[Federal Register Volume 73, Number 85 (Thursday, May 1, 2008)]
[Proposed Rules]
[Pages 23982-23988]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-9457]


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 Proposed Rules
                                                 Federal Register
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 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
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  Federal Register / Vol. 73, No. 85 / Thursday, May 1, 2008 / Proposed 
Rules  

[[Page 23982]]



NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Parts 712 and 741

RIN 3133-AD20


Credit Union Service Organizations

AGENCY: National Credit Union Administration (NCUA).

ACTION: Proposed rule.

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SUMMARY: NCUA proposes to change its credit union service organization 
(CUSO) rule by adding two new categories of permissible CUSO 
activities: Credit card loan origination and payroll processing 
services. The proposal would also add new examples of permissible CUSO 
activities within existing categories and would expand the scope of two 
categories of services to include persons eligible for credit union 
membership. The proposal would impose new regulatory limits on the 
ability of credit unions to recapitalize their CUSOs in certain 
circumstances. While the CUSO rule generally only applies to federal 
credit unions (FCUs), the proposal would revise and extend to all 
federally insured credit unions the provisions ensuring that credit 
union regulators have access to books and records and that CUSOs are 
operated as separate legal entities. The proposal would also clarify 
that CUSOs may buy and sell participations in loans they are authorized 
to originate under the current rule. Finally, NCUA proposes to delete 
as unnecessary the section in the current rule concerning amendment 
requests. These amendments will clarify the rule while enhancing CUSO 
operations and addressing safety and soundness concerns.

DATES: Comments must be received on or before June 30, 2008.

ADDRESSES: You may submit comments by any 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 712, CUSO Amendments'' 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: Ross P. Kendall, Staff Attorney, 
Office of General Counsel, at the above address or telephone (703) 518-
6540.

SUPPLEMENTARY INFORMATION:

A. Background

    FCUs have the authority to lend up to 1% of their paid-in and 
unimpaired capital and surplus and to invest an equivalent amount in 
credit union organizations. 12 U.S.C. 1757(5)(D), (7)(I). NCUA 
regulates this FCU lending and investing authority in the CUSO rule. 12 
CFR Part 712. The CUSO rule permits an FCU to invest in or lend to a 
CUSO only if the CUSO primarily serves credit unions, its membership, 
or the membership of credit unions contracting with the CUSO. 12 CFR 
712.3(b).
    NCUA's policy is to review its regulations periodically to 
``update, clarify and simplify existing regulations and eliminate 
redundant and unnecessary provisions.'' Interpretive Ruling and Policy 
Statement (IRPS) 87-2, Developing and Reviewing Government Regulations. 
NCUA notifies the public about the review, which is conducted on a 
rolling basis so that a third of its regulations are reviewed each 
year. These proposed changes are, in part, a result of NCUA's 2007 
review under IRPS 87-2, which covered the middle third of the 
regulations, including part 712. The proposed changes are intended to 
update and clarify the regulation.

B. Proposed Changes

Expanding the Scope of Certain Services To Include Persons Within the 
Field of Membership

    In October 2006, Congress enacted the Financial Services Regulatory 
Relief Act of 2006 (Reg Relief Act), which amended section107(12) of 
the FCU Act to permit FCUs to provide certain financial services to 
persons within their fields of membership. The Reg Relief Act also 
amended the FCU Act to extend the general lending maturity limit for 
FCUs from 12 years to 15 years. Public Law 109-351, sections 502-503, 
120 Stat. 1966 (2006). On October 19, 2006, the NCUA Board issued an 
interim final rule to implement these provisions. 71 FR 62875 (October 
27, 2006). The Board made the interim rule permanent effective March 
26, 2007. 72 FR 7927 (February 22, 2007).
    Legislative history of the Reg Relief Act indicates that Congress 
intended to allow FCUs ``to sell negotiable checks, money orders, and 
other similar transfer instruments, including international and 
domestic electronic fund transfers, to anyone eligible for membership, 
regardless of their membership status.'' S. Rpt. 109-256, p. 5; H. Rpt. 
109-356 Part 1, p. 63. The Board believes the enactment of that law 
warrants a parallel expansion in the CUSO rule, since an FCU may elect 
to provide some or all of these types of services through the vehicle 
of a CUSO.
    The current CUSO rule provides that CUSOs must ``primarily'' serve 
credit unions or their members. 12 CFR 712.3(b). The rule is founded on 
language in the FCU Act permitting FCUs to lend to service 
organizations established primarily to serve the needs of credit unions 
and whose business relates to the daily operation of credit unions. 12 
U.S.C. 1757(5)(D). A similar constraint is contained in the investment 
authority: CUSOs must provide services ``associated with the routine 
operations of credit unions.'' 12 U.S.C. 1757(7)(I). Insofar as the Reg 
Relief Act has expanded the scope of FCU operations by authorizing 
certain money transfer services to be provided to persons eligible for 
membership, the Board believes it prudent to make a similar adjustment 
to the ``primarily serves'' governor applicable to CUSOs. Services 
covered in the Reg Relief Act correspond to the checking and

[[Page 23983]]

currency services and the electronic transaction services categories in 
the CUSO rule. Accordingly, the Board proposes to amend 712.3(b) to 
specify that FCUs may lend to or invest in CUSOs providing services 
under these two categories so long as the CUSO primarily provides them 
to persons within the FCU's field of membership, or to persons eligible 
for membership in credit unions with which the CUSO has contracts.

