Regulatory Reform Agenda, 39702-39711 [2017-17673]
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[Federal Register Volume 82, Number 161 (Tuesday, August 22, 2017)] [Proposed Rules] [Pages 39702-39711] From the Federal Register Online via the Government Publishing Office [www.gpo.gov] [FR Doc No: 2017-17673] ======================================================================== Proposed Rules Federal Register ________________________________________________________________________ This section of the FEDERAL REGISTER contains notices to the public of the proposed issuance of rules and regulations. The purpose of these notices is to give interested persons an opportunity to participate in the rule making prior to the adoption of the final rules. ======================================================================== Federal Register / Vol. 82, No. 161 / Tuesday, August 22, 2017 / Proposed Rules [[Page 39702]] NATIONAL CREDIT UNION ADMINISTRATION 12 CFR Chapter VII Regulatory Reform Agenda AGENCY: National Credit Union Administration (NCUA). ACTION: Request for comment. ----------------------------------------------------------------------- SUMMARY: NCUA has established a Regulatory Reform Task Force (Task Force) to oversee the implementation of the agency's regulatory reform agenda. This is consistent with the spirit of President Trump's regulatory reform agenda and Executive Order 13777. Although NCUA, as an independent agency, is not required to comply with Executive Order 13777, the agency chooses to comply with its spirit and has reviewed all of NCUA's regulations to that end. The substance of the Task Force's initial report is provided in this notice. NCUA seeks public comment on the report and if any other regulatory changes should be made. DATES: Comments must be received on or before November 20, 2017. ADDRESSES: You may submit comments by any one of the following methods (Please send comments by one method only):NCUA Web site: https://www.ncua.gov/about/pages/board-comments.aspx. Email: Address to boardcomments@ncua.gov. Include ``[Your name]--Comments on NCUA Regulatory Reform Agenda'' in the email subject line. Fax: (703) 518-6319. Use the subject line described above for email. Mail: Address to Gerald Poliquin, Secretary of the Board, National Credit Union Administration, 1775 Duke Street, Alexandria, Virginia 22314-3428. Hand Delivery/Courier: Same as mailing address. Public Inspection: You can view all public comments on NCUA's Web site at https://www.ncua.gov/about/pages/board-comments.aspx as submitted, except for those we cannot post for technical reasons. NCUA will not edit or remove any identifying or contact information from the public comments submitted. You may inspect paper copies of comments in NCUA's headquarters at 1775 Duke Street, Alexandria, Virginia 22314, by appointment weekdays between 9 a.m. and 3 p.m. To make an appointment, call (703) 518-6546 or send an email to OGCMail@ncua.gov. FOR FURTHER INFORMATION CONTACT: Thomas I. Zells, Staff Attorney, Office of General Counsel, National Credit Union Administration, 1775 Duke Street, Alexandria, Virginia 22314 or telephone: (703) 548-2478. SUPPLEMENTARY INFORMATION Table of Contents I. Background a. NCUA's Regulatory Mission b. The Regulatory Reform Agenda II. This Notice--NCUA's Implementation of the Regulatory Reform Agenda III. The Task Force Report a. Executive Summary b. Introduction c. General Recommendations d. Regulatory Recommendations and Proposed Timeline IV. Request for Comment I. Background a. NCUA's Regulatory Mission NCUA, as a prudential safety and soundness regulator, is charged with protecting the safety and soundness of the credit union system and, in turn, the National Credit Union Share Insurance Fund (NCUSIF) and the taxpayer through regulation and supervision. NCUA's mission is to ``provide, through regulation and supervision, a safe and sound credit union system, which promotes confidence in the national system of cooperative credit.'' \1\ Consistent with that mission, NCUA has statutory responsibility for a wide variety of regulations that protect the credit union system, members, and the NCUSIF. --------------------------------------------------------------------------- \1\ https://www.ncua.gov/About/Pages/Mission-and-Vision.aspx. --------------------------------------------------------------------------- b. The Regulatory Reform Agenda President Trump has established a regulatory reform agenda and issued multiple executive orders designed to alleviate unnecessary regulatory burdens. NCUA is not subject to these executive orders but has nonetheless chosen to comply with them in spirit. Executive Order 13777, entitled ``Enforcing the Regulatory Reform Agenda,'' directs subject agencies to establish Regulatory Task Forces and to evaluate existing regulations to identify those that should be repealed, replaced, or modified. The Executive Order requires subject agencies to, at a minimum, attempt to identify regulations that: 1. Eliminate jobs, or inhibit job creation; 2. Are outdated, unnecessary, or ineffective; 3. Impose costs that exceed benefits; 4. Create a serious inconsistency or otherwise interfere with regulatory reform initiatives and policies; 5. Are inconsistent with the requirements of section 515 of the Treasury and General Government Appropriations Act, 2001 (44 U.S.C. 3516 note), or the guidance issued pursuant to that provision, in particular those regulations that rely in whole or in part on data, information, or methods that are not publicly available or that are insufficiently transparent to meet the standard for reproducibility; or 6. Derive from or implement Executive Orders or other Presidential directives that have been subsequently rescinded or substantially modified. II. This Notice--NCUA's Implementation of the Regulatory Reform Agenda In complying with the spirit of Executive Order 13777, NCUA formed its Task Force in March 2017. The Task Force undertook an exhaustive review of NCUA's regulations and issued its first draft report to Chairman McWatters in May 2017 and submitted it without change to the NCUA Board in June 2017. This report outlines the Task Force's proposed review and reporting procedures and makes numerous recommendations for the amendment or repeal of regulatory requirements that the Task Force believes are outdated, ineffective, or excessively burdensome. The substance of the report is provided below. The report has been minimally modified from its original form to ensure readability and compliance with Federal Register publication requirements. [[Page 39703]] III. The Task Force Report a. Executive Summary Executive Order 13777 requires agencies to appoint a Regulatory Reform Officer (RRO) and establish a Regulatory Reform Task Force (Task Force) to oversee the implementation of regulatory reform initiatives and policies to ensure that agencies effectively carry out regulatory reforms, consistent with applicable law. Although NCUA is not required to comply with this Executive Order, the agency is choosing to comply with its spirit. From the end of March to the beginning of May, the Task Force met and reviewed all of NCUA's Regulations to determine how best to fulfill the aims of the Executive Order and decide what regulations could be eliminated, revised, improved, or clarified. This report contains the Task Force's initial findings and recommendations. The Task Force has developed a comprehensive four-year agenda for reviewing and revising NCUA's Regulations. The regulations are broken into three tiers that cover the four-year scope. The Task Force