility Program.

    NCUA's Regulatory Flexibility Program (RegFlex) exempts from all or 
part of the NCUA regulatory restrictions identified elsewhere in this 
part credit unions that demonstrate sustained superior performance as 
measured by CAMEL rating and net worth classification. RegFlex credit 
unions also are authorized to purchase and hold an expanded range of 
obligations.


Sec.  742.2  Criteria to qualify for RegFlex designation.

    (a) Automatic qualification. A credit union automatically qualifies 
for RegFlex designation, without formal notification, when it has:
    (1) CAMEL. Received a composite CAMEL rating of ``1'' or ``2'' for 
the two (2) preceding examinations; and
    (2) Net worth. Maintained a net worth classification of ``well 
capitalized'' under part 702 of this chapter for all six (6) preceding 
consecutive quarters or, if subject to a risk-based net worth (RBNW) 
requirement under part 702 of this chapter, has remained ``well 
capitalized'' for all six (6) preceding consecutive quarters after 
applying the applicable RBNW requirement.
    (b) Application for designation. A credit union that does not 
automatically qualify under paragraph (a) of this section may apply for 
a RegFlex designation, which may be granted in whole or in part upon 
notification by the appropriate Regional Director, if the credit union 
has either:
    (1) CAMEL. Received a composite CAMEL rating of ``3'' or better for 
the preceding examination; or
    (2) Net worth. Maintained a net worth classification of ``well 
capitalized'' under part 702 of this chapter for less than all six (6) 
preceding consecutive quarters or, if subject to an RBNW requirement 
under part 702 of this chapter, has remained ``well capitalized'' for 
less than all six (6) preceding consecutive quarters after applying the 
applicable RBNW requirement.


Sec.  742.3  Loss and revocation of RegFlex designation.

    (a) Loss of authority. RegFlex authority is lost when a credit 
union that qualified automatically under the CAMEL and net worth 
criteria in Sec.  742.2(a) no longer meets either of those criteria. 
Once the authority is lost, the credit union may no longer claim the 
exemptions and authority set forth in Sec.  742.4.
    (b) Revocation of authority. The Regional Director may revoke a 
credit union's RegFlex authority under Sec.  742.2, in whole or in 
part, for substantive and documented safety and soundness reasons. When 
revoking RegFlex authority, the regional director must give written 
notice to the credit union stating the reasons for the revocation. The 
revocation is effective upon the credit union's receipt of notice from 
the regional director.
    (c) Appeal of revocation. A credit union has 60 days from the date 
of the regional director's determination to revoke RegFlex authority to 
appeal the action, in whole or in part, to NCUA's Supervisory Review 
Committee. The Regional Director's determination will remain in effect 
unless and until 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 
date of the Committee's decision to appeal to the NCUA Board.
    (d) Grandfathering of past actions. Any action duly taken in 
reliance upon RegFlex authority will not be affected or undone by 
subsequent loss or revocation of that authority. Any actions exercised 
after RegFlex authority is lost or revoked must comply with all 
applicable regulatory requirements and restrictions. Nothing in this 
part shall affect NCUA's authority to require a credit union to divest 
its investments or assets for substantive safety and soundness reasons.


Sec.  742.4  RegFlex relief.

    (a) Exemptions. RegFlex credit unions are exempt from the following 
regulatory restrictions:
    (1) Charitable contributions. Sec.  701.25 of this chapter 
concerning charitable contributions;
    (2) Nonmember deposits. Sec.  701.32(b) and (c) of this chapter 
concerning the maximum amount of non-member deposits a credit union can 
accept; and
    (3) Fixed assets. Sec.  701.36(a), (b) and (c) of this chapter 
concerning the maximum amount of fixed assets a credit union can 
acquire;
    (4) Member business loans. Sec.  723.7(b) of this chapter 
concerning the personal liability and guarantee of principals for 
member business loans.
    (5) Discretionary control of investments. Sec.  703.5(b)(1)(ii) and 
(2) of this chapter concerning the maximum amount of investments over 
which discretionary control can be delegated;
    (6) ``Stress testing'' of investments. Sec.  703.12(c) of this 
chapter concerning ``stress testing'' of securities holdings to assess 
the impact of an extreme interest rate shift;
    (7) Zero-coupon securities. Sec.  703.16(b) of this chapter 
concerning the maximum maturity length of zero-coupon securities;
    (8) Borrowing repurchase transactions. Sec.  703.13(d)(3) of this 
chapter, concerning the maturity of investments a credit union 
purchases with the proceeds received in a borrowing repurchase 
transaction, provided the value of the investments that mature later 
than the borrowing repurchase transaction does not exceed 100 percent 
of the federal credit union's net worth;
    (9) Commercial mortgage related security. Sec.  703.16(d) of this 
chapter prohibiting the purchase of a commercial mortgage related 
security that is not otherwise permitted by 12 U.S.C. 1757(7)(E), 
provided:
    (i) The security is rated in one of the two highest rating 
categories by at least one nationally-recognized statistical rating 
organization;
    (ii) The security meets the definition of mortgage related security 
as defined in 15 U.S.C. 78c(a)(41) and the definition of commercial 
mortgage related security as defined in Sec.  703.2 of this chapter;
    (iii) The security's underlying pool of loans contains more than 50 
loans with no one loan representing more than 10 percent of the pool; 
and
    (iv) The aggregate total of commercial mortgage related securities 
purchased by the Federal credit union does not exceed 50 percent of its 
net worth.
    (b) Purchase of obligations from a FICU. A RegFlex credit union is 
authorized to purchase and hold the following obligations, provided 
that it would be empowered to grant them:
    (1) Eligible obligations. Eligible obligations pursuant to Sec.  
701.23(b)(1)(i) of this chapter without regard to whether they are 
obligations of its members, provided they are purchased from a 
federally-insured credit union only;
    (2) Student loans. Student loans pursuant to Sec.  
701.23(b)(1)(iii) of this chapter, provided they are purchased from a 
federally-insured credit union only;
    (3) Mortgage loans. Real-state secured loans pursuant to 
701.23(b)(1)(iv) of this chapter, provided they are purchased from a 
federally-insured credit union only;
    (4) Eligible obligations of a liquidating credit union. Eligible 
obligations of a liquidating credit union pursuant to Sec.  
701.23(b)(1)(ii) of this chapter without regard to whether they are 
obligations of the liquidating credit union's members,

[[Page 43800]]

provided that such purchases do not exceed 5 percent (5%) of the 
unimpaired capital and surplus of the purchasing credit union.

[FR Doc. 05-14805 Filed 7-28-05; 8:45 am]
BILLING CODE 7535-01-P