Credit Card Loan Origination

    The Board is proposing to permit CUSOs to originate and hold credit 
card loans as a principal on its own behalf or on behalf of credit 
unions. As far as lending, the current CUSO rule permits CUSOs to 
engage in consumer mortgage lending, business lending and student 
lending. Generally, NCUA has permitted CUSOs to engage in loan 
origination where a degree of expertise is required to be successful, 
such as business, student and real estate lending, and that expertise 
may not be attainable by many individual credit unions. See, e.g., 63 
FR 10743, 10752 (March 5, 1998). NCUA believes credit card origination 
also requires a degree of specialization and expertise to succeed and 
the proposal will permit credit unions to collaborate and pool 
resources and expertise through the vehicle of a CUSO. Accordingly, the 
Board believes credit card origination should be an approved CUSO 
activity.
    Credit unions administering their own credit card programs 
encounter substantial risks and burdens. Thin margins and competitive 
pricing characterize the credit card business at the prime end of the 
market and a small number of banks with nationwide operations dominate 
the business. Permitting FCUs to use a CUSO to manage their card 
programs will help credit unions to manage that risk.
    CUSOs are already engaged in providing various types of card 
processing and related services. The expansion is also consistent with 
an underlying principle of the CUSO rule, which is to foster and 
support the development of expertise in a particular line of business 
to a degree that is often unattainable at the individual credit union 
level. The amendment would combine the scale, expertise, and back 
office operational support required to be successful in the credit card 
business.
    Many credit unions have found it difficult to manage their credit 
card business successfully and have elected to sell that business to 
other financial institutions. In many cases, credit unions that have 
sold their business to another institution but retained an affinity 
association with the cards find that service levels and consumer 
support are not as good as the credit union had expected. In addition, 
in some cases the financial institution cross-markets other products 
and services to the cardholders and sometimes succeeds in drawing other 
business away from the credit union. Even if the acquiring institution 
allows a credit union to remain associated with the card, its earnings 
on the card business will be significantly reduced. The Board believes 
this amendment will provide an alternative for credit unions interested 
in selling their credit card business.
    The CUSO rule, implementing a statutory limitation, prohibits a 
CUSO from acquiring control, directly or indirectly, of a depository 
financial institution so an FCU seeking to establish a CUSO for credit 
card origination cannot fund its operation by receiving deposits. 12 
U.S.C. 1757(7)(I); 12 CFR 712.6. In addition, the Board notes that 
NCUA's loan participation rule would not support the sale to FCUs of 
participation interests in a credit card portfolio, which consists of 
open-end, revolving credit.

