OPM is proposing a rule to redefine the geographic boundaries of the following appropriated fund FWS wage areas: Hagerstown-Martinsburg-Chambersburg, MD; Richmond, VA; Roanoke, VA; and Washington, DC. This proposed rule would redefine the Shenandoah National Park portions of Albemarle, Augusta, Greene, Page, and Rockingham Counties, VA, to the Washington, DC, wage area. Shenandoah National Park would become consolidated under the Washington, DC, FWS wage area so that the installation would be defined to a single wage area. This change is based on a recent recommendation of FPRAC, the statutory national labor-management committee responsible for advising OPM on matters affecting the pay of FWS employees. From time to time, FPRAC reviews the boundaries of wage areas and provides OPM with recommendations for changes if the Committee finds that changes are warranted.

As provided by 5 CFR 532.211, this regulation allows consideration of the following criteria when defining wage area boundaries: distance, transportation facilities, and geographic features; commuting patterns; and similarities in overall population, employment, and the kinds and sizes of private industrial establishments.

The Shenandoah National Park (approximately 105 miles long) is currently split among four FWS areas. When the FWS was first established, most of Shenandoah National Park was in the Hagerstown-Martinsburg-Chambersburg wage area. Over time, as a result of changes in Office of Management and Budget defined metropolitan statistical areas, the wage area definitions for some counties that comprise the Shenandoah National Park have been changed by OPM based on recommendations of FPRAC.

Presently, portions of the Shenandoah National Park are defined to the Hagerstown-Martinsburg-Chambersburg, MD; Richmond, VA; Roanoke, VA; and Washington, DC, FWS wage areas as follows:

(1) The Shenandoah National Park portion of Albemarle and Greene Counties, VA, is defined to the Richmond wage area;

(2) The Shenandoah National Park portion of Augusta County, VA, is defined to the Roanoke wage area;

(3) The Shenandoah National Park portion of Madison, Rappahannock, and Warren Counties, VA, is defined to the Washington, DC, wage area; and

(4) The Shenandoah National Park portion of Page and Rockingham Counties, VA, is defined to the Hagerstown-Martinsburg-Chambersburg, MD, wage area.

Albemarle and Greene Counties, except for the Shenandoah National Park portions, continue to be appropriately defined to the Richmond, VA, wage area. Augusta County, except for the Shenandoah National Park portion, continues to be appropriately defined to the Roanoke, VA, wage area. Page and Rockingham Counties, except for the Shenandoah National Park portions, continue to be appropriately defined to the Hagerstown-Martinsburg-Chambersburg, MD, wage area. Madison, Rappahannock, and Warren Counties continue to be appropriately defined to the Washington, DC, wage area.

There are 14 FWS National Park Service (NPS) employees working in the Shenandoah National Park portion of Madison County and 17 FWS NPS employees working in the Shenandoah National Park portion of Page County. So that the FWS employees working at Shenandoah National Park are not split among four wage areas, OPM proposes that the Shenandoah National Park portions of Albemarle, Augusta, Greene, Page, and Rockingham Counties be redefined to the Washington, DC, wage area. Shenandoah National Park would then be entirely defined to the Washington, DC, wage area. This change would provide equal pay treatment for FWS employees working at Shenandoah National Park.

FPRAC, the national labor-management committee responsible for advising OPM on matters concerning the pay of FWS employees, recommended this change by consensus. This change would be effective on the first day of the first applicable pay period beginning on or after 30 days following publication of the final regulations.

This action is not a “significant regulatory action” under the terms of Executive Order (E.O.) 12866 (58 FR 51735, October 4, 1993) and is therefore not subject to review under E.O. 12866 and 13563 (76 FR 3821, January 21, 2011).

OPM certifies that this rule will not have a significant economic impact on a substantial number of small entities.

We have examined this rule in accordance with Executive Order 13132, Federalism, and have determined that this rule will not have any negative impact on the rights, roles and responsibilities of State, local, or tribal governments.

This regulation meets the applicable standard set forth in Executive Order 12988.

This rule will not result in the expenditure by State, local, and tribal governments, in the aggregate, or by the private sector, of $100 million or more in any year and it will not significantly or uniquely affect small governments. Therefore, no actions were deemed necessary under the provisions of the Unfunded Mandates Reform Act of 1995.

This rule does not impose any new reporting or record-keeping requirements subject to the Paperwork Reduction Act.

Accordingly, OPM is proposing to amend 5 CFR part 532 as follows:

Table of Contents I. The Petition A. Background B. Issues Raised in the Petition II. Public Comments on the Petition A. Overview of Public Comments B. Comments Received to Specific Questions in the Docketing Request for Comment C. NRC Response to Additional Public Comments III. Reasons for Consideration IV. Availability of Documents V. Conclusion I. The Petition

The NRC received and docketed a PRM (ADAMS Accession No. ML20157A266) dated May 18, 2020, filed by Ronald K. Lattanze on behalf of Lucerno Dynamics, LLC. On September 15, 2020, the NRC published a notice of docketing and request for public comment on the petition (85 FR 57148). The petitioner requested that the NRC amend its regulations in part 35 of title 10 of the Code of Federal Regulations (10 CFR), “Medical Use of Byproduct Material,” to require reporting of certain nuclear medicine injection extravasations as medical events. Extravasation is the infiltration of injected fluid into the tissue surrounding a vein or artery. Extravasation is not limited to the administration of radiopharmaceuticals.

In 1980, the Commission amended the medical use regulations in 10 CFR part 35 to require the reporting of medical misadministrations (later renamed medical events) (45 FR 31701; May 14, 1980). Misadministration reporting allowed the NRC to investigate misadministrations for possible violations, evaluate licensee corrective actions, inform other licensees of potential problems, and take generic corrective actions. In this 1980 rulemaking, the Commission stated in a comment response that it did not consider extravasation to be a misadministration because extravasation frequently occurs in otherwise normal intravenous or intraarterial injections and that extravasations are virtually impossible to avoid.

The misadministration reporting requirements were updated in 1991 (56 FR 34104; July 25, 1991) with dose criteria based on the National Council on Radiation Protection and Measurements dose levels. These dose criteria were added to clarify the definition of misadministration and to exclude events involving diagnostic procedures, which the Commission considered low-risk. The next major update of 10 CFR part 35 was completed in 2002 (67 FR 20250; April 24, 2002). The term “misadministration” was replaced with “medical event,” the existing dose reporting criteria for patient exposures from medical events was retained, and a dose threshold of 0.5 Sv (50 rem) shallow dose equivalent to the skin was added. The extravasation exemption was not addressed.

The NRC identified two issues in the petition as follows:

Issue 1: The exemption of radiopharmaceutical extravasations from medical event reporting is based on the incorrect assertion that radiopharmaceutical extravasations are virtually impossible to avoid and therefore does not protect the public from unsafe irradiation. The petitioner requested that the NRC amend § 35.2, “Definitions,” to include a definition of “extravasation” as follows: “Extravasation means the inadvertent injection or infusion of some or all of a radiopharmaceutical dosage into the tissue surrounding a vein or artery.”

Issue 2: Exemption of extravasations from medical event reporting requirements results in a lack of transparency to patients, the public, and the NRC. The petitioner also requested that the NRC amend § 35.3045(a)(1), “Report and Notification of a Medical Event,” by adding a new paragraph (iv) as follows: “(iv) An extravasation that leads to an irradiation resulting in a localized dose equivalent exceeding 0.5 Sieverts (Sv) (50 rem).”

On September 15, 2020, the NRC requested comments from the public on the petition and posed eight specific questions to gain information on the scope of and basis for the issues raised by the petitioner. The comment period closed on November 30, 2020. The NRC received 488 public comment submissions, including late-filed submissions. All the comment submissions received on this petition are available on https://www.regulations.gov under Docket ID NRC-2020-0141. A comment submission is a communication or document submitted to the NRC by an individual or entity, with one or more individual comments addressing a subject or issue. Eighty-eight submissions (from the Association for Vascular Access, Organization of Agreement States, congressional representatives, and private citizens) generally supported the petition, 396 submissions (from 11 medical communities and private citizens) generally opposed the petition, and two submissions were duplicates. The NRC reviewed and considered all comments in its evaluation of the petition.

The following is a summary of the feedback that the NRC received from the public on the eight specific questions posed in the notice of docketing and request for public comment on the petition.

Question 1: How frequently does radiopharmaceutical extravasation occur?

Comments Received: Twenty-five comments provided at least one of the following replies to the frequency of radiopharmaceutical extravasations: (1) there is clinical evidence that extravasation rates are greater than 1 percent of all administrations; (2) the frequency rate is unknown because extravasations are not reported; or (3) some groups are understating the frequency and potential harm to patients.

Four comments stated that the extravasation frequencies cited in the petition—average of 15 percent and a range of 2 to 23 percent of all administrations—are misleading and biased. Twenty-one additional comments stated that the frequency of either therapeutic or diagnostic extravasations is very rare, typically less than 1 percent of injections. Some of the 21 comments stated that this information is based on their own clinical observations, which these comments further stated is consistent with the results from peer-reviewed manuscripts.

Question 2: Do you know of any extravasations that have resulted in harm to patients? If so, what were the circumstances, the type of effect or harm, and the impacts.

Comments Received: Thirty-nine comments provided at least one of the following responses related to patient harm due to extravasations: (1) it is difficult to know if extravasations have resulted in patient harm because they are not tracked and rarely studied; (2) it can take months or years for the effects to become evident; (3) there are over 50 peer-reviewed papers that list the following adverse biological effects of extravasations—local pain, erythema, swelling, lesions, wet and dry desquamation, severe tissue damage, and radiation necrosis; (4) even diagnostic extravasations can lead to high radiation doses to injection site tissue; and (5) extravasations can hinder the ability to deliver therapeutic applications of nuclear medicine.

Forty-nine comments provided at least one of the following responses related to patient harm due to extravasations: (1) despite millions of nuclear medicine injections, there have been no serious cases of patient harm; (2) no instances of patient harm have been observed during decades on the job; and (3) there is a lack of clinical and research studies demonstrating instances of harm.

Question 3: For medical use licensees, does your facility currently monitor for radiopharmaceutical extravasations? If so, why and how do you monitor? If not, why not?

Comments Received: Sixteen comments stated that they are currently monitoring for extravasations through scans or other methods. Ten comments stated they have capabilities to monitor for and minimize extravasations but some clinics are doing a better job of monitoring than others. The same ten comments stated that requiring monitoring of extravasations would hold all clinics to a higher bar and increase injection quality and patient health. Four comments agreed that not all institutions monitor extravasations probably because they do not need to report extravasations.

Question 4: Do you expect that monitoring for extravasations and reviewing the results would improve radiopharmaceutical administration techniques at medical use licensee facilities? If so, how? If not, why not?

Comments Received: Thirty-six comments stated that monitoring extravasations would improve injection quality. The same comments stated that tracking would lead to a better understanding of how often extravasations occur, which would lead to better training to reduce the frequency of occurrence. In addition, the same comments noted that there is plenty of evidence in clinical observations and peer-reviewed literature that the frequency of extravasations can be reduced.

Twelve comments stated that monitoring and reviewing extravasations would not improve injection quality because highly trained professionals are already doing their best to prevent extravasations from occurring, so monitoring would only cause unnecessary burdens. Three comments stated that monitoring extravasations would not improve injection quality because extravasations occur largely as a result of patients having poor vascular structure. In addition, the same comments noted that, in particular, pediatric, geriatric, and chemotherapy patients often have compromised vascularity.

Question 5: Do you believe an NRC regulatory action requiring monitoring and review of extravasations would improve patient radiological health and safety? If so, how? If not, why not?

Comments Received: Fourteen comments stated that they had concerns about the health of patients for both therapeutic and diagnostic extravasations. The same comments stated that reporting of extravasations would lead to a better understanding of their frequency and severity, which could reduce how often they occur and lead to better patient health. One comment supported the petition because extravasations then could be tracked and their frequencies reduced to the benefit of patients.

Four comments stated that there would not be improvements to patient health due to monitoring and reporting of extravasations because they are not preventable. Seven comments stated that there would be no health benefits but there would be additional burdens to medical licensees. Two comments stated that monitoring for extravasations would negatively impact patient health because any manipulation of the injection site or addition of sensors could decrease blood flow, resulting in radioactive material remaining in the injection site for a longer period of time.

Question 6: Are there any benefits, not related to medical techniques, to monitoring and reporting certain extravasations as medical events? What would be the burden associated with monitoring for and reporting certain extravasations as medical events?

Comments Received: Forty-two comments stated that there would be considerable burdens to monitoring and reporting extravasations without much, if any, benefit. One commenter provided the example that 14 million diagnostic procedures are performed annually and if there is a 1 percent extravasation rate, then the result would be 140,000 medical events annually. The commenters stated that the main burdens they are concerned about are (1) reporting with minimal or no benefit, (2) considerable increase in paperwork, (3) considerable financial costs for practitioners and the entire medical field—possibly hundreds of millions of dollars, (4) the total time for extra monitoring and the frequency of nuclear medicine injections would allow for fewer patients to be seen, and (5) it may create false radiation safety concerns in patients and increase public fear concerning nuclear medicine.

Eight comments listed the following benefits to monitoring and reporting extravasations: (1) patients will know when an extravasation occurs, (2) it will lead to better diagnostics, (3) it will lead to better data for tracking, and (4) it will reduce medical workload and costs. Ten comments stated that those in opposition are overstating the burdens to the medical community. The comments also stated that the new detection methods are more cost effective for detecting extravasations than traditional computed tomography (CT) scans. Lastly, the comments noted that while there could be additional costs, it would increase the incentive to provide quality injections.

Question 7: If the NRC were to require that licensees report certain extravasations as medical events, what reporting criteria should be used to provide the NRC data that can be used to identify problems, monitor trends, and ensure that all licensees take corrective action(s)?

Comments Received: Nine comments were in favor of the petitioner's proposed 0.5 Sv (50 rem) reporting level because it is consistent with the level used for nuclear medicine both domestically and internationally. In addition, the same comments stated that the petitioner's proposed reporting level will lead to better monitoring and reduce the frequency of extravasations.

Eight comments stated the following concerns with the petitioner's proposed reporting level of 0.5 Sv (50 rem): (1) the criterion is arbitrary and does not harm the skin or tissue; (2) it takes more than 2 Gray (Gy) (200 rad) to cause impacts to skin in fluoroscopy procedures, which is much higher than the proposed criterion; and (3) if an extravasation does occur, the nuclear agents end up in the intended part of the body similar to a non-extravasated injection ( i.e., extravasations migrate from the lymphatic system and end up in the venous system). Nine comments did not support the petitioner's proposed criteria of 0.5 Sv (50 rem) because there is not a good or technically sound way to evaluate the dose to the tissue. Two comments stated that there should not be any criteria because there should be no reporting of extravasation.

Question 8: If the NRC requires reporting of extravasations that meet medical event reporting criteria, should a distinction be made between reporting extravasations of diagnostic and therapeutic radiopharmaceuticals? If so, why? If not, why not?

Comments Received: Eighteen comments stated that there should not be a distinction between diagnostics and therapeutics for classification of medical events because (1) if you exceed 0.5 Sv (50 rem), you could be causing harm regardless of the method, (2) diagnostic extravasations can cause harm or compromise scans, and (3) few facilities monitor diagnostic injections, but monitoring tools now exist that could lead to a better understanding of the frequency and help reduce the occurrence of extravasations. One comment supported the classification of therapeutic injection extravasations as medical events; explaining, however, that some diagnostic doses are used as “test doses” to determine injection quality; and stated that classifying these “test doses” as extravasations would be contradictory since they are meant to improve patient safety.

Twenty-five comments expressed concerns regarding classification of diagnostic extravasations as medical events because they are of such low dose that they do not cause harm or compromise scans. The same comments also noted that while therapeutic extravasations can cause tissue damage, they are extremely rare events that are dealt with under existing regulations. Lastly, most of these 25 comments do not support the classification of diagnostic or therapeutic extravasations as medical events, with an especially strong position against the classification of diagnostic extravasations as medical events.

The NRC received thirty-three additional comments related to the petition that did not provide a direct response to the specific questions in the notice of docketing and request for public comment on the petition. In addition, the NRC received three comments that were out of scope. The NRC has binned these additional comments related to the petition into two categories. The following discussion provides a summary of each category and the NRC's response to the grouped comments, including—if appropriate—a summary of the basis for the response.

Comment: The NRC received nine comments supporting the proposed criteria of 0.5 Sv (50 rem) because the dose to the skin from extravasation can be estimated and this limit is 500 times higher than the dose from an “ideal injection.”

NRC Response: The NRC disagrees with this comment. The NRC's medical event reporting dose threshold criteria (0.05 Sv [5 rem] effective dose equivalent, 0.5 Sv [50 rem] to an organ or tissue, or 0.5 Sv [50 rem] shallow dose equivalent to the skin) are conservative dose levels that would not be expected to cause patient harm. The criteria were implemented in part to screen out medical events involving diagnostic procedures because, as stated by the Commission, the NRC agrees that routine doses from diagnostic procedures represent a small amount of risk to the patient. On the dose levels, the Commission further commented that these levels correspond to a threshold well below the onset of acute, clinically detectable adverse effects that may be caused by exposure to ionizing radiation. Reporting extravasations at 0.5 Sv (50 rem) would result in many extravasation events of low radiation safety significance being reported. However, the NRC agrees that the topic of extravasation is important and therefore is considering the issues raised in the petition and assessing a more risk-informed reporting requirement in the rulemaking process.

Comment: The NRC received a comment stating that reporting extravasations is within the purview of the NRC. While administration of radiopharmaceuticals is a practice of medicine, misadministration of radiopharmaceuticals should be reported and this will not intrude on the practice of medicine.

NRC Response: The NRC agrees with this comment. Requiring medical event reporting of radiation-safety-significant extravasations is within the purview of the NRC's regulatory authority and supports the NRC's public health and safety mission.

Comment: The NRC received one comment concerning the lack of rationale explaining why extravasation of diagnostic injections should be exempted from medical event reporting.

NRC Response: The NRC agrees with this comment. The NRC questions whether excluding diagnostic administrations from an extravasation reporting requirement is supportable. Due to the smaller amounts of radioactivity used in diagnostic procedures, extravasation of diagnostic radiopharmaceuticals would rarely be expected to result in adverse tissue effects. However, while rare, significant extravasations of diagnostic radiopharmaceuticals with longer half-lives (such as thallium-201) could result in adverse tissue effects (Van der Pol et al., 2017) and would be considered a safety-significant medical event.

Comment: The NRC received four comments stating that extravasation is a generic medical issue outside the NRC's regulatory authority and is best managed at the institutional level.

NRC Response: The NRC disagrees with this comment. The radiation safety impact of some extravasations can be severe enough to warrant regulatory action, and reporting and tracking these incidents is of interest to the NRC.

Comment: The NRC received three comments concerning diagnostic extravasations. The comments state that minor diagnostic extravasations occur frequently but can be detected by scans and do not reduce scan quality or affect patient health. The comments further state that concerns regarding diagnostic extravasations are overstated and extravasation should be managed at the institutional level.

NRC Response: The NRC partially disagrees with this comment. While diagnostic extravasations of safety significance are rare, significant extravasations of certain diagnostic radiopharmaceuticals can cause adverse tissue effects, such as prolonged erythema and even skin necrosis (Van der Pol et al., 2017). The NRC is interested in medical event reporting of radiation-safety-significant extravasations, regardless of whether they involve diagnostic or therapeutic radiopharmaceuticals.

Comment: The NRC received 11 comments stating that the NRC's extravasation exemption is outdated.

Response: The NRC agrees with this comment. In 1980 the use of injectable radiopharmaceuticals involved diagnostic dosages of lower energy gamma emitting radionuclides. Since then, nuclear medicine has evolved to include use of higher energy positron-emitting diagnostic radiopharmaceuticals (for positron emission tomography imaging) and therapeutic radiopharmaceuticals, which use higher doses of radioactivity to treat certain cancers and diseases. The NRC is revisiting the exclusion of extravasation from medical event reporting in light of intervening changes in radiopharmaceuticals in the rulemaking process.

Although the petitioner requested that the NRC require the reporting of radiopharmaceutical extravasations exceeding 0.5 Sv (50 rem) localized dose equivalent, the NRC considered the issue more broadly and evaluated whether to require reporting of certain radiopharmaceutical extravasations of radiation safety significance as medical events. The NRC evaluated whether (1) the radiation safety risk from extravasations merits medical event reporting, (2) extravasations are preventable, (3) including extravasations in medical event reporting would align with the objectives of the NRC's medical event reporting regulations, and (4) regulating extravasations would align with the NRC's Medical Use Policy Statement (65 FR 47654; August 3, 2000). The staff recommends further evaluating, within the NRC's rulemaking process, medical event reporting of extravasations that require medical attention for a suspected radiation injury. The remaining paragraphs of Section III summarize the NRC's evaluation of the two issues identified in the petition.

Issue 1: The exemption of radiopharmaceutical extravasations from medical event reporting is based on the incorrect assertion that radiopharmaceutical extravasations are virtually impossible to avoid and therefore does not protect the public from unsafe irradiation.

The petitioner stated that recent evidence demonstrates that extravasations are avoidable, invalidating the NRC's 1980 determination and subsequent exemption of extravasations from medical event reporting requirements. The petitioner asserted that reporting extravasations as medical events would reduce the amount of extravasations and protect patients from harmful injections. In addition, the petitioner asserted that diagnostic and therapeutic extravasations can result in significant radiation doses to injection site tissue, potentially causing adverse tissue reactions and cancer. The petitioner stated that diagnostic extravasations can also affect the accuracy of imaging study results, affect the patient's care, and may lead to unnecessary radiation dose due to repeat imaging studies. Lastly, the petitioner asserted that, per the NRC's Medical Use Policy Statement, the NRC has the obligation to regulate extravasations as necessary to provide for the radiation safety of workers and the general public.

NRC Evaluation: The NRC believes that the Commission's 1980 decision to exclude extravasations from medical event reporting should be reconsidered in the rulemaking process given the evolution of nuclear medicine since then. However, the NRC does not agree with the petitioner that the 1980 decision is invalidated because extravasations are avoidable. Although there have been many advancements in nuclear medicine since 1980, there is still no technology or technique that can fully prevent an extravasation. While monitoring technology could help identify extravasations earlier and improvements in training, skill, and tools could help reduce the prevalence of extravasations, there is no way to fully prevent extravasations from occurring. Even the most skilled clinician may infiltrate an injection due to many factors outside of the control of the clinician. Patient anatomy, age, body habitus, hydration, and prior medical treatment are all factors that may impact an intravenous administration.

The NRC agrees with the petitioner that medical event reporting of extravasations may focus some medical licensees on reducing their extravasation rate through implementation of quality improvement programs for intravenous administration of radiopharmaceuticals, and reducing the extravasation rate would improve radiation safety for patients.

The NRC agrees that certain extravasations can result in radiation-safety-significant doses to the tissue around the administration site, which could result in adverse tissue effects. However, published studies (Van der Pol et al., 2017; Hall et al., 2006) and input from the medical community and the Advisory Committee on the Medical Uses of Isotopes (ACMUI) indicate that due to the smaller amounts of radioactivity used in diagnostic procedures, extravasations of diagnostic radiopharmaceuticals are typically of low radiation safety significance and would rarely be expected to result in adverse tissue effects. The NRC agrees that extravasations of therapeutic radiopharmaceuticals, which deliver larger amounts of radioactivity to treat cancer and other ailments by killing cells, may cause tissue damage around the administration site (Van der Pol et al., 2017; Bonta et al., 2011; Tylski et al., 2018; Benjegerdes et al., 2017).

The NRC's Medical Use Policy Statement says, in part, that the NRC will not intrude into medical judgments affecting patients, except as necessary to provide for the safety of workers and the general public. The policy also states that the NRC will regulate radiation safety, when justified by the risk to the patient, primarily to assure the use of radionuclides is in accordance with the physician's directions. The NRC agrees that medical event reporting of certain extravasations would support these patient safety objectives of the Medical Use Policy Statement by potentially reducing the occurrence of radiation-safety-significant extravasations. Therefore, the NRC is considering the issues raised by the petitioner in a rulemaking process that will assess risk-informed reporting requirements for extravasations.

Issue 2: Exemption of extravasations from medical event reporting requirements results in a lack of transparency to patients, the public, and the NRC.

The petitioner asserted that the exemption of extravasations from medical event reporting requirements results in a lack of transparency to the patients, the public, and the NRC as the extravasation events are not documented in the NRC's Nuclear Material Events Database (NMED), which contains records of events involving nuclear material reported to the NRC. The petitioner asserted that this may result in patients and clinicians being unaware that the diagnostic image or intended therapy may have been compromised, and the NRC remains unaware when licensees misadminister radiopharmaceuticals resulting in doses that exceed medical event reporting limits.

NRC Evaluation: Under the NRC's current practice of excluding extravasations from medical event reporting, extravasations that result in suspected radiation injury, or even those that meet the NRC's public health and safety significance criteria for an abnormal occurrence, are not required to be reported to the NRC. The NRC agrees that reporting radiation-safety-significant extravasations would increase transparency between patients, physicians, and the NRC. If certain extravasations were required to be reported under § 35.3045, this would enhance transparency through medical event reporting requirements for notifying the patient, referring physician, and the NRC within 24 hours of discovering the event and through event notification reports published by the NRC. These event notifications would be publicly available on the NRC website. These extravasation events would be shared with and evaluated by the ACMUI on an annual basis. Additionally, the reporting and analysis of safety-significant extravasation events would allow the NRC to identify similarities in reports from multiple facilities and issue generic communications to share information that may help licensees to reduce the occurrence of radiation-safety-significant extravasations and mitigate their consequences.

