Fixed Assets, Member Business Loans, and Regulatory Flexibility Program, 66295-66298 [2010-27149]
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66295
Rules and Regulations
Federal Register
Vol. 75, No. 208
Thursday, October 28, 2010
This section of the FEDERAL REGISTER
contains regulatory documents having general
applicability and legal effect, most of which
are keyed to and codified in the Code of
Federal Regulations, which is published under
50 titles pursuant to 44 U.S.C. 1510.
The Code of Federal Regulations is sold by
the Superintendent of Documents. Prices of
new books are listed in the first FEDERAL
REGISTER issue of each week.
NATIONAL CREDIT UNION
ADMINISTRATION
12 CFR Parts 701, 723, and 742
RIN 3133–AD68
Fixed Assets, Member Business
Loans, and Regulatory Flexibility
Program
National Credit Union
Administration (NCUA).
ACTION: Final rule.
AGENCY:
NCUA is revising certain
provisions of its Regulatory Flexibility
Program (RegFlex) to enhance safety and
soundness for credit unions. Those
provisions pertain to fixed assets,
member business loans (MBL), stress
testing of investments, and discretionary
control of investments. Some of these
revisions will require conforming
amendments to NCUA’s fixed assets and
MBL rules.
DATES: The rule is effective November
29, 2010.
FOR FURTHER INFORMATION CONTACT:
Frank Kressman, Senior Staff Attorney,
Office of General Counsel, 1775 Duke
Street, Alexandria, Virginia 22314 or
telephone (703) 518–6540.
SUPPLEMENTARY INFORMATION:
SUMMARY:
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A. Background—Regulatory Flexibility
Program
The RegFlex Program exempts from
certain regulatory restrictions and grants
additional powers to those federal credit
unions (FCUs) that have demonstrated
sustained superior performance as
measured by CAMEL ratings and net
worth classifications. 12 CFR 742.1. An
FCU may qualify for RegFlex treatment
automatically or by application to the
appropriate regional director. 12 CFR
742.2. Specifically, an FCU
automatically qualifies when it has
received a composite CAMEL rating of
‘‘1’’ or ‘‘2’’ for the two preceding
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examinations and has maintained a net
worth classification of ‘‘well capitalized’’
under Part 702 of NCUA’s rules for six
consecutive preceding quarters or, if
subject to a risk-based net worth
(RBNW) requirement under Part 702,
has remained ‘‘well capitalized’’ for six
consecutive preceding quarters after
applying the applicable RBNW
requirement. An FCU that does not
automatically qualify may apply for a
RegFlex designation with the
appropriate regional director. 12 CFR
742.2(a) and (b). An FCU’s RegFlex
authority can be lost or revoked. 12 CFR
742.3.
The NCUA Board established RegFlex
in 2002. 66 FR 58656 (November 23,
2001). Since then, NCUA has amended
RegFlex a number of times to increase
available relief for FCUs from a variety
of regulatory restrictions or lessen the
criteria required for obtaining RegFlex
status. 71 FR 4039 (January 25, 2006); 72
FR 30247 (May 31, 2007); 74 FR 13083
(March 26, 2009).
B. March 2010 Proposal
1. Overview
The current RegFlex rule provides
RegFlex credit unions with regulatory
relief in the following ten areas: (1)
Charitable contributions; (2)
nonmember deposits; (3) fixed assets;
(4) MBLs; (5) discretionary control of
investments; (6) stress testing of
investments; (7) zero-coupon securities;
(8) borrowing repurchase transactions;
(9) commercial mortgage related
securities; and (10) purchase of
obligations from a federally insured
credit union. In March 2010, the NCUA
Board proposed amendments to the
fixed assets, MBL, stress testing of
investments, and discretionary control
of investments provisions of the RegFlex
rule and requested comment on those
amendments. 75 FR 14372 (March 25,
2010). The following sections discuss
those proposed amendments in greater
detail.
2. Fixed Assets
The Federal Credit Union Act
authorizes FCUs to purchase, hold, and
dispose of property necessary or
incidental to their operations. 12 U.S.C.
1757(4). Generally, the fixed asset rule
provides limits on fixed asset
investments, establishes occupancy and
other requirements for acquired and
abandoned premises, and prohibits
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certain transactions. 12 CFR 701.36.
Fixed assets are defined in 701.36(e) as
premises, furniture, fixtures, and
equipment and includes any office,
branch office, suboffice, service center,
parking lot, facility, real estate where a
credit union transacts or will transact
business, office furnishings, office
machines, computer hardware and
software, automated terminals, and
heating and cooling equipment. Section
701.36 prohibits an FCU with $1 million
or more in assets from investing in fixed
assets, the aggregate of which exceeds
five percent of the FCU’s shares and
retained earnings, although upon an
FCU’s application, a regional director
may set a higher limit. 12 CFR
701.36(a)(1) and (2).
The RegFlex rule exempts RegFlex
credit unions from the referenced five
percent limit. 12 CFR 701.36(a)(1). In
the proposal, NCUA stated it believed
that investing in higher levels of nonearning assets can materially affect a
credit union’s earnings ability and,
therefore, its viability. NCUA proposed
to rescind this exemption for RegFlex
credit unions. NCUA offered call report
data to show that there is a higher
percentage of earnings problems among
credit unions with more than five
percent of shares and retained earnings
invested in fixed assets and that the
percentage of earnings problems
increases as the level of fixed assets
increases. NCUA also included several
examples to illustrate the kinds of fixed
asset-related financial problems some
credit unions have experienced.