approached this task with Executive Order's stated policy of ``alleviat[ing] unnecessary regulatory burdens placed on the American people'' and the strong philosophy of regulatory relief embraced by both the new administration and NCUA's Chairman in mind. As a result, the Task Force's recommendations eclipse the depth of changes previously proposed during NCUA's Economic Growth and Regulatory Paperwork Reduction Act (EGRPRA) and annual one-third regulatory review processes. For comparison purposes, this report also includes NCUA's 2016 EGRPRA report to Congress and the agency's regulatory review recommendations from 2014-2016. These attachments are not included in this Federal Register notice. Instead, they are available on NCUA's Web site at https://www.ncua.gov/regulation-supervision/Pages/rules.aspx. The primary factors for evaluating the tiers were degree of impact and degree of effort, which are described in Section II of this report [section III.c of this Federal Register notice]. ``Impact'' is focused on the magnitude of the benefit that would result from the change, and how broadly the stakeholder community would be impacted. ``Effort'' considers how much time and energy would go into making the change. Additional consideration was also given to the need to connect or sequence certain changes together, efforts to change regulations that are already underway, and the overall level of resources available to carry out this comprehensive approach. Consistent with the spirit of the Executive Order, the Task Force recommends publishing in the Federal Register, with a 90 day comment period, a summary version of the Section III [III.d] regulations targeted for reform. This summary version would provide both a description of the regulations and the recommended actions. Publication will require an affirmative NCUA Board vote. Going forward, the Task Force shall determine a mechanism for measuring progress in performing the tasks outlined in the Executive Order and report to the Board. The Task Force also recommends that in the second quarter of 2018, after NCUA has received and evaluated public comments on the summary version of Section III [III.d], the Task Force, upon consultation with the Board, provide the Board with a second report and a refined blueprint of the timeline for completing the specific amendments discussed in Tiers 2 and 3 of Section III [III.d] of this report. It is important to note that, while the report and refined blueprint will guide NCUA's actions moving forward, the process of implementing the amendments suggested in Tier 1 has already begun. b. Introduction Executive Order 13777 states that ``it is the policy of the United States to alleviate unnecessary regulatory burdens placed on the American people.'' It goes on to require that each Task Force created under this Executive Order ``evaluate existing regulations [ ] and make recommendations to the agency head regarding their repeal, replacement, or modification, consistent with applicable law.'' Executive Order 13777 requires agencies to appoint a Regulatory Reform Officer (RRO) and establish a Regulatory Reform Task Force (Task Force) to oversee the implementation of regulatory reform initiatives and policies to ensure that agencies effectively carry out regulatory reforms, consistent with applicable law. Although NCUA is not required to comply with this Executive Order, the agency is choosing to comply with its spirit. Because NCUA is an independent agency, it does not have the structure of a cabinet department. Accordingly, the Task Force has tried to cohere the language of the Executive Order to NCUA's structure, as well as follow the timeline outlined in it. On March 20, 2017, Chairman McWatters appointed General Counsel Michael McKenna as NCUA's Regulatory Reform Officer and chair of the Regulatory Reform Task Force (Task Force). In addition, Chairman McWatters appointed to the Task Force the following: (1) Larry Fazio, Director, Examination & Insurance; (2) Ralph Monaco, Chief Economist; (3) Scott Hunt, Director, Office of National Examinations & Supervision; (4) Eugene Schied, Deputy Chief Financial Officer; and (5) Bob Foster, Director of Public and Congressional Affairs. General Counsel Michael McKenna added Special Counsel to the General Counsel Ross Kendall and Staff Attorney Tom Zells to the Task Force on March 21, 2017. From the end of March to the beginning of May, the Task Force met and reviewed all of NCUA's Regulations to determine how best to fulfill the aims of the Executive Order and decide what regulations could be eliminated, revised, improved, or clarified. Section II [III.c] provides five general recommendations for complying with the spirt of the Executive Order. Section III [III.d] outlines those regulations the Task Force believes are ripe for reform. The current recommendations are the views of the Task Force; the Task Force has not yet consulted with the NCUA Board, other NCUA staff or sought the opinion of the credit union industry. Sections IV and V of this document contain the NCUA portion of the final EGRPRA report and NCUA's annual one-third regulatory reviews from 2014-2016. The Task Force's recommendations are generally consistent with that report and the regulatory reviews, but more fully embrace the regulatory relief philosophy of the current administration, the Chairman and Executive Order 13777, and should be used as guiding principles for the NCUA Board's regulatory reform initiatives moving forward. c. General Recommendations The NCUA Regulatory Reform Task Force recommends a comprehensive approach for eliminating, revising, improving, and clarifying NCUA's regulations over a four year period. The approach would examine all aspects of NCUA's regulations and embrace the strong philosophy of regulatory relief promoted by the new administration, NCUA's Chairman, and Executive Order 13777. The Task Force's recommendations propose greater and more significant regulatory relief amendments than have been embraced in the past. As such, this report makes recommendations that, while for the most part consistent with those articulated in NCUA's EGRPRA report [[Page 39704]] and annual one-third regulatory reviews, may not have been prescribed by those documents. The general framework for this approach considers as primary factors both the ``degree of effort'' and ``degree of impact'' involved in amending each section of the existing regulations. Additional consideration is also given to the need to connect or sequence certain changes together, efforts to change regulations that are already underway, and the overall level of resources available to carry out this comprehensive approach. All regulatory changes will require the affirmative vote of the NCUA Board. The primary factors for assessing how to comprehensively approach the review of NCUA regulations are defined as follows: Degree of Effort: The degree of effort considers factors such as the length of time needed to make the change, the complexity of the change, the resources needed to make the change and the perceived contentiousness of the change. A lower degree of effort has relatively fewer of these characteristics than does a high degree of effort. Degree of Impact: The degree of impact mostly considers the number of credit unions that would experience a benefit from the change. A low degree of impact classification does not mean that an amendment is unimportant. The table on the following page arranges these two primary factors into an effort/impact prioritization matrix. The purpose of the matrix is to guide agency efforts toward the actions