Applicability of Select CUSO Rule Provisions to Federally Insured 
Credit Unions

    Currently, the CUSO rule only applies to FCUs but the Board is 
proposing to have two particular provisions addressing safety and 
soundness considerations apply to federally insured, state chartered 
credit unions (FISCUs), namely, the provision requiring a CUSO's 
agreement to permit NCUA to have access to its books and records and 
the provision requiring investing FCUs to take steps to ensure the CUSO 
maintains corporate separateness. 12 CFR 712.3(d)(3), 712.4. While NCUA 
has the authority under the FCU Act to impose regulatory requirements 
on FISCUs, 12 U.S.C. 1781-1790d, it works cooperatively with state 
supervisory authorities in exercising this authority and generally only 
regulates where there are safety and soundness concerns.
    The Board proposes to amend subpart B of part 741 of its rules to 
add a new section specifying that FISCUs must adhere to the 
requirements in Sec.  712.3(d)(3) and Sec.  712.4. The proposed 
amendment would specify that a CUSO is any entity in which a credit 
union has an ownership interest or to which a credit union has extended 
a loan and that is engaged primarily in providing products or services 
to credit unions or credit union members. This provision follows the 
approach taken by NCUA in defining a CUSO for FCU investment and loan 
purposes. As discussed above, based on changes made by the Reg Relief 
Act, the Board is proposing to expand the CUSO definition to include, 
in the case of check cashing and money transfer services, entities that 
primarily serve individuals eligible for credit union membership. The 
Board proposes to incorporate this concept into this section of the 
rule as well by specifying that CUSOs that provide these types of 
services fall within the scope of the rule if the services are provided 
primarily to credit unions or individuals who are eligible for 
membership in credit unions having a loan, investment or contract with 
the CUSO.
    Some state laws may authorize FISCUs to lend to or invest in 
entities that are not primarily engaged in serving credit unions, 
credit union members, or persons eligible for membership, and the rule 
would not apply in these cases. The Board anticipates that entities 
that are not primarily engaged in serving credit unions or their 
members will not present the types of safety and soundness and systemic 
risks about which it is most concerned. Comment is solicited on 
possible other approaches to describing the scope of the rule. In 
addition, the Board proposes to revise the last sentence in Sec.  
712.1, which currently states that Part 712 has no applicability to 
FISCUs or their subsidiaries that do not have FCU investments or loans.
    FISCUs are exposed to significant potential safety and soundness 
and reputation risks based on their relationship with their CUSOs. 
Although NCUA has the right to examine books and records belonging to a 
FISCU, it does not enjoy a similar right concerning access to the books 
and records of the CUSO. Without that access, NCUA cannot thoroughly 
and accurately evaluate CUSO risks to FISCUs and, ultimately, the risk 
to the National Credit Union Share Insurance Fund. The Board notes, in 
this respect, that not all states impose the same type of relatively 
strict investment limits in the FCU Act, which limit FCU investment in 
all CUSOs to one percent of unimpaired capital and surplus. 12 U.S.C. 
1757(7)(I). Similarly, not all states limit the types of activities in 
which a CUSO may engage. Further, without some assurance that the FISCU 
is insulated from claims that might be asserted against its CUSO, there 
is risk that the FISCU could lose more than the value of its investment 
in its CUSO.
    NCUA experience with several FISCUs that own CUSOs presenting 
significant exposure to potential loss supports this amendment. There 
are

[[Page 23984]]

CUSOs, for example, that have used extensive leveraging from non-credit 
union sources to fund commercial loans. In turn, credit unions often 
buy participations in these loans, sometimes without having conducted 
an adequate due diligence themselves. Other CUSOs are engaging in loan 
origination despite being thinly capitalized, presenting risk to the 
credit union that losses or affirmative liability sustained by the CUSO 
will pass to them. If the CUSO should become bankrupt or insolvent, 
losses to those credit unions holding participation interests in loans 
the CUSO originated and serviced could also result. In other cases, 
CUSOs may be used by the credit union to develop an undue concentration 
of loans in a particular business segment or geographic area. This 
presents reputation risk to the credit union, especially if significant 
defaults arise and foreclosures become necessary. CUSOs may also engage 
directly in lines of business that present risks, such as a trust 
business or mortgage or commercial loan origination.
    The Board understands and acknowledges that the degree of risk to a 
FISCU depends on several factors, including the nature of the services 
its CUSO provides and the relative extent of the CUSO's involvement in 
the credit union's overall business. For example, the Board is 
substantially more concerned about a CUSO that originates mortgage and 
business loans than one that provides backroom management or 
operational support. CUSOs engaging in widespread sale of participation 
interests and providing loan servicing on behalf of a significant 
number of credit unions present potential systemic risks that the Board 
believes warrant direct monitoring. NCUA solicits the views of 
commenters about ways to isolate and address this type of risk without 
unduly burdening the industry or unnecessarily covering all CUSO 
relationships. For example, it may make sense to identify types of 
business or degrees of market penetration as conditions for 
applicability of the rule.
    The Board is aware a FISCU may be required to maintain an 
investment in an entity to receive services at optimal terms and rates, 
but in which the credit union's share of the overall business of that 
entity is relatively minor. In such cases, the credit union may not 
have enough influence or involvement with the entity to be able to 
require its consent to access to books and records by NCUA. The Board 
solicits input from the public about ways to address this circumstance, 
such as by creating a minimum investment threshold for applicability of 
the rule.
    Finally, the Board is aware some states may already have rules or 
requirements governing corporate separateness between FISCUs and their 
CUSOs. The Board solicits input from the public about whether the rule 
ought to include a provision, similar to that which exists in NCUA's 
member business lending rule, by which states could demonstrate that 
compliance with an existing state rule adequately addresses the 
liability concerns present in this context. Also, the proposed 
amendment states expressly that it does not preempt any applicable 
state law or regulation that currently authorizes a state credit union 
regulatory authority (SSA) to review a CUSO's books and records or to 
conduct an examination of the CUSO.
    Reciprocity. As the discussion above documents, the right of access 
to books and records of CUSOs is an important tool in assuring safety 
and soundness. The Board understands, however, that not every SSA 
enjoys a right of access to books and records of CUSOs in which FISCUs 
chartered by that state have an investment or other relationship. There 
may also be cases in which a FISCU has only a contractual relationship 
with a CUSO but does not have either a loan to or an investment in the 
CUSO, which may be owned exclusively by one or more FCUs.
    To address this circumstance, the Board proposes to change Sec.  
712.3(d)(3) to require the credit union's agreement with the CUSO to 
permit access not only to NCUA but also to any SSA having supervisory 
responsibility over any FISCU that has a loan, an investment, or a 
contractual agreement for products or services with the CUSO. This will 
assure that an SSA with responsibility for a credit union has the 
opportunity to review and evaluate the risk to which its institutions 
may be exposed. Even though NCUA enjoys a cooperative relationship with 
all SSAs and typically shares relevant information with them, the Board 
recognizes there may be circumstances in which access to books and 
records is useful or necessary for the SSA. At the same time, the Board 
does not anticipate that extending the rule in this way will result in 
an inordinate number of requests for access by SSAs to CUSO books and 
records.
    Transition Period for Compliance. The Board acknowledges that it 
will take some time for FISCUs to develop and enter agreements with 
their CUSOs and to obtain legal opinions addressing corporate 
separateness issues. The Board also recognizes that FCUs with loans to 
or investments in CUSOs will be required under this proposal to make 
changes in the agreements they currently have with their CUSOs. The 
Board proposes to establish a compliance date for each of these changes 
that is not earlier than six months following the date of publication 
of the final rule in the Federal Register. Accordingly, the proposed 
rule changes reflect this compliance date.