The documents identified in the following table are listed in the order in which they are cited in this notice and are available to interested persons through one or more of the following methods, as indicated.

For the reasons cited in this document, the NRC will consider the issues raised in the petition in the rulemaking process. The NRC will evaluate the current requirements and guidance for reporting of certain nuclear medicine injection extravasations as medical events. The NRC tracks the status of all rules and PRMs on its website at https://www.nrc.gov/about-nrc/regulatory/rulemaking/rules-petitions.html. The public can monitor further NRC action on the rulemaking titled, “Reporting Nuclear Medicine Injection Extravasations as Medical Events,” that will address the issues in this petition by searching for Docket ID NRC-2022-0218 on the Federal rulemaking website, https://www.regulations.gov. In addition, the Federal rulemaking website allows members of the public to receive alerts when changes or additions occur in a docket folder. To subscribe: (1) navigate to the docket folder (NRC-2022-0218); (2) click the “Subscribe” link; and (3) enter an email address and click on the “Subscribe” link. Publication of this document in the Federal Register closes Docket ID NRC-2020-0141 for PRM-35-22.

The Board is proposing to amend §§ 701.21, 701.22, 701.23, and part 714 of the NCUA's regulations regarding the purchase of loan participations and the purchase, sale, and pledge of eligible obligations and other loans (including notes of liquidating credit unions). 1 The Board intends this proposal provide FICUs with additional flexibility to make use of advanced technologies and opportunities offered by the fintech sector. In addition, the proposed amendments are intended to clarify ambiguities related to loan participations and eligible obligations.

Over the last several years, the NCUA has modernized and updated several of its regulations to shift from a prescriptive to a principles-based approach. As a result of this effort, many of the agency's regulations are now principles-based, meaning the regulations provide a framework for a credit union to determine how to structure its operations. The NCUA's principles-based approach to rulemaking is intended to apply a broad, well-defined, set of principles governing the regulated activity. This principles-based approach enables a credit union to establish and adjust its policies and procedures to reflect its board-established risk-tolerance levels, provided those policies and procedures continue to meet the principles outlined in the regulation, including safety and soundness and compliance considerations.

The Board believes shifting to a more principles-based approach with respect to loan participations and eligible obligations is appropriate and will be beneficial to FICUs. By removing certain prescriptive limits and other qualifying conditions, and replacing them with risk-focused, principles-based requirements, the Board believes this proposal will advance the agency's efforts to strike an appropriate balance between mitigating risk to the National Credit Union Share Insurance Fund (Share Insurance Fund), protecting credit union members and fostering growth and stability in the credit union system. In addition, this shift would provide FICUs with flexibility to innovate how they manage their balance sheets while offering new or enhanced services to their members. The Board also believes the proposed changes would increase FICUs' ability to engage in lending arrangements with other financial institutions and third parties, including fintech companies providing lending services, expanding their access to diverse loan origination channels, new markets and potential new services to their members. Finally, the Board notes that this proposal would address part of one of the strategic objectives outlined in the 2022 NCUA Annual Performance Plan, which is to ensure NCUA policies and regulations appropriately address emerging and innovative financial technologies.

The proposed rule would remove certain prescriptive limitations and other qualifying requirements relating to eligible obligations and provide credit unions with additional flexibility to purchase eligible obligations of their members. Removing the current prescriptive limitations and other qualifying requirements will allow federal credit unions (FCUs) additional flexibility to engage with the advanced technologies and other opportunities offered by the fintech sector. The greater flexibility and individual autonomy will also allow FCUs to establish their own risk tolerance limits and governance policies for these activities, while codifying due diligence, risk assessment, compliance and other management processes that are consistent with the Board's long-standing expectations for safe, sound, fair and affordable lending practices.

The proposed rule would also provide credit unions with additional flexibility to participate in loans acquired through indirect lending arrangements, allowing FICUs to utilize advanced technologies and opportunities offered by the fintech sector.

As discussed in greater detail in the section-by-section analysis, the Board is proposing to amend § 701.21 of the NCUA's regulations to add new paragraph (c)(9) regarding indirect lending and indirect leasing arrangements. The new paragraph is intended to replace the language defining indirect lending and indirect leasing arrangements under current § 701.23(b)(4)(iv), which would be removed under this proposal for the reasons explained below.

The proposal would also amend § 701.22 of the NCUA's regulations. In particular, the proposal requests comment on certain clarifying amendments to the introductory paragraph, and would codify NCUA Legal Opinion 15-0813, Loan Participations in Indirect Loans—Originating Lender. 2 Through the codification of Legal Opinion 15-0813, this proposed rule would clarify that a FICU engaged in an indirect lending relationship can meet the definition of “eligible organization” under § 701.22 of the NCUA's regulations, provided the FICU meets certain conditions. Specifically, under this proposal, for purposes of § 701.22, a FICU would be considered the originating lender and meet the definition of an “eligible organization” if the FICU makes the final underwriting decision regarding the loan, and the loan is assigned to the purchaser very soon after the inception of the obligation to extend credit.

The Board notes that it intends the codification of the aforementioned legal opinion to clarify that a FICU can meet the definition of “originating lender” in certain transactions where the FICU is engaging in indirect lending arrangements with fintech companies and other third-party loan acquisition channels, such as Credit Union Service Organizations (CUSOs) and other loan-originating retailers.

In addition, this proposed rule would amend § 701.23 of the NCUA's current regulations as follows:

• Proposing certain clarifying and conforming amendments to the introductory paragraph to § 701.23.

• Removing the CAMELS ratings and well-capitalized requirements under § 701.23(b)(2) for FCU purchases of certain non-member loans from FICUs.

• Narrowing the application of the 5-percent limit on the purchase of eligible obligations to notes of a liquidating credit union.

• Adding safety and soundness requirements to section § 701.23(b)(6)(i)-(vi) concerning the purchase of eligible obligations, to offset risks associated with removing the CAMELS and well-capitalized requirements from § 701.23(b)(2), and narrowing the application of the 5-percent limit to notes of liquidating credit unions. Safety and soundness and compliance requirements would apply to all FCUs engaged in the purchase of eligible obligations and notes from a liquidating credit union. In particular, the proposed rule would require an FCU purchasing eligible obligations or notes from a liquidating credit union to:

○ establish written, board-approved policies, risk assessments, and risk management process requirements that are commensurate with the size, scope, type, complexity, and level of risk posed by the planned purchase activities. These policies would include underwriting standards for the loans, ongoing performance and risk monitoring, including compliance risk, tailored to the types of loans purchased and the sellers as applicable, and portfolio concentration limits by loan types and risk categories in relation to net worth;

○ conduct due diligence on a seller prior to the purchase; and

○ require the written loan purchase agreements to contain certain contract language and provisions (similar to the standards currently established for loan participation agreements under § 701.22 of the NCUA's regulations);

○ provide for a legal review and assessment of applicable loan purchase agreements or contracts to protect the FCU's legal and business interests from undue risk.

• Revising the definition of an eligible obligation under § 701.23(a)(1) to clarify the distinction between transactions treated as loan participations and those treated as eligible obligations.

• Revising the applicability of the 5-percent limit, discussed in more detail later in this document, from covering the purchase of most eligible obligations to only “notes” purchased by an FCU from a liquidating credit union.

• Revising the “grandfathered purchases” section of the current rule to include eligible obligation purchases that were executed before the effective date of this proposed rule (if adopted) and complied with § 701.23 at the time the transaction was executed, subject to safety and soundness and compliance considerations.

• Adding safety and soundness requirements to § 701.23(c) concerning the sale of eligible obligations, requiring the selling FCU to do the following:

○ obtain a legal review and assessment of all applicable loan sale agreements or contracts to protect the FCU's legal and business interests; and

○ identify the specific loan(s) being sold either directly in the written loan sale agreement or through a document that is incorporated by reference into the loan sale agreement.

The Board is also proposing to amend § 714.9 of the NCUA's regulations to make certain conforming amendments related to proposed changes to § 701.23(b)(4).

Finally, the proposal would make certain other conforming changes and technical amendments in other sections of the NCUA's regulations. The Board does not view these additional conforming technical changes as substantive.

Section 120(a)  3 of the Federal Credit Union Act (FCU Act or Act) authorizes the Board to prescribe rules and regulations for the administration of the Act. 4 Similarly, section 209  5 of the FCU Act authorizes the Board to prescribe such rules and regulations as it may deem necessary or appropriate to carry out the share insurance provisions of subchapter II of the Act. In addition, section 206 of the FCU Act provides the Board with broad authority to take enforcement action against a FICU or an “institution-affiliated party”  6 that is engaging or has engaged, or the Board has reasonable cause to believe that is about to engage, in an unsafe or unsound practice in conducting the business of such credit union. 7 Congress chose not to define “unsafe or unsound practices” in the FCU Act, leaving determinations regarding which actions are unsafe or unsound to the Board.

Section 107(5)(E) of the FCU Act authorizes FCUs to engage in participation lending with other credit unions, credit union organizations, or financial organizations in accordance with written policies of the board of directors. 8 Section 107(5)(E) also provides that a credit union that originates a loan for which participation arrangements are made in accordance with this subsection shall retain an interest of at least 10 per centum of the face amount of the loan. 9

Section 107(13) of the FCU Act authorizes FCUs, in accordance with rules and regulations prescribed by the Board, to purchase, sell, pledge, or discount or otherwise receive or dispose of, in whole or in part, any eligible obligation (as defined by the Board) of its members. 10 In addition, section 107(13) authorizes FCUs, in accordance with rules and regulations prescribed by the Board, to purchase from any liquidating credit union notes made by individual members of the liquidating credit union at such prices as may be agreed upon by the board of directors of the liquidating credit union and the board of directors of the purchasing credit union, but no purchase may be made under authority of this paragraph if, upon the making of that purchase, the aggregate of the unpaid balances of notes purchased under authority of this paragraph would exceed 5 per centum of the unimpaired capital and surplus of the credit union. 11

Section 107(14) of the FCU Act authorizes FCUs, subject to regulations of the Board, to sell all or a part of its assets to another credit union, to purchase all or part of the assets of another credit union, and to assume the liabilities of the selling credit union and those of its members. 12

As discussed in more detail below, this proposal would make several changes to sections in part 701 of the NCUA's regulations. The Board requests comment on all aspects of the proposal and on specific questions and issues mentioned below. These changes are intended to clarify numerous provisions regarding loans to members and lines of credit to members under § 701.21; loan participations under § 701.22; and the purchase, sale, and pledge of eligible obligations under § 701.23. In addition, the proposal would amend the NCUA's current regulatory requirements under §§ 701.22 and 701.23. The amended requirements would provide FICUs authority and autonomy to innovate and transact business with fintech companies and other institutions that provide services associated with the origination and sale of loans made to members of FICUs.

As discussed in more detail below, this proposal would, as a conforming amendment, add new provisions to § 701.21 regarding indirect lending arrangements and indirect leasing arrangements. The new provisions are intended to take the place of a provision in current § 701.23, which would be removed under the proposal. No other changes to § 701.21 are proposed.

For reasons discussed in the preamble discussion on current § 701.23(b)(4), the NCUA is proposing to delete paragraph (b)(4)(iv) regarding indirect lending from § 701.23. Current § 701.23(b)(4)(iv) excludes certain loans acquired through indirect lending arrangements and indirect leasing arrangements from the 5-percent limit on the aggregate of the unpaid balance of certain loans purchased under § 701.23. While the language excluding loans and leases acquired through indirect lending and indirect leasing arrangements would no longer be needed in § 701.23(b)(4), the definition of such arrangements is still relevant for purposes of other provisions in the NCUA's regulations. Under current paragraph (b)(4), and NCUA's long-standing interpretation, 13 loans acquired by an FCU pursuant to an indirect lending arrangement are considered loans made by the FCU under § 701.21, rather than loans purchased under § 701.23. Accordingly, the Board is proposing to add to § 701.21 new paragraph (c)(9) regarding indirect lending and indirect leasing arrangements. The new paragraph is intended to replace the language defining indirect lending and indirect leasing arrangements under current § 701.23(b)(4)(iv).

Proposed new § 701.21(c)(9)(i) would define the terms “indirect leasing arrangement” and “indirect lending arrangement” for purposes of the NCUA's regulations. Current § 701.23(b)(4)(iv) provides that an indirect lending or indirect leasing arrangement that is classified as a loan and not the purchase of an eligible obligation because the FCU makes the final underwriting decision, and the sales or lease contract is assigned to the FCU very soon after it is signed by the member and the dealer or leasing company, is excluded in calculating the 5-percent limit. The NCUA believes splitting the provision in paragraph (b)(4)(iv) into two definitions will help clarify the existing requirements. Accordingly, proposed new § 701.21(c)(9)(i) would provide that the term indirect leasing arrangement means a written agreement to purchase leases from the leasing company where the purchaser makes the final underwriting decision, and the lease agreement is assigned to the purchaser very soon after it is signed by the member and the leasing company. Proposed new paragraph (c)(9)(i) would provide further that the term indirect lending arrangement means a written agreement to purchase loans from the loan originator where the purchaser makes the final underwriting decision regarding making the loan, and the loan is assigned to the purchaser very soon after the inception of the obligation to extend credit.

Both proposed new definitions would use language that is generally similar, but not identical, to the language in current § 701.23(b)(4)(iv). The NCUA is proposing to revise the language used in current paragraph (b)(4)(iv) to clarify the different requirements that apply to indirect leasing arrangements and indirect lending arrangements. The proposed changes are intended to clarify but not change the current meaning of both terms.

The Board specifically requests comment on whether proposed paragraph (c)(9) would have a material impact on credit unions' existing and future indirect lending arrangements, indirect leasing arrangements, or both.

Proposed new § 701.21(c)(9)(ii), consistent with current § 701.23(b)(4)(iv), would clarify the difference between loans made pursuant to indirect lending arrangements under § 701.21 and loans purchased under § 701.23. Current § 701.23(b)(4)(iv) excludes loans acquired pursuant to certain indirect lending arrangements from the 5-percent limit under current paragraph (b)(4). Paragraph (b)(4)(iv) provides that an indirect lending or indirect leasing arrangement that is classified as a loan and not the purchase of an eligible obligation because the FCU makes the final underwriting decision, and the sales or lease contract is assigned to the FCU very soon after it is signed by the member and the dealer or leasing company, is excluded from calculating the 5-percent limit. 14 As previously mentioned, current § 701.23(b)(4)(iv) would be removed under this proposal. Accordingly, proposed new § 701.21(c)(9)(ii) would provide that a loan acquired pursuant to an indirect lending arrangement, and that meets the requirements of § 701.21, is classified as a loan and not the purchase of a loan for purposes of the NCUA's regulations, which are codified in chapter VII of title 12 of the Code of Federal Regulations.

Proposed new § 701.21(c)(9)(iii), consistent with current §§ 701.23(b)(4)(iv) and 714.9, would clarify the difference between leases made pursuant to indirect leasing arrangements under § 714.2(b)  15 and leases purchased under § 701.23. Current § 701.23(b)(4)(iv) excludes leases acquired pursuant to certain indirect leasing arrangements from the 5-percent limit under current paragraph (b)(4). Paragraph (b)(4)(iv) provides that an indirect lending or indirect leasing arrangement that is classified as a loan and not the purchase of an eligible obligation because the FCU makes the final underwriting decision, and the sales or lease contract is assigned to the FCU very soon after it is signed by the member and the dealer or leasing company, is excluded in calculating the 5-percent limitation. 16 Similarly, current § 714.9 provides that an FCU's indirect leasing arrangements are not subject to the eligible obligation limit if they satisfy the provisions of § 701.23(b)(3)(iv) that require that an FCU make the final underwriting decision and that the lease contract is assigned to the FCU very soon after it is signed by the member and the dealer or leasing company. Accordingly, proposed new § 701.21(c)(9)(iii) would provide that a lease acquired pursuant to an indirect leasing arrangement, and that meets the requirements of part 714 of the NCUA's regulations, is classified as a lease and not the purchase of a lease for purposes of the NCUA's regulations, which are codified in chapter VII of title 12 of the Code of Federal Regulations.

As discussed in more detail below, the proposal would make several clarifying amendments to § 701.22. These changes are primarily intended to clarify FCUs' authority to purchase loan participations and the requirements applicable to the purchase of loan participations by federally insured, state-chartered credit unions (FISCUs).

The introductory paragraph to current § 701.22 sets forth the scope and limitations of the section. The NCUA Board added the introductory paragraph to § 701.22 as part of a final rule it approved in 2013 (2013 Final Rule). 17 The introductory paragraph was intended to clarify several issues related to the scope and applicability of § 701.22. In particular, the 2013 Final Rule explained as follows in the remainder of this paragraph. The introductory text clarified the scope of the rule and helps distinguish a loan participation under § 701.22 from an eligible obligation under § 701.23. Further, it clarified that the rule applies to a natural person FICU's purchase of a loan participation where the borrower is not a member of that credit union. Generally, an FCU's purchase, in whole or in part, of its member's loan is covered by NCUA's eligible obligations rule at § 701.23. Additionally, by a cross-reference to Part 741 of NCUA's regulations, the rule also was made applicable to natural person FISCUs. The Board noted that corporate credit unions are subject to the loan participation requirements set forth in Part 704 and, therefore, are not subject to § 701.22 of NCUA's regulations. 18

The introductory paragraph has seven separate substantive provisions. First, the paragraph provides that this section applies only to loan participations as defined in the section. Second, it provides that the section does not apply to the purchase of an investment interest in a pool of loans. Third, it provides that the section establishes the requirements a FICU must satisfy to purchase a loan participation. Fourth, it provides that the section applies to a FICU's purchase of a loan participation only where the borrower is not a member of the purchasing FICU and where a continuing contractual obligation between the seller and purchaser is contemplated. Fifth, it provides that § 701.23 generally applies to an FCU's purchase of all or part of a loan made to one of its members. Sixth, it provides that § 741.225 requires FISCUs to comply with the requirements of §§ 701.22 through 741.225 provides that FISCUs are exempt from the borrower membership requirement in current § 701.22(b)(4). Seventh, the paragraph provides that the section does not apply to corporate credit unions as defined in part 704.

In the 2013 Final Rule, the Board added a similar introductory paragraph to § 701.23 regarding the purchase, sale, and pledge of eligible obligations to clarify the scope of that section and distinguish loan participations from eligible obligations. The provisions included in that introductory paragraph are discussed in detail later in the part of the preamble on the introductory paragraph to § 701.23.

Since adopting the prefatory language in both sections, the NCUA has received inquiries from NCUA examiners, FICUs, fintech companies, and other parties who have expressed confusion about how to interpret many of these provisions. This confusion has led to inconsistent reporting of loan interests by FICUs and uncertainty about which of the two sections, § 701.22 or § 701.23, to apply to certain transactions, particularly innovative programs that have been designed by FICUs after 2013. In addition, the Board is concerned that continued confusion about lines of authority in this area could discourage FICUs from entering into certain safe, sound and compliant loan participation, purchase, or sale agreements that are within their statutory authority.

One significant issue with the current introductory paragraph to § 701.22 that parties have raised is when a FICU's partial loan purchase is subject to that section. In particular, parties have cited the continuing contractual obligation qualifier as a source of confusion. The third sentence in the introductory paragraph to current § 701.22 provides that the section applies only to a FICU's purchase of a loan participation where the borrower is not a member of that credit union and where a continuing contractual obligation between the seller and purchaser is contemplated. 19 The fourth sentence in the paragraph provides further that, generally, an FCU's purchase of all or part of a loan made to one of its own members, subject to a limited exception for certain well-capitalized FCUs in § 701.23(b)(2), where no continuing contractual obligation between the seller and purchaser is contemplated, is governed by § 701.23 of this part. 20 Similarly, the introductory paragraph to § 701.23 provides that § 701.23 governs an FCU's purchase, sale, or pledge of all or part of a loan to one of its own members, subject to a limited exception for certain well-capitalized FCUs, where no continuing contractual obligation between the seller and purchaser is contemplated. 21

In practice, however, purchase agreements, regardless of whether the transactions involve the purchase of an eligible obligation or a loan participation, frequently contain some form of continuing contractual obligation between the buyer and the seller, including representations and warranties regarding the loans and loan repurchase agreements, servicing agreements, and other similar types of ongoing obligations set forth under the agreements. The Board believes the continuing contractual obligation clauses in the third and fourth sentences in the introductory paragraphs to current § 701.22 are unnecessary when determining whether a loan purchase agreement qualifies as either a loan participation or an eligible obligation.

In addition to the concerns explained above, the clause where the borrower is not a member of that credit union in the first part of the third sentence of the introductory paragraph conflicts with another provision in § 701.22. This language could be misinterpreted to suggest that § 701.22 does not apply to a partial loan purchase where the borrower is a member of the purchasing credit union, even when the transaction otherwise meets the definition of a loan participation under § 701.22. This clause directly conflicts with the more specific requirement in § 701.22(b)(4), which provides that the borrower must become a member of one of the participating credit unions before the purchasing FICU purchases a participation interest in the loan. The NCUA has long interpreted the more specific language in paragraph (b)(4) as controlling and has applied the requirements of § 701.22 to partial loan purchases where the purchase meets the definition of a loan participation and the borrower is a member of the purchasing FICU.

Accordingly, the NCUA believes the removal of this clause will serve to clarify and reduce confusion when § 701.22 applies to certain transactions. As part of this proposal, the Board requests comment on whether deleting the fourth and fifth sentences in the introductory paragraph to current § 701.22 would clarify when the section applies to certain transactions. After considering any public comments received on this issue, the Board may adopt these amendments in a final rule based on this proposal.

The NCUA recognizes that whether the purchase of a partial loan is a loan participation under § 701.22 or a loan purchase under § 701.23 may still be uncertain in some instances even if these sentences are removed. The NCUA believes, however, that other provisions in § 701.22, such as the definition of loan participation and the conditions outlined in paragraph (b), make clear which transactions are subject to the requirements of § 701.22.

As discussed in more detail in the part of the preamble below regarding § 701.23, the Board is also considering deleting the continuing contractual obligations sentence in current § 701.23, subject to comments received on this proposal. The Board intends this change to work in conjunction with the proposed changes to the introductory paragraph to current § 701.22.

The Board is proposing no other changes to the introductory paragraph to current § 701.22. Another provision in the introductory paragraph that is often misread, however, is the sentence providing that § 701.22 does not apply to the purchase of an investment interest in a pool of loans. That sentence is intended to clarify that the purchase of such investment interests, to the extent they are permitted, are governed by part 703 of the NCUA's regulations for FCUs (and under part 741 of the NCUA's regulations and as authorized under state law for FISCUs) and not § 701.22. This continues to be the case under this proposal. The NCUA notes further that this qualification to the section makes clear that § 701.22 neither applies to nor authorizes FICU investments in either asset-backed securities or the purchase of other similar investment interests in pools of loans. 22 The requirements of § 701.22 apply to each individual loan a FICU purchases a loan participation interest in. 23

If all the changes proposed above are adopted in a final rule, the introductory text of § 701.22 would provide the section applies only to loan participations as defined in paragraph (a). It does not apply to the purchase of an investment interest in a pool of loans. The section establishes the requirements a federally insured credit union must satisfy to purchase a participation in a loan. Federally insured state-chartered credit unions are required by § 741.225 to comply with the loan participation requirements of the section. The section does not apply to corporate credit unions, as that term is defined in § 704.2.

The proposed rule would add a second sentence to the current definition of “originating lender” in § 701.22(a) to codify and further clarify a 2015 NCUA legal opinion (2015 Opinion) regarding loan participations in indirect loans. 24 The NCUA's 2013 Final Rule amended the loan participation regulation to, among other things, clarify that the originating lender must participate in the loan throughout the life of the loan. 25 In the 2013 Final Rule, the NCUA explained that this requirement derives from sections 107(5) and (5)(E) of the FCU Act. 26 Section 107(5) provides in relevant part that an FCU shall have power to participate with other credit unions, credit union organizations, or financial organizations in making loans to credit union members. 27 Section 107(5)(E) requires further that participation loans with other credit unions, credit union organizations, or financial organizations shall be in accordance with written policies of the credit union's board of directors, provided that a credit union which originates a loan for which participation arrangements are made in accordance with this subsection shall retain an interest of at least 10 per centum of the face amount of the loan. 28 While the statutory requirements of section 107(5)(E) primarily pertain to FCUs involved in loan participations, the Board chose, for safety and soundness reasons, to extend most of the requirements in § 701.22 to cover all FICUs as part of the 2013 Final Rule. 29

In the 2013 Final Rule, the Board noted two specific safety and soundness concerns as reasons for adopting the current definition of “originating lender,” explaining in relevant part as follows:

The 2013 Final Rule requires an originating lender to remain part of the participation arrangement and to retain a continuing interest in the loan in order to be a true participant. Otherwise, the transaction is not a loan participation but more akin to the sale of an eligible obligation. As the Board noted in 1991, permitting the sale of participation interests in eligible obligations will blur the distinction between loan participations and loan purchases and sales, arguably circumventing the purpose of the loan participation and eligible obligations rules. Additionally, the Board believes the continued participation of the lender that initially originated the loan is integral to a safe and sound participation arrangement. In 1991, the Board expressed its concern that a lender may have a decreased interest in properly underwriting a loan if they know they can later reduce their risk by selling participation interests in it. The requirement for the originating lender's continued participation in a loan participation arrangement is intended to address this safety and soundness concern. 30

As explained in more detail below, these concerns are fully accounted for under the 2015 Opinion and this proposal by limiting the interpretation to indirect loans and requiring that such loans meet the same general requirements applicable to indirect loans made by FCUs under current § 701.23(b)(4)(iv).