that are expected to yield the greatest benefit relative to the degree of effort to make a particular change. The more immediate focus of the regulatory reform effort should emphasize changes that would require a relatively small effort in order to yield a large impact (benefit), as well as some changes with a significant impact that may require a higher degree of effort (the right side of the matrix). Changes that would fall on the left side of the matrix (lesser impact) will also be pursued in this comprehensive approach, but in many cases as a less immediate focus. [GRAPHIC] [TIFF OMITTED] TP22AU17.082 The Task Force's initial prioritization of regulatory reforms is presented in Section III [III.d] of this document, which prioritizes the regulatory review into three tiers. As expressed in Section III [III.d], Tier 1 regulations provide the most important targets for reform and they should be amended in the first two years of this project. Tier 2 and Tier 3 regulations would be implemented in year three and year four respectively. The timeframe for Tier 2 and Tier 3 is dependent on timely completion of Tier 1 and NCUA Board priorities. Tier 2 and Tier 3 regulations should be scheduled later because generally these will require more research and consensus on reform initiatives. Consistent with the Executive Order, the Task Force recommends publishing in the Federal Register, with a 90 day comment period, a summary version of the Section III [III.d] regulations targeted for reform. This summary version would include a description of the regulations and the recommended actions. Publication will require an affirmative NCUA Board vote. The Task Force also recommends a Board briefing at an open meeting to report on the substance of the comments received, as well as to report on the progress in reforming Tier 1 regulations. The Task Force also recommends that in the second quarter of 2018, after NCUA has received and evaluated [[Page 39705]] public comments on the summary version of Section III [III.d], the Task Force, upon consultation with the Board, provide the Board with a refined blueprint of the timeline for completing the specific amendments discussed in Tiers 2 and 3 of Section III [III.d] of this report. It is important to note that, while the report and refined blueprint will guide NCUA's actions moving forward, the process of implementing the amendments suggested in Tier 1 has already begun. Despite this blueprint, NCUA Board future priorities may change over time with circumstances, so ongoing changes to the tiers can be expected. In light of the comprehensive approach articulated by the Executive Order, the Task Force recommends suspending the Office of General Counsel's annual one-third review of NCUA's Regulations because the Task Force will have reviewed all of NCUA's Regulations as part of this project. The Task Force recommends that the one-third review be revived again in 2020. The Task Force recommends that the offices of primary interest, the Office of General Counsel and the Office of Examination & Insurance take the lead in revising all regulations. This makes sense both because of the substantive expertise each office of primary interest will have for individual regulations and because the regular duties of both the General Counsel and the Director of E&I encompass the efforts that will be required in amending the regulations. The lead offices will also consult and engage other offices as needed. Finally, the Task Force recommends the agency continue to coordinate with the other federal financial institution regulators to determine if there are any joint rulemakings that can be targeted for reform. d. Regulatory Recommendations and Proposed Timeline 2 --------------------------------------------------------------------------- \2\ Recommendation Categories: Remove, Clarify, Simplify, Improve, Expand (Authority/Relief). --------------------------------------------------------------------------- As noted, Section III [III.d] details the specific regulations the Task Force identified as being ripe for reform initiatives and makes general recommendations about how each of the identified regulations should be amended and the timeline that should be followed. The Task Force's recommendations, as described in Section II [III.c], follow. i. Tier 1 (First 24 Months) 1. Sec. 701.21--Loans to Members and Lines of Credit to Members Addresses: Loan maturity limits for federal credit unions. Sections: 701.21(c)(4),(f), & (g). Category: Clarify. Degree of Effort: Moderate. Degree of Impact: High. Recommendation: Combine all the maturity limitations into one section. Current maturity limits are confusing because they are not all co-located. Also, incorporate the legal opinion with respect to modifications to make it clear a lending action (like a troubled debt restructuring) that does not meet the generally accepted accounting principles (GAAP) standard for a ``new loan'' is not subject to the maturity limits. In addition, consider providing longer maturity limits for 1-4 family real estate loans and other loans (such as home improvement and mobile home loans) permitted by 12 U.S.C. 1757(5)(A)(i) and (ii) and removing the ``case-by-case'' exception the NCUA Board can provide. Addresses: Single borrower and group of associated borrowers limit. Sections: 701.21(c)(5); 701.22(a) & (b)(5); 723.2 & 723.4(c). Category: Clarify. Degree of Effort: Low. Degree of Impact: High. Recommendation: Combine single borrower (and group of associated borrowers) limits into one provision. Currently these limits are interspersed in the general loan, loan participation and member business lending regulations. It would provide clarity and consistency to incorporate all references in one location. Addresses: Third-party servicing of indirect vehicle loans. Sections: 701.21(h). Category: Remove. Degree of Effort: Low. Degree of Impact: Moderate. Recommendation: Revise this section to eliminate the portfolio limits and related waiver provision. A single, comprehensive third- party due diligence regulation would address the minimum expectations for credit unions using any servicers. 2. Sec. 701.21--Loans to Members and Lines of Credit to Members Addresses: Compensation in connection with loans. Sections: 701.21(c)(8). Category: Clarify. Degree of Effort: Low. Degree of Impact: Moderate/High. Recommendation: Modify to provide flexibility with respect to senior executive compensation plans that incorporate lending as part of a broad and balanced set of organizational goals and performance measures. 3. Appendix A to Part 701--Federal Credit Union Bylaws Addresses: Federal Credit Union Bylaws. Sections: Appendix A to Part 701. Category: Improve. Degree of Effort: High. Degree of Impact: High. Recommendation: Recommend using an ANPR and forming a working group to update the Bylaws. The Bylaws have not been significantly updated in nearly a decade and need to be modernized; the modernization is likely to be complex enough to require a working group approach. 4. Appendix B to Part 701--Chartering and Field of Membership Manual Addresses: Field of Membership. Sections: Appendix B to Part 701. Category: Expand Authority. Degree of Effort: Moderate. Degree of Impact: Moderate. Recommendation: Revise the chartering and field of membership rules to give applicants for community-charter approval, expansion or conversion the option, in lieu of a presumptive community, to submit a narrative to establish common interests or interaction among residents of the area it proposes to serve, thus qualifying the area as a well- defined local community. Add public hearings for determining well- defined local communities with populations over 2.5 million. Remove the population limit on a community consisting of a statistical area or a portion thereof. Finally, when such an area is subdivided into metropolitan divisions, permit a credit union to designate a portion of the area as its community without regard to division boundaries.