Regulatory Reform Agenda, 65926-65954 [2018-27473]

Download as PDF 65926 Federal Register / Vol. 83, No. 245 / Friday, December 21, 2018 / Proposed Rules that mission, the NCUA has statutory responsibility for a wide variety of regulations that protect the credit union system, members, and the NCUSIF. NATIONAL CREDIT UNION ADMINISTRATION 12 CFR Chapter VII Regulatory Reform Agenda National Credit Union Administration (NCUA). ACTION: Notice of regulatory review. AGENCY: The 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 the president’s regulatory reform agenda and Executive Order 13777. Although the NCUA, as an independent agency, is not required to comply with Executive Order 13777, the agency chose to comply with its spirit and reviewed all of the NCUA’s regulations to that end. The Task Force published and sought comment on its first report in August 2017. Having reviewed all of the comments received, the Task Force is publishing its second and final report. DATES: December 21, 2018. ADDRESSES: Office of General Counsel, National Credit Union Administration, 1775 Duke Street, Alexandria, Virginia 22314. SUMMARY: 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. The NCUA’s Regulatory Mission b. The Regulatory Reform Agenda c. This Document II. The Second Report a. General Recommendations b. The Consolidated Refined Blueprint c. The Detailed Refined Blueprint and Summary of Comments I. Background amozie on DSK3GDR082PROD with PROPOSALS2 a. The NCUA’s Regulatory Mission The NCUA, as a prudential 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. The 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 1 https://www.ncua.gov/About/Pages/Missionand-Vision.aspx. VerDate Sep<11>2014 00:33 Dec 21, 2018 Jkt 247001 b. The Regulatory Reform Agenda The president has established a regulatory reform agenda and issued multiple executive orders designed to alleviate unnecessary regulatory burdens. The 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. c. This Document The NCUA established a Regulatory Reform Task Force (Task Force) in March 2017 to oversee the implementation of the agency’s regulatory reform agenda. This is consistent with the spirit of the president’s regulatory reform agenda and Executive Order 13777. Although the NCUA, as an independent agency, is not required to comply with Executive Order 13777, the agency chose to comply with its spirit and reviewed all of the NCUA’s regulations to that end. The Task Force undertook an exhaustive review of the 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. The first report outlined the Task Force’s proposed review and reporting procedures and made PO 00000 Frm 00002 Fmt 4701 Sfmt 4702 numerous recommendations for the amendment or repeal of regulatory requirements that the Task Force believed to be outdated, ineffective, or excessively burdensome. On August 22, 2017 the NCUA published the substance of the Task Force’s first report in the Federal Register and sought public comment.2 This document contains the Task Force’s second and final report. As described more fully below, this report contains both general recommendations for the NCUA’s regulatory reform agenda moving forward and a refined blueprint of the timeline for recommended regulatory changes. The NCUA began implementing Tier 1 of the regulatory reform agenda in May 2017. The agency aims to have commenced action on all Tier 1 recommendations by May 2019. The agency plans to initiate the implementation of Tier 2 and Tier 3 recommendations in May or June 2019 and 2020, respectively. II. The Second Report a. General Recommendations i. Report Structure The structure of this report closely tracks the structure of the first report. The Task Force has retained the effort/ impact prioritization matrix used in the first report 3 and has tried to structure the notice as similarly as possible. Along with a consolidated refined blueprint of the timeline for future regulatory actions, this report includes a detailed refined blueprint that provides the first report’s recommendations, a general summary of comments received on the recommendations, and this report’s recommendations. The Task Force does not intend to respond to the specific substance of commenters’ recommendations in this report. Instead, this report is largely focused on setting the procedures governing the regulatory reform agenda as it moves forward and providing the refined timeline for completing the Task Force’s recommendations. Commenters’ substantive recommendations, while considered in the development of this report and its refined timeline, will be most helpful in shaping recommended actions as they are more fully developed. Commenter recommendations related to completed actions have been reviewed by the Task Force and will be considered in future rulemakings unless otherwise indicated. The NCUA will also separately publish a consolidated version of this report on the NCUA website. The 2 82 3 Id. E:\FR\FM\21DEP2.SGM FR 39702 (Aug. 22, 2017). at 39704. 21DEP2 Federal Register / Vol. 83, No. 245 / Friday, December 21, 2018 / Proposed Rules consolidated report will provide the Task Force’s recommendations from the first report, the Task Force’s updated recommendations, and the updated prioritizations. documents related to the individual recommendations and whether any changes to the recommendation or refined blueprint timeline have been made. ii. Measuring Future Progress As contemplated by both Executive Order 13777 and the first report, the Task Force recommends that the NCUA measure the agency’s progress as it advances through the regulatory reform agenda. To best do this, the Task Force recommends that the NCUA publish on its website the outline of this report’s refined blueprint, subject to needed future modifications, to be updated every six months to monitor progress. This outline should document whether the agency has published any iii. The NCUA’s Annual Regulatory Review In the first report, the Task Force recommended suspending the NCUA Office of General Counsel’s annual regulatory review until 2020. Approximately five commenters supported the temporary suspension. Several commenters opposed the suspension, noting that changes will likely occur between now and 2020, including to the NCUA Board composition. One of these commenters felt that the NCUA should maintain a 65927 formal mechanism for stakeholder insight into the effect of existing regulations on a contemporary basis and asked that the review be reinstated in January 2019 as Tier 1 is completed. Based on commenter feedback, the Task Force has amended its recommendation. The Task Force recommends that the annual regulatory review resume in January 2019, via a notice published on the NCUA’s website. The 2019 regulatory review will cover parts 700–710 of the NCUA’s regulations. The Task Force believes the annual regulatory review plays an important role in giving stakeholders a continuing means of providing feedback as changes are made and take effect. b. The Consolidated Refined Blueprint REPORT 1 AND REPORT 2 PRIORITIZATION COMPARISON Regulation Report 2 priority amozie on DSK3GDR082PROD with PROPOSALS2 Report 2 Justification for change Tier 1 1. Corporate Credit Unions ................................... 2. Emergency Mergers .......................................... 3. Securitization ..................................................... 4. Supervisory Review Committee ........................ 5. Appeals ............................................................. 6. Equity Distribution ............................................. 7. Capital Planning and Stress Testing ................ 8. Advertising ......................................................... 9. Field of Membership ......................................... 10. Risk-Based Capital Delay ............................... and Risk-Based Capital Substantive ........................ Completed Completed Completed Completed Completed Completed Completed Completed Completed Completed ............................... Tier 2 11. FCU Bylaws .................................................... 12. Payday Alternative Loans ............................... Proposed ............... Proposed ............... Tier 1 ..................... Not in Report ......... 13. Loans to Members: a. Loan Maturity Limits, b. Single borrower and Group of Associated Borrowers Limit. 14. Appraisals ........................................................ 15. Fidelity Bonds .................................................. 16. Supervisory Committee Audits and Verification (Engagement Letter, Target Date of Delivery). 17. Supervisory Committee Audits and Verification (Audit per Supervisory Committee Guide). 18. Subordinated Debt (formerly Alternative Capital). Proposed ............... Tier 1 ..................... N/A. N/A. N/A. N/A. N/A. N/A. N/A. N/A. N/A. The risk-based capital rule finalized in October 2018 addressed both the delay and substantive recommendations made in the first report. N/A. The Task Force believes the proposed change will provide additional regulatory relief. N/A. Proposed ............... Proposed ............... Tier 1 ..................... Tier 1 ..................... Tier 1 ..................... Tier 1 ..................... N/A. N/A. N/A. Tier 1 ..................... Tier 1 ..................... N/A. Tier 1 ..................... Tier 2 ..................... 19. Designation of Low Income Status; Acceptance of Secondary Capital Accounts by LowIncome Designated Credit Unions. Tier 1 ..................... Tier 2 ..................... 20. Borrowed Funds from Natural Persons .......... Tier 1 ..................... Tier 2 ..................... 21. Payment on Shares by Public Units and Nonmembers. Tier 1 ..................... Tier 2 ..................... 22. Compensation in Connection with Loans ....... Tier 1 ..................... Tier 1 ..................... Subordinated debt (formerly alternative capital) is a priority for the Chairman, the agency, and commenters. As such, all recommendations associated with subordinated debt were moved to Tier 1. Subordinated debt (formerly alternative capital) is a priority for the Chairman, the agency, and commenters. As such, all recommendations associated with subordinated debt were moved to Tier 1. Subordinated debt (formerly alternative capital) is a priority for the Chairman, the agency, and commenters. As such, all recommendations associated with subordinated debt were moved to Tier 1. Upon further consideration and in response to stakeholder feedback the Task Force has moved this recommendation from Tier 2 to Tier 1. N/A. VerDate Sep<11>2014 00:33 Dec 21, 2018 Jkt 247001 PO 00000 Frm 00003 ............. ............. ............. ............. ............. ............. ............. ............. ............. ............. Report 1 priority Fmt 4701 Tier Tier Tier Tier Tier Tier Tier Tier Tier Tier 1 1 1 1 1 1 1 1 1 1 ..................... ..................... ..................... ..................... ..................... ..................... ..................... ..................... ..................... ..................... Sfmt 4702 E:\FR\FM\21DEP2.SGM 21DEP2 65928 Federal Register / Vol. 83, No. 245 / Friday, December 21, 2018 / Proposed Rules REPORT 1 AND REPORT 2 PRIORITIZATION COMPARISON—Continued Regulation Report 2 priority Report 1 priority Justification for change 23. CUSOs ............................................................ Tier 1 ..................... Tier 3 ..................... 24. Loan Interest Rate, Temporary Rate .............. Tier 1 ..................... Tier 3 ..................... The Task Force believes that this recommendation is appropriately placed in Tier 1. The change should be low effort and high impact. The loan interest rate is a priority for the Board, the agency, and commenters. Report 2 1. Investment and Deposit Activities ..................... Tier 2 (First Item) .. Tier 2 ..................... 2. Loan Participations ............................................ 3. Purchase, Sale, and Pledge of Eligible Obligations. 4. Purchase of Assets and Assumption of Liabilities. 5. Third-Party Due Diligence Requirements and .. Tier 2 ..................... Tier 2 ..................... Tier 2 ..................... Tier 2 ..................... Upon further consideration and in response to stakeholder feedback the Task Force has decided to move this item to the top of Tier 2. N/A. N/A. Tier 2 ..................... Tier 2 ..................... N/A. Tier 2 ..................... Tier 3 ..................... These recommendations were combined and put into Tier 2. Third-Party Servicing of Indirect Vehicle Loans. 6. Payout priorities in Involuntary Liquidation ....... Tier 2 ..................... Tier 1 Tier 2 ..................... Tier 3 ..................... Report 2 1. Preemption of State Laws (Loans to Members and Lines of Credit to Members). 2. Treasury Tax and Loan Depositaries and Financial Agents of the Government. 3. Leasing .............................................................. 4. Central Liquidity Facility .................................... 5. Maximum Borrowing Authority .......................... 6. Special Reserve for Nonconforming Investments. 7. Security Program, Report of Suspected Crimes, Suspicious Transactions, Catastrophic Acts, and Bank Secrecy Act Compliance. 8. Records Preservation Program and Appendices—Record Retention Guidelines; Catastrophic Act Preparedness Guidelines. c. The Detailed Refined Blueprint and Summary of Comments amozie on DSK3GDR082PROD with PROPOSALS2 Tier 2 As discussed, this report contains both a refined blueprint for the timeline for implementing the Task Force’s recommendations and a summary of the comments the NCUA received on the first report. The NCUA received nearly 50 comments on the first report. Commenters overwhelmingly supported the NCUA’s regulatory reform agenda. It should be noted that comment tallies are only reflective of the number of commenters who directly addressed a specific recommendation or issue. Many commenters expressed general support for the first report or for wide-ranging review of a number of regulations. The NCUA has completed ten of the first report’s initial regulatory relief recommendations: 1. Corporate Credit Unions; 2. Emergency Mergers; 3. Securitization; 4. Supervisory Review Committee; VerDate Sep<11>2014 00:33 Dec 21, 2018 Jkt 247001 Tier 3 Tier 3 ..................... Tier 3 ..................... N/A. Tier 3 ..................... Tier 3 ..................... N/A. Tier Tier Tier Tier Tier Tier Tier Tier ..................... ..................... ..................... ..................... N/A. N/A. N/A. N/A. Tier 3 ..................... Tier 3 ..................... N/A. Tier 3 ..................... Tier 3 ..................... N/A. 3 3 3 3 ..................... ..................... ..................... ..................... 3 3 3 3 5. Appeals Procedures; 6. The Equity Distribution; 7. Capital Planning and Stress Testing; 8. Accuracy of Advertising and Notice of Insured Status; 9. Field of Membership; and 10. Risk-Based Capital. Additionally, the NCUA has issued proposed rules or commenced action for five other recommendations: 1. Bylaws; 2. Loan Maturities; 3. The Single Borrower or Group of Associated Borrower Limit; 4. Appraisals; 5. Fidelity Bonds. Nearly all commenters explicitly commended the NCUA’s efforts to identify outdated, ineffective, or excessively burdensome requirements and ease regulatory burden while modernizing the NCUA’s regulations. PO 00000 This recommendation will help protect the NCUSIF and higher prioritization is appropriate. Frm 00004 Fmt 4701 Sfmt 4702 i. Tier 1 (First 24 Months) 1. Completed Actions 1. Part 704—Corporate Credit Unions Addresses: Corporate Credit Unions. Sections: 704. Category: Improve. Degree of Effort: Moderate. Degree of Impact: Low. Report 1: Amend capital standards for corporate credit unions to include expanding what constitutes Tier 1 Capital. For mergers, permit Tier 1 Capital to include generally accepted accounting principles (GAAP) equity acquired. Also, establish a retained earnings requirement of 2.50%, 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. Comments: The NCUA issued this final rule in November 2017. However, E:\FR\FM\21DEP2.SGM 21DEP2 amozie on DSK3GDR082PROD with PROPOSALS2 Federal Register / Vol. 83, No. 245 / Friday, December 21, 2018 / Proposed Rules a number of commenters either addressed the rulemaking or provided other substantive comments on part 704. Several commenters that submitted their comments prior to the November final rule’s publication explicitly asked the NCUA to finalize the proposed rule. One of these commenters stated that the proposal provides corporate credit unions with greater flexibility in the calculation and treatment of capital and promotes increased certainty and stability in the credit union system. Several commenters agreed that expressly including merger-acquired GAAP equity as retained earnings would clarify that capital is available to cover losses, resulting in greater accounting transparency and reduced ambiguity. These commenters also supported counting perpetual contributed capital as Tier 1 Capital, especially given the confusion for credit union auditors evaluating potential perpetual contributed capital impairment. The commenters argued that the limitation of perpetual contributed capital for regulatory capital purposes undermines the full value of perpetual contributed capital to absorb losses during an economic event. Approximately 15 commenters asked the NCUA to review part 704 in its entirety to explore modernization opportunities for the benefit of corporate credit unions and natural person members. The commenters argued that this would provide more relief by decreasing regulatory burden, increasing operational efficiency, and improving member services. One of these commenters stated that the NCUA revised part 704 as a result of the financial crisis and consequently the corporate system has significantly contracted and consolidated. Another commenter argued for more regulatory relief and refinement of the rules governing corporate credit unions, and recommended that the NCUA: (1) Form a task force with state regulators to review future adjustments to the corporate credit union rules; (2) reintroduce meaningful dual chartering by eliminating unnecessary preemption of state rules, particularly with respect to corporate credit union governance; and (3) enhance the joint supervision of corporates and their risk to natural person credit unions by formalizing increased information sharing between the NCUA and the state regulators supervising the corporate credit unions’ natural person credit union members. As discussed below, commenters also recommended a number of more specific substantive changes to part 704. One commenter noted that, relative to credit risk management, the NCUA VerDate Sep<11>2014 00:33 Dec 21, 2018 Jkt 247001 limits investments in any single obligor to the greater of 25% of total capital or $5 million. Section 704.6(c)(2) provides several exceptions to the single-obligor limit, including an exception for credit card master trust asset-backed securities that allows for a higher limit of 50% of total capital in any single obligor. The commenter stated that other assetbacked securities utilize the master trust structures such as vehicle, equipment, and student loan master trusts. The commenter opined that, like credit card master trusts, these other master trusts offer larger asset pools and greater borrower and geographic diversity. The commenter further noted that many offer structural features that enhance the safety of the investments. The commenter asked that, given the described advantages of master trust asset-backed securities, the NCUA consider including these additional master trust asset-backed securities in the exception allowing for investments up to 50% of capital. One commenter asked the NCUA to examine the concept of Weighted Average Life (WAL) as a tool for risk mitigation of government-issued or guaranteed securities. The commenter noted that, per the current rule, a corporate credit union must manage its financial assets to maintain a WAL of 2 years or less to be measured at monthend in the base case, and 2.25 years or less to be measured at month-end in a 50% prepayment speed slowdown scenario. The commenter observed that under § 704.8(h) U.S. Governmentissued or guaranteed securities are allowed a modest one-half WAL treatment. The commenter stated that government-guaranteed securities exhibit no credit risk, are highly liquid in the marketplace, serve as a buffer in economic stress scenarios, and are valuable collateral for liquidity in the capital markets and at the Federal Reserve Bank. The commenter argued that the one-half WAL treatment is not enough of a benefit or incentive for buying these securities. The commenter stated that they were not recommending that the NCUA Board revise the WAL measurement for credit-related securities, § 704.8(f) and (g), but did recommend the factor in § 704.8(h) be changed to make the WAL of government-issued and governmentbacked securities equal to a cash equivalent. The commenter asserted it is technically incorrect to assign WAL limits on government-guaranteed instruments. One commenter noted that § 704.8 limits the WAL of corporate credit unions’ financial assets and asserted that the NCUA’s WAL thresholds for PO 00000 Frm 00005 Fmt 4701 Sfmt 4702 65929 corporates were intentionally designed to limit a corporate’s services to natural person credit unions to short-term liquidity lending and payments system services. The commenter recalled that the NCUA noted at the time that the WAL provision was essential in the absence of cash-flow mismatch test requirements. The commenter said that neither natural person credit unions nor other financial institutions have explicit limitations on the WAL of the asset side of their balance sheets.4 The commenter conceded that, as the corporate system restructured in the aftermath of the corporate crisis, such regulatory shaping of the marketplace, and restrictions on corporate credit union growth and operations, were arguably necessary to contain risk. However, the commenter also argued that these same limitations restrict corporate credit union service to natural person credit unions, which in turn may be hindering the ability of some natural person credit unions to remain competitive in the marketplace. In addition to the WAL restrictions, the commenter noted that corporate credit unions are also limited to 180 days maturity on secured borrowings. The commenter contended that, taken together, the WAL and secured borrowing provisions limit corporates’ ability to provide term lending and other liquidity management services to natural person credit unions. The commenter further observed that natural person credit unions have limited choices to find those essential services elsewhere, noting that the Federal Reserve discount window is generally a lender of last resort, and credit union membership in the Federal Home Loan Bank (FHLB) system may be more limited than commonly understood. The commenter concluded that, while the commenter and state regulators remain keenly aware of the severity of the corporate crisis and understand the importance of the lessons learned, the future of the corporate system cannot be solely controlled by a crisis mindset. The commenter also suggested the formation of a joint working group to help identify the proper regulatory balance. Another commenter argued that a corporate credit union that has been granted Part 1 expanded authority should have more flexibility in the WAL requirement than base or base plus corporate credit unions. The commenter argued that since a Part 1 corporate has 4 The commenter stated that ‘‘[n]atural person credit union WAL of assets is factored into Prompt Corrective Action (PCA) net worth calculations, but are not limited by the PCA. See 12 CFR 702.105– 107.’’ E:\FR\FM\21DEP2.SGM 21DEP2 amozie on DSK3GDR082PROD with PROPOSALS2 65930 Federal Register / Vol. 83, No. 245 / Friday, December 21, 2018 / Proposed Rules a stronger developed infrastructure and higher capital requirements, such as a minimum leverage ratio of 6%, permission to increase the WAL in the base case and stressed scenario should be allowed. The commenter recommended the calculation be tiered to reflect a correlation to the required higher leverage ratios. The commenter said that, for example, a Part 1 corporate with: a 6% leverage ratio should be permitted to have a 2.5 year WAL in the base and 2.75 year WAL in the 50% slower prepayment scenario; a 7% leverage ratio should be permitted to have a 3.5 year WAL in the base and 4.0 year WAL in the 50% slower prepayment scenario; and an 8% leverage ratio should be permitted to have a 4.5 year WAL in the base and 5.0 year WAL in the 50% slower prepayment scenario. The commenter noted that Part 1 corporates are required to have more developed risk mitigation tools as part of their infrastructure in addition to stronger capital ratios. The commenter felt higher capital ratios are a good assessment of the safety and soundness of any financial institution and should correlate with the amount of risk a corporate should take. The commenter concluded that the additional regulatory flexibility within the WAL calculation is commensurate with the additional required capital and stronger infrastructure. One commenter, a Part 1 corporate credit union, said that they would welcome the opportunity to expand their investment authority related to credit risk to correlate with the stronger capital position. The commenter would like to be able to buy investment grade subordinated secured asset-backed securities and would like parity with investment grade unsecured corporate debt, which is currently permitted under Part 1. The commenter argued parity would allow Part 1 corporates an investment opportunity that has the same credit rating and the same credit risk regardless of subordination. The commenter suggested subordinated investments within the secured assetbacked sector should be limited to only those sectors that are highly mature, such as credit cards, auto loans and FFELP-backed student loans. The commenter also asserted that a lower credit rating investment in these sectors is arguably less risky than the highest rating investment in a less mature, esoteric sector that does not have a proven track record through a business cycle. The same commenter observed that part 704 has different definitions for credit risk for Part 1 versus base plus authorities. Specifically, the commenter VerDate Sep<11>2014 00:33 Dec 21, 2018 Jkt 247001 noted that under Part 1 a purchase must be of ‘‘investment grade’’ whereas for base plus a purchase must only have a ‘‘minimal amount of credit risk.’’ The commenter pointed out that a distinction has been made for credit risk as it applies to Part 1 versus base plus, but the standard for investment action plans remains the same for both expanded authorities. The commenter stated that investment action plans are defined as required when the investment presents more than a minimal amount of credit risk. The commenter suggested this infers that an investment purchased under Part 1 as ‘‘investment grade’’ would be considered subject to an investment action plan immediately after purchase. The commenter did not believe this was the NCUA’s intent and asked that this be clarified to remove any ambiguity. Another commenter suggested that there should be a way for a corporate credit union to make a minimal investment in a company without the company being classified a corporate credit union service organization (CUSO). The commenter stated that many companies shun corporate credit union investment dollars due to the regulatory constraints of becoming a corporate CUSO, having to primarily serve credit unions and to follow the various regulatory restrictions of part 704. The commenter said that without the opportunity to invest in companies, a corporate credit union cannot direct or participate in the direction of new products or services. The commenter argued that the intent of an investment in such a company is not measured by a return as it is with traditional investments (securities) but instead is an opportunity to help bring new technologies, products, and services to credit union members. One commenter requested that the NCUA make a technical correction. The commenter noted that changes to the member business lending rule caused references in § 704.7(e)(3) to § 723.1(b) and former § 723.16 to no longer be valid, leaving the rules for a loan to a member that is not a credit union or a corporate CUSO unclear. Report 2: The NCUA issued a final rule related to the first report’s recommendations in November 2017.5 Part 704 is scheduled to be reviewed again as part of the Office of General Counsel’s 2019 annual regulatory review. 2. Appendix B to Part 701—Chartering and Field of Membership Manual Addresses: Emergency Mergers. 5 82 PO 00000 FR 55497 (Nov. 22, 2017). Frm 00006 Fmt 4701 Sfmt 4702 Sections: Appendix 1 to Appendix B to Part 701. Category: Improve. Degree of Effort: Moderate. Degree of Impact: Moderate.6 Report 1: Revise the definition of the term ‘‘in danger of insolvency’’ for emergency merger purposes to provide a standard that better protects the 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 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. Comments: Approximately ten commenters offered support for the recommendations. Several commenters indicated the recommendation would make it easier for emergency mergers to occur and further protect the NCUSIF. One commenter said the recommended changes would allow the NCUA to better identify credit unions in danger of insolvency and give acquiring credit unions more time to step in and resolve troubled credit unions. Several commenters noted that, while they supported the increased flexibility, they objected to any regulatory regime that would result in rigid guidelines forcing credit union mergers. The commenters asked the NCUA to avoid any inflexible, one-size-fits-all rubric to resolve financially challenged institutions. One commenter felt the 208 assistance program had a poor track record in preventing credit union insolvency and urged the NCUA to explore ways to either improve the program’s success rate or to seek more effective remedies to help struggling credit unions. Report 2: The NCUA issued a final rule related to the first report’s recommendations in December 2017.7 No further action is being considered by the NCUA Board at this time. Part 701 is scheduled to be reviewed again as part of the Office of General Counsel’s 2019 annual regulatory review. 3. Securitization Addresses: Securitization. Sections: 721. Category: Expand Authority. Degree of Effort: High. Degree of Impact: Low. 6 Includes potential efficiencies and/or cost savings for NCUA. 7 82 FR 60283 (Dec. 20, 2017). E:\FR\FM\21DEP2.SGM 21DEP2 amozie on DSK3GDR082PROD with PROPOSALS2 Federal Register / Vol. 83, No. 245 / Friday, December 21, 2018 / Proposed Rules Report 1: Issue a legal opinion letter authorizing federal credit unions (FCUs) 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 (FICU), of financial assets transferred by the credit union in connection with a securitization or a participation. Comments: Approximately ten commenters offered general support for the recommendations. One commenter asked the NCUA to issue guidance to permit CUSOs to serve as aggregators of the mortgages underlying the securities. The commenter specifically reiterated the following points that it raised in a previously submitted letter: ‘‘(1) Expand the eligibility of loans beyond those originated by the securitizing credit union, in particular, by permitting the use of purchased loans needed to complete a pool as well as allowing the aggregation of loans by CUSOs; (2) provide flexibility in the levels of residual and retained interests in securitized assets that a credit union may hold; (3) authorize credit unions to have special purpose vehicles with the authority to enter into derivative transactions; and (4) provide additional clarifications on the types of securitization transactions in which credit unions may engage.’’ Several commenters requested new guidance as soon as possible. Another commenter urged the NCUA to work with the industry to develop guidance on an accelerated timeline. The commenter reasoned that building an effective securitization program takes time and investment in people and systems; thus, it is vital to have a clear understanding of any limitations on the type of activities a credit union can undertake. As part of this guidance, the commenter also suggested the NCUA set guidelines to allow well qualified credit unions, or their CUSOs, to serve as loan aggregators. The commenter felt that loan aggregation is a natural and necessary role within the financial services industry that should be extended to credit unions. Another commenter asked to work with the NCUA to develop the guidance through a working or advisory group established to allow credit unions and securitization experts to help identify key issues and concerns. Report 2: The NCUA implemented the first report’s recommendations through its June 2017 safe harbor final rule,8 and its June 21, 2017 legal opinion letter 8 82 FR 29699 (June 30, 2017). VerDate Sep<11>2014 00:33 Dec 21, 2018 Jkt 247001 65931 regarding the authority to issue and sell securities.9 Additionally, the Office of Examination and Insurance is currently developing guidance on asset securitization for credit unions. The NCUA is also evaluating whether any additional regulation, guidance, or supervision will be necessary. Report 2: The NCUA issued a final rule related to the first report’s recommendations in October 2017.10 No further action is being considered by the NCUA Board at this time. Part 746 is scheduled to be reviewed again as part of the Office of General Counsel’s 2020 annual regulatory review. 4. Supervisory Review Committee Addresses: Supervisory Review Committee. Sections: 746, Subpart A. Category: Improve. Degree of Effort: High. Degree of Impact: Low. Report 1: Expand and formalize procedures by which FICUs may secure review of material supervisory determinations by the 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 the NCUA’s Office of Examination and Insurance before a matter is considered by the SRC. Comments: Approximately five commenters offered specific support for the recommendations. One commenter commended the SRC reforms and the NCUA’s commitment to consider including appeals information in the agency’s Annual Report. Another commenter supported the final rule, but still desired additional improvements that were not finalized, such as consistent review panels and review of CAMEL 1 and 2 component scores. Several other commenters expressed appreciation for the NCUA’s willingness to provide several opportunities for review of material supervisory determinations from a program office. These commenters welcomed the additions of the intermediate SRC and the opportunity for oral argument before the NCUA Board directly. However, these commenters did contend that, given the nature of the regulator/ regulated relationship, an independent review option should also be available. Further, the commenters felt the rule should allow for a request for oral hearing up until the final disposition, reasoning that as a credit union works through a complaint it may determine an oral hearing is appropriate and it should be able to request one up until an appeal decision is made. 5. Appeals Addresses: Appeals. Sections: 746, Subpart B. Category: Improve. Degree of Effort: High. Degree of Impact: Low. Report 1: 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 NCUA 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 SRC). Appeals of matters that are delegated by rule to an officer or position below the NCUA Board for final, binding agency action are also excluded. Comments: Approximately ten commenters offered general support for the recommendations. One of these commenters commended the reforms and the NCUA’s commitment to considering the inclusion of appeals information in the agency’s Annual Report. Another commenter strongly supported the consolidation and improvement of procedures regarding appeals of adverse determinations. The NCUA does not have direct supervisory authority over CUSOs; however, one commenter said that the NCUA’s exercise of de facto supervision over CUSOs means CUSOs should also have the ability to appeal adverse determinations made by NCUA examiners through the CUSO review process. A handful of the supportive commenters noted that they appreciate the improved process, but felt the agency should provide a mechanism for 9 Asset Securitization Authority, NCUA OGC Op. Ltr. 17–0670 (June 21, 2017), available at https:// www.ncua.gov/regulation-supervision/Pages/rules/ legal-opinions/2017/asset-securitizationauthority.pdf. PO 00000 Frm 00007 Fmt 4701 Sfmt 4702 10 82 E:\FR\FM\21DEP2.SGM FR 50270 (Oct. 30, 2017). 