[Federal Register Volume 76, Number 249 (Wednesday, December 28, 2011)]
[Proposed Rules]
[Pages 81421-81429]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-33041]


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NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Parts 701, 703, 723, and 742

RIN 3133-AD98


Eligible Obligations, Charitable Contributions, Nonmember 
Deposits, Fixed Assets, Investments, Member Business Loans, and 
Regulatory Flexibility Program

AGENCY: National Credit Union Administration (NCUA).

ACTION: Proposed rule with request for comments.

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SUMMARY: NCUA proposes to eliminate the Regulatory Flexibility Program 
(RegFlex) to provide regulatory relief to Federal credit unions. NCUA 
also proposes to remove or amend related rules to ease compliance 
burden while retaining certain safety and soundness standards. Those 
rules pertain to eligible obligations, charitable contributions, 
nonmember deposits, fixed assets, investments, and member business 
loans.

DATES: Send your comments to reach us on or before February 27, 2012. 
We may not consider comments received after the above date in making 
our decision on the proposed rule.

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/Legal/Regs/Pages/PropRegs.aspx Follow the instructions for 
submitting comments.
     E-mail: Address to [email protected]. Include ``[Your 
name] Comments on Proposed Rule 742, Regulatory Flexibility 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.
    Public Inspection: You can view all public comments on NCUA's Web 
site at http://www.ncua.gov/Legal/Regs/Pages/PropRegs.aspx as 
submitted, except for those we cannot post for technical reasons. NCUA 
will not edit or remove any identifying or contact information from the 
public comments submitted. You may inspect paper copies of comments in 
NCUA's law library at 1775 Duke Street, Alexandria, Virginia 22314, by 
appointment weekdays between 9 a.m. and 3 p.m. To make an appointment, 
call (703) 518-6546 or send an e-mail to [email protected].

FOR FURTHER INFORMATION CONTACT: Chrisanthy Loizos, Staff Attorney, 
Office of General Counsel, at the above address or telephone (703) 518-
6540, or Matthew J. Biliouris, Director of Supervision, or J. Owen 
Cole, Director, Division of Capital Markets, Office of Examination and 
Insurance, at the above address or telephone (703) 518-6360.

SUPPLEMENTARY INFORMATION: 

I. Background
II. The Rule as Proposed
III. Section-by-Section Analysis
IV. Regulatory Procedures

I. Background

a. Why is NCUA proposing this rule?

    On July 11, 2011, President Obama issued Executive Order 13579, 
ordering independent agencies, including NCUA, to consider whether they 
can modify, streamline, expand, or repeal existing rules to make their 
programs more effective and less burdensome.\1\ Consistent with the 
spirit of the Executive Order and as part of NCUA's Regulatory 
Modernization Initiative, the NCUA Board (Board) has decided to propose 
a rule that streamlines its regulatory program by eliminating RegFlex. 
The proposed rule would relieve regulatory burden on Federal credit 
unions (FCUs) because they would no longer need to engage in any 
process for a RegFlex designation. In addition, FCUs that are currently 
not RegFlex eligible would receive regulatory relief because the 
proposal extends to them most of the flexibilities previously available 
only to RegFlex FCUs.
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    \1\ President Obama also signed the Plain Writing Act of 2010 
(Pub. L. 111-274) into law on October 13, 2010 ``to improve the 
effectiveness and accountability of Federal agencies to the public 
by promoting clear Government communication that the public can 
understand and use.'' This preamble is written to meet plain writing 
objectives.
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b. What is RegFlex?

    RegFlex relieves FCUs from certain regulatory restrictions and 
grants them additional powers if they have demonstrated sustained 
superior performance as measured by CAMEL rating and net worth 
classification. 12 CFR 742.1. An FCU may qualify for RegFlex treatment 
automatically or by application to the appropriate regional director. 
12 CFR 742.2. Specifically, an FCU automatically qualifies when it has 
received a composite CAMEL rating of ``1'' or ``2'' during its last two 
examinations and has maintained a net worth classification of ``well 
capitalized'' under part 702 of NCUA's rules for the last six quarters. 
If an FCU is subject to a risk-based net worth (RBNW) requirement under 
part 702, it also qualifies for RegFlex treatment when it has remained 
``well capitalized'' for the last six quarters after applying the 
applicable RBNW requirement. An FCU that does not automatically qualify 
may apply for a RegFlex designation with the appropriate regional 
director. 12 CFR 742.2(a) and (b).
    The Board established RegFlex in 2002. 66 FR 58656 (Nov. 23, 2001). 
Since then, NCUA has amended RegFlex a number of times to increase 
available relief for FCUs from a variety of regulatory restrictions, 
reduce the criteria to obtain RegFlex status, or enhance safety and 
soundness for FCUs. 71 FR 4039 (Jan. 25, 2006); 72 FR 30247 (May 31, 
2007); 74 FR 13083 (Mar. 26, 2009); 75 FR 66298 (Oct. 28, 2010).
    The current RegFlex rule provides RegFlex FCUs with relief from 
restrictions in the following six areas or ``flexibilities'': (1) 
Charitable contributions; (2) nonmember deposits; (3) fixed assets; (4) 
zero-coupon investments; (5) borrowing repurchase transactions; and (6) 
commercial mortgage related securities. It also provides an additional 
flexibility by specifically authorizing the purchase of obligations 
from federally insured credit unions beyond those an FCU may purchase 
under the NCUA's eligible obligations rule, Sec.  701.23.

II. The Rule as Proposed

a. How would this rule change RegFlex and reduce regulatory burden on 
FCUs?

    NCUA proposes to eliminate RegFlex and the charitable contributions 
rule, and amend the rules that apply to eligible obligations, nonmember 
deposits, fixed assets, and investments. With this proposal, the Board 
intends to enable FCUs to engage in the activities permitted by the 
existing RegFlex rule. As of June 30, 2011, there are 4,534 FCUs, 2,764 
of which are RegFlex FCUs. The proposed changes would extend regulatory 
relief to the remaining 1,770 FCUs that do not currently enjoy a 
RegFlex designation. NCUA requests

[[Page 81422]]

your comments on the proposed rulemaking.
    The proposed rule places most of the six flexibilities of the 
RegFlex rule into the subject-specific rules that apply to all FCUs. 
Under the existing rule, RegFlex FCUs do not have to comply with the 
charitable contributions rule. The proposed rulemaking, therefore, 
removes the charitable contributions rule so that all FCUs may make 
donations based on sound judgment and business practices without 
regulatory restrictions. At present, RegFlex FCUs do not have to comply 
with the limits on nonmember deposits. The NCUA Board has reviewed the 
amount of nonmember deposits currently held by FCUs and proposes an 
adjustment to the nonmember deposits rule to allow FCUs to accept more 
nonmember deposits. Likewise, the proposed rulemaking extends the 
amount of time in which FCUs must occupy unimproved property to six 
years, as currently permitted for RegFlex FCUs. Finally, the proposed 
amendments to the investment rule permit extended maturities for zero-
coupon investments and borrowing repurchase transactions as well as the 
ability to purchase commercial mortgage related securities under 
similar conditions to the existing RegFlex rule. In addition, the 
proposed rule moves the provisions to buy nonmember and other 
obligations currently found in the RegFlex rule, into the eligible 
obligations rule, Sec.  701.23.
    This proposal closely follows the analyses the Board previously 
used when it adopted the various flexibilities in the RegFlex rule. 
While the proposed rule extends relief to FCUs, the Board recognizes 
the relief granted by this proposal may not be appropriate for every 
FCU. Only FCUs with the requisite expertise and policies to engage in 
the activities addressed in this rulemaking, as well as the financial 
condition necessary for particular activities, should avail themselves 
of the proposed new authorities. Each FCU's board of directors bears 
the ultimate responsibility for its FCU's direction and control. NCUA 
may also take appropriate supervisory action to address unsafe and 
unsound practices or conditions.

b. Does this rule create greater restrictions than the current rules?