\3\ --------------------------------------------------------------------------- \3\ The timeline of this rule is subject to pending litigation. --------------------------------------------------------------------------- 5. Appendix B to Part 701--Chartering and Field of Membership Manual Addresses: Emergency Mergers. Sections: Appendix 1 to Appendix B to Part 701. Category: Improve. Degree of Effort: Moderate. Degree of Impact: Moderate.\4\ --------------------------------------------------------------------------- \4\ Includes potential efficiencies and/or cost savings for NCUA. --------------------------------------------------------------------------- Recommendation: Revise the definition of the term ``in danger of insolvency'' for emergency merger purposes to provide a standard that better protects the National Credit Union Share Insurance Fund (NCUSIF). First, for two of the three current net worth-based categories, extend the time period in which a credit union's net worth is projected to either render it [[Page 39706]] insolvent or drop below two percent from 24 to 30 months and from 12 to 18 months, respectively. Additionally, add a fourth category to the three existing net worth-based categories of the definition, to include credit unions that have been granted or received assistance under section 208 of the Federal Credit Union Act (FCU Act) within the last 15 months. 6. Part 702--Capital Adequacy Addresses: Capital Planning and Stress Testing. Sections: 702.501-702.506. Category: Expand Relief. Degree of Effort: Moderate. Degree of Impact: Moderate.\5\ --------------------------------------------------------------------------- \5\ Includes potential efficiencies and/or cost savings for NCUA. --------------------------------------------------------------------------- Recommendation: Explore raising the threshold for required stress testing to an amount greater than $10 billion, and assigning responsibility for conducting stress testing to the credit unions. 7. Part 702--Capital Adequacy Addresses: Risk-Based Capital (Delay). Sections: 702. Category: Improve. Degree of Effort: Low. Degree of Impact: High.\6\ --------------------------------------------------------------------------- \6\ Includes potential efficiencies and/or cost savings for NCUA. --------------------------------------------------------------------------- Recommendation: Consider extending the January 1, 2019, implementation date to avoid needing to develop call report and system changes while this rule is under review. This will also allow time for the agency to more closely coincide changes with the implementation of the new expected credit loss accounting standard and consider any changes in risk-based capital standards for community banks currently being considered by the federal banking agencies.\7\ Considerations include changing the definition of complex to narrow the applicability of the rule, allowing for credit unions with high net worth ratios to be exempt, and simplifying the overall risk category and weighting scheme. (See also number 7 in Tier 2 discussion below.) --------------------------------------------------------------------------- \7\ CECL (current expected credit loss) is a new accounting standard adopted by the Financial Accounting Standards Board (FASB) affecting how credit unions account for losses and related reserves for financial instruments. The FASB effective date of CECL applicable to credit unions is 2021. --------------------------------------------------------------------------- 8. Part 704--Corporate Credit Unions Addresses: Corporate Credit Unions. Sections: 704. Category: Improve. Degree of Effort: Moderate. Degree of Impact: Low. Recommendation: Amend capital standards for corporate credit unions to include expanding what constitutes Tier 1 Capital. For mergers, permit Tier 1 Capital to include GAAP Equity Acquired. Also, establish a retained earnings requirement of 2.50 percent, which, when achieved, will allow for all perpetual contributed capital to be included in Tier 1 Capital. The current rule for perpetual contributed capital would remain in effect until the retained earnings requirement is met. 9. Part 713--Fidelity Bond and Insurance Coverage Addresses: Fidelity Bond and Insurance Coverage. Sections: 713. Category: Improve. Degree of Effort: High. Degree of Impact: High.\8\ --------------------------------------------------------------------------- \8\ Includes potential efficiencies and/or cost savings for NCUA. --------------------------------------------------------------------------- Recommendation: Explore ways to implement the requirements of the FCU Act in the least costly way possible. While requiring fidelity coverage is an FCU Act requirement, NCUA's objective should be to allow a credit union to make a business decision based on their own product and service needs. This will effectively reduce NCUA's involvement in a credit union's operational decisions while maintaining the spirit of the FCU Act. This should be done separately from the Regulatory Reform Task Force.\9\ --------------------------------------------------------------------------- \9\ The timeline of this rule is subject to pending litigation. --------------------------------------------------------------------------- 10. Part 715--Supervisory Committee Audits and Verification Addresses: Engagement letter, target date of delivery. Sections: 715.9(c)(6). Category: Remove. Degree of Effort: Low. Degree of Impact: High. Recommendation: Revise this section of the regulation to remove the specific ``120 days from the date of calendar or fiscal year-end under audit (period covered)'' reference from this section. Recommend the target date of the engagement letter be presented so the ``credit union can meet the annual audit requirement.'' This allows credit unions to negotiate the target date of delivery with the person or firm they contract with, but also ensures they meet the audit requirement per the FCU Act. This would also alleviate the need for a waiver. 11. Part 715--Supervisory Committee Audits and Verification Addresses: Audit per Supervisory Committee Guide. Sections: 715.7(c). Category: Clarify. Degree of Effort: Moderate. Degree of Impact: High. Recommendation: Revise this to remove the reference to NCUA's Supervisory Committee Audit Guide. In its place, include minimum standards a supervisory committee audit would be required to meet if they do not obtain a CPA opinion audit. 12. Securitization Addresses: Securitization. Sections: 721. Category: Expand Authority. Degree of Effort: High. Degree of Impact: Low. Recommendation: Issue a legal opinion letter authorizing federal credit unions to issue and sell securities under their incidental powers authority. Also, finalize the safe harbor rule proposed in 2014 regarding the treatment by the NCUA Board, as liquidating agent or conservator of a federally insured credit union, of financial assets transferred by the credit union in connection with a securitization or a participation. 