21DEP2 65932 Federal Register / Vol. 83, No. 245 / Friday, December 21, 2018 / Proposed Rules amozie on DSK3GDR082PROD with PROPOSALS2 collection of exam feedback on the performance of individual examiners. These commenters argued that independent, ongoing, and confidential surveys should be processed and compiled by an external third party, free from public repercussion. The commenters felt that such a process would be advantageous for the NCUA by demonstrating education, training, and consistency metrics, as well as assisting in the merit pay process. The commenters said that most industries have successfully implemented client satisfaction methodologies to support data-driven decision making. Finally, one commenter supported this measure, but asked for reconsideration of additional changes, including expedited appeals when time is of the essence. Report 2: The NCUA issued a final rule related to the first report’s recommendations in October 2017.11 No further action is being considered by the NCUA Board at this time. Part 746 is scheduled to be reviewed again as part of the Office of General Counsel’s 2020 annual regulatory review. 6. Part 741—Requirements for Insurance Addresses: National Credit Union Share Insurance Fund Equity Distributions. Sections: 741.4; 741.13. Category: Improve. Degree of Effort: Low. Degree of Impact: High. Report 1: 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. Comments: A handful of commenters specifically supported the recommendation. Two of these commenters expected the same principles to be applied to 2018 Temporary Corporate Credit Union Stabilization Fund rebates. A third commenter strongly supported the recommendation, noting that the bright line proposed seems fairer to FICUs than the practice in existence at the time of the comment. The commenter emphasized that it is inherently inequitable to let credit unions terminate insurance coverage mid-year, and thereby avoid the risks of a premium assessment or capitalization 11 82 FR 50288 (Oct. 30, 2017). VerDate Sep<11>2014 00:33 Dec 21, 2018 Jkt 247001 deposit increase for the remaining months of that year, and still reward them with equity distributions at yearend. That practice, the commenter argued, disadvantages FICUs that remain insured throughout the calendar year and bear the risks others may avoid. The commenter also felt that FICUs considering terminating federal share insurance coverage should factor the risk of missing out on a year-end equity distribution into their decision. Conversely, a handful of commenters opposed the recommendation. One commenter asked the NCUA to apportion any potential distributions based on the total amount of assessments paid by the FICU and suggested a FICU’s proportionate share of a future equity distribution be determined by measuring the average of its four quarter-end insured share balances reported during the year applicable to the distribution. Several of the commenters reiterated concerns they had previously raised during the equity distribution method comment period. One of these commenters strongly urged the NCUA to forego any efforts related to this provision. The commenter felt that it is unclear how this provision would impact future equity distributions as they relate to the Corporate Resolution Program. The commenter noted that, at the time of the comment, if a FICU terminates federal share insurance coverage during the calendar year the credit union is entitled to receive an equity distribution, which is based on the insured shares as of the last day of the most recently ended reporting period and then reduced by the number of months remaining in the calendar year. The commenter applauded the simple and fair logic of that approach. Finally, another commenter reiterated objections to changes to § 741.4 that would deprive a credit union of a pro rata NCUSIF dividend share for a year in which that credit union was NCUSIF insured for at least part of the year. Separately, several commenters argued that the NCUSIF’s normal operating level can and should return to its historical 1.30% over the next several years. The commenters felt that, as the regulatory reform agenda moves forward in eliminating duplicative and outdated compliance burdens, continued stability will further ameliorate additional concerns regarding the NCUSIF’s normal operating level. Another commenter expressed continued concern over the 1.39% normal operating level, arguing the increase is significant deviation from the NCUA’s proven, successful policy. The commenter urged the NCUA PO 00000 Frm 00008 Fmt 4701 Sfmt 4702 to re-evaluate the normal operating level and to set it at 1.34% for a temporary period, followed by a return to the traditional 1.30% level. The commenter said that this historical policy dictated that the NCUSIF’s equity ratio would be countercyclical, rising in good times so that premiums would not be necessary at the troughs of a recession. Report 2: The NCUA issued a final rule related to the first report’s recommendations in February 2018.12 Under the final rule, a financial institution must file at least one quarterly Call Report within the current calendar year to be eligible to receive an NCUSIF equity distribution. This requirement applies to all potential beneficiaries of an NCUSIF equity distribution including FICUs that terminate federal share insurance coverage through conversion, merger, or liquidation. No further action is being considered by the NCUA Board at this time. Part 741 is scheduled to be reviewed again as part of the Office of General Counsel’s 2020 annual regulatory review. 7. 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.13 Report 1: 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. Comments: Several commenters offered general support for the recommendations. Commenters’ substantive recommendations focused on narrowing the rule’s applicability. Several commenters suggested raising the threshold to a significantly higher value, reasoning that since most credit unions are well under the $10 billion threshold currently, but have room to grow, a higher threshold would better reflect macroeconomic realities than an inflexible dollar amount. These commenters also argued that large credit unions are best equipped to internally self-conduct these exercises, with reports to examiners, given that, unlike the banking agencies, NCUA staff are not consistently involved in large institution contingency exercises. One commenter asked the NCUA to consider Congressional efforts to raise the bank stress testing threshold to $250 billion. Several other commenters argued that, 12 83 FR 7954 (Feb. 23, 2018). potential efficiencies and/or cost savings for NCUA. 13 Includes E:\FR\FM\21DEP2.SGM 21DEP2 Federal Register / Vol. 83, No. 245 / Friday, December 21, 2018 / Proposed Rules amozie on DSK3GDR082PROD with PROPOSALS2 given research indicating that the asset size of an institution is insufficient to determine riskiness, the proposal should be expanded to provide relief for more credit unions.14 One commenter argued that stress testing has become overly burdensome and has added unnecessary cost to the NCUA and affected credit unions, particularly considering the overall financial strength of the credit unions impacted by the rule. Report 2: On April 25, 2018, the NCUA issued a final rule 15 amending its stress testing regulations, which, among other things, raised the threshold for required stress testing to a minimum of $15 billion, and assigned responsibility for conducting stress testing to covered credit unions. No further action is being considered by the NCUA Board at this time. Part 702 is scheduled to be reviewed again as part of the Office of General Counsel’s 2019 annual regulatory review. 8. 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. Report 1: Revise certain provisions of the NCUA’s advertising rule to provide regulatory relief to FICUs. The current draft NPRM proposes to allow FICUs 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. Comments: Approximately ten commenters generally supported the recommendations and an increased parity with banks. Approximately five commenters specifically supported expanding the radio/television 14 The commenters cited recent proposals by federal banking regulators and the Office of Financial Research’s report, ‘‘Size Alone is not Sufficient to Identify Systemically Important Banks,’’ to support their position. 15 83 FR 17901 (Apr. 25, 2018). VerDate Sep<11>2014 00:33 Dec 21, 2018 Jkt 247001 exemption to 30 seconds. Several commenters supported eliminating the requirement for the advertising statement on statements of conditions. Approximately five commenters specifically supported updates to the rule to accommodate social media and urged that any new or modified rules should ensure credit unions retain maximum flexibility and the ability to take advantage of new technologies. Several commenters specifically supported the fourth version of the advertising statement. One commenter asked the NCUA to take steps to emphasize that part 740 preempts state advertising restrictions for FCUs and federally insured, statechartered credit unions (FISCUs). The commenter said that, for example, at a minimum, any modifications to these rules should retain the first sentence of part 740: ‘‘[T]his part applies to all federally insured credit unions.’’ The commenter further added that additional revisions to bolster the preemptive force of part 740 could provide additional clarity for both FCUs and FISCUs and ensure that all credit unions operate under fair and consistent advertising rules. One commenter suggested that the final rule should be much more expansive. Several commenters emphasized that this rule is a priority to them. One of these commenters asked the NCUA to make the fourth advertising statement and the 30 second exemption effective immediately following the proposed rule’s comment closing date. One commenter found the changes unneeded, reasoning that saving a few characters on social media is a nonissue and not worthy of Tier 1 status, especially since Twitter doubled its character limits. Report 2: The NCUA issued a final rule related to the first report’s recommendations in April 2018.16 No further action is being considered by the NCUA Board at this time. Part 740 is scheduled to be reviewed again as part of the Office of General Counsel’s 2020 annual regulatory review. 9. 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. Report 1: Revise the chartering and field of membership rules to give applicants for community-charter approval, expansion or conversion the 16 83 PO 00000 FR 17910 (Apr. 25, 2018). Frm 00009 Fmt 4701 Sfmt 4702 65933 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. Comments: Approximately ten commenters offered general support for the proposal. Several commenters opposed the public hearing requirement for determining well-defined local communities with populations over 2.5 million. One of these commenters felt that while such hearings may be warranted in the case of a narrative application, the requirement seemed capricious in the case of a well-defined presumptive community application based on a Combined Statistical Area or Metropolitan Statistical Area. Another of these commenters felt this is a technical legal issue for which public input is neither necessary nor appropriate. A handful of commenters supported removing the population limit on a community consisting of a statistical area or a portion thereof. One of these commenters said that the NCUA should approve field of membership requests based on the FCU’s demonstrated ability to serve members within a community, regardless of population, rather than on an arbitrary cap. At least one commenter supported allowing designation of a portion of a statistical area as a community without regard to metropolitan division boundaries. Another commenter asked the NCUA to consider additional improvements, including: Deadlines for FOM amendment requests, increased transparency in the decision making process, and streamlined charter conversions and notification requirements. Report 2: The NCUA issued a final rule related to the first report’s recommendations in June 2018.17 Specifically, the final rule allows the option for an applicant to submit a narrative to establish the existence of a well-defined local community instead of limiting the applicant to a presumptive statistical community. Also, the NCUA Board will hold a public hearing for narrative applications where the 17 83 E:\FR\FM\21DEP2.SGM FR 30289 (June 28, 2018). 21DEP2 65934 Federal Register / Vol. 83, No. 245 / Friday, December 21, 2018 / Proposed Rules proposed community exceeds a population of 2.5 million people. Further, for communities that are subdivided into metropolitan divisions, the NCUA Board will permit an applicant to designate a portion of the area as its community without regard to division boundaries. The NCUA Board expressly declined to increase the population limit for presumptive statistical communities. The final rule became effective September 1, 2018.18 Part 701 is scheduled to be reviewed again as part of the Office of General Counsel’s 2019 annual regulatory review. amozie on DSK3GDR082PROD with PROPOSALS2 10. Part 702—Capital Adequacy Addresses: Risk-Based Capital. Sections: 702. Category: Improve. Degree of Effort: Low. Degree of Impact: High.19 Report 1 (Delay): 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 current expected credit loss (CECL) accounting standard and consider any changes in risk-based capital standards for community banks currently being considered by the federal banking agencies.20 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. Report 1 (Substantive): 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. Comments: Approximately 15 commenters offered comments supporting delay of the RBC rule. Several commenters specifically 18 The NCUA has appealed the U.S. District Court for the District of Columbia’s ruling on the October 2016 field of membership rule. 19 Includes potential efficiencies and/or cost savings for NCUA. 20 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. VerDate Sep<11>2014 00:33 Dec 21, 2018 Jkt 247001 supported delaying implementation of the rule so that the NCUA can revisit the need for it as adopted. Approximately five commenters cited the concurrent timeline for implementation of the new CECL standard as a factor necessitating delay. One of these commenters reasoned that aligning these dates would provide additional time for capital planning and, to the degree deemed appropriate, potential alignment with community bank capital standards. The commenter felt such a delay would be high impact and low effort and consistent with Executive Order 13777’s spirit. Another commenter asked that the NCUA provide to credit unions any economic analysis it has conducted on the impact of the CECL standard, which the commenter believed will likely compound compliance issues for RBC covered credit unions when it takes effect. Approximately ten commenters cited system integration and call report update issues as factors necessitating delay. Several of these commenters said that compliance requirements have not been adequately noticed to provide system integration updates. Another commenter emphasized that without delay credit unions will be challenged to make required call report and system changes as the rule remains under review. One commenter stated that internal adjustments and implementation of new call report instructions take considerable resources with each change. The commenter felt that delaying the effective date and preventing a series of smaller and possibly conflicting changes that need to be readjusted over the next year will save credit unions time and resources. Several commenters said that delay and further study should be one of the agency’s highest priorities. The commenters reasoned that, given the January 2019 effective date, credit unions must begin planning for and altering operations as early as the second quarter of 2018 and strongly urged the NCUA to announce a delay as soon as possible. The commenters stressed that the longer the NCUA waits to delay the rule, the higher the likelihood that credit union operations will be affected. Another commenter said that delay is necessary to give credit unions more time to review the rule and to give the NCUA more time to develop the necessary call report changes. The commenter suggested the call report should be modernized to reduce reporting burdens and give regulators better tools for on-site exams and off-site monitoring. PO 00000 Frm 00010 Fmt 4701 Sfmt 4702 Approximately ten commenters asked the NCUA to narrowly tailor and simplify the rule. Approximately five commenters specifically asked the NCUA to narrow the complex credit union definition. Approximately five commenters specifically supported reducing the applicability of RBC and risk-weights to all smaller credit unions. Another commenter asked that, if the rule is retained, the NCUA further consider the rule’s scope and a complex credit union definition that is not so dependent on asset size. One commenter asked the NCUA to raise the threshold to at least $500 million. The commenter reasoned that the RBC requirements are supposed to give larger institutions greater flexibility while appropriately addressing system risk posed by larger institutions, goals the commenter does not believe a $100 million threshold satisfies. Approximately five commenters suggested the NCUA simplify the overall risk category and weighting scheme. Another commenter asked the NCUA to revisit the rule in light of the other federal banking agencies’ current review of simplified capital standards for community banks. Approximately five commenters asked the NCUA to exempt credit unions with high net worth ratios. One of these commenters asked the NCUA to study further whether RBC requirements should be applied to natural person credit unions and whether credit unions with high net worth ratios should be exempt from the RBC requirements. Another of these commenters suggested that the NCUA could implement an ‘‘off-ramp’’ from RBC requirements for well-capitalized credit unions similar to the CHOICE Act provision.21 Approximately five commenters stressed that RBC requirements should be narrowly tailored to capture only the appropriate risk profiles intended. The commenters said that credit unions are unique and vary in terms of asset class, lending activities, and membership fields and cautioned against a one-sizefits-all approach or methodology that would subject credit unions to undue regulatory burden that fails to appropriately address their activities. Approximately five commenters, in addressing the RBC recommendations, said that supplemental capital should be permitted to count towards credit unions’ RBC requirements, to the extent they must be met. One of these commenters asked that, if the NCUA’s 2015 RBC final rule is revised or retained instead of repealed, alternative 21 Financial CHOICE Act of 2017, H.R. 10, 115th Cong. (2017). E:\FR\FM\21DEP2.SGM 21DEP2 amozie on DSK3GDR082PROD with PROPOSALS2 Federal Register / Vol. 83, No. 245 / Friday, December 21, 2018 / Proposed Rules capital authority be provided to help covered credit unions meet the new RBC requirements. Another commenter stated that, regardless of any RBC delay, the alternative capital rulemaking should proceed now under Tier 1. The commenter said that the rulemaking is especially necessary because credit unions will need time to plan for and adopt new alternative capital options so they can manage their balance sheets prior to any RBC effective date. Several commenters asked the NCUA to adjust its RBC standards to accommodate the credit union model as opposed to the banking model, which the standards are based on. One of these commenters suggested that the NCUA should review European standards which take into account the cooperative model. The commenter suggested that, if the NCUA lacks the authority to make these changes, it should request such authority from Congress. One commenter provided a substantial comment arguing that the NCUA should incorporate the findings and actions of other federal banking agencies. The commenter cited a previous letter sent to the NCUA noting that the federal banking agencies issued a joint proposal to reduce regulatory burden by simplifying capital rules. The commenter said that the banking agencies proposed, in part, to simplify the threshold deduction for mortgage servicing assets (MSAs). The commenter stated that this would include raising the limit for MSAs from 10% of common equity tier I capital to 25%, where any MSAs that exceed that limit would be deducted from regulatory capital. The commenter felt that, while the federal banking agencies’ proposal would maintain MSA risk weight at 250%, this move clearly demonstrates the commitment to reduce regulatory capital burdens. The commenter said that the NCUA could take comparable measures to ease capital requirements, such as a reduced risk-weighting for MSAs and CUSOs, as well as the disparate weighting of mortgages based on concentration. Another commenter asked the NCUA to discard the 2015 RBC final rule and return to the previous one because the prior form of RBC is consistent with prompt corrective action (PCA) requirements under the FCU Act. The commenter also noted, however, that bank regulators are increasingly wary of RBC and some economists doubt its usefulness. The commenter cited a 2013 Mercatus Center study that the commenter said concluded that RBC is not an effective predictor of bank performance. The commenter also asked the NCUA to reconsider whether a VerDate Sep<11>2014 00:33 Dec 21, 2018 Jkt 247001 higher RBC requirement for wellcapitalized credit unions, compared to the one for adequately-capitalized credit unions, is justified given the language of the FCU Act under PCA, which the commenter believed conclusively precludes this result. At least ten commenters specifically suggested that substantive amendments to RBC are a priority. One commenter stated that Tier 2 prioritization for substantive changes was acceptable, provided the NCUA delay RBC’s implementation by at least 24-months. Another commenter recommended that the NCUA classify the Task Force recommendations as Tier 1 and accelerate the process to provide meaningful regulatory relief as soon as possible. Several commenters said that reconsideration of many aspects of the RBC rule should be a top priority. Report 2: After careful consideration and review, the NCUA issued a final rule related to the first report’s recommendations in October 2018.22 The final rule delayed the effective date of the RBC rule until January 1, 2020, and amended the definition of ‘‘complex’’ credit union for risk-based capital purposes, resulting in an increase in the asset threshold from $100 million to $500 million. Part 702 is scheduled to be reviewed again as part of the Office of General Counsel’s 2019 annual regulatory review. 2. Proposed Actions 11. Appendix A to Part 701—Federal Credit Union Bylaws Addresses: FCU Bylaws. Sections: Appendix A to Part 701. Category: Improve. Degree of Effort: High. Degree of Impact: High. Report 1: Recommend using an advance notice of proposed rulemaking (ANPR) and forming a working group to update the FCU bylaws. The FCU 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. Comments: Approximately five commenters offered general support for the recommendation. Several other commenters stated that bylaws should be optional, with credit unions permitted to use their own bylaws. Those commenters cautioned that the NCUA should not impose new and additional regulatory compliance or reporting burdens. One supportive commenter noted its previous calls for the NCUA to issue a proposed rulemaking or ANPR to implement the 2014 FCU Bylaws working group’s recommendations, including amending the required number of members needed on matters relating to special meetings and board nominations. Another commenter felt that NCUA’s prior approval of all bylaw changes is unnecessary when an after the fact notice to the region should suffice, particularly for changes already approved for other credit unions. The commenter also believed that sanctions for failure to comply with bylaws are overly harsh and unnecessary for most credit unions. One commenter specifically argued that Articles III and IV on member meetings and elections are overly prescriptive and need to be revisited with an eye toward facilitating governance procedures. Report 2: The NCUA issued a bylaws ANPR in March 2018 23 and a proposed rule with a request for comment in October 2018.24 12. § 701.21—Loans to members and lines of credit to members Addresses: Payday Alternative Loans (PALs). Sections: 701.21(c)(7). Category: Improve. Degree of Effort: High. Degree of Impact: High. Report 1: Not Available. Comments: Not Available. Report 2: In June 2018 the NCUA proposed amendments to the NCUA’s general lending rule to provide FCUs with an additional option to offer PALs.25 This proposal would not replace the current PALs rule (PALs I). Rather, it would be an alternative option, with different terms and conditions, for FCUs to offer PALs to their members. Specifically, this proposal (PALs II) would differ from PALs I by modifying the minimum and maximum amount of the loans, modifying the number of loans a member can receive in a rolling sixmonth period, eliminating the minimum membership requirement, and increasing the maximum maturity for these loans. The proposal would incorporate all other requirements of PALs I into PALs II. The NCUA also solicited advanced comment on the possibility of creating a third PALs loan program (PALs III), which could include different fee structures, loan features, maturities, and loan amounts. The comment period for this proposal closed on August 3, 2018. The Task Force recommends that the NCUA evaluate 23 83 FR 12283 (Mar. 21, 2018). FR 56640 (Nov. 13, 2018). 25 83 FR 25583 (June 4, 2018). 24 83 22 83 PO 00000 FR 55467 (Nov. 6, 2018). Frm 00011 Fmt 4701 Sfmt 4702 65935 E:\FR\FM\21DEP2.SGM 21DEP2 65936 Federal Register / Vol. 83, No. 245 / Friday, December 21, 2018 / Proposed Rules the comments received and explore the development of a PALS II final rule and potentially a PALS III proposal. amozie on DSK3GDR082PROD with PROPOSALS2 13. § 701.21—Loans to members and lines of credit to members Addresses: Loan maturity limits for FCUs. Sections: 701.21(c)(4)(e), (f), & (g). Category: Clarify. Degree of Effort: Moderate. Degree of Impact: High. Report 1: 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 GAAP standard for a ‘‘new loan’’ is not subject to the maturity limits. In addition, consider providing longer maturity limits for 1- to 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. Comments: Approximately ten commenters offered general support for the recommendations. Approximately ten commenters supported co-locating the maturity limits. These commenters stated that having limits spread across the regulations is confusing and inefficient and felt that having all of the limits in one section will improve compliance. Several commenters specifically supported incorporating the legal opinion. These commenters felt this would provide clarity and consistency across the examination regions and help compliance. Approximately five commenters specifically supported longer maturity limits for 1- to 4- family real estate loans and other similar housing loans and elimination of the case-by-case exception. These commenters argued that longer maturity limits would allow credit unions to more effectively compete in the real estate lending market. One of these commenters felt that removing the case-by-case requirements is consistent with the NCUA’s decision to give credit unions greater flexibility in making loans, provided such loans are consistent with prudent safety and soundness standards. Several other commenters specifically suggested amendments to the FCU Act’s loan maturity provisions, including changes to designate 1- to 4non-owner occupied loans as real estate loans rather than member business loans (MBLs). VerDate Sep<11>2014 00:33 Dec 21, 2018 Jkt 247001 Report 2: The NCUA issued a proposed rule with a request for comment in August 2018 addressing the first report’s recommendations.26 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. Report 1: 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. Comments: Approximately ten commenters agreed with the recommendation and offered general support. Two of these commenters stated that the recommendation will provide consistency for compliance purposes. One commenter supported the recommendation, but also asked for additional guidance and/or clarification as to the application of associated borrower in the commercial lending context. One commenter suggested moving this recommendation to Tier 3 so that resources can be used on more substantive relief. Report 2: The NCUA Board requested further comment on the single borrower and group of associated borrower limits in the August 2018 proposal addressing loan maturities.27 14. Part 722—Appraisals Addresses: Appraisals. Sections: 722. Category: Expand Relief. Degree of Effort: Moderate. Degree of Impact: High. Report 1: The NCUA should further explore issuing a rule to raise appraisal thresholds separately from the interagency process. In response to comments received through the Economic Growth and Regulatory Paperwork Reduction Act (EGRPRA) process, the 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 26 83 FR 39622 (Aug. 10, 2018). 27 Id. PO 00000 Frm 00012 Fmt 4701 Sfmt 4702 rental income derived from the real estate. In contrast to the other agencies’ appraisal regulations, the 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 the NCUA’s regulation for most real estate related loans, but also recognize a separate appraisal threshold of $1 million for 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 the 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, the NCUA further explore issuing a rule to raise both thresholds separately from the interagency process. Comments: Approximately ten commenters specifically stated that they supported raising the commercial real estate threshold to $400,000. One commenter strongly opposed raising the commercial real estate threshold. The commenter argued that the federal banking agencies’ proposal exemplified regulatory arbitrage, and contradicts regulators’ concerns regarding the commercial real estate market and the quality of evaluations. The commenter felt that regulators should be calling for heightened due diligence by institutions, particularly for credit unions and small community/regional banks, which the commenter suggested are less likely to have robust collateral risk management policies, practices, and procedures. The commenter asserted that bank failures overwhelmingly occur amongst smaller institutions and are in large part due to poor commercial lending decisions. The commenter also cited a recent survey that purportedly indicated an overwhelming majority of those closest to this issue believe that the thresholds should remain at $250,000. The commenter said that, while they appreciate lender concerns about appraiser availability in some rural areas, a national policy should not be tailored around isolated conditions. E:\FR\FM\21DEP2.SGM 21DEP2 amozie on DSK3GDR082PROD with PROPOSALS2 Federal Register / Vol. 83, No. 245 / Friday, December 21, 2018 / Proposed Rules The commenter stated that any one real estate market may experience rapid growth, but that growth may increase the importance of appraisals, as real estate is prone to market fluctuations. The commenter further emphasized that during the EGRPRA process many bank representatives’ appraisal concerns related to residential not commercial topics. To that point, the commenter noted that the number of commercial real estate appraisers has remained relatively steady in recent years as commercial lending activity has seen slight increases. The commenter concluded by saying that if the agencies proceed with the proposal the qualifications requirements for those completing evaluations should be raised or elevated to offset the safety and soundness risks caused by the increase in the threshold level. Approximately ten commenters specifically supported raising the threshold level for certain qualifying business loans (QBLs) to $1 million like it is for banks. One of these commenters provided a lengthy historical discussion on the NCUA’s appraisal waiver provision, § 722.3(a)(9), and compared it to the FDIC’s exemption for QBLs. The commenter analogized the need to remove the clunky waiver process to the NCUA’s recent removal of the MBL waiver. One commenter opposed raising the QBL threshold. The commenter was pleased the EGRPRA review did not recommend an increase in the QBL threshold. The commenter said that this is consistent with statements made by banking sector representatives, who expressed little to no concern about the current threshold during several outreach meetings. The commenter also noted that many of the loans that would be impacted by a proposed increase in the owner-occupied threshold level are guaranteed by the Small Business Administration (SBA) and that currently the SBA requires an appraisal for all loans above $250,000. Approximately ten commenters offered support for the NCUA to act separately from the interagency appraisals working group. The commenters expressed that raising the appraisal thresholds outside of the current interagency process makes sense as credit unions and the NCUA’s regulations differ from banks and the other agencies’ regulations. The commenters said that the changes should maximize relief, be consistent with credit union practice, and quickly provide parity with the requirements applicable to banks on appraisals. Conversely, one commenter said that absent more information, the NCUA’s withdrawal from the interagency VerDate Sep<11>2014 00:33 Dec 21, 2018 Jkt 247001 rulemaking was concerning. The commenter noted that state and federal regulators have recognized that current appraisal requirements are in some cases overly burdensome without producing a measurable offsetting supervisory benefit. The commenter also observed that critique of the appraisal requirements was a prominent theme in response to the EGRPRA process. The commenter stated two primary concerns with the NCUA’s withdrawal. First, the commenter said that the purpose of the Federal Financial Institutions Examination Council (FFIEC) is to coordinate consistent standards and that having divergent supervisory standards can cause complications when banks and credit unions interact in the marketplace. The commenter stated that the existing appraisal standard discrepancies have caused complication with loan participations, confused consumer/member borrowers, and confused loan officers. Second, the commenter was also concerned that when the NCUA has broken with its federal banking agency peers in the past it has been to impose unnecessarily higher standards on credit unions. Approximately three commenters stated the appraisals reforms should be made a priority. One of these commenters said that it was important to their state’s credit unions. Another of these commenters stressed that this should be proposed as soon as feasible to afford credit unions the same regulatory flexibility that other depository institutions now have. A different commenter stated that the inconsistency of the appraisal requirements for business loans made by credit unions compared to banks is a top issue for credit unions. One commenter stated that the current thresholds limit the ability of credit unions to use more advantageous rules on appraisals from the secondary market. The commenter noted that Fannie Mae provides appraisal waivers for some home purchase loans when there is a 20% down payment and a prior appraisal was obtained under its Collateral Underwriter program. The commenter said that Freddie Mac has a similar approach. The commenter stated that certain new mortgage refinancing, such as when the borrower has at least 20% equity in the home and is not receiving cash as part of the transaction, generally no longer requires appraisals in the secondary market. The commenter urged the NCUA Board to consider these developments as it reviews the NCUA’s appraisal requirements. PO 00000 Frm 00013 Fmt 4701 Sfmt 4702 65937 Finally, one commenter encouraged dialogue with state regulators as changes are considered. Report 2: The NCUA issued a proposed rule with a request for comment in September 2018 addressing the first report’s recommendations.28 The agency issued this proposal separately from the other banking agencies. The proposal would increase the threshold below which appraisals would not be required for nonresidential real estate transactions from $250,000 to $1,000,000. For nonresidential real estate transactions that would be exempted from the appraisal requirement as a result of the revised threshold, federally insured credit unions would still be required to obtain a written estimate of market value of the real estate collateral that is consistent with safe and sound lending practices. Additionally, the proposal would restructure § 722.3 of the NCUA’s appraisal regulation to clarify its requirements for the reader. Finally, the proposal would, consistent with the Economic Growth, Regulatory Relief, and Consumer Protection Act,29 exempt from the NCUA’s appraisal regulation certain federally related transactions involving real estate where the property is located in a rural area, valued below $400,000, and no state certified or licensed appraiser is available. 