The 2013 Final Rule responded to concerns raised by commenters regarding the proposed definition of “originating lender” and its application in situations where a CUSO underwrites and processes a loan, but the FICU funds the loan. In response to this feedback the Board provided the following explanation.

These commenters observed that a CUSO often serves as an originator in name only and, thus, is not the most appropriate party to regard as the originating lender for the purposes of the rule. For example, loans may be underwritten and processed by a CUSO, but funded by its owner credit union. The Board acknowledged that this CUSO model is not uncommon within the industry and permissible under § 712.5. For purposes of this final rule, it was the Board's intent that the originating lender is the entity with which the borrower initially or originally contracts for the loan. 31

As noted above, the Board's responses to commenters in the 2013 Final Rule regarding the definition of originating lender were limited to situations in which a FICU purchased a loan from a CUSO that had underwritten the loan. The Board did not discuss the application of the definition of originating lender to CUSOs or other entities in the context of indirect lending arrangements in which a purchasing FICU underwrites the loan and makes the final underwriting decision. Accordingly, the application of the definition of originating lender to CUSOs or other entities in the context of indirect lending arrangements was left unaddressed in the 2013 Final Rule and open to later interpretation by the NCUA, which is what it did two years later in the 2015 Opinion discussed in more detail in the following paragraphs.

The NCUA has long used the act of underwriting a loan as a feature to distinguish between transactions where a FICU makes a loan and transactions where a FICU purchases a loan. 32 In particular, in a 1997 legal opinion the NCUA explained:

By requiring the purchasing credit union to make the final underwriting decision in an indirect lending transaction, the NCUA ensured that the purchasing credit union was not relying on the due diligence of the loan seller who might otherwise have had a decreased interest in properly underwriting the loan knowing it would later be sold. Moreover, under the NCUA's loan participation regulation, the originating lender is required to retain at least a 5-percent interest in any participation interest for the life of the loan. 34 Accordingly, where an eligible organization makes a loan through an indirect lending arrangement there is no greater risk of incentives for lax or improper underwriting for purposes of § 701.22 than if the eligible organization had processed and funded the loan itself.

Furthermore, as discussed in the 1997 legal opinion quoted above, the NCUA has long distinguished between indirect loans, made under section 107(5) of the FCU Act and 12 CFR 701.21, and eligible obligations purchased under section 107(13) of the FCU Act and 12 CFR 701.23. 35 For over 25 years the NCUA has treated indirect loans—as defined under current § 701.23(b)(4)(iv)—made by a credit union to be separate and distinct from eligible obligations. Accordingly, while permitting the sale of participation interests in eligible obligations might blur the distinction between loan participations and loan purchases and sales and circumvent the purpose of the loan participation and eligible obligations rules, allowing the sale of participation interests in indirect loans presents no such risk.

Working within the regulatory and interpretative history discussed above, the NCUA determined in the 2015 Opinion that an “eligible organization”  36 may be considered the “originating lender” for purposes of § 701.22 where the eligible organization generated the loan through an “ indirect lending arrangement”   37 with a retailer such as an auto dealer. 38 Current § 701.22(a) defines the term “originating lender” as “the participant with which the borrower initially or originally contracts for a loan and who, thereafter or concurrently with the funding of the loan, sells participations to other lenders.”  39 The 2015 Opinion explained that, in indirect lending arrangements with a retailer such as an auto dealer, the retailer is acting as an agent of the eligible organization, and is simply performing as an administrative functionary processing a loan for the eligible organization, and the retailer's activities are part and parcel of, and an extension of, the eligible organization's lending operations. In this context, the 2015 Opinion concluded, the retailer is not acting as a separate lender generating loans for itself and then selling those loans to an eligible organization. Rather, the retailer is a facilitator that is part of the eligible organization's loan processing mechanism, and the eligible organization is the de facto originating lender and, therefore, the originating lender for purposes of the NCUA's loan participation rule.

The 2015 Opinion explained further that a loan purchased by an eligible organization must satisfy two conditions to be classified as an “indirect loan” and not the purchase of a loan. 40 First, the eligible organization must make the final underwriting decision regarding the loan. In other words, a loan must be underwritten by the purchasing eligible organization before completion of the loan or sales contract. 41 An eligible organization may use an automated credit scoring system to make its final underwriting decision as long as the “score” obtained from the automated system is the sole determinant for granting credit. 42 When an eligible organization establishes the qualifying criteria for the automated scoring system, it is effectively making an advance decision on a particular application. 43 So long as the party entering the borrower's application information does not exercise any judgment regarding that information, the score will be deemed to reflect the FCU's lending policies. 44

Second, the sales contract must be assigned to the eligible organization very soon after it is signed by the borrower and the dealer. 45 As explained in a separate NCUA legal opinion, assignment close in time to the making of the loan allows the retailer to function as the facilitator of the loan while the eligible organization remains the true lender. 46 The length of time that satisfies “very soon after” depends on the nature of the loan and the practical realities of assigning certain kinds of loans in the current marketplace and in accordance with prevailing industry standards. 47 While “very soon after” is generally determined on a case-by-case basis by loan type and in accordance with commercial reasonableness, the longer the time between the formation of the contract and its assignment, the more likely the program will be viewed as involving the purchase of an eligible obligation rather than the making of a loan. 48

The Board believes that codifying the 2015 Opinion will clarify the loan participations rule and facilitate further growth in credit unions' purchase and sale of indirect loan participations. Industry data shows significant growth in credit unions engaging in indirect lending programs, which have become an important channel for credit unions to extend services to their members and provide a viable source of income to support their growth.

Since 2015, FICUs have experienced large growth in indirect lending programs as reflected in Table 1. The $299 billion outstanding balance of indirect loans as of June 30, 2022, more than doubled the 2015 year-end loan balance. 49

During the past seven years, FICUs' indirect lending activities had double-digit increases (ranging from 14 percent to 21 percent) year over year between 2016 and 2018, and a low single-digit increase in 2019 and 2020. 50 The speed of growth went back to double digits in 2021, with FICUs reporting an aggregate 16.26 percent increase as of June 30, 2022, from year-end 2021. 51 The share of indirect loans outstanding in FICUs' total loan portfolio increased from 17.35 percent in 2015 to 21.22 percent in 2018, and reached 21.56 percent as of June 30, 2022, after maintaining at 20 percent for the past three years. 52

Furthermore, between December 31, 2015, and June 30, 2022, the delinquency rate on the indirect lending program was relatively stable, ranging from 0.77 percent to 0.47 percent, while the net charge-off percent decreased from 0.7 percent in 2017 to 0.24 percent in 2021 and 0.21 percent in June 2022. 53

For the reasons discussed previously, and consistent with sections 107(5) and 107(5)(E) of the FCU Act and the 2015 Opinion, the Board is proposing to codify into the NCUA's regulations its interpretation that an eligible organization may be considered an “originating lender” for purposes of § 701.22 where the eligible organization generates a loan through an indirect lending arrangement. Moreover, the Board proposes to further clarify in the regulation that any “eligible organization”—as that term is defined under § 701.22(a)—that acquires a loan through an indirect lending arrangement acts as the originating lender for purposes of § 701.22, provided the eligible organization made the final underwriting decision regarding making the loan and was assigned the loan or sales contract very soon after the inception of the obligation to extend credit. In such cases, the Board considers the third party processing the loan to be an agent of the eligible organization that performs as an administrative functionary processing the loan for the eligible organization, and the third party's activities are part and parcel, and an extension, of the eligible organization's lending operations.

Where an indirect loan is underwritten by the purchasing eligible organization before the loan is made and the loan is transferred to the eligible organization very soon after the inception of the obligation to extend credit, the Board believes there is little risk the loan will not be properly underwritten. Accordingly, proposed § 701.22(a) would add to the end of the definition of “originating lender” a second clarifying sentence providing that originating lender includes a participant that acquires a loan through an indirect lending arrangement as defined under § 701.21(c)(9). Proposed paragraph (c)(9) provides, in part, that indirect lending arrangement means a written agreement to purchase loans from the loan originator where the purchaser makes the final underwriting decision regarding making the loan, and the loan is assigned to the purchaser very soon after the inception of the obligation to extend credit.

The Board specifically requests comment on whether there are certain types of transactions that should be excluded from the interpretation above. In particular, are there transactions in which eligible organizations acquire loans through indirect lending arrangements, but the third parties making the loans do not act as administrative functionaries processing the loan on behalf of the eligible organizations, and the third parties' activities are not part and parcel, and an extension, of the eligible organizations' lending operations? If there are transactions of this type, please explain why they should be excluded and provide information about the transactions and the specific activities undertaken by the parties.

In addition, the Board requests comment on whether there are other factors, changes, safety and soundness, or compliance implications the NCUA should consider related to the proposed amendments to the definition of “originating lender.” If there are, please explain them in detail and provide supporting data and information. Should the Board consider providing additional clarity such as adding some parameters around the meaning of “very soon after” for the assignment of the loan or contract to the credit union? Examples could be within seven days of the borrower executing the loan or contract, or assignment prior to the first loan payment.

The Board also invites comments on what it means for the credit union to make the final underwriting decision regarding making the loan in an indirect lending arrangement. For example, should the Board specify in the rule that a credit union in an indirect lending arrangement must be involved or consulted at the time of the extension of credit? Or, can the credit union simply provide its underwriting standards to the other party in the indirect lending arrangement and clarify in the indirect lending agreement that only those loans meeting the credit union's underwriting standards will be accepted for funding? Would a credit union still be making the final underwriting decision if a third party includes significantly more underwriting criteria that are more restrictive, for example, than the credit union requires?

Also, should the Board establish an indirect lending rule? And if so, what specifically should the Board consider in any future indirect lending rulemaking? Should a credit union be considered the originating lender in cases where an intermediary is added to a loan transaction between the initial party extending credit and a credit union, including a third party facilitating the loan transaction? The NCUA received several inquiries from the credit union system related to CUSOs that work with other lenders to extend credit. The CUSOs in those cases then either receive an immediate assignment of the loans and/or act as a facilitator in immediately assigning loans further to credit unions, where the loans meet the credit unions' underwriting criteria.

Are there structural, safety and soundness, or compliance concerns that would warrant considering that the addition of intermediaries in loan origination transactions, including CUSOs, precludes a credit union assignee from being considered the originating lender under the revised definition in the proposed rule?

Are there any additional safety and soundness or compliance implications concerning the proposed definition of “originating lender” that the Board should consider?

Should the Board consider defining the term “an investment in a pool of loans” in a future rulemaking? If so, how should it be defined and why?

Current § 701.22(e) provides that notwithstanding paragraph (b)(5)(ii) of § 701.22, during the period commencing on April 21, 2020, and concluding on December 31, 2022, the aggregate amount of loan participations that may be purchased from any one originating lender shall not exceed the greater of $5,000,000 or 200 percent of the FICU's net worth. 56 The Board approved § 701.22(e) to help ensure that FICUs remained operational and had sufficient liquidity during the COVID-19 pandemic. 57 The Board concluded, at the time, that the amendments would provide FICUs with the necessary flexibility in a manner consistent with the NCUA's responsibility to maintain the safety and soundness of the credit union system. 58 As provided in current paragraph (e), the temporary regulatory relief provided under the paragraph will expire on December 31, 2022. Accordingly, the Board is proposing to remove this paragraph as part of any final rule amending § 701.22 issued after December 31, 2022.

The Board welcomes comments on the impact, if any, that was experienced due to the flexibilities provided in the temporary rule. Did the temporary rule have any effect on the participation markets? Are there any safety and soundness or compliance implications related to the expiration of the flexibilities?

Finally, the Board invites comment on what other recommendations it should consider in the loan participation rule. For example, should the Board consider replacing prescriptive limits with principles-based requirements? Should the Board consider removing the limit on the amount of loan participations that could be purchased from any one originating lender under current § 701.22(b)(5)(ii)?

As discussed in more detail in this portion of the preamble, this proposal would make several changes to current § 701.23 of the NCUA's regulations. These changes are intended to clarify numerous provisions regarding the purchase, sale, and pledge of eligible obligations. The proposal would also amend the NCUA's current regulatory requirements under current § 701.23 to provide FCUs expanded authority and autonomy to innovate and transact business with fintech companies and other institutions that provide services associated with the origination and sale of loans made to members of FCUs.

The introductory paragraph to current § 701.23 sets forth the scope and limitations of the section. The Board added the introductory paragraph to § 701.23 as part of the 2013 Final Rule. 59 The introductory paragraph was added to clarify several issues related to the scope and applicability of § 701.23. In particular, the 2013 Final Rule explained in five sentences as follows: The proposal added introductory text to § 701.23 to clarify the scope of § 701.23 and to distinguish transactions under § 701.23 from transactions covered by § 701.22. The final rule adopts the additional language substantially as proposed, but with some amendments to conform it to a 2012 final rule promulgated by NCUA eliminating the Regulatory Flexibility Program (RegFlex). 60 The final rule regarding RegFlex provides a limited exception to the general requirement that an FCU's purchase, sale, or pledge of all or part of a loan must be to one of its own members. 61 Specifically, the exception permits FCUs that meet the well capitalized standard to buy loans from other FICUs 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 also makes a parallel conforming amendment to the introductory text to § 701.22 in this regard. 62

The introductory paragraph to current § 701.23 has three separate substantive provisions. First, the paragraph provides that the section governs an FCU's purchase, sale, or pledge of all or part of a loan to one of its own members where no continuing contractual obligation is contemplated between the seller and the purchaser. The first provision also notes that there is a limited exception to the membership requirement for certain well-capitalized FCUs. Second, the paragraph elaborates on the membership requirement by providing that the borrower must be a member of the purchasing FCU before the purchase is made, except as provided in current § 701.23(b)(2). Third, the paragraph provides broadly that an FCU may not purchase a non-member loan to hold in its portfolio.

Since amending § 701.23 as part of the 2013 Final Rule, the NCUA has received numerous inquiries from NCUA examiners, FCUs, fintech companies, and other parties who have expressed confusion about how to interpret these provisions. This confusion has led to inconsistent reporting of loan interests by FCUs and uncertainty regarding which of the two sections, § 701.22 or § 701.23, applies to certain transactions, particularly innovative programs that have been designed by FICUs after 2013. In addition, the Board is concerned that continued confusion about when a borrower is required to be a member under § 701.23 could discourage FCUs from entering into certain safe and sound loan purchase, sale, and pledge agreements that are within their statutory authority.

The clause in the first sentence of the introductory paragraph to current § 701.23 that provides “where no continuing contractual obligation between the seller and purchaser is contemplated” continues to be a source of confusion for examiners and the credit union system. As mentioned above, in practice loan purchase agreements, regardless of whether the transactions involve the purchase of an eligible obligation or a loan participation, frequently contain some form of continuing contractual obligation between the buyer and the seller, including representations and warranties regarding the loans and loan repurchase agreements, servicing agreements, and other similar types of ongoing obligations. Accordingly, the Board requests comments on deleting the continuing contractual obligations clause in current § 701.23. The Board intends this potential change to work in conjunction with the proposed changes to the introductory paragraph to current § 701.22.

In the introductory paragraph to § 701.23, the Board is considering two other changes in conjunction with amendments made elsewhere in this proposal, which are described in more detail below. First, the Board requests comments on removing the clause referring to the limited exception for well-capitalized FCUs. As discussed in more detail below in the part of the preamble on § 701.23(b)(2), the Board is proposing to remove the well-capitalized requirements for FCU purchases of certain non-member loans from FICUs. Accordingly, the Board believes that deleting the clause referring to the limited exception for well-capitalized FCUs is a necessary conforming amendment.

Second, the Board is proposing to remove the third sentence in the introductory paragraph to current § 701.23 to clarify the broad prohibition on holding non-member loans in the portfolio. This prohibition appears to have originally been intended to address FCU purchases of non-member loans to complete pools of loans for resale, as authorized for real estate-secured loans and federally guaranteed student loans under current § 701.23(b)(1)(iii) and (iv). The prohibition on retaining the non-member loans in portfolio goes together with the authority in paragraphs (b)(1)(iii) and (iv) because those provisions allow an FCU to buy such non-member loans solely to complete a pool of loans for resale.

Moreover, the second sentence in current § 701.23(b)(1)(iv) further confirms this relationship by providing that a pool must include a substantial portion of the credit union's members' loans and must be sold promptly. 63 For other purchases of non-member loans under current § 701.23, the authority is not tied to a plan or requirement to resell the loans being purchased. Prohibiting the FCU from retaining the loans in portfolio, as the current wording in the undesignated introductory paragraph implies, unnecessarily restricts FCUs' authority to purchase and hold non-member loans from FICUs under current § 701.23(b)(1)(ii)  64 and (b)(2). Accordingly, the Board requests comment on deleting the third sentence in the introductory paragraph to § 701.23, providing that an FCU may not purchase a non-member loan to hold in its portfolio.

The Board is considering one other change to the introductory paragraph. The second paragraph provides that for purchases of eligible obligations, except as described in paragraph (b)(2) of the section, the borrower must be a member of the purchasing FCU before the purchase is made. As discussed above, there are express exceptions to the membership requirement under paragraph (b)(1) as well as in paragraph (b)(2). For example, paragraphs (b)(1)(iii) and (iv) authorize FCUs to buy non-member loans to complete a pool of loans for resale. Accordingly, the Board requests comment on amending the second sentence in the introductory paragraph to current § 701.23 to provide that for purchases of eligible obligations, except as described under paragraph (b) of the section, the borrower must be a member of the purchasing FCU before the purchase is made.

If the changes proposed above are adopted in a final rule, the introductory text of § 701.23 would provide that the section governs an FCU's purchase, sale, or pledge of all or part of a loan to one of its own members, subject to certain exceptions. The introductory paragraph would provide further that for purchases of eligible obligations, except as otherwise described under paragraph (b) of § 701.23, the borrower must be a member of the purchasing FCU before the purchase is made.

The proposed rule would, among other changes discussed below, amend current § 701.23(a) to add the heading “Definitions” to the paragraph and remove the numbering from the individual definitions under paragraph (a). This change is intended to avoid errors and confusion when definitions in paragraph (a), which may be cross referenced elsewhere in the NCUA's regulations, are added or removed. Accordingly, the individual definitions included under proposed § 701.23(a) will be listed in alphabetic order but will not be numbered individually.

Eligible obligation. Proposed § 701.23(a) would amend the definition of “eligible obligation” to clearly distinguish between an eligible obligation and a note held by a liquidating credit union. Current § 701.23(a) defines the term eligible obligation broadly to mean a loan or group of loans, which includes the notes of a liquidating credit union. 65 As explained in the part of the preamble on § 701.23(b)(4), under this proposal the statutory 5-percent limitation on the aggregate of the unpaid balance of notes purchased under § 701.23 would apply to only notes of liquidating credit unions and not to eligible obligations as that term is generally used under section 107(13)  66 of the FCU Act. Accordingly, the proposal would amend the current definition of eligible obligation to clarify that the term does not include a note held by a liquidating credit union.

The proposal would also amend the definition of “eligible obligation” to clarify that the term includes a whole loan or part of a loan. The NCUA has long held the position that the term eligible obligation includes loans, in whole or in part, provided the loan does not meet the definition of a loan participation under § 701.22(a). 67 The Board believes that the amended definition of an eligible obligation would provide clarity and reduce confusion in the credit union system concerning when a transaction involving a loan purchased in part (partial loan) meets the regulatory definition of an eligible obligation. It has come to the Board's attention that many credit union officials find the eligible obligations rule unclear, specifically when attempting to determine which rule applies to a loan purchased in part. The amended definition will allow FCU officials to differentiate between a transaction involving a partial loan that meets the definition of an eligible obligation under § 701.23 and a transaction involving a partial loan that meets the definition of a loan participation under § 701.22.

Current § 701.22(a) provides that loan participation means a loan where one or more eligible organizations participate pursuant to a written agreement with the originating lender, and the written agreement requires the originating lender's continuing participation throughout the life of the loan. For example, if an FCU purchases a partial loan that does not meet the definition of loan participation under proposed § 701.22(a), then the transaction may still be permissible provided it meets the definition of an “eligible obligation” under proposed § 701.23(a) and meets the requirements under that section.

Finally, the proposal would amend the definition of “eligible obligation” to remove the words “group of loans.” The words are redundant because the term eligible obligation is used in its plural form, eligible obligations, throughout proposed and current § 701.23 to indicate where the section authorizes or applies to the purchase of one or more loans. The Board believes removing the phrase “group of loans,” in conjunction with the other changes discussed in this proposal, will clarify the definition of eligible obligation. Accordingly, for all the reasons discussed above, proposed § 701.23(a) would provide that eligible obligation means a whole loan or part of a loan (other than a note held by a liquidating credit union) that does not meet the definition of a loan participation under § 701.22(a).

Liquidating credit union. Proposed § 701.23(a) would define the term “liquidating credit union” to specify the point in time when a credit union meets the definition of a liquidating credit union for purposes of applying the 5-percent limitation in proposed § 701.23(b)(4). The term liquidating credit union is used but not defined in current § 701.23 because the section does not distinguish between eligible obligations and notes of liquidating credit unions for purposes of calculating the 5-percent limitation on the aggregate of the unpaid balance of loans purchased under current § 701.23(b)(1) and (b)(2)(ii). As explained in more detail later in the part of the preamble on proposed § 701.23(b)(4), under this proposal, the 5-percent limitation would apply only to notes purchased from liquidating credit unions, making it necessary for the NCUA to specify the point in time when a credit union meets the definition of a liquidating credit union. Consistent with Congress' use of the broad term “credit union” in section 107(13) of the FCU Act, the definition of liquidating credit union would include both liquidating FICUs and liquidating credit unions not insured by the NCUA. 68

Accordingly, the Board proposes to define the term liquidating credit union as follows: Liquidating credit union means: (1) in the case of a voluntary liquidation, a credit union is a liquidating credit union as of the date the members vote to approve liquidation; and (2) in the case of an involuntary liquidation, a credit union is a liquidating credit union as of the date the board of directors is served an order of liquidation issued by either the NCUA or the state supervisory authority.

The Board specifically requests comment on whether the Board should provide any additional clarity regarding the definitions of the terms “eligible obligation” and “loan participation.” If so, what further clarification should be provided?

Also, should the Board consider defining the term “empowered to grant” in a future rulemaking? Are there any other terms used in § 701.23 that the Board should consider defining or further clarifying through a future rulemaking?

Current § 701.23(b) would be amended, as discussed in more detail later in this preamble, to make certain substantive changes and to implement clarifying and conforming changes. Proposed § 701.23(b) would amend the current paragraph heading to current paragraph (b) to clarify which transactions are covered under the paragraph. The current heading for paragraph (b) is “Purchase.” The Board believes that this would result in only a minor technical change to current § 701.23(b). The amended rule would only add the two words “of loans” to the current rule text to better clarify the type of eligible obligation transactions for which this section would apply, that being the purchase of loans. Accordingly, the paragraph heading for proposed § 701.23(b) would be revised to read “Purchase of loans.”

Current § 701.23(b)(1)(ii) authorizes FCUs to purchase certain eligible obligations of a liquidating credit union's individual members from the liquidating credit union. As explained previously in the part of the preamble on § 701.23(a) regarding the definition of eligible obligation, under this proposal, notes of liquidating credit unions would no longer be included within the definition of “eligible obligations.” Accordingly, subject to the 5-percent limitation, this proposal would amend current § 701.23(b)(1)(ii) to remove the references to eligible obligations and authorize FCUs to purchase notes of a liquidating credit union's individual members from the liquidating credit union.

The word “mortgage” is misspelled in the first sentence of current § 701.23(b)(1)(iv). Proposed § 701.23(b)(1)(iv) would revise the current rule to correct that misspelling. No substantive changes would be made to current paragraph (b)(1)(iv).

Proposed § 701.23(b)(2) would revise the current rule to remove the CAMELS rating requirement and the capital classification requirements in the introductory paragraph. Current § 701.23(b)(2) provides that an FCU that received a composite CAMELS rating of “1” or “2” for the last two (2) full examinations and maintained a capital classification of “well capitalized” under part 702 of the chapter for the six (6) immediately preceding quarters may purchase and hold certain obligations, provided that it would be empowered to grant them.

The Board is proposing to simplify the rule and provide FCUs additional authority to purchase loans. This includes removing limits on eligible obligations of a credit union's members and removing the CAMELS rating and capital classification requirements.

The CAMELS rating and capital classification requirements were added to the NCUA's regulations as part of a 2001 final rule regarding the NCUA's RegFlex program. 69 The 2001 final rule explained, in two sentences responding to commenters suggestions that the requirements be removed, as follows: The Board continues to believe that CAMEL ratings and net worth ratios are the best measures of how well a credit union is managed and how much risk it presents to the NCUSIF and the credit union system. That is, consistent with safety and soundness concerns, credit unions with advanced levels of net worth and consistently strong supervisory examination ratings have earned exemptions from certain NCUA Regulations. 70

FCUs have generally managed their loan purchase, sale, and pledge activity well since the addition of the CAMELS and capital requirements and continue to do so. Approximately 10 percent of FCUs were engaged in the purchase, sale, or pledge of loans during the first half of 2022. 71

Additionally, the Board notes that this purchase authority is limited to only purchases from a FICU. Therefore, the loans able to be purchased under this authority are already in the credit union system. Moving the obligation from one FICU to another FICU generally is not expected to result in a significant increase to the Share Insurance Fund's risk exposure.