    No, although the proposal modifies some of the RegFlex 
flexibilities. The Board proposes to establish a maximum maturity of 30 
years for zero-coupon investments even though the RegFlex rule does not 
currently subject RegFlex FCUs to a maturity limit on these 
investments. The Board believes the maturity cap will have no negative 
impact on these FCUs. The proposed rule also removes the automatic 
exemption from the nonmember deposits limit, but the Board does not 
foresee any adverse impact on FCUs with the proposed change.
    RegFlex FCUs currently operating under the automatic exemption 
criteria for a RegFlex designation will generally continue to be able 
to avail themselves of the flexibilities found in part 742. Under the 
proposal, FCUs that received a RegFlex designation from a regional 
director because they did not meet the standards for automatic 
qualification will now, like current non-RegFlex FCUs, have certain 
conditions placed on their previous RegFlex flexibilities, unless they 
receive approval for additional authority. The Board discusses these 
conditions further in the section-by-section analysis.

III. Section-by-Section Analysis

    NCUA proposes to remove part 742 in its entirety to eliminate 
RegFlex. NCUA also proposes to remove or amend the related rules that 
apply to eligible obligations, charitable contributions, nonmember 
deposits, fixed assets, investments, and member business loans. As the 
Board noted when it first adopted RegFlex, the regulatory provisions 
covered in RegFlex are not specifically required by statute. This 
proposed rulemaking aims to ease compliance burden and permit greater 
flexibility for FCUs in managing their operations, while simultaneously 
retaining certain safety and soundness standards.
    The Board also intends to delete an FCU's ability to appeal the 
revocation of its RegFlex designation to the NCUA's Supervisory Review 
Committee. NCUA Interpretive Ruling and Policy Statement (IRPS) 11-1, 
76 FR 23871 (Apr. 29, 2011). If the Board eliminates RegFlex 
designations as proposed, there will be no need for such an appeal. In 
that event, the Board intends to issue a direct final IRPS that would 
remove RegFlex revocations from the list of material supervisory 
determinations an FCU may appeal under NCUA IRPS 11-1.

a. Charitable Contributions

    FCUs make charitable contributions under the provision in the FCU 
Act that authorizes an FCU ``to exercise such incidental powers as 
shall be necessary or requisite to enable it to carry on effectively 
the business for which it is incorporated.'' 44 FR 56691 (Oct. 2, 
1979); 64 FR 19441 (Apr. 21, 1999); 12 U.S.C. 1757(17).
    The current charitable contributions rule, Sec.  701.25, restricts 
an FCU's ability to make donations. It only allows an FCU to make 
charitable contributions or donations to nonprofit organizations 
located in or conducting activities in a community in which the FCU has 
a place of business, or to organizations that are tax exempt under 
Sec.  501(c)(3) of the Internal Revenue Code and operate primarily to 
promote and develop credit unions. The rule requires an FCU's board of 
directors to approve charitable contributions based on a determination 
that the contributions are in the best interests of the FCU and are 
reasonable given the FCU's size and financial condition. Under the 
rule, directors may establish a budget for charitable donations and 
authorize FCU officials to select recipients and disburse funds. The 
RegFlex rule, Sec.  742.4(a)(1), exempts RegFlex FCUs from the entire 
charitable contributions rule.
    The Board proposes to eliminate the entire charitable contributions 
rule, Sec.  701.25, so that any FCU can make donations without the 
prior approval of its board of directors and without regulatory 
restrictions as to recipients. The Board notes that, even in the 
absence of a charitable contributions rule, an FCU's authority to make 
donations is dictated by its incidental powers authority given in the 
FCU Act. As such, contributions must be necessary or requisite to 
enable the FCU to effectively carry on its business. See 12 CFR 721.2. 
Furthermore, FCU directors have a fiduciary duty to direct management 
to operate within sound business practices and the best interests of 
the membership under Sec.  701.4. In addition, article XVI, section 4 
of the FCU Bylaws prohibits FCU directors, committee members, officers, 
agents, and employees from conflicts of interest that could arise in 
the context of making charitable donations.

b. Nonmember Deposits

    The FCU Act permits an FCU to receive shares from nonmember public 
units, political subdivisions \2\ and credit

[[Page 81423]]

unions, but the FCU is subject to the limits in the nonmember deposits 
rule, Sec.  701.32. 12 U.S.C. 1757(6); 12 CFR 701.32. Under paragraph 
(b) of Sec.  701.32, the maximum amount of all public unit and 
nonmember shares that an FCU may hold cannot exceed the greater of 20% 
of the FCU's total shares or $1.5 million. This means that an FCU 
holding less than $7.5 million in total shares cannot accept nonmember 
deposits in excess of $1.5 million, as 20% of $7.5 million is $1.5 
million. Under paragraph (c) of Sec.  701.32, nonmember share deposits 
that an FCU has accepted to meet a matching requirement for a Community 
Development Revolving Loan Fund loan counts against the nonmember 
deposit limit once the FCU has repaid the loan. An FCU may request an 
exemption from the appropriate regional director to exceed the limit. 
If the regional director denies the request for an exemption, the FCU 
may appeal the decision to the Board. The RegFlex rule currently 
exempts RegFlex FCUs from both paragraphs (b) and (c) of Sec.  701.32. 
RegFlex FCUs, therefore, are not subject to the limit on the amount of 
deposits they may accept from nonmember public units and credit unions.
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    \2\ The terms ``public unit'' and ``political subdivision'' in 
the nonmember deposit rule are defined in paragraphs (c) and (d) of 
Sec.  745.1. ``Public unit'' means the United States, any state of 
the United States, the District of Columbia, the Commonwealth of 
Puerto Rico, the Panama Canal Zone, any territory or possession of 
the United States, any county, municipality, or political 
subdivision thereof, or any Indian tribe as defined in section 3(c) 
of the Indian Financing Act of 1974. ``Political subdivision'' 
includes any subdivision of a public unit or any principal 
department of such public unit, (1) The creation of which 
subdivision or department has been expressly authorized by state 
statute, (2) to which some functions of government have been 
delegated by state statute, and (3) to which funds have been 
allocated by statute or ordinance for its exclusive use and control. 
It also includes drainage, irrigation, navigation improvement, 
levee, sanitary, school or power districts and bridge or port 
authorities, and other special districts created by state statute or 
compacts between the states. Subordinate or nonautonomous divisions, 
agencies, or boards within principal departments are not included.
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    Currently, only four RegFlex FCUs exceed the limitation in Sec.  
701.32(b) of the greater of 20% of total shares or $1.5 million in 
nonmember deposits. Each of those FCUs holds more than $1.5 million in 
nonmember deposits, but less than $3 million. The Board, therefore, 
proposes to raise the dollar threshold on the nonmember deposit limit 
in Sec.  701.32(b) to $3 million. The increase in the dollar limit 
would permit FCUs with less than $7.5 million in total shares to accept 
up to $3 million in nonmember deposits, compared to their current $1.5 
million limit. The Board acknowledges that, by eliminating RegFlex, 
RegFlex FCUs would lose their blanket exemption from the nonmember 
deposit cap. From its review of the nonmember deposits presently held 
by RegFlex FCUs, however, the Board believes the proposal provides all 
of the necessary flexibility and regulatory relief to all FCUs without 
adversely affecting any of the RegFlex FCUs that have accepted 
nonmember deposits in excess of the cap. The Board also continues to 
recognize the risks that nonmember shares may present. Nonmember shares 
are characteristically more volatile than core member shares. This 
additional volatility can pose asset liability management concerns and 
liquidity concerns. The proposed adjustment to the dollar threshold in 
paragraph (b)(1) maintains the regulatory relief that RegFlex FCUs have 
enjoyed, extends relief to FCUs, and remains attentive to safety and 
soundness considerations.

