[Federal Register Volume 77, Number 105 (Thursday, May 31, 2012)]
[Rules and Regulations]
[Pages 31981-31993]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-13212]


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NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Parts 701, 703, 713, 721, 723, and 742

RIN 3133-AD98


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

AGENCY: National Credit Union Administration (NCUA).

ACTION: Final rule and interim final rule with comment period.

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SUMMARY: NCUA is removing certain regulations and eliminating the 
Regulatory Flexibility Program (RegFlex) to provide regulatory relief 
to federal credit unions. NCUA is also removing or amending 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, incidental powers, and member business loans. In addition, 
NCUA is issuing an interim final rule with a request for comment to 
amend a provision in the fidelity bond rule to remove references to 
RegFlex.

DATES: Effective dates: The final rule, as well as the interim final 
rule pertaining to the revisions in the fidelity bond rule, Sec.  
713.6, will go into effect on July 2, 2012.
    Comment date: We will consider comments on the interim final rule 
portion (the fidelity bond rule, Sec.  713.6), as discussed in section 
IV of the preamble of this rulemaking. Send your comments to reach us 
on or before July 30, 2012. We may not consider comments received after 
the above date in making any decision whether to amend the interim 
final rule.

ADDRESSES: In commenting on the interim final rule, 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.
     Email: Address to [email protected]. Include ``[Your 
name] Comments on Interim Final Rule, Section 713.6, Fidelity Bond'' in 
the email subject line.
     Fax: (703) 518-6319. Use the subject line described above 
for email.
     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 email 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. Summary of Comments on December 2011 Proposed Rule
III. Final Rule
IV. Interim Final Rule and Request for Comment
V. Rule Summary Table
VI. Regulatory Procedures

I. Background

a. Why is NCUA adopting 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. Consistent with the spirit 
of the Executive Order and as part of NCUA's Regulatory Modernization 
Initiative, the NCUA Board (Board) is adopting this rule to streamline 
its regulatory program by eliminating RegFlex. The final rule relieves 
regulatory burden on federal credit unions (FCUs) because they will no 
longer need to engage in any process for a RegFlex designation. In 
addition, the final rule provides regulatory relief to FCUs that are 
currently not RegFlex eligible because it extends to them most of the 
flexibilities previously available only to RegFlex FCUs.
    The Board issued a Notice of Proposed Rulemaking (NPRM) in December 
2011. 76 FR 81421 (Dec. 28, 2011). The comment period on the proposed 
rule ended on February 27, 2012. NCUA received seventeen comment 
letters on the NPRM: Four from FCUs, three from trade associations (1 
representing banks, 2 representing credit unions), nine from state 
credit union leagues, and one from a law firm. The majority of the 
commenters supported the rulemaking generally. Four commenters did not 
support the rule as proposed, and the remaining commenters offered 
comments on particular provisions but did not take a position on the 
initiative as a whole. For the reasons discussed below, the Board is 
adopting the amendments almost exactly as proposed. As such, the Board 
does not restate the legal analysis it presented in the NPRM's preamble 
and incorporates it by reference here in this rulemaking. Id.

b. What was RegFlex?

    The Board established RegFlex in 2002. 66 FR 58656 (Nov. 23, 2001). 
RegFlex relieved FCUs from certain regulatory restrictions and granted 
them additional powers if they demonstrated sustained superior 
performance as measured by CAMEL rating and net worth classification. 
An FCU could qualify for RegFlex treatment automatically or by 
application to the appropriate regional director. Specifically, an FCU 
automatically qualified for a RegFlex designation when it received a 
composite CAMEL rating of ``1'' or ``2'' for two consecutive 
examination cycles and maintained a net worth classification of ``well 
capitalized'' under part 702 of NCUA's rules for the last six quarters. 
An FCU subject to a risk-based net worth (RBNW) requirement under part 
702 could also qualify for RegFlex treatment

[[Page 31982]]

if it remained ``well capitalized'' for the last six quarters after 
applying the applicable RBNW requirement. FCUs that did not 
automatically qualify for a RegFlex designation could seek one with the 
appropriate regional director.
    The rule gave RegFlex FCUs 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 (CMRS). It provided 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. RegFlex FCUs were also 
permitted a higher maximum allowable deductible for fidelity bond 
coverage under Sec.  713.6.

c. What changes did NCUA propose?

    The Board proposed to eliminate RegFlex and the charitable 
contributions rule, and amend the rules that apply to eligible 
obligations, nonmember deposits, fixed assets, and investments, so that 
all FCUs could engage in activities previously permitted only for 
RegFlex FCUs, subject to some conditions. 76 FR 81421 (Dec. 28, 2011).
    The NPRM removed the charitable contributions rule in its entirety 
and placed the remaining six flexibilities of the RegFlex rule into the 
subject-specific rules that apply to all FCUs. It adjusted the 
nonmember deposits rule to allow some FCUs to accept more nonmember 
deposits. The proposed rule extended to six years the amount of time in 
which all FCUs must occupy unimproved property under NCUA's fixed 
assets rule. The proposed amendments to the investment rule permitted 
extended maturities for zero-coupon investments and borrowing 
repurchase transactions, as well as the purchase of CMRS under similar 
conditions allowed for RegFlex FCUs. The NPRM moved the provisions to 
buy nonmember and other obligations from the RegFlex rule into the 
eligible obligations rule, Sec.  701.23. Lastly, the proposal made a 
nonsubstantive change to the member business loan rule that cross-
references RegFlex.
    While providing additional regulatory flexibility, the NPRM made a 
few modifications to authorities and did not extend the full scope of 
every RegFlex authority to all FCUs. The Board proposed to remove the 
automatic exemption from the nonmember deposits limit that had been 
granted to RegFlex FCUs. In so doing, the Board noted that the change 
would not negatively impact those FCUs based on the volume of nonmember 
deposits held by them.
    With regard to the investment rule amendments, the NPRM created a 
``well capitalized standard'' based on the automatic designation 
criteria used in RegFlex. An FCU meets the well capitalized standard if 
it has received a composite CAMEL rating of ``1'' or ``2'' for two 
consecutive full 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 proposed rule provided that well capitalized FCUs could 
purchase zero-coupon investments with a maximum maturity of no more 
than 30 years, while FCUs not meeting the standard would continue to be 
subject to a maturity cap of 10 years unless they received approval 
from their regional director. The NPRM permitted FCUs not meeting the 
well capitalized standard to enter into borrowing repurchase 
transactions in which the security purchased with the proceeds from the 
borrowing agreement matured no more than 30 days after the maturity of 
the borrowing, unless they received additional approval from their 
regional director. Consistent with the RegFlex program, the NPRM did 
not impose the 30-day mismatch restriction on FCUs meeting the well 
capitalized standard. The proposal limited the amount of securities 
that any FCU, whether well capitalized or not, could purchase with 
mismatched maturities to 100% of the FCU's net worth. It also permitted 
FCUs not meeting the well capitalized standard to purchase private 
label CMRS subject to an aggregate limit of 25% of net worth, unless 
their regional director granted authority to purchase securities in an 
amount up to 50% of net worth, which is the cap for FCUs meeting the 
well capitalized standard.