Recapitalization of Insolvent CUSOs

    Under certain circumstances, an FCU may consider re-capitalizing a 
CUSO that has become insolvent because it determines the investment is 
prudent, even though some portion of the amount invested in the 
recapitalization effort may have no book value for the FCU.
    The Board believes the risks inherent in this situation warrant an 
amendment to the CUSO rule that would apply in cases in which an FCU is 
already less than adequately capitalized or where the recapitalization 
of the CUSO would render the FCU less than adequately capitalized under 
NCUA's prompt corrective action (PCA) rules. 12 CFR Part 702. In either 
case, an FCU contemplating such an investment would be required to 
obtain approval in advance from the appropriate NCUA regional director 
if the investment would result in an aggregate cash outlay, measured on 
a cumulative basis (regardless of how the investment is valued for 
accounting purposes) in an amount in excess of one percent of the 
credit union's paid in and unimpaired capital and surplus.
    This amendment would minimize the likelihood, which is possible 
under the current rule, that an FCU may be investing, on an aggregate 
basis, more than one percent of its capital in a CUSO. The amendment 
would also prevent an FCU from continuing to invest in an entity that 
has become a lost cause. NCUA has had specific experience with credit 
unions that have elected to invest additional funds with CUSOs that 
have experienced losses. That decision calls for business judgment and 
is, in most cases, within the discretion of the board of directors. 
Where, however, the proposed investment would change the credit union's 
PCA rating to less than adequate, or where the credit union is already 
in a less than adequately capitalized condition, the Board believes 
prior notice to and approval from NCUA is appropriate.

Amendment Requests

    The current rule has a section outlining a process by which the 
NCUA Board can consider approval for a CUSO activity not currently 
preapproved. 12

[[Page 23985]]

CFR 712.7. This section provides that NCUA will consider a request to 
be a petition to amend the rule and indicates the agency will solicit 
public comment or otherwise act on the request within sixty days. This 
provision, which dates to 1986, was brought over intact from the prior 
version of the rule when NCUA conducted a wholesale review and revision 
of the rule in 1998. 63 FR 10743, 10754 (March 5, 1998). Although NCUA 
staff receive numerous inquiries about whether a particular CUSO 
activity is already within one of the preapproved categories, NCUA has 
received only one formal request to amend the rule, which the Board 
rejected. In addition, since the 1998 amendment of the CUSO rule, NCUA 
adopted a change to its rule and policy on promulgation of regulations 
to include a general provision on the procedures by which members of 
the public may petition the NCUA Board for the issuance, amendment or 
repeal of any rule. 12 CFR 791.8(c); Interpretive Ruling and Policy 
Statement 87-2 as amended by Interpretive Ruling and Policy Statement 
03-2. Accordingly, the Board believes the amendment provisions 
described in Sec.  712.7 of the CUSO rule are redundant and should be 
deleted.