3. MBLs
The MBL rule requires a credit union
making a business loan to obtain the
personal liability and guarantee of the
borrower’s principals as part of the
rule’s collateral and security
requirements. 12 CFR 723.7(b). Under
the current rules, RegFlex credit unions
are exempt from that requirement but
may choose to require the principals’
guarantee as part of their own
underwriting standards and best
practices. Id.
NCUA proposed to rescind this
exemption for RegFlex credit unions.
NCUA stated that it believed obtaining
the principals’ personal guarantee is a
prudent underwriting practice that
greatly enhances the likelihood of loan
repayment and should be required of all
credit unions. NCUA also stated that a
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credit union that fails to do so subjects
itself to increased risk, particularly in
economic times when MBL
delinquencies and MBL charge-offs are
increasing. NCUA noted that credit
unions would continue to have the
option of seeking a waiver of the
guarantee requirement under 723.10(e).
4. Stress Testing of Investments
NCUA’s investment rule requires an
FCU to monitor the securities it holds.
12 CFR 703.12. Specifically, at least
monthly, an FCU must prepare a written
report setting out the fair value and
dollar change since the prior month-end
for each security held with summary
information for its entire portfolio. 12
CFR 703.12(a). Similarly, at least
quarterly, an FCU must prepare a
written report setting out the sum of the
fair values of all fixed and variable rate
securities whose features include:
(1) Embedded options; (2) remaining
maturities greater than three years; or
(3) coupon formulas that are related to
more than one index or are inversely
related to, or multiples of, an index. 12
CFR 703.12(b). If the sum in the
quarterly report is greater than the
FCU’s net worth, then the report must
estimate the potential impact, in
percentage and dollar terms, of an
immediate and sustained parallel shift
in market interest rates of plus and
minus 300 basis points on: (1) The fair
value of each security in the FCU’s
portfolio; (2) the fair value of the FCU’s
portfolio as a whole; and (3) the FCU’s
net worth. 12 CFR 703.12(c). This
calculation is known as ‘‘stress testing’’
the securities. Under the current rules,
RegFlex credit unions are exempt from
the requirement to stress test their
securities.
NCUA noted in the proposal that
because of low investment yields due to
the current economic environment,
many credit unions are incurring
additional risk by investing in long-term
instruments to increase yield and
improve earnings. NCUA believes many
credit unions are purchasing investment
products they do not fully understand
and are incurring significant interest
rate and liquidity risk.
NCUA offered call report data to
illustrate the degree to which credit
unions are investing in products with
longer maturities further out on the
yield curve. Although this may help
achieve greater yield in the short term,
an increase in market rates could result
in a significant decrease in product
value and cause liquidity problems.
NCUA stated that credit unions need to
stress test their investments so they
have a clearer understanding of their
risk profile, can better manage risk, and
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as a matter of safety and soundness and
responsible business practices.
Accordingly, the Board proposed to
rescind the RegFlex exemption in this
context.
5. Discretionary Control of Investments
NCUA’s investment rule requires an
FCU to retain discretionary control over
its purchase and sale of investments
although, under the rule, an FCU will
not be deemed to have delegated
discretionary control to an investment
adviser if the FCU reviews all
recommendations from the investment
adviser and authorizes a recommended
purchase or sale transaction before its
execution. 12 CFR 703.5(a). An
exception to this general rule is that an
FCU may delegate discretionary control
over the purchase and sale of its
investments to a person outside the FCU
if the person is an investment advisor
registered with the Securities and
Exchange Commission and if the
amount delegated is limited to up to 100
percent of the FCU’s net worth at the
time of delegation. 12 CFR 703.5(b). If
an FCU exercises this limited authority,
it must adjust the amount of funds held
under discretionary control to comply
with the 100 percent of net worth cap
at least annually. Id.
Under the current rule, a RegFlex
credit union is exempt from the
discretionary control requirements in
703.5 that pertain to the 100 percent of
net worth limitation. In the proposal,
NCUA noted that it was becoming
increasingly concerned about the safety
and soundness of credit unions and
their investments considering the recent
investment climate and reports of
fraudulent practices in the investment
banking industry. Accordingly, the
Board proposed to rescind the RegFlex
exemption pertaining to discretionary
control of investments.
C. Summary of Comments and
Discussion
1. General
NCUA received 50 comments on the
proposal: 30 from credit unions, 14 from
credit union trade associations, 1 from
a bank trade association, and 5 from
other interested parties. Two
commenters supported the proposal in
its entirety. The vast majority of
commenters opposed some aspect of the
proposal and some supported some
aspect of the proposal.
In broad terms, there was a consensus
among commenters’ opinion that the
data and examples NCUA cited to
support rescinding the four RegFlex
exemptions were insufficient and
highlighted a few extreme cases that do
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not represent a systemic problem in the
credit union industry. Similarly,
commenters generally agreed that the
purpose of RegFlex is still important
and should be preserved and noted that
NCUA has the authority to revoke
RegFlex status for underperforming
credit unions.
2. MBL
The majority of those commenters
who discussed the MBL aspect of the
proposal opposed it. Most said that it
would create a significant competitive
disadvantage for credit unions where
competing lenders may not have such a
requirement. Most also stated that the
personal guarantee requirement could
result in credit unions losing their
highest quality borrowers to competitors
that do not require a guarantee.