II. Summary of Comments on December 2011 Proposed Rule

    A majority of commenters supported the Board's efforts to extend 
regulatory flexibility to FCUs. Other commenters felt the proposal did 
not provide enough relief and failed to extend similar relief to 
federally insured, state-chartered credit unions. One credit union 
trade association stated that the proposal removed clear eligibility 
standards for FCUs to obtain expanded authorities. It opposed the 
elimination of an appeals process to NCUA's Supervisory Review 
Committee, similar to the one through which RegFlex FCUs could appeal 
RegFlex designation revocations, if an FCU were not permitted to engage 
in the full range of flexibilities. The bank trade association stated 
that, although it supports efforts to reduce regulatory burdens, NCUA 
should not extend such regulatory relief to FCUs that are 
undercapitalized or represent supervisory concerns. Another commenter 
found that the RegFlex program under part 742 sufficiently accomplished 
its goals in its current form. The Board has carefully reviewed and 
analyzed the comment letters and describes specific comments on the 
NPRM below.

a. Charitable Contributions

    In the NPRM, the Board proposed to eliminate the entire charitable 
contributions rule, Sec.  701.25. Section 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 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 that operate primarily to promote and 
develop credit unions. It further requires an FCU's board of directors 
to approve charitable contributions based on a determination that the 
contributions are in the FCU's best interests 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), exempted RegFlex FCUs from the entire charitable 
contributions rule. By removing Sec.  701.25, the Board is now allowing 
any FCU to make donations without the prior approval of its board of 
directors and without regulatory restrictions as to recipients.
    In the NPRM, the Board noted that, even in the absence of a 
charitable contributions rule, an FCU's authority to make donations is 
authorized by incidental powers given in the Federal Credit Union Act 
(Act), 12 U.S.C. 1757(17). 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

[[Page 31983]]

that could arise in the context of making charitable donations.
    Two credit union trade associations, four leagues, and three credit 
unions supported the elimination of the charitable contributions rule. 
Three of these commenters maintained that the limitations on an FCU's 
incidental powers, the board's fiduciary duties, and the FCU Bylaws 
already set the appropriate standards for charitable contributions. One 
commenter stated that the change would eliminate a bureaucratic hurdle 
and enable FCUs to further their mission of helping people of modest 
means. The bank trade association stated that the charitable 
contributions rule protects the interests of members and avoids 
conflicts of interest and, therefore, requested that NCUA retain it. 
The Board believes the Act, FCU bylaws, part 721, and Sec.  701.4 
provide sufficient constraints on an FCU's ability to make charitable 
contributions. Accordingly, the final rule removes Sec.  701.25 as 
proposed.
    One credit union commenter expressed concern that FCUs would need 
to seek approval to make donations because NCUA did not propose to 
amend Sec.  721.3 to expressly identify charitable contributions as a 
preapproved incidental power. Since 1979, NCUA has recognized that FCUs 
may make charitable contributions under the provision in the 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 Board appreciates the 
suggestion to clarify an FCU's authority to make charitable 
contributions and donations in the incidental powers rule. The final 
rule amends Sec.  721.3 accordingly by adding a new paragraph, derived 
from NCUA legal opinions, identifying this authority.

b. Nonmember Deposits

    The Act permits an FCU to receive shares from nonmember public 
units, political subdivisions, and credit unions, 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. 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 count against the nonmember deposit limit once 
the FCU has repaid the loan. An FCU may request an exemption from its 
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 exempted RegFlex FCUs from both paragraphs (b) 
and (c) of Sec.  701.32, so RegFlex FCUs have not been subject to the 
limit on the amount of public unit and nonmember shares.
    The NPRM raised the dollar threshold on the nonmember deposit limit 
in Sec.  701.32(b) to $3 million. The Board acknowledged that, by 
eliminating RegFlex, RegFlex FCUs would lose their blanket exemption 
from the nonmember deposit cap. Based on the amount of nonmember 
deposits held by RegFlex FCUs, however, the Board stated that the 
proposal provided 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.
    Both credit union trade associations and two leagues objected to 
the elimination of the RegFlex blanket exemption from the nonmember 
deposit rule's cap because all FCUs would now need a waiver to exceed 
the cap. One commenter stated that most FCUs find the waiver process, 
in general, to be unduly burdensome, time consuming, and, on occasion, 
arbitrary. One commenter characterized the removal of the exemption as 
an unfair and inflexible approach, and another stated that the change 
does not represent an easing of regulatory compliance burden. Three of 
these commenters generally supported raising the dollar threshold, but 
one of the trade associations stated it was unclear why NCUA chose the 
new level to be $3 million. The league commenters agreed with the $3 
million threshold, suggested a higher threshold, or advocated 
preservation of the exemption for RegFlex institutions. One commenter 
suggested that NCUA eliminate the cap or, at a minimum, increase it to 
$5 million.
    Two league commenters and one credit union supported the change to 
the nonmember deposit dollar threshold. One commenter stated that, 
although the rule would eliminate the current exemption, the proposal 
provided the appropriate amount of flexibility and regulatory relief to 
FCUs without adversely impacting RegFlex FCUs. Another commenter noted 
that smaller asset-sized FCUs can enjoy the opportunity to acquire an 
increased volume of nonmember deposits.
    The bank trade association supported the proposed rule's 
requirement that all FCUs be subject to nonmember share limits. It 
objected, however, to the proposed increase of the dollar threshold 
from $1.5 million to $3 million, citing asset liability management and 
liquidity concerns that could be created for some small FCUs with such 
an increase. The commenter stated that small FCUs may not have the 
necessary plans, practices, and experience to manage such an inflow of 
deposits. It, therefore, recommended the rule require small FCUs taking 
advantage of the higher threshold of $3 million to adopt policies 
managing the risk associated with nonmember deposits. The commenter 
further stated that because NCUA's Prompt Corrective Action rule, Sec.  
702.202, specifies that the prohibition on accepting nonmember deposits 
is a discretionary supervisory action for NCUA, undercapitalized credit 
unions should be prohibited from accepting or rolling over nonmember 
deposits.
    As the Board stated in the NPRM, nonmember shares are 
characteristically more volatile than core member shares. This 
additional volatility can pose asset liability management concerns and 
liquidity concerns. The Board determined it was appropriate to raise 
the dollar threshold to $3 million because the agency's data reveals 
that only four RegFlex FCUs currently exceed the limitation in Sec.  
701.32(b) of the greater of 20% of total shares or $1.5 million in 
nonmember deposits, and each of those FCUs holds less than $3 million. 
To raise the maximum dollar threshold to $5 million would create a 
wider gap for FCUs with lower total shares from the percentage of 20% 
of total shares threshold without any need for such an increase. For 
instance, an FCU with $7.5 million in total shares has been subject to 
the $1.5 million and 20% percent caps of Sec.  701.32. Under this final 
rule, however, the FCU will be permitted to accept up to $3 million in 
nonmember deposits, representing 40% of total shares. To permit this 
FCU to accept up to $5 million in shares would permit the FCU to accept 
nonmember deposits amounting to two-thirds or over 66% of its total 
shares. As such, the final rule maintains the proposed adjustment to 
the dollar threshold in paragraph (b)(1) because it maintains the 
regulatory relief that RegFlex FCUs have enjoyed. Furthermore, the 
adjustment extends relief to FCUs, particularly those FCUs that have 
lower amounts of total shares, and remains attentive to safety and 
soundness considerations. The Board also finds it unnecessary to 
include a blanket prohibition for undercapitalized FCUs