Payroll Processing

    The Board proposes to amend the CUSO rule to authorize CUSOs to 
provide payroll processing services directly to credit union members. 
NCUA's Office of General Counsel has concluded that an FCU may provide 
its members with payroll processing services as an exercise of its 
incidental powers and that a CUSO may assist the FCU in its provision 
of that service. OGC Op. 05-1204 (February 15, 2006). Until now, 
however, NCUA has not permitted a CUSO to provide this service directly 
to members, based in part on the agency's longstanding view that 
clerical and managerial services authorized for CUSOs may only be 
performed on behalf of the FCU. Some public comments filed in response 
to the annual regulatory review proposed that NCUA authorize CUSOs to 
provide this service directly to members.
    As with the credit card discussion above, the Board believes this 
is a logical extension of the CUSO rule. Some CUSOs currently provide 
support to credit unions offering payroll services to their members by 
providing data processing support, which is already a preapproved CUSO 
activity. Payroll services are essentially the electronic movement of 
money through accounts. It is a very common ancillary service for 
business members and a key part of the business services package of 
services. Allowing CUSOs to offer this service directly to credit union 
members would be a better and much simpler model to implement and is a 
natural extension of the current pre-approved services.

Additional Examples of Permissible Activities Within Approved 
Categories

    The CUSO rule sets out broad categories of permissible CUSO 
activities that are related to the routine daily operation of credit 
unions. 12 U.S.C. 1757(I); 12 CFR 712.5. Most of the broad categories 
have examples of specific activities that are permissible within the 
category. The specific activities are provided as illustrations of 
activities permissible under the particular category, and are not 
intended as an exclusive or exhaustive list. 12 CFR 712.5.
    From time to time, NCUA receives requests from FCUs and other 
interested parties to review and evaluate whether a particular activity 
falls within one or more of the approved categories. These 
determinations are usually made in legal opinion letters issued by 
NCUA's Office of General Counsel directly in response to the request. 
Although the opinion letters are posted on the agency website and are 
available for public review, the Board believes it is appropriate to 
amend the CUSO rule to include these examples in the rule, so that the 
agency's position has maximum exposure.
    In the recent past, NCUA has determined that a CUSO may provide for 
all aspects of a real estate settlement for mortgage loans the credit 
union grants to its members. Examples of permissible services include: 
arranging the title search; reviewing the title work; providing title 
insurance as an agent for the underwriter; and handling the settlement 
of the mortgage loan. The Office of General Counsel concluded these 
activities, although not specifically listed in the rule, fall within 
the preapproved categories of insurance brokerage services and loan 
support services and relate to the routine daily operations of credit 
unions. Accordingly, the Board proposes to amend the rule to include 
real estate settlement services as an example under each of these 
preapproved categories.
    NCUA's Office of General Counsel has also recently concluded the 
following activities are permissible examples of services that CUSOs 
may provide under one or more preapproved categories:
    [rtarr8] Employee leasing services and support, permissible under 
professional and management services, Sec.  712.5(b);
    [rtarr8] Purchase and servicing of non-performing loans, 
permissible under loan support services, Sec.  712.5(j);
    [rtarr8] Business counseling and related services for credit union 
business members, permissible under professional and management 
services and financial counseling services, Sec.  712.5(b), (f);
    [rtarr8] Referral and processing of loan applications for members 
turned down by the credit union, permissible under loan support 
services, Sec.  712.5(j).
    Accordingly, the Board proposes to amend the rule to include each 
of these services as representative examples of permissible services 
under the noted preapproved category.

Loan Participations

    Part 712 specifically authorizes CUSOs to engage in consumer 
mortgage loan origination, member business loan origination, and 
student loan origination. 12 CFR 712.5(c), (d), (n). CUSOs are also 
recognized in NCUA's loan participations rule as a ``credit union 
organization'' authorized to engage in the purchase and sale of loan 
participations. 12 CFR 701.22(a)(4). The CUSO rule does not, however, 
specify that a CUSO may engage in the purchase or sale of participation 
interests in loans they are authorized to make. The Board is aware 
CUSOs are currently engaged in this practice and believes it is 
permissible. The Board proposes to conform the CUSO rule with the loan 
participation rule by clarifying the authority to originate a loan 
includes the authority to buy or sell a participation interest in that 
type of loan. As noted above, however, the NCUA's loan participation 
rule would not support the sale to FCUs of participation interests in a 
credit card portfolio, which consists of open-end, revolving credit.

Request for Comments

    Although the Board is not proposing additional, specific regulatory 
changes to the CUSO rule at this time, the Board solicits comment on 
the issue of consolidated opinion audits for CUSOs that are majority 
owned by a single FCU. The CUSO rule currently requires an FCU to 
obtain a written commitment from any CUSO in which it has made an 
investment or to which it has made a loan that the CUSO will secure an 
annual opinion audit of its financial statements, performed in 
accordance with generally accepted auditing standards by a licensed, 
certified public accountant. 12 CFR 712.3(d)(2). In 2005, the Board 
amended this rule to allow an FCU owning 100% of a CUSO to comply with 
the audit requirement by