Some noted that, even though the
personal guarantee exemption is
currently in place, most credit unions
still obtain the guarantee on the bulk of
their MBLs. They noted that the
exemption should remain in place for
those instances where it makes sense
not to require a guarantee, such as when
the borrower poses minimal credit risk,
the underwriting is strong, or where
other factors such as high collateral
value is more important than a
guarantee. Some commenters also noted
that NCUA should not restrict a credit
union’s ability to make MBLs at a time
when making small business loans is a
national priority. Finally, many
commenters stated that the process for
obtaining a waiver from this
requirement is too slow and
cumbersome to deal with this issue.
NCUA has thoroughly considered
these comments and appreciates the
concerns the commenters have
expressed. For the reasons discussed in
the proposal as summarized above,
NCUA still believes it is prudent to
require all credit unions to comply with
the personal guarantee requirement.
NCUA recognizes that in the
competitive MBL marketplace credit
unions need to be free of unnecessary
restrictions that hamper their ability to
serve their members’ business loan
needs. NCUA does not believe this is an
unnecessary restriction. Additionally,
NCUA acknowledges that the current
waiver process, in some circumstances,
is too slow to accommodate the
practical timing needs of processing
MBLs. NCUA is committed to making
the waiver process more user friendly in
this context and will look into ways of
doing so. However, NCUA believes it is
in the interest of safety and soundness
to rescind this exemption and reminds
credit unions they will continue to have
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these exemptions on safety and
soundness grounds.
3. Fixed Assets
The majority of those commenters
who discussed the fixed asset
component of the proposal opposed
rescinding the exemption from the 5%
fixed asset cap. About a third of them
also noted that it could inhibit
branching activities and credit union
growth. Many commenters suggested
raising the fixed asset cap to a higher
level, such as 8–10% for all FCUs, or
establishing a sliding scale where FCUs
with higher net worth would have a
higher fixed asset cap.
Some mentioned that the increasing
need to purchase computer technology
necessary to serve their members makes
the 5% cap challenging. A few
commenters noted that rescinding the
exemption could be a hardship on those
credit unions with long-term growth
plans that are based, in part, on using
the exemption. A handful of others
suggested NCUA grandfather those
credit unions already exceeding the cap.
NCUA believes that safety and
soundness considerations dictate
rescinding this exemption. Excessive
investment in fixed assets often leads to
other financial difficulties for credit
unions. Also, the nature and timing of
investing in fixed assets is such that
credit unions have sufficient time to
request a waiver from the 5% limitation
if necessary even for credit unions that
have begun executing their growth
strategies.
Credit unions that have already
exceeded the 5% limit on the effective
date of this rule will be grandfathered at
that limit. If their level of fixed assets
subsequently trends downward, then so
will the level at which they are
grandfathered. Grandfathered credit
unions are, however, still eligible to
apply for a waiver to increase their fixed
asset investments. For example, a credit
union grandfathered at 8% whose fixed
assets trend downward to 6.5% will
have a new grandfathered limit of 6.5%.
Further, if that same credit union then
wishes to increase its fixed assets to 9%,
then it may apply for a waiver to do so.
Accordingly, the fixed assets exemption
is rescinded as proposed.
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the option of seeking a waiver of the
guarantee requirement under 723.10(e).
D. Regulatory Procedures
4. Discretionary Control of Investments
and Stress Testing of Investments
A relatively few commenters chose to
discuss the discretionary control of
investment authority and stress testing
of investments components of the
proposal. Among those that did
comment, some opposed the proposal
and others supported it. Accordingly,
NCUA adopts the proposal to rescind
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Regulatory Flexibility Act
The Regulatory Flexibility Act
requires NCUA to prepare an analysis to
describe any significant economic
impact a rule may have on a substantial
number of small entities (primarily
those under ten million dollars in
assets). This rule enhances safety and
soundness without additional regulatory
burden. Accordingly, this will not have
a significant economic impact on a
substantial number of small credit
unions, and therefore, no regulatory
flexibility analysis is required.
Small Business Regulatory Enforcement
Fairness Act
The Small Business Regulatory
Enforcement Fairness Act (SBREFA) of
1996, Public Law 104–121, provides
generally for congressional review of
agency rules. A reporting requirement is
triggered in instances where NCUA
issues a final rule as defined by Section
551 of the Administrative Procedures
Act. 5 U.S.C. 551. The Office of
Information and Regulatory Affairs, an
office within OMB, has reviewed this
rule and determined that, for purposes
of SBREFA, this is not a major rule.
Paperwork Reduction Act
66297
The Treasury and General Government
Appropriations Act, 1999—Assessment
of Federal Regulations and Policies on
Families
NCUA has determined that this 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).
List of Subjects
12 CFR Part 701
Credit unions.
12 CFR Part 723
Credit, Credit unions, Reporting and
recordkeeping requirements.
12 CFR Part 742
Credit unions, reporting and
recordkeeping requirements.
By the National Credit Union
Administration Board on October 21, 2010.
Mary Rupp,
Secretary of the Board.
For the reasons discussed above,
NCUA amends 12 CFR parts 701, 723,
and 742 as follows:
■
PART 701—ORGANIZATION AND
OPERATIONS OF FEDERAL CREDIT
UNIONS
1. The authority citation for part 701
continues to read as follows:
■
NCUA has determined that this rule
will not increase paperwork
requirements under the Paperwork
Reduction Act of 1995 and regulations
of the Office of Management and
Budget.