Further, the current CAMELS and net worth restrictions are only applicable to a limited segment of the credit union system given that the vast majority of FCUs have a CAMELS composite rating of 1 or 2 and are well-capitalized. 72 Expansion of this authority would allow slightly more FCUs to purchase obligations from a FICU, potentially creating additional revenue and capital for the purchaser and providing an additional outlet for selling FICUs, creating additional liquidity channels in the credit union system.

Lastly, the NCUA believes any increased risk associated with removing the CAMELS rating and capital classification requirements in current § 701.23 would also be minimized by the addition of the proposed principles-based due diligence, risk assessment, and risk management requirements.

Accordingly, the introductory paragraph to proposed § 701.23(b)(2) would provide that an FCU may purchase and hold certain obligations if it would be empowered to grant them.

Current § 701.23(b)(2)(ii) authorizes FCUs to purchase certain eligible obligations of a liquidating credit union without regard to whether they are obligations of the liquidating credit union's individual members. As explained earlier in the part of the preamble on § 701.23(a) regarding the definition of eligible obligation, under this proposal notes of liquidating credit unions would no longer be included within the definition of “eligible obligation.” Accordingly, this proposal would amend current § 701.23(b)(2)(ii) to remove the words “eligible obligations” and “obligations” and authorize FCUs to purchase notes of a liquidating credit union without regard to whether they are notes of the liquidating credit union's individual members.

Proposed § 701.23(b)(3)(ii) would revise the current requirement that written agreements and schedules of loans be retained by the purchaser. Current § 701.23(b)(3)(ii) provides that a written agreement and a schedule of the eligible obligations covered by the agreement are retained in the purchaser's office. Under the proposed rule, the purchasing FCU would still be required to retain the written loan purchase agreement and a schedule of the eligible obligations covered by the agreement, but the proposal would eliminate the requirement for it to be retained in the purchaser's office.

The Board acknowledges the requirement for the FCU to retain the written loan purchase agreement and schedule of the eligible obligations in the purchaser's office could imply that the written loan purchase agreement and schedule be retained in a hard-copy format, which is outdated given the current digital environment. An FCU might choose to store its records in electronic format, in the cloud, or housed in off-site servers or databases. The Board intends, with this proposed change, that the FCU make the written loan purchase agreement and schedule of the eligible obligations covered by the agreement available upon request. 73 Credit unions that have some or all of their records maintained by an off-site data processor are considered to be in compliance for the storage of those records if the service agreement specifies the data processor safeguards against the simultaneous destruction of production and back-up information. 74 Accordingly, proposed § 701.23(b)(3)(ii) would provide that a written agreement and a schedule of the eligible obligations covered by the agreement are retained by the purchaser.

This proposed change would align this requirement with the NCUA's regulations and guidelines for FICUs on records preservation programs. Under part 749, the NCUA does not require or recommend a particular format for record retention. If the credit union stores records on microfilm, microfiche, or in an electronic format, the stored records must be accurate, reproducible, and accessible to an NCUA examiner. 75 If records are stored on the credit union premises, they should be immediately accessible upon the examiner's request; if records are stored by a third party or off site, then they should be made available to the examiner within a reasonable time after the examiner's request. The credit union must maintain the necessary equipment or software to permit an examiner to review and reproduce stored records upon request. The credit union should also ensure that the reproduction is acceptable for submission as evidence in a legal proceeding. 76

This proposal would amend current § 701.23(b)(4), which limits the aggregate unpaid balance of certain eligible obligations purchased by an FCU to a maximum of 5 percent of the FCU's unimpaired capital and surplus. Under this proposed rule, the 5-percent limitation would apply solely to notes of a liquidating credit union's members purchased by an FCU from the liquidating credit union. As discussed in the following paragraphs, the Board has determined this change would remove a regulatory limit to the purchase of eligible obligations that the FCU Act does not require. The Board believes adequate safety and soundness of eligible obligations purchases can be accomplished through principles-based regulation rather than a once-size-fits-all limitation.

Section 701.23 provides both the regulatory authority for purchases of eligible obligations by an FCU and the limitations. Currently, the 5-percent limitation applies to eligible obligations purchased by an FCU under § 701.23(b)(1) and (b)(2)(ii). In general, paragraph (b)(1) authorizes an FCU to purchase (1) eligible obligations of its members; (2) eligible obligations of a liquidating credit union's members from the liquidating credit union; and (3) student loans and real estate-secured loans from any source to facilitate the purchasing FCU's packaging of a pool of such loans to be sold or pledged on the secondary market. Paragraph (b)(2)(ii), which is on purchases from FICUs, authorizes an FCU to purchase the “eligible obligations of a liquidating credit union without regard to whether they are obligations of the liquidating credit union's members.”

The statutory source of the 5-percent limitation is section 107(13) of the FCU Act. 77 Section 107 generally enumerates the powers of FCUs, and paragraph (13) authorizes an FCU to make certain loan purchases. Specifically, paragraph (13) provides verbatim as follows: in accordance with rules and regulations prescribed by the Board, to purchase, sell, pledge, or discount or otherwise receive or dispose of, in whole or in part, any eligible obligations (as defined by the Board) of its members and to purchase from any liquidating credit union notes made by individual members of the liquidating credit union at such prices as may be agreed upon by the board of directors of the liquidating credit union and the board of directors of the purchasing credit union, but no purchase may be made under authority of this paragraph if, upon the making of that purchase, the aggregate of the unpaid balances of notes purchased under authority of this paragraph would exceed 5 per centum of the unimpaired capital and surplus of the credit union. 78

Section 107(13) applies to the purchase of two mutually exclusive categories of loans—“eligible obligations” (as that term may be defined by the Board) of the purchasing FCU's members and the “notes” of a liquidating credit union made to the liquidating credit union's members. The 5-percent limitation, however, applies solely to the second category of loans, that is, the notes of a liquidating credit union to its members. The statutory language specifies that “no purchase may be made . . . if, upon the making of that purchase, the aggregate of the unpaid balances of notes purchased under authority of this paragraph would exceed 5 per centum of the unimpaired capital and surplus of the credit union.”  79 The 5-percent limitation is specific to the “aggregate unpaid balances of notes ”  80 purchased “under authority of this paragraph” (that is, paragraph (13) of section 107). As italicized in the preceding quotes, the only notes authorized to be purchased pursuant to section 107(13) are those of a liquidating credit union to its members. Notwithstanding the ambiguity introduced by the reference to the entire “paragraph” (13) in the context of the 5-percent limitation, the following term “notes” narrows the required scope of its application to purchases from a liquidating credit union.

Despite the statutory wording, the NCUA's implementing regulation at 12 CFR 701.23 does not distinguish between eligible obligations and notes. Section 107(13) of the FCU Act empowers the NCUA to define the term “eligible obligation.” The NCUA has exercised this discretion by opting to jointly treat notes and other eligible obligations as the same type of instrument under its regulations. Both are encompassed in the regulatory definition of the term “eligible obligation,” which is defined to be “a loan or group of loans.”  81 The proposed rule would amend current § 701.23 to more closely follow the statutory language. Under the proposed rule, the 5-percent limitation would apply solely to the purchase by an FCU of the notes made by a liquidating credit union to the liquidating credit union's members. The limitation would not apply to other loans purchased by an FCU under the authority of section 107(13).

The proposed rule would also amend the definition of “eligible obligations” to reflect the revised scope of the 5-percent limitation. Under the proposed rule, the term “eligible obligation” would be revised to mean “a whole loan or part of a loan (other than a note held by a liquidating credit union) that does not meet the definition of a loan participation under § 701.22(a).”  82

The Board acknowledges that the current scope of the 5-percent limitation reflects or implies an alternate legal reading of the statutory language, which the Board recognizes as a plausible reading. The alternate reading hinges on the language providing that “no purchase may be made under authority of this paragraph. ” The term “this paragraph” encompasses paragraph (13) of section 107 in its entirety. This reading applies the 5-percent limitation to all instruments (eligible obligations and notes) purchased pursuant to paragraph (13). The current regulation reflects such an interpretation, and the Board has made past statements in support of this reading. 83 This proposed rule constitutes a reconsideration of the NCUA's prior position. As noted, the NCUA has determined that the proposed regulatory change is more consistent with the language of the FCU Act and is more aligned with the different safety and soundness considerations with respect to eligible obligations in general and notes purchased from a liquidating credit union.

The proposed reading is better supported by accepted canons of statutory construction. The statutory construction canon of “consistent usage” logically presumes that different words denote different ideas. 84 Accordingly, the use of the terms “eligible obligations” and “notes” is intended to distinguish between two mutually exclusive categories of loans. Further, the canon holds that “a word or phrase is presumed to bear the same meaning throughout a text.”  85 The use of the word “notes” in paragraph 107(13) is appropriately interpreted consistently and exclusively to reference only notes made by a liquidating credit union to its members.

The proposed reading also aligns with the “surplusage” canon of statutory interpretation. Under this canon, “every word and every provision is to be given effect if possible.”  86 “No word should be ignored. None should needlessly be given an interpretation that causes it to duplicate another provision or have no consequence.”  87 The proposed interpretation accounts for language subsequent to “under authority of this paragraph” that modifies the clause's scope. This subsequent language specifies that the prohibition applies only “if, upon the making of that purchase, the aggregate of the unpaid balances of notes purchased under authority of this paragraph would exceed 5 per centum of the unimpaired capital and surplus of the credit union.” Thus, the limit's application is required only with respect to the purchase of “notes,” which, as stated previously, is appropriately narrowed to solely cover loans made by liquidating credit unions to their members. Reading the statute to require application of the 5-percent limitation to “eligible obligations” conflates the terms “notes” and “eligible obligations,” despite the different terminology Congress enacted. The effect of treating the terms as duplicative is to effectively ignore the use of the term “notes,” which should be separately considered under the surplusage canon.

It also bears noting that the stated rationale for original enactment of the 5-percent limitation does not apply to the purchase of eligible obligations. The 5-percent limitation language in section 107(13) of the FCU Act was added by Congress in 1968 and referred solely to notes of liquidating credit unions at that time because that statute did not refer to purchases of eligible obligations. 88 That language is identical to the current version of the statutory text and continues to refer solely to “notes” of liquidating credit unions. Prior to the amendment, FCUs lacked express statutory authority to purchase the loans of liquidating credit unions. As a result, liquidating credit unions were hampered in their efforts to dispose of their assets to repay their members. The Senate report accompanying the legislation explained that the change would “greatly increase the market for the notes of liquidating credit unions and will prevent liquidating credit unions from having to go outside the credit union movement to liquidate their assets.”  89 However, Congress was also mindful of the risks that might be posed in purchasing the loans of credit unions compelled to liquidate due to poor management decisions. 90 As a result, it opted to limit the ability of an FCU to purchase notes of liquidating credit unions to 5 percent of its unimpaired capital and surplus. 91

The express authority to purchase eligible obligations was later added to the text of section 107(13) in 1977. 92 The legislative history from that time shows the amendment was intended to provide FCUs with flexibility to use secondary market facilities to enhance liquidity, especially in relation to real estate loans. 93 The purchase by an FCU of loans made to its own members is not analogous to, and does not pose the same inherent risk that, purchasing the notes of a liquidating credit union does. Accordingly, it is reasonable that Congress would elect not to mandate a limit on the ability of an FCU to make such purchases. This supposition is supported by Congress' decision to use the new term “eligible obligations” (and in granting the NCUA broad authority to define this term), rather than simply revising the existing scope of the term “notes” to include member loans. Further, the legislative history accompanying enactment of the 1977 amendments does not make any mention of the 5-percent limitation being applicable to eligible obligations.

The 1977 legislative history in several instances also refers to the amendment granting FCUs the ability to purchase the “notes” of its members. One could infer from this that the term “eligible obligations” was intended to be read synonymously with “notes.”  94 This reading appears at least plausible because the broad category of “notes” could be seen to encompass various debt instruments, including notes or written documents evidencing a member's eligible obligations. Such a reading, however, is not required and is inferior to the interpretation the Board is proposing in this rule for two reasons. First, Congress ultimately opted to use the term “eligible obligations” in the statutory amendment that was enacted. The codified text supersedes non-binding statements in the legislative record. 95 Secondly, and as discussed earlier, accepted canons of statutory construction favor an interpretation that provides individual terms with their own individual meaning.

For the preceding reasons, the NCUA has determined that the proposed regulatory change is more consistent with the language of the FCU Act. The NCUA also has determined that the amendment will not pose a safety and soundness risk due to the addition of principles-based risk management requirements. By amending the current rule to narrow the application of the 5-percent limitation to the aggregate of the unpaid balances of loans purchased from any source to instead apply to only the “notes” of a liquidating credit union, the Board intends to allow FCUs greater capacity, flexibility, and individual autonomy to establish their own risk tolerance limits for the amount of the loans of its members that can be purchased from any source other than a liquidating credit union. This includes other financial institutions, fintech companies, third-party loan acquisition channels such as CUSOs, and other loan-originating retailers.

While the narrower interpretation of section 107(13) of the FCU Act would remove the existing limit on the amount of eligible obligations that an FCU could purchase, establishing risk management expectations will minimize potential risk to the Share Insurance Fund while allowing FCUs more flexibility in how they manage their eligible obligation purchase activities. Proposed new § 701.23(b)(6), which is discussed in detail later in the part of the preamble on paragraph (b)(6), would outline minimum risk management standards that must be included in the written loan purchase policy for any FCU that plans to purchase eligible obligations. The Board believes these risk management standards should be part of the normal business practices at well-run FCUs that engage in the purchase of eligible obligations, and as such, should not represent an additional burden. It is the Board's view that the proposed changes would allow well-run FCUs more autonomy and flexibility in how they conduct their business. Provided the FCU can demonstrate and document that its loan purchase activity does not present a material risk to the viability or solvency of the FCU through the standards established in § 701.23(b)(6), the FCU should be able to establish its own internal standards to meet its business needs and the needs of its members.

The proposed rule would amend current § 701.23(b)(4) to remove the exclusions provided in paragraphs (b)(4)(i) through (iv) and revise the current language to apply the 5-percent limit to only notes purchased from liquidating credit unions. While the narrower interpretation of section 107(13) of the FCU Act would remove the existing restriction on the amount of eligible obligations an FCU could purchase, the new risk management requirements will minimize the potential increase in risk to the Share Insurance Fund, while allowing FCUs more flexibility in how they manage their loan purchase activities. Accordingly, proposed § 701.23(b)(4) would provide that the aggregate of the unpaid balance of notes purchased under paragraphs (b)(1)(ii) and (b)(2)(ii) of § 701.23 shall not exceed 5 percent of the unimpaired capital and surplus of the purchaser.

The Board invites comments concerning the proposed rule narrowing the application of the 5-percent limitation to only apply to the aggregate amount of “notes” that can be purchased by an FCU from a liquidating credit union. Should the Board consider defining the term “notes” as used to calculate the 5-percent limitation for the aggregate of the unpaid balances of notes an FCU could purchase from a liquidating credit union? If so, how should it be defined?

Are there additional changes to this rule that the Board should consider in the future that would further facilitate credit union engagement with fintech companies and other third parties in a safe and sound manner?

Proposed § 701.23(b)(5) would amend the current rule to broaden the grandfathering provision in current paragraph (b)(5). Current § 701.23(b)(5) provides that, subject to safety and soundness considerations, an FCU 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. The Board believes the proposed revisions to the current grandfathering provision would avoid placing undue burden on FCUs that were operating in compliance with the existing rule and avoid disrupting the existing eligible obligations market by forcing widespread divestments of the eligible obligations currently held in FCU loan portfolios. While the proposed grandfathering provision would allow FCUs to continue to hold eligible obligations that were purchased prior to the effective date of this rule, it does not exempt FCUs from conducting and updating risk assessments, establishing concentration limits, or monitoring the ongoing condition of the FCU's eligible obligation loan portfolio.

Accordingly, proposed § 701.23(b)(5) would provide that, subject to safety and soundness considerations, an FCU may hold any of the loans described in paragraph (b) of this section that were acquired before the effective date of the final rule approved by the Board; provided the transaction was in compliance with § 701.23 at the time the transaction was executed.

The proposal would add a new paragraph (b)(6) to § 701.23, which would set forth basic due diligence, risk assessment, and management requirements that must be addressed in an FCU's internal written purchase policies. 96 An FCU's board of directors is responsible for planning, directing, and controlling the FCU's activities. To fulfill these duties, the board of directors must establish adequate policies. The introductory paragraph to proposed § 701.23(b)(6) would provide that the purchases of eligible obligations and notes of liquidating credit unions must comply with the purchasing FCU's internal written purchase policies, which must contain certain provisions.

The specific policy requirements, which are discussed in detail below, are part of the basic fiduciary responsibilities and duties required of boards of directors. 97 The requirements in the proposed rule address the basic elements necessary to administer a safe and sound loan purchase program.

As discussed previously, the Board is proposing that these requirements be added to mitigate the risk of removing certain regulatory limits on the purchase of loans by FCUs. The new requirements proposed under § 701.23(b)(6) are crafted to encourage credit discipline and promote safe and sound loan purchase programs, which are intended to protect the Share Insurance Fund. These requirements continue the Board's long-standing expectations for FCUs that purchase loans to appropriately identify and mitigate undue risk, while also providing FCUs greater flexibility to establish their own risk tolerance limits. These principles eliminate some unintended consequences of the prescriptive requirements in current § 701.23(b)(2) that, in some cases, resulted in FCUs managing their lending practices and balance sheets to regulatory restrictions instead of broader considerations for safe and sound lending practices.

The proposed framework would provide credit unions with expanded flexibility to develop loan purchase policies that are commensurate with the size, scope, type, complexity, and level of risk posed by the planned loan purchase activities. The proposed changes are intended to provide principles-based requirements that are useful for credit unions of any size or complexity to implement the appropriate level of due diligence, risk assessment, and management.

When determining whether to start a loan purchase program and developing related written policies, credit unions should consider whether the proposed loan purchase activities are consistent with the FCU's overall business strategy and risk tolerances, and financial and operational capabilities. Loan purchase, sale, or pledge activities that are inconsistent with the FCU's risk tolerance levels or beyond management's ability to manage can pose material risks to an FCU's financial or operational condition.

The risk management expectations that are outlined in this proposal reflect the key components of long-standing supervisory expectations as communicated to credit unions through NCUA Letters to Credit Unions (LCU), Supervisory Letters, and the Examiner's Guide. The NCUA specifically requests comment on the written purchase policy requirements being proposed in paragraph (b)(6) of the rule. Are the principles-based due diligence, risk assessment, and management requirements proposed sufficient to offset the risk associated with removing the CAMELS rating and “well capitalized” requirements for a credit union to purchase and hold eligible obligations from a FICU? Are there other principles-based safety and soundness or compliance criteria the Board should consider that would mitigate the risk of removing certain prescriptive requirements from the rule?

Proposed new § 701.23(b)(6)(i) would require FCUs to perform due diligence on the seller, and any applicable counterparties, before purchasing an eligible obligation. Conducting due diligence on third parties is a long-standing expectation for credit unions engaging in third-party relationships and when introducing new loan programs and products, as noted in NCUA LCU 01-CU-20 (November 2001), NCUA LCU 08-CU-26 (November 2008), and NCUA LCU 10-CU-03 (March 2010). 98

Third-party relationships with credit unions have resulted in financial stress due to unexpected costs, legal disputes, and asset losses on several occasions. Due diligence reviews are important because they assist credit unions in risk identification and mitigation when engaging in a new loan program and when partnering with outside parties to enhance services to members. Failure to complete adequate due diligence can result in the acquisition of loan volumes that exceed the board's risk appetite, loan types that go beyond management's ability to manage, or loan types or volume that exceed the capabilities of current loan processing and management information systems. The use of third parties can add complexity and additional risk to a credit union's activities and may also expose the credit union to consumer compliance and other legal risks. For example, failure to conduct adequate due diligence could lead to an FCU entering into agreements with a third party that may discontinue services in the future. This could lead to disruptions in member service, uncollected payments on loans, and potential losses if the third party fails to remit funds that are due to the purchasing FCU.

The responsibility to perform appropriate due diligence remains with the FCU's board of directors and management and cannot be outsourced. Overreliance on the due diligence information provided by a third party without independent review by the FCU's board and management could result in unsafe and unsound practices.

The proposed rule allows FCUs the flexibility to determine the level and depth of due diligence reviews that are necessary based on the level of risk posed by the loans being purchased and the third-party relationships. Several factors may be considered when determining the appropriate nature of due diligence for third-party loan purchases and programs, including:

• the transaction's complexity;

• the purchasing FCU's internal lending policies and procedures;

• the transaction's size relative to the FCU's existing loan portfolio, concentrations, and net worth level; and

• the purchasing FCU's management and staff expertise regarding the types of loans being purchased.

Additionally, FCUs can take a tiered approach when establishing their due diligence processes in their loan purchase policies. For example, when conducting background checks the FCU can determine how best to assess a third party's business reputation, potential conflicts of interest, experience, and compliance with federal and state laws, rules, and regulations based on the type of relationship with the third party and its risk exposure.

Accordingly, proposed § 701.23(b)(6)(i) would provide that the purchasing FCU's written purchase policy must require that the purchasing FCU conduct due diligence on the seller of the loans and other counterparties to the transaction prior to the purchase.

Proposed new § 701.23(b)(6)(ii) would require FCUs to establish risk assessment and risk management processes for purchase activities. Conducting risk assessments and implementing risk management processes reflect the NCUA's long-standing expectation that credit unions incorporate these activities in relationships with third parties as outlined in NCUA LCU 07-CU-13 (April 2008), Evaluating Third-Party Relationships; NCUA LCU 22-CU-05 (March 2022), CAMELS Rating System; and NCUA Letter to FCUs 02-FCU-09 (March 2002), Risk-Focused Examination Program. 99 The purchase of loans can provide an FCU with a wide range of benefits, including achieving strategic loan growth, managing liquidity, adjusting risk exposures, and enhancing the services provided to members. However, an FCU that starts a new lending program, including the purchase or sale of loans, or engages with third parties without fully understanding the associated risks, may expose itself to credit, interest rate, liquidity, transaction, compliance, strategic, or reputation risk. Risk assessments allow credit unions to better understand the risk involved in new products and services to ensure the board has effective processes in place to control the risk. Not understanding these associated risks may result in the FCU operating outside of the board's risk appetite and can result in elevated risk to the Share Insurance Fund. FCUs are ultimately responsible for safeguarding member assets and ensuring sound operations.

Adequate risk management processes include ongoing monitoring and oversight of the loan purchase program. This includes formal reporting to the board of directors and the FCU's senior management, which will ensure the board is able to fulfill its duties. An FCU's management reporting should be timely and commensurate with the size, complexity, and risk exposure of the FCU. For example, the board of directors should be informed when targets are met or exceeded, or limits breached. Reports should also consist of appropriate information that the board of directors and management could use to make informed decisions and take timely corrective action when warranted. For effective governance, an FCU's board of directors and management must understand the nature and level of risk associated with the FCU's purchased loan portfolio and program and receive periodic updates and reports on the performance of the purchased loan portfolio.

The proposed rule provides FCUs the flexibility to tailor their risk assessment and management processes to fit within their governance framework and other operations, while providing a basic framework to follow when developing their initial and ongoing risk assessment and management processes. Accordingly, proposed § 701.23(b)(6)(ii) would provide that the purchasing FCU's internal written purchase policies must establish risk assessment and risk management process requirements that are commensurate with the size, scope, type, complexity, and level of risk posed by the planned loan purchase activities.

Proposed new § 701.23(b)(6)(iii) would require FCUs to establish certain internal underwriting and ongoing monitoring standards for eligible obligation purchase activities. Underwriting is the foundation of lending. Without ensuring that underwriting standards are in place that adequately address how to analyze a borrower's ability to repay their debt, the board will not be able to fulfill its responsibilities for the safety and soundness of the FCU's lending activities. By this same logic, the board must also monitor the level of credit risk within the credit union's loan portfolio. Changing economic conditions at the local, regional, or national level can materially impact the likelihood that the credit union's outstanding loans are repaid. For example, the closure of a local business that is a large employer of the credit union's members could significantly change the risk profile of the credit union's loan portfolio. Changing levels of credit risk within the FCU's existing loan portfolio (including eligible obligations) may necessitate strategic changes or mitigating actions. If the level of credit risk begins to exceed the board's risk appetite, then risk exposures may need to be adjusted. Depending on the circumstances, this could include, but is not limited to, restricting the purchase of new eligible obligations, implementing more conservative underwriting standards, or potentially divesting parts of the existing loan portfolio.

The FCU's internal policies must address the level of underwriting to be performed for the purchase of loans. Underwriting should identify all risks that could materially influence the purchasing FCU's decision to proceed with a loan purchase. Appropriate underwriting standards that adequately address how to analyze a borrower's ability to repay their loan and the support provided by collateral are a basic tenet of lending and help ensure that the FCU will be repaid, which protects its members and the Share Insurance Fund. Without appropriate underwriting standards, an FCU will not be able to accurately assess its risk of credit loss. Originating or purchasing loans to high credit risk borrowers without appropriately understanding and planning for that risk can result in unexpectedly high loss rates that negatively impact earnings and net worth, which may impair the viability of the credit union and pose a risk to the Share Insurance Fund. A lack of adequate underwriting standards can also result in adverse risk selection, whereby high credit risk borrowers are only able to obtain loans from institutions with lax underwriting, resulting in the FCU attracting borrowers with a much higher risk of default.