[[Page 23986]]

conducting a consolidated audit in which the CUSO's financial data is 
included in the consolidated statement of financial condition. 70 FR 
55227 (September 21, 2005). At that time, the Board considered and 
rejected the idea of permitting consolidated audits where the CUSO is 
majority owned, rather than wholly owned, by an FCU. Several commenters 
urged the Board to reconsider this approach, citing in support of their 
view the fact that consolidated audits for majority owned subsidiaries 
are permissible under generally accepted accounting principles. The 
Board's determination was based principally on concern for potential 
minority investors in a CUSO that is majority owned by one FCU, who 
might not be able to review a separate opinion audit before making an 
investment. The Board solicits comment from the public on whether to 
revise this rule to permit a majority owner to obtain only a 
consolidated audit and, if so, how the interests of minority investors 
can be protected.
    The Board believes these proposed changes are consistent with its 
ongoing efforts to reduce regulatory burden while assuring that credit 
unions operate in a safe and sound manner. The Board welcomes comment 
on all aspects of the proposal.

Regulatory Procedures

Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) requires NCUA to prepare an 
analysis to describe any significant economic impact any proposed 
regulation may have on a substantial number of small entities. NCUA 
considers credit unions having less than ten million dollars in assets 
to be small for purposes of RFA. Interpretive Ruling and Policy 
Statement (IRPS) 87-2 as amended by IRPS 03-2. The proposed changes to 
the CUSO rule impose minimal compliance obligations by requiring credit 
unions to comply with certain one-time regulatory requirements 
concerning agreements with CUSOs and maintenance of separate corporate 
identities. Of the 3,599 credit unions (FCUs and FISCUs) with assets of 
less than ten million dollars that filed a form 5300 call report with 
NCUA as of December 31, 2007, only 195 reported any interest in a CUSO. 
Since approximately only 5.5% of credit unions meeting the small credit 
union definition reported having any interest in CUSOs of any type, 
NCUA has determined and certifies that this proposed rule, if adopted, 
will not have a significant economic impact on a substantial number of 
small credit unions. Accordingly, the NCUA has determined that an RFA 
analysis is not required.

Paperwork Reduction Act

    NCUA recognizes that the proposal to require FISCUs to comply with 
certain provisions of the CUSO rule constitutes an information 
collection within the meaning of the Paperwork Reduction Act (PRA). 44 
U.S.C. 3507(d). The aspects of the proposed amendments that raise PRA 
issues include the requirement that a FISCU obtain a written agreement 
with its CUSO providing NCUA and the relevant SSA with access to the 
CUSO's books and records and the requirement that it take steps to 
assure that it maintains a corporate identity separate from its CUSO.
    NCUA estimates it will take an average of two hours for a credit 
union to implement an agreement with its CUSO regarding access to 
information, and an additional two hours to obtain a written legal 
opinion. All FISCUs with an investment in or loan to a CUSO will need 
to comply with these requirements as an initial matter; however, 
thereafter, the rule's impact will only be on those FISCUs that enter 
into a new arrangement with a CUSO. According to NCUA records, of the 
3,065 FISCUs that filed a form 5300 call report with NCUA as of 
December 31, 2007, 1,044 reported at least one interest in a CUSO. 
These FISCUs reported a total CUSO count of 2,219. At year-end 2006, 
there were 3,173 FISCUs, of which 1,050 reported at least one interest 
in a CUSO. These FISCUs reported a total CUSO count of 2,183. For year-
end 2005, there were 3,302 FISCUs, of which 1,017 reported at least one 
CUSO investment. These FISCUs reported a total CUSO count of 2,035. The 
three-year average suggests that, despite declining numbers of credit 
unions (due mainly to merger and consolidation activity), FISCUs make 
approximately 92 new investments in CUSOs each year. Using these 
estimates, information collection obligations imposed by the rule, on 
an annual basis, are analyzed below:
Initial Compliance by All FISCUs
    a. Written agreement relating to access to information.
    Total FISCU investment interests reported in CUSOs, 12/31/2007: 
2,219.
    Frequency of response: One-time.
    Initial hour burden: 2.
    2 hours x 2,219 = 4,438.

    b. Written legal opinion.
    Number of respondents: 2,219.
    Frequency of response: One-time.
    Initial hour burden: 2.

2 hours x 2,219 = 4,438.

Annual Compliance Obligations
    a. Written agreement relating to corporate separateness and access 
to information.
    Average number of new FISCU investment interests reported in CUSOs: 
92.
    Frequency of response: annually.
    Annual hour burden: 2.

2 hours x 92 = 184.

    b. Written legal opinion.
    Number of respondents, i.e., requiring new or updated opinion per 
year: 92.
    Frequency of response: annually.
Annual hour burden: 2.

2 hours x 92 = 184.