c. Fixed Assets

    The FCU Act authorizes an FCU to purchase, hold, and dispose of 
property necessary or incidental to its operations. 12 U.S.C. 1757(4). 
Generally, the fixed asset rule provides limits on fixed asset 
investments, establishes occupancy and other requirements for acquired 
and abandoned premises, and prohibits certain transactions. 12 CFR 
701.36. Fixed assets are defined in Sec.  701.36(e) and include 
premises. Premises means any office, branch office, suboffice, service 
center, parking lot, facility, or real estate where a credit union 
transacts or will transact business.
    When an FCU acquires premises for future expansion and does not 
fully occupy the space within one year, the rule requires the FCU's 
board of directors to have a resolution in place by the end of that 
year with plans for full occupation. 12 CFR 701.36(b)(1). Additionally, 
the FCU must partially occupy the premises within three years, unless 
the FCU obtains a waiver within 30 months of acquiring the premises. 12 
CFR 701.36(b)(1)-(2). Where an FCU is acquiring unimproved land, the 
partial occupancy requirement often is more difficult to satisfy than 
if the FCU were purchasing premises with an existing branch building. 
The existing fixed assets rule and the RegFlex rule extend the three-
year time period to six years for RegFlex FCUs, but only with respect 
to the acquisition of unimproved land. 12 CFR 701.36(d), 742.4(a)(3).
    The Board proposes to amend the fixed assets rule to extend the 
three-year time period to six years for any FCU that is acquiring 
unimproved land. This extension would not apply, however, to any other 
kind of premises. As it discussed in previous rulemakings, the Board is 
aware that the fixed asset rule's three-year partial occupancy 
requirement, even with a waiver option, may be burdensome for some 
FCUs. NCUA recognizes many real estate transactions are complex and 
time consuming. These transactions involve a full array of issues that 
an FCU must address before it is ready to occupy the premises. This is 
especially true in the unimproved land context with its construction-
related issues. The Board believes it is appropriate to now extend 
relief from this compliance burden to all FCUs by allowing an FCU up to 
six years to partially occupy some of the space on a full-time basis if 
it initially acquired the property as unimproved land. Under the 
proposed change to paragraph (b)(2) in Sec.  701.36, all FCUs would 
have additional flexibility they need to manage their fixed asset 
portfolios, consistent with safe and sound credit union operations.

d. Zero-Coupon Investments

    Under Sec.  703.16(b), an FCU may not purchase a zero-coupon 
investment with a maturity date that is more than 10 years from the 
related settlement date. The RegFlex rule exempts RegFlex FCUs from the 
maximum maturity length of 10 years in the investment rule. 12 CFR 
742.4(a)(4). When creating the exemption for RegFlex FCUs, the Board 
determined it would not have a significant adverse impact on safety and 
soundness and would increase potential yield with prudent asset 
liability management. 66 FR 58656, 58659 (Nov. 23, 2001).
    Since the adoption of the RegFlex rule, however, NCUA has carefully 
reviewed the strategic and risk management considerations for 
permitting the use of long-term zero-coupon investments in credit union 
portfolios. NCUA has concluded that such long-term investments 
generally are not appropriate. Zero-coupon investments with maturities 
exceeding 10 years have higher price sensitivity than other securities, 
including shorter-term zero-coupon investments. This increased price 
sensitivity, together with the lack of interim cash flows, makes long-
term zero-coupon investments inconsistent with the primary portfolio 
objectives of safety and liquidity.
    The table below shows approximate percentage declines in the price 
of zero-coupon investments and coupon-bearing Treasury bonds from a 300 
basis point increase in rates. The percentage loss on zero-coupon 
investments increases dramatically with maturity and greatly exceeds 
that on coupon-bearing Treasury bonds at maturities greater than 10 
years. Losses of this magnitude could also make FCUs reluctant to sell 
zero-coupon investments and recognize losses during periods of 
liquidity stress.

[[Page 81424]]



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                                                                      % Change in     % Change in
                                                                      Price (from     Price (from
                         Maturity (Years)                           +300 bps) Zero-    +300 bps)
                                                                        Coupon          Coupon
                                                                       Treasury        Treasury
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2.................................................................               4               4
5.................................................................              12              12
10................................................................              25              21
20................................................................              44              30
30................................................................              58              39
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Source: Bloomberg--TRA function, October 7, 2011.

    To balance the risk management concerns inherent in zero-coupon 
investments with the flexibility previously granted to RegFlex FCUs, 
the Board proposes to establish the maximum maturity date of zero-
coupon investments to 30 years for any FCU that meets a ``well 
capitalized standard'' for purposes of this rulemaking. An FCU meeting 
the ``well capitalized standard'' is an FCU that has received a 
composite CAMEL rating of ``1'' or ``2'' during its last two 
examinations and (1) has maintained a ``well capitalized'' net worth 
classification for the immediately preceding six quarters, or (2) has 
remained ``well capitalized'' for the immediately preceding six 
quarters after applying the applicable RBNW requirement. The Board 
expects that FCUs considering the purchase of zero-coupon investments 
will be familiar with the dramatic rise in percentage loss on these 
investments with maturity, as demonstrated in the table. Only FCUs with 
the appropriate level of expertise positioned to measure the safety and 
soundness of purchasing zero-coupons with extended maturities should 
consider such investments.
    To ensure the proposed rule does not eliminate the flexibility 
currently enjoyed by RegFlex FCUs, the proposed rule ``grandfathers'' 
zero-coupon investments purchased in accordance with current Sec.  
742.4(a)(4) before the effective date of the final rule. As such, the 
rule would not require an FCU that, under its RegFlex authority, 
purchased zero-coupon investments with maturities greater than 10 years 
to divest these investments so long as those investments are on the 
FCU's books before the effective date of the final rule.
    An FCU that does not meet the well capitalized standard will be 
held to the requirement currently found in Sec.  703.16(b). It may not 
purchase a zero-coupon investment with a maturity date that is more 
than 10 years from the related settlement date, unless the FCU has 
received approval from its regional director to purchase such an 
investment with a greater maturity.
    To achieve the Board's objectives, the Board proposes to remove the 
current prohibition from Sec.  703.16, amend Sec. Sec.  703.14 and 
703.18, and add a new Sec.  703.20. The proposed rule adds the purchase 
of zero-coupon investments to Sec.  703.14(i) as a permissible 
investment under certain conditions. An FCU may only purchase a zero-
coupon investment with a maturity date of up to 10 years from the 
related settlement date, unless it receives written approval from its 
regional director to purchase such investment with a longer maturity 
under new proposed Sec.  703.20. FCUs meeting the well capitalized 
standard may purchase zero-coupon investments with maturity dates no 
greater than 30 years. Finally, the proposed rule adds a grandfather 
provision to Sec.  703.18 for zero-coupon investments purchased under 
RegFlex authority before the effective date of the final rule.

