[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
________________________________________________________________________
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