[[Page 31984]]

to accept nonmember deposits in Sec.  701.32 as suggested by one 
commenter. The Prompt Corrective Action rule, Sec.  702.202(b)(6), 
offers NCUA the appropriate flexibility in determining whether limiting 
or prohibiting an undercapitalized FCU from accepting nonmember 
deposits is the appropriate supervisory action under particular facts.

c. Fixed Assets

    The 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 assets 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'' is defined in Sec.  701.36(e) and includes 
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). RegFlex FCUs have enjoyed more flexibility by 
having authority to take up to six years to partially occupy unimproved 
land they acquired for future expansion. 12 CFR 701.36(d), 742.4(a)(3). 
In the NPRM, the Board proposed to amend the fixed assets rule to 
extend the three-year time period to six years for any FCU that 
acquires unimproved land.
    One credit union trade association, five leagues, and two credit 
unions supported the proposed extension of time from three years to six 
years. One league noted that, while most FCUs will probably not use the 
expanded time frame, the flexibility will assist them in implementing 
building plans efficiently. Another league stated that the change 
provides relief to FCUs that acquired land during better economic times 
or rates. It noted that, under the proposed extension, FCUs will not be 
forced to choose between seeking a waiver or selling land because they 
could not meet the three-year timeline.
    As noted in the NPRM's preamble and discussed in previous 
rulemakings, the Board recognizes that many real estate transactions 
are complex and time consuming, and they 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 final rule adopts the change to the 
fixed assets rule as proposed by permitting any FCU a longer time (up 
to six years, rather than only three years) to partially occupy the 
premises if it initially acquired the property as unimproved land.

d. Investment Authorities

    Some of the commenters provided general comments applicable to most 
or all facets of the NPRM's proposed changes to the investment rule. 
One credit union generally supported the ability of all FCUs to invest 
in zero-coupon investments and CMRS, as well as to engage in borrowing 
repurchase transactions. Two leagues stated that, while their members 
were generally supportive of giving FCUs expanded investment 
authorities, these relatively sophisticated financial instruments 
require a baseline of expertise. The commenters stated that the rule 
should include requirements for staff to have demonstrated expertise to 
handle these transactions. One league argued that the proposal's well 
capitalized standard merely eliminates the RegFlex designation while 
preserving the same restrictions on eligibility. As such, the commenter 
urged NCUA to consider whether the current restrictions on some types 
of investments should be removed for more FCUs to allow flexibility in 
diversifying investments and to reduce reliance on the ``currently 
limited'' investments allowed under NCUA's rules. The Board maintains 
the standards and conditions for the various investment authorities set 
forth the proposed rule as discussed in the responses to specific 
comments below.
1. 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. RegFlex FCUs have been exempt from the maximum 
maturity length of 10 years in the investment rule. 12 CFR 742.4(a)(4). 
To balance the risk management concerns inherent in zero-coupon 
investments with the flexibility previously granted to RegFlex FCUs, 
the Board proposed to establish the maximum maturity date of zero-
coupon investments to 30 years for any FCU that meets the NPRM's well 
capitalized standard. The Board proposed to grandfather zero-coupon 
investments purchased in accordance with Sec.  742.4(a)(4) before the 
effective date of the final rule, so FCUs that purchased zero-coupon 
investments with maturities greater than 10 years under RegFlex 
authority would not be required to divest those investments. The 
proposed rule also provided that an FCU not meeting the well 
capitalized standard may only purchase a zero-coupon investment with a 
maturity date that is no more than 10 years from the related settlement 
date, unless it received approval from its regional director to 
purchase such an investment with a greater maturity.
    Three commenters objected to the proposed rule change for zero-
coupon investments. One credit union trade association encouraged NCUA 
to eliminate the 10-year maturity limit for zero-coupon investments. 
One credit union stated the current rule is sufficient. Both of these 
commenters stated that this issue is more appropriately addressed 
within an FCU's investment policy. One league stated that it is more 
appropriate to adopt a rule specific to interest rate risk rather than 
remove the current flexibility afforded to certain RegFlex FCUs.
    Two leagues supported the proposed changes regarding zero-coupon 
investments. One commenter stated that it is reasonable to require an 
FCU that does not meet the well capitalized standard to obtain approval 
from its regional director to purchase a zero-coupon investment with a 
maturity greater than ten years. The commenter also supported the 
creation of a maximum maturity date of 30 years for well capitalized 
FCUs. Another commenter suggested that the proposal include greater 
flexibility by permitting well capitalized FCUs to pursue a waiver from 
the 30-year maturity limit, as other FCUs would have the option to seek 
waivers from their 10-year maturity cap.
    As the Board noted in the NPRM's preamble, the percentage loss on 
zero-coupon investments increases dramatically with maturity. These 
losses could make FCUs reluctant to sell zero-coupon investments and 
recognize losses during periods of liquidity stress. Therefore, 
consistent with safety and soundness principles, the Board does not 
believe it is appropriate to allow FCUs to purchase or hold zero-coupon 
investments with maturity dates that exceed 30 years. Accordingly, the 
Board adopts the final rule as proposed.
2. Borrowing Repurchase Transactions
    A borrowing repurchase transaction is a transaction in which an FCU 
agrees to sell a security to a counterparty and to