An FCU engaging in loan purchases should conduct an independent credit analysis and assessment of the borrower's creditworthiness and ability-to-repay, the support provided by collateral if relied on as part of the credit decision, and changes to the risk profile of the purchased loans. A purchasing FCU should not rely on the underwriting and analysis performed by the seller, or work performed by other third-party underwriters on behalf of a seller. To do so is an unsafe and unsound practice.

An FCU can leverage its current internal underwriting policies for similar loan types when developing its loan purchase policies. Performing credit and collateral analysis as if it were the originator should result in purchased loans that are consistent with the board of director's overall business strategy, risk tolerances, and credit quality standards. To the extent a purchasing FCU relies on a third party's credit models for credit decisions, the purchasing FCU should perform due diligence on the credit model. An FCU is not prohibited from relying on a qualified and independent third party to perform model validation. However, the purchasing FCU should review the model validation to determine if it is sufficient.

The purchasing FCU's internal loan purchase policies should outline and identify the loan types that are acceptable for purchase. For example, acceptable loan types could include residential real estate (1-4 family or multi-family first lien and/or junior lien), solar loans, automobile loans, student loans, unsecured loans, out-of-territory loans, commercial loans, or government guaranteed loans (guaranteed and/or unguaranteed portion).

The loan purchase policy should address the level and depth of the underwriting and analysis that is required for each loan type permitted to be purchased based on the specific loan category, type, size, complexity, and risk profile of the borrower. The proposed rule allows flexibility to establish those parameters, while providing a basic framework for FCUs to follow when developing their policies.

Accordingly, proposed § 701.23(b)(6)(iii) would provide that the purchasing FCU's internal written purchase policies must establish internal underwriting and ongoing monitoring standards that are commensurate with the size, scope, type, complexity, and level of risk posed by the loan purchase activities. Proposed paragraph (b)(6)(iii) would provide further that underwriting and ongoing monitoring standards must address the borrower's creditworthiness and ability to repay, and the support provided by collateral if the collateral was used as part of the credit decision.

Proposed new § 701.23(b)(6)(iv) would provide that the purchasing FCU's internal written purchase policy must require that the written purchase agreements include certain language. A well-written loan purchase agreement can minimize conflicts between the FCU and other parties to the agreement. The Board believes that any written loan purchase agreement must clearly delineate the roles, duties, and obligations of the seller, the purchasing FCU, servicer, and any other parties associated with the agreement, as applicable. The proposed rule establishes minimum provisions that any well-written loan purchase agreement must address.

The written loan purchase agreement is a critical component of any third-party relationship. In addition to establishing the rights and obligations of each party to the loan agreement, it should clearly address how the relationship operates. The written loan purchase agreement should fully describe the roles and responsibilities of all parties to the agreement, including any subcontractors. A well-written loan purchase agreement should address dispute resolution, requirements for any ongoing credit information if necessary for the loan type, remedies upon loan default and bankruptcy, identify which party bears the costs of collateral disposition, whether there are recourse arrangements for early pay-off, and if there is an obligation for the purchasing FCU to make any additional purchases or credit advances.

The purchasing FCU's board of directors and management should understand that it may have limited control over credit decisions for loans purchased in part, including limitations on the ability of the purchasing FCU to participate in loan modifications, act on defaulted loans, or decline to make additional advances if the purchasing FCU deems such advances are not prudent in relation to the loan quality. The written loan agreement must address these circumstances, and other conditions under which the parties to the agreement may replace the servicer if services are not performed in accordance with the terms of the written loan purchase agreement. The purchasing FCU must also know the location and custodian for the original loan documents if the original loan documents are not required to be transferred to the purchasing FCU as part of the loan purchase transaction. The purchasing FCU could be required to provide the original loan documents to various parties involved in the administration and collection of the purchased loans. The purchasing FCU would therefore need to know where the original documents were located and which party to contact should the purchasing FCU need to obtain the original loan documents.

The written loan purchase agreement must, prior to the loan purchase transaction, identify the specific loan or loans being purchased, and the interest being purchased. A loan purchase transaction may involve a single loan or multiple loans, purchased in whole or in part. The documentation, for example, can be as simple as an addendum or schedule identifying each loan, provided the addendum or schedule is incorporated by reference into the loan purchase agreement. This provision clarifies in the existing rule that the loan purchase transaction involves the purchase of individual loans, and it is not the purchase of an investment interest in a pool of loans. Accordingly, for all the reasons outlined above, proposed § 701.23(b)(6)(iv) would provide that the purchasing FCU's internal written purchase policy must require that the written purchase agreement include: the specific loans being purchased (either directly in the agreement or through a document that is incorporated by reference into the agreement); the location and custodian for the original loan documents; an explanation of the duties and responsibilities of the seller, servicer, and all parties with respect to all aspects of the loans being purchased, including servicing, default, foreclosure, collection, and other matters involving the ongoing administration of the loans, if applicable; and the circumstances and conditions under which the parties to the agreement may replace the servicer when the seller retains the servicing rights for the loans being purchased, if applicable.

Proposed new § 701.23(b)(6)(v) would require that FCUs establish certain portfolio concentration limits. Excessive concentration risk can severely impact the financial condition of an FCU. High concentrations in areas experiencing economic distress could result in significant losses exceeding an FCU's net worth. An FCU's board of directors and management have the responsibility to identify, manage, monitor, and control the risks facing the FCU, including concentration risk. FCU management must know what their concentration risks are and be able to demonstrate appropriate risk management and mitigation practices to minimize the risk of significant financial condition decline. Accordingly, proposed § 701.23(b)(6)(v) would provide that a purchasing FCU's internal written purchase policies must establish portfolio concentration limits by loan type and risk category in relation to net worth that are commensurate with the size, scope, and complexity of the credit union's loan purchases. Paragraph (b)(6)(v) would provide further that the policy limits must take into account the potential impact of loan concentrations on the purchasing credit union's earnings, loan loss reserves, and net worth.

An FCU's loan purchase policy should establish credit underwriting and administration requirements that address the risks and characteristics unique to the loan types permitted for purchase. An FCU's loan purchase policy concentration limits should be considered for the aggregate amount of total purchased loans, for each loan type, risk factor, or category permitted. For example, concentration limits can be set by loan or collateral type but may also be set by associated borrower, origination channel, geographic area, or other risk category as applicable.

An FCU's board of directors should establish concentration risk limits commensurate with its net worth levels and consider how the limits fit into the overall strategic plan of the FCU. When credit union loan portfolios are concentrated in a small number of loan products that are significantly exposed to similar or correlated risk factors, a single event can impact a large portion of the loan portfolio and result in elevated losses that, if not managed appropriately, can lead to the credit union's failure. Since the year 2000, more than 50 percent of the NCUA's postmortems and material loss reviews have cited concentration risk as a central component of credit union failures. An FCU's board of directors should use a comprehensive perspective when developing loan purchase concentration policy limits, including identifying outside forces (such as economic or housing price uncertainty) that would affect the ability to manage concentration risk. The parameters set by the board of directors should be specific to each portfolio and should include limits on loan types and third-party relationship exposure, at a minimum. The concentration risk limits should correlate to the FCU's overall growth objectives, financial targets, and net worth plan. The concentration risk limits set forth in the FCU's policy should be closely linked to those codified in related policies, including, but not limited to, real estate loans, member business loans, asset/liability management (ALM), and investment policies. Concentrations that exceed net worth must be monitored carefully, and the board of directors should document an adequate rationale for undertaking that level of risk. 100

Proposed new § 701.23(b)(6)(vi) would address when a legal review of agreements or contracts would be required. The written loan purchase agreement is a critical component of any third-party relationship and, as such, the requirement for a legal review is a key element in the overall risk mitigation and management process. By obtaining legal advice regarding third-party contracts, an FCU can ensure its legal and business interests are appropriately protected, and the board of directors and management understand the risks, rights, and responsibilities of each party to the written loan purchase agreement. Accordingly, proposed § 701.23(b)(6)(vi) would provide that an FCU's internal written purchase policy must address when a legal review of agreements or contracts will be performed to ensure that the legal and business interests of the credit union are protected against undue risk.

A legal review of the written loan purchase agreements and contracts will help an FCU ensure that the board of directors and management understand the rights and responsibilities of each party. For example, the review could identify which party bears the costs of collateral disposition, whether there are recourse arrangements, or whether the agreement includes a commitment for the purchasing FCU to make additional loan purchases and describe the interest being purchased. A legal review may also reduce a credit union's legal, compliance, or reputation risk by ensuring that the written loan purchase agreement complies with all applicable state and federal laws.

Further, an FCU should understand what actions it may take if the contract is breached, or services are not performed as expected. For example, the legal review could determine if the written loan purchase agreements include recourse language that requires a seller to buy back loans with missing documents, made outside of policy, or otherwise not in conformance with representations and warranties. The written loan purchase agreement is a critical component of any third-party relationship and, as such, a legal review is a key element in the overall risk mitigation and management process.

The proposal would make a non-substantive conforming change to current § 701.23(c)(1). In addition, the proposal would make certain substantive changes to paragraph (c)(2) and add new paragraphs (c)(3) and (4), which are discussed in more detail in the following paragraphs. No changes would be made in the introductory sentence to current § 701.23(c).

As required by the changes discussed below, proposed § 701.23(c)(1) would make a conforming amendment to current § 701.23(c)(1). The conforming amendment would remove the “and” at the end of the provision to allow for an additional provision to be added under § 701.23(c)(2). No substantive change to this provision is intended.

The proposal would amend current § 701.23(c)(2) to change the retention requirements for the written agreement and schedule of eligible obligations sold by an FCU. The Board believes that this would result in only a minor technical change to current § 701.23(c)(2). Under the proposed rule, the FCU selling the eligible obligations would still be required to retain the written loan sales agreement and a schedule of the eligible obligations covered by the agreement. The Board acknowledges the requirement for the FCU to retain the written loan sales agreement and schedule of the eligible obligations in the seller's office could imply that the written loan sales agreement and schedule be retained in a hard-copy format, which is outdated given the current digital environment. An FCU might choose to store its records in electronic format, in the cloud, or housed in off-site servers or databases.

This proposed change would align this requirement with the NCUA's regulations and guidelines for FICUs on records preservation programs. Under part 749, the NCUA does not require or recommend a particular format for record retention. If the credit union stores records on microfilm, microfiche, or in an electronic format, the stored records must be accurate, reproducible, and accessible to an NCUA examiner. 101 If records are stored on the credit union premises, they should be immediately accessible upon the examiner's request; if records are stored by a third party or off site, then they should be made available to the examiner within a reasonable time after the examiner's request. The credit union must maintain the necessary equipment or software to permit an examiner to review and reproduce stored records upon request. The credit union should also ensure that the reproduction is acceptable for submission as evidence in a legal proceeding. 102 Accordingly, proposed § 701.23(c)(2) would provide that a written agreement, and a schedule of the eligible obligations covered by the agreement, is retained by the selling credit union that identifies the specific loans being sold either directly in the agreement or through a document that is incorporated by reference into the agreement.

The proposal would add new paragraph (c)(3) to § 701.23 to require a legal review of the written agreement to protect the legal and business interests of the selling FCU. A legal review of the written loan sales agreements and contracts will help an FCU ensure that the board of directors and management understand the rights and responsibilities of each party. For example, the legal review would make clear which party bears the costs of collateral disposition, whether there are recourse arrangements, whether the agreement includes a commitment for the purchasing credit union to make additional loan purchases, and whether it describes the interest being purchased. The legal review would also ensure that the written loan sales agreement complies with all applicable state and federal laws, helping to minimize a credit union's legal, compliance, and reputation risk. The legal review should address loan and collateral documentation and information that the selling party is required to share with the purchasing party, status reports on payments and interest accrual, exit strategies, procedures for modifying loan terms, notification of adverse loan events, and collection procedures if servicing rights are retained by the seller. Further, an FCU should understand what actions it may take if the contract is breached or services are not performed as expected. The written loan sales agreement is a critical component of any third-party relationship and, as such, the requirement for a legal review is a key element in the overall risk mitigation and management process.

Accordingly, proposed § 701.23(c)(3) would require a legal review of the written agreement is completed that includes the terms, recourse, and risk-sharing arrangements, and, as applicable, loan administration and controls, to ensure that the selling FCU's legal and business interests are protected from undue risks.

The proposed rule would amend current § 701.23(d)(1)(iii) to amend the retention requirements for agreements covering eligible obligations pledged by an FCU. The Board believes that this would result in only a minor technical change to current § 701.23(d)(1)(iii). Under the proposed rule, the FCU pledging the eligible obligations would still be required to retain the written agreement covering the pledging arrangement. The Board acknowledges the requirement for the FCU that pledges the eligible obligations to retain the written agreement in the office could imply that the written agreement should be retained in a hard-copy format, which is outdated given the current digital environment. An FCU might choose to store its records in electronic format, in the cloud, or housed in off-site servers or databases. The Board's intent is that the FCU that pledges the eligible obligations make the written agreement covering the pledging arrangement available upon request. 103

This proposed change would align this requirement with the NCUA's regulations and guidelines for FICUs on records preservation programs. Under part 749, the NCUA does not require or recommend a particular format for record retention. If the credit union stores records on microfilm, microfiche, or in an electronic format, the stored records must be accurate, reproducible, and accessible to an NCUA examiner. 104 If records are stored on the credit union premises, they should be immediately accessible upon the examiner's request; if records are stored by a third party or off site, then they should be made available to the examiner within a reasonable time after the examiner's request. The credit union must maintain the necessary equipment or software to permit an examiner to review and reproduce stored records upon request. The credit union should also ensure that the reproduction is acceptable for submission as evidence in a legal proceeding. 105

Accordingly, proposed § 701.23(d)(1)(iii) would require that a written agreement covering the pledging arrangement is retained by the credit union that pledges the eligible obligations.

The proposed rule would amend current § 701.23(g) by adding a paragraph heading. The Board believes that this would result in only a minor technical change to paragraph (g). The amended rule would add the three-word descriptive heading “payments and compensation” for this section of the rule, but does not add any additional requirements or make any other changes to this section of this rule. Accordingly, proposed § 701.23(g) would have the paragraph heading “payments and compensation.”

The proposed rule would not extend the regulatory relief in § 701.23(i) that the Board approved in April of 2020 in response to COVID-19. This temporary relief is set to sunset on December 31, 2022. Current paragraph (i) provides that: notwithstanding § 701.23(b), during the period commencing on April 21, 2020, and concluding on December 31, 2022, an FCU may: purchase, in whole or in part, and within the limitations of the board of directors' written purchase policies, any eligible obligations pursuant to paragraph (b)(1)(i) and (b)(2)(i) without regard to whether they are loans the credit union is empowered to grant or are refinancing to ensure the obligations are ones the purchasing credit union is empowered to grant; and purchase and hold the obligations described in § 701.23(b)(2)(i) through (iv) if the FCU's CAMELS composite rating is “1,” “2,” or “3”. 106

As provided in current paragraph (i), the temporary regulatory relief provided under the paragraph expires on December 31, 2022. The Board temporarily modified certain regulatory requirements to help ensure that FICUs remained operational and liquid during the COVID-19 pandemic. The Board concluded, at the time, that the amendments would provide FICUs with the necessary flexibility in a manner consistent with the NCUA's responsibility to maintain the safety and soundness of the credit union system. The Board provided this temporary regulatory relief to assist credit unions in navigating the national emergency resulting from the COVID-19 pandemic. 107 Since the implementation of temporary regulatory relief, many credit unions have generally resumed normal, pre-pandemic operations. The majority of the COVID-19 pandemic health mitigation efforts imposed by states as well as the federal government have been lifted (non-essential business closures, social distancing requirements, and mask mandates).

The expiration date of the temporary final rule was initially extended through the close of December 31, 2021, by publishing the extension in the Federal Register on December 22, 2020. 108 Due to the continued impact of COVID-19, the Board decided it was necessary to further extend the effective period of these temporary modifications until December 31, 2022, by publishing the extension in the Federal Register on December 22, 2021. 109 The Board is proposing to remove current paragraph (i) from § 701.23 as part of any final rule issued after December 31, 2022.

Current § 714.9 provides that the indirect leasing arrangements of an FCU are not subject to the eligible obligation limit if they satisfy the provisions of § 701.23(b)(3)(iv) that require that FCUs make the final underwriting decision and that the lease contract is assigned to the FCU very soon after it is signed by the member and the dealer or leasing company. The reference in current § 714.9 cites to § 701.23(b)(3)(iv), but there is no paragraph (b)(3)(iv) in that section. It is clear from the “eligible obligations limit” language in current § 714.9, however, that the cross citation is intended to reference the exclusion from the 5-percent limitation in current § 701.23(b)(4)(iv). Because this proposal would amend § 701.23(b)(4) to remove paragraph (b)(4)(iv) and would no longer apply the 5-percent limitation to any purchases of eligible obligations, as explained earlier in the preamble, current § 714.9 would be rendered moot by this proposal. Accordingly, this proposal would remove the language in current § 714.9 and reserve the blank section for future use.

The Board seeks comments specifically on the placement of the definition of indirect leasing arrangement in the NCUA's regulations. The proposed definition would apply throughout the NCUA's regulations and is being proposed for inclusion in § 701.21 alongside the related definition of indirect lending arrangement that the Board is proposing to add to new § 701.21(c)(9)(i). The Board requests comments on whether stakeholders would find it clearer or more user-friendly to codify this definition in part 714.

The Regulatory Flexibility Act (RFA) generally requires that, in connection with a notice of proposed rulemaking, an agency prepare and make available for public comment an initial regulatory flexibility analysis that describes the impact of a proposed rule on small entities. A regulatory flexibility analysis is not required, however, if the agency certifies that the rule will not have a significant economic impact on a substantial number of small entities (defined for purposes of the RFA to include credit unions with assets less than $100 million)  110 and publishes its certification and a short, explanatory statement in the Federal Register together with the rule.

The Board fully considered the potential economic impact of the proposed changes during the development of the proposed rule. As noted in the preamble, the proposed rules would clarify the NCUA's current regulations and provide additional flexibilities to FICUs, making it easier to take advantage of advanced technologies and opportunities offered by the fintech sector.

The proposed rule would not impose any new significant burden on FICUs and may ease some existing requirements. Small FICUs are not obligated to buy and sell eligible obligations and loan participations. Additionally, while the proposed rule introduces risk management and due diligence policy expectations, FICUs have the flexibility to tailor required processes and policies to fit within their existing governance framework and commensurate with their size and complexity. Accordingly, the NCUA certifies that it would not have a significant economic impact on a substantial number of small FICUs.

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. 111 For purposes of the PRA, a paperwork burden may take the form of a reporting, disclosure, or recordkeeping requirement, each referred to as an information collection. The NCUA may not conduct or sponsor, and the respondent is not required to respond to, an information collection unless it displays a currently valid Office of Management and Budget (OMB) control number.

The rule as previously published contains an information collection in the form of a written policy requirement and a transaction documentation requirement, covered by OMB control numbers 3133-0127 and 3133-0141. The proposed changes to part 701 would not result in a change in burden, and there are no new information collection requirements associated with this proposed rule.

Executive Order 13132 encourages independent regulatory agencies to consider the impact of their actions on state and local interests. The NCUA, an independent regulatory agency as defined in 44 U.S.C. 3502(5), voluntarily complies with the principles of the executive order to adhere to fundamental federalism principles. This proposed rule would reduce regulatory burdens on, and expand the authority of, federally insured credit unions, including federally insured, state-chartered natural-person credit unions to purchase certain loans and loan participations. It may have, to some degree, a 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. It does not, however, rise to the level of material impact for purposed of Executive Order 13132.

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

For the reasons discussed above, the Board proposes to amend 12 CFR parts 701 and 714 as follows:

The revisions read as follows:

The revisions and additions read as follows:

This document sets forth proposed amendments to 26 CFR part 1 under section 401 of the Internal Revenue Code (Code). Final regulations relating to the electronic delivery of applicable notices and participant elections were published in the Federal Register on October 20, 2006 (71 FR 61877) (2006 final regulations). The 2006 final regulations included new § 1.401(a)-21 setting forth standards for the use of an electronic medium to provide applicable notices to recipients or to make participant elections, amended Q&A-13 of § 54.4980F-1 by revising the rules for using an electronic method to provide a section 204(h) notice, and made certain conforming amendments. 1 Section 1.401(a)-21 reflects the applicable provisions of the Electronic Signatures in Global and National Commerce Act, Public Law 106-229, 114 Stat. 464 (2000) (E-SIGN), as it relates to the electronic delivery of applicable notices and participant elections. For an in-depth description of the provisions of E-SIGN, see the background section in the preamble of the 2006 final regulations.

Section 1.401(a)-21(d) sets forth several special rules relating to the use of an electronic medium to make a participant election, which is defined in § 1.401(a)-21(e)(6) as any consent, election, request, agreement, or similar communication made by or from a participant, beneficiary, alternate payee, or an individual entitled to benefits under a retirement plan, employee benefit arrangement, or individual retirement plan. First, the person eligible to make a participant election must be effectively able to access the electronic medium used to make the participant election. Second, the electronic system used in making a participant election must be reasonably designed to preclude any person other than the appropriate person from making the participant election. Third, the electronic system must provide the person making the participant election with a reasonable opportunity to review, confirm, modify, or rescind the terms of the election before it becomes effective. Fourth, the person making the participant election must receive, within a reasonable time, confirmation of the effect of the election through either a written paper document or an electronic medium under a system that satisfies the applicable notice requirements under § 1.401(a)-21(b) or (c).

Spousal consent rules apply to plans that are subject to the qualified joint and survivor annuity (QJSA) and qualified preretirement survivor annuity (QPSA) requirements of section 417. 2 In general, these spousal consent rules require that a participant's spouse consent to the participant's election to take certain plan distributions or loans, and that such consent be witnessed by a plan representative or a notary public. See generally section 417(a)(2); § 1.401(a)-20, Q&A-8(b) and Q&A-24; and § 1.417(e)-1(b). Section 1.401(a)-21(d)(6)(i) provides that, in the case of a participant election that is required to be witnessed by a plan representative or a notary public (such as a spousal consent under section 417), the signature of the individual making the participant election must be witnessed in the physical presence of a plan representative or a notary public (physical presence requirement). Section 1.401(a)-21(d)(6)(ii) provides that, if the signature of an individual is witnessed in the physical presence of a notary public, an electronic notarization acknowledging the signature (in accordance with section 101(g) of E-SIGN, 3 and applicable State law for notaries public) will not be denied legal effect.

Section 1.401(a)-21(d)(6)(iii) provides that the Commissioner may provide in guidance published in the Internal Revenue Bulletin that the use of procedures under an electronic system is deemed to satisfy the physical presence requirement, but only if those procedures with respect to the electronic system provide the same safeguards for participant elections as are provided through the physical presence requirement.

During the Coronavirus Disease 2019 (COVID-19) pandemic, 4 the Treasury Department and the IRS received several requests from stakeholders to permit remote witnessing of spousal consents by a notary public or a plan representative over the internet using digital tools and live audio-video technologies (remote witnessing) for plan distributions and loans. These stakeholders stated that, due to social distancing requirements and other measures put into place in response to the COVID-19 pandemic, the physical presence requirement in § 1.401(a)-21(d)(6) made it difficult, if not impossible, for a participant to receive a plan distribution or loan for which spousal consent was required. In response to the COVID-19 pandemic and requests for relief from stakeholders, the Treasury Department and the IRS issued a notice granting temporary relief from the physical presence requirement for spousal consents and, in response to the continuing COVID-19 pandemic and additional requests for relief from stakeholders, three additional notices granting extensions of the temporary relief (together, the temporary relief notices). 5 The temporary relief notices granted relief for the period January 1, 2020, through December 31, 2022.

Under the temporary relief notices, in the case of a participant election witnessed by a notary public, an electronic system that uses remote witnessing is deemed to satisfy the physical presence requirement if the participant election is executed via live audio-video technology that otherwise satisfies the requirement for participant elections and is consistent with State law requirements that apply to the notary public.

In the case of a participant election witnessed by a plan representative, under the temporary relief notices, an electronic system that uses remote witnessing is deemed to satisfy the physical presence requirement if the electronic system uses live audio-video technology and satisfies the following requirements: (1) the individual signing the participant election must present a valid photo ID to the plan representative during the live audio-video conference, and may not merely transmit a copy of the photo ID prior to or after the witnessing; (2) the live audio-video conference must allow for direct interaction between the individual and the plan representative (for example, a pre-recorded video of the person signing is not sufficient); (3) the individual must transmit by fax or electronic means a legible copy of the signed document directly to the plan representative on the same date it was signed; and (4) after receiving the signed document, the plan representative must acknowledge that the signature has been witnessed by the plan representative in accordance with the requirements of the temporary relief notices and transmit the signed document, including the acknowledgement, back to the individual under a system that satisfies the applicable notice requirements under § 1.401(a)-21(c).