15. 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.30 Report 1: Explore ways to implement the requirements of the FCU Act in the least costly way possible. While requiring fidelity coverage is statutorily mandated by the FCU Act, the 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 the NCUA’s involvement in a credit union’s operational decisions while remaining consistent with the FCU Act. This should be done separately from the Regulatory Reform Task Force process. Comments: Approximately five commenters agreed that credit unions should be able to make business decisions on required fidelity bond and insurance coverage. One commenter 28 83 FR 49857 (Oct. 3, 2018). Growth, Regulatory Relief, and Consumer Protection Act, Public Law 115–174, 132 Stat. 1296 (2018). 30 Includes potential efficiencies and/or cost savings for NCUA. 29 Economic E:\FR\FM\21DEP2.SGM 21DEP2 65938 Federal Register / Vol. 83, No. 245 / Friday, December 21, 2018 / Proposed Rules suggested a working group that includes credit unions and insurers to update the rules to provide flexibility to make business decisions about bond coverage, particularly regarding the scope of coverage and deductibles. The commenter also felt that an ANPR would be useful to identify the range of issues before an actual proposal is developed. One commenter suggested that the NCUA move this to Tier 2 and focus on more pressing relief given the NCUA’s recent legal opinion relative to this topic.31 Report 2: The NCUA issued a proposed rule with a request for comment in November 2018 addressing the first report’s recommendations.32 The NCUA also issued a legal opinion addressing the permissibility of certain joint coverage provisions in fidelity bonds in September 2017.33 3. Future Actions amozie on DSK3GDR082PROD with PROPOSALS2 16. 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. Report 1: 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. Comments: Approximately five commenters offered general support for the recommendation. One commenter said that relief in this area is not a high priority and suggested a Tier 3 prioritization. Report 2: The Task Force recommends adopting the first report’s recommendation and prioritization. A proposed rule addressing this recommendation will likely be issued during the first quarter of 2019. 17. Part 715—Supervisory Committee Audits and Verification Addresses: Audit per Supervisory Committee Guide. Sections: 715.7(c). 31 OGC Op. Ltr. 17–0959 (Sept. 26, 2017). FR 59318 (Nov. 23, 2018). 33 OGC Op. Ltr. 17–0959 (Sept. 26, 2017). 32 83 VerDate Sep<11>2014 00:33 Dec 21, 2018 Jkt 247001 Category: Clarify. Degree of Effort: Moderate. Degree of Impact: High. Report 1: Revise this provision to remove the reference to the NCUA’s Supervisory Committee Audit Guide. In its place, include minimum standards a supervisory committee audit would be required to meet if the committee does not obtain a CPA opinion audit. Comments: Two commenters offered general support for the recommendations. Three commenters suggested that if the NCUA pursues this change, it should not impose additional compliance burdens and instead only simplify, clarify, and streamline the ‘‘minimum standards’’ required for supervisory committee audits. Another commenter argued that more substantial changes are needed. The commenter stated that while the NCUA applies some of part 715 to FISCUs by reference in §§ 741.6 and 741.202, it is unclear which provisions of part 715 apply to FISCUs. The commenter asked the NCUA to clarify which requirements apply to FISCUs by fully incorporating the audit requirements applicable to FISCUs in part 741. The commenter also recommended that the NCUA separate the FCU Supervisory Committees’ rules from FISCUs’ audit requirements since not all FISCUs use supervisory committees in their governance structures or for audits. One commenter asked that this recommendation be moved to Tier 3 because relief in this area is not a high priority. Report 2: The Task Force recommends adopting the first report’s recommendation and prioritization. A proposed rule addressing this recommendation will likely be issued during the first quarter of 2019. 18. Subordinated Debt (Formerly Alternative Capital) Addresses: Subordinated Debt. Sections: 702 generally. Category: Expand Authority. Degree of Effort: High. Degree of Impact: Low. Report 1: 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 FICUs could use in meeting capital standards. First, the NCUA Board should decide whether to make changes to the secondary capital regulation for low-income designated credit unions. Second, the NCUA Board should decide whether or not to authorize credit unions to issue supplemental capital instruments that would only count towards the riskbased net worth requirement. PO 00000 Frm 00014 Fmt 4701 Sfmt 4702 Comments: Approximately fifteen commenters offered general support for the recommendation. Several commenters suggested that the NCUA has the statutory authority to include alternative capital to satisfy the riskbased net worth requirement, and should do so. These commenters felt that an initial volume limit of 25% of retained earnings or 2% of total assets, whichever is greater, would be appropriate. Several other commenters said that alternative capital is necessary considering the RBC requirements. Another commenter argued that, in addition to allowing credit unions to use supplemental capital for RBC requirements, the NCUA should allow supplemental capital to be counted towards the current PCA capital requirements. The commenter said that the ability to raise supplemental capital provides the credit union industry and the NCUSIF additional layers of protection against unexpected losses. Approximately three of these commenters specifically said that they support efforts to explore additional sources of capital for purposes of net worth requirement calculations. These commenters felt supplemental capital should be permitted to count toward the risk-based net worth requirements. Several of these commenters suggested a supervisory approach that sets forth base requirements for issuance of capital instruments without specifying precisely how such broadly-defined instruments would comply. The commenters stated that the focus instead should be on the approval process, similar to the Food and Drug Administration’s drug monograph approval procedures. Another of these commenters urged the NCUA to promulgate a rule that incorporates the following principles: (1) Preserve the not-for-profit, mutual member-owned and cooperative structure of credit unions and ensure that ownership interest remains with the members; (2) ensure that the capital structure of credit unions is not fundamentally changed; (3) provide a degree of permanence such that the sudden outflow of capital will not occur; (4) allow for a feasible means to augment supplemental capital; and (5) provide a solution with market viability. Several commenters stated that secondary capital and supplemental capital should be consolidated. One commenter felt that for supplemental capital to be effective it should: Transfer risk outside of the credit union system; be scalable and appropriate to the size and complexity of the credit union; and provide sufficient parity with the banks so as not to negatively impact investor E:\FR\FM\21DEP2.SGM 21DEP2 amozie on DSK3GDR082PROD with PROPOSALS2 Federal Register / Vol. 83, No. 245 / Friday, December 21, 2018 / Proposed Rules interest in credit union supplemental capital instruments. One commenter suggested that the NCUA create a pilot program for alternative capital, similar to the derivatives rule. The commenter believed that by piloting supplemental capital with a select group of wellcapitalized, well-managed credit unions, the NCUA could efficiently monitor the program’s effectiveness and glean best practices that could benefit the entire industry. At least eight commenters emphasized that this issue should be made a Tier 1 priority. One of these commenters argued that two years is too long to wait to be able to participate in capital markets. The commenter emphasized that credit unions are required to maintain the same capital ratios, sustain the same reserves, and pay for deposit insurance the same as any bank. Several commenters asked the NCUA to reaffirm its commitment to implement the rule prior to the 2019 RBC effective date. Several commenters expressed concern that the report is ambiguous as to whether the agency remains committed to a robust alternative capital rulemaking, which they deem contrary to previous statements from the NCUA linking alternative capital rulemaking to RBC. The commenters argued that substantial work and deliberation has already been done and to abdicate the progress made would squander one of the more significant, and long sought, regulatory relief opportunities before the NCUA. More specifically, one commenter took issue with the report stating that the ‘‘Board should decide whether or not to authorize credit unions to issue supplemental capital instruments that would only count towards the riskbased net worth requirement.’’ The commenter said that the NCUA Board’s public statements seem to show this affirmative decision has already been made and mentioned that substantial work has already been done to develop the rule. The commenter cited the RBC comment process, the 2017 alternative capital ANPR, and the 2007 working group white paper as evidence of the work already done. The commenter asked the NCUA Board to move forward now to capitalize on this momentum. The commenter also emphasized that the NCUA, the NCUA Board, and the Chairman have consistently stated the intent to implement the supplemental capital rule prior to the RBC requirements’ effective date and took issue with the report providing ‘‘no compelling justification to reverse course.’’ The commenter argued that abandonment of this initiative is inconsistent with the regulatory reform VerDate Sep<11>2014 00:33 Dec 21, 2018 Jkt 247001 agenda’s goals and while the report’s effort/impact matrix makes sense generally, it falls short given the NCUA Board’s consistent statements. The commenter further pointed to statements by the Chairman that suggest the rule would afford credit unions heightened opportunity to extend jobcreating small business loans that strengthen the economic viability of Main Street. Additionally, the commenter reiterated that RBC requirements may impose significant regulatory burden if not accompanied by access to some form of supplemental capital. The commenter concluded that a well-designed supplemental capital rule would serve as a tool to help credit unions meet the new RBC requirements and would ensure that the RBC rules are comparable to other bank regulatory agencies as required by 12 U.S.C. 1790d(b)(1)(A). Another commenter was perplexed by alternative capital’s Tier 2 placement, especially since the NCUA has prioritized other PCA/net worth requirement related provisions in Tier 1. For example, the commenter argued that alternative capital’s Tier 2 placement would make it unavailable for use in meeting risk-based net worth requirements until after the RBC rule’s effective date. The commenter also took issue with the fact that the first report is ‘‘ambiguous’’ as to whether the agency remains committed to a robust alternative capital rulemaking. The commenter felt this contrary to repeated statements from the NCUA unequivocally linking an alternative capital rulemaking to RBC. The commenter said that alternative capital is an essential tool for both low-income designated credit unions and non-lowincome designated complex credit unions to meet net worth thresholds. The commenter also cited an FAQ on the NCUA’s website stating that the NCUA Board plans to move forward with a rule to allow supplemental capital to be counted in the RBC numerator before the rule’s effective date.34 The commenter lamented that substantial work and deliberation has already been done, including, but not 34 Frequently Asked Questions about NCUA’s Risk-Based Capital Final Rule October 2015 (stating ‘‘Q10. Will credit unions be authorized to raise supplemental capital for purposes of risk-based net worth? Yes. The NCUA Board plans in a separate proposed rule to address comments supporting additional forms of supplemental capital. As the risk-based capital final rule does not take effect until January 1, 2019, there is ample time for the NCUA Board to finalize a new rule to allow supplemental capital to be counted in the riskbased capital numerator before the effective date.’’), available at https://www.ncua.gov/Legal/ Documents/RBC/RBC-Final-Rule-FAQs.pdf. PO 00000 Frm 00015 Fmt 4701 Sfmt 4702 65939 limited to: A 2007 whitepaper concluding supplemental capital was a worthwhile policy goal; solicitation of input on supplemental capital during the RBC comment process; a 2016 NCUA Board briefing on issues related to supplemental capital; a 2017 ANPR with over 100 supportive comments; and legislation introduced in Congress to provide alternative capital authority for all credit unions without regard to RBC standards. The commenter acknowledged that alternative capital is complex, but emphasized that state regulators, the NCUA, and many in the credit union system have been studying this issue and developing regulatory frameworks for well over a decade. The commenter asked the NCUA to commence rulemaking to enhance lowincome designated credit union secondary capital rules and to establish supplemental capital for RBC. One commenter strongly disagreed that an alternative capital overhaul would have a low impact and instead felt alternative capital authority would have a substantial impact. The commenter argued that capital modernization is needed as credit unions face both external challenges such as economic cycles, social media and Bank Transfer Day, with no growth opportunities beyond retained earnings. The commenter said that the need for increased earnings through managed risk is stronger than ever and a critical component of capital modernization. The commenter stated that credit unions are seeking the ability to increase loan portfolios and other growth opportunities within the not-for-profit cooperative structure. The commenter believed authority to issue and accept alternative capital is vital to safeguarding the future of the credit union system and argued that unforeseen circumstances could strain a credit union’s capital position to a point where the ability to quickly raise supplemental capital would be a valuable option. The commenter felt that increasing retained earnings, often the only current option, may not be sufficient in a severely stressed situation. The commenter suggested that alternative capital would also provide an additional source of protection for the NCUSIF. Report 2: Upon further consideration and in response to stakeholder feedback the Task Force moved this recommendation from Tier 2 to Tier 1. Subordinated debt (formerly alternative capital) is a priority for the Chairman, the agency, and commenters. As such, all recommendations associated with subordinated debt were moved to Tier 1. All other aspects of this recommendation remain unchanged. E:\FR\FM\21DEP2.SGM 21DEP2 65940 Federal Register / Vol. 83, No. 245 / Friday, December 21, 2018 / Proposed Rules amozie on DSK3GDR082PROD with PROPOSALS2 19. § 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. Report 1: 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. Comments: In response to this recommendation, six commenters were supportive of alternative capital generally. One commenter said that more credit unions are looking to take advantage of the economic opportunities of secondary capital. The commenter stated that although it is a comparatively small field now, amendments could offer a new avenue for low-income designated credit unions that are hesitant due to regulatory barriers to find new sources of capital and help to provide services for chronically underserviced communities. The commenter felt that improving regulatory clarity and reducing the burden of the approval process could benefit low-income designated credit unions and the communities they serve. Another commenter argued that secondary capital accounts should be controlled by state law for FISCUs, including those seeking a low-income designation by their state regulatory agency. The commenter believed that the limits §§ 701.32 and 701.34 place on FISCUs pursuant to § 741.204 are unnecessarily preemptive and unduly burdensome. The commenter felt that while secondary capital accounts do not count toward regulatory capital requirements for non-low-income designated credit unions, the ability to offer the accounts is not inherently unsafe and unsound, and therefore should be subject to state law. Report 2: Upon further consideration and in response to stakeholder feedback the Task Force moved this recommendation from Tier 2 to Tier 1. Subordinated debt (formerly alternative capital) is a priority for the Chairman, the agency, and commenters. As such, all recommendations associated with subordinated debt were moved to Tier 1. All other aspects of this recommendation remain unchanged. VerDate Sep<11>2014 00:33 Dec 21, 2018 Jkt 247001 20. § 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. Report 1: Recommend revising this section of the regulation to comprehensively address the borrowing authority for FCUs. See the January 2017 ANPR on alternative capital for a discussion on this subject. Also, see recommended changes to part 702. A comprehensive borrowing rule could provide clarity and certainty needed to support supplemental capital. Comments: Several commenters said that a comprehensive borrowing rule could provide clarity to support supplemental capital concerns, but cautioned against imposing additional regulatory burdens. These commenters stated that any rule should retain flexibility for credit unions to structure the offering in a cost-effective manner, regardless of the nature of the capital instrument, be it equity or subordinated debt. One commenter suggested the NCUA implement a pilot program similar to the derivatives rule. The commenter felt that a pilot program would yield best practices that could benefit the entire industry. The commenter recognized that statutory amendments may be necessary to provide meaningful alternative capital options for all credit unions, but suggested that a revised regulatory capital framework would still offer increased flexibility to credit unions that must meet the NCUA’s risk-based net worth requirement. One commenter asked for a Tier 1 prioritization. Report 2: Upon further consideration and in response to stakeholder feedback the Task Force has moved this recommendation from Tier 2 to Tier 1. Subordinated debt (formerly alternative capital) is a priority for the Chairman, the agency, and commenters. As such, all recommendations associated with subordinated debt were moved to Tier 1. All other aspects of this recommendation remain unchanged. 21. § 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. Report 1: Raise the nonmember deposit limit from 20% to 50%. As the functional equivalent of borrowing, this PO 00000 Frm 00016 Fmt 4701 Sfmt 4702 will parallel the ability of credit unions to borrow from any source up to 50% of paid-in and unimpaired capital and surplus per § 1757(9) of the FCU Act. A credit union is required to be lowincome designated to accept nonmember deposits, limiting the institutions that can engage in this activity. Comments: Approximately five commenters offered general support for the recommendation. Several commenters noted that they support the development and preservation of community development credit unions and the use of the NCUA’s statutory authority to support and encourage their growth. These commenters felt that raising the nonmember deposit limit to 50% would be a positive step. One commenter believed that raising the limit would allow credit unions to establish deeper relationships with political subdivisions and other public units, such as cities and counties. Another commenter noted that concerns regarding the limit have caused many to shy away from or unnecessarily limit a strategic source of liquidity. The commenter stated that, as is the case for loan participations, the use of the national wholesale market on both the liability side of the balance sheet as well as the asset side allows credit unions to manage certain risks with greater precision and provides for the ability to take advantage of liquidity sources that may allow for expansion of services while competing on a level playing field. One commenter stated that these types of transactions are functional equivalents to borrowings and should be subject to the same limits. Another commenter asked that the NCUA provide an exemption to any state regulatory authority that seeks to set a higher limit. Finally, several commenters asked for a Tier 1 prioritization. Report 2: Upon further consideration and in response to stakeholder feedback the Task Force has moved this recommendation from Tier 2 to Tier 1. All other aspects of this recommendation remain unchanged. 22. § 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. Report 1: Modify to provide flexibility with respect to senior executive compensation plans that incorporate lending as part of a broad and balanced E:\FR\FM\21DEP2.SGM 21DEP2 amozie on DSK3GDR082PROD with PROPOSALS2 Federal Register / Vol. 83, No. 245 / Friday, December 21, 2018 / Proposed Rules set of organizational goals and performance measures. Comments: Approximately ten commenters offered general support for the recommendation. One commenter supported allowing the flexibility to structure senior executive compensation plans to incorporate lending incentives. The commenter felt that such plans will help credit unions compete more effectively for talent and align organizational goals more closely with individual incentives. Another commenter supported the recommendation, but encouraged the NCUA to add stipulations that would require loan delinquencies to be given consideration so that the quality of the loans is measured. Several commenters argued that de minimis thresholds should apply in any assessment of compensation, either discretionary or compulsory. Multiple commenters asked the NCUA to clarify how the agency interprets ‘‘overall financial performance’’ in § 701.21(c)(8)(iii). One of these commenters stated that, despite the rule’s allowance for covered employees to receive compensation based on the credit union’s ‘‘overall financial performance,’’ credit unions and examiners sometimes disagree regarding compensation programs that appear to meet this requirement. Another commenter stated that two provisions in particular create confusion and unduly limit well managed credit unions’ ability to provide incentives for good performance: (1) Section 701.21(c)(8)(iii)(B) permits bonuses and compensation to an employee but it must be based on the ‘‘overall financial performance’’ of the credit union, rather than being tied to the performance of their department or individual function; and (2) Section 701.21(c)(8)(iii)(C), under which a bonus or incentive may be provided to an employee in connection with lending performance, but the employee cannot be a senior management official. According to the commenter, the 1995 final rule’s preamble states that the rule allows FCUs to pay: ‘‘(1) to any employee, including a senior management employee, an incentive or bonus based on the overall financial performance of the credit union.’’ The commenter argued that, while the regulatory text does not specifically include the ‘‘including senior management’’ language in subsection (iii)(b), the preambles of the proposal and final rules make clear the intention to include senior management in the exception. According to the commenter, the 1995 final rule did not articulate any specific concerns to warrant the exclusion of VerDate Sep<11>2014 00:33 Dec 21, 2018 Jkt 247001 senior management from the overall financial performance exception. One commenter did not support the incentive compensation proposal. Report 2: The Task Force recommends adopting the first report’s recommendation and prioritization. 23. 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. Report 1: 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’’ 35 or that are ‘‘providing services which are associated with the routine operations of credit unions.’’ 36 Comments: A handful of commenters offered very general support for increasing and enhancing CUSO permissible activities. Several commenters that supported expanding CUSO permissible activities argued that, for many credit unions, the use of CUSOs will be essential as the need to seek operational efficiencies intensifies and credit unions face increasing competitive pressure from a variety of depository and non-depository financial service providers, such as fintechs. The commenters indicated that CUSOs provide a means for credit unions to address challenges related to changing consumer expectations and the need for technologies to better serve credit union members. Another commenter suggested that the NCUA abandon the preapproved list of CUSO activities and permit credit unions to invest in or loan to CUSOs offering products and services generally incidental to credit union business. One commenter asked the NCUA to allow limited FCU investment in a FISCU CUSO even if that FISCU CUSO engages in activities not permissible for an FCU. The commenter argued that de minimis exposure should not rise to the level of being considered circumvention of FCU permissible activity provisions and suggested that this change would expand the opportunities for system collaboration and innovation. Approximately five commenters asked that the NCUA expand and clarify CUSOs’ loan origination powers. Commenters suggested that the NCUA expand permissible activities in § 712.5 35 12 36 12 PO 00000 U.S.C. 1757(5)(D). U.S.C. 1757(7)(I). Frm 00017 Fmt 4701 Sfmt 4702 65941 to include ‘‘loan origination of all types of loans that may be provided by a credit union.’’ The commenters noted that with this addition the specific origination authority for business loans, consumer mortgage loans, student loans, and credit card loans could be deleted. Several of these commenters also suggested the NCUA make it clear that CUSOs are able to make, purchase, or sell any types of loans that credit unions can make on their own. Several commenters wrote extensively on this issue. One of these commenters believed that CUSOs can play a pivotal role as credit unions turn increasingly to collaborative solutions in lending to reduce costs and compete with noncredit union loan aggregators. The commenter said that if CUSOs cannot be loan aggregators, credit unions will be at the mercy of non-credit union loan aggregators who are not willing to deal with the membership requirements. The commenter noted that credit unions are currently excluded from participation in the loan aggregation networks that more consumers are turning to for loans, especially for auto loans. The commenter argued that the fact that some types of loans are permitted to be originated by CUSOs and some are not seems based on historical happenstance rather than any sound policy. The commenter, along with several other commenters, stated that § 712.5 is a categorical list of pre-approved activities a CUSO may provide and not meant to be an exclusive laundry list of activities. However, the ‘‘categories’’ of loan origination services CUSOs are permitted to provide are not categories of services by themselves and create confusion in the industry. To demonstrate this, the commenter noted that ‘‘business loan origination’’ has meant for years that CUSOs can originate and hold ‘‘business loans’’ and asked if this precludes a CUSO from originating ‘‘commercial loans.’’ Similarly, the commenter asked if ‘‘consumer mortgage loan origination’’ precludes the origination of home equity loans or lines of credit. The commenter emphasized that selective lending power can be awkward and confusing. The commenter suggested the time is appropriate to expand CUSO lending powers. The commenter argued that CUSOs should have the power to ‘‘originate and hold all types of loans credit unions can make.’’ The commenter believed that this change would create an unambiguous, rational, and highly defensible lending services definition for CUSO powers and would correct a policy that the commenter felt E:\FR\FM\21DEP2.SGM 21DEP2 amozie on DSK3GDR082PROD with PROPOSALS2 65942 Federal Register / Vol. 83, No. 245 / Friday, December 21, 2018 / Proposed Rules authorizes certain lending powers for CUSOs and excludes others without a rational basis. More specifically, the commenter suggested that the NCUA amend § 712.5 by deleting references to the origination of business loans, consumer mortgage loans, student loans and credit card loans (§ 712.5(c), (d), (n), and (s)) and adding the power to ‘‘originate and hold loans, including the authority to buy and sell participation interests in such loans’’ as a new § 712.5(c). A handful of commenters emphasized that the ability for CUSOs to package and sell loans to investment buyers is critical to credit unions moving forward, particularly if Fannie Mae and Freddie Mac are eliminated or their presence in the marketplace is reduced. The commenters felt that to continue cost effectively providing home loans that put the borrowers first, credit unions need to participate in the securitization market. The commenters stressed that secured loan investment packages require scale in order to make them affordable and attractive in the marketplace and noted that, except for a limited few, credit unions do not have sufficient loan volume to create single issuer loan packages. The commenters encouraged the NCUA to explore the ability of multiple credit unions to combine to sell their loans in multiissuer packages with crossindemnifications. The commenters concluded that enabling this cooperative activity would be a significant contributor to future financial health and stability for the industry. Approximately five commenters provided comments addressing CUSO examinations. Several of these commenters provided general statements that CUSOs should not be subject to full examinations. Several other commenters asked the NCUA to revise the current approach to safety and soundness supervision of credit union CUSO investments and suggested it is best performed through the credit union supervisory framework, not the direct supervision of CUSOs themselves. The Task Force notes that the NCUA does not directly regulate or supervise CUSOs, but instead supervises credit unions’ CUSO investments through the credit union supervisory framework. Several commenters asked the NCUA to stop exercising de facto exam powers over CUSOs. The commenters described these exams as compelling CUSOs to report directly to the NCUA and comply with NCUA directives through the credit union owners and felt this was an exercise of power without specific VerDate Sep<11>2014 00:33 Dec 21, 2018 Jkt 247001 congressional authority. The commenters asked the NCUA to revise the regulations in a manner that leaves no doubt that the agency is acting both within its authority and consistently with the need for safety and soundness supervision of credit union CUSO investments. The commenters also suggested that the NCUA use this regulatory review process to continue to compile necessary data on the investment of credit unions in CUSOs through the registry, but discontinue conducting de facto examinations in the form of CUSO reviews. One commenter said that if the NCUA elects to continue to exercise de facto supervision over CUSOs, the agency should formally advise the Bureau of Consumer Financial Protection (BCFP) of that fact. The commenter noted that the BCFP administers the Secure and Fair Enforcement for Mortgage Licensing Act and the licensing and registration of mortgage loan originators (MLOs). The commenter said that prior to the passage of the most recent CUSO regulation, the NCUA advised the BCFP that it did not have the power to regulate CUSOs. The commenter said that this resulted in MLOs in the CUSOs providing mortgage lending services having to be licensed and not registered. The commenter explained that in multistate situations, this means that MLOs and the CUSOs may have to be licensed in many states and incur greatly increased expenses and regulatory burden. The commenter requested the NCUA’s assistance, should it continue to conduct de facto CUSO examinations in the form of CUSO reviews, in informing the BCFP that the NCUA exercises sufficient supervision over CUSOs to justify that CUSOs be exempt from the licensing requirements and the MLOs in CUSOs qualify for registration. Several commenters said that they believe the percentage credit unions can invest in CUSOs should be increased. The Task Force notes that the FCU Act limits FCU CUSO investments to the 1% of paid-in and unimpaired capital and surplus currently permitted by § 712.2(a) of the NCUA’s regulations.37 Another commenter noted that they support review of the CUSO regulation and said that they felt the January 2016 changes were punitive and excessive in light of the relatively low risk CUSOs pose to the system and went beyond the NCUA’s authority. The commenter believed that the current rule burdens CUSO operations and limits credit unions’ abilities to use CUSOs to maximize their services. The commenter said that, for example, the rule 37 12 PO 00000 U.S.C. 1757(7)(I). Frm 00018 Fmt 4701 Sfmt 4702 established elaborate reporting of CUSO activities to the NCUA and includes a list of high risk CUSO activities such as payroll processing that subject CUSOs to additional requirements. The commenter asked the NCUA to reconsider these requirements. The commenter also asked the NCUA to reconsider the need for the ‘‘costly CUSO Registry.’’ Additionally, the commenter said that they did not support the NCUA’s past efforts to obtain statutory authority over CUSOs and other third-party service providers. The commenter stated that they appreciate that the current NCUA Board is not pressing Congress for such authority. The commenter felt that such authority would be an unnecessary expansion of the agency, would result in higher costs to credit unions, and would divert the agency from its primary mission of supervising and regulating credit unions. One commenter asked the NCUA to reorganize the CUSO rules to co-locate FISCU applicable provisions or move the FISCU applicable provisions to part 741 to eliminate confusion as to which provisions apply to FISCUs. One commenter suggested that there should be a way for a corporate credit union to make a minimal investment in a company without treating it as a corporate CUSO. The commenter stated that many companies shun corporate credit union investment dollars due to the regulatory constraints of becoming a corporate CUSO, having to primarily serve credit unions and to follow the various regulatory restrictions of part 704. The commenter said that without the opportunity to invest in companies, a corporate credit union cannot direct or participate in the direction of new products or services. The commenter argued that the intent of an investment in such a company is not measured by a return as it is with traditional investments (securities) but instead is an opportunity to help bring new technologies, products, and services to credit union members. Finally, a commenter, noting their strong belief in the economies of scale and other advantages that CUSOs confer to credit unions, asked the NCUA to increase the prioritization of CUSO reform. The commenter recommended that the NCUA Board publish an ANPR in 2018 that solicits ideas and other feedback. Report 2: Upon further consideration and in response to stakeholder feedback the Task Force has moved this recommendation from Tier 3 to Tier 1. After reviewing the degree of effort and the potential impact, the Task Force believes that this recommendation is E:\FR\FM\21DEP2.SGM 21DEP2 Federal Register / Vol. 83, No. 245 / Friday, December 21, 2018 / Proposed Rules amozie on DSK3GDR082PROD with PROPOSALS2 more appropriately placed in Tier 1. The change should be low effort and high impact. The NCUA plans to issue a 2019 proposed rule on allowing CUSOs to originate any loan that a credit union may provide. 24. § 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.38 Report 1: 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. Comments: Several commenters offered general support for the recommendations. A handful of commenters urged the NCUA to further explore options, including eliminating the maximum interest rate. Approximately five commenters noted that the loan interest rate ceiling has stayed at 18% since 1987 and felt it makes sense to study whether future rate changes should be tied to a domestic index. One of these commenters felt such a change would give much-needed elasticity to a rate cap that hasn’t changed since 1987 despite dramatic economic swings. Another commenter felt that a variable rate could result in more certainty for FCUs regarding future loan rate ceilings and would facilitate credit union lending and overall planning. One commenter suggested amending the ceiling to a 15% spread over prime, and articulated a belief that this action would help credit unions reduce interest rate risk. The commenter said that the NCUA has urged credit unions to be vigilant in identifying and managing interest rate risk and felt this action would go a long way towards helping credit unions reduce risk. The commenter believed that adjusting the interest rate cap so it floats with the level of prime would provide regulatory relief to the entire industry because it would benefit any credit union that makes variable rate loans to its members. The commenter said that, absent this relief, credit unions will either absorb margin compression, which places more capital at risk, or scale back lending to certain segments of the population. The commenter felt that this relief would enable credit 38 Includes potential efficiencies and/or cost savings for NCUA. VerDate Sep<11>2014 00:33 Dec 21, 2018 Jkt 247001 unions to remain competitive, serve a broader spectrum of their members, and better manage risk and capital. The commenter concluded that this would provide relief for credit unions and reduce risk to the NCUSIF because the industry would be better positioned to absorb rising interest rates. Several commenters said that removal of a specific means for notifications is appropriate given the pace of development in modern communication technology. The commenters believed that, to that end, the NCUA should take steps to ensure the application of this principle to all aspects of credit unions’ communications, including advocating that credit unions have the flexibility to contact their members via modern communications. Several commenters asked the NCUA to move the recommendation to Tier 1. One of the commenters urged the NCUA to make this its top priority given rising rates and the expectation the Federal Reserve Board will continue to raise rates in 2018. Report 2: Upon further consideration and in response to stakeholder feedback the Task Force has moved this recommendation from Tier 3 to Tier 1. In addition to being a priority for commenters, the loan interest rate is a priority for the Board. As such, the NCUA plans to issue a 2019 ANPR to solicit further input. 4. Other Commenter Suggestions for Tier 1 One commenter asked the NCUA to eliminate the readily marketable collateral standard in the new MBL rule. The commenter said that readily marketable collateral is a legal term of art that has not previously been imposed on credit unions. The commenter stated that, in determining whether to classify collateral as ‘‘readily marketable,’’ the Office of the Comptroller of the Currency has focused on an instrument’s fungibility, trading ease, the ability to obtain reliable price quotations on a daily basis, and trading of the instruments through a regulated market. The commenter noted that, unlike banks, which the commenter said can easily obtain and utilize such collateral, credit unions typically do not often deal with collateral that satisfies the above criteria. The commenter said that this has resulted in some credit unions being unable to engage in MBLs that they were previously authorized to engage in, notwithstanding the fact that one of the primary purposes of the NCUA’s MBL reforms was to give credit unions greater flexibility to make MBLs provided doing so was consistent with a credit union’s risk profile and PO 00000 Frm 00019 Fmt 4701 Sfmt 4702 65943 expertise. The commenter concluded that the NCUA should exercise its regulatory power to remove the readily marketable collateral standard and instead mandate that a credit union only be allowed to make such loans based on sound and prudent underwriting standards backed by adequate collateral. The commenter suggested a Tier 1 prioritization for this recommendation. Several commenters asked for changes related to the restoration of accrual status on member business loan workouts. The commenters recommended clarifying appendix B to part 741, the interpretive ruling and policy statement on loan workouts, nonaccrual policy, and regulatory reporting of troubled debt restructured loans. More specifically, the commenters recommended the NCUA align its policy pursuant to restoration to accrual status on member business loan workouts with those of other federal bank regulators. The commenters said that the NCUA’s rules require a repayment period of six consecutive payments while banking agencies require only six consecutive months. The commenter stated that the NCUA’s more restrictive term creates difficulties with credits with annual payments. The commenters said that under the NCUA’s structure a credit could be in non-accrual status for six years despite strong performance in the case of an annual credit. The commenters asked the NCUA to reconsider whether the more stringent repayment requirement for credit union commercial accrual status remains necessary. One of these commenters noted that semi-annual or annual payment schedules are commonly found in agricultural purpose MBLs. The commenters suggested a Tier 1 prioritization for this recommendation. ii. Tier 2 (Year 3) 1. Part 703—Investment and Deposit Activities Addresses: Investment and Deposit Activities. Sections: 703. Category: Improve & Expand. Degree of Effort: High. Degree of Impact: High. Report 1: Revise the regulation to remove unnecessary restrictions on investment authorities not required by the FCU Act, and provide a principlesbased 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 FISCUs as well). See the appendix for details on modifying this regulation. Investments Comments: Approximately ten commenters offered E:\FR\FM\21DEP2.SGM 21DEP2 amozie on DSK3GDR082PROD with PROPOSALS2 65944 Federal Register / Vol. 83, No. 245 / Friday, December 21, 2018 / Proposed Rules explicit support for the expansion of investment authority, removal of unnecessary restrictions not required by the FCU Act, and a principles-based approach. Several of these commenters said that these changes would allow credit unions to reduce risk and perform better. Several more of these commenters said that in order to be competitive in today’s financial services marketplace credit unions should be permitted to invest in a broad range of investment alternatives, subject to the decision-making control of their member directors. These commenters said that amending this section could give credit unions access to professionally-managed, separateaccount investments with greater transparency than is afforded via permitted mutual funds. Several other commenters argued that if the FCU Act allows a type of investment, a credit union should be able to consider its purchase based on its balance sheet needs, risk appetite, and safety and soundness position. One commenter suggested that any approved rule changes should be accompanied by similar guidance and training for examiners to help ensure principlesbased changes are permitted. One commenter stated that a principles-based approach may enhance permissible investment options available to credit unions to fund executive and employee benefit programs that help retain and attract quality employees. Another commenter argued that a more principles-based approach will allow credit unions to tailor their investment activities to their individual portfolio needs. The commenter also concluded that allowing further authority will strengthen the board and senior management’s ability to consider the best options based on individual circumstances. Several commenters stated that they support the removal of the prescriptive due diligence requirements applicable toward investment advisors and brokerdealers, given the nature of those business models, and instead requiring credit unions to perform due diligence. One commenter encouraged the creation of a working group that includes credit union officials and investment advisors. The commenter also suggested the development of an ANPR to provide a foundation for a comprehensive update of part 703. The commenter further recommended that the NCUA consider investment authority for community banks as it reviews new flexibility for credit unions. VerDate Sep<11>2014 00:33 Dec 21, 2018 Jkt 247001 Approximately five commenters asked the NCUA to permit credit unions to purchase mortgage servicing rights. Approximately five commenters asked the NCUA to allow credit unions to invest in municipal bonds without limitation. One of these commenters said that the blanket limitations on municipal security exposure only hamper credit unions that are able to appropriately measure, understand, and deal with the risks specific to these investments, which the commenter stated are quite common in other financial institutions. The commenter argued that the ability to take some credit risk in the investment portfolio allows credit unions to maintain needed earnings while reducing other portfolio risks, such as interest rate risk. The commenter stated that some credit unions have suffered material losses and/or lost revenue due to this unnecessary limit. The commenter also said that the limit does not factor risk considerations for general obligation versus revenue securities as is considered in the FCU Act (revenue issues having a limit versus general obligations having none), nor does it consider the effect of other credit enhancement factors, such as sinking fund provisions. One commenter prioritized and strongly supported removing limits on zero-coupon investments. The commenter felt that change would provide credit unions with added flexibility to manage their investment portfolios as they seek to offset risk. Another commenter objected to requiring a minimum of investment grade for all investments and argued it would increase regulatory burden. One commenter asked the NCUA to expand investment authority to include other asset classes important for risk diversification and portfolio performance. The commenter asked the NCUA to explore authorizing the purchasing of: Investment-grade corporate debt; auto and other consumer debt asset-backed securities; and mortgage servicing rights assets. The commenter argued that for a credit union with sufficient resources, knowledge, systems, and procedures to handle the risks, there is no reason why investing in investment-grade corporate debt and asset-backed securities products should be prohibited. The commenter felt that authorization would promote the overall efficiency of credit union industry investment holdings since these asset classes are important for risk diversification and portfolio performance. The commenter argued that empirical data shows that a reasonable allocation to these assets PO 00000 Frm 00020 Fmt 4701 Sfmt 4702 classes provides diversification benefits such that the return series is less risky, not more risky. The commenter did advise that they are not aware of the legal landscape and the effort authorization would require. The commenter also said that credit unions are already in the mortgage servicing business and many are already large holders of these assets. The commenter noted, however, that many credit unions also may desire to shed the asset, possibly because of concerns over the asset’s risk profile or the economic barriers to building an efficient servicing operation. The commenter concluded that allowing for transacting could promote the greater efficiency of the overall system. Several commenters asked that at least some of the part 703 changes be moved to Tier 1. One of these commenters specifically asked that the recommendations in Subpart A numbers 1, 5, 7, 9, and 16 be moved to Tier 1. Derivatives Comments: Approximately five commenters explicitly supported removal of the preapproval requirements for derivatives and replacement with a notification requirement. One commenter opposed removal of the preapproval requirement and replacement with a notice requirement. The commenter felt that at this point it is important for the NCUA to ensure that a credit union is sophisticated enough to purchase derivatives. One of the supportive commenters commended efforts to widen the rule’s applicability and said that the replacement of the application process with a notification requirement and the removal of the volume-based limits are a step forward in promoting a more efficient interest rate risk management process. Several of the supportive commenters also supported the removal of limits on permissible off-balance sheet hedging instruments and expanding eligible collateral to include agency debt. These commenters felt that these changes would allow more credit unions to effectively manage interest rate risk, subject to appropriate supervisory intervention. Another commenter suggested that the authorization of two instruments, Eurodollar futures and interest rate swap futures, would improve hedging efficiency and effectiveness. One commenter noted that the NCUA has not reviewed the derivatives rule since it was issued in 2014 and asked that review of the rule be made a priority. The commenter said that the combination of the suspended annual regulatory review and the Tier 2 classification defers consideration until E:\FR\FM\21DEP2.SGM 21DEP2 amozie on DSK3GDR082PROD with PROPOSALS2 Federal Register / Vol. 83, No. 245 / Friday, December 21, 2018 / Proposed Rules 2020 at the earliest. The commenter argued that this designation ‘‘creates a serious inconsistency or otherwise interferes with regulatory reform initiatives and policies,’’ which is one of the criteria of Executive Order 13777. Further, the commenter disagreed that the effort associated with revising this rule is high. The commenter reasoned that the derivatives volume limits appear in a narrow section of part 703 and the invention of these artificial limits created more work than removing them would. The commenter did not understand why, given the Task Force acknowledged that the impact of revising this rule would be high, it is not a Tier 1 proposal—high impact and low effort. The commenter concluded by urging the NCUA to at least fix the weighted average remaining maturity notional (WARMN) limit immediately if the agency delays review of the entire rule. Several commenters asked the NCUA to immediately eliminate the volumebased limits. One of these commenters argued that the derivatives volume limits, particularly the WARMN, have no parallel in the regulatory practice of any other FFIEC regulator, nor any state regulatory body of which the commenter is aware. The commenter also said that, similarly, the fair value limit threshold of negative 25% of regulatory net worth is arbitrary and is not evidence that a credit union has failed to hedge its assets properly. The commenter said that failure to manage interest rate risk, created by serving members’ needs through long-term real estate lending, is the greatest mid- to long- term financial threat facing credit unions, and therefore, the NCUSIF. The commenter felt that credit unions and the NCUSIF have been fortunate to have gone through a sustained period of low interest rates, but luck is not a riskmitigation strategy. The commenter cited the following to evidence that the need for hedging is significant: 49% of credit union loans are real estate loans, a portfolio that continues to grow at 10% per year; only 15% of credit union mortgage loans are adjustable rate loans; and 33% of credit union assets are longterm, whereas only 4% of credit union deposits are longer than three years. The commenter felt that part 703 already provides the governance and approval framework required to ensure that credit unions do not use derivatives for speculative purposes or in ways that inadvertently create harm to their net worth. The commenter argued that the derivatives volume limits do not reduce risk and said that, to the contrary, they limit the capacity of credit unions to VerDate Sep<11>2014 00:33 Dec 21, 2018 Jkt 247001 adequately hedge the interest rate risk inherent in their business practice, thereby creating risk to the credit unions and the NCUSIF. The commenter continued by arguing that tying notional value limits to a small multiple of net worth, as opposed to the amount of long-term assets the FCU holds, fails to match permissible risk mitigation to the risk created by holding those long-term assets. The commenter said that if an FCU has 10% net worth and mixes its swaps between 5 and 10 years to cover the longer-end of its fixed-rate loan portfolio, a 100% WARMN means the FCU cannot have notional swaps of more than 13.33% of assets. The commenter concluded that such a limit is sufficient if the FCU has long-term assets limited to 25–30% of its assets, but it is probably insufficient if an FCU has more long-term assets. As an example, the commenter said that a credit union with 60% of its assets in mortgage loans should be permitted to hedge at least 50% of this amount with long-term swaps, or roughly 25% of assets (or 250% of net worth). The commenter said that if instead the credit union can only hedge 13.33% of assets, as short-term rates rise sooner than assets mature, the credit union’s net worth can quickly dissipate, given the fact that a large share of the long-term assets are largely un-hedged. The commenter said that, put more simply, the current WARMN limit means that a credit union with 10% net worth can only hedge 10% of its balance sheet with 10 year pay-fixed interest rate swaps. The commenter argued that this is simply insufficient for the large percentage of credit unions engaged in mortgage lending. The commenter believed that the current WARMN limit dramatically increases interest rate risk for the credit union system overall. The commenter finished by stating that the industry cannot wait two to three more years with nothing more than a hope that unhedged interest rates will remain stable and low. Two commenters provided detailed comments advocating that the NCUA allow credit unions to invest in mutual funds that have access to the same interest rate risk mitigating derivatives as credit unions. One of these commenters suggested that mutual funds could be effective in mitigating interest rate risk by engaging in limited derivative activities. The commenter noted that § 703.100(b)(2) of the NCUA’s regulations specifically excludes mutual funds that contain derivatives from being a permissible FCU investment. The commenter felt that mutual fund managers with a high level of derivatives expertise and a well- PO 00000 Frm 00021 Fmt 4701 Sfmt 4702 65945 developed derivatives program infrastructure could help mitigate the portion of interest rate risk attributable to credit unions’ indirect investments. The commenter stated that mutual funds marketed to credit unions and restricted to FCU permissible investments should be expected to encounter risks similar to those faced by FCUs themselves. The commenter said that those risks, including interest rate risk, are passed on to shareholder credit unions if left unmitigated by the portfolios. The commenter recommended that the NCUA clarify that mutual funds have access to the same interest rate risk mitigating derivatives as credit unions themselves. The commenter believed that this broad, comprehensive view of interest rate risk mitigation would ultimately reduce risk to the NCUSIF. The commenter suggested that the NCUA explicitly state that, in addition to investing in all other FCU-permissible investments, mutual funds that possess an NCUA-approved level of financial sophistication, risk management, and operational capabilities (and market to credit union investors) may invest in permitted derivatives to mitigate the inherent risks of those other FCU-permissible investments. The commenter felt this change could be implemented with a low degree of effort given the regulatory and compliance infrastructure a mutual fund registered under the Investment Company Act of 1940 already has in place, but could have a significant impact given the limited number of credit unions that have been granted derivative authority to date. The other commenter asked the NCUA to allow credit unions to invest in mutual funds offered by Management Investment Companies (MICs). The commenter said that the MIC would be the entity receiving NCUA derivatives authority as opposed to numerous individual credit unions. The commenter suggested that the NCUA could modify regulations to incorporate requirements for individual credit union investors utilizing any MIC issued funds with derivative authorities (policies, procedures, etc.). According to the commenter, the MIC would be registered under the Investment Company Act of 1940 and the Securities Act of 1933. From this perspective, the commenter said that the MIC would fall under the SEC’s regulatory scope. The commenter noted that the existing regulatory framework of the mutual fund industry includes considerable oversight at the time of registration, as well as frequent ongoing reporting requirements. The commenter said that, E:\FR\FM\21DEP2.SGM 21DEP2 amozie on DSK3GDR082PROD with PROPOSALS2 65946 Federal Register / Vol. 83, No. 245 / Friday, December 21, 2018 / Proposed Rules as they understand it, this reporting includes an annual prospectus, annual and semi-annual reports and other requirements related to various changes which occur during the interim. The commenter concluded that with this approach a credit union could invest in mutual funds that obtained derivatives authority from the NCUA. The commenter said that the intention would not be to create a fund invested entirely in derivatives, but to allow approved MICs the ability to utilize derivative tools to manage the interest rate risk within the fund. The commenter suggested that, as opposed to credit unions investing in individual securities with embedded interest rate, a credit union could utilize a fund as an alternative investment tool. The commenter noted that investing in such a fund would not grant any additional derivative authority to a credit union. The commenter concluded that this solution could: Increase the number of credit unions that could afford to participate and receive the benefits of derivative tools; allow access for credit unions with assets less than $250 million; reduce the cost of participating in the program; utilize the expertise of regulated third parties; provide less of a resource drain on NCUA staff; and retain for the NCUA the direct ability to set and monitor requirements of thirdparty vendors. The commenter felt that this could be an important risk management tool. 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. Report 1: Recommend moving § 701.21(i) to part 703 Subpart B— Derivatives Authority to have all options/derivatives authority in one section. Comments: Two commenters offered general support for the recommendation, noting that they support all conforming clarifications to ensure that regulations are clear, consistent, and where appropriate bundled in relevant and rational sections. One commenter opposed this recommendation and the recommendation to rename 703 Subpart B ‘‘Derivatives and Hedging Authority.’’ The commenter felt that the changes add complexity, which is contrary to the intent of the regulatory reform agenda. One commenter asked that it be deprioritized since it is a procedural change that the commenter does not believe will afford significant relief. VerDate Sep<11>2014 00:33 Dec 21, 2018 Jkt 247001 Report 2: Upon further consideration and in response to stakeholder feedback the Task Force has moved this recommendation to the top of Tier 2 and the NCUA plans to take action related to this recommendation in 2019. The Task Force has also merged into the investments recommendation the separate recommendation to move § 701.21(i) to part 703 Subpart B— Derivatives Authority so that all options/derivatives authority in one section. The Task Force also emphasizes that the FCU Act prevents the NCUA from offering all of the relief credit unions are seeking in this area. All other aspects of these recommendations remain unchanged. 2. § 701.22—Loan Participations Addresses: The 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% of the FICU’s net worth (unless waived). Sections: 701.22(b)(5)(ii); 701.22(c). Category: Remove. Degree of Effort: Low. Degree of Impact: High. Report 1: Remove the prescriptive limit on the aggregate amount of loan participations that may be purchased from one originating lender. Replace with a requirement that 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% of net worth. Eliminates the need for the waiver provision in § 701.22(c). Comments: Approximately 15 commenters offered support for eliminating the prescriptive limit on the aggregate amount of loan participations that may be purchased from any one originating lender and allowing credit unions to establish limits within a board approved policy. One commenter asked the NCUA to provide coordinated training and guidance for examiners if the recommendation is adopted to avoid an exam defaulting to the previous prescriptive standard. Another commenter stated that they felt this proposal was well-reasoned. The commenter said that the credit risk associated with an individual loan and the concentration risk from a high aggregate single borrower exposure are more significant risks to the NCUSIF than those associated with overexposure to a properly vetted originating lender. The commenter felt that the current limitation has the adverse and unintended effect of forcing credit unions to pursue loans from new, unfamiliar, and in some cases less qualified and experienced originators PO 00000 Frm 00022 Fmt 4701 Sfmt 4702 simply to avoid an arbitrary cap. The commenter believed that such pursuits result in an inefficient use of internal resources to conduct proper and ongoing originator due diligence, which if not done properly will result in additional risk within a credit union’s portfolio. The commenter concluded that allowing each credit union to establish its own sensible policy limit on the aggregate amount of loan participations purchased from a single originating lender will bring needed flexibility and encourage credit unions to customize their participation loan programs to their own size, needs, and appetite for risk. Another commenter observed that under the MBL rule the NCUA treats certain purchased loan participations as MBLs, including for risk weighting under the RBC rule. The commenter said that if the participation involves a loan to a member of the purchasing credit union, even though the loan was originated by the selling credit union, the interest in the participation must be counted as an MBL by the purchasing credit union. The commenter felt that this treatment is not justified and encouraged the NCUA to reconsider it as it reviews this regulation. The commenter said that, in light of the provisions that apply to loan participations under the MBL rule, the loan participations rule could benefit from the approach proposed for eligible obligations (strip away requirements not required by the FCU Act and consolidate provisions in one place in the regulations). One commenter noted that the conflict of interest provisions regarding the use of third parties to review a loan participation could be clearer as to when the third party can actually acquire an interest in the loan participation. Several commenters asked that this be made a priority and moved to Tier 1. One commenter argued that the recommendations require relatively low effort, involve removing prescriptive limits or otherwise streamlining requirements, and would help credit unions manage their balance sheets more effectively. The commenter reasoned that removing unnecessary prescriptive limits and elements that are contrary to modern holistic balance sheet funds management theory would provide some credit unions risk management options that may be too late in three years when the market environment may have changed further. Report 2: The Task Force recommends adopting the first report’s recommendation and prioritization, with an understanding that the FCU Act E:\FR\FM\21DEP2.SGM 21DEP2 Federal Register / Vol. 83, No. 245 / Friday, December 21, 2018 / Proposed Rules amozie on DSK3GDR082PROD with PROPOSALS2 prevents the NCUA from offering all of the relief credit unions are seeking. 3. § 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. Report 1: 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.39 Comments: Approximately ten commenters offered general support for the recommendations. Several commenters said that the removal of supervisory ratings and limitations beyond the statutory scope will aid credit unions in their member service business by reducing regulatory burden. The commenters felt that providing credit unions with the unlimited ability to purchase, sell, and pledge eligible member obligations is in the spirit of the credit union business model. One commenter opined that current limits to purchasing eligible obligations may only exacerbate the challenges facing credit unions that are struggling for earnings and/or risk diversification and take away much needed opportunities that could otherwise be part of a strategic aspect to cure concerns. The commenter said that waivers take time and rely on examiners recognizing the strategic importance/appropriateness of the request. One commenter stated that the NCUA has the authority to allow credit unions to purchase whole loans from non-credit unions and argued that credit unions ought to have broad authority to purchase loans from other originators, particularly other federally insured depositories. The commenter argued that purchasing loans from other financial institutions can be a riskappropriate, well-priced alternative to purchasing low-yielding, over-priced securities. Another commenter said that, although the recommendation lacks detail, they would support a revised rule that allows for any credit union to purchase an eligible obligation that has been originated by a FICU, regardless of whether it is an obligation of its members. The commenter believed such 39 See 12 U.S.C. 1757(7)(E), 1757(13), and 1757(14). VerDate Sep<11>2014 00:33 Dec 21, 2018 Jkt 247001 a rule would not bring new risk into the system, yet would provide purchasing and selling FICUs with more market options, which ultimately would lower the cost for consumers. Finally, one commenter asked the NCUA to clean up the language in § 701.23, which it believes to be the single most confusing regulation governing FCU powers. Several commenters also asked that the recommendations be moved to Tier 1. One commenter contended that since the regulation was part of the Office of General Counsel’s 2015 regulatory review revisions should be considered in 2018. Another commenter argued that the recommendations require relatively low effort, involve removing prescriptive limits or otherwise streamlining requirements, and would help credit unions manage their balance sheets more effectively. The commenter reasoned that removing unnecessary prescriptive limits and elements that are contrary to modern holistic balance sheet funds management theory would provide some credit unions risk management options that may be too late in three years when the market environment may have changed further. Report 2: The Task Force recommends adopting the first report’s recommendation and prioritization. 