[[Page 31985]]

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 as 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).
    While 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, NCUA adopted a limited exemption for RegFlex FCUs 
from the maturity restriction. 12 CFR 703.13(d)(3); 68 FR 32958, 32959 
(June 3, 2003). A RegFlex FCU has been permitted to purchase securities 
with maturities exceeding the maturity of the borrowing repurchase 
transaction, commonly referred to as having mismatched maturities, 
provided the amount of any such purchased securities does not exceed 
the FCU's net worth. 12 CFR 742.4(a)(5).
    In the NPRM, the Board proposed to continue this flexibility of 
mismatched maturities for borrowing repurchase transactions for FCUs 
meeting the well capitalized standard. It also proposed to grandfather 
borrowing repurchase transactions into which an FCU entered pursuant to 
its RegFlex authority before the effective date of the final rule. The 
Board also sought to extend relief from the maturity requirement to 
FCUs not meeting the well capitalized standard. Under the proposed 
rule, these FCUs could enter into borrowing repurchase transactions and 
use the proceeds to purchase investments with maturities no more than 
30 days later than the transaction's term, so long as the value of the 
purchased investments would not exceed the related FCU's net worth. In 
addition, under the NPRM, FCUs not meeting the well capitalized 
standard would be allowed to request additional authority from their 
regional directors to enter transactions whereby the maturity mismatch 
would be greater than 30 days. Lastly, the Board sought comment on 
whether the final rule 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.
    Two leagues and one credit union supported the revised standards on 
maturity matching for borrowing repurchase transactions. One credit 
union requested that the final rule permit FCUs that are well 
capitalized under part 702 but that do not have a CAMEL rating of 1 or 
2 to enter these transactions without a maturity mismatch limitation, 
provided the assets pledged are guaranteed by a governmental agency or 
government-sponsored enterprise. One credit union trade association did 
not support any minimum experience requirements for staff involved in 
the analysis and ongoing risk management of borrowing repurchase 
transactions, arguing that FCUs should have the flexibility to hire 
qualified personnel without comparing the applicant to a predetermined 
set of NCUA criteria.
    The final rule makes no substantive change to the proposed rule. It 
does clarify, however, that when an FCU purchases investments that have 
mismatched maturities under borrowing repurchase agreements, the 
aggregate or total value of purchased investments made under these 
conditions cannot exceed the FCU's net worth. Therefore, under the 
final rule, an FCU may purchase investments with maturities exceeding 
the maturity of the borrowing repurchase transaction if the aggregate 
amount of all such purchased investments does not exceed its net worth. 
The Board notes that the final rule does not create an exception for 
purchased investments that are guaranteed by a government agency or 
government-sponsored entity because the conditions on maturity 
mismatches are intended to address interest rate risk, rather than 
default risk. The suggested exception would not further the Board's 
goal. In addition, the final rule does not include experience 
requirements. The Board again reminds FCUs, however, that they should 
position themselves, through in-house or contracted expertise, to 
properly engage in the analysis and ongoing risk management of 
borrowing repurchase transactions.
3. Commercial Mortgage Related Security (CMRS)
    Pursuant to section 107(15)(B) of the Act, a RegFlex FCU had been 
permitted to purchase CMRS that are not otherwise permitted by section 
107(7)(E) of the Act if: (i) the security is rated in one of the two 
highest rating categories by at least one nationally-recognized 
statistical rating organization (NRSRO); (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. 12 CFR 742.4(a)(6). In the NPRM, the Board proposed to 
permit FCUs meeting the well capitalized standard to purchase private 
label CMRS under these same conditions.
    The Board also proposed to permit an FCU not meeting the well 
capitalized standard to purchase private label CMRS under the 
conditions applicable to well capitalized FCUs, but it limited the 
aggregate amount of CMRS to 25 percent of the FCU's net worth. The NPRM 
permitted such an FCU to seek authorization from its regional director 
to purchase a greater amount of CMRS, up to 50 percent of its net 
worth, if it could demonstrate three consecutive years of effective 
CMRS portfolio management and the ability to evaluate key risk factors. 
The proposed rule also added a grandfather provision for private label 
CMRS purchased by an FCU under its RegFlex authority before the 
effective date of the final rule. In the NPRM, the Board sought comment 
on whether the conditions for purchasing CMRS should be enhanced to 
encourage diversity and mitigate risk.
    One league and one credit union supported the changes for CMRS as 
proposed. One credit union trade association advocated additional 
authority for FCUs in this area and supported removal of limitations on 
CMRS that are not required by the Act. One credit union stated its 
particular concern with the proposal because it believes the failure of 
the corporate credit union system was caused by significant 
concentrations of private label mortgage related securities. The 
commenter stated that the proposed rule lacks sufficient guidance 
related to credit risk management. It suggested that, at a minimum, the 
rule require: pre-purchase credit analysis, including analysis of 
underlying collateral, geographic diversification, cash flows, and 
credit structures, as well as identification and general avoidance of 
subordinated tranches that represent elevated levels of credit risk in 
favor of senior tranches; documentation and retention of credit 
analyses for as long as an FCU holds the CMRS; and ongoing credit 
monitoring to identify emerging negative trends and potential concerns. 
While the Board does not incorporate these conditions in the final 
rule, the Board strongly believes the commenter has identified best 
practices to which FCUs should adhere if they are to purchase CMRS. The 
Board adopts the provisions regarding CMRS in the final rule as 
proposed.