Several stakeholders requesting an extension of the temporary relief provided in Notice 2020-42 further requested that the relief be made permanent. In response, Notices 2021-03 and 2021-40 solicited comments relating to remote witnessing. Notice 2021-03 solicited comments on whether relief from the physical presence requirement should be made permanent and, if made permanent, what, if any, procedural safeguards would be necessary to reduce the risk of fraud, spousal coercion, or other abuse in the absence of a physical presence requirement. Notice 2021-03 also stated that any permanent modification to the physical presence requirement would be made through the regulatory process, giving stakeholders an opportunity to provide additional comments.

Notice 2021-40 solicited general and specific comments on whether permanent guidance modifying the physical presence requirement should be issued. Specifically, the Treasury Department and the IRS requested comments regarding: (1) how the temporary removal of the physical presence requirement for participant elections required to be witnessed by a plan representative or a notary public has affected costs and burdens for all parties (for example, participants, spouses, and plans) and whether there are costs and burdens associated with the physical presence requirement that support modifying the requirement on a permanent basis; (2) whether there is evidence that the temporary removal of the physical presence requirement has resulted in fraud, spousal coercion, or other abuse, and how, if the physical presence requirement is permanently modified, increased fraud, spousal coercion, or other abuse may be likely to result from that modification; (3) how participant elections are being witnessed, or are expected to be witnessed, as the COVID-19 pandemic abates (for example, whether the availability of in-person notarization has returned, or is expected to return, to pre-COVID-19 pandemic levels); (4) if guidance permanently modifying the physical presence requirement is issued, what procedures should be established to provide the same safeguards for participant elections as are provided through the physical presence requirement; and (5) if guidance permanently modifying the physical presence requirement is issued, whether the guidance should establish procedures for witnessing by plan representatives that are different from procedures for witnessing by notaries public.

Commenters supporting remote witnessing for spousal consents made several arguments in support of adding remote witnessing as a permanent alternative to the physical presence requirement. Supporters argued that the remote witnessing process, in particular remote witnessing by a notary public, is easy to use, reduces the time it takes to process a distribution, and saves participants and beneficiaries both time and money. 6 For example, two commenters stated that remote witnessing by a notary public takes about 8 minutes on average. In addition, supporters argued that remote witnessing provides a necessary alternative for participants and spouses with mobility challenges, health concerns, and long commute times.

In response to concerns about potential fraud, supporters of remote witnessing for spousal consents argued that State notarization laws allowing remote witnessing have strict guidelines to help prevent fraudulent activity, including knowledge-based authentication and credential analysis. Supporters also noted that, during the period of remote witnessing permitted by the temporary relief notices, plans had not reported any evidence of fraud, spousal coercion, or other abuse.

In addressing whether additional safeguards should be added to the requirements for remote witnessing of spousal consents, supporters of remote witnessing generally argued that the safeguards provided in the temporary relief notices are adequate. They also pointed out that technological advances (such as real-time ID verification, electronic authentication standards, and digital recording and storage) have the potential to make the remote witnessing process more secure than the in-person witnessing process.

Some supporters of remote witnessing of spousal consents argued against establishing procedures for remote witnessing by a plan representative that differ from the procedures for a notary public. However, others argued that separate rules may be warranted because a plan representative (unlike a notary public) is not subject to any State oversight or mandated procedures for witnessing. One commenter suggested requiring that plan representatives use secure two-way live audio-video communication, record the audio-video communication, and store the audio-video recording.

Many supporters of remote witnessing of spousal consents supported a rule preventing a plan from requiring remote witnessing for spousal consents. They argued that a spouse should be able to choose to have a spousal consent witnessed in person, even if the plan permits remote witnessing.

Finally, one supporter of remote witnessing of spousal consents suggested clarification that the protections for participant elections made with an electronic medium set forth in § 1.401(a)-21(d) also apply to spousal elections made with an electronic medium. For example, the commenter suggested requiring that the system be designed to preclude anyone other than a spouse from giving consent and that a spouse be given a reasonable opportunity to review, confirm, modify, or rescind a spousal consent before it becomes effective.

Commenters opposing remote witnessing for spousal consents made several arguments in favor of retaining the physical presence requirement without modification. In particular, they argued that there is no longer a public health emergency justification for waiving the physical presence requirement, that the temporary relief notices were a temporary measure to address a national public health emergency, and that social distancing requirements and other measures have eased, so there is no longer a sufficient rationale for changing the physical presence requirement.

In addition, in response to statements by commenters that there has been no evidence of fraud during the period of the temporary relief granted under the temporary relief notices, opponents of remote witnessing for spousal consents argued that it usually takes many years for evidence of fraud to surface and that investigating and resolving allegations of fraud can take years. Opponents of remote witnessing also argued that a notary public or plan representative witnessing a spousal consent remotely, unlike a notary public or plan representative witnessing a spousal consent in-person, cannot check for signs of ID tampering or physically inspect ID security features intended to prevent forgeries. They further argued that knowledge-based authentication is not effective for a married couple because spouses are likely to know key facts about each other. With respect to detecting spousal coercion and pressure, opponents of remote witnessing of spousal consents argued that remote witnessing is inferior to in-person witnessing. For example, a commenter argued that a webcam's field of vision is narrow and cannot see individuals outside the field of vision who may be exerting undue influence on a spouse signing a consent. Opponents of remote witnessing for spousal consents noted that a conflict of interest may exist between spouses over the form and timing of retirement distributions and loans, so that a participant may put significant pressure on a spouse to waive spousal rights.

In addressing whether additional safeguards should be added to the requirements for remote witnessing of spousal consents in the temporary relief notices, opponents of remote witnessing for spousal consents argued that, if remote witnessing were permitted, the scope of the current safeguards in § 1.401(a)-21(d) should be clarified. For example, plans should be required to—(1) send to a spouse who provides spousal consent certain documents, such as a confirmation of the consent (separate from documents sent to a participant) in a manner that ensures actual receipt, (2) make a visual recording of the consent process, and (3) retain all critical plan records with respect to a participant election or spousal consent. They also suggested that the Treasury Department and the IRS impose additional protections, such as requiring that plans allow spouses to choose to have a spousal consent witnessed in person and providing guidance on post-consent confirmations.

The proposed regulation modifies the participant election rules in § 1.401(a)-21(d) in two significant ways. First, the proposed regulation sets forth alternatives to the physical presence requirement in § 1.401(a)-21(d)(6) for the witnessing of a spousal consent. These alternatives permit a spousal consent to be witnessed remotely by a notary public or plan representative, but only if certain conditions are satisfied. Second, the proposed regulation clarifies that the protections in § 1.401(a)-21(d) that apply to participant elections made using an electronic medium also apply to spousal consents made using an electronic medium. As part of that clarification, the proposed regulation modifies existing Example 3 in § 1.401(a)-21(f), which illustrates the electronic transmission of a participant election for a plan loan and related notarized spousal consent, to clarify that the protections in § 1.401(a)-21(d) apply to the spousal consent. The proposed regulation also makes other minor conforming changes.

Section 1.401(a)-21(d)(6)(i) of the proposed regulation generally retains the physical presence requirement set forth in the existing regulation. The physical presence requirement provides that, in the case of a spousal consent that is required to be witnessed by a notary public or a plan representative (such as a spousal consent under section 417), the signature of the person signing the spousal consent must be witnessed in the physical presence of a notary public or plan representative.

However, the proposed regulation also provides two alternatives to the physical presence requirement for spousal consents. These two alternatives are similar to the alternatives in the temporary relief notices issued in response to the COVID-19 pandemic. For more information about the temporary relief notices, see Part C in the Background section of this preamble, under the heading Notices Issued in Response to COVID-19 Pandemic.

Proposed § 1.401(a)-21(d)(6)(ii)(A) sets forth remote witnessing rules for spousal consents witnessed by a notary public. The proposed regulation provides that, as an alternative to satisfying the physical presence requirement, a plan may accept a spousal consent witnessed remotely by a notary public, provided that (1) the signature of the person signing the spousal consent is witnessed by the notary public using live audio-video technology, (2) the requirements in § 1.401(a)-21(d) for spousal consents are satisfied, and (3) the remote witnessing is consistent with State law requirements that apply to the notary public. This alternative is substantially similar to the temporary relief from the physical presence requirement provided in the temporary relief notices for remote witnessing by a notary public.

Section 1.401(a)-21(d)(6)(ii)(A)( 2 ) of the proposed regulation requires that a plan that accepts spousal consents witnessed remotely by a notary public, as described in proposed § 1.401(a)-21(d)(6)(ii)(A)( 1 ), must also accept spousal consents witnessed in the physical presence of a notary public. Both supporters and opponents of remote witnessing suggested this requirement (which was also included in the temporary relief notices providing extensions).

The proposed regulation also sets forth remote witnessing rules for spousal consents witnessed by a plan representative. Proposed § 1.401(a)-21(d)(6)(ii)(B) provides that, as an alternative to satisfying the physical presence requirement, a plan may accept a spousal consent witnessed remotely by a plan representative, provided that (1) the signature of the person signing the spousal consent is witnessed by a plan representative using live audio-video technology, (2) the requirements in § 1.401(a)-21(d) for spousal consents are satisfied, and (3) the remote witnessing satisfies the following five requirements described in proposed § 1.401(a)-21(d)(6)(ii)(B)( 1 ) through ( 5 ):

First, the person signing the spousal consent must present a valid photo ID to the plan representative during the live audio-video conference. For example, the person signing the spousal consent may not merely transmit a copy of the photo ID to the plan representative prior to or after the witnessing. Second, the live audio-video conference must allow for direct interaction between the person signing the spousal consent and the plan representative. A pre-recorded video of the person signing the spousal consent does not satisfy this requirement. Third, the person signing the spousal consent must transmit by electronic means a legible copy of the signed document directly to the plan representative on the same date that the spousal consent is signed. Fourth, after receiving the signed spousal consent, the plan representative must acknowledge that the signature has been witnessed by the plan representative and transmit the signed spousal consent, including the acknowledgement, back to the person signing the spousal consent under a system that satisfies the applicable notice requirements in § 1.401(a)-21(c). Fifth, a recording of the audio-video conference during which the spousal consent was signed remotely must be made by the plan representative and, consistent with § 1.401(a)-21(a)(3)(ii), 7 must be retained by the plan in accordance with section 6001 (which provides rules relating to the maintenance of records, statements, and special returns). The first four requirements are similar to the requirements in the temporary relief notices, and the fifth requirement is an additional requirement suggested by commenters both supporting and opposing remote witnessing.

Section 1.401(a)-21(d)(6)(iii) of the proposed regulation continues to include rules that are in the existing regulation relating to electronic notarization. In particular, the proposed regulation provides that, if the physical presence requirements (or the alternative remote witnessing requirements) are satisfied, an electronic notarization acknowledging a signature (in accordance with section 101(g) of E-SIGN and State law applicable to a notary public) will not be denied legal effect.

The proposed regulation clarifies that the five special rules regarding use of an electronic medium in existing § 1.401(a)-21(d) apply to spousal consents. First, the electronic medium under an electronic system used to make a participant election or spousal consent must be a medium that the person who is eligible to make the election or consent is effectively able to access. Second, the electronic system used in making a participant election or spousal consent must be reasonably designed to preclude any person other than the appropriate person from making the participant election or spousal consent. Whether this condition is satisfied is based on facts and circumstances, including whether the participant election or spousal consent has the potential for a conflict of interest between the persons involved in the election or consent. Third, the electronic system used in making a participant election or spousal consent must provide the person making the election or consent with a reasonable opportunity to review, confirm, modify, or rescind the terms of the election or consent before it becomes effective. Fourth, the person making the participant election or spousal consent must receive, within a reasonable time, a confirmation of the effect of the election or consent through either a written paper document or an electronic medium under a system that satisfies the requirements of § 1.401(a)-21(b) or (c) (as if the confirmation were an applicable notice). Fifth, for spousal consents required to be witnessed by a plan representative or a notary public, the spousal consent must be witnessed in accordance with proposed § 1.401(a)-21(d)(6).

The requirements regarding use of an electronic medium in existing § 1.401(a)-21(d) apply to participant elections, and that term is defined broadly in § 1.401(a)-21(e)(6) to include any consent, election, request, agreement, or similar communication made by or from a participant, beneficiary, alternative payee, or an individual entitled to benefits. Under this broad definition, structured for simplicity, a participant election includes a spousal consent. However, in responding to the request for comments on whether to add spousal protections, commenters both supporting and opposing remote witnessing suggested explicitly applying the safeguards in § 1.401(a)-21(d) to spousal consents, including the safeguard that confirmation of the spousal consent be provided to the spouse. Although these safeguards already apply to spousal consents under existing § 1.401(a)-21(d), in response to these comments, the Treasury Department and the IRS believe that it is helpful to clarify and emphasize that these protections apply to spousal consents.

Accordingly, the proposed regulation includes three clarifications with respect to spousal consents. First, the proposed regulation provides a separate definition for spousal consent. Section 1.401(a)-21(e)(8) of the proposed regulation defines a spousal consent as a written consent signed by a participant's spouse that meets the requirements of section 417(a)(2)(A). Second, as described in the preceding paragraph, amendments are made in § 1.401(a)-21(d) to clarify that each special rule regarding use of an electronic medium for participant elections applies to spousal consents. Third, the proposed regulation modifies Example 3 in § 1.401(a)-21(f) to clarify how the protections in § 1.401(a)-21(d) apply to spousal consents. Example 3 in existing § 1.401(a)-21(f) illustrates the application of § 1.401(a)-21(d) to a participant election for a plan loan and a related notarized spousal consent. The example describes how a plan can satisfy the requirements in § 1.401(a)-21(d)(4) and (5), by providing the participant an opportunity to review the election and a confirmation of the election. However, the example is silent on how those requirements apply to the participant's spouse with respect to the spousal consent. The modified example addresses the application of those requirements with respect to the spousal consent.

The protections in § 1.401(a)-21(d) (as clarified by the proposed regulation), including the ability for a spouse to review and rescind a spousal consent, provide spouses using an electronic medium to sign a spousal consent (including the use of remote witnessing, whether by a notary public or a plan representative) with protections that are not provided to spouses who do not sign spousal consents using an electronic medium. Section 1.401(a)-20, Q&A-30, provides that, in general, a plan may preclude a spouse from revoking consent once it has been given, but that a participant must always be allowed to change an election during the applicable election period. However, as provided in existing § 1.401(a)-21(d) and clarified in this proposed regulation, § 1.401(a)-21(d)(4) requires a plan to give the spouse, for a spousal consent made using an electronic medium that is subject to § 1.401(a)-21(d), a reasonable opportunity to review, confirm, modify, or rescind the terms of the spousal consent before it becomes effective.

The Treasury Department and the IRS understand that there are strongly held points of view both in support of and in opposition to remote witnessing. As previously discussed in Part D of the Background section of this preamble, under the heading Comments Relating to Remote Witnessing of Spousal Consents, commenters supporting remote witnessing argued that remote witnessing provides a valuable option to participants and spouses (including those with limited mobility), by offering an essential convenience during a period in which more people rely on technological advances for their financial transactions. On the other hand, commenters opposing remote witnessing argued that spousal pension rights particularly affect retirement security for women and that any decision to waive those rights should be afforded maximum safeguards. 8

In drafting the proposed regulation, the Treasury Department and the IRS have worked to strike a balance between the competing interests identified by commenters by offering remote witnessing as an option to those who elect to use it, but still requiring conditions on remote witnessing that are either similar to or more protective than the conditions in the temporary relief notices. Many of these conditions, including prohibiting a plan from requiring remote witnessing of spousal consents by a notary public and requiring that a plan representative record the audio-video conference during which a spousal consent is signed remotely (and retain the recording), were suggested both by commenters supporting and by commenters opposing remote witnessing.

In addition, the Treasury Department and the IRS believe that, by clarifying that the protections in § 1.401(a)-21(d) apply both to participant elections and spousal consents, the proposed regulation emphasizes several essential protections for a spouse using an electronic medium to sign a spousal consent. Those protections include requiring a plan to send a spouse confirmation of a spousal consent separate from the documents sent to the participant making the election and giving the spouse the ability to review and rescind the spousal consent.

This regulation is proposed to apply beginning on the date that is six months after publication of the Treasury decision adopting these rules as a final regulation in the Federal Register . Prior to the applicability date of the final regulation, taxpayers may rely on the rules set forth in this notice of proposed rulemaking.

For copies of recently issued revenue procedures, revenue rulings, notices and other guidance published in the Internal Revenue Bulletin, please visit the IRS website at www.irs.gov or contact the Superintendent of Documents, U.S. Government Publishing Office, Washington, DC 20402.

This proposed regulation is not subject to review under section 6(b) of Executive Order 12866 pursuant to the Memorandum of Agreement (April 11, 2018) between the Treasury Department and the Office of Management and Budget regarding review of tax regulations.

The collections of information referenced in this proposed regulation were previously reviewed and approved by the Office of Management and Budget in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)) under control number 1545-1632.

Comments on the collection of information and the accuracy of estimated average annual burden and suggestions for reducing this burden should be sent to the Office of Management and Budget, Attn: Desk Officer for the Department of the Treasury, Office of Information and Regulatory Affairs, Washington, DC 20503, with copies to the Internal Revenue Service, Attn: IRS Reports Clearance Officer, SE:W:CAR:MP:T:T:SP; Washington, DC 20224. Comments on the collection of information should be received by March 30, 2023.

An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a valid control number assigned by the Office of Management and Budget.

Books or records relating to a collection of information must be retained as long as their contents may become material in the administration of any internal revenue law. Generally, tax returns and tax return information are confidential, as required by 26 U.S.C. 6103.

Pursuant to the Regulatory Flexibility Act, it is hereby certified that this regulation will not have a significant economic impact on a substantial number of retirement plans, or their administrators and sponsors. This certification is based on several factors. First, the provisions of the proposed regulation that permit the remote witnessing of spousal consents are voluntary; plans are not required to permit remote witnessing, and spouses are not required to use remote witnessing even if a plan sponsor chooses to make remote witnessing available as an option under its plan. Accordingly, it is anticipated that a sponsor will permit remote witnessing under its plan only if the sponsor concludes that remote witnessing is more convenient and less burdensome for the plan and its participants and beneficiaries. Similarly, it is anticipated that a spouse in a plan that permits remote witnessing will use remote witnessing only if the spouse concludes that remote witnessing is more convenient and less burdensome. Further, the requirements for remote witnessing in the proposed regulation are substantially similar to requirements already imposed under the temporary relief notices, and the new requirements imposed under the proposed regulation with respect to witnessing by a plan representative (that is, that the plan must record the audio-video conference and retain the recording) were suggested by commenters (including commenters supporting remote witnessing).

Second, the provisions of the proposed regulation relating to the application of the requirements in § 1.401(a)-21(d) to spousal consents are merely clarifications of existing regulations. As previously stated, under existing § 1.401(a)-21, spousal consents are a subset of participant elections, so that the requirements in § 1.401(a)-21(d) apply to spousal consents. Thus, this proposed regulation does not impose new compliance burdens and is not expected to result in economically meaningful changes in behavior related to existing § 1.401(a)-21.

For the reasons stated, a regulatory flexibility analysis under the Regulatory Flexibility Act is not required. The Treasury Department and the IRS invite comments on the impact of this regulation on small entities. Pursuant to section 7805(f) of the Code, this notice of proposed rulemaking has been submitted to the Chief Counsel of Advocacy of the Small Business Administration for comment on its impact on small business.

Before these proposed amendments to the regulation are adopted as a final regulation, consideration will be given to comments that are submitted timely to the IRS as prescribed in the preamble under the ADDRESSES section. The Treasury Department and the IRS request comments on all aspects of the proposed regulation. Any electronic comments and paper comments submitted will be made available at www.regulations.gov or upon request.

A telephonic public hearing has been scheduled for April 11, 2023, beginning at 10 a.m. ET. The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who wish to present oral comments by telephone at the public hearing must submit electronic or written comments and an outline of the topics to be addressed and the time to be devoted to each topic by March 30, 2023 as prescribed in the preamble under the ADDRESSES section. For those requesting to speak during the public hearing, send an outline of topic submissions electronically via the Federal eRulemaking Portal at www.regulations.gov (indicate IRS and REG-114666-22).

Individuals who want to testify (by telephone) at the public hearing must send an email to publichearings@irs.gov to receive the telephone number and access code for the public hearing. The subject line of the email must contain the regulation number REG-114666-22 and the word TESTIFY. For example, the subject line may say: Request to TESTIFY at Hearing for REG-114666-22. The email should include a copy of the speaker's public comments and outline of topics. Individuals who want to attend (by telephone) the public hearing must also send an email to publichearings@irs.gov to receive the telephone number and access code for the public hearing. The subject line of the email must contain the regulation number REG-114666-22 and the word ATTEND. For example, the subject line may say: Request to ATTEND Hearing for REG-114666-22. To request special assistance during the public hearing, contact the Publications and Regulations Branch of the Office of Associate Chief Counsel (Procedure and Administration) by sending an email to publichearings@irs.gov (preferred) or by telephone at (202) 317-5177 (not a toll-free number).

A period of 10 minutes will be allocated to each person for making comments. After the deadline for receiving outlines has passed, the IRS will prepare an agenda containing the schedule of speakers. Copies of the agenda will be made available at www.regulations.gov, search IRS and REG-114666-22. Copies of the agenda will also be available by emailing a request to publichearings@irs.gov. Please put “REG-114666-22 Agenda Request” in the subject line of the email.

The principal authors of this regulation are Arslan Malik and Pamela Kinard, Office of Associate Chief Counsel (Employee Benefits, Exempt Organizations, and Employment Taxes (EEE)). However, other personnel from the IRS and the Treasury Department participated in the development of this regulation.

Accordingly, the Treasury Department and the IRS are proposing to amend 26 CFR part 1 as follows:

The revisions and addition read as follows:

Throughout this document whenever “we,” “us,” or “our” is used, we mean EPA.

On June 22, 2010, EPA published a new 1-hour primary SO 2 NAAQS of 75 parts per billion (ppb), which is met at an ambient air quality monitoring site when the 3-year average of the annual 99th percentile of daily maximum 1-hour average concentrations does not exceed 75 ppb, as determined in accordance with appendix T of 40 CFR part 50. See 75 FR 35520, codified at 40 CFR 50.17(a)-(b). EPA has promulgated designations for this standard in four rounds. Alton Township, Illinois was designated nonattainment by EPA on June 30, 2016, as part of the Agency's Round 2 designations.

In the Round 2 designations, EPA designated areas including power plants exceeding certain emissions criteria, specifically including the Wood River power plant located in Wood River, Illinois. The modeling that Illinois submitted in support of its Round 2 designations recommendations included both the Wood River power plant and an additional source, the Alton Steel, Inc. steel mill in Alton, Illinois (Alton Steel). Alton Steel was included in the modeling analysis because its SO 2 emissions showed the potential for creating significant SO 2 concentration gradients within the modeling domain. The modeling was done using the AERMOD air dispersion modeling software utilizing data based on actual emissions from the Wood River Power Station and Alton Steel.

The state found that the highest modeled NAAQS violations in the area were almost entirely due to Alton Steel emissions and especially occurred along or near Alton Steel's north fence line. The Alton Steel facility consists of a melt shop and a rolling mill in which steel scrap is melted (electric arc furnace), refined/alloyed (ladle metallurgical furnace), and then cast/formed into blooms and slabs. Illinois provided suitable evidence that Wood River should be judged not to contribute to the modeled violation as the facility was shut down in 2016. As such, Illinois recommended the designation of nonattainment for Alton Township to focus on the NAAQS violations caused by Alton Steel.

The state's modeling in support of its designation recommendation indicated that the predicted 99th percentile 1-hour average concentration within the chosen modeling domain was 456.40 micrograms per cubic meter (μg/m 3 ), or 174.2 ppb. This modeled concentration included the background concentration of SO 2 and was based on actual emissions from the facilities in the area. Illinois performed a culpability analysis which demonstrated that only a small group of receptors violated the 2010 SO 2 NAAQS, and these receptors were primarily affected by emissions from Alton Steel, which were greatly influenced by downwash. High concentrations near Alton Steel were a consequence of building downwash combined with downward pointing vents, and primarily occurred when winds were blowing from the southwest, a direction that maximized the impact of the Alton Steel building in causing downwash and downwash-influenced concentrations in nearby ambient air locations.

On September 18, 2015, Illinois submitted its recommendations for EPA to designate certain areas of the state as part of the Round 2 designations. In its submission, Illinois recommended that a portion of Madison County be designated as nonattainment for the 2010 SO 2 NAAQS—specifically, a portion of southern Alton Township. EPA, agreeing with Illinois' analysis of the area, concurred with the state's proposed finding of nonattainment for Alton Township. EPA published a final action designating the area as nonattainment on July 12, 2016 (81 FR 45039), which became effective September 12, 2016. In response to EPA's designation of the Alton Township area, Illinois submitted an attainment plan on December 13, 2018, to EPA for approval. Under CAA section 192(a), these plans are required to demonstrate that their respective areas will attain the NAAQS as expeditiously as practicable, but no later than five years from the effective date of designation, which was September 12, 2021.

Unlike in the Round 2 designations modeling, the Alton Township attainment demonstration does not include the Wood River Power Station among the sources modeled. Wood River was excluded from the nonattainment area because in November 2015, the facility owner (Dynegy, Inc.) publicly announced that the power plant would be closing, pending approval of the electrical transmission system operator (Midcontinent Independent System Operator). The facility was retired in June 2016 and ceased emitting SO 2 at that point, and was demolished in February 2021.