    Two other aspects of the proposal raise PRA issues. FCUs with an 
investment in or loan to a CUSO will need to revise the current 
agreement they have with their CUSO to provide for access to books and 
records by any SSA, if the CUSO also has a loan or investment from a 
FISCU or provides any contractual services to a FISCU. According to 
NCUA records, of the 5,036 FCUs that filed a form 5300 call report with 
NCUA as of December 31, 2007, 1,112 reported at least one interest in a 
CUSO; a total of 2,190 CUSO interests was reported. For purposes of 
this analysis, NCUA estimates that this requirement will affect one-
half of all CUSOs owned by FCUs. Using these estimates, information 
collection obligations imposed by this aspect of the rule, on an annual 
basis, are analyzed below:

Changing the Written Agreement Relating to Access to Information

    One-half of total FCU investment interests reported in CUSOs, 12/
31/2007: 1,095.
    Frequency of response: One-time.
Initial hour burden: 1.

1 hour x 1,095 = 1,095.

    The third aspect of the proposed changes that involves PRA 
consideration is the requirement pertaining to recapitalizing CUSOs 
that have become insolvent. The proposed rule would require certain 
credit unions to seek and obtain prior approval from NCUA before making 
an investment to recapitalize an insolvent CUSO. According to NCUA's 
records, as of December 31, 2007, there were only 36 FCUs that were 
less than adequately capitalized (i.e., net worth of under 6%). 
According to year-end 2007 call report data, none of these FCUs 
currently has any interest in any CUSOs. As of December 31, 2007, there 
were no FCUs at or near the less than adequately capitalized threshold 
reporting an investment in an insolvent CUSO.

[[Page 23987]]

NCUA estimates it would take an FCU approximately two hours to complete 
a request for NCUA's prior approval for an investment to recapitalize 
an insolvent CUSO.
Obtaining NCUA Prior Approval
    Total FCUs less than adequately Capitalized, 12/31/2007: 36.
    Frequency of response: One-time.
    Initial hour burden: 2.

2 hours x 36 = 72.

    In accordance with the requirements of the PRA, NCUA intends to 
obtain a modification of its current OMB Control Number, 3133-0149, to 
support these proposed changes. Simultaneous with its publication of 
this proposed amendment to Part 712, NCUA is submitting a copy of the 
proposed rule to the Office of Management and Budget (OMB) along with 
an application for a modification of the OMB Control Number.
    The PRA and OMB regulations require that the public be provided an 
opportunity to comment on the paperwork requirements, including an 
agency's estimate of the burden of the paperwork requirements. The NCUA 
Board invites comment on: (1) Whether the paperwork requirements are 
necessary; (2) the accuracy of NCUA's estimates on the burden of the 
paperwork requirements; (3) ways to enhance the quality, utility, and 
clarity of the paperwork requirements; and (4) ways to minimize the 
burden of the paperwork requirements.
    Comments should be sent to: OMB Reports Management Branch, New 
Executive Office Building, Room 10202, Washington, DC 20503; Attention: 
Mark Menchik, Desk Officer for NCUA. Please send NCUA a copy of any 
comments submitted to OMB.

Executive Order 13132

    Executive Order 13132 encourages independent regulatory agencies to 
consider the impact of their 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. The bulk of this proposed rule, if adopted, 
will apply only to federally-chartered credit unions. The proposal also 
calls for the application of certain aspects of the CUSO rule to state 
chartered, federally-insured credit unions. By law, these institutions 
are already subject to numerous provisions of NCUA's rules, based on 
the agency's role as the insurer of member share accounts and the 
significant interest NCUA has in the safety and soundness of their 
operations. In any event, the proposed rule 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 this proposal 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, Public Law 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 in 12 CFR Part 712

    Administrative practices and procedure, Credit, Credit unions, 
Investments, Reporting and record keeping requirements.

    By the National Credit Union Administration Board on April 17, 
2008.
Mary F. Rupp,
Secretary of the Board.
    Accordingly, NCUA proposes to amend 12 CFR parts 712 and 741 as 
follows:

PART 712--CREDIT UNION SERVICE ORGANIZATIONS (CUSOs)

    1. 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.
    2. Amend Sec.  712.1 by revising the last sentence to read as 
follows:


Sec.  712.1  What does this part cover?

    * * * Sections 712.3(d)(3) and 712.4 of this part apply to state-
chartered credit unions and their subsidiaries, as provided in Sec.  
741.222 of this chapter.
    3. Amend Sec.  712.2 by adding a new paragraph (d)(3) to read as 
follows:


Sec.  712.2  How much can an FCU invest in or loan to CUSOs, and what 
parties may participate?