4. § 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. Report 1: Review this regulation to determine if NCUA approval is really needed in purchasing loans and assuming liabilities from market participants other than FICUs. 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 transactions not material to the acquirer) is an inordinate burden for the institution and the NCUA. Comments: Approximately ten commenters offered general support for the recommendation and felt prior approval an unnecessary burden. Several commenters agreed that requiring agency approval in every case might be an inordinate burden, especially since credit unions already have broad authority to make loans, buy investments and other assets, and enter into transactions that create liabilities. Several commenters said that credit unions should retain the broad PO 00000 Frm 00023 Fmt 4701 Sfmt 4702 65947 flexibility and authority to lend, purchase, and sell assets and liabilities, not subject to NCUA approval in all cases. These commenters welcomed review to determine whether NCUA approvals are necessary in deals between credit unions and other nonFICU market participants. One commenter argued that preapproval should not be required for a FISCU purchase of liabilities from a non-FICU. The commenter believed that the NCUA’s approval for such transactions has never materially contributed to the transaction’s safety and soundness and argued that there is no indication that a non-FICU, regulated by a state regulator, is less safe than an FCU. Another commenter argued that nothing in Title II of the FCU Act gives the NCUA the authority to proscribe the loan purchase powers of a FISCU. The commenter asked the NCUA to eliminate the loan seller restrictions governing FISCUs in § 741.8. Finally, several commenters asked that this recommendation be moved to Tier 1. Report 2: The Task Force recommends adopting the first report’s recommendation and prioritization, with an understanding that the FCU Act prevents the NCUA from offering all of the relief credit unions are seeking. 5. § 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. Report 1: Add a comprehensive thirdparty due diligence regulation and remove and/or relocate such provisions from other regulations. Comments: A handful of commenters supported increased clarity and simplification, but cautioned that no new or additional regulatory burdens should be imposed. One of these commenters was concerned that ‘‘comprehensive’’ implies additional regulations. This commenter said that vendor due diligence is a priority for credit unions as more services become more complex requiring the use of specialized vendors. However, the commenter felt that the current regulations achieve the NCUA’s desired goal of a safe and sound credit union system. One commenter agreed with a review of what they believed to be considerable and burdensome due diligence requirements. This commenter generally agreed with consolidating due diligence requirements in one rule, but did not think the agency should regulate how credit unions meet their due E:\FR\FM\21DEP2.SGM 21DEP2 amozie on DSK3GDR082PROD with PROPOSALS2 65948 Federal Register / Vol. 83, No. 245 / Friday, December 21, 2018 / Proposed Rules diligence obligations. The commenter said that any revised due diligence rule should not be overly prescriptive, but should focus on allowing credit unions to determine how best to vet third parties. Several other commenters felt the recommendation did not provide sufficient information to comment. One of these commenters said that they would oppose any recommendation that would increase NCUA authority over third-party vendors. The commenter believed that would significantly increase credit unions’ costs. Another of these commenters stated that they have a robust due diligence program and do not support additional regulatory burden aimed at reinventing the thirdparty services landscape. The commenter argued that such action would run contrary to Executive Order 13777. Addresses: Third-party servicing of indirect vehicle loans. Sections: 701.21(h). Category: Remove. Degree of Effort: Low. Degree of Impact: Moderate. Report 1: 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. Comments: Approximately ten commenters offered general support for the recommendations. One of these commenters specifically noted that the recommendations will assist compliance. Several commenters offered support, but were concerned that a ‘‘comprehensive’’ regulation would lead to overly burdensome requirements. One of these commenters asked the NCUA to focus on clarifying and condensing existing third-party due diligence requirements. Another of these commenters expressed their desire that the NCUA ensure that credit unions maintain control over the direction of their institution and are not intimidated by examiners who may micromanage credit union contracts. One commenter supported the Tier 1 prioritization. Another commenter asked that once the comprehensive guidance related to third-party management is developed all references to third-party due diligence be consolidated into a single provision requiring credit unions establish policies for managing third-party relationships. Report 2: Upon further consideration and in response to stakeholder feedback the Task Force has combined these recommendations in Tier 2 to avoid VerDate Sep<11>2014 00:33 Dec 21, 2018 Jkt 247001 bifurcating rulemakings addressing third-party management. 6. 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.40 Report 1: Revise the payout priorities to make unsecured creditors pari passu with the NCUSIF. Currently, unsecured creditors are senior to the NCUSIF. Comments: A handful of commenters generally supported the recommendation. Several of these commenters felt that the recommendation would help the larger credit union industry. One commenter noted that while the recommendation lacked detail, they support it because it could further protect the NCUSIF. Report 2: Upon further consideration and in response to stakeholder feedback the Task Force has moved this recommendation from Tier 3 to Tier 2. The Task Force believes this recommendation will help to protect the NCUSIF and higher prioritization is appropriate. iii. Tier 3 (Year 4+) 1. § 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. Report 1: Enhance federal preemption where possible and appropriate. FCUs 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. Comments: Approximately ten commenters offered general support for the recommendations. One of these commenters asked the NCUA to clarify the scope of preemption as it applies to FISCUs, not just FCUs. Approximately five of the commenters emphasized the potential beneficial impact on credit unions in multi-state situations. These commenters emphasized that multi-state lenders face regulatory overlap and additional burden. They felt that providing greater clarity on where federal law applies through regulation would provide regulatory relief. One 40 Includes potential efficiencies and/or cost savings for the NCUA. PO 00000 Frm 00024 Fmt 4701 Sfmt 4702 commenter said that any opportunity to ensure and clarify for credit unions the supremacy of federal lending laws is welcome and long overdue. Another commenter said that determining whether a state law is preempted is difficult and they would appreciate any additional or explicit guidance. One commenter emphasized that preemption to facilitate operations can help reduce compliance burdens and produce cost savings. The commenter noted that it supported the NCUA’s view of its preemption authority and encouraged the agency to consider preemption broadly while being mindful of consumer and state authority concerns. Several commenters felt that preemption should be made a priority. These commenters recommended elevating the recommendation to either Tier 1 or Tier 2. A few commenters did caution the NCUA to make sure that federal preemption of applicable state laws and regulations is narrowly tailored so as not to undermine a state supervisory structure. The commenters said that since many credit unions opt for state charters based on their members’ business needs, any federal legal preemption should not unduly burden the compliance obligations of credit unions who have not sought the degree of federal oversight imposed. Report 2: The Task Force recommends adopting the first report’s recommendation and prioritization. 2. § 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. Category: Remove/Improve. Degree of Effort: Moderate. Degree of Impact: Low. Report 1: Determine if this regulation remains relevant and necessary. Comments: Several commenters thought this regulation irrelevant, unnecessary, and no longer applicable. Report 2: The Task Force recommends eliminating this regulation. 3. Part 714—Leasing Addresses: Leasing. Sections: 714. Category: Improve. Degree of Effort: Moderate. Degree of Impact: Undetermined. Report 1: Review this regulation to identify if any changes or improvements are needed. Comments: Approximately five commenters encouraged relief to provide flexibility and inspire more leasing. One of these commenters noted E:\FR\FM\21DEP2.SGM 21DEP2 Federal Register / Vol. 83, No. 245 / Friday, December 21, 2018 / Proposed Rules amozie on DSK3GDR082PROD with PROPOSALS2 that the leasing rule was adopted in 2000 and, while there may not be the need for numerous changes, it is appropriate that the NCUA review the rule, which the commenter believed to be overly detailed and oriented toward micromanagement. The commenter stated that, for example, the rule controls the amount of the estimated residual value a credit union may rely upon to satisfy the full payout lease requirement, which is 25% of the original cost of the leased property unless the amount above that is guaranteed. The commenter felt this kind of detail about the mechanics of a leasing program would be more appropriately determined by the credit union. Several commenters said that credit unions should have the flexibility to run their business as best suits their members’ needs. These commenters argued that the leasing regulations should be reduced to allow more credit unions, other than the largest, to engage in this activity if it is appropriate to their business needs. The commenters felt that credit unions are uniquely positioned to provide creative, tailored lease terms that give members greater flexibility in personal leases. Report 2: The Task Force recommends adopting the first report’s recommendation and prioritization. 4. 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. Report 1: Update this regulation to streamline, facilitate the use of correspondents, and reduce minimum collateral requirements for certain loans/collateral. Comments: Approximately five commenters provided comments offering support and substantive recommendations. Several commenters stated that they support updates that reduce minimum collateral requirements as well as facilitate the use of correspondents. As detailed more fully below, one commenter provided a number of substantive recommendations. The commenter said that for the past several years, the corporate credit union community has worked closely with the CLF in order to provide operational efficiency with advances, repayments, and collateral management through a correspondent agreement with each VerDate Sep<11>2014 00:33 Dec 21, 2018 Jkt 247001 corporate credit union. As such, the commenter asked that the NCUA amend § 725.2 to include a definition of a correspondent. The commenter also asked the NCUA to modify § 725.19 to reflect a market-based approach to collateral values. The commenter noted that current CLF collateral requirements call for a blanket net book value equal to at least 110% of advances and for certain types of collateral, i.e. marketable securities, CLF collateral values compare unfavorably to the Federal Reserve Board discount window and the Federal Home Loan Banks. Additionally, the commenter requested that the NCUA eliminate various references to dates in part 725 that are outdated. The commenter also suggested the NCUA consider amending § 725.4(a)(2), which requires an agent member to purchase capital stock for all of its member natural person credit unions, in conjunction with a change to § 304(b)(2) of the FCU Act,41 to allow the purchase of capital stock on behalf of a select group of member credit unions. The commenter noted that as corporate credit unions recapitalized their balance sheets following the crisis, the purchase of CLF capital stock for all member credit unions was thought to be prohibitively expensive by the corporate community. The commenter believed that the suggested changes would enable more natural person credit unions to access liquidity from the CLF during periods of tight liquidity. The commenter also thought that corporate credit unions should have the ability to borrow directly from the CLF for liquidity purposes, and requested that the NCUA consider modifications to part 725 in conjunction with efforts to modernize the FCU Act in order to allow CLF advances directly to corporate credit unions. The commenter noted that during the financial crisis the CLF instituted several programs, including the Credit Union System Investment Program, which provided access to liquidity for select corporate credit unions. The commenter said that these programs required an advance from the CLF to a natural person credit union, following which the natural person credit union invested proceeds of the advance in a note issued by the corporate credit union and guaranteed by the NCUSIF pursuant to the Temporary Corporate Credit Union Liquidity Guarantee Program. The commenter argued that, while these transactions facilitated liquidity to corporate credit unions, the transactions were complex and costly. 41 12 PO 00000 U.S.C. 1795c(b)(2). Frm 00025 Fmt 4701 The commenter also noted that they object to § 306(a)(1) of the FCU Act,42 which reads in part ’’the Board shall not approve an application for credit the intent of which is to expand credit union portfolios.’’ The commenter argued that all advances expand a credit union’s portfolio and the determination of whether or not an advance serves a liquidity purpose should be left up to the CLF. A separate commenter asked the NCUA to review the authority for the CLF as well as its role and function. The commenter opined that the CLF was designed to be an important and useful facility that provides access to liquidity for those credit unions that could demonstrate the need and repay their borrowings. The commenter also stated that the CLF provides credit unions with a reliable resource for contingency funding needs. The commenter said that despite the CLF’s past role, it currently has only 269 regular members and has no loans. The commenter believed that the CLF can be a useful facility that credit unions may utilize for liquidity when interest rates begin to rise again and asked the NCUA to work with Congress to restructure the CLF, ease requirements for credit unions to be members, and extend the range of borrowing opportunities. One commenter specifically supported the Tier 3 categorization. Another commenter, citing the CLF’s role during the financial crisis, felt part 725 warrants a higher priority. Report 2: The Task Force recommends adopting the first report’s recommendation and prioritization, with an understanding that the FCU Act prevents the NCUA from offering all of the relief credit unions are seeking. 5. Part 741—Requirements for Insurance Addresses: Maximum borrowing authority. Sections: 741.2. Category: Remove. Degree of Effort: Low. Degree of Impact: Low. Report 1: Remove the 50% borrowing limit for FISCUs and the related waiver provision. State law should govern in this area. Comments: Approximately five commenters offered general support for the recommendation. One commenter specifically supported the Tier 3 categorization. Report 2: The Task Force recommends adopting the first report’s recommendation and prioritization. 42 Id. Sfmt 4702 65949 E:\FR\FM\21DEP2.SGM § 1795e(a)(1). 21DEP2 65950 Federal Register / Vol. 83, No. 245 / Friday, December 21, 2018 / Proposed Rules 6. 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. Report 1: Remove as no longer necessary and not consistent with GAAP.43 Comments: Several commenters agreed with the recommendation. One commenter stated that a low prioritization is appropriate. Report 2: The Task Force recommends adopting the first report’s recommendation and prioritization. amozie on DSK3GDR082PROD with PROPOSALS2 7. 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. Report 1: 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. Comments: Approximately 15 commenters asked the NCUA to reform the Bank Secrecy Act (BSA) regulations and suggested the NCUA work with the Department of the Treasury and other regulators to support meaningful changes to minimize the costs and problems encountered in meeting BSA and anti-money laundering (AML) requirements. Several other commenters emphasized that BSA and AML compliance remain substantial issues and urged the NCUA to minimize compliance burdens. Another commenter noted that BSA compliance is a huge burden in paying for systems, training, and personnel. Several commenters also asked the NCUA to work with the Treasury and the Financial Crimes Enforcement Network (FinCEN) to eliminate burden from duplication in BSA requirements. Approximately five commenters asked that the threshold for Currency Transaction Reports (CTRs) and Suspicious Activity Reports (SARs) be raised to a minimum of $20,000 to provide relief, ensure that only effective useful data is transmitted, and allow 43 There are 11 FISCUs from 8 different states that report a total of $4.4 million in this account on the Call Report as of December 31, 2016. VerDate Sep<11>2014 00:33 Dec 21, 2018 Jkt 247001 field examiners to provide consistent guidance during exams. Commenters noted that the current threshold has remained unchanged since 1972 and that the threshold would be over if $50,000 if adjusted for inflation. Several commenters requested that the SAR and CTR forms be combined into one form submission. Another commenter asked that the NCUA promote better communication over mandatory reporting. The commenter stated that credit unions often file defensive SARs, which are of little use to law enforcement, to avoid compliance failures. The commenter believed reforms to promote open communication between law enforcement and credit unions would allow the system to function like Congress intended. The commenter also argued that enforcement of FinCEN regulations by the NCUA, without direct law enforcement feedback, is cumbersome and should be changed. Another commenter suggested significantly curtailing customer due diligence requirements and eliminating redundant SARs filings for corporate credit unions. One commenter suggested that FinCEN and federal law enforcement should consider awarding a percentage, such as 10%, of fines or awards to credit unions in civil and criminal actions when those institutions’ filings were instrumental in a case. The commenter believed that incentivizing better filings would result in better quality SARs, greater compliance, and the alleviation of some of the high costs of BSA compliance. One commenter asked the NCUA to relax its requirement for monthly reporting of SAR activity to the board. The commenter stated that there is no statutory requirement that mandates monthly reporting and asked the NCUA to allow credit unions to report SAR filings promptly to the board, with promptly defined as the next regularly scheduled board meeting or at least quarterly. Approximately five commenters offered support for a working group. Another commenter specifically supported the use of an ANPR. Several commenters said the NCUA should persuade FinCEN, other financial regulators, and Congress to reform some of the BSA inefficiencies. Approximately 15 commenters asked that part 748 be made a priority. One commenter noted their appreciation for the NCUA’s effort to reform BSA compliance procedures, but articulated a belief that substantive changes must originate from FinCEN and Congress. Another commenter asked the NCUA to explain all exam policies and priorities, PO 00000 Frm 00026 Fmt 4701 Sfmt 4702 particularly new ones, and provide the information in one ‘‘examination issues’’ location on the agency’s website and in agency documents, such as letters to credit unions and examiners’ guides. Report 2: The Task Force recommends adopting the first report’s recommendation and prioritization. Further, the Task Force emphasizes that the NCUA has limited authority in this area. Many of the changes requested by commenters fall outside of the NCUA’s purview. The Task Force does note that the NCUA continues to participate in interagency work in this area. 8. 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. Report 1: 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. Comments: Approximately 15 commenters stated that the record retention guidelines are unclear and conflicting. One of these commenters noted that, while the rule states that any records not explicitly mentioned as vital records do not need to be maintained permanently and can be destroyed periodically as determined by the credit union, other parts of the NCUA’s regulations have record retention requirements. The commenter included two examples. First, under part 749 certain supervisory committee documents are not vital records and are subject to periodic destruction; yet under part 715 certain supervisory committee documents must be retained until the completion of the next verification process. Second, merger documents are not explicitly listed as permanent records in part 749; however, the NCUA’s Credit Union Merger Procedures and Merger Forms Manual states that the continuing credit union must maintain all documents and records related to a merger. Another commenter agreed with the review and noted that some retention requirements lack a termination date. Several commenters asked the NCUA to update part 749 to reflect and adapt to technology record maintenance changes. Approximately 15 commenters asked that changes to this regulation be made E:\FR\FM\21DEP2.SGM 21DEP2 Federal Register / Vol. 83, No. 245 / Friday, December 21, 2018 / Proposed Rules a priority. Conversely, one commenter felt the changes would have negligible benefit and agreed with the Tier 3 prioritization. Several commenters asked the NCUA to develop a working group. One commenter specifically supported using an ANPR to frame the numerous issues. Report 2: The Task Force recommends adopting the first report’s recommendation and prioritization. iv. Other Comments timelines based on credit union feedback. Another commenter asked the NCUA to consider the implementation timelines for these changes, noting that credit unions and the NCUA will require substantial transition time to conform to new or changed regulations. The commenter asked that examiner training be emphasized to avoid implementation inconsistencies. 2. Prioritizations Generally One commenter asked the Task Force to use a taxonomic system with Tier 1, Class A regulations receiving highest priority, followed by Tier 1, Class B regulations, and so forth. 1. Timeline Several commenters asked that the four year timeline be accelerated. One commenter agreed with reassessing the 65951 3. Other Other suggestions included: Colocating all rules applicable to FISCUs; amendments to the definition of loan-tovalue in part 723; formation of a Credit Union Advisory Council; flood insurance amendments; suggestions for how to better comply with Executive Orders 13771 and 13777; investment in fintech companies; clarity and parity for financing of pre-sold construction homes; changes to the PALs program; and more. d. Appendix to Section III—Part 703 Recommendations Details INVESTMENTS—PART 703 SUBPART A Item Change Rationale 1 ......... Investment Policies § 703.3 Fine tune section to focus on investment activities and not on balance sheet activities. E.g., remove (c) and (d), IRR and liquidity, since those items should be addressed in the IRR and liquidity policies. 2 ......... Discretionary Control Over Investments and Investment Advisor § 703.5(b)(1)(ii), § 703.5(b)(2)—(Net worth limit) Remove 100 percent of net worth limit for delegated discretionary control. Would need to add language to ensure credit unions have provided investment advisors with investment guidelines that contain: Duration/average life targets, permissible investments, and investment limits. 3 ......... This would allow credit unions to have professionally managed, separate-account, investments without imposing a limit. There are no limits on mutual funds where the credit union has less control of what the manager invests in. Separate-account delegated discretionary programs have considerably more transparency than mutual funds. Discretionary Control Over Investments and Investment Advisor § 703.5(b)(3)—(Due diligence) Remove prescriptive due diligence requirements and simply state the credit union must perform due diligence on the investment advisor. 4 ......... This section is too prescriptive for a credit union to perform due diligence. It also does not focus on the investment advisor’s ability to manage investments for the credit union. Credit Analysis § 703.6—(Due diligence) Modify exception to credit analysis requirements to only securities guaranteed by the entities listed in the section. 5 ......... This will make it clear that NCUA requires credit analysis for investments not guaranteed, but 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. Credit Analysis § 703.6—(Maximum credit risk) Require a minimum of investment grade for all investments .......... 6 ......... Sets a minimum expectation of credit worthiness for all investments purchased under the part 703 investment authority. Credit Analysis § 703.6—(Credit union process and people) A credit union, or its investment advisor, must have sufficient resources, knowledge, systems, and procedures to handle the risks and risk management (e.g., IRR modeling) of the investments it purchases. amozie on DSK3GDR082PROD with PROPOSALS2 Reduces burden on credit unions by not requiring IRR and liquidity policies in the investment policy. Also should help credit unions focus on balance sheet risk. 7 ......... This establishes the basic standard for a credit union to purchase an investment. This will allow for a loosening of part 703 since NCUA has established standards to purchase investments that may have been prohibited or restricted in the past. Broker-Dealers—§ 703.8(b)—(Due diligence) Remove prescriptive due diligence requirements and simply state the credit union must perform due diligence on the broker-dealer. 8 ......... This section is too prescriptive for a broker-dealer that doesn’t provide advice. May want to specify standards for broker-dealers that provide advice to credit unions. Monitoring Non-Security Investments § 703.10—(Reporting requirements) Remove this section ......................................................................... VerDate Sep<11>2014 00:33 Dec 21, 2018 Jkt 247001 PO 00000 Frm 00027 Fmt 4701 Unduly prescriptive. Sfmt 4702 E:\FR\FM\21DEP2.SGM 21DEP2 65952 Federal Register / Vol. 83, No. 245 / Friday, December 21, 2018 / Proposed Rules INVESTMENTS—PART 703 SUBPART A—Continued Item Change 9 ......... Rationale Valuing Securities § 703.11(a) & (d)—(Due diligence) Combine sections and remove the reference to two price quotations. The requirement should be that the credit union use market inputs to determine if the purchase is at a reasonable market price. 10 ....... Valuing Securities § 703.11(c)—(Due diligence) Remove this section ......................................................................... 11 ....... Unnecessary. This should be dictated by GAAP. Monitoring Securities § 703.12(a)—(Reporting requirements) Move to and combine with § 703.11 ................................................ 12 ....... Streamlines part 703. Monitoring Securities § 703.12(b), (c) and (d)—(Reporting requirements) Remove these sections and 703.12(a) will be combined with part 703.11. 13 ....... Unduly prescriptive. Permissible Investment Activities and Permissible Investments § 703.13 and § 703.14 Merge these sections and add language from the FCU Act for permissible investments. 14 ....... Streamlines rule and provides full investment authority allowed under the Act. Permissible Investment Activities § 703.13(d)—(Borrowing repurchase transactions) Allow mismatch permissible in § 703.20 as the ‘‘base’’ permissible activity. 15 ....... A 30 day mismatch is low risk. Permissible Investments § 703.14(a)—(Permissible indices for variable rate investments) Expand permissible indices for credit unions that have sufficient resources, knowledge, systems, and procedures to handle the risks of the investment. Ability to model the investment for IRR should be required. 16 ....... This could provide credit unions with investments that they could benefit from and not pose a risk to the NCUSIF. Permissible Investments § 703.14(e)—(Muni bond limits) Remove limitations on municipal exposure ..................................... 17 ....... This limit is unnecessary. Credit unions should determine limits. Permissible Investments § 703.14(h)—(Mortgage note repurchase transactions) Limits will be reviewed to determine if they are appropriate ........... 18 ....... Limits may need to be increased or eliminated. Permissible Investments § 703.14(i)—(Zero coupon investment restrictions) Remove limits on zero-coupon investments .................................... 19 ....... Interest rate and liquidity risk should be managed from a balance sheet standpoint. This appears to try to manage it from an individual security standpoint. This limit is unnecessary. Permissible Investments § 703.14(j)(3)—(Commercial mortgage related securities) Remove this section ......................................................................... 20 ....... Not realistic in the current market place. Furthermore, 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. Prohibited Investment Activities § 703.15—(Short Sales) Review regulatory history on the prohibition of short sales ............. amozie on DSK3GDR082PROD with PROPOSALS2 Currently too prescriptive. A principled approach conforms more to market convention. 21 ....... Restriction may be reconsidered. Prohibited Investments § 703.16(a)—(Mortgage servicing rights) Determine if mortgage servicing rights (MSRs) are permissible for credit unions to purchase per the FCU Act. If so, there should be consideration given to permit the purchase of MSRs. 22 ....... VerDate Sep<11>2014 Buying MSRs from other credit unions may offer efficiencies in the credit union system. Prohibited Investments § 703.16(b)—(Exchangeable, IO and PO MBS) 00:33 Dec 21, 2018 Jkt 247001 PO 00000 Frm 00028 Fmt 4701 Sfmt 4702 E:\FR\FM\21DEP2.SGM 21DEP2 Federal Register / Vol. 83, No. 245 / Friday, December 21, 2018 / Proposed Rules 65953 INVESTMENTS—PART 703 SUBPART A—Continued Item Change Rationale Remove this section ......................................................................... A credit union should be able to purchase interest-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. 23 ....... Grandfathered Investments § 703.18 Remove sections that will no longer apply based on other changes in the rule. 24 ....... Some parts of the section may not apply due to other changes in the rule. Investment Pilot Program § 703.19 Remove this section ......................................................................... 25 ....... Pilot programs will no longer be needed with the proposed changes. Request for Additional Authority § 703.20 Remove this section ......................................................................... Will no longer be needed with the removal or alignment of the restrictions in other sections. DERIVATIVES—PART 703 SUBPART B AND RELATED ITEMS Item Change 1 ......... Rationale ‘‘Move’’ Put-option purchases in managing increased interest rate risk for real estate loans produced for sale on the secondary market, in 701.21(i) to 703.102(a) Move the product to the Subpart B permissible derivative products 2 ......... ‘‘Move’’ European financial options contract in 703.14(g) to 703.102(a) Move the product to the Subpart B permissible derivative products 3 ......... This would consolidate into one place all permissible derivative activities. ‘‘Rename’’ 703 Subpart B from ‘‘Derivatives Authority’’ to ‘‘Derivatives and Hedging Authority’’ Name change ................................................................................... 4 ......... Would widen the rule to address off balance sheet hedging instruments that are permissible. ‘‘Move and Modify’’ Derivatives section in 703.14(k) to 703 Subpart B With the move, remove 703.14(k)(1), move 703.14(k)(2) to 703.100 and move 703.14(k)(3) to 703.102. 5 ......... Would provide more clarity on hedging activities for TBA, Dollar Rolls, etc. ‘‘Modify’’ Derivatives Application process to ‘‘Notification’’ Remove the FCU application requirements and replace with a ‘‘Notification’’. This would require changes to § 703.108, § 703.109, § 703.110, § 703.111, § 703.112. 6 ......... The ‘‘Notification’’ requirements would include providing NCUA with at least 60 day notice before initially engaging in a Derivative transaction. ‘‘Remove’’ Derivatives Regulatory Limits Remove the volume limits on derivatives activity. This would require changes to § 703.103, § 703.105, Appendix A. 7 ......... Will be better supported as part of supervision guidance and possible use as scoping metrics. ‘‘Expand’’ Eligible Collateral for Margining Expand the eligible collateral in 703.104(a)(2)(iii) to include Agency Debt (Ginnie Mae Securities). amozie on DSK3GDR082PROD with PROPOSALS2 This would consolidate into one place all permissible derivative activities. 8 ......... This is an acceptable practice and should have been in the Final Rule. ‘‘Modify’’ Eligibility (only part) Remove or change 703.108(b) to require notice but not pre-approval, and re-evaluate the CAMEL and asset size eligibility criteria. 9 ......... Allows for more credit unions to use derivatives to manage interest rate risk subject to supervisory intervention if they are not equipped to manage it properly. ‘‘Modify’’ Notification requirement for FISCUs Change 741.219(b) .......................................................................... VerDate Sep<11>2014 00:33 Dec 21, 2018 Jkt 247001 PO 00000 Frm 00029 Fmt 4701 Make consistent with FCU notification requirements. Sfmt 4702 E:\FR\FM\21DEP2.SGM 21DEP2 65954 Federal Register / Vol. 83, No. 245 / Friday, December 21, 2018 / Proposed Rules DERIVATIVES—PART 703 SUBPART B AND RELATED ITEMS—Continued Item Change 10 ....... Rationale ‘‘Remove’’ Pilot Program Participants Change 703.113 ............................................................................... Not relevant anymore. By the National Credit Union Administration Board on December 13, 2018. Gerard Poliquin, Secretary of the Board. [FR Doc. 2018–27473 Filed 12–20–18; 8:45 am] amozie on DSK3GDR082PROD with PROPOSALS2 BILLING CODE 7535–01–P VerDate Sep<11>2014 00:33 Dec 21, 2018 Jkt 247001 PO 00000 Frm 00030 Fmt 4701 Sfmt 9990 E:\FR\FM\21DEP2.SGM 21DEP2