[[Page 31986]]

e. 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 so that it meets the empowered to grant 
requirement. 12 CFR 701.23(b)(1)(i). 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 in 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 
restricts the aggregate amount of loans that an FCU may purchase to 
five 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 in the 
secondary market. 12 CFR 701.23(b)(3).
    RegFlex FCUs have been permitted to buy loans from other federally 
insured credit unions without regard to whether the loans are eligible 
obligations of the purchasing FCU's 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 cap of five 
percent of unimpaired capital and surplus. 12 CFR 742.4(b)(4); 66 FR 
15055, 15059 (Mar. 15, 2001). RegFlex FCUs also have been able to 
purchase student loans and real estate-secured loans without the 
requirement that loans be purchased to facilitate a secondary market 
pool package. 12 CFR 742.4(b).
    The NPRM retained the flexibility currently provided to RegFlex 
FCUs for FCUs meeting the well capitalized standard. The proposed rule 
also grandfathered all eligible obligations purchased by RegFlex FCUs 
before the effective date of the final rule. The proposed rule 
similarly amended paragraph (e) in Sec.  723.1 to address nonmember 
business loans purchased under RegFlex authority or obligations 
purchased under proposed Sec.  701.23(b)(2). The Board requested 
specific comment on whether it should extend the flexibility from the 
eligible obligations rule to all FCUs or establish an approval process 
through regional directors for FCUs not meeting the well capitalized 
standard.
    One league supported the expansion in the eligible obligations 
rule. One credit union trade association recommended, at a minimum, an 
expansion of this authority to allow FCUs that are somewhat less than 
well capitalized to take advantage of the flexibility afforded to FCUs 
meeting the well capitalized standard. Likewise, one league and one 
credit union commenter urged NCUA to extend the flexibility for 
eligible obligations to all FCUs or provide a waiver process similar to 
the process for other expanded authorities. One commenter stated that 
eligible obligation purchases that are made after an FCU applies proper 
due diligence do not pose a safety and soundness issue for that FCU or 
the National Credit Union Share Insurance Fund. The credit union 
commenter also urged NCUA to expand the purchasing authority to all 
FCUs so they can benefit from the stabilizing effects of purchasing 
well-performing obligations from diverse portfolios of other federally 
insured credit unions. The commenter further stated that an expansion 
would enhance safety and soundness in two ways. First, a purchasing FCU 
can increase earnings by deploying excess liquidity into higher 
yielding, high quality assets when loan demand from its members may be 
low. Second, a purchasing FCU can reduce concentration risk because 
selling institutions have different fields of membership. The commenter 
also made suggestions to clarify the proposed regulatory text in Sec.  
701.23.
    The final rule substantively adopts the provisions in the proposed 
rule pertaining to eligible obligations with two changes. It includes a 
provision that allows FCUs not meeting the well capitalized standard to 
seek authority from their regional directors to purchase obligations 
from other federally insured credit unions under the same conditions 
applicable to FCUs that do meet the well capitalized standard. The 
final rule also uses plain language rather than paragraph citations 
within Sec.  701.23 for ease of reading.

III. Final Rule

a. RegFlex

    The final rule removes part 742 from title 12 to eliminate RegFlex 
as the Board proposed in the NPRM. The Board noted in the preamble to 
the proposed rule that it would address the appeals process before 
NCUA's Supervisory Review Committee for RegFlex designation 
revocations. In a separate, contemporaneous rulemaking, the Board is 
amending NCUA Interpretive Ruling and Policy Statement 11-1, 76 FR 
23871 (Apr. 29, 2011), to remove RegFlex appeals from the purview of 
the committee because RegFlex no longer exists as of the effective date 
of this rule.

b. Charitable Contributions

    The final rule removes the entire charitable contributions rule, 
Sec.  701.25, from part 701. With the deletion of this section, an FCU 
will no longer be restricted by regulation to make donations only to 
certain recipients and will not be required to obtain prior approval 
from its board of directors. An FCU's authority to make donations will 
continue to be governed by its incidental powers authority under the 
Act, the fiduciary duties of its board, and its bylaws. NCUA has long 
recognized an FCU's authority to make charitable contributions and 
donations because an FCU may ``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). Contributions, therefore, 
must be necessary or requisite to enable the FCU to effectively carry 
on its business. 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.
    As noted, the making of charitable contributions has long been 
recognized by NCUA as an approved incidental power. The final rule, 
therefore, amends Sec.  721.3 by adding a new paragraph (b) to identify 
this authority and renumbers the remaining activities in the section.

c. Nonmember Deposits

    The final rule raises the dollar threshold on the nonmember deposit 
limit in Sec.  701.32(b) from $1.5 million to $3 million. The maximum 
amount of all public unit and nonmember shares that any FCU may hold 
cannot exceed the greater of 20 percent of the FCU's total shares or $3 
million. Unlike the former RegFlex rule, the final rule does not 
provide a standardized exemption from the nonmember deposit cap. 
Section 701.32, however, continues to permit an FCU to request from its 
regional director an exemption to exceed the limit on the maximum 
amount of nonmember deposits. 12 CFR 701.32(b)(3)-(5). If the regional 
director denies the request for

[[Page 31987]]

an exemption, the FCU may appeal the decision to the Board. 12 CFR 
701.32(b)(5).

d. Fixed Assets

    The final rule amends Sec.  701.36(b)(2) to permit any FCU a six-
year time frame to partially occupy the premises if the FCU acquired 
unimproved land for its future expansion. As in the current rule, 
premises are partially occupied when the FCU is using some part of the 
space on a full-time basis. An FCU may request a waiver from the 
partial occupation requirement. The amendment applies only to 
unimproved real property and does not apply to any other kind of 
premises.

e. Zero-Coupon Investments

    In order to balance the risk management concerns discussed in the 
NPRM, the final rule restricts FCUs meeting the well capitalized 
standard from purchasing any zero-coupon investment with a maturity 
date greater than 30 years. It also provides that an FCU not meeting 
the well capitalized standard may not purchase a zero-coupon investment 
with a maturity date that is more than 10 years from the related 
settlement date, unless it has received approval from its regional 
director to purchase such an investment with a greater maturity. In 
addition, the final rule grandfathers zero-coupon investments purchased 
under RegFlex authority before the effective date of this rule.
    FCUs considering the purchase of zero-coupon investments should be 
familiar with the dramatic rise in percentage loss on these investments 
with maturity. Only FCUs with the appropriate level of expertise 
positioned to measure the safety and soundness of purchasing zero-
coupon investments with extended maturities should consider such 
investments.