e. Borrowing Repurchase Transactions

    A borrowing repurchase transaction is a transaction in which an FCU 
agrees to sell a security to a counterparty and to repurchase the same 
or an identical security from that counterparty at a specified future 
date and at a specified price. 12 CFR 703.2. Subject to additional 
restrictions, an FCU may enter into a borrowing repurchase transaction 
so long as any investments the FCU purchases with borrowed funds mature 
no later than the maturity of the borrowing repurchase transaction. 12 
CFR 703.13(d).
    As stated, the investment rule prohibits an FCU from purchasing a 
security with the proceeds from a borrowing repurchase agreement if the 
purchased security matures after the maturity of the borrowing 
repurchase agreement. 12 CFR 703.13(d)(3). NCUA adopted this 
restriction because FCUs could incur significant interest rate risk by 
borrowing funds at short-term interest rates and investing in long-term 
fixed rate instruments. Interest rate risk results if an FCU invests 
the proceeds of the transaction significantly shorter or longer than 
the borrowing transaction.
    NCUA, however, adopted a limited exemption for RegFlex FCUs from 
the maturity restriction. 68 FR 32958, 32959 (June 3, 2003). In so 
doing, the Board recognized that NCUA does not impose a similar 
prohibition for other borrowing arrangements. The RegFlex rule permits 
RegFlex FCUs to purchase securities with maturities exceeding the 
maturity of the borrowing repurchase transaction, also commonly 
referred to as having mismatched maturities. The amount of any such 
purchased securities, however, cannot exceed the credit union's net 
worth under Sec.  742.4(a)(5).
    The Board proposes to continue this flexibility of mismatched 
maturities for borrowing repurchase transactions for FCUs meeting the 
well capitalized standard. The Board also proposes extending relief 
from the maturity requirement to FCUs that do not meet the well 
capitalized standard. The proposal amends paragraph (d)(3) of Sec.  
703.13 to permit FCUs to enter into borrowing repurchase transactions 
and use the proceeds to purchase securities with maturities no more 
than 30 days later than the transaction's term and the value of the 
purchased assets does not exceed the FCU's net worth. FCUs that do not 
meet the well capitalized standard may also request additional 
authority from their regional directors under proposed Sec.  703.20 to 
enter transactions whereby the maturity mismatch would be greater than 
30 days. The proposed rule also adds a grandfather provision to Sec.  
703.18 for borrowing repurchase transactions that an FCU entered under 
its RegFlex authority before the effective date of the final rule.
    The proposed Sec.  703.13(d)(3), therefore, sets out the three 
possible scenarios for borrowing repurchase transactions. In the first 
instance, the borrowing and corresponding investment transactions must 
have matched maturities. In the second instance, the matched maturity 
requirement would not apply if an FCU buys investments that mature no 
more than 30 days later than the borrowing repurchase transaction and 
the value of those investments does not exceed 100 percent of the FCU's 
net worth. In the third instance, an FCU that meets the well 
capitalized standard may enter borrowing repurchase transactions with 
mismatched maturities greater than 30 days if the value of the 
investments does not exceed 100 percent of the FCU's net worth.
    The Board proposes that an FCU that does not meet the well 
capitalized standard enter a borrowing repurchase agreement with a 
maturity mismatch between the repurchase agreement and the reinvested 
funds not to exceed 30 days. The Board seeks comment on whether the 
regulation should specify minimum experience requirements for staff 
involved in the analysis and ongoing risk management of a repurchase-
agreement book, especially in cases where maturities of sources and 
uses are mismatched.

f. Commercial Mortgage Related Security

    Section 703.16(d) of NCUA's investment rule generally prohibits an 
FCU from purchasing commercial

[[Page 81425]]