Agencies

[Federal Register Volume 83, Number 245 (Friday, December 21, 2018)]
[Proposed Rules]
[Pages 65926-65954]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-27473]



[[Page 65925]]

Vol. 83

Friday,

No. 245

December 21, 2018

Part IV





National Credit Union Administration





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12 CFR Chapter VII





Regulatory Reform Agenda; Proposed Rule

Federal Register / Vol. 83 , No. 245 / Friday, December 21, 2018 / 
Proposed Rules

[[Page 65926]]


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NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Chapter VII


Regulatory Reform Agenda

AGENCY: National Credit Union Administration (NCUA).

ACTION: Notice of regulatory review.

-----------------------------------------------------------------------

SUMMARY: The 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 the president's 
regulatory reform agenda and Executive Order 13777. Although the NCUA, 
as an independent agency, is not required to comply with Executive 
Order 13777, the agency chose to comply with its spirit and reviewed 
all of the NCUA's regulations to that end. The Task Force published and 
sought comment on its first report in August 2017. Having reviewed all 
of the comments received, the Task Force is publishing its second and 
final report.

DATES: December 21, 2018.

ADDRESSES: Office of General Counsel, National Credit Union 
Administration, 1775 Duke Street, Alexandria, Virginia 22314.

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. The NCUA's Regulatory Mission
    b. The Regulatory Reform Agenda
    c. This Document
II. The Second Report
    a. General Recommendations
    b. The Consolidated Refined Blueprint
    c. The Detailed Refined Blueprint and Summary of Comments

I. Background

a. The NCUA's Regulatory Mission

    The NCUA, as a prudential 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. The 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, the 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

    The president has established a regulatory reform agenda and issued 
multiple executive orders designed to alleviate unnecessary regulatory 
burdens. The 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.

c. This Document

    The NCUA established a Regulatory Reform Task Force (Task Force) in 
March 2017 to oversee the implementation of the agency's regulatory 
reform agenda. This is consistent with the spirit of the president's 
regulatory reform agenda and Executive Order 13777. Although the NCUA, 
as an independent agency, is not required to comply with Executive 
Order 13777, the agency chose to comply with its spirit and reviewed 
all of the NCUA's regulations to that end. The Task Force undertook an 
exhaustive review of the 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. The first report outlined the 
Task Force's proposed review and reporting procedures and made numerous 
recommendations for the amendment or repeal of regulatory requirements 
that the Task Force believed to be outdated, ineffective, or 
excessively burdensome. On August 22, 2017 the NCUA published the 
substance of the Task Force's first report in the Federal Register and 
sought public comment.\2\
---------------------------------------------------------------------------

    \2\ 82 FR 39702 (Aug. 22, 2017).
---------------------------------------------------------------------------

    This document contains the Task Force's second and final report. As 
described more fully below, this report contains both general 
recommendations for the NCUA's regulatory reform agenda moving forward 
and a refined blueprint of the timeline for recommended regulatory 
changes. The NCUA began implementing Tier 1 of the regulatory reform 
agenda in May 2017. The agency aims to have commenced action on all 
Tier 1 recommendations by May 2019. The agency plans to initiate the 
implementation of Tier 2 and Tier 3 recommendations in May or June 2019 
and 2020, respectively.