Authority: 12 U.S.C. 1752(5), 1755, 1756,
1757, 1759, 1761a, 1761b, 1766, 1767, 1782,
1784, 1787, and 1789. Section 701.6 is also
authorized by 31 U.S.C. 3717. Section 701.31
is also authorized by 15 U.S.C. 1601 et seq.,
42 U.S.C. 1861 and 42 U.S.C. 3601–3610.
Section 701.35 is also authorized by 42
U.S.C. 4311–4312.
Executive Order 13132
■
Executive Order 13132 encourages
independent regulatory agencies to
consider the impact of their actions on
state and local interests. In adherence to
fundamental federalism principles,
NCUA, an independent regulatory
agency as defined in 44 U.S.C. 3502(5),
voluntarily complies with the executive
order. This final rule would not have a
substantial direct effect on the states, on
the relationship between the national
government and the states, or on the
distribution of power and
responsibilities among the various
levels of government. NCUA has
determined that this final rule does not
constitute a policy that has federalism
implications for purposes of the
executive order.
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2. Amend § 701.36 by revising
paragraphs (d) introductory text and
(d)(1) to read as follows:
§ 701.36
FCU ownership of fixed assets.
*
*
*
*
*
(d) Regulatory Flexibility Program.
Federal credit unions that meet
Regulatory Flexibility Program
standards, as determined pursuant to
Part 742 of this chapter, are exempt
from the three-year partial occupancy
requirement described in paragraph (b)
of this section when acquiring
unimproved land for future expansion
pursuant to the terms of section
742.4(a)(3) of this chapter. For a Federal
credit union eligible for the Regulatory
Flexibility Program that subsequently
loses eligibility:
(1) Section 742.3 of this chapter
provides that NCUA may require the
credit union to divest any existing fixed
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assets for substantive safety and
soundness reasons; and
*
*
*
*
*
PART 723—MEMBER BUSINESS
LOANS
3. The authority citation for part 723
continues to read as follows:
■
Authority: 12 U.S.C. 1756, 1757, 1757A,
1766, 1785, 1789.
§ 723.7
[Amended]
4. Amend § 723.7 by removing the last
sentence of paragraph (b).
■
PART 742—REGULATORY
FLEXIBILITY PROGRAM
5. The authority citation for part 742
continues to read as follows:
■
Authority: 12 U.S.C. 1756, 1766.
§ 742.4
[Amended]
6. Amend § 742.4 by removing the
first sentence of paragraph (a)(3) and
removing paragraphs (a)(4), (5), and (6)
and redesignating paragraphs (a)(7), (8),
and (9) as (a)(4), (5), and (6),
respectively.
■
[FR Doc. 2010–27149 Filed 10–27–10; 8:45 am]
BILLING CODE 7535–01–P
NATIONAL CREDIT UNION
ADMINISTRATION
12 CFR Part 702
RIN 3133–AD81
Prompt Corrective Action; Amended
Definition of Low-Risk Assets
A. Background
National Credit Union
Administration (NCUA).
ACTION: Interim final rule with request
for comments.
AGENCY:
NCUA is issuing this Interim
Final Rule to amend the definition of
‘‘low-risk assets’’ for regulatory capital
purposes. Assets in this category receive
a risk-weighting of zero, reflecting the
absence of credit risk. The amendment
will expand the definition of ‘‘low-risk
assets’’ to include debt instruments on
which the payment of principal and
interest is unconditionally guaranteed
by NCUA as an agency of the Executive
Branch of the United States.
DATES: This rule is effective October 28,
2010. Comments must be received on or
before November 29, 2010.
ADDRESSES: You may submit comments
by any of the following methods (Please
send comments by one method only):
• Federal eRulemaking Portal: https://
www.regulations.gov. Follow the
instructions for submitting comments.
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SUMMARY:
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• NCUA Web Site: https://
www.ncua.gov/Resources/
RegulationsOpinionsLaws/
ProposedRegulations.aspx. Follow the
instructions for submitting comments.
• E-mail: Address to
regcomments@ncua.gov. Include ‘‘[Your
name] Comments on Risk Portfolio
Defined’’ in the e-mail subject line.
• Fax: (703) 518–6319. Use the
subject line described above for e-mail.
• Mail: Address to Mary Rupp,
Secretary of the Board, National Credit
Union Administration, 1775 Duke
Street, Alexandria, Virginia 22314–
3428.
• Hand Delivery/Courier: Same as
mail address.
FOR FURTHER INFORMATION CONTACT:
Steven W. Widerman, Trial Attorney, at
the above address, or telephone: (703)
518–6557.
SUPPLEMENTARY INFORMATION:
Public Inspection of Comments: All
public comments are available on the
agency’s Web site at: https://
www.ncua.gov/Resources/
RegulationsOpinionsLaws/
RegulationComments.aspx as
submitted, except as may not be
possible for technical reasons. Public
comments will not be edited to remove
any identifying or contact information.
Paper copies of comments may be
inspected in NCUA’s law library at 1775
Duke Street, Alexandria, Virginia 22314,
by appointment weekdays between
9 a.m. and 3 p.m. To make an
appointment, call (703) 518–6546 or
send an e-mail to OGCMail@ncua.gov.
1. Prompt Corrective Action. In 1998,
the Credit Union Membership Access
Act, Public Law 105–219, 112 Stat. 913,
mandated a system of regulatory capital
standards for natural person credit
unions entitled ‘‘Prompt Corrective
Action’’ (‘‘PCA’’). 12 U.S.C. 1790d et seq.
PCA imposes minimum capital
standards and corresponding remedies
to improve a credit union’s net worth.