13. Part 722--Appraisals Addresses: Appraisals. Sections: 722. Category: Expand Relief. Degree of Effort: Moderate. Degree of Impact: High. Recommendation: NCUA should further explore issuing a rule to raise appraisal thresholds separately from the interagency process. In response to comments received through the EGRPRA process, NCUA joined with the other banking agencies to establish an interagency task force to consider whether changes in the appraisal threshold are warranted. The task force is now drafting a proposed rule to relieve certain appraisal burdens. In particular, the proposal would increase the appraisal threshold from $250,000 to $400,000 for ``commercial real estate loans'' where repayment is dependent primarily on the sale of real estate or rental income derived from the real estate. In contrast to the other agencies' appraisal regulations, NCUA's appraisal regulation does not currently distinguish, with respect to the appraisal threshold requirement, between different types of real estate secured loans. Under 12 CFR part 722, the dollar threshold for any real estate secured loan is $250,000; loans above that amount must be supported by an appraisal performed by a state certified appraiser. The banking agencies' current appraisal regulations have the same $250,000 threshold as NCUA's regulation for most real estate related loans, but also recognize a separate appraisal threshold of $1 million for [[Page 39707]] certain real estate related business loans that are not dependent on the sale of, or rental income derived from, real estate as the primary source of income (hereinafter, qualifying business loans). If NCUA joins the task force in issuing this joint proposed rule defining and raising the threshold for ``commercial real estate loans,'' the agency will likely also need to address the appraisal threshold for ``qualifying business loans'' in a subsequent rulemaking. Recommend that, instead of joining the joint proposed rule, NCUA further explore issuing a rule to raise both thresholds separately from the interagency process.\10\ --------------------------------------------------------------------------- \10\ If NCUA decides to join the other agencies in issuing this joint proposed rule the timing will be subject to the interagency process. --------------------------------------------------------------------------- 14. Part 740--Accuracy of Advertising and Notice of Insured Status Addresses: Accuracy of Advertising and Notice of Insured Status. Sections: 740. Category: Expand Relief. Degree of Effort: Moderate. Degree of Impact: High. Recommendation: Revise certain provisions of NCUA's advertising rule to provide regulatory relief to federally insured credit unions. The current draft NPRM proposes to allow federally insured credit unions to use a fourth version of the official advertising statement, ``Insured by NCUA.'' The draft also expands a current exemption from the advertising statement requirement regarding radio and television advertisements and eliminates the requirement to include the official advertising statement on statements of condition required to be published by law. Finally, it requests comment about whether the regulation should be modified to accommodate advertising via new types of social media, mobile banking, text messaging and other digital communication platforms, including Twitter and Instagram. Changes made based on this final request would need to be part of a separate rulemaking. 15. Part 741--Requirements for Insurance \11\ --------------------------------------------------------------------------- \11\ Also make technical corrections to the GAAP citations in 741.6(c). --------------------------------------------------------------------------- Addresses: Conversion from, or termination of, Federal share insurance. Sections: 741.4(j)(1)(ii). Category: Improve. Degree of Effort: Low, Degree of Impact: Low.\12\ --------------------------------------------------------------------------- \12\ Includes potential efficiencies and/or cost savings for NCUA. --------------------------------------------------------------------------- Recommendation: Revise this section of the regulation to preclude a credit union that has already converted to another form of insurance from receiving a subsequently declared NCUSIF dividend. Currently, if a credit union terminates insurance before a premium is declared it does not pay, but if it terminates insurance before a dividend is declared but within the same calendar year it receives the dividend. This is unfair to credit unions that remain insured. 16. Supervisory Review Committee Addresses: Supervisory Review Committee. Sections: 746, Subpart A. Category: Improve. Degree of Effort: High. Degree of Impact: Low. Recommendation: Expand and formalize procedures by which federally insured credit unions may secure review of material supervisory determinations by NCUA's Supervisory Review Committee (SRC). Broaden the jurisdiction of the SRC to more closely conform to the practices of the other federal financial institution regulatory agencies. Expand the pool of agency personnel who will serve on the SRC and implement an optional, intermediate level of review by the Director of NCUA's Office of Examination and Insurance before a matter is considered by the SRC. 17. Appeals Addresses: Appeals. Sections: 746, Subpart B. Category: Improve. Degree of Effort: High. Degree of Impact: Low. Recommendation: Consolidate procedures currently imbedded in various substantive regulations by which parties affected by an adverse determination at the regional or program office level may appeal that determination to the NCUA Board. Exclude formal enforcement actions and certain other subject areas. Establish uniform procedural guidelines to govern appeals and provide an avenue by which appellants may request the opportunity to appear in person before the Board. Matters that are excluded from the proposed new rule either require a formal hearing on the record in accordance with the Administrative Procedure Act (e.g., formal enforcement actions and certain creditor claims in liquidation) or are already governed by separate, discrete procedures (e.g., enforcement measures under prompt corrective action or material supervisory determinations reviewable by the Supervisory Review Committee). Appeals of matters that are delegated by rule to an officer or position below the Board for final, binding agency action are also excluded. ii. Tier 2 (Year 3) 1. Sec. 701.22--Loan Participations Addresses: Establish a limit on the aggregate amount of loan participations that may be purchased from any one originating lender not to exceed the greater of $5 million or 100 percent of the federally insured credit union's net worth (unless waived). Sections: 701.22(b)(5)(ii); 701.22(c). Category: Remove. Degree of Effort: Low. Degree of Impact: High. Recommendation: Remove the prescriptive limit on the aggregate amount of loan participations that may be purchased from one originating lender. Replace with a requirement the credit union establish a limit in their policy, and tie into proposed new universal standards for third-party due diligence with heightened standards if it exceeds 100 percent of net worth. Eliminates the need for the waiver provision in section 701.22(c). 2. Sec. 701.23--Purchase, Sale, and Pledge of Eligible Obligations Addresses: Purchase, sale, and pledge of eligible obligations. Sections: 701.23. Category: Clarify & Expand. Degree of Effort: Moderate. Degree of Impact: High. Recommendation: Simplify and combine all the authority to purchase loans and other assets into one section, and provide full authority consistent with the FCU Act. Eligible obligations of the credit union's members should have no limit. Remove CAMEL rating and other limitations not required by the FCU Act.