mortgage related securities (CMRS) of an issuer other than a 
government-sponsored enterprise. This prohibition is consistent with 
section 107(7)(E) of the FCU Act. 12 U.S.C. 1757(7)(E). Under Sec.  
107(15)(B) of the FCU Act, however, FCUs are permitted to purchase 
mortgage related securities (as defined in section 3(a)(41) of the 
Securities Exchange Act of 1934, as amended). 12 U.S.C. 1757(15)(B). 
That definition includes mortgage related securities backed solely by 
residential mortgages, solely by CMRS, and by mixed residential and 
commercial mortgages. Although section 107(15)(B) and section 107(7)(E) 
permit different kinds of investments for FCUs, some overlap exists 
between the two. Specifically, some CMRS described in section 
107(15)(B) also fit the description of investments permitted by section 
107(7)(E). 67 FR 78996, 78997 (Dec. 27, 2002).
    Based on its analysis of the interplay of these sections in the FCU 
Act and the development of the CMRS market, NCUA permitted RegFlex FCUs 
to purchase CMRS that are not otherwise permitted by section 107(7)(E) 
of the FCU Act, subject to certain safety and soundness related 
restrictions. 68 FR 32958 (June 3, 2003).
    Under the existing RegFlex rule, Sec.  742.4(a)(6), RegFlex FCUs 
may purchase CMRS that are not otherwise permitted by section 107(7)(E) 
if: (i) The security is rated in one of the two highest rating 
categories by at least one nationally-recognized statistical rating 
organization (NSRO);\3\ (ii) the security meets the definition of 
mortgage related security as defined in 15 U.S.C. 78c(a)(41) and the 
definition of CMRS in Sec.  703.2; (iii) the pool of loans underlying 
the CMRS contains more than 50 loans with no one loan representing more 
than 10 percent of the pool; and (iv) the FCU does not purchase an 
aggregate amount of CMRS in excess of 50 percent of its net worth. The 
Board proposes to permit all FCUs to purchase private label CMRS under 
certain conditions.
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    \3\ As required by Section 939A of the Dodd-Frank Wall Street 
Reform and Consumer Protection Act (Dodd-Frank), the Board issued a 
proposal on March 1, 2011 to change this prong with the following 
language: ``The issuer has at least a very strong capacity to meet 
its financial obligations, even under adverse economic conditions, 
for the projected life of the security.'' 76 FR 11164 (Mar. 1, 
2011). If and when a final rule is adopted, a similar conforming 
change will be made as necessary for this rulemaking.
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    The proposed rule removes the Sec.  703.16 prohibition barring the 
purchase of private label CMRS and adds the authority as a permissible 
investment in proposed Sec.  703.14(j), with limits based on whether 
the FCU meets the well capitalized standard. An FCU that meets the well 
capitalized standard may purchase private label CMRS under the same 
parameters currently found in Sec.  742.4(a)(6). An FCU that does not 
meet the well capitalized standard may purchase private label CMRS if: 
(i) The security is rated in one of the two highest rating categories 
by at least one NSRO (as amended in accordance with Section 939A of 
Dodd-Frank); (ii) the security meets the definition of mortgage related 
security as defined in 15 U.S.C. 78c(a)(41) and the definition of CMRS 
in Sec.  703.2; (iii) the pool of loans underlying the CMRS contains 
more than 50 loans with no one loan representing more than 10 percent 
of the pool; and (iv) the FCU does not purchase an aggregate amount of 
private label CMRS in excess of 25 percent of its net worth, unless it 
receives authority from the applicable regional director to purchase a 
higher amount. Proposed Sec.  703.20 provides the approval process so 
that an FCU may exceed the aggregate cap on CMRS of 25% net worth up to 
a maximum of 50% of net worth. As part of its request for approval, an 
FCU must demonstrate three consecutive years of effective CMRS 
portfolio management and the ability to evaluate key risk factors.
    Finally, the proposed rule adds a grandfather provision to Sec.  
703.18 for private label CMRS purchased by an FCU under its RegFlex 
authority before the effective date of the final rule. As such, an FCU 
that does not meet the well capitalized standard under the proposal, 
but which holds private label CMRS in excess of 25% of its net worth, 
would not be required to divest of those holdings on its books when the 
final rule takes effect. Such an FCU, however, could not make 
additional purchases of CMRS while its aggregate CMRS holdings exceed 
25% of its net worth, without the approval from the appropriate 
regional director under proposed Sec.  703.20.
    The Board acknowledges that the proposed authority, as with all of 
the flexibilities that would be granted under this proposed rulemaking, 
is not appropriate for every FCU. Selection of CMRS consistent with 
safety and soundness requires careful analysis of the underlying 
commercial mortgages and corresponding collateral, as well as analysis 
of the cash flow, credit structure, and market performance of the 
security. As with all investments, FCUs must understand and be capable 
of managing the risks associated with CMRS before purchasing them. The 
investment rule's Sec.  703.3 requires an FCU's board of directors to 
develop investment policies that address credit, liquidity, interest 
rate, and concentration risks. 12 CFR 703.3. The policy must also 
identify the characteristics of any investments that are suitable for 
the FCU. FCUs that purchase CMRS must develop sound risk management 
policies and construct limits that represent the FCU board's risk 
tolerance.
    The Board also notes that the proposal does not diminish NCUA's 
authority to require an FCU to divest its investments or assets for 
substantive safety and soundness reasons. Divestiture is a safety and 
soundness remedy imposed on a case-by-case basis.
    The Board seeks comment on whether the conditions for purchasing 
CMRS in the rule should be enhanced to encourage diversity and mitigate 
risk. NCUA is concerned from its recent experience that the current 
rule may contain inadequate limitations.

g. Eligible Obligations

    The eligible obligations rule permits an FCU to purchase loans from 
any source, provided that two conditions are satisfied. 12 CFR 701.23. 
First, the borrower is a member of that FCU. Second, the loan is either 
of a type the FCU is empowered to grant or the FCU refinances the loan 
within 60 days of its purchase to meet that standard. 12 CFR 
701.23(b)(1)(i). The phrase ``empowered to grant'' refers to an FCU's 
authority to make the type of loans permitted by the FCU Act, NCUA 
regulations, FCU Bylaws, and an FCU's own internal policies. NCUA OGC 
Op. 04-0713 (Oct. 25, 2004). The rule also permits an FCU to purchase 
student loans and real estate-secured loans, from any source, if the 
purchasing FCU grants these loans on an ongoing basis and is purchasing 
either type of loan to facilitate the packaging of a pool of such loans 
for sale or pledge on the secondary market. 12 CFR 701.23(b)(1)(iii)-
(iv). An FCU may also purchase the obligations of a liquidating credit 
union's individual members from the liquidating credit union. 12 CFR 
701.23(b)(ii). The eligible obligations rule imposes restrictions, 
including a limit on the aggregate amount of loans that an FCU may 
purchase of 5 percent of the purchasing FCU's unimpaired capital and 
surplus. 12 CFR 701.23(b)(3). It excludes certain types of loans from 
this limit, including loans purchased to facilitate a sale or pledge on 
the secondary market. 12 CFR 701.23(b)(3).
    The current RegFlex rule permits RegFlex FCUs to buy loans from 
other federally insured credit unions without regard to whether the 
loans are eligible obligations of the purchasing FCU's

[[Page 81426]]

members or the members of a liquidating credit union. 12 CFR 742.4(b). 
Loans purchased from a liquidating credit union, however, are subject 
to the eligible obligations cap of 5 percent unimpaired capital and 
surplus. 12 CFR Sec.  742.4(b)(4); 66 FR 15055, 15059 (Mar. 15, 2001). 
RegFlex FCUs may also purchase student loans and real-estate secured 
loans without the need to purchase them in order to facilitate a 
secondary market pool package under current Sec.  742.4(b). When the 
Board adopted the rule, it relied on its legal analysis of sections 
107(13) and 107(14) in the FCU Act to provide the relief to RegFlex 
FCUs. Section 107(13) of the FCU Act authorizes the purchase of 
eligible obligations of an FCU's members or the members of a 
liquidating credit union. 12 U.S.C. 1757(13). Section 107(14) of the 
FCU Act allows an FCU to purchase all or part of the assets of another 
credit union. 12 U.S.C. 1757(14). In relying on the authority of 
Section 107(14) to adopt the eligible obligation provision in the 
RegFlex rule, the Board acknowledged that it was taking a more 
expansive interpretation than it had in the past, but that the 
interpretation was consistent with other FCU powers. 66 FR 58656, 58660 
(Nov. 23, 2001); 51 FR 15055, 15059 (Mar. 15, 2001). In adopting this 
provision in the RegFlex rule, NCUA intended to expand the liquidity 
options for RegFlex FCUs, provide them with enhanced regulatory 
flexibility, and enhance the safety and soundness of the credit union 
system.
    The proposed rule retains the flexibility provided currently in the 
RegFlex rule for FCUs meeting the well capitalized standard by 
transferring the provisions of current Sec.  742.4(b) to a renumbered 
Sec.  701.23 as paragraph (b)(2). The Board also proposes to 
grandfather all obligations purchased by RegFlex FCUs under the 
existing Sec.  742.4(b) as addressed in the proposed paragraph (b)(5) 
of Sec.  701.23. NCUA proposes a similar amendment to paragraph (e) in 
Sec.  723.1 to address nonmember business loans purchased under RegFlex 
authority or proposed Sec.  701.23(b)(2).
    The Board requests specific comment on whether it should extend the 
flexibility from the eligible obligations rule as discussed to all 
FCUs. Are there safety and soundness concerns that prevent the Board 
from extending this authority to all FCUs? Alternatively, should the 
final rule permit FCUs that do not meet the well capitalized standard 
to request approval from regional directors, similar to the proposed 
process for expanded investment authority?

h. Summary of Proposed Sections

    In a further effort to comply with the Plain Writing Act of 2010 
(Pub. L. 111-274), the Board includes the following table to assist 
readers in following the various proposed authorities for well 
capitalized FCUs and FCUs that do not meet the well capitalized 
standard. We are providing this table for your reference only. Please 
refer to the preamble and proposed regulatory text for specific 
information about the proposed rule.