Id. The NCUA Board implemented a
comprehensive system of PCA primarily
under Part 702.1 12 CFR 702 et seq.
1 Part 702 has been amended five times since it
was originally adopted in 2000: First, to incorporate
limited technical corrections. 65 FR 55439 (Sept.
14, 2000). Second, to delete sections made obsolete
by adoption of a uniform quarterly schedule for
filing Call Reports. 67 FR 12459 (March 19, 2002).
Third, to incorporate a series of revisions and
adjustments to improve and simplify PCA
implementation. 67 FR 71078 (Nov. 29, 2002).
Fourth, to add a third risk-weighting tier to the
standard risk-based net worth component for
member business loans. 68 FR 56537, 56546 (Oct.
1, 2003). A proposal to modify the criteria for filing
a net worth restoration plan, 67 FR 7113 (Nov. 29,
2002), was never adopted. Fifth, to implement a
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Under PCA, a natural person credit
union’s ‘‘net worth ratio’’ determines its
classification among five statutory net
worth categories. 12 U.S.C. 1790d(c); 12
CFR 702.102. A credit union’s minimum
required ‘‘net worth ratio’’ is based upon
a risk-weighting applied to each of eight
different portfolios of credit union
assets.2 Id. § 702.104. As a credit union’s
‘‘net worth ratio’’ declines, so does its
classification among the five net worth
categories, thus subjecting it to an
expanding range of mandatory and
discretionary supervisory actions. 12
U.S.C. 1790d(e), (f) and (g); 12 CFR
702.204(a)–(b).
2. Corporate System Resolution. In
response to the unprecedented
disruption in the nation’s credit markets
over the last two years, NCUA and other
federal banking regulators have taken a
series of steps to preserve the nation’s
confidence in financial institutions.
Through its Corporate Stabilization
Program, NCUA has taken specific
actions to stabilize the corporate credit
union (‘‘CCU’’) system and to address
problems associated with the impact of
the economic downturn on CCUs. Chief
among these problems is the substantial
devaluation of the mortgage-backed and
asset-backed securities (‘‘the distressed
assets’’) held in the investment
portfolios of CCUs. In several cases, the
realization of losses on these distressed
assets has driven the CCU into
insolvency, requiring NCUA to place the
CCU into liquidation.
To monetize the distressed assets held
by the liquidated CCUs, NCUA has
embarked on a Corporate System
Resolution Program primarily to sell
those distressed assets to a trust
established by NCUA. The trust will
then resecuritize the distressed assets in
the form of senior debt instruments
denominated ‘‘NCUA Guaranteed Notes’’
(‘‘NGNs’’) that will be offered to public
investors, including financial
institutions.3 The trust will pass
through to the NGN-holders the
monthly cash flows produced by the
statutory amendment allowing the acquirer in a
merger of credit unions to combine the merging
credit union’s retained earnings with its own to
determine the acquirer’s post-merger ‘‘net worth.’’
73 FR 72688 (Dec. 1, 2008).
2 ‘‘Long-term real estate loans,’’ ‘‘Member Business
Loans (‘‘MBL’’) outstanding,’’ ‘‘Investments,’’ ‘‘Lowrisk assets,’’ ‘‘Average-risk assets,’’ ‘‘Loans sold with
recourse,’’ ‘‘Unused MBL commitments’’ and
‘‘Allowance.’’ 12 CFR 702.104.
3 The first offering of this senior debt consists of
$3.8 billion in fixed- and floating-rate ‘‘NCUA
Guaranteed Notes 2010–R1.’’ The underlying
distressed assets of this debt are the residential
mortgage-backed securities held by the liquidation
estate of U.S. Central Federal Credit Union. Credit
unions purchased a significant proportion of the
first NGN offering. NCUA anticipates a series of
similar NGN offerings.
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[Federal Register Volume 75, Number 208 (Thursday, October 28, 2010)]
[Rules and Regulations]
[Pages 66295-66298]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-27149]
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Rules and Regulations
Federal Register
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Federal Register / Vol. 75, No. 208 / Thursday, October 28, 2010 /
Rules and Regulations
[[Page 66295]]
NATIONAL CREDIT UNION ADMINISTRATION
12 CFR Parts 701, 723, and 742
RIN 3133-AD68
Fixed Assets, Member Business Loans, and Regulatory Flexibility
Program
AGENCY: National Credit Union Administration (NCUA).
ACTION: Final rule.
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SUMMARY: NCUA is revising certain provisions of its Regulatory
Flexibility Program (RegFlex) to enhance safety and soundness for
credit unions. Those provisions pertain to fixed assets, member
business loans (MBL), stress testing of investments, and discretionary
control of investments. Some of these revisions will require conforming
amendments to NCUA's fixed assets and MBL rules.
DATES: The rule is effective November 29, 2010.
FOR FURTHER INFORMATION CONTACT: Frank Kressman, Senior Staff Attorney,
Office of General Counsel, 1775 Duke Street, Alexandria, Virginia 22314
or telephone (703) 518-6540.