\13\ --------------------------------------------------------------------------- \13\ See 12 U.S.C. 1757(7)(E), 1757(13), and 1757(14). --------------------------------------------------------------------------- 3. Sec. 741.8--Purchase of assets and assumption of liabilities Addresses: Purchase of assets and assumption of liabilities. Sections: 741.8. Category: Improve. Degree of Effort: Moderate. Degree of Impact: Moderate. Recommendation: Review this regulation to determine if NCUA approval is really needed in purchasing loans and assuming liabilities from market participants other than federally insured credit unions. Credit unions already have relatively broad authority to make loans, buy investments and other assets, and enter into transactions that create liabilities. Requiring NCUA approval in all cases (including [[Page 39708]] transactions not material to the acquirer) is an inordinate burden for the institution and NCUA. 4. Sec. 701.32--Payment on Shares by Public Units and Nonmembers Addresses: Payment on shares by public units and nonmembers. Sections: 701.32. Category: Expand. Degree of Effort: Low. Degree of Impact: Moderate. Recommendation: Raise the nonmember deposit limit from 20 percent to 50 percent. As the functional equivalent of borrowing, this will parallel the ability of credit unions to borrow from any source up to 50 percent of paid-in and unimpaired capital and surplus per section 1757(9) of the FCU Act. A credit union is required to be low-income designated to accept nonmember deposits, limiting the institutions that can engage in this activity. 5. Sec. 701.34--Designation of Low Income Status; Acceptance of Secondary Capital Accounts by Low-Income Designated Credit Unions Addresses: Designation of low income status; Acceptance of secondary capital accounts by low-income designated credit unions. Sections: 701.34. Category: Improve. Degree of Effort: High. Degree of Impact: Low. Recommendation: See the January 2017 ANPR on Alternative Capital for the broad range of changes that need to be made to this regulation to relocate capital treatment to Part 702 and address securities law issues, issuance and redemption standards, etc. 6. Sec. 701.38--Borrowed Funds From Natural Persons Addresses: Borrowed funds from natural persons. Sections: 701.38. Category: Clarify/Expand. Degree of Effort: High. Degree of Impact: Moderate. Recommendation: Recommend revising this section of the regulation to comprehensively address borrowing authority for federal credit unions. See the January 2017 ANPR on Alternative Capital for a discussion on this subject. Also, see recommended changes to Part 703. A comprehensive borrowing rule could provide clarity and certainty needed to support supplemental capital. 7. Part 702--Capital Adequacy Addresses: Risk-Based Capital (Substantive Amendments). Sections: 702. Category: Improve. Degree of Effort: High. Degree of Impact: Low/Moderate.\14\ --------------------------------------------------------------------------- \14\ Degree of impact depends on the approach. --------------------------------------------------------------------------- Recommendation: Considerations include changing the definition of complex to narrow the applicability of the rule, allowing for credit unions with high net worth ratios to be exempt, and simplifying the overall risk category and weighting scheme. These amendments need to be coordinated with any amendments to supplemental and secondary capital, which need to be coordinated with any amendments to the borrowing rule. 8. Alternative Capital Addresses: Alternative Capital. Sections: 702 generally. Category: Expand Authority. Degree of Effort: High. Degree of Impact: Low. Recommendation: As a follow up to the ANPR issued in January 2017, the NCUA Board should consider whether to propose a rule on alternative forms of capital federally insured credit unions could use in meeting capital standards. First, the Board should decide whether to make changes to the secondary capital regulation for low-income designated credit unions. Second, the Board should decide whether or not to authorize credit unions to issue supplemental capital instruments that would only count towards the risk-based net worth requirement. 9. Part 703--Investment and Deposit Activities Addresses: Investment and Deposit Activities. Sections: 703. Category: Improve & Expand. Degree of Effort: High. Degree of Impact: High. Recommendation: Revise the regulation to remove unnecessary restrictions on investment authorities not required by the FCU Act, and provide a principles-based approach focused on governance for investing activity. Also, remove the pre-approval requirement for derivatives authority and substitute with a notice requirement (coheres this to Part 741 for federally insured, state-charted credit unions as well). See the appendix for details on modifying this regulation. 10. Sec. 701.21--Loans to Members and Lines of Credit to Members Addresses: Put option purchases in managing increased interest-rate risk for real estate loans produced for sale on the secondary market. Sections: 701.21(i). Category: Clarify. Degree of Effort: Low. Degree of Impact: High. Recommendation: Recommend moving section 701.21(i) to Part 703 Subpart B--Derivatives Authority to have all options/derivatives authority in one section. iii. Tier 3 (Year 4+) \15\ --------------------------------------------------------------------------- \15\ These regulations will require more discussion on any potential changes. --------------------------------------------------------------------------- 1. Sec. TBD--Third-Party Due Diligence Requirements Addresses: Third-party due diligence requirements. Sections: TBD. Category: Simplify & Improve. Degree of Effort: Moderate. Degree of Impact: High. Recommendation: Add a comprehensive third-party due diligence regulation and remove and/or relocate such provisions from other regulations. 2. Sec. 701.21--Loans to Members and Lines of Credit to Members Addresses: Preemption of state laws Sections: 701.21(b) Category: Simplify & Improve Degree of Effort: Moderate Degree of Impact: High Recommendation: Enhance Federal preemption where possible and appropriate. Federal credit unions that are multi-state lenders still are subject to a variety of state laws that create overlap and additional regulatory burden. Enhancing preemption where possible and appropriate may help reduce overlap and burden. 3. Sec. 701.21--Loans to Members and Lines of Credit to Members Addresses: Loan interest rate, temporary rate. Sections: 701.21(c)(7)(ii). Category: Expand/Clarify. Degree of Effort: Moderate. Degree of Impact: Low.\16\ --------------------------------------------------------------------------- \16\ Includes potential efficiencies and/or cost savings for NCUA. --------------------------------------------------------------------------- Recommendation: Research the possibility of using a variable rate instead of a fixed, temporary rate. Also, remove the specific means for notifying credit unions to preserve future flexibility in sending notices in the most efficient and suitable manner available. 4. Sec. 701.37--Treasury Tax and Loan Depositaries and Financial Agents of the Government Addresses: Treasury tax and loan depositaries and financial agents of the Government. Sections: 701.37. [[Page 39709]] Category: Remove/Improve. Degree of Effort: Moderate. Degree of Impact: Undetermined. Recommendation: Determine if this regulation remains relevant and necessary. 