f. Borrowing Repurchase Transactions

    Section 703.13(d)(3)(iii) of the final rule permits FCUs meeting 
the well capitalized standard to purchase investments with maturities 
exceeding the maturity of the borrowing repurchase transaction. Section 
703.13(d)(3)(ii) permits FCUs not meeting the well capitalized standard 
to enter into borrowing repurchase transactions and use the proceeds to 
purchase investments with maturities no more than 30 days later than 
the transaction's term. Under Sec.  703.20, these FCUs may request 
additional authority from their regional directors to enter 
transactions whereby the maturity mismatch would be greater than 30 
days. The final rule also clarifies that the total value of investments 
that any FCU purchases through transactions with mismatched maturities 
cannot exceed its net worth. In addition, the final rule contains a 
grandfather provision for borrowing repurchase transactions into which 
an FCU entered under its RegFlex authority before the effective date of 
this rule.
    The final rule, therefore, sets out three possible scenarios for 
borrowing repurchase transactions under Sec.  703.13(d)(3). 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 after the maturity of the borrowing 
repurchase transaction and the aggregate or total 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 total value of investments purchased 
through transactions with mismatched maturities does not exceed 100 
percent of the FCU's net worth.

g. CMRS

    The final rule removes the prohibition in Sec.  703.16 on the 
purchase of private label CMRS. The final rule permits an FCU that 
meets the well capitalized standard to purchase CMRS that are not 
otherwise permitted by section 107(7)(E) of the Act if: (i) the 
security is rated in one of the two highest rating categories by at 
least one NRSRO; \1\ (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 final rule 
provides that an FCU that does not meet the well capitalized standard 
may purchase private label CMRS under conditions (i) through (iii) 
above, but limits the aggregate amount of private label CMRS to 25 
percent of its net worth. Section 703.20 establishes an approval 
process so that such an FCU may seek authorization from its regional 
director to purchase a greater amount of CMRS, up to a maximum of 50% 
of its 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.
---------------------------------------------------------------------------

    \1\ 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 in part 742 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). When NCUA adopts a final rule for the proposed 
rulemaking issued in March 2011, the standard will change 
accordingly.
---------------------------------------------------------------------------

    Finally, the final 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 this rule. As such, an FCU that 
does not meet the well capitalized standard, but which holds private 
label CMRS in excess of 25% of its net worth on the effective date of 
this rule, is not required to divest those holdings on its books. The 
FCU, however, cannot 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 Sec.  703.20.
    The Board notes again that the authority to purchase private label 
CMRS, as with all of the flexibilities in the final rule, 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. If necessary, NCUA may require an FCU to divest its 
investments or assets for substantive safety and soundness reasons, on 
a case-by-case basis.

h. Eligible Obligations

    The final rule renumbers Sec.  701.23 and, under paragraph (b)(2), 
permits FCUs that meet the well capitalized standard to buy loans from 
other federally insured credit unions without regard to whether the 
loans are eligible obligations of the purchasing FCU's members or the 
members of a liquidating credit union. The final rule

[[Page 31988]]

subjects loans purchased from a liquidating credit union to the 
eligible obligations cap of five percent of unimpaired capital and 
surplus. FCUs meeting the well capitalized standard may also purchase 
student loans and real estate-secured loans without the requirement 
that the loans be purchased to facilitate a secondary market pool 
package. The final rule also grandfathers all obligations purchased 
under RegFlex authority before the effective date of this rule and 
makes a similar amendment to paragraph (e) in Sec.  723.1 to address 
nonmember business loans purchased under RegFlex authority or 
obligations under Sec.  701.23(b)(2).
    In addition, the final rule permits FCUs that do not meet the well 
capitalized standard to request authority from their regional directors 
to engage in this activity through a written request similar to the 
process created in paragraph (b) of Sec.  703.20.

IV. The Interim Final Rule and Request for Comment

    In issuing the proposed rule, NCUA inadvertently omitted changes to 
RegFlex references in its rule setting the permissible deductible for 
fidelity bond coverage. 12 CFR 713.6. That rule establishes a formula 
for calculating the maximum allowable deductible based on asset size 
with a cap of $200,000, but permits RegFlex FCUs a higher maximum 
deductible of up to $1 million. 12 CFR 713.6(a)(1), (c). With the 
elimination of RegFlex, the Board is issuing an interim final rule to 
amend the fidelity bond rule so that it is consistent with the other 
subject-specific rules discussed in this preamble. The interim final 
rule changes the applicable benchmark for increased deductible limits 
in Sec.  713.6 from RegFlex FCUs to FCUs meeting the same well 
capitalized standard used in the other rules impacted by the 
elimination of RegFlex.
    The amendments track those that the Board makes in the final rule, 
as well as the Sec.  713.6 provisions the Board adopted in 2005 for 
FCUs that automatically qualified for a RegFlex designation. 70 FR 
61713 (Oct. 26, 2005)
    The interim final rule permits a maximum deductible for fidelity 
bond coverage of $1 million if the FCU has: (1) Received a composite 
CAMEL rating of ``1'' or ``2'' during its last two full examinations 
and (2) maintained a ``well capitalized'' net worth classification for 
the immediately preceding six quarters or has remained ``well 
capitalized'' for the immediately preceding six quarters after applying 
the applicable RBNW requirement.
    Once a year, an FCU meeting the interim final rule's well 
capitalized standard must review its continued eligibility for a higher 
deductible under the rule, which is the same approach applied by the 
Board when it adopted the fidelity bond RegFlex provisions in 2005. Id. 
at 61714. An FCU's continued eligibility will be based on its asset 
size as reflected in its most recent year-end 5300 call report and its 
net worth as reflected in that same report. If an FCU that previously 
qualified for the higher deductible has a decrease in assets based on 
its most recent year-end 5300 call report or its net worth has 
decreased so that it would no longer qualify under the well capitalized 
standard in the rule, then it must obtain the coverage otherwise 
required by Sec.  713.6. Likewise, if an FCU meets the assets threshold 
and its net worth would otherwise continue to qualify it for the well 
capitalized standard, but it failed to receive either a CAMEL rating of 
1 or 2 during its most recent examination report, it must obtain the 
required coverage with a deductible of no more than $200,000.
    The Board is adopting this rulemaking as an interim final rule 
because it meets the good cause exception to the procedures under the 
Administrative Procedure Act (APA), 5 U.S.C. 553(b)(3). Notice and 
public procedures are impracticable and contrary to the public interest 
in this matter because the final rule eliminates RegFlex. To maintain 
cross-references to RegFlex in the fidelity bond coverage rule would 
cause confusion in implementation by FCUs, as well as undue and 
untimely execution of NCUA's functions in monitoring compliance with 
Sec.  713.6. The interim final rule complements the final rule, and it 
is appropriate for the Board to synchronize its adoption of all of the 
rule changes made in this document. The Board finds these reasons are 
good cause to dispense with the APA's notice and comment period and the 
procedures in NCUA's Interpretive Ruling and Policy Statement 87-2. 5 
U.S.C. 553(b)(3)(B); 52 FR 35213 (Sept. 18, 1987), as amended by 68 FR 
31949 (May 29, 2003). The interim final rule has an effective date 30 
days after publication in the Federal Register, which coincides with 
the final rule's effective date. Although the rule is being issued as 
an interim final rule, the Board encourages interested parties to 
submit comments within 60 days so the Board can consider any amendments 
to the rule.