* * * * *
    (d) * * *
    (3) Special rule in the case of less than adequately capitalized 
FCUs. This rule applies in the case of either an FCU that is currently 
less than adequately capitalized, as determined under part 702, or 
where the making of an investment in a CUSO would render the FCU less 
than adequately capitalized under part 702. Before making an investment 
in a CUSO, the FCU must obtain prior written approval from the 
appropriate NCUA regional office if the making of the investment would 
result in an aggregate cash outlay, measured on a cumulative basis 
(regardless of how the investment is valued for accounting purposes) in 
an amount in excess of one percent of the credit union's paid in and 
unimpaired capital and surplus.
* * * * *


Sec.  712.3  [Amended]

    4. Amend Sec.  712.3 as follows:
    a. Amend paragraph (b) by deleting the period at the end of the 
sentence and adding the phrase ``; provided, however, that with respect 
to services provided under paragraph (a) and (g) of Sec.  712.5, this 
requirement is met if the CUSO primarily provides such services to 
persons who are eligible for membership in the FCU or are eligible for 
membership in credit unions contracting with the CUSO.'' in its place.
    b. Revise paragraph (d)(3) to read as follows:


Sec.  712.3  What are the characteristics of and what requirements 
apply to CUSOs?

* * * * *
    (d) * * *
    (3)(i) Provide NCUA, its representatives, and the state credit 
union regulatory authority having jurisdiction over any federally 
insured, state-chartered credit union with an outstanding loan to, 
investment in or contractual agreement for products or services with 
the CUSO with complete access to any books and records of the CUSO and 
the ability to review CUSO internal controls, as deemed necessary by 
NCUA or the state credit union regulatory authority in carrying out 
their respective responsibilities under the Act and the relevant state 
credit union statute.
    (ii) The effective date for compliance with this section is [INSERT 
DATE THAT IS 180 DAYS FOLLOWING PUBLICATION OF THE FINAL RULE IN THE 
Federal Register].
    5. Amend Sec.  712.5 as follows:
    a. Add a new paragraph (b)(11);
    b. Amend paragraph (c) by deleting the semicolon at the end of the 
sentence and replacing it with the phrase: ``,

[[Page 23988]]

including the authority to buy and sell participation interests in such 
loans;''
    c. Amend paragraph (d) by deleting the semicolon at the end of the 
sentence and replacing it with the phrase: ``, including the authority 
to buy and sell participation interests in such loans;''
    d. Redesignate paragraphs (e) through (r) as paragraphs (g) through 
(t), respectively, and add new paragraphs (e) and (f).
    e. Under the newly redesignated paragraphs (h), (j) and (l) add new 
paragraphs (h)(7), (j)(4), and (l)(4) through (l)(6);
    f. Amend the newly redesignated paragraph (p) by deleting the 
semicolon at the end of the sentence and replacing it with the phrase: 
``, including the authority to buy and sell participation interests in 
such loans;''
    The revisions read as follows:


Sec.  712.5  What activities and services are preapproved for CUSOs?

* * * * *
    (b) * * *
    (11) Employee leasing services
* * * * *
    (e) Credit card loan origination;
    (f) Payroll processing services;
* * * * *
    (h) * * *
    (7) Business counseling and consultant services;
* * * * *
    (j) * * *
    (4) Real estate settlement services;
* * * * *
    (l) * * *
    (4) Real estate settlement services;
    (5) Purchase and servicing of non-performing loans; and
    (6) Referral and processing of loan applications for members whose 
loan applications have been turned down by the credit union;


Sec.  712.7  [Removed and Reserved]

    6. Remove and reserve Sec.  712.7.

PART 741--REQUIREMENTS FOR INSURANCE

    1. The authority citation for part 741 continues to read as 
follows:

    Authority: 12 U.S.C. 1757, 1766, 1781-1790, and 1790d.
    2. Add a new Sec.  741.222 to read as follows:


Sec.  741.222  Credit Union Service Organizations.

    (a) Any credit union that is insured pursuant to Title II of the 
Act must adhere to the requirements in Sec.  712.3(d)(3) and Sec.  
712.4 of this chapter concerning agreements between credit unions and 
their credit union service organizations (CUSOs) and the requirement to 
maintain separate corporate identities. For purposes of this section, a 
CUSO is any entity in which a credit union has an ownership interest or 
to which a credit union has extended a loan and that is engaged 
primarily in providing products or services to credit unions or credit 
union members, or, in the case of checking and currency services, 
including check cashing services, sale of negotiable checks, money 
orders, and electronic transaction services, including international 
and domestic electronic fund transfers, to persons eligible for 
membership in any credit union having a loan, investment or contract 
with the entity.
    (b) This section shall have no preemptive effect with respect to 
the laws or rules of any state providing for access to CUSO books and 
records or CUSO examination by credit union regulatory authorities.
    (c) The effective date for compliance with this section is [INSERT 
DATE THAT IS 180 DAYS FOLLOWING PUBLICATION OF THE FINAL RULE IN THE 
FEDERAL REGISTER].

[FR Doc. E8-9457 Filed 4-30-08; 8:45 am]
BILLING CODE 7535-01-P