5. Part 709--Involuntary Liquidation of Federal Credit Unions and Adjudication of Creditor Claims Involving Federally Insured Credit Unions in Liquidation Addresses: Payout priorities in involuntary liquidation. Sections: 709.5. Category: Clarify. Degree of Effort: Low. Degree of Impact: Low.\17\ --------------------------------------------------------------------------- \17\ Includes potential efficiencies and/or cost savings for NCUA. --------------------------------------------------------------------------- Recommendation: Revise the payout priorities to make unsecured creditors pari passu with the NCUSIF. Currently, unsecured creditors are senior to the NCUSIF. 6. Part 712--Credit Union Service Organizations (CUSOs) Addresses: Credit Union Service Organizations (CUSOs). Sections: 712. Category: Remove & Expand. Degree of Effort: Low. Degree of Impact: High. Recommendation: Recommend examining the CUSO regulation and evaluating the permissible activities in light of the FCU Act permitting CUSOs ``whose business relates to the daily operations of the credit unions they serve'' \18\ or that are ``providing services which are associated with the routine operations of credit unions.'' \19\ --------------------------------------------------------------------------- \18\ 12 U.S.C. 1757(5)(D). \19\ 12 U.S.C. 1757(7)(I). --------------------------------------------------------------------------- 7. Part 714--Leasing Addresses: Leasing. Sections: 714. Category: Improve. Degree of Effort: Moderate. Degree of Impact: Undetermined. Recommendation: Review this regulation to identify if any changes or improvements are needed. 8. Part 725--National Credit Union Administration Central Liquidity Facility (CLF) Addresses: National Credit Union Administration Central Liquidity Facility (CLF). Sections: 725. Category: Clarify. Degree of Effort: Moderate. Degree of Impact: Moderate. Recommendation: Update this regulation to streamline, facilitate the use of correspondents, and reduce minimum collateral requirements for certain loans/collateral. 9. Part 741--Requirements for Insurance Addresses: Maximum borrowing authority. Sections: 741.2. Category: Remove. Degree of Effort: Low. Degree of Impact: Low. Recommendation: Remove the 50 percent borrowing limit for federally insured, state-chartered credit unions and the related waiver provision. State law should govern in this area. 10. Part 741--Requirements for Insurance Addresses: Special reserve for nonconforming investments. Sections: 741.3(a)(2). Category: Remove. Degree of Effort: Low. Degree of Impact: Technical Amendment. Recommendation: Remove as no longer necessary and not consistent with GAAP.\20\ --------------------------------------------------------------------------- \20\ There are 11 federally insured, state-chartered credit unions from 8 different states that report a total of $4.4 million in this account on the Call Report as of December 31, 2016. --------------------------------------------------------------------------- 11. Part 748--Security Program, Report of Suspected Crimes, Suspicious Transactions, Catastrophic Acts, and Bank Secrecy Act Compliance Addresses: Security Program, Report of Suspected Crimes, Suspicious Transactions, Catastrophic Acts, and Bank Secrecy Act Compliance. Sections: 748. Category: Improve. Degree of Effort: Moderate. Degree of Impact: High. Recommendation: Review this regulation to identify if any changes or improvements are needed. Recommend using an ANPR and forming a working group due to the complexity. 12. Part 749--Records Preservation Program and Appendices--Record Retention Guidelines; Catastrophic Act Preparedness Guidelines Addresses: Records Preservation Program and Appendices--Record Retention Guidelines; Catastrophic Act Preparedness Guidelines Sections: 749 Category: Improve Degree of Effort: Moderate Degree of Impact: High Recommendation: Review this regulation to identify if any changes or improvements are needed. Recommend using an ANPR and forming a working group due to the complexity. e. Appendix to Section III--Part 703 Recommendations Details Investments--Part 703 Subpart A ------------------------------------------------------------------------ Item Change Rationale ------------------------------------------------------------------------ 1. Investment Policies Sec. Fine tune section to Reduces burden on 703.3. focus on investment credit unions by activities and not not requiring IRR on balance sheet and liquidity activities. E.g., policies in the remove (c) and (d), investment policy. IRR and liquidity, Also should help since those items credit unions focus should be addressed on balance sheet in the IRR and risk. liquidity policies. 2. Discretionary Control Remove 100 percent This would allow Over Investments and of net worth limit credit unions to Investment Advisor Sec. for delegated have professionally 703.5(b)(1)(ii), Sec. discretionary managed, separate- 703.5(b)(2)--(Net worth control. Would need account, limit). to add language to investments without ensure credit imposing a limit. unions have There are no limits provided investment on mutual funds advisors with where the credit investment union has less guidelines that control of what the contain: Duration/ manager invests in. average life Separate-account targets, delegated permissible discretionary investments, and programs have investment limits. considerably more transparency than mutual funds. 3. Discretionary Control Remove prescriptive This section is too Over Investments and due diligence prescriptive for a Investment Advisor Sec. requirements and credit union to 703.5(b)(3)--(Due simply state the perform due diligence). credit union must diligence. It also perform due does not focus on diligence on the the investment investment advisor. advisor's ability to manage investments for the credit union. [[Page 39710]] 4. Credit Analysis Sec. Modify exception to This will make it 703.6--(Due diligence). credit analysis clear that NCUA requirements to requires credit only securities analysis for guaranteed by the investments not entities listed in guaranteed, but the section. issued by, agencies. Currently the rule would not require a credit analysis for a Fannie Mae loss sharing bond or an unguaranteed subordinate tranche of a Freddie Mac multi-family mortgage security. 5. Credit Analysis Sec. Require a minimum of Sets a minimum 703.6--(Maximum credit investment grade expectation of risk). for all investments. credit worthiness for all investments purchased under the Part 703 investment authority. 6. Credit Analysis Sec. A credit union, or This establishes the 703.6--(Credit union its investment basic standard for process and people). advisor, must have a credit union to sufficient purchase an resources, investment. This knowledge, systems, will allow for a and procedures to loosening of Part handle the risks 703 since NCUA has and risk management established (e.g. IRR modeling) standards to of the investments purchase it purchases. investments that may have been prohibited or restricted in the past. 7. Broker-Dealers--Sec. Remove prescriptive This section is too 703.8(b)--(Due diligence). due diligence prescriptive for a requirements and broker-dealer that simply state the doesn't provide credit union must advice. May want to perform due specify standards diligence on the for broker-dealers broker-dealer. that provide advice to credit unions. 8. Monitoring Non-Security Remove this section. Unduly prescriptive. Investments Sec. 703.10-- (Reporting requirements). 9. Valuing Securities Sec. Combine sections and Currently too 703.11(a) & (d)--(Due remove the prescriptive. A diligence). reference to two principled approach price quotations. conforms more to The requirement market convention. should be that the credit union use market inputs to determine if the purchase is at a reasonable market price. 