------------------------------------------------------------------------
                                                      FCUs not meeting
   Proposed rule authority      FCUs meeting well     well capitalized
                              capitalized standard        standard
------------------------------------------------------------------------
Charitable Contributions....  Well capitalized      This flexibility
                               FCUs may make         would be extended
                               donations             to all FCUs.
                               consistent with
                               their incidental
                               powers authority
                               and board's
                               fiduciary duties.
Non-member Deposits.........  May accept up to the  This flexibility
                               greater of 20%        would be extended
                               total shares or $3    to all FCUs. (The
                               million. May          proposed rule
                               request exemption     raises the dollar
                               from regional         threshold from $1.5
                               director for          million to $3
                               greater amount.       million. An FCU
                                                     with less than $15
                                                     million in total
                                                     shares may now
                                                     accept up to $3
                                                     million in
                                                     nonmember
                                                     deposits.)
Unimproved Property for       May take up to six    This flexibility
 Future Expansion.             years to partially    would be extended
                               occupy unimproved     to all FCUs.
                               property purchased
                               for future
                               expansion.
Zero-coupon Investments*....  May purchase Zero-    May purchase Zero-
                               coupon investments    coupon investments
                               with maturity dates   with maturity dates
                               up to 30 years.       up to 10 years. May
                                                     request authority
                                                     from regional
                                                     director for
                                                     maturities up to 30
                                                     years.
Borrowing Repurchase          May enter into        May enter into
 Transaction*.                 Borrowing             Borrowing
                               Repurchase            Repurchase
                               Transactions where    Transactions where
                               the underlying        the underlying
                               investments mature    investments mature
                               later than the        no later than 30
                               borrowing, up to      days after the
                               100 percent of net    borrowing, up to
                               worth.                100 percent of net
                                                     worth. May request
                                                     authority from
                                                     regional director
                                                     for longer maturity
                                                     mismatch.
Private Label Commercial      Not restricted to     Similar
 Mortgage Related Security     purchasing only       flexibilities would
 (CMRS)*.                      CMRS issued by        be extended to all
                               Fannie Mae or         FCUs, under the
                               Freddie Mac. May      following
                               purchase Private      conditions:
                               Label CMRS if:       Requirements (i)-
                              (i) the security is    (iii) would be the
                               rated in one of the   same as for Well
                               two highest rating    Capitalized FCUs.
                               categories by at     The limit in
                               least one NSRO;.      requirement (iv)
                              (ii) it is a           would be 25 percent
                               ``mortgage related    of net worth. May
                               security'' under      request approval
                               the Securities        from the regional
                               Exchange Act of       director for higher
                               1934 and Sec.         limit, up to 50
                               703.2;.               percent of net
                              (iii) the pool of      worth, if FCU has 3
                               loans underlying      consecutive years
                               the CMRS contains     of effective CMRS
                               more than 50 loans    portfolio
                               with no one loan      management and the
                               representing more     ability to evaluate
                               than 10 percent of    key risk factors.
                               the pool; and.
                              (iv) the FCU does
                               not purchase an
                               aggregate amount in
                               excess of 50
                               percent of net
                               worth..

[[Page 81427]]

 
Purchase of Eligible          In addition to the    May purchase EOs
 Obligations (EOs)*.           authority in the      under the
                               current Sec.          conditions in the
                               701.23, may buy       current Sec.
                               loans from other      701.23 (subject to
                               federally insured     membership or
                               credit unions         pooling
                               without regard to     requirements).
                               whether the loans
                               are EOs of the
                               purchasing FCU's
                               members. May also
                               purchase nonmember
                               student loans and
                               real estate loans
                               without the need to
                               purchase them in
                               order to facilitate
                               a secondary market
                               pool package. Also
                               may purchase loans
                               from a liquidating
                               credit union
                               regardless of
                               whether the loans
                               were made to
                               liquidating CU's
                               members, subject to
                               the aggregate cap
                               on eligible
                               obligations of 5
                               percent of
                               unimpaired capital
                               and surplus.
------------------------------------------------------------------------
\*\ All authorized activity entered into before effective date is
  grandfathered.

i. Request for Comment

    The Board asks for your comment on whether the proposed rulemaking 
accomplishes the following: (1) Reduces compliance burden for FCUs; (2) 
assists them in improving financial performance; and (3) better enables 
them to provide member services, including extensions of credit. The 
Board also asks for your comment as to whether FCUs without 
consistently strong examination ratings and levels of net worth have 
the ability to manage the risks of the proposed expanded authorities. 
For instance, if NCUA grants additional authority regarding the 
maturity limit restrictions on zero-coupon investments or borrowing 
repurchase transactions for FCUs, that either do not meet the well 
capitalized standard or lack demonstrated expertise in managing 
particular investment risk, does it raise significant liquidity or 
safety and soundness concerns?

IV. Regulatory Procedures

a. Regulatory Flexibility Act

    The Regulatory Flexibility Act requires NCUA to prepare an analysis 
to describe any significant economic impact a proposed rule may have on 
a substantial number of small entities (primarily those under ten 
million dollars in assets). This proposed rule reduces compliance 
burden and extends regulatory relief while maintaining existing safety 
and soundness standards. NCUA has determined this proposed rule will 
not have a significant economic impact on a substantial number of small 
credit unions, so NCUA is not required to conduct a regulatory 
flexibility analysis.

b. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (PRA) applies to rulemakings in 
which an agency by rule creates a new paperwork burden on regulated 
entities or modifies an existing burden. 44 USC 3507(d); 5 CFR part 
1320. For purposes of the PRA, a paperwork burden may take the form of 
either a reporting or a recordkeeping requirement, both referred to as 
information collections.
    The proposed rule contains an information collection in the form of 
a voluntary written request for additional authorities from a regional 
director under proposed Sec.  703.20. An FCU that does not meet the 
``well capitalized standard'' may submit a written request to its 
regional director to request expanded authority above any or all of the 
following provisions in the proposed rule: (1) The borrowing repurchase 
transaction maximum maturity mismatch of 30 days under proposed Sec.  
703.13(d)(3)(ii), (2) the zero-coupon investment 10-year maximum 
maturity under proposed Sec.  703.14(i), up to a maturity of no more 
than 30 years, and (3) the aggregate commercial mortgage related 
security limit of 25% of net worth under proposed Sec.  703.14(j), up 
to no more than 50% of net worth. An FCU meets the ``well capitalized'' 
standard if the FCU has received a composite CAMEL rating of ``1'' or 
``2'' during its last two examinations and (1) has maintained a ``well 
capitalized'' net worth classification for the immediately preceding 
six quarters, or (2) has remained ``well capitalized'' for the 
immediately preceding six quarters after applying the applicable RBNW 
requirement. The Board estimates 1,770 FCUs may apply for an additional 
authority under Sec.  703.20. The cumulative total annual paperwork 
burden is estimated to be approximately 1,770 hours.
    NCUA considers comments by the public on this proposed collection 
of information in:
     Evaluating whether the proposed collection of information 
is necessary for the proper performance of the functions of the NCUA, 
including whether the information will have a practical use;
     Evaluating the accuracy of the NCUA's estimate of the 
burden of the proposed collection of information, including the 
validity of the methodology and assumptions used;
     Enhancing the quality, usefulness, and clarity of the 
information to be collected; and
     Minimizing the burden of collection of information on 
those who are required to respond, including through the use of 
appropriate automated, electronic, mechanical, or other technological 
collection techniques or other forms of information technology, e.g., 
permitting electronic submission of responses.
    The PRA requires the Office of Management and Budget (OMB) to make 
a decision concerning the collection of information contained in the 
proposed regulation between 30 and 60 days after publication of this 
document in the Federal Register. Therefore, a comment to OMB is best 
assured of having its full effect if OMB receives it within 30 days of 
publication. This does not affect the deadline for the public to 
comment to NCUA on the proposed regulation.
    Comments on the proposed information collection requirements should 
be sent to: Office of Information and Regulatory Affairs, OMB, New 
Executive Office Building, 725 17th Street NW., Washington, DC 20503; 
Attention: NCUA Desk Officer, with a copy to Mary Rupp, Secretary of 
the Board, National Credit Union Administration, 1775 Duke Street, 
Alexandria, Virginia 22314-3428.

c. Executive Order 13132

    Executive Order 13132 encourages independent regulatory agencies to 
consider the impact of their actions on state and local interests. 
NCUA, an independent regulatory agency as defined in 44 U.S.C. 3502(5), 
voluntarily complies with the executive order to adhere to fundamental 
federalism principles. This proposed rule would

[[Page 81428]]

not have a substantial direct effect on the states, on the relationship 
between the national government and the states, or on the distribution 
of power and responsibilities among the various levels of government. 
NCUA has determined that this proposed rule does not constitute a 
policy that has federalism implications for purposes of the executive 
order.

e. Agency Regulatory Goal

    NCUA's goal is to promulgate clear and understandable regulations 
that impose minimal regulatory burden. We request your comments on 
whether this proposed rule is understandable and minimally intrusive if 
implemented as proposed.

List of Subjects

12 CFR part 701

    Credit unions.

12 CFR part 703

    Credit unions, Investments.

12 CFR part 723

    Credit, Credit unions, Reporting and recordkeeping requirements.

12 CFR part 742

    Credit unions, reporting and recordkeeping requirements.

    By the National Credit Union Administration Board on December 
15, 2011.
Mary Rupp,
Secretary of the Board.
    For the reasons discussed above, NCUA proposes to amend 12 CFR 
parts 701, 703, 723, and 742 as follows:

PART 701--ORGANIZATION AND OPERATIONS OF FEDERAL CREDIT UNIONS

    1. The authority citation for part 701 continues to read as 
follows:

    Authority:  12 U.S.C. 1752(5), 1755, 1756, 1757, 1759, 1761a, 
1761b, 1766, 1767, 1782, 1784, 1787, and 1789. Section 701.6 is also 
authorized by 31 U.S.C. 3717. Section 701.31 is also authorized by 
15 U.S.C. 1601 et seq., 42 U.S.C. 1861 and 42 U.S.C. 3601-3610. 
Section 701.35 is also authorized by 42 U.S.C. 4311-4312.
    2. In Sec.  701.23:
    a. Redesignate paragraphs (b)(2) and (3) as paragraphs (b)(3) and 
(4);
    b. Add new paragraph (b)(2);
    c. In newly redesignated paragraph (b)(4) introductory text, remove 
the phrase ``under paragraph (b) of this section'' and add in its place 
``under paragraphs (b)(1) and (b)(2)(ii) of this section'';
    d. Add paragraph (b)(5) to read as follows:
    The additions read as follows:


Sec.  701.23  Purchase, sale, and pledge of eligible obligations.

* * * * *
    (b) * * *
    (2) Purchase of obligations from a FICU. A Federal credit union 
that received a composite CAMEL rating of ``1'' or ``2'' for the last 
two (2) examinations and maintained a net worth classification of 
``well capitalized'' under part 702 of this chapter for the six (6) 
immediately preceding quarters or, if subject to a risk-based net worth 
(RBNW) requirement under part 702 of this chapter, has remained ``well 
capitalized'' for the six (6) immediately preceding quarters after 
applying the applicable RBNW requirement may purchase and hold the 
following obligations, provided that it would be empowered to grant 
them:
    (i) Eligible obligations. Eligible obligations pursuant to 
paragraph (b)(1)(i) of this section without regard to whether they are 
obligations of its members, provided they are purchased from a 
federally-insured credit union only;
    (ii) Eligible obligations of a liquidating credit union. Eligible 
obligations of a liquidating credit union pursuant to paragraph 
(b)(1)(ii) of this section without regard to whether they are 
obligations of the liquidating credit union's members.
    (iii) Student loans. Student loans pursuant to paragraph 
(b)(1)(iii) of this section, provided they are purchased from a 
federally-insured credit union only;
    (iv) Mortgage loans. Real-estate secured loans pursuant to 
paragraph (b)(1)(iv) of this section, provided they are purchased from 
a federally-insured credit union only;
* * * * *
    (5) Grandfathered purchases. Subject to safety and soundness 
considerations, a Federal credit union may hold any of the loans 
described in paragraph (b)(2) of this section provided it was 
authorized to purchase the loan and purchased the loan before 
[EFFECTIVE DATE OF FINAL RULE].
* * * * *


Sec.  701.25  [Removed and Reserved]

    3. Remove and reserve Sec.  701.25.


Sec.  701.32  [Amended]

    4. In Sec.  701.32, amend paragraph (b)(1) by removing ``$1.5 
million'' after the words ``federal credit union'' and adding in its 
place ``$3 million''.
    5. Amend Sec.  701.36 by revising paragraph (b)(2) and removing 
paragraph (d) and redesignating paragraph (e) as paragraph (d).
    The revision reads as follows:


Sec.  701.36  FCU ownership of fixed assets.

* * * * *
    (b) * * *
    (2) When a Federal credit union acquires premises for future 
expansion, it must partially occupy the premises within a reasonable 
period, not to exceed three years, unless the credit union has acquired 
unimproved real property for future expansion. The NCUA may waive this 
partial occupation requirement in writing upon written request. The 
request must be made within 30 months after the property is acquired. 
If the Federal credit union has acquired unimproved real property to 
develop for future expansion, it must partially occupy the premises 
within a reasonable period, not to exceed six years.
* * * * *

PART 703--INVESTMENTS AND DEPOSIT ACTIVITIES

    6. The authority citation for part 703 continues to read as 
follows:

    Authority:  12 U.S.C. 1757(7), 1757(8), 1757(15).

    7. In Sec.  703.13, revise paragraph (d)(3) to read as follows:


Sec.  703.13  Permissible investment activities.