SUPPLEMENTARY INFORMATION:
A. Background--Regulatory Flexibility Program
The RegFlex Program exempts from certain regulatory restrictions
and grants additional powers to those federal credit unions (FCUs) that
have demonstrated sustained superior performance as measured by CAMEL
ratings and net worth classifications. 12 CFR 742.1. An FCU may qualify
for RegFlex treatment automatically or by application to the
appropriate regional director. 12 CFR 742.2. Specifically, an FCU
automatically qualifies when it has received a composite CAMEL rating
of ``1'' or ``2'' for the two preceding examinations and has maintained
a net worth classification of ``well capitalized'' under Part 702 of
NCUA's rules for six consecutive preceding quarters or, if subject to a
risk-based net worth (RBNW) requirement under Part 702, has remained
``well capitalized'' for six consecutive preceding quarters after
applying the applicable RBNW requirement. An FCU that does not
automatically qualify may apply for a RegFlex designation with the
appropriate regional director. 12 CFR 742.2(a) and (b). An FCU's
RegFlex authority can be lost or revoked. 12 CFR 742.3.
The NCUA Board established RegFlex in 2002. 66 FR 58656 (November
23, 2001). Since then, NCUA has amended RegFlex a number of times to
increase available relief for FCUs from a variety of regulatory
restrictions or lessen the criteria required for obtaining RegFlex
status. 71 FR 4039 (January 25, 2006); 72 FR 30247 (May 31, 2007); 74
FR 13083 (March 26, 2009).
B. March 2010 Proposal
1. Overview
The current RegFlex rule provides RegFlex credit unions with
regulatory relief in the following ten areas: (1) Charitable
contributions; (2) nonmember deposits; (3) fixed assets; (4) MBLs; (5)
discretionary control of investments; (6) stress testing of
investments; (7) zero-coupon securities; (8) borrowing repurchase
transactions; (9) commercial mortgage related securities; and (10)
purchase of obligations from a federally insured credit union. In March
2010, the NCUA Board proposed amendments to the fixed assets, MBL,
stress testing of investments, and discretionary control of investments
provisions of the RegFlex rule and requested comment on those
amendments. 75 FR 14372 (March 25, 2010). The following sections
discuss those proposed amendments in greater detail.
2. Fixed Assets
The Federal Credit Union Act authorizes FCUs to purchase, hold, and
dispose of property necessary or incidental to their operations. 12
U.S.C. 1757(4). Generally, the fixed asset rule provides limits on
fixed asset investments, establishes occupancy and other requirements
for acquired and abandoned premises, and prohibits certain
transactions. 12 CFR 701.36. Fixed assets are defined in 701.36(e) as
premises, furniture, fixtures, and equipment and includes any office,
branch office, suboffice, service center, parking lot, facility, real
estate where a credit union transacts or will transact business, office
furnishings, office machines, computer hardware and software, automated
terminals, and heating and cooling equipment. Section 701.36 prohibits
an FCU with $1 million or more in assets from investing in fixed
assets, the aggregate of which exceeds five percent of the FCU's shares
and retained earnings, although upon an FCU's application, a regional
director may set a higher limit. 12 CFR 701.36(a)(1) and (2).
The RegFlex rule exempts RegFlex credit unions from the referenced
five percent limit. 12 CFR 701.36(a)(1). In the proposal, NCUA stated
it believed that investing in higher levels of non-earning assets can
materially affect a credit union's earnings ability and, therefore, its
viability. NCUA proposed to rescind this exemption for RegFlex credit
unions. NCUA offered call report data to show that there is a higher
percentage of earnings problems among credit unions with more than five
percent of shares and retained earnings invested in fixed assets and
that the percentage of earnings problems increases as the level of
fixed assets increases. NCUA also included several examples to
illustrate the kinds of fixed asset-related financial problems some
credit unions have experienced.
3. MBLs
The MBL rule requires a credit union making a business loan to
obtain the personal liability and guarantee of the borrower's
principals as part of the rule's collateral and security requirements.
12 CFR 723.7(b). Under the current rules, RegFlex credit unions are
exempt from that requirement but may choose to require the principals'
guarantee as part of their own underwriting standards and best
practices. Id.
NCUA proposed to rescind this exemption for RegFlex credit unions.
NCUA stated that it believed obtaining the principals' personal
guarantee is a prudent underwriting practice that greatly enhances the
likelihood of loan repayment and should be required of all credit
unions. NCUA also stated that a
[[Page 66296]]
credit union that fails to do so subjects itself to increased risk,
particularly in economic times when MBL delinquencies and MBL charge-
offs are increasing. NCUA noted that credit unions would continue to
have the option of seeking a waiver of the guarantee requirement under
723.10(e).
4. Stress Testing of Investments
NCUA's investment rule requires an FCU to monitor the securities it
holds. 12 CFR 703.12. Specifically, at least monthly, an FCU must
prepare a written report setting out the fair value and dollar change
since the prior month-end for each security held with summary
information for its entire portfolio. 12 CFR 703.12(a). Similarly, at
least quarterly, an FCU must prepare a written report setting out the
sum of the fair values of all fixed and variable rate securities whose
features include: (1) Embedded options; (2) remaining maturities
greater than three years; or (3) coupon formulas that are related to
more than one index or are inversely related to, or multiples of, an
index. 12 CFR 703.12(b). If the sum in the quarterly report is greater
than the FCU's net worth, then the report must estimate the potential
impact, in percentage and dollar terms, of an immediate and sustained
parallel shift in market interest rates of plus and minus 300 basis
points on: (1) The fair value of each security in the FCU's portfolio;
(2) the fair value of the FCU's portfolio as a whole; and (3) the FCU's
net worth. 12 CFR 703.12(c). This calculation is known as ``stress
testing'' the securities. Under the current rules, RegFlex credit
unions are exempt from the requirement to stress test their securities.