V. Rule Summary Table

    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 by distinguishing the authorities for FCUs that meet the well 
capitalized standard and FCUs that do not. We are providing this table 
for your reference only. Please refer to regulatory text, as well as 
the preambles for the NPRM and the final rule, for specific 
information.

------------------------------------------------------------------------
                                                      FCUs not meeting
    Final rule authority        FCUs meeting well     well capitalized
                              capitalized standard        standard
------------------------------------------------------------------------
Charitable Contributions....  Well capitalized      This flexibility
                               FCUs may make         applies to all
                               donations             FCUs.
                               consistent with
                               their incidental
                               powers authority
                               and board's
                               fiduciary duties.
Nonmember Deposits..........  May accept up to the  This flexibility
                               greater of 20%        applies to all
                               total shares or $3    FCUs.
                               million. May
                               request exemption
                               from regional
                               director for
                               greater amount.
Unimproved Property for       May take up to six    This flexibility
 Future Expansion.             years to partially    applies to all
                               occupy unimproved     FCUs.
                               real 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.

[[Page 31989]]

 
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, provided   days after the
                               the total amount of   borrowing, provided
                               investments           the total amount of
                               purchased do not      investments
                               exceed 100 percent    purchased do not
                               of net worth.         exceed 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 apply
 (CMRS)*.                      CMRS issued by        to all FCUs, under
                               Fannie Mae or         the following
                               Freddie Mac. May      conditions:
                               purchase Private     Requirements (i)-
                               Label CMRS if:        (iii) would be the
                              (i) the security is    same as for Well
                               rated in one of the   Capitalized FCUs.
                               two highest rating   The limit in
                               categories by at      requirement (iv) is
                               least one NRSRO;.     25 percent of net
                              (ii) it is a           worth. May request
                               ``mortgage related    approval from the
                               security'' under      regional director
                               the Securities        for higher limit,
                               Exchange Act of       up to 50 percent of
                               1934 and Sec.         net worth, if FCU
                               703.2;.               has 3 consecutive
                                                     years of effective
                                                     CMRS portfolio
                                                     management and the
                                                     ability to evaluate
                                                     key risk factors.
                              (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 in
                               excess of 50
                               percent of net
                               worth.
Purchase of Eligible          In addition to the    These flexibilities
 Obligations *.                authority in the      may be extended if
                               current Sec.          approved by
                               701.23, may buy       regional director,
                               loans from other      otherwise limited
                               federally insured     to the other
                               credit unions         provisions of Sec.
                               without regard to      701.23 for
                               whether the loans     purchasing eligible
                               are obligations of    obligations
                               the purchasing        (subject to
                               FCU's members. May    membership or
                               also purchase         pooling
                               nonmember student     requirements)
                               loans and real
                               estate loans
                               without the need
                               for purchase 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.
Fidelity Bond Coverage--      $2,000 plus 1/1000    $2,000 plus 1/1000
 Maximum Deductible for FCUs   of total assets up    of total assets up
 with Over $1 million in       to a maximum of       to a maximum of
 Assets.                       $1,000,000.           $200,000.
------------------------------------------------------------------------
* All authorized activity entered into before the effective date of the
  final rule is grandfathered.

VI. Regulatory Procedures

a. Regulatory Flexibility Act

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

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 U.S.C. 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. As required, NCUA has applied to the Office of 
Management and Budget (OMB) for approval of the information collection 
requirement described below.
    The final 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 and Sec.  701.23(h). 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 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, (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, and (4) the membership and pooling 
limitations in Sec.  701.23(b)(1) when purchasing loans under Sec.  
701.23(b)(2). An FCU meets the well capitalized standard if the FCU has 
received a composite CAMEL rating of ``1'' or ``2'' during its last two 
full 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. In the 
proposed rule, the Board estimated 1,770 FCUs may apply for an 
additional authority. The cumulative total annual paperwork burden is 
estimated to be approximately 1,770 hours.

[[Page 31990]]

    OMB is currently reviewing NCUA's submission and NCUA will publish 
the OMB number assigned to this rulemaking once issued.

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 final rule will 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 rule does not constitute a policy that has 
federalism implications for purposes of the executive order.

d. Small Business Regulatory Enforcement Fairness Act

    The Small Business Regulatory Enforcement Fairness Act of 1996 
(Pub. L. 104-121) provides generally for congressional review of agency 
rules. A reporting requirement is triggered in instances where NCUA 
issues a final rule as defined by Section 551 of the Administrative 
Procedure Act. 5 U.S.C. 551. The Office of Management and Budget has 
determined that this rule is not a major rule for purposes of the Small 
Business Regulatory Enforcement Fairness Act of 1996.

e. Assessment of Federal Regulations and Policies on Families

    NCUA has determined that this final IRPS 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).

List of Subjects

12 CFR Part 701

    Credit unions.

12 CFR Part 703

    Credit unions, Investments.

12 CFR Part 713

    Credit unions, Insurance, Reporting and recordkeeping requirements.

12 CFR Part 721

    Credit unions.

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 May 24, 
2012.
Mary Rupp,
Secretary of the Board.

    For the reasons discussed above, NCUA amends 12 CFR parts 701, 703, 
713, 721, 723, and 742 as follows:

PART 701--ORGANIZATION AND OPERATIONS OF FEDERAL CREDIT UNIONS

0
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.