* * * * *
    (d) * * *
    (3) The investments referenced in paragraph (d)(2) of this section 
must mature under the following conditions:
    (i) No later than the maturity of the borrowing repurchase 
transaction;
    (ii) No later than thirty days after the borrowing repurchase 
transaction, unless authorized under Sec.  703.20, provided the value 
of the investments does not exceed 100 percent of the Federal credit 
union's net worth; or
    (iii) At any time later than the maturity of the borrowing 
repurchase transaction, provided the value of the investments does not 
exceed 100 percent of the Federal credit union's net worth and the 
credit union received a composite CAMEL rating of ``1'' or ``2'' for 
the last two (2) examinations and maintained a net worth classification 
of ``well capitalized'' under part 702 of this chapter for the six (6) 
immediately preceding quarters or, if subject to a risk-based net worth 
(RBNW) requirement under part 702 of this chapter, has remained ``well 
capitalized'' for the six (6) immediately preceding quarters after 
applying the applicable RBNW requirement.
* * * * *
    8. Amend Sec.  703.14 by adding paragraphs (i) and (j) to read as 
follows:

[[Page 81429]]

Sec.  703.14  Permissible investments.

* * * * *
    (i) Zero-coupon investments. A Federal credit union may only 
purchase a zero-coupon investment with a maturity date that is no 
greater than 10 years from the related settlement date, unless 
authorized under Sec.  703.20 or otherwise provided in this paragraph. 
A Federal credit union that received a composite CAMEL rating of ``1'' 
or ``2'' for the last two (2) examinations and maintained a net worth 
classification of ``well capitalized'' under part 702 of this chapter 
for the six (6) immediately preceding quarters or, if subject to a 
risk-based net worth (RBNW) requirement under part 702 of this chapter, 
has remained ``well capitalized'' for the six (6) immediately preceding 
quarters after applying the applicable RBNW requirement may purchase a 
zero-coupon investment with a maturity date that is no greater than 30 
years from the related settlement date.
    (j) Commercial mortgage related security (CMRS). A Federal credit 
union may purchase a CMRS permitted by Section 107(7)(E) of the Act; 
and, pursuant to Section 107(15)(B) of the Act, a CMRS of an issuer 
other than a government-sponsored enterprise enumerated in Section 
107(7)(E) of the Act, provided:
    (1) The CMRS is rated in one of the two highest rating categories 
by at least one nationally-recognized statistical rating organization;
    (2) The CMRS 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 part;
    (3) The CMRS's underlying pool of loans contains more than 50 loans 
with no one loan representing more than 10 percent of the pool; and
    (4) The aggregate amount of private label CMRS purchased by the 
Federal credit union does not exceed 25 percent of its net worth, 
unless authorized under Sec.  703.20 or as otherwise provided in this 
subparagraph. A Federal credit union that has received a composite 
CAMEL rating of ``1'' or ``2'' for the last two (2) examinations and 
maintained a net worth classification of ``well capitalized'' under 
part 702 of this chapter for the six (6) immediately preceding quarters 
or, if subject to a risk-based net worth (RBNW) requirement under part 
702 of this chapter, has remained ``well capitalized'' for the six (6) 
immediately preceding quarters after applying the applicable RBNW 
requirement, may hold private label CMRS in an aggregate amount not to 
exceed 50% of its net worth.


Sec.  703.16  [Amended]

    9. In Sec.  703.16, remove paragraph (b) and paragraph (d) and 
redesignate paragraphs (c), (e), and (f) as paragraphs (b), (c), and 
(d), respectively.
    10. In Sec.  703.18, redesignate paragraph (b) as paragraph (c) and 
add new paragraph (b) read as follows:


Sec.  703.18  Grandfathered investments.

* * * * *
    (b) A Federal credit union may hold a zero-coupon investment with a 
maturity greater than 10 years, a borrowing repurchase transaction in 
which the investment matures at any time later than the maturity of the 
borrowing, or CMRS that cause the credit union's aggregate amount of 
CMRS from issuers other than government-sponsored enterprises to exceed 
25% of its net worth, in each case if it purchased the investment or 
entered the transaction under the Regulatory Flexibility Program before 
[EFFECTIVE DATE OF FINAL RULE].
    11. Add Sec.  703.20 to read as follows:


Sec.  703.20  Request for additional authority.

    (a) Additional authority. A Federal credit union may submit a 
written request to its regional director seeking expanded authority 
above the following limits in this part:
    (1) Borrowing repurchase transaction maximum maturity mismatch of 
30 days under Sec.  703.13(d)(3)(ii).
    (2) Zero-coupon investment 10-year maximum maturity under Sec.  
703.14(i), up to a maturity of no more than 30 years.
    (3) CMRS aggregate limit of 25% of net worth under Sec.  703.14(j), 
up to no more than 50% of net worth. To obtain approval for additional 
authority, the Federal credit union must demonstrate three consecutive 
years of effective CMRS portfolio management and the ability to 
evaluate key risk factors.
    (b) Written request. A Federal credit union desiring additional 
authority must submit a written request to the NCUA regional office 
having jurisdiction over the geographical area in which the credit 
union's main office is located, that includes the following:
    (1) A copy of your investment policy;
    (2) The higher limit sought;
    (3) An explanation of the need for additional authority;
    (4) Documentation supporting your ability to manage the investment 
or activity; and
    (5) An analysis of the credit union's prior experience with the 
investment or activity.
    (c) Approval process. A regional director will provide a written 
determination on a request for expanded authority within 60 calendar 
days after receipt of the request; however, the 60-day period will not 
begin until the requesting credit union has submitted all necessary 
information to the regional director. The regional director will inform 
the requesting credit union, in writing, of the date the request was 
received and of any additional documentation that the regional director 
might require in support of the request. If the regional director 
approves the request, the regional director will establish a limit on 
the investment or activity as appropriate and subject to the 
limitations in this part. If the regional director does not notify the 
credit union of the action taken on its request within 60 calendar days 
of the receipt of the request or the receipt of additional requested 
supporting information, whichever occurs later, the credit union may 
proceed with its proposed investment or investment activity.
    (d) Appeal to NCUA Board. A Federal credit union may appeal any 
part of the determination made under paragraph (c) to the NCUA Board by 
submitting its appeal through the regional director within 30 days of 
the date of the determination.

PART 723--MEMBER BUSINESS LOANS

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

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

    13. In Sec.  723.1 revise paragraph (e) to read as follows:


Sec.  723.1  What is a member business loan?

* * * * *
    (e) Purchases of nonmember loans and nonmember loan participations. 
Any interest a credit union obtains in a nonmember loan, pursuant to 
Sec.  701.22, Sec.  701.23(b)(2), under a Regulatory Flexibility 
Program designation before [EFFECTIVE DATE OF FINAL RULE] or other 
authority, is treated the same as a member business loan for purposes 
of this rule and the risk weighting standards under part 702 of this 
chapter, except that the effect of such interest on a credit union's 
aggregate member business loan limit will be as set forth in Sec.  
723.16(b) of this part.

PART 742--[REMOVED]

    16. Under the authority of 12 U.S.C. 1756 and 1766, the National 
Credit Union Administration removes part 742.
[FR Doc. 2011-33041 Filed 12-27-11; 8:45 am]
BILLING CODE 7535-01-P