NCUA noted in the proposal that because of low investment yields
due to the current economic environment, many credit unions are
incurring additional risk by investing in long-term instruments to
increase yield and improve earnings. NCUA believes many credit unions
are purchasing investment products they do not fully understand and are
incurring significant interest rate and liquidity risk.
NCUA offered call report data to illustrate the degree to which
credit unions are investing in products with longer maturities further
out on the yield curve. Although this may help achieve greater yield in
the short term, an increase in market rates could result in a
significant decrease in product value and cause liquidity problems.
NCUA stated that credit unions need to stress test their investments so
they have a clearer understanding of their risk profile, can better
manage risk, and as a matter of safety and soundness and responsible
business practices. Accordingly, the Board proposed to rescind the
RegFlex exemption in this context.
5. Discretionary Control of Investments
NCUA's investment rule requires an FCU to retain discretionary
control over its purchase and sale of investments although, under the
rule, an FCU will not be deemed to have delegated discretionary control
to an investment adviser if the FCU reviews all recommendations from
the investment adviser and authorizes a recommended purchase or sale
transaction before its execution. 12 CFR 703.5(a). An exception to this
general rule is that an FCU may delegate discretionary control over the
purchase and sale of its investments to a person outside the FCU if the
person is an investment advisor registered with the Securities and
Exchange Commission and if the amount delegated is limited to up to 100
percent of the FCU's net worth at the time of delegation. 12 CFR
703.5(b). If an FCU exercises this limited authority, it must adjust
the amount of funds held under discretionary control to comply with the
100 percent of net worth cap at least annually. Id.
Under the current rule, a RegFlex credit union is exempt from the
discretionary control requirements in 703.5 that pertain to the 100
percent of net worth limitation. In the proposal, NCUA noted that it
was becoming increasingly concerned about the safety and soundness of
credit unions and their investments considering the recent investment
climate and reports of fraudulent practices in the investment banking
industry. Accordingly, the Board proposed to rescind the RegFlex
exemption pertaining to discretionary control of investments.
C. Summary of Comments and Discussion
1. General
NCUA received 50 comments on the proposal: 30 from credit unions,
14 from credit union trade associations, 1 from a bank trade
association, and 5 from other interested parties. Two commenters
supported the proposal in its entirety. The vast majority of commenters
opposed some aspect of the proposal and some supported some aspect of
the proposal.
In broad terms, there was a consensus among commenters' opinion
that the data and examples NCUA cited to support rescinding the four
RegFlex exemptions were insufficient and highlighted a few extreme
cases that do not represent a systemic problem in the credit union
industry. Similarly, commenters generally agreed that the purpose of
RegFlex is still important and should be preserved and noted that NCUA
has the authority to revoke RegFlex status for underperforming credit
unions.
2. MBL
The majority of those commenters who discussed the MBL aspect of
the proposal opposed it. Most said that it would create a significant
competitive disadvantage for credit unions where competing lenders may
not have such a requirement. Most also stated that the personal
guarantee requirement could result in credit unions losing their
highest quality borrowers to competitors that do not require a
guarantee.
Some noted that, even though the personal guarantee exemption is
currently in place, most credit unions still obtain the guarantee on
the bulk of their MBLs. They noted that the exemption should remain in
place for those instances where it makes sense not to require a
guarantee, such as when the borrower poses minimal credit risk, the
underwriting is strong, or where other factors such as high collateral
value is more important than a guarantee. Some commenters also noted
that NCUA should not restrict a credit union's ability to make MBLs at
a time when making small business loans is a national priority.
Finally, many commenters stated that the process for obtaining a waiver
from this requirement is too slow and cumbersome to deal with this
issue.
NCUA has thoroughly considered these comments and appreciates the
concerns the commenters have expressed. For the reasons discussed in
the proposal as summarized above, NCUA still believes it is prudent to
require all credit unions to comply with the personal guarantee
requirement. NCUA recognizes that in the competitive MBL marketplace
credit unions need to be free of unnecessary restrictions that hamper
their ability to serve their members' business loan needs. NCUA does
not believe this is an unnecessary restriction. Additionally, NCUA
acknowledges that the current waiver process, in some circumstances, is
too slow to accommodate the practical timing needs of processing MBLs.
NCUA is committed to making the waiver process more user friendly in
this context and will look into ways of doing so. However, NCUA
believes it is in the interest of safety and soundness to rescind this
exemption and reminds credit unions they will continue to have
[[Page 66297]]
the option of seeking a waiver of the guarantee requirement under
723.10(e).
3. Fixed Assets
The majority of those commenters who discussed the fixed asset
component of the proposal opposed rescinding the exemption from the 5%
fixed asset cap. About a third of them also noted that it could inhibit
branching activities and credit union growth. Many commenters suggested
raising the fixed asset cap to a higher level, such as 8-10% for all
FCUs, or establishing a sliding scale where FCUs with higher net worth
would have a higher fixed asset cap.
Some mentioned that the increasing need to purchase computer
technology necessary to serve their members makes the 5% cap
challenging. A few commenters noted that rescinding the exemption could
be a hardship on those credit unions with long-term growth plans that
are based, in part, on using the exemption. A handful of others
suggested NCUA grandfather those credit unions already exceeding the
cap.
NCUA believes that safety and soundness considerations dictate
rescinding this exemption. Excessive investment in fixed assets often
leads to other financial difficulties for credit unions. Also, the
nature and timing of investing in fixed assets is such that credit
unions have sufficient time to request a waiver from the 5% limitation
if necessary even for credit unions that have begun executing their
growth strategies.