II. The Second Report

a. General Recommendations

i. Report Structure
    The structure of this report closely tracks the structure of the 
first report. The Task Force has retained the effort/impact 
prioritization matrix used in the first report \3\ and has tried to 
structure the notice as similarly as possible. Along with a 
consolidated refined blueprint of the timeline for future regulatory 
actions, this report includes a detailed refined blueprint that 
provides the first report's recommendations, a general summary of 
comments received on the recommendations, and this report's 
recommendations. The Task Force does not intend to respond to the 
specific substance of commenters' recommendations in this report. 
Instead, this report is largely focused on setting the procedures 
governing the regulatory reform agenda as it moves forward and 
providing the refined timeline for completing the Task Force's 
recommendations. Commenters' substantive recommendations, while 
considered in the development of this report and its refined timeline, 
will be most helpful in shaping recommended actions as they are more 
fully developed. Commenter recommendations related to completed actions 
have been reviewed by the Task Force and will be considered in future 
rulemakings unless otherwise indicated.
---------------------------------------------------------------------------

    \3\ Id. at 39704.
---------------------------------------------------------------------------

    The NCUA will also separately publish a consolidated version of 
this report on the NCUA website. The

[[Page 65927]]

consolidated report will provide the Task Force's recommendations from 
the first report, the Task Force's updated recommendations, and the 
updated prioritizations.
ii. Measuring Future Progress
    As contemplated by both Executive Order 13777 and the first report, 
the Task Force recommends that the NCUA measure the agency's progress 
as it advances through the regulatory reform agenda. To best do this, 
the Task Force recommends that the NCUA publish on its website the 
outline of this report's refined blueprint, subject to needed future 
modifications, to be updated every six months to monitor progress. This 
outline should document whether the agency has published any documents 
related to the individual recommendations and whether any changes to 
the recommendation or refined blueprint timeline have been made.
iii. The NCUA's Annual Regulatory Review
    In the first report, the Task Force recommended suspending the NCUA 
Office of General Counsel's annual regulatory review until 2020. 
Approximately five commenters supported the temporary suspension. 
Several commenters opposed the suspension, noting that changes will 
likely occur between now and 2020, including to the NCUA Board 
composition. One of these commenters felt that the NCUA should maintain 
a formal mechanism for stakeholder insight into the effect of existing 
regulations on a contemporary basis and asked that the review be 
reinstated in January 2019 as Tier 1 is completed.
    Based on commenter feedback, the Task Force has amended its 
recommendation. The Task Force recommends that the annual regulatory 
review resume in January 2019, via a notice published on the NCUA's 
website. The 2019 regulatory review will cover parts 700-710 of the 
NCUA's regulations. The Task Force believes the annual regulatory 
review plays an important role in giving stakeholders a continuing 
means of providing feedback as changes are made and take effect.

b. The Consolidated Refined Blueprint

                                 Report 1 and Report 2 Prioritization Comparison
----------------------------------------------------------------------------------------------------------------
             Regulation                 Report 2 priority       Report 1 priority      Justification for change
----------------------------------------------------------------------------------------------------------------
                                                 Report 2 Tier 1
----------------------------------------------------------------------------------------------------------------
1. Corporate Credit Unions.........  Completed.............  Tier 1................  N/A.
2. Emergency Mergers...............  Completed.............  Tier 1................  N/A.
3. Securitization..................  Completed.............  Tier 1................  N/A.
4. Supervisory Review Committee....  Completed.............  Tier 1................  N/A.
5. Appeals.........................  Completed.............  Tier 1................  N/A.
6. Equity Distribution.............  Completed.............  Tier 1................  N/A.
7. Capital Planning and Stress       Completed.............  Tier 1................  N/A.
 Testing.
8. Advertising.....................  Completed.............  Tier 1................  N/A.
9. Field of Membership.............  Completed.............  Tier 1................  N/A.
10. Risk-Based Capital Delay.......  Completed.............  Tier 1................  The risk-based capital rule
 and...............................  ......................  ......................   finalized in October 2018
 Risk-Based Capital Substantive....  ......................  Tier 2................   addressed both the delay
                                                                                      and substantive
                                                                                      recommendations made in
                                                                                      the first report.
11. FCU Bylaws.....................  Proposed..............  Tier 1................  N/A.
12. Payday Alternative Loans.......  Proposed..............  Not in Report.........  The Task Force believes the
                                                                                      proposed change will
                                                                                      provide additional
                                                                                      regulatory relief.
13. Loans to Members: a. Loan        Proposed..............  Tier 1................  N/A.
 Maturity Limits, b. Single
 borrower and Group of Associated
 Borrowers Limit.
14. Appraisals.....................  Proposed..............  Tier 1................  N/A.
15. Fidelity Bonds.................  Proposed..............  Tier 1................  N/A.
16. Supervisory Committee Audits     Tier 1................  Tier 1................  N/A.
 and Verification (Engagement
 Letter, Target Date of Delivery).
17. Supervisory Committee Audits     Tier 1................  Tier 1................  N/A.
 and Verification (Audit per
 Supervisory Committee Guide).
18. Subordinated Debt (formerly      Tier 1................  Tier 2................  Subordinated debt (formerly
 Alternative Capital).                                                                alternative capital) is a
                                                                                      priority for the Chairman,
                                                                                      the agency, and
                                                                                      commenters. As such, all
                                                                                      recommendations associated
                                                                                      with subordinated debt
                                                                                      were moved to Tier 1.
19. Designation of Low Income        Tier 1................  Tier 2................  Subordinated debt (formerly
 Status; Acceptance of Secondary                                                      alternative capital) is a
 Capital Accounts by Low-Income                                                       priority for the Chairman,
 Designated Credit Unions.                                                            the agency, and
                                                                                      commenters. As such, all
                                                                                      recommendations associated
                                                                                      with subordinated debt
                                                                                      were moved to Tier 1.
20. Borrowed Funds from Natural      Tier 1................  Tier 2................  Subordinated debt (formerly
 Persons.                                                                             alternative capital) is a
                                                                                      priority for the Chairman,
                                                                                      the agency, and
                                                                                      commenters. As such, all
                                                                                      recommendations associated
                                                                                      with subordinated debt
                                                                                      were moved to Tier 1.
21. Payment on Shares by Public      Tier 1................  Tier 2................  Upon further consideration
 Units and Nonmembers.                                                                and in response to
                                                                                      stakeholder feedback the
                                                                                      Task Force has moved this
                                                                                      recommendation from Tier 2
                                                                                      to Tier 1.
22. Compensation in Connection with  Tier 1................  Tier 1................  N/A.
 Loans.

[[Page 65928]]

 
23. CUSOs..........................  Tier 1................  Tier 3................  The Task Force believes
                                                                                      that this recommendation
                                                                                      is appropriately placed in
                                                                                      Tier 1. The change should
                                                                                      be low effort and high
                                                                                      impact.
24. Loan Interest Rate, Temporary    Tier 1................  Tier 3................  The loan interest rate is a
 Rate.                                                                                priority for the Board,
                                                                                      the agency, and
                                                                                      commenters.
----------------------------------------------------------------------------------------------------------------
                                                 Report 2 Tier 2
----------------------------------------------------------------------------------------------------------------
1. Investment and Deposit            Tier 2 (First Item)...  Tier 2................  Upon further consideration
 Activities.                                                                          and in response to
                                                                                      stakeholder feedback the
                                                                                      Task Force has decided to
                                                                                      move this item to the top
                                                                                      of Tier 2.
2. Loan Participations.............  Tier 2................  Tier 2................  N/A.
3. Purchase, Sale, and Pledge of     Tier 2................  Tier 2................  N/A.
 Eligible Obligations.
4. Purchase of Assets and            Tier 2................  Tier 2................  N/A.
 Assumption of Liabilities.
5. Third-Party Due Diligence         Tier 2................  Tier 3................  These recommendations were
 Requirements and.                                                                    combined and put into Tier
                                                                                      2.
    Third-Party Servicing of         Tier 2................  Tier 1
     Indirect Vehicle Loans.
6. Payout priorities in Involuntary  Tier 2................  Tier 3................  This recommendation will
 Liquidation.                                                                         help protect the NCUSIF
                                                                                      and higher prioritization
                                                                                      is appropriate.
----------------------------------------------------------------------------------------------------------------
                                                 Report 2 Tier 3
----------------------------------------------------------------------------------------------------------------
1. Preemption of State Laws (Loans   Tier 3................  Tier 3................  N/A.
 to Members and Lines of Credit to
 Members).
2. Treasury Tax and Loan             Tier 3................  Tier 3................  N/A.
 Depositaries and Financial Agents
 of the Government.
3. Leasing.........................  Tier 3................  Tier 3................  N/A.
4. Central Liquidity Facility......  Tier 3................  Tier 3................  N/A.
5. Maximum Borrowing Authority.....  Tier 3................  Tier 3................  N/A.
6. Special Reserve for               Tier 3................  Tier 3................  N/A.
 Nonconforming Investments.
7. Security Program, Report of       Tier 3................  Tier 3................  N/A.
 Suspected Crimes, Suspicious
 Transactions, Catastrophic Acts,
 and Bank Secrecy Act Compliance.
8. Records Preservation Program and  Tier 3................  Tier 3................  N/A.
 Appendices--Record Retention
 Guidelines; Catastrophic Act
 Preparedness Guidelines.
----------------------------------------------------------------------------------------------------------------

c. The Detailed Refined Blueprint and Summary of Comments

    As discussed, this report contains both a refined blueprint for the 
timeline for implementing the Task Force's recommendations and a 
summary of the comments the NCUA received on the first report. The NCUA 
received nearly 50 comments on the first report. Commenters 
overwhelmingly supported the NCUA's regulatory reform agenda. It should 
be noted that comment tallies are only reflective of the number of 
commenters who directly addressed a specific recommendation or issue. 
Many commenters expressed general support for the first report or for 
wide-ranging review of a number of regulations.
    The NCUA has completed ten of the first report's initial regulatory 
relief recommendations:
    1. Corporate Credit Unions;
    2. Emergency Mergers;
    3. Securitization;
    4. Supervisory Review Committee;
    5. Appeals Procedures;
    6. The Equity Distribution;
    7. Capital Planning and Stress Testing;
    8. Accuracy of Advertising and Notice of Insured Status;
    9. Field of Membership; and
    10. Risk-Based Capital.
    Additionally, the NCUA has issued proposed rules or commenced 
action for five other recommendations:
    1. Bylaws;
    2. Loan Maturities;
    3. The Single Borrower or Group of Associated Borrower Limit;
    4. Appraisals;
    5. Fidelity Bonds.
    Nearly all commenters explicitly commended the NCUA's efforts to 
identify outdated, ineffective, or excessively burdensome requirements 
and ease regulatory burden while modernizing the NCUA's regulations.
i. Tier 1 (First 24 Months)
1. Completed Actions
1. Part 704--Corporate Credit Unions
    Addresses: Corporate Credit Unions.
    Sections: 704.
    Category: Improve.
    Degree of Effort: Moderate.
    Degree of Impact: Low.
    Report 1: Amend capital standards for corporate credit unions to 
include expanding what constitutes Tier 1 Capital. For mergers, permit 
Tier 1 Capital to include generally accepted accounting principles 
(GAAP) equity acquired. Also, establish a retained earnings requirement 
of 2.50%, 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.
    Comments: The NCUA issued this final rule in November 2017. 
However,

[[Page 65929]]

a number of commenters either addressed the rulemaking or provided 
other substantive comments on part 704. Several commenters that 
submitted their comments prior to the November final rule's publication 
explicitly asked the NCUA to finalize the proposed rule. One of these 
commenters stated that the proposal provides corporate credit unions 
with greater flexibility in the calculation and treatment of capital 
and promotes increased certainty and stability in the credit union 
system. Several commenters agreed that expressly including merger-
acquired GAAP equity as retained earnings would clarify that capital is 
available to cover losses, resulting in greater accounting transparency 
and reduced ambiguity. These commenters also supported counting 
perpetual contributed capital as Tier 1 Capital, especially given the 
confusion for credit union auditors evaluating potential perpetual 
contributed capital impairment. The commenters argued that the 
limitation of perpetual contributed capital for regulatory capital 
purposes undermines the full value of perpetual contributed capital to 
absorb losses during an economic event.
    Approximately 15 commenters asked the NCUA to review part 704 in 
its entirety to explore modernization opportunities for the benefit of 
corporate credit unions and natural person members. The commenters 
argued that this would provide more relief by decreasing regulatory 
burden, increasing operational efficiency, and improving member 
services. One of these commenters stated that the NCUA revised part 704 
as a result of the financial crisis and consequently the corporate 
system has significantly contracted and consolidated. Another commenter 
argued for more regulatory relief and refinement of the rules governing 
corporate credit unions, and recommended that the NCUA: (1) Form a task 
force with state regulators to review future adjustments to the 
corporate credit union rules; (2) reintroduce meaningful dual 
chartering by eliminating unnecessary preemption of state rules, 
particularly with respect to corporate credit union governance; and (3) 
enhance the joint supervision of corporates and their risk to natural 
person credit unions by formalizing increased information sharing 
between the NCUA and the state regulators supervising the corporate 
credit unions' natural person credit union members.
    As discussed below, commenters also recommended a number of more 
specific substantive changes to part 704.
    One commenter noted that, relative to credit risk management, the 
NCUA limits investments in any single obligor to the greater of 25% of 
total capital or $5 million. Section 704.6(c)(2) provides several 
exceptions to the single-obligor limit, including an exception for 
credit card master trust asset-backed securities that allows for a 
higher limit of 50% of total capital in any single obligor. The 
commenter stated that other asset-backed securities utilize the master 
trust structures such as vehicle, equipment, and student loan master 
trusts. The commenter opined that, like credit card master trusts, 
these other master trusts offer larger asset pools and greater borrower 
and geographic diversity. The commenter further noted that many offer 
structural features that enhance the safety of the investments. The 
commenter asked that, given the described advantages of master trust 
asset-backed securities, the NCUA consider including these additional 
master trust asset-backed securities in the exception allowing for 
investments up to 50% of capital.
    One commenter asked the NCUA to examine the concept of Weighted 
Average Life (WAL) as a tool for risk mitigation of government-issued 
or guaranteed securities. The commenter noted that, per the current 
rule, a corporate credit union must manage its financial assets to 
maintain a WAL of 2 years or less to be measured at month-end in the 
base case, and 2.25 years or less to be measured at month-end in a 50% 
prepayment speed slowdown scenario. The commenter observed that under 
Sec.  704.8(h) U.S. Government-issued or guaranteed securities are 
allowed a modest one-half WAL treatment. The commenter stated that 
government-guaranteed securities exhibit no credit risk, are highly 
liquid in the marketplace, serve as a buffer in economic stress 
scenarios, and are valuable collateral for liquidity in the capital 
markets and at the Federal Reserve Bank. The commenter argued that the 
one-half WAL treatment is not enough of a benefit or incentive for 
buying these securities. The commenter stated that they were not 
recommending that the NCUA Board revise the WAL measurement for credit-
related securities, Sec.  704.8(f) and (g), but did recommend the 
factor in Sec.  704.8(h) be changed to make the WAL of government-
issued and government-backed securities equal to a cash equivalent. The 
commenter asserted it is technically incorrect to assign WAL limits on 
government-guaranteed instruments.
    One commenter noted that Sec.  704.8 limits the WAL of corporate 
credit unions' financial assets and asserted that the NCUA's WAL 
thresholds for corporates were intentionally designed to limit a 
corporate's services to natural person credit unions to short-term 
liquidity lending and payments system services. The commenter recalled 
that the NCUA noted at the time that the WAL provision was essential in 
the absence of cash-flow mismatch test requirements. The commenter said 
that neither natural person credit unions nor other financial 
institutions have explicit limitations on the WAL of the asset side of 
their balance sheets.\4\ The commenter conceded that, as the corporate 
system restructured in the aftermath of the corporate crisis, such 
regulatory shaping of the marketplace, and restrictions on corporate 
credit union growth and operations, were arguably necessary to contain 
risk. However, the commenter also argued that these same limitations 
restrict corporate credit union service to natural person credit 
unions, which in turn may be hindering the ability of some natural 
person credit unions to remain competitive in the marketplace. In 
addition to the WAL restrictions, the commenter noted that corporate 
credit unions are also limited to 180 days maturity on secured 
borrowings. The commenter contended that, taken together, the WAL and 
secured borrowing provisions limit corporates' ability to provide term 
lending and other liquidity management services to natural person 
credit unions. The commenter further observed that natural person 
credit unions have limited choices to find those essential services 
elsewhere, noting that the Federal Reserve discount window is generally 
a lender of last resort, and credit union membership in the Federal 
Home Loan Bank (FHLB) system may be more limited than commonly 
understood. The commenter concluded that, while the commenter and state 
regulators remain keenly aware of the severity of the corporate crisis 
and understand the importance of the lessons learned, the future of the 
corporate system cannot be solely controlled by a crisis mindset. The 
commenter also suggested the formation of a joint working group to help 
identify the proper regulatory balance.
---------------------------------------------------------------------------

    \4\ The commenter stated that ``[n]atural person credit union 
WAL of assets is factored into Prompt Corrective Action (PCA) net 
worth calculations, but are not limited by the PCA. See 12 CFR 
702.105-107.''
---------------------------------------------------------------------------

    Another commenter argued that a corporate credit union that has 
been granted Part 1 expanded authority should have more flexibility in 
the WAL requirement than base or base plus corporate credit unions. The 
commenter argued that since a Part 1 corporate has

[[Page 65930]]

a stronger developed infrastructure and higher capital requirements, 
such as a minimum leverage ratio of 6%, permission to increase the WAL 
in the base case and stressed scenario should be allowed. The commenter 
recommended the calculation be tiered to reflect a correlation to the 
required higher leverage ratios. The commenter said that, for example, 
a Part 1 corporate with: a 6% leverage ratio should be permitted to 
have a 2.5 year WAL in the base and 2.75 year WAL in the 50% slower 
prepayment scenario; a 7% leverage ratio should be permitted to have a 
3.5 year WAL in the base and 4.0 year WAL in the 50% slower prepayment 
scenario; and an 8% leverage ratio should be permitted to have a 4.5 
year WAL in the base and 5.0 year WAL in the 50% slower prepayment 
scenario. The commenter noted that Part 1 corporates are required to 
have more developed risk mitigation tools as part of their 
infrastructure in addition to stronger capital ratios. The commenter 
felt higher capital ratios are a good assessment of the safety and 
soundness of any financial institution and should correlate with the 
amount of risk a corporate should take. The commenter concluded that 
the additional regulatory flexibility within the WAL calculation is 
commensurate with the additional required capital and stronger 
infrastructure.
    One commenter, a Part 1 corporate credit union, said that they 
would welcome the opportunity to expand their investment authority 
related to credit risk to correlate with the stronger capital position. 
The commenter would like to be able to buy investment grade 
subordinated secured asset-backed securities and would like parity with 
investment grade unsecured corporate debt, which is currently permitted 
under Part 1. The commenter argued parity would allow Part 1 corporates 
an investment opportunity that has the same credit rating and the same 
credit risk regardless of subordination. The commenter suggested 
subordinated investments within the secured asset-backed sector should 
be limited to only those sectors that are highly mature, such as credit 
cards, auto loans and FFELP-backed student loans. The commenter also 
asserted that a lower credit rating investment in these sectors is 
arguably less risky than the highest rating investment in a less 
mature, esoteric sector that does not have a proven track record 
through a business cycle.
    The same commenter observed that part 704 has different definitions 
for credit risk for Part 1 versus base plus authorities. Specifically, 
the commenter noted that under Part 1 a purchase must be of 
``investment grade'' whereas for base plus a purchase must only have a 
``minimal amount of credit risk.'' The commenter pointed out that a 
distinction has been made for credit risk as it applies to Part 1 
versus base plus, but the standard for investment action plans remains 
the same for both expanded authorities. The commenter stated that 
investment action plans are defined as required when the investment 
presents more than a minimal amount of credit risk. The commenter 
suggested this infers that an investment purchased under Part 1 as 
``investment grade'' would be considered subject to an investment 
action plan immediately after purchase. The commenter did not believe 
this was the NCUA's intent and asked that this be clarified to remove 
any ambiguity.
    Another commenter suggested that there should be a way for a 
corporate credit union to make a minimal investment in a company 
without the company being classified a corporate credit union service 
organization (CUSO). The commenter stated that many companies shun 
corporate credit union investment dollars due to the regulatory 
constraints of becoming a corporate CUSO, having to primarily serve 
credit unions and to follow the various regulatory restrictions of part 
704. The commenter said that without the opportunity to invest in 
companies, a corporate credit union cannot direct or participate in the 
direction of new products or services. The commenter argued that the 
intent of an investment in such a company is not measured by a return 
as it is with traditional investments (securities) but instead is an 
opportunity to help bring new technologies, products, and services to 
credit union members.
    One commenter requested that the NCUA make a technical correction. 
The commenter noted that changes to the member business lending rule 
caused references in Sec.  704.7(e)(3) to Sec.  723.1(b) and former 
Sec.  723.16 to no longer be valid, leaving the rules for a loan to a 
member that is not a credit union or a corporate CUSO unclear.
    Report 2: The NCUA issued a final rule related to the first 
report's recommendations in November 2017.\5\ Part 704 is scheduled to 
be reviewed again as part of the Office of General Counsel's 2019 
annual regulatory review.
---------------------------------------------------------------------------

    \5\ 82 FR 55497 (Nov. 22, 2017).
---------------------------------------------------------------------------

2. 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.\6\
---------------------------------------------------------------------------

    \6\ Includes potential efficiencies and/or cost savings for 
NCUA.
---------------------------------------------------------------------------

    Report 1: Revise the definition of the term ``in danger of 
insolvency'' for emergency merger purposes to provide a standard that 
better protects the 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 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.
    Comments: Approximately ten commenters offered support for the 
recommendations. Several commenters indicated the recommendation would 
make it easier for emergency mergers to occur and further protect the 
NCUSIF. One commenter said the recommended changes would allow the NCUA 
to better identify credit unions in danger of insolvency and give 
acquiring credit unions more time to step in and resolve troubled 
credit unions. Several commenters noted that, while they supported the 
increased flexibility, they objected to any regulatory regime that 
would result in rigid guidelines forcing credit union mergers. The 
commenters asked the NCUA to avoid any inflexible, one-size-fits-all 
rubric to resolve financially challenged institutions. One commenter 
felt the 208 assistance program had a poor track record in preventing 
credit union insolvency and urged the NCUA to explore ways to either 
improve the program's success rate or to seek more effective remedies 
to help struggling credit unions.
    Report 2: The NCUA issued a final rule related to the first 
report's recommendations in December 2017.\7\ No further action is 
being considered by the NCUA Board at this time. Part 701 is scheduled 
to be reviewed again as part of the Office of General Counsel's 2019 
annual regulatory review.
---------------------------------------------------------------------------

    \7\ 82 FR 60283 (Dec. 20, 2017).
---------------------------------------------------------------------------

3. Securitization
    Addresses: Securitization.
    Sections: 721.
    Category: Expand Authority.
    Degree of Effort: High.
    Degree of Impact: Low.