0
2. In Sec.  701.23:
0
a. Redesignate paragraphs (b)(2) and (3) as paragraphs (b)(3) and (4);
0
b. Add new paragraph (b)(2):
0
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'';
0
d. Add paragraph (b)(5);
0
e. Add paragraph (h).
    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) full 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 without regard to 
whether they are obligations of its members, provided they are 
purchased from a federally-insured credit union and the obligations are 
either:
    (A) Loans the purchasing credit union is empowered to grant; or
    (B) Loans refinanced with the consent of the borrowers, within 60 
days after they are purchased, so that they are loans the purchasing 
credit union is empowered to grant;
    (ii) Eligible obligations of a liquidating credit union. Eligible 
obligations of a liquidating credit union without regard to whether 
they are obligations of the liquidating credit union's members.
    (iii) Student loans. Student loans provided they are purchased from 
a federally-insured credit union only;
    (iv) Real estate-secured loans. Real estate-secured loans 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 July 2, 
2012.
* * * * *
    (h) Additional authority. (1) A federal credit union may submit a 
written request to its regional director seeking expanded authority to 
purchase loans described in paragraph (b)(2) of this section, if it is 
not otherwise authorized by this section. The written request must 
include the following:
    (i) A copy of the credit union's purchase policy;
    (ii) The types of eligible obligations under paragraph (b)(2) of 
this section that the credit union seeks to purchase;
    (iii) An explanation of the need for additional authority; and
    (iv) An analysis of the credit union's prior experience with the 
purchase of eligible obligations.
    (2) 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 
requires in support of the request. If the regional director approves 
the request, the regional director will establish a limit on loan 
purchases as appropriate and subject to the limitations in this 
section. 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

[[Page 31991]]

occurs later, the credit union may purchase loans it requested under 
paragraph (b)(2) of this section.
    (3) Appeal to NCUA Board. A federal credit union may appeal any 
part of the determination made under this paragraph to the NCUA Board 
by submitting its appeal through the regional director within 30 days 
of the date of the determination.


Sec.  701.25  [Removed and Reserved]

0
3. Remove and reserve Sec.  701.25.


Sec.  701.32  [Amended]

0
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''.

0
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. If a 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. Premises are partially occupied when 
the credit union is using some part of the space on a full-time basis. 
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.
* * * * *

PART 703--INVESTMENTS AND DEPOSIT ACTIVITIES

0
6. The authority citation for part 703 continues to read as follows:

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


0
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 all investments purchased with maturities later than borrowing 
repurchase transactions 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 all investments purchased 
with maturities later than borrowing repurchase transactions 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) full 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.
* * * * *

0
8. Amend Sec.  703.14 by adding paragraphs (i) and (j) to read as 
follows:


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) full 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) full 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]

0
9. In Sec.  703.16, remove paragraphs (b) and (d) and redesignate 
paragraphs (c), (e), and (f) as paragraphs (b), (c), and (d) 
respectively.

0
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 
July 2, 2012.

0
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:

[[Page 31992]]

    (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 the credit union's investment policy;
    (2) The higher limit sought;
    (3) An explanation of the need for additional authority;
    (4) Documentation supporting the credit union's 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 
requires 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 713--FIDELITY BONDS AND INSURANCE COVERAGE FOR FEDERAL CREDIT 
UNIONS

0
12. The authority citation for part 713 continues to read as follows:

    Authority: 12 U.S.C. 1761a, 1761b, 1766(a), 1766(h), 
1789(a)(11).


0
13. In Sec.  713.6, revise paragraphs (a)(1) and (c) to read as 
follows:


Sec.  713.6  What is the permissible deductible?

    (a)(1) The maximum amount of allowable deductible is computed based 
on a federal credit union's asset size and capital level, as follows:

----------------------------------------------------------------------------------------------------------------
                   Assets                                             Maximum deductible
----------------------------------------------------------------------------------------------------------------
$0 to $100,000..............................  No deductible allowed.
$100,001 to $250,000........................  $1,000.
$250,000 to $1,000,000......................  $2,000.
Over $1,000,000.............................  $2,000 plus 1/1000 of total assets up to a maximum of $200,000;
                                               for credit unions that have received a composite CAMEL rating of
                                               ``1'' or ``2'' for the last two (2) full 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, the
                                               maximum deductible is $1,000,000.
----------------------------------------------------------------------------------------------------------------

* * * * *
    (c) A federal credit union that has received a composite CAMEL 
rating of ``1'' or ``2'' for the last two (2) full 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 is eligible to qualify for a deductible in excess of 
$200,000. The credit union's eligibility is determined based on it 
having assets in excess of $1 million as reflected in its most recent 
year-end 5300 call report. A federal credit union that previously 
qualified for a deductible in excess of $200,000, but that subsequently 
fails to qualify based on its most recent year-end 5300 call report 
because either its assets have decreased or it no longer meets the net 
worth requirements of this paragraph or fails to meet the CAMEL rating 
requirements of this paragraph as determined by its most recent 
examination report, must obtain the coverage otherwise required by 
paragraph (b) of this section within 30 days of filing its year-end 
call report and must notify the appropriate NCUA regional office in 
writing of its changed status and confirm that it has obtained the 
required coverage.

PART 721--INCIDENTAL POWERS

0
14. The authority citation for part 721 continues to read as follows:

    Authority:  12 U.S.C. 1757(17), 1766, 1789.


0
15. In Sec.  721.3, redesignate paragraphs (b) through (l) as 
paragraphs (c) through (m) and add new paragraph (b) to read as 
follows:


Sec.  721.3  What categories of activities are preapproved incidental 
powers necessary or requisite to carry on a credit union's business?

* * * * *
    (b) Charitable contributions and donations. Charitable 
contributions and donations are gifts you provide to assist others 
through contributions of staff, equipment, money, or other resources. 
Examples of charitable contributions include donations to community 
groups, nonprofit organizations, other credit unions or credit union 
affiliated causes, political donations, as well as donations to create 
charitable foundations.
* * * * *

PART 723--MEMBER BUSINESS LOANS

0
16. The authority citation for part 723 continues to read as follows:

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


[[Page 31993]]



0
17. 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. Sec.  701.22 and 701.23(b)(2), under a Regulatory Flexibility 
Program designation before July 2, 2012 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]

0
18. Under the authority of 12 U.S.C. 1756 and 1766, the National Credit 
Union Administration removes part 742.

[FR Doc. 2012-13212 Filed 5-30-12; 8:45 am]
BILLING CODE 7535-01-P