Credit unions that have already exceeded the 5% limit on the
effective date of this rule will be grandfathered at that limit. If
their level of fixed assets subsequently trends downward, then so will
the level at which they are grandfathered. Grandfathered credit unions
are, however, still eligible to apply for a waiver to increase their
fixed asset investments. For example, a credit union grandfathered at
8% whose fixed assets trend downward to 6.5% will have a new
grandfathered limit of 6.5%. Further, if that same credit union then
wishes to increase its fixed assets to 9%, then it may apply for a
waiver to do so. Accordingly, the fixed assets exemption is rescinded
as proposed.
4. Discretionary Control of Investments and Stress Testing of
Investments
A relatively few commenters chose to discuss the discretionary
control of investment authority and stress testing of investments
components of the proposal. Among those that did comment, some opposed
the proposal and others supported it. Accordingly, NCUA adopts the
proposal to rescind these exemptions on safety and soundness grounds.
D. Regulatory Procedures
Regulatory Flexibility Act
The Regulatory Flexibility Act requires NCUA to prepare an analysis
to describe any significant economic impact a rule may have on a
substantial number of small entities (primarily those under ten million
dollars in assets). This rule enhances safety and soundness without
additional regulatory burden. Accordingly, this will not have a
significant economic impact on a substantial number of small credit
unions, and therefore, no regulatory flexibility analysis is required.
Small Business Regulatory Enforcement Fairness Act
The Small Business Regulatory Enforcement Fairness Act (SBREFA) of
1996, Public Law 104-121, provides generally for congressional review
of agency rules. A reporting requirement is triggered in instances
where NCUA issues a final rule as defined by Section 551 of the
Administrative Procedures Act. 5 U.S.C. 551. The Office of Information
and Regulatory Affairs, an office within OMB, has reviewed this rule
and determined that, for purposes of SBREFA, this is not a major rule.
Paperwork Reduction Act
NCUA has determined that this rule will not increase paperwork
requirements under the Paperwork Reduction Act of 1995 and regulations
of the Office of Management and Budget.
Executive Order 13132
Executive Order 13132 encourages independent regulatory agencies to
consider the impact of their actions on state and local interests. In
adherence to fundamental federalism principles, NCUA, an independent
regulatory agency as defined in 44 U.S.C. 3502(5), voluntarily complies
with the executive order. This final rule would not have a substantial
direct effect on the states, on the relationship between the national
government and the states, or on the distribution of power and
responsibilities among the various levels of government. NCUA has
determined that this final rule does not constitute a policy that has
federalism implications for purposes of the executive order.
The Treasury and General Government Appropriations Act, 1999--
Assessment of Federal Regulations and Policies on Families
NCUA has determined that this 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).
List of Subjects
12 CFR Part 701
Credit unions.
12 CFR Part 723
Credit, Credit unions, Reporting and recordkeeping requirements.
12 CFR Part 742
Credit unions, reporting and recordkeeping requirements.
By the National Credit Union Administration Board on October 21,
2010.
Mary Rupp,
Secretary of the Board.
0
For the reasons discussed above, NCUA amends 12 CFR parts 701, 723, and
742 as follows:
PART 701--ORGANIZATION AND OPERATIONS OF FEDERAL CREDIT UNIONS
0
1. The authority citation for part 701 continues to read as follows:
Authority: 12 U.S.C. 1752(5), 1755, 1756, 1757, 1759, 1761a,
1761b, 1766, 1767, 1782, 1784, 1787, and 1789. Section 701.6 is also
authorized by 31 U.S.C. 3717. Section 701.31 is also authorized by
15 U.S.C. 1601 et seq., 42 U.S.C. 1861 and 42 U.S.C. 3601-3610.
Section 701.35 is also authorized by 42 U.S.C. 4311-4312.
0
2. Amend Sec. 701.36 by revising paragraphs (d) introductory text and
(d)(1) to read as follows:
Sec. 701.36 FCU ownership of fixed assets.
* * * * *
(d) Regulatory Flexibility Program. Federal credit unions that meet
Regulatory Flexibility Program standards, as determined pursuant to
Part 742 of this chapter, are exempt from the three-year partial
occupancy requirement described in paragraph (b) of this section when
acquiring unimproved land for future expansion pursuant to the terms of
section 742.4(a)(3) of this chapter. For a Federal credit union
eligible for the Regulatory Flexibility Program that subsequently loses
eligibility:
(1) Section 742.3 of this chapter provides that NCUA may require
the credit union to divest any existing fixed
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assets for substantive safety and soundness reasons; and
* * * * *
PART 723--MEMBER BUSINESS LOANS
0
3. The authority citation for part 723 continues to read as follows:
Authority: 12 U.S.C. 1756, 1757, 1757A, 1766, 1785, 1789.
Sec. 723.7 [Amended]
0
4. Amend Sec. 723.7 by removing the last sentence of paragraph (b).
PART 742--REGULATORY FLEXIBILITY PROGRAM
0
5. The authority citation for part 742 continues to read as follows:
Authority: 12 U.S.C. 1756, 1766.
Sec. 742.4 [Amended]
0
6. Amend Sec. 742.4 by removing the first sentence of paragraph (a)(3)
and removing paragraphs (a)(4), (5), and (6) and redesignating
paragraphs (a)(7), (8), and (9) as (a)(4), (5), and (6), respectively.
[FR Doc. 2010-27149 Filed 10-27-10; 8:45 am]
BILLING CODE 7535-01-P