10. Valuing Securities Sec. Remove this section. Unnecessary. This 703.11(c)--(Due diligence). should be dictated by GAAP. 11. Monitoring Securities Move to and combine Streamlines Part Sec. 703.12(a)-- with Sec. 703.11. 703. (Reporting requirements). 12. Monitoring Securities Remove these Unduly prescriptive. Sec. 703.12(b), (c) and sections and 703.12 (d)--(Reporting (a) will be requirements). combined with Part 703.11. 13. Permissible Investment Merge these sections Streamlines rule and Activities and Permissible and add language provides full Investments Sec. 703.13 from the FCU Act investment and Sec. 703.14. for permissible authority allowed investments. under the Act. 14. Permissible Investment Allow mismatch A 30 day mismatch is Activities Sec. 703.13(d) permissible in Sec. not very risky. (Borrowing repurchase 703.20 as the transactions). ``base'' permissible activity. 15. Permissible Investments Expand permissible This could provide Sec. 703.14(a)-- indices for credit credit unions with (Permissible indices for unions that have investments that variable rate investments). sufficient they could benefit resources, from and not pose a knowledge, systems, risk to the NCUSIF. and procedures to handle the risks of the investment. Ability to model the investment for IRR should be required. 16. Permissible Investments Remove limitations This limit is Sec. 703.14(e)--(Muni on municipal unnecessary. Credit bond limits). exposure. unions should determine limits. 17. Permissible Investments Limits will be Limits may need to Sec. 703.14(h)--(Mortgage reviewed to be increased or note repurchase determine if they eliminated. transactions). are appropriate. 18. Permissible Investments Remove limits on Interest rate and Sec. 703.14(i)--(Zero zero-coupon liquidity risk coupon investment investments. should be managed restrictions). from a balance sheet standpoint. This appears to try to manage it from an individual security standpoint. This limit is unnecessary. 19. Permissible Investments Remove this section. Not realistic in the Sec. 703.14(j)(3)-- current market (Commercial mortgage place. Furthermore, related securities). having a large number of loans was actually a negative in many CMRS deals prior to 2007. Less attention was paid to the smaller loans that were poorly underwritten versus the larger loans in the deal. 20. Prohibited Investment Review regulatory Restriction may be Activities Sec. 703.15-- history on the reconsidered. (Short Sales). prohibition of short sales. 21. Prohibited Investments Determine if Buying MSRs from Sec. 703.16(a)--(Mortgage mortgage servicing other credit unions servicing rights). rights (MSRs) are may offer permissible for efficiencies in the credit unions to credit union purchase per the system. FCU Act. If so, there should be consideration given to permit the purchase of MSRs. 22. Prohibited Investments Remove this section. A credit union Sec. 703.16(b)-- should be able to (Exchangeable, IO and PO purchase interest- MBS). only and principal- only investments if it has sufficient resources, knowledge, systems, and procedures to handle the risks and risk management (e.g. IRR modeling) of the investments it purchases. [[Page 39711]] 23. Grandfathered Remove sections that Some parts of the Investments Sec. 703.18. will no longer section may not apply based on apply due to other other changes in changes in the the rule. rule. 24. Investment Pilot Program Remove this section. Pilot programs will Sec. 703.19. no longer be needed with the proposed changes. 25. Request for Additional Remove this section. Will no longer be Authority Sec. 703.20. needed with the removal or alignment of the restrictions in other sections. ------------------------------------------------------------------------ Derivatives--Part 703 Subpart B and Related Items ------------------------------------------------------------------------ Item Change Rationale ------------------------------------------------------------------------ 1. ``Move'' Put-option Move the product to This would purchases in managing the Subpart B consolidate into increased interest-rate permissible one place all risk for real estate loans derivative products. permissible produced for sale on the derivative secondary market, in activities. 701.21(i) to 703.102(a). 2. ``Move'' European Move the product to This would financial options contract the Subpart B consolidate into in 703.14(g) to 703.102(a). permissible one place all derivative products. permissible derivative activities. 3. ``Rename'' 703 Subpart B Name change......... Would widen the rule from ``Derivatives to address off Authority'' to balance sheet ``Derivatives and Hedging hedging instruments Authority''. that are permissible. 4. ``Move and Modify'' With the move, Would provide more Derivatives section in remove clarity on hedging 703.14(k) to 703 Subpart B. 703.14(k)(1), move activities for TBA, 703.14(k)(2) to Dollar Rolls, etc. 703.100 and move 703.14(k)(3) to 703.102. 5. ``Modify'' Derivatives Remove the FCU The ``Notification'' Application process to application requirements would ``Notification''. requirements and include providing replace with a NCUA with at least ``Notification''. 60 day notice This would require before initially changes to Sec. engaging in a 703.108, Sec. Derivative 703.109, Sec. transaction. 703.110, Sec. 703.111, Sec. 703.112. 6. ``Remove'' Derivatives Remove the volume Will be better Regulatory Limits. limits on supported as part derivatives of supervision activity. This guidance and would require possible use as changes to Sec. scoping metrics. 703.103, Sec. 703.105, Appendix A. 7. ``Expand'' Eligible Expand the eligible This is an Collateral for Margining. collateral in acceptable practice 703.104(a)(2)(iii) and should have to include Agency been in the Final Debt (Ginnie Mae Rule. Securities). 8. ``Modify'' Eligibility Remove or change Allows for more (only part). 703.108(b) to credit unions to require notice but use derivatives to not pre-approval, manage interest and re-evaluate the rate risk subject CAMEL and asset to supervisory size eligibility intervention if criteria. they are not equipped to manage it properly. 9. ``Modify'' Notification Change 741.219(b)... Make consistent with requirement for FISCUs. FCU notification requirements. 10. ``Remove'' Pilot Program Change 703.113...... Not relevant Participants. anymore. ------------------------------------------------------------------------ IV. Request for Comment Executive Order 13777 requires that ``each Regulatory Reform Task Force shall seek input and other assistance, as permitted by law, from entities significantly affected by Federal regulations, including State, local, and tribal governments, small businesses, consumers, non- governmental organizations, and trade associations.'' In compliance with the spirit of the Executive Order, the Board seeks comments on all aspects of the Task Force's report. Commenters are also encouraged to discuss any other relevant issues they believe NCUA should consider with respect to reducing regulatory burden and fulfilling the aims of Executive Order 13777. The Board requests that, to the extent feasible, commenters provide documentation to support any recommendations. By the National Credit Union Administration Board on August 15, 2017. John H. Brolin, Acting Board Secretary. [FR Doc. 2017-17673 Filed 8-21-17; 8:45 am] BILLING CODE 7535-01-P
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