Nonattainment area SO 2 SIPs must meet the applicable requirements of the CAA, and specifically CAA sections 110, 172, 191 and 192. EPA's regulations governing nonattainment area SIPs are set forth at 40 CFR part 51, with specific procedural requirements and control strategy requirements residing at subparts F and G, respectively. Soon after Congress enacted the 1990 amendments to the CAA, EPA issued comprehensive guidance on SIPs in a document entitled the “General Preamble for the Implementation of Title I of the Clean Air Act Amendments of 1990,” published at 57 FR 13498 (April 16, 1992) (General Preamble). Among other things, the General Preamble addressed SO 2 SIPs and fundamental principles for SIP control strategies. Id. at 13545-49, 13567-68. On April 23, 2014, EPA issued guidance and recommendations for meeting the statutory requirements in SO 2 SIPs addressing the 2010 primary NAAQS, in a document entitled, “Guidance for 1-Hour SO 2 Nonattainment Area SIP Submissions” (April 2014 guidance), available at https://www.epa.gov/sites/production/files/2016-06/documents/20140423guidance_nonattainment_sip.pdf. In the April 2014 guidance, EPA described the statutory requirements for a complete nonattainment area SIP, which includes an accurate emissions inventory of current emissions for all sources of SO 2 within the nonattainment area; an attainment demonstration; enforceable emissions limitations and control measures; demonstration of RFP; implementation of RACM (including RACT); NNSR; and adequate contingency measures for the affected area.

In order for EPA to fully approve a SIP as meeting the requirements of CAA sections 110, 172 and 191-192 and EPA's regulations at 40 CFR part 51, the SIP for the affected area needs to demonstrate to EPA's satisfaction that each of the aforementioned requirements have been met. Under CAA sections 110(l) and 193, EPA may not approve a SIP that would interfere with any applicable requirement concerning NAAQS attainment and RFP, or any other applicable requirement, and no requirement in effect (or required to be adopted by an order, settlement, agreement, or plan in effect before November 15, 1990), in any area which is a nonattainment area for any air pollutant, may be modified in any manner unless it ensures equivalent or greater emission reductions of such air pollutant.

CAA section 172(c)(1) directs states with areas designated as nonattainment to demonstrate that the submitted plan provides for attainment of the NAAQS. 40 CFR part 51, subpart G further delineates the control strategy requirements that SIPs must meet, and EPA has long required that all SIPs and control strategies reflect the four fundamental principles of quantification, enforceability, replicability, and accountability. See General Preamble, at 13567-68. SO 2 attainment plans must consist of two components: (1) emission limits and other control measures that assure implementation of permanent, enforceable and necessary emission controls, and (2) a modeling analysis which meets the requirements of 40 CFR part 51, appendix W which demonstrates that these emission limits and control measures provide for timely attainment of the primary SO 2 NAAQS as expeditiously as practicable, but by no later than the attainment date for the affected area. In all cases, the emission limits and control measures must be accompanied by appropriate methods and conditions to determine compliance with the respective emission limits and control measures, and must be quantifiable ( i.e., a specific amount of emission reduction can be ascribed to the measures), fully enforceable (specifying clear, unambiguous and measurable requirements for which compliance can be practicably determined), replicable (the procedures for determining compliance are sufficiently specific and non-subjective so that two independent entities applying the procedures would obtain the same result), and accountable (source specific limits must be permanent and must reflect the assumptions used in the SIP demonstrations).

EPA's April 2014 guidance recommends that the emission limits be expressed as short-term average limits ( e.g., addressing emissions averaged over one or three hours), but also allows for emission limits with longer averaging times of up to 30 days so long as the state meets various suggested criteria. See April 2014 guidance, pp. 22 to 39. The guidance recommends that, should states and sources utilize a longer-term average limit, the limit should be set at an adjusted level that reflects a stringency comparable to the 1-hour critical emission value shown to provide for attainment that the plan otherwise could have set as a 1-hour emission limit.

Illinois' plan applies 1-hour average emission limits to Alton Steel. However, Illinois' plan also considers the impact of an additional facility that is about 12 kilometers from Alton Steel, namely Ameren's Portage des Sioux Power Center (“Sioux” or “Ameren-Sioux”) in St. Charles County, Missouri, a facility that is subject to a 24-hour block average limit. Therefore, EPA is providing the following discussion of its rationale for approving the use of longer-term average limits in plans designed to provide for attainment.

The April 2014 guidance provides an extensive discussion of EPA's view that appropriately set comparably stringent limits based on averaging times as long as 30 days can be found to provide for attainment of the 2010 SO 2 NAAQS. In evaluating this option, EPA considered the nature of the standard, conducted detailed analyses of the impact of the use of 30-day average limits on the prospects for attaining the standard, and carefully reviewed how best to achieve an appropriate balance among the various factors that warrant consideration in judging whether a state's plan provides for attainment. See id.; see also id. at appendices B, C and D.

As specified in 40 CFR 50.17(b), the 1-hour primary SO 2 NAAQS is met at an ambient air quality monitoring site when the 3-year average of the annual 99th percentile of daily maximum 1-hour average concentrations is less than or equal to 75 ppb. In a year with 365 days of valid monitoring data, the 99th percentile would be the fourth highest daily maximum 1-hour value. The 2010 SO 2 NAAQS, including this form of determining compliance with the standard, was upheld by the U.S. Court of Appeals for the District of Columbia Circuit in Nat'l Envt'l Dev. Ass'n's Clean Air Project v. EPA, 686 F.3d 803 (D.C. Cir. 2012). Because the standard has this form, a single exceedance of the level of the NAAQS does not create a violation of the standard. Instead, at issue is whether a source operating in compliance with a properly set limit reflecting a longer-term average could cause hourly exceedances of the NAAQS level, and if so the resulting frequency and magnitude of such hourly exceedances, and in particular whether EPA can have reasonable confidence that a properly set longer-term average limit will provide that the 3-year average of the annual fourth highest daily maximum hourly value will be at or below 75 ppb. The following is a synopsis of EPA's review of how to judge whether such plans “provide for attainment,” based on modeling of projected allowable emissions and in light of the NAAQS' form for determining attainment at monitoring sites.

For plans for SO 2 based on 1-hour emission limits, the standard approach is to conduct modeling using fixed emission rates. The maximum emission rate that would be modeled to result in attainment ( i.e., in an “average year”  1 shows three, not four days with maximum hourly levels exceeding 75 ppb, over three consecutive years) is labeled the “critical emission value.” The modeling process for identifying this critical emission value inherently considers the numerous variables that affect ambient concentrations of SO 2 , such as meteorological data, background concentrations, and topography. In the standard approach, the state would then provide for attainment by setting a continuously applicable 1-hour emission limit at this critical emission value. This is the approach Illinois took for setting limits at Alton Steel.

EPA recognizes that some sources have highly variable emissions, for example due to variations in fuel sulfur content and operating rate, that can make it extremely difficult, even with a well-designed control strategy, to ensure in practice that emissions for any given hour do not exceed the critical emissions value. EPA also acknowledges the concern that longer-term emission limits can allow short periods with emissions above the critical emissions value, which, if coincident with meteorological conditions conducive to high SO 2 concentrations, could in turn create the possibility of a NAAQS level exceedance occurring on a day when an exceedance would not have occurred if emissions were continuously controlled at the level corresponding to the critical emissions value. However, for several reasons, EPA believes that the approach recommended in its guidance document suitably addresses this concern. First, from a practical perspective, EPA expects the actual emission profile of a source subject to an appropriately set longer-term average limit to be like the emission profile of a source subject to an analogous 1-hour average limit. EPA expects this similarity because it has recommended that the longer-term average limit be set at a level that is comparably stringent to the otherwise applicable 1-hour limit (reflecting a downward adjustment from the critical emissions value) and that takes the source's emissions profile into account. As a result, EPA expects either form of emissions limit to yield comparable air quality.

Second, from a more theoretical perspective, EPA has compared the likely air quality with a source having maximum allowable emissions under an appropriately set longer-term limit, as compared to the likely air quality with the source having maximum allowable emissions under the comparable 1-hour limit. In this comparison, in the 1-hour average limit scenario, the source is presumed at all times to emit at the critical emissions level, and in the longer-term average limit scenario, the source is presumed occasionally to emit more than the critical emissions value but on average, and presumably at most times, to emit well below the critical emissions value. In an “average year,” compliance with the 1-hour limit is expected to result in three exceedance days ( i.e., three days with an hourly value above 75 ppb) and a fourth day with a maximum hourly value at 75 ppb. By comparison, with the source complying with a longer-term limit, it is possible that additional exceedances would occur that would not occur in the 1-hour limit scenario (if emissions exceed the critical emissions value at times when meteorology is conducive to poor air quality). However, this comparison must also factor in the likelihood that exceedances that would be expected in the 1-hour limit scenario would not occur in the longer-term limit scenario. This result arises because the longer-term limit requires lower emissions most of the time (because the limit is set well below the critical emissions value), so a source complying with an appropriately set longer term limit is likely to have lower emissions at critical times than would be the case if the source were emitting as allowed with a 1-hour limit.

As a hypothetical example to illustrate these points, suppose a source that always emits 1,000 pounds of SO 2 per hour, which results in air quality at the level of the NAAQS ( i.e., results in a design value of 75 ppb). Suppose further that in an “average year,” these emissions cause the 5 highest maximum daily average 1-hour concentrations to be 100 ppb, 90 ppb, 80 ppb, 75 ppb, and 70 ppb. Then suppose that the source becomes subject to a 30-day average emission limit of 700 pounds per hour. It is theoretically possible for a source meeting this limit to have emissions that occasionally exceed 1,000 pounds per hour, but with a typical emissions profile, emissions would much more commonly be between 600 and 800 pounds per hour. This simplified example assumes a zero-background concentration, which allows one to assume a linear relationship between emissions and air quality. (A nonzero background concentration would make the mathematics more difficult but would give similar results.) Air quality will depend on what emissions happen on what critical hours, but suppose that emissions at the relevant times on these 5 days are 800 pounds per hour, 1,100 pounds per hour, 500 pounds per hour, 900 pounds per hour, and 1,200 pounds per hour, respectively. (This is a conservative example because the average of these emissions, 900 pounds per hour, is well over the 30-day average emission limit.) These emissions would result in daily maximum 1-hour concentrations of 80 ppb, 99 ppb, 40 ppb, 67.5 ppb, and 84 ppb. In this example, the fifth day would have an exceedance that would not otherwise have occurred, but the third day would not have an exceedance that otherwise would have occurred, and the fourth day would have been below, rather than at, 75 ppb. In this example, the fourth highest maximum daily concentration under the 30-day average would be 67.5 ppb.

This simplified example encapsulates the findings of a more complicated statistical analysis that EPA conducted using a range of scenarios using actual plant data. As described in appendix B of EPA's April 2014 guidance, EPA found that the requirement for lower average emissions is highly likely to yield better air quality than is required with a comparably stringent 1-hour limit. Based on analyses described in appendix B of its 2014 guidance, EPA expects that an emissions profile with maximum allowable emissions under an appropriately set, comparably stringent 30-day average limit is likely to have the net effect of having a lower number of hourly exceedances of the NAAQS level and better air quality than an emission profile with maximum allowable emissions under a 1-hour emission limit at the critical emissions value. 2 This result provides a compelling policy rationale for allowing the use of a longer averaging period, in appropriate circumstances where the facts indicate this result can be expected to occur.

The question then becomes whether this approach—which is likely to produce a lower number of overall hourly NAAQS level exceedances even though it may produce some unexpected exceedances above the critical emission value—meets the requirement in section 110(a)(1) and 172(c)(1) for state implementation plans to “provide for attainment” of the NAAQS. For SO 2 , as for other pollutants, it is generally impossible to design a nonattainment plan in the present that will guarantee that attainment will occur in the future. A variety of factors can cause a well-designed attainment plan to fail and unexpectedly not result in attainment, for example if meteorology occurs that is more conducive to poor air quality than was anticipated in the plan. Therefore, in determining whether a plan meets the requirement to provide for attainment, EPA's task is commonly to judge not whether the plan provides absolute certainty that attainment will in fact occur, but rather whether the plan provides an adequate level of confidence of prospective NAAQS attainment. From this perspective, in evaluating use of a 30-day average limit, EPA must weigh the likely net effect on air quality. Such an evaluation must consider the risk that occasions with meteorology conducive to high concentrations will have elevated emissions leading to NAAQS level exceedances that would not otherwise have occurred and must also weigh the likelihood that the requirement for lower emissions on average will result in days not having hourly exceedances that would have been expected with emissions at the critical emissions value. Additional policy considerations, such as in this case the desirability of accommodating real world emissions variability without significant risk of NAAQS violations, are also appropriate factors for EPA to weigh in judging whether a plan provides a reasonable degree of confidence that the plan will lead to attainment. Based on these considerations, especially given the high likelihood that a continuously enforceable limit averaged over as long as 30 days, determined in accordance with EPA's guidance, will result in attainment, EPA believes as a general matter that such limits, if appropriately determined, can reasonably be considered to provide for attainment of the 2010 SO 2 NAAQS.

The April 2014 guidance offers specific recommendations for determining an appropriate longer-term average limit. The recommended method starts with determination of the 1-hour emission limit that would provide for attainment ( i.e., the critical emissions value), and applies an adjustment factor to determine the (lower) level of the longer-term average emission limit that would be estimated to have a stringency comparable to the otherwise necessary 1-hour emission limit. This method uses a database of continuous emission data reflecting the type of control that the source will be using to comply with the SIP emission limits, which (if compliance requires new controls) may require use of an emission database from another source. The recommended method involves using these data to compute a complete set of emission averages, computed according to the averaging time and averaging procedures of the prospective emissions limit. In this recommended method, the ratio of the 99th percentile among these long-term averages to the 99th percentile of the 1-hour values represents an adjustment factor that may be multiplied by the candidate 1-hour emission limit to determine a longer-term average emission limit that may be considered comparably stringent. 3 The guidance also addresses a variety of related topics, such as the potential utility of setting supplemental emission limits, such as mass-based limits, to reduce the likelihood and/or magnitude of elevated emission levels that might occur under the longer-term emission rate limit.

Preferred air quality models for use in regulatory applications are described in appendix A of EPA's Guideline on Air Quality Models (40 CFR part 51, appendix W). In 2005, EPA promulgated AERMOD as the Agency's preferred near-field dispersion modeling for a wide range of regulatory applications addressing stationary sources (for example in estimating SO 2 concentrations) in all types of terrain based on extensive developmental and performance evaluation. Supplemental guidance on modeling for purposes of demonstrating attainment of the SO 2 standard is provided in appendix A to the April 2014 guidance document referenced above. Appendix A provides extensive guidance on the modeling domain, the source inputs, assorted types of meteorological data, and background concentrations. Consistency with the recommendations in this guidance is generally necessary for the attainment demonstration to offer adequately reliable assurance that the plan provides for attainment.

As stated previously, attainment demonstrations for the 2010 1-hour primary SO 2 NAAQS must demonstrate future attainment and maintenance of the NAAQS in the entire area designated as nonattainment ( i.e., not just at the violating monitor) by using air quality dispersion modeling ( see appendix W to 40 CFR part 51) to show that the mix of sources and enforceable control measures and emission rates in an identified area will not lead to a violation of the SO 2 NAAQS. For a short-term ( i.e., 1-hour) standard, EPA believes that dispersion modeling, using allowable emissions and addressing stationary sources in the affected area (and in some cases those sources located outside the nonattainment area which may affect attainment in the area) is technically appropriate, efficient, and effective in demonstrating attainment in nonattainment areas because it takes into consideration combinations of meteorological and emission source operating conditions that may contribute to peak ground-level concentrations of SO 2 .

The meteorological data used in the analysis should generally be processed with the most recent version of AERMET. Estimated concentrations should include ambient background concentrations, should follow the form of the standard, and should be calculated as described in section 2.6.1.2 of the August 23, 2010, clarification memo on “Applicability of Appendix W Modeling Guidance for the 1-hr SO 2 National Ambient Air Quality Standard” (U.S. EPA, 2010).

This section generally discusses EPA's evaluation of the modeled attainment demonstration for Illinois' plan. A more detailed discussion is also presented in a technical support document (TSD) contained in the public docket for this proposed approval of Illinois' SIP.

As part of its SIP development process, Illinois used EPA's regulatory dispersion model, AERMOD, to help determine the SO 2 emission limit revisions that would be needed to bring the Alton Township nonattainment area into attainment of the 2010 SO 2 NAAQS. For its 2018 Alton Township attainment plan, Illinois has relied upon AERMOD Version 18081 and the companion AERMOD User Guide documentation in developing this attainment demonstration. Regulatory default options were specified in developing the attainment demonstration that are consistent with established practices for use of AERMOD in determining NAAQS compliance for SIP revisions. Included among those default options are stack tip downwash, buoyancy induced dispersion, default wind profile coefficients, default vertical potential temperature gradients, and final plume rise. EPA finds these selections appropriate.

This attainment demonstration uses a modeling domain that reflects the geographic extent of emission sources included in the Round 2 modeling for the Wood River Power Plant. The most significant sources addressed in the modeling for the area are the Alton Steel facility and the Ameren-Sioux power center in Missouri about 13 kilometers west-northwest of the nonattainment area. These two facilities are the principal causes of the modeled violations in the area. Illinois modeled several other, relatively minor sources within the area that did not contribute significantly to the violation. Illinois performed a culpability analysis to quantify the impacts of these various minor sources to determine their contribution to the modeled violations. At the highest concentrations the model estimated in the area, all other sources combined, aside from Ameren-Sioux and Alton Steel, contributed less than 2 μg/m 3 in total to the modeled violations. The way these sources are modeled are discussed in detail below.

The receptor network encompasses the nonattainment area and consists of discrete fence line receptors spaced at approximately 50-meter intervals and a gridded receptor array with 100-meter interval spacings. The receptor density is consistent with standard modeling guidance for adequately capturing and resolving SO 2 concentration maxima. See TSD pg. 3.

Selection of terrain data corresponds to the geographic area represented by the Alton Township nonattainment area, as well as the locations of facilities nearby that influence concentrations in the area. U.S. Geological Survey (USGS) National Elevation Dataset (NED) data were obtained in an appropriate format for use in AERMAP and used for generating the necessary terrain inputs. Elevations from the NED data were determined for all sources and structures, and both elevations and representative hill heights were determined for receptors.

A detailed site characterization of the Alton Steel facility, Ameren-Sioux power center, and pertinent other sources provided dimensional and locational data for structures and stacks necessary for addressing building-induced plume downwash. Stacks constructed to less than good engineering practice (GEP) height and within the “zone of influence” of a nearby structure have plumes that are potentially subject to excessive downwash. Illinois used EPA's Building Profile Input Program with PRIME algorithm (BPIPPRM, version 04274) to generate direction-specific building parameters for modeling building wake effects. The location and height of each stack and flare to be evaluated, and the locations and heights of nearby structures, were processed in BPIPPRM to produce the building parameters required by AERMOD.

Most of the stacks modeled by Illinois are modeled at heights that BPIPPRM considers to be at or below GEP height. However, two sources in this analysis were modeled by Illinois with stacks above GEP height. The stack at the Ameren-Sioux facility is constructed above GEP height and was modeled by Illinois at actual height. Additionally, at WRB Refining, several stacks have been constructed with heights above GEP height and were modeled at the actual stack height and at full potential to emit. WRB Refining, despite being modeled above GEP height, is not considered a significant contributor to the violations in the area. Illinois performed a culpability analysis and concluded that WRB has a very low contribution, less than 1 μg/m 3 in all modeled scenarios, to the modeled violations. As such, Illinois modeling that facility at GEP height would change little about the principal sources of SO 2 pollution in the area. Ameren-Sioux was modeled at above GEP height and was determined to be a significant contributor to the violations in the area. EPA has conducted supplemental modeling to correct any deficiencies in Illinois's modeling related to the characterization of emissions in the area. EPA used Illinois' receptor grid, meteorological surface and upper air stations, model settings, and some source parameters to develop the modeling demonstration. EPA is relying on our supplemental modeling to support the attainment plan and establish that the area is now modeling attainment. See TSD pg. 6. More discussion on this topic is included in the sections below.

Procedures for selecting and developing meteorological data have been provided in the draft document “Regional Meteorological Data Processing Protocol, EPA Region 5 and States.”  4 This document describes selection criteria for surface meteorological data that address the representativeness of the meteorological data collection site to the emission source/receptor impact area. There are two specific criteria to be considered: (1) the suitability of meteorological data for the study area, and (2) the similarity of surface conditions and surroundings at the emission source/receptor impact area compared to characteristics at the location of the meteorological instrumentation tower.

In its 2018 submission, Illinois used the then-most recent five years (2012-2016) of surface meteorological data from St. Louis, Missouri (WBAN No. 13994, 28 kilometers to the southwest) and coincident upper air data from Lincoln, Illinois (WBAN No. 4833, 157 km to the northeast). These data were determined to be representative of the NAA's airshed. These data, in combination with surface characteristics data, were processed using AERSURFACE (version 13016) to prepare the meteorological data for simulating the area's planetary boundary layer turbulence structure. Illinois utilized AERMET (version 16216) to process the raw meteorological data. Illinois obtained Automated Surface Observing Systems (ASOS) one-minute wind speed and wind direction data for NWS surface stations and processed it using AERMINUTE (version 15272). EPA utilized the meteorological data processed by Illinois in its supplemental modeling. See TSD pg. 13.

The frequency and magnitude of wind speed and direction are defined in terms of where the wind is blowing from, parsed out in sixteen 22.5-degree wind sectors. The predominant wind direction during the five-year period is from the south, occurring approximately 9.8% of the time. The highest percentage wind speed range, occurring 34.5% of the time, was in the 3.6-5.7 meters per second range.

In its 2018 submittal, Illinois provided an analysis modeling other SO 2 sources in the area, including GBC Metals, Olin Corporation, National Maintenance & Repair, Alton Water Treatment Facility, Conoco-Phillips Hartford Plant, Alton Memorial Hospital, St. Anthony's Hospital, St. Claire's Hospital, the Charles E. Mahoney Plant, WRB Refinery, and most notably including the Alton Steel facility and the Ameren-Sioux facility. Data for detailed site characterization (stack locations, fence line locations, building dimensions, etc.) of these sources were gathered and/or generated to support development of specific AERMOD inputs. Illinois used EPA's Building Profile Input Program with PRIME algorithm (BPIPPRM, version 04274) to generate direction-specific building inputs for modeling building wake effects within AERMOD. Building-induced plume downwash was addressed for all stacks and flares. The flares, all of which are located at WRB Refining, were modeled with adjusted release parameters including fixed values for temperature, exit velocity, and modified values for release height and diameter. Illinois relied upon the AERSCREEN User's Guide  5 to calculate the effective height and diameter for modeling the flares. Following the submittal from Illinois, EPA performed a supplemental modeling run to evaluate changes in allowable emissions that occurred after Illinois submitted the attainment plan and to correct any deficiencies in the emissions data or source characterization that could potentially cause reduced concentrations. See TSD p. 2.

The most significant sources affecting the nonattainment area were Alton Steel and the Ameren-Sioux facility in Missouri. While the Ameren-Sioux facility is not in the nonattainment area, Illinois modeled this facility due to its proximity to the nonattainment area and its high SO 2 emissions, yielding an impact of up to 283.4 μg/m 3 on the air quality in the area. Illinois modeled numerous minor point sources in the nonattainment area as well. Illinois did not explicitly model emissions from non-point sources, for example mobile emissions, incineration, agricultural field burning, etc., in AERMOD but instead represented the impact of these sources via monitored background data.

Illinois' SIP submittal describes an exploratory run that Illinois conducted in order to define the air quality problem in the area and to determine the most appropriate remedy. Notably, the baghouse at Alton Steel was originally configured to emit out of downward pointing vents, which Illinois modeled using the POINTHOR option in AERMOD to consider the horizontally pointing vents. Based on the results of these runs in which Alton Steel was the principal contributor to the highest modeled violations, Illinois chose to mandate construction of a single vertical unobstructed stack for this emission unit. Thus, Illinois' attainment demonstration modeling represented this emission point (and all other emission points) as a vertical unobstructed stack release. Flares were modeled with adjusted release parameters, consistent with EPA's guidance for modeling flares presented in the AERSCREEN User's Guide. 6 The adjusted parameters include fixed values for temperature (1,273 degrees Kelvin) and exit velocity (20 meters/second) and modified values for release height and diameter.

Ameren-Sioux operates two coal-fired boilers. Illinois modeled this source using information provided by the Missouri Department of Natural Resources. Illinois' modeling indicated that the limit on Ameren-Sioux in Missouri's SIP of 4.8 lbs/MMBtu did not ensure attainment inside the Alton nonattainment area. Illinois' modeling run evaluating the impact of maximum allowable emissions from Ameren-Sioux also reflecting the reconfigured ladle metallurgy facility (LMF) stack for Alton Steel yielded a maximum predicted 99th percentile 1-hour average concentration of 298.5 μg/m 3 , and Illinois concluded that scaling this result down to reflect a temporally representative operating rate (either a 60th or a 70th percentile rate) for Ameren-Sioux would also show violations.

EPA conducted a supplemental modeling run to correct deficiencies in the characterization of emissions in Illinois's modeling. EPA evaluated the estimated concentrations based on application of a new limit of 7,342 lbs/hour averaged over a 24-hour block period on the Ameren-Sioux facility published on November 16, 2022 (87 FR 68634). The adopted new limit is substantially lower than the previous SIP limit of 4.8 lbs/MMBtu. Each of the facility's two boilers are rated to have a maximum heat input capacity of 4,920 MMBtu/hr and when applied to the former rate limit, add up to an effective rate of 47,232 lbs/hour on a facility-wide basis. The newly adopted limit marks a significantly reduced emission rate for the facility. EPA's supplemental modeling was based on the modeling runs submitted by Illinois, which modeled maximum uncontrolled emissions limits for all sources at the time but did not consider the revised limit at Ameren-Sioux. EPA's supplemental model run revised the modeled emissions for Ameren-Sioux to reflect the new 24-hour block limit and modeled the facility at GEP height.

The revised limit on Ameren-Sioux is on a 24-hour block average basis. Much of EPA's 2014 guidance addresses the situation in which modeling is used to determine the 1-hour critical emissions value used to calculate a limit necessary to provide for attainment, in which an adjustment factor is determined and applied to identify a reduced longer-term average limit to correspond to the modeled 1-hour value. The comparable stringency methodology provided in the guidance could also be utilized to estimate a 1-hour emission rate that may be used in a dispersion modeling run. Specifically, a preexisting longer-term average limit can be divided by the appropriate adjustment factor to determine an hourly modeled emission rate that is commensurate with the longer-term limit. Application of an adjustment factor means modeling this source using an hourly emission rate to which the 24-hour block limit established in Missouri's SIP is comparably stringent.

In EPA's supplemental modeling run, the emissions from Boilers 1 and 2 were treated as merged for a combined emissions rate from Ameren-Sioux. EPA's stack height regulations restrict the circumstances under which plume merging is creditable. Under 40 CFR 51.100(hh), plume merging is defined to be a prohibited dispersion technique except, in the case of merging occurring after July 8, 1985, for cases in which such merging is part of a change in operation at the facility that includes the installation of pollution controls and is accompanied by a net reduction in the allowable emissions of a pollutant. (See 40 CFR 51.100(hh)(2)(B)). The stack height regulations also note that this exclusion from the definition of dispersion techniques shall apply only to the emission limitation for the pollutant affected by such change in operation. To reduce its SO 2 emissions, Ameren-Sioux began operation of flue gas desulfurization of the emissions from Boilers 1 and 2 on November 15, 2010, and October 26, 2010, respectively. The construction of the new stack to vent the emissions from these units was part of the same project as installation of flue gas desulfurization equipment. Although Missouri did not adjust its SIP emission limit to reflect the reduction of allowable emissions until several years after the installation of the pollution controls, the merging accompanied the installation of controls and may also be considered to accompany a net reduction in allowable emissions because the initial request for credit for merging was accompanied by a limit that required the net emission reduction that the Ameren-Sioux control project achieved. See TSD at 5.

The final SO 2 emission rate modeled for the merged Boilers 1 and 2 stack at Ameren-Sioux was 10,301.669 lbs/hr (1,297.988 g/s). Based on guidance from the 2014 U.S. EPA's SO 2 NAAQS Designations Modeling Technical Assistance Document, a ratio of 1-hour to 24-hour block average 99th percentile SO 2 emission rates in lbs/hr were calculated using data collected from 2016-2020. This resulted in an adjustment factor of 2,007 lbs/hr/2,816 lbs/hr = 0.7127. When the adjustment factor of 0.7127 is applied to the 24-hour block limit of 7,342 lbs/hr, a 1-hour emission rate to which the longer-term limit would be comparably stringent to would be 10,301.669 lbs/hr. The merged stack was modeled using the GEP stack height of 145.41 meters.

The other model inputs of EPA's supplemental run, i.e., receptor grid, background concentrations, meteorological data, and list of modeled sources, were consistent with the Illinois submitted modeling. Stack heights for the merged two vents at Ameren-Sioux and two stacks at WRB Refining were modified in the supplemental run to be consistent with GEP stack heights. The supplemental run used version 21112 of AERMOD. Results of these runs are described below.

A key element of Illinois' attainment plan is a change in Alton Steel's LMF exhaust configuration from the four downward-angled vents to a single 70-foot high, three-foot diameter stack with an unobstructed (no rain cap), vertically directed exhaust stream, which is represented in their final modeling. This change was mandated in Illinois' Construction Permit #18020009. As required by the construction permit, the SO 2 emissions of this furnace shall not exceed 0.10 pound/ton of steel produced, 11.20 pounds per hour and 37.50 tons per year. The first two of these limits apply on an hourly basis, such that Illinois' plan is designed to provide for attainment based on emission limits for the primary source in the area that apply every hour. Illinois is not relying on the limit on annual emissions to provide for attainment.

An important prerequisite for approval of an attainment plan is that the emission limits that provide for attainment be quantifiable, fully enforceable, replicable, and accountable. See General Preamble at 13567-68. The revised SO 2 emission SIP limit at Ameren-Sioux is expressed as a 24-hour block average limit. Therefore, part of the review of Illinois' attainment plan must address the use of these limits, both with respect to the general suitability of using this limit for this purpose and with respect to whether the particular limits included in and/or credited by the plan have been suitably demonstrated to provide for attainment. The first subsection that follows addresses the enforceability of the limits in and/or credited by the plan, and the second subsection that follows addresses the credited 24-hour block limit.

The change to Alton Steel's LMF exhaust configuration from the four downward-angled vents to a single 70-foot high, three-foot diameter stack with an unobstructed (no rain cap), vertically directed exhaust was mandated in Illinois Construction Permit #18020009, which is being incorporated into Illinois' SIP in the present action. This permitting action provides the federal enforceability supporting this portion of the attainment demonstration element of the revised SIP. As required by the construction permit, the SO 2 emissions of this furnace shall not exceed 0.10 pound per ton of steel produced, 11.20 pounds per hour and 37.50 tons per year. EPA considers these emission limits and source configuration requirements, specified in Construction Permit Number #18020009, to be suitably enforceable. The facility must submit annual compliance certifications to ensure that the facility is meetings its SIP limits. Additionally, the facility must submit a semi-annual Monitoring Report to the Illinois EPA, Air Compliance Section, summarizing required monitoring and identifying all instances of deviation from the permit. Stack testing must be done to verify the margin of compliance with the SO 2 limit.

For Ameren-Sioux, EPA has approved a more stringent 24-hour block limit submitted by Missouri that is aimed at reducing the facility's allowable emissions to levels that will allow the Alton nonattainment area to be modeled in attainment. 7 Ameren-Sioux will be subject to the more restrictive limit of 7,342 lbs/hour of SO 2 averaged over a 24-hour block period. Being a large coal fired EGU, the Ameren-Sioux facility is required to monitor its release of SO 2 via CEMS for other reasons such as the acid rain program and the Cross-State Air Pollution Rule (CSAPR). This requirement also provides for a means to measure compliance at the source to ensure that the facility does not exceed its permanent and enforceable limit. To demonstrate compliance, Ameren must calculate the calendar day 24-hour block average emission for each unit subject to the facility wide emission limit. Unit level emission rates will then be summed together to determine a facility wide emission rate. Only valid operating hours will be included in the calculations for the daily emission rates. Valid operating hours include only hours that meet the primary equipment hourly operating requirements of 40 CFR 75.10(d). For example, if the source only meets 40 CFR 75.10(d) operational requirements for one hour in a particular 24-hour block period, the compliance with the emissions limit would be calculated by the total emissions divided by the one hour of operation that meets 40 CFR 75.10(d). Therefore, any day with at least one hour that meets operational requirements will have a calculated block average that will be used to demonstrate compliance with the emissions limit. Hours when the units are experiencing startup, shutdown, or malfunction conditions will be used for the calculation if they meet the primary equipment hourly operating requirements of 40 CFR 75.10(d).

As noted above, while Illinois considered only the 1-hour average limits it adopted for Alton Steel, EPA also considered the updated 24-hour block limit approved into the Missouri SIP for the Ameren-Sioux facility. Therefore, the hypothetical critical emissions value to which Ameren-Sioux's 24-hour block average limit would be comparably stringent, and that is used in the attainment modeling for the area, would reflect an upward adjustment from the 7,342 lbs/hour averaged over a 24-hour block period. EPA conducted a site-specific analysis of variability at Ameren-Sioux using 2016-2020 CEMS data from EPA's Clean Air Markets Division's MySQL database, which was the most up to date information available at the time of analysis. EPA employed the method detailed in our 2014 guidance and used the historic 1-hour 99th percentile of SO 2 emissions against the 99th percentile 24-hour block average to derive an appropriate adjustment factor. EPA determined that the adjustment factor for the Ameren-Sioux facility is 0.7127 and that it would be appropriate to apply this adjustment factor to Ameren-Sioux's long term averaging limit in order to estimate a 1-hour emission rate for modeling purposes. After applying the adjustment factor, EPA determined that a 1-hour emission rate used for modeling purposes would be 10,301.669 lbs/hour. EPA has determined through our supplemental modeling that an hourly emissions rate of 10,301.669 lbs/hour is protective of the standard. As such, EPA determines that Ameren-Sioux's updated limit of 7,342 lbs/hour will provide for attainment in the nonattainment area.

The Illinois demonstration of modeled attainment of the 2010 SO 2 NAAQS is based upon the combined impacts of facility-specific emission rates together with monitored background concentrations integrated into the simulations. Regional sources not explicitly modeled in AERMOD, but which are contributors to ambient SO 2 loadings within the nonattainment area, are represented via background monitoring data. In accordance with a “Tier 2” approach in EPA's guidance on background concentrations, Illinois identified separate background values for each hour of the day for each of the four seasons, for a total of 96 background values. Each of these values represents a three-year average (2014-2016) of the second highest hourly concentration for the applicable hour of the day for the applicable season. The seasonal, hourly-averaged 2014-2016 SO 2 background values for the attainment demonstration were developed from data collected at the East St. Louis monitor. See TSD at 13. These values range from 6.81 to 27.4 ppb, with an average value of 14.94 ppb.

Illinois evaluated many factors in their modeling runs to evaluate measures needed to ensure attainment in the area. In their modeling runs, Illinois indicated that the prior limit in Ameren-Sioux's Missouri's SIP did not ensure attainment. Illinois determined that the impact of maximum allowable emissions from Ameren-Sioux also reflecting the reconfigured LMF stack for Alton Steel yielded a maximum predicted 99th percentile 1-hour average concentration of 298.5 μg/m 3 , and Illinois concluded that scaling this result down to reflect a temporally representative operating rate (either a 60th or a 70th percentile rate) would also show violations.

EPA concludes that Illinois' modeling is a suitable demonstration that its requirements in the new permit for Alton Steel and all other Illinois sources in the nonattainment area were properly addressed in the attainment plan. EPA's supplemental modeling has demonstrated that the updated 24-hour block limit for Ameren-Sioux of 7,342 lbs SO 2 /hr and the revised limits at Alton Steel provide for attainment. For reasons described above, EPA considers the limits relied upon in this plan to be permanent and enforceable. EPA's modeling suitably demonstrates that the Ameren-Sioux limit (in combination with requirements for Alton Steel) provides for attainment.

As noted above, EPA conducted a supplementary modeling run to evaluate the Ameren-Sioux facility subject to the updated 7,342 lbs SO 2 /hr 24-hour block limit that is found in the Missouri SIP. Since this limit is evaluated on a 24-hour block basis, EPA applied a 71.27 percent adjustment factor, modeling a 1-hour emissions rate of 10,300.666 lbs SO 2 per hour to which the 24-hour block limit is comparably stringent. The modeled design value from EPA's supplemental run was 196.2 μg/m 3 , or 74.9 ppb. This run used GEP stack heights, which for two facilities were slightly lower than the heights Illinois modeled; a separate supplementary run without these corrections yielded essentially identical results. These results confirm Illinois' demonstration that with the applicability and creditability of revised limits for Alton Steel and Ameren-Sioux, Illinois' plan provides for attainment. EPA believes that this 24-hour block average emission limit, in combination with the requirements for Alton Steel, are suitable elements of a plan that appropriately provides for attainment.

The Round 2 Wood River Study Area emission inventory was used as the starting point for creating the Alton Township NAA modeling inventory. A re-evaluation of sources was instituted, which reflected a shift in modeling focus from Dynegy's Wood River Power Station to the Alton Steel “mini-mill.” This re-evaluation was also driven by the need to address allowable emissions (for the SIP revision) rather than actual emissions (for an area designation recommendation).

The emissions inventory and source emission rate data for an area serve as the foundation for air quality modeling and other analyses that enable states to: (1) estimate the degree to which different sources within a nonattainment area contribute to violations within the affected area; and (2) assess the prospects for attaining the standard based on alternative control measures. As noted above, the state must develop and submit to EPA a comprehensive, accurate, and current inventory of actual emissions from all sources of SO 2 emissions in each nonattainment area, as well as any sources located outside the nonattainment area which may affect attainment in the area. See CAA section 172(c)(3).

Illinois provided a comprehensive, accurate, and current inventory of emissions of SO 2 in and within 10 kilometers of the Alton township area. Illinois additionally examined whether any large sources beyond 10 kilometers of the nonattainment area might also have significant air quality impacts in the area, resulting in the addition of Ameren-Sioux to the inventory. By this means, Illinois has developed a thorough list of the sources with any potential to cause impacts that warrant including in the area's attainment modeling.

Illinois included the sources of WRB Refining Inc. (formerly named ConocoPhillips), National Maintenance and Repair Inc., GBC Metals LLC (d/b/a Olin Brass), Olin Corporation, Alton Water Treatment Facility, ConocoPhillips Hartford Lubricant Plant, Alton Memorial Hospital, St. Anthony's Hospital, St. Clare's Hospital, and Charles E. Mahoney Company along with Alton Steel. The emission sources at Alton Steel, as well as those for many of the modeled nearby Illinois facilities, do not operate with variable loads but rather as “on-off” process operations, with the notable exception of Ameren-Sioux. The emissions inventory that Illinois submitted reflects actual emissions of these sources.

Section 172(c)(1) of the CAA requires states to adopt and submit all RACM, including RACT, as needed to attain the standards as expeditiously as practicable. Section 172(c)(6) requires the SIP to contain enforceable emission limits and control measures necessary to provide for timely attainment of the standard. Illinois has required the principal contributor to the NAAQS violations, Alton Steel, to build a stack aimed at reducing the facility's contribution to the nonattainment area. Alton Steel built a stack to disperse emissions more appropriately from their facility; this change, along with establishment of suitable emission limits in their construction permit, along with the proposed limit on Ameren-Sioux to be found in the Missouri SIP, ensures that the area will attain the SO 2 air quality standard. Consequently, consistent with EPA policy that reasonable measures do not extend beyond a set of measures that provide for attainment, Illinois asserts, and EPA concurs, that the state's plan satisfies requirements for RACM/RACT.

EPA approved Illinois' nonattainment new source review rules on December 17, 1992 (57 FR 59928); September 27, 1995 (60 FR 49780); and May 13, 2003 (68 FR 25504). These rules provide for appropriate new source review for SO 2 sources undergoing construction or major modification in the Alton Township area without need for modification of the approved rules. Although these rules predated promulgation of the 2010 SO 2 standards, these rules are written in a manner such that new sources within areas that become designated nonattainment for this new standard, such as the Alton Township area, become subject to these nonattainment new source review requirements. Therefore, this requirement has been met for this area.

Section 172 of the CAA requires Illinois' Alton Township Attainment Plan SIP to provide for reasonable further progress toward attainment. For SO 2 SIPs, which address a small number of affected sources, requiring expeditious compliance with attainment emission limits can address the RFP requirement. Alton Steel was required to complete its stack construction and meet its emission limits by December 31, 2018. For Ameren-Sioux, a new limit was approved into the Missouri SIP establishing a more stringent limit by establishing a limit of 7,342 lbs/hour averaged over a 24-hour block period. EPA approved Ameren-Sioux's new limit on November 16, 2022 (87 FR 68634) and is permanent and enforceable. EPA concludes that the timely requirements in the state's plan, including revised limits and construction of a 70-foot-tall stack for the Alton Steel facility and the SIP approved limit of Ameren-Sioux, represent implementation of control measures as expeditiously as practicable. This plan shows that Illinois can provide for attaining the standard. Accordingly, EPA proposes to find that Illinois' plan provides for RFP.

Section 172 of the CAA requires that nonattainment plans include additional measures which will take effect if an area fails to meet RFP or fails to attain the standard by the attainment date. As noted above, EPA guidance describes special features of SO 2 planning that influence the suitability of alternative means of addressing the requirement in section 172(c)(9) for contingency measures for SO 2 . An appropriate means of satisfying this requirement is for the state to have a comprehensive enforcement program that identifies sources of violations of the SO 2 NAAQS and for the state to undertake aggressive follow-up for compliance and enforcement. Illinois' plan provides for satisfying the contingency measure requirement in this manner for sources in the state. EPA concurs and proposes to approve Illinois' plan for meeting the contingency measure requirement in this manner.

EPA is proposing to approve Illinois' submission as a SIP revision, which the state submitted to EPA on December 31, 2018, for attaining the 2010 SO 2 NAAQS for the Alton Township nonattainment area. As part of this action, EPA is proposing to incorporate Illinois' Permit to Construct Number #18020009, applicable to Alton Steel, by reference into the SIP. The permit requires that Alton Steel operates a new LMF stack to replace the four downward facing vents on the individual compartments on the LMF stack. The SO 2 emissions from the LMF stack must not exceed 0.10 pound per ton of steel produced, 11.20 pounds per hour, and 37.50 tons per year.

This SO 2 nonattainment plan includes Illinois' attainment demonstration for the Alton township SO 2 nonattainment area. Although Illinois did not explicitly model air quality based on Ameren-Sioux's updated limit, Illinois provided sufficient information and modeling to enable EPA to conduct additionally necessary supplemental modeling to demonstrate that the revised limit at the Alton Steel facility, that will drastically reduce any contributions from Illinois to the violations modeled in the NAA, and a lower limit imposed on Ameren-Sioux by Missouri would allow the area to meet the standard. Therefore, EPA concludes that the modeling in Illinois' plan, as supplemented by EPA, adequately demonstrates that the control requirements that apply to relevant sources in and near the area, including the revised 24-hour block SO 2 limit for Ameren-Sioux, provide for attainment in the area. As previously explained, EPA conducted a confirmatory model run explicitly applying the more stringent limit at Ameren-Sioux, and factoring a historically representative adjustment factor, showing more directly that the measures in Illinois' plan as supplemented by this limit provide for attainment. This nonattainment plan also addresses requirements for emission inventories, RACT/RACM, RFP, and contingency measures. Illinois has previously addressed requirements regarding nonattainment area NSR. EPA has determined that Illinois' SO 2 nonattainment plan meets the applicable requirements of CAA sections 172, 191, and 192. EPA is taking public comments for thirty days following the publication of this proposed action in the Federal Register . EPA will take these comments into consideration in our final action.

In this rule, EPA is proposing to include in a final EPA rule regulatory text that includes incorporation by reference. In accordance with requirements of 1 CFR 51.5, EPA is proposing to incorporate by reference the Illinois construction permit for Alton Steel, Inc., issued March 5, 2018, as described in section VI. of this preamble. EPA has made, and will continue to make, these documents generally available through www.regulations.gov and at the EPA Region 5 Office (please contact the person identified in the FOR FURTHER INFORMATION CONTACT section of this preamble for more information).

Under the CAA, the Administrator is required to approve a SIP submission that complies with the provisions of the CAA and applicable Federal regulations. 42 U.S.C. 7410(k); 40 CFR 52.02(a). Thus, in reviewing SIP submissions, EPA's role is to approve state choices, provided that they meet the criteria of the CAA. Accordingly, this action merely approves state law as meeting Federal requirements and does not impose additional requirements beyond those imposed by state law. For that reason, this action:

• Is not a significant regulatory action subject to review by the Office of Management and Budget under Executive Orders 12866 (58 FR 51735, October 4, 1993) and 13563 (76 FR 3821, January 21, 2011);

• Does not impose an information collection burden under the provisions of the Paperwork Reduction Act (44 U.S.C. 3501 et seq. );

• Is certified as not having a significant economic impact on a substantial number of small entities under the Regulatory Flexibility Act (5 U.S.C. 601 et seq. );

• Does not contain any unfunded mandate or significantly or uniquely affect small governments, as described in the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4);

• Does not have federalism implications as specified in Executive Order 13132 (64 FR 43255, August 10, 1999);

• Is not an economically significant regulatory action based on health or safety risks subject to Executive Order 13045 (62 FR 19885, April 23, 1997);

• Is not a significant regulatory action subject to Executive Order 13211 (66 FR 28355, May 22, 2001);

• Is not subject to requirements of Section 12(d) of the National Technology Transfer and Advancement Act of 1995 (15 U.S.C. 272 note) because application of those requirements would be inconsistent with the CAA; and

• Does not provide EPA with the discretionary authority to address, as appropriate, disproportionate human health or environmental effects, using practicable and legally permissible methods, under Executive Order 12898 (59 FR 7629, February 16, 1994).

In addition, the SIP is not approved to apply on any Indian reservation land or in any other area where EPA or an Indian tribe has demonstrated that a tribe has jurisdiction. In those areas of Indian country, the rule does not have tribal implications and will not impose substantial direct costs on tribal governments or preempt tribal law as specified by Executive Order 13175 (65 FR 67249, November 9, 2000).

The Magnuson-Stevens Act requires that each regional fishery management council submit any FMP amendment it prepares to NMFS for review and approval, disapproval, or partial approval by the Secretary of Commerce. The Magnuson-Stevens Act also requires that NMFS, upon receiving an FMP amendment, immediately publish a notice in the Federal Register announcing that the amendment is available for public review and comment. This notice announces that proposed Amendment 122 to the BSAI FMP is available for public review and comment.

The Council prepared, and the Secretary approved, the BSAI FMP under the authority of the Magnuson-Stevens Act (16 U.S.C. 1801 et seq. ). The BSAI FMP is implemented by regulations governing U.S. fisheries at 50 CFR parts 600 and 679. The Council is authorized to prepare and recommend an FMP amendment for the conservation and management of a fishery covered under the FMP.

Amendment 122 would create a limited access privilege program—the PCTC Program—in the BSAI Pacific cod trawl fishery, allocating harvest quota to participants based on their history in the fishery. Amendment 122 would allocate quota share (QS) to groundfish License Limitation Program (LLP) license holders based on the harvest of BSAI Pacific cod during the qualifying years of 2009 through 2019. Amendment 122 would also allocate QS to a processor permit holder based on processing history during those qualifying years. Under this program, QS holders would be required to join a PCTC Program cooperative annually. Cooperatives would be allocated an exclusive harvest privilege in the form of cooperative quota (CQ), equal to the aggregate QS of all cooperative members. The Council's intent in recommending Amendment 122 is to improve the prosecution of the fishery by promoting safety and stability in the harvesting and processing sectors, increasing the value of the fishery, minimizing bycatch to the extent practicable, providing for the sustained participation of fishery dependent communities, and ensuring the sustainability and viability of the Pacific cod resource in the BSAI.

Amendment 122 would add section 3.7.6 of the FMP to: (1) Authorize the PCTC Program harvesters and processors to form cooperatives to harvest their QS; (2) Allocate QS to harvesters based on legal landings of targeted BSAI Pacific cod by trawl catcher vessels (CVs) during the 2009 to 2019 qualifying years; (3) Allocate QS to Bering Sea processors based on deliveries of legal landings of targeted BSAI Pacific cod by trawl CVs during the 2009 to 2019 qualifying years; (4) Establish annual halibut and crab prohibited species catch (PSC) limits specific to the BSAI Pacific cod trawl CV sector during the annual harvest specifications process; (5) Require cooperatives to reserve 12 percent of A season CQ as a set-aside for delivery to an Aleutian Islands shoreplant if the community of Adak or Atka file a notice of intent to process Pacific cod that year; (6) Establish an aggregate Gulf of Alaska (GOA) groundfish sideboard and halibut PSC limit for all American Fisheries Act (AFA) CVs that are not currently exempt from GOA sideboards (except when participating in the Central GOA Rockfish Program); (7) Restrict PCTC Program harvesters that are exempt from GOA sideboards from leasing CQ derived from their QS; and (8) Establish limitations on transferability of QS, requirements for cooperative reporting to the Council, and ownership and use caps.

Amendment 122 would remove section 3.6.5 of the FMP because Amendment 113 and its implementing regulations were vacated by the U.S. District Court for the District of Columbia (Court) on March 21, 2019. BSAI Amendment 113 required harvesters to deliver a certain amount of Pacific cod to AI shoreside processors, as recommended by the Council and implemented by NMFS at the start of the 2017 fishing year (81 FR 84434, November 23, 2016). This proposed amendment would remove Amendment 113 and implement an alternative delivery set-aside under which PCTC Program cooperatives would reserve CQ for delivery to an Aleutian Island shoreplant under certain conditions.

NMFS is soliciting public comments on proposed Amendment 122 through the end of the comment period (see DATES ). NMFS intends to publish in the Federal Register and seek public comment on a proposed rule that would implement Amendment 122 following NMFS's evaluation of the proposed rule under the Magnuson-Stevens Act.

Respondents do not need to submit the same comments on Amendment 122 and the proposed rule. All relevant written comments received by the end of the applicable comment period, whether specifically directed to the FMP amendment or the proposed rule, will be considered by NMFS in the approval/disapproval decision for Amendment 122 and addressed in the response to comments in the final rule. Comments received after that date may not be considered in the approval/disapproval decision on Amendment 122. To be certain of consideration, comments must be received, not just postmarked or otherwise transmitted, by the last day of the comment period (see DATES ).