[[Page 65931]]

    Report 1: Issue a legal opinion letter authorizing federal credit 
unions (FCUs) 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 (FICU), of financial 
assets transferred by the credit union in connection with a 
securitization or a participation.
    Comments: Approximately ten commenters offered general support for 
the recommendations. One commenter asked the NCUA to issue guidance to 
permit CUSOs to serve as aggregators of the mortgages underlying the 
securities. The commenter specifically reiterated the following points 
that it raised in a previously submitted letter: ``(1) Expand the 
eligibility of loans beyond those originated by the securitizing credit 
union, in particular, by permitting the use of purchased loans needed 
to complete a pool as well as allowing the aggregation of loans by 
CUSOs; (2) provide flexibility in the levels of residual and retained 
interests in securitized assets that a credit union may hold; (3) 
authorize credit unions to have special purpose vehicles with the 
authority to enter into derivative transactions; and (4) provide 
additional clarifications on the types of securitization transactions 
in which credit unions may engage.''
    Several commenters requested new guidance as soon as possible. 
Another commenter urged the NCUA to work with the industry to develop 
guidance on an accelerated timeline. The commenter reasoned that 
building an effective securitization program takes time and investment 
in people and systems; thus, it is vital to have a clear understanding 
of any limitations on the type of activities a credit union can 
undertake. As part of this guidance, the commenter also suggested the 
NCUA set guidelines to allow well qualified credit unions, or their 
CUSOs, to serve as loan aggregators. The commenter felt that loan 
aggregation is a natural and necessary role within the financial 
services industry that should be extended to credit unions. Another 
commenter asked to work with the NCUA to develop the guidance through a 
working or advisory group established to allow credit unions and 
securitization experts to help identify key issues and concerns.
    Report 2: The NCUA implemented the first report's recommendations 
through its June 2017 safe harbor final rule,\8\ and its June 21, 2017 
legal opinion letter regarding the authority to issue and sell 
securities.\9\ Additionally, the Office of Examination and Insurance is 
currently developing guidance on asset securitization for credit 
unions. The NCUA is also evaluating whether any additional regulation, 
guidance, or supervision will be necessary.
---------------------------------------------------------------------------

    \8\ 82 FR 29699 (June 30, 2017).
    \9\ Asset Securitization Authority, NCUA OGC Op. Ltr. 17-0670 
(June 21, 2017), available at https://www.ncua.gov/regulation-supervision/Pages/rules/legal-opinions/2017/asset-securitization-authority.pdf.
---------------------------------------------------------------------------

4. Supervisory Review Committee
    Addresses: Supervisory Review Committee.
    Sections: 746, Subpart A.
    Category: Improve.
    Degree of Effort: High.
    Degree of Impact: Low.
    Report 1: Expand and formalize procedures by which FICUs may secure 
review of material supervisory determinations by the 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 the NCUA's Office of Examination and 
Insurance before a matter is considered by the SRC.
    Comments: Approximately five commenters offered specific support 
for the recommendations. One commenter commended the SRC reforms and 
the NCUA's commitment to consider including appeals information in the 
agency's Annual Report. Another commenter supported the final rule, but 
still desired additional improvements that were not finalized, such as 
consistent review panels and review of CAMEL 1 and 2 component scores. 
Several other commenters expressed appreciation for the NCUA's 
willingness to provide several opportunities for review of material 
supervisory determinations from a program office. These commenters 
welcomed the additions of the intermediate SRC and the opportunity for 
oral argument before the NCUA Board directly. However, these commenters 
did contend that, given the nature of the regulator/regulated 
relationship, an independent review option should also be available. 
Further, the commenters felt the rule should allow for a request for 
oral hearing up until the final disposition, reasoning that as a credit 
union works through a complaint it may determine an oral hearing is 
appropriate and it should be able to request one up until an appeal 
decision is made.
    Report 2: The NCUA issued a final rule related to the first 
report's recommendations in October 2017.\10\ No further action is 
being considered by the NCUA Board at this time. Part 746 is scheduled 
to be reviewed again as part of the Office of General Counsel's 2020 
annual regulatory review.
---------------------------------------------------------------------------

    \10\ 82 FR 50270 (Oct. 30, 2017).
---------------------------------------------------------------------------

5. Appeals
    Addresses: Appeals.
    Sections: 746, Subpart B.
    Category: Improve.
    Degree of Effort: High.
    Degree of Impact: Low.
    Report 1: 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 NCUA 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 SRC). Appeals of matters 
that are delegated by rule to an officer or position below the NCUA 
Board for final, binding agency action are also excluded.
    Comments: Approximately ten commenters offered general support for 
the recommendations. One of these commenters commended the reforms and 
the NCUA's commitment to considering the inclusion of appeals 
information in the agency's Annual Report. Another commenter strongly 
supported the consolidation and improvement of procedures regarding 
appeals of adverse determinations. The NCUA does not have direct 
supervisory authority over CUSOs; however, one commenter said that the 
NCUA's exercise of de facto supervision over CUSOs means CUSOs should 
also have the ability to appeal adverse determinations made by NCUA 
examiners through the CUSO review process.
    A handful of the supportive commenters noted that they appreciate 
the improved process, but felt the agency should provide a mechanism 
for

[[Page 65932]]

collection of exam feedback on the performance of individual examiners. 
These commenters argued that independent, ongoing, and confidential 
surveys should be processed and compiled by an external third party, 
free from public repercussion. The commenters felt that such a process 
would be advantageous for the NCUA by demonstrating education, 
training, and consistency metrics, as well as assisting in the merit 
pay process. The commenters said that most industries have successfully 
implemented client satisfaction methodologies to support data-driven 
decision making. Finally, one commenter supported this measure, but 
asked for reconsideration of additional changes, including expedited 
appeals when time is of the essence.
    Report 2: The NCUA issued a final rule related to the first 
report's recommendations in October 2017.\11\ No further action is 
being considered by the NCUA Board at this time. Part 746 is scheduled 
to be reviewed again as part of the Office of General Counsel's 2020 
annual regulatory review.
---------------------------------------------------------------------------

    \11\ 82 FR 50288 (Oct. 30, 2017).
---------------------------------------------------------------------------

6. Part 741--Requirements for Insurance
    Addresses: National Credit Union Share Insurance Fund Equity 
Distributions.
    Sections: 741.4; 741.13.
    Category: Improve.
    Degree of Effort: Low.
    Degree of Impact: High.
    Report 1: 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.
    Comments: A handful of commenters specifically supported the 
recommendation. Two of these commenters expected the same principles to 
be applied to 2018 Temporary Corporate Credit Union Stabilization Fund 
rebates. A third commenter strongly supported the recommendation, 
noting that the bright line proposed seems fairer to FICUs than the 
practice in existence at the time of the comment. The commenter 
emphasized that it is inherently inequitable to let credit unions 
terminate insurance coverage mid-year, and thereby avoid the risks of a 
premium assessment or capitalization deposit increase for the remaining 
months of that year, and still reward them with equity distributions at 
year-end. That practice, the commenter argued, disadvantages FICUs that 
remain insured throughout the calendar year and bear the risks others 
may avoid. The commenter also felt that FICUs considering terminating 
federal share insurance coverage should factor the risk of missing out 
on a year-end equity distribution into their decision.
    Conversely, a handful of commenters opposed the recommendation. One 
commenter asked the NCUA to apportion any potential distributions based 
on the total amount of assessments paid by the FICU and suggested a 
FICU's proportionate share of a future equity distribution be 
determined by measuring the average of its four quarter-end insured 
share balances reported during the year applicable to the distribution. 
Several of the commenters reiterated concerns they had previously 
raised during the equity distribution method comment period. One of 
these commenters strongly urged the NCUA to forego any efforts related 
to this provision. The commenter felt that it is unclear how this 
provision would impact future equity distributions as they relate to 
the Corporate Resolution Program. The commenter noted that, at the time 
of the comment, if a FICU terminates federal share insurance coverage 
during the calendar year the credit union is entitled to receive an 
equity distribution, which is based on the insured shares as of the 
last day of the most recently ended reporting period and then reduced 
by the number of months remaining in the calendar year. The commenter 
applauded the simple and fair logic of that approach. Finally, another 
commenter reiterated objections to changes to Sec.  741.4 that would 
deprive a credit union of a pro rata NCUSIF dividend share for a year 
in which that credit union was NCUSIF insured for at least part of the 
year.
    Separately, several commenters argued that the NCUSIF's normal 
operating level can and should return to its historical 1.30% over the 
next several years. The commenters felt that, as the regulatory reform 
agenda moves forward in eliminating duplicative and outdated compliance 
burdens, continued stability will further ameliorate additional 
concerns regarding the NCUSIF's normal operating level. Another 
commenter expressed continued concern over the 1.39% normal operating 
level, arguing the increase is significant deviation from the NCUA's 
proven, successful policy. The commenter urged the NCUA to re-evaluate 
the normal operating level and to set it at 1.34% for a temporary 
period, followed by a return to the traditional 1.30% level. The 
commenter said that this historical policy dictated that the NCUSIF's 
equity ratio would be countercyclical, rising in good times so that 
premiums would not be necessary at the troughs of a recession.
    Report 2: The NCUA issued a final rule related to the first 
report's recommendations in February 2018.\12\ Under the final rule, a 
financial institution must file at least one quarterly Call Report 
within the current calendar year to be eligible to receive an NCUSIF 
equity distribution. This requirement applies to all potential 
beneficiaries of an NCUSIF equity distribution including FICUs that 
terminate federal share insurance coverage through conversion, merger, 
or liquidation. No further action is being considered by the NCUA Board 
at this time. Part 741 is scheduled to be reviewed again as part of the 
Office of General Counsel's 2020 annual regulatory review.
---------------------------------------------------------------------------

    \12\ 83 FR 7954 (Feb. 23, 2018).
---------------------------------------------------------------------------

7. 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.\13\
---------------------------------------------------------------------------

    \13\ Includes potential efficiencies and/or cost savings for 
NCUA.
---------------------------------------------------------------------------

    Report 1: 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.
    Comments: Several commenters offered general support for the 
recommendations. Commenters' substantive recommendations focused on 
narrowing the rule's applicability. Several commenters suggested 
raising the threshold to a significantly higher value, reasoning that 
since most credit unions are well under the $10 billion threshold 
currently, but have room to grow, a higher threshold would better 
reflect macroeconomic realities than an inflexible dollar amount. These 
commenters also argued that large credit unions are best equipped to 
internally self-conduct these exercises, with reports to examiners, 
given that, unlike the banking agencies, NCUA staff are not 
consistently involved in large institution contingency exercises. One 
commenter asked the NCUA to consider Congressional efforts to raise the 
bank stress testing threshold to $250 billion. Several other commenters 
argued that,

[[Page 65933]]

given research indicating that the asset size of an institution is 
insufficient to determine riskiness, the proposal should be expanded to 
provide relief for more credit unions.\14\ One commenter argued that 
stress testing has become overly burdensome and has added unnecessary 
cost to the NCUA and affected credit unions, particularly considering 
the overall financial strength of the credit unions impacted by the 
rule.
---------------------------------------------------------------------------

    \14\ The commenters cited recent proposals by federal banking 
regulators and the Office of Financial Research's report, ``Size 
Alone is not Sufficient to Identify Systemically Important Banks,'' 
to support their position.
---------------------------------------------------------------------------

    Report 2: On April 25, 2018, the NCUA issued a final rule \15\ 
amending its stress testing regulations, which, among other things, 
raised the threshold for required stress testing to a minimum of $15 
billion, and assigned responsibility for conducting stress testing to 
covered credit unions. No further action is being considered by the 
NCUA Board at this time. Part 702 is scheduled to be reviewed again as 
part of the Office of General Counsel's 2019 annual regulatory review.
---------------------------------------------------------------------------

    \15\ 83 FR 17901 (Apr. 25, 2018).
---------------------------------------------------------------------------

8. 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.
    Report 1: Revise certain provisions of the NCUA's advertising rule 
to provide regulatory relief to FICUs. The current draft NPRM proposes 
to allow FICUs 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.
    Comments: Approximately ten commenters generally supported the 
recommendations and an increased parity with banks. Approximately five 
commenters specifically supported expanding the radio/television 
exemption to 30 seconds. Several commenters supported eliminating the 
requirement for the advertising statement on statements of conditions. 
Approximately five commenters specifically supported updates to the 
rule to accommodate social media and urged that any new or modified 
rules should ensure credit unions retain maximum flexibility and the 
ability to take advantage of new technologies. Several commenters 
specifically supported the fourth version of the advertising statement.
    One commenter asked the NCUA to take steps to emphasize that part 
740 preempts state advertising restrictions for FCUs and federally 
insured, state-chartered credit unions (FISCUs). The commenter said 
that, for example, at a minimum, any modifications to these rules 
should retain the first sentence of part 740: ``[T]his part applies to 
all federally insured credit unions.'' The commenter further added that 
additional revisions to bolster the preemptive force of part 740 could 
provide additional clarity for both FCUs and FISCUs and ensure that all 
credit unions operate under fair and consistent advertising rules.
    One commenter suggested that the final rule should be much more 
expansive. Several commenters emphasized that this rule is a priority 
to them. One of these commenters asked the NCUA to make the fourth 
advertising statement and the 30 second exemption effective immediately 
following the proposed rule's comment closing date.
    One commenter found the changes unneeded, reasoning that saving a 
few characters on social media is a non-issue and not worthy of Tier 1 
status, especially since Twitter doubled its character limits.
    Report 2: The NCUA issued a final rule related to the first 
report's recommendations in April 2018.\16\ No further action is being 
considered by the NCUA Board at this time. Part 740 is scheduled to be 
reviewed again as part of the Office of General Counsel's 2020 annual 
regulatory review.
---------------------------------------------------------------------------

    \16\ 83 FR 17910 (Apr. 25, 2018).
---------------------------------------------------------------------------

9. 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.
    Report 1: 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.
    Comments: Approximately ten commenters offered general support for 
the proposal. Several commenters opposed the public hearing requirement 
for determining well-defined local communities with populations over 
2.5 million. One of these commenters felt that while such hearings may 
be warranted in the case of a narrative application, the requirement 
seemed capricious in the case of a well-defined presumptive community 
application based on a Combined Statistical Area or Metropolitan 
Statistical Area. Another of these commenters felt this is a technical 
legal issue for which public input is neither necessary nor 
appropriate. A handful of commenters supported removing the population 
limit on a community consisting of a statistical area or a portion 
thereof. One of these commenters said that the NCUA should approve 
field of membership requests based on the FCU's demonstrated ability to 
serve members within a community, regardless of population, rather than 
on an arbitrary cap. At least one commenter supported allowing 
designation of a portion of a statistical area as a community without 
regard to metropolitan division boundaries. Another commenter asked the 
NCUA to consider additional improvements, including: Deadlines for FOM 
amendment requests, increased transparency in the decision making 
process, and streamlined charter conversions and notification 
requirements.
    Report 2: The NCUA issued a final rule related to the first 
report's recommendations in June 2018.\17\ Specifically, the final rule 
allows the option for an applicant to submit a narrative to establish 
the existence of a well-defined local community instead of limiting the 
applicant to a presumptive statistical community. Also, the NCUA Board 
will hold a public hearing for narrative applications where the

[[Page 65934]]

proposed community exceeds a population of 2.5 million people. Further, 
for communities that are subdivided into metropolitan divisions, the 
NCUA Board will permit an applicant to designate a portion of the area 
as its community without regard to division boundaries. The NCUA Board 
expressly declined to increase the population limit for presumptive 
statistical communities. The final rule became effective September 1, 
2018.\18\ Part 701 is scheduled to be reviewed again as part of the 
Office of General Counsel's 2019 annual regulatory review.
---------------------------------------------------------------------------

    \17\ 83 FR 30289 (June 28, 2018).
    \18\ The NCUA has appealed the U.S. District Court for the 
District of Columbia's ruling on the October 2016 field of 
membership rule.
---------------------------------------------------------------------------

10. Part 702--Capital Adequacy
    Addresses: Risk-Based Capital.
    Sections: 702.
    Category: Improve.
    Degree of Effort: Low.
    Degree of Impact: High.\19\
---------------------------------------------------------------------------

    \19\ Includes potential efficiencies and/or cost savings for 
NCUA.
---------------------------------------------------------------------------

    Report 1 (Delay): 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 current expected credit loss (CECL) accounting standard and 
consider any changes in risk-based capital standards for community 
banks currently being considered by the federal banking agencies.\20\ 
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.
---------------------------------------------------------------------------

    \20\ 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.
---------------------------------------------------------------------------

    Report 1 (Substantive): 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.
    Comments: Approximately 15 commenters offered comments supporting 
delay of the RBC rule. Several commenters specifically supported 
delaying implementation of the rule so that the NCUA can revisit the 
need for it as adopted.
    Approximately five commenters cited the concurrent timeline for 
implementation of the new CECL standard as a factor necessitating 
delay. One of these commenters reasoned that aligning these dates would 
provide additional time for capital planning and, to the degree deemed 
appropriate, potential alignment with community bank capital standards. 
The commenter felt such a delay would be high impact and low effort and 
consistent with Executive Order 13777's spirit. Another commenter asked 
that the NCUA provide to credit unions any economic analysis it has 
conducted on the impact of the CECL standard, which the commenter 
believed will likely compound compliance issues for RBC covered credit 
unions when it takes effect.
    Approximately ten commenters cited system integration and call 
report update issues as factors necessitating delay. Several of these 
commenters said that compliance requirements have not been adequately 
noticed to provide system integration updates. Another commenter 
emphasized that without delay credit unions will be challenged to make 
required call report and system changes as the rule remains under 
review. One commenter stated that internal adjustments and 
implementation of new call report instructions take considerable 
resources with each change. The commenter felt that delaying the 
effective date and preventing a series of smaller and possibly 
conflicting changes that need to be readjusted over the next year will 
save credit unions time and resources. Several commenters said that 
delay and further study should be one of the agency's highest 
priorities. The commenters reasoned that, given the January 2019 
effective date, credit unions must begin planning for and altering 
operations as early as the second quarter of 2018 and strongly urged 
the NCUA to announce a delay as soon as possible. The commenters 
stressed that the longer the NCUA waits to delay the rule, the higher 
the likelihood that credit union operations will be affected. Another 
commenter said that delay is necessary to give credit unions more time 
to review the rule and to give the NCUA more time to develop the 
necessary call report changes. The commenter suggested the call report 
should be modernized to reduce reporting burdens and give regulators 
better tools for on-site exams and off-site monitoring.
    Approximately ten commenters asked the NCUA to narrowly tailor and 
simplify the rule. Approximately five commenters specifically asked the 
NCUA to narrow the complex credit union definition. Approximately five 
commenters specifically supported reducing the applicability of RBC and 
risk-weights to all smaller credit unions. Another commenter asked 
that, if the rule is retained, the NCUA further consider the rule's 
scope and a complex credit union definition that is not so dependent on 
asset size. One commenter asked the NCUA to raise the threshold to at 
least $500 million. The commenter reasoned that the RBC requirements 
are supposed to give larger institutions greater flexibility while 
appropriately addressing system risk posed by larger institutions, 
goals the commenter does not believe a $100 million threshold 
satisfies.
    Approximately five commenters suggested the NCUA simplify the 
overall risk category and weighting scheme. Another commenter asked the 
NCUA to revisit the rule in light of the other federal banking 
agencies' current review of simplified capital standards for community 
banks.
    Approximately five commenters asked the NCUA to exempt credit 
unions with high net worth ratios. One of these commenters asked the 
NCUA to study further whether RBC requirements should be applied to 
natural person credit unions and whether credit unions with high net 
worth ratios should be exempt from the RBC requirements. Another of 
these commenters suggested that the NCUA could implement an ``off-
ramp'' from RBC requirements for well-capitalized credit unions similar 
to the CHOICE Act provision.\21\ Approximately five commenters stressed 
that RBC requirements should be narrowly tailored to capture only the 
appropriate risk profiles intended. The commenters said that credit 
unions are unique and vary in terms of asset class, lending activities, 
and membership fields and cautioned against a one-size-fits-all 
approach or methodology that would subject credit unions to undue 
regulatory burden that fails to appropriately address their activities.
---------------------------------------------------------------------------

    \21\ Financial CHOICE Act of 2017, H.R. 10, 115th Cong. (2017).
---------------------------------------------------------------------------

    Approximately five commenters, in addressing the RBC 
recommendations, said that supplemental capital should be permitted to 
count towards credit unions' RBC requirements, to the extent they must 
be met. One of these commenters asked that, if the NCUA's 2015 RBC 
final rule is revised or retained instead of repealed, alternative

[[Page 65935]]

capital authority be provided to help covered credit unions meet the 
new RBC requirements. Another commenter stated that, regardless of any 
RBC delay, the alternative capital rulemaking should proceed now under 
Tier 1. The commenter said that the rulemaking is especially necessary 
because credit unions will need time to plan for and adopt new 
alternative capital options so they can manage their balance sheets 
prior to any RBC effective date.
    Several commenters asked the NCUA to adjust its RBC standards to 
accommodate the credit union model as opposed to the banking model, 
which the standards are based on. One of these commenters suggested 
that the NCUA should review European standards which take into account 
the cooperative model. The commenter suggested that, if the NCUA lacks 
the authority to make these changes, it should request such authority 
from Congress.
    One commenter provided a substantial comment arguing that the NCUA 
should incorporate the findings and actions of other federal banking 
agencies. The commenter cited a previous letter sent to the NCUA noting 
that the federal banking agencies issued a joint proposal to reduce 
regulatory burden by simplifying capital rules. The commenter said that 
the banking agencies proposed, in part, to simplify the threshold 
deduction for mortgage servicing assets (MSAs). The commenter stated 
that this would include raising the limit for MSAs from 10% of common 
equity tier I capital to 25%, where any MSAs that exceed that limit 
would be deducted from regulatory capital. The commenter felt that, 
while the federal banking agencies' proposal would maintain MSA risk 
weight at 250%, this move clearly demonstrates the commitment to reduce 
regulatory capital burdens. The commenter said that the NCUA could take 
comparable measures to ease capital requirements, such as a reduced 
risk-weighting for MSAs and CUSOs, as well as the disparate weighting 
of mortgages based on concentration.
    Another commenter asked the NCUA to discard the 2015 RBC final rule 
and return to the previous one because the prior form of RBC is 
consistent with prompt corrective action (PCA) requirements under the 
FCU Act. The commenter also noted, however, that bank regulators are 
increasingly wary of RBC and some economists doubt its usefulness. The 
commenter cited a 2013 Mercatus Center study that the commenter said 
concluded that RBC is not an effective predictor of bank performance. 
The commenter also asked the NCUA to reconsider whether a higher RBC 
requirement for well-capitalized credit unions, compared to the one for 
adequately-capitalized credit unions, is justified given the language 
of the FCU Act under PCA, which the commenter believed conclusively 
precludes this result.
    At least ten commenters specifically suggested that substantive 
amendments to RBC are a priority. One commenter stated that Tier 2 
prioritization for substantive changes was acceptable, provided the 
NCUA delay RBC's implementation by at least 24-months. Another 
commenter recommended that the NCUA classify the Task Force 
recommendations as Tier 1 and accelerate the process to provide 
meaningful regulatory relief as soon as possible. Several commenters 
said that reconsideration of many aspects of the RBC rule should be a 
top priority.
    Report 2: After careful consideration and review, the NCUA issued a 
final rule related to the first report's recommendations in October 
2018.\22\ The final rule delayed the effective date of the RBC rule 
until January 1, 2020, and amended the definition of ``complex'' credit 
union for risk-based capital purposes, resulting in an increase in the 
asset threshold from $100 million to $500 million. Part 702 is 
scheduled to be reviewed again as part of the Office of General 
Counsel's 2019 annual regulatory review.
---------------------------------------------------------------------------

    \22\ 83 FR 55467 (Nov. 6, 2018).
---------------------------------------------------------------------------

2. Proposed Actions
11. Appendix A to Part 701--Federal Credit Union Bylaws
    Addresses: FCU Bylaws.
    Sections: Appendix A to Part 701.
    Category: Improve.
    Degree of Effort: High.
    Degree of Impact: High.
    Report 1: Recommend using an advance notice of proposed rulemaking 
(ANPR) and forming a working group to update the FCU bylaws. The FCU 
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.
    Comments: Approximately five commenters offered general support for 
the recommendation. Several other commenters stated that bylaws should 
be optional, with credit unions permitted to use their own bylaws. 
Those commenters cautioned that the NCUA should not impose new and 
additional regulatory compliance or reporting burdens. One supportive 
commenter noted its previous calls for the NCUA to issue a proposed 
rulemaking or ANPR to implement the 2014 FCU Bylaws working group's 
recommendations, including amending the required number of members 
needed on matters relating to special meetings and board nominations. 
Another commenter felt that NCUA's prior approval of all bylaw changes 
is unnecessary when an after the fact notice to the region should 
suffice, particularly for changes already approved for other credit 
unions. The commenter also believed that sanctions for failure to 
comply with bylaws are overly harsh and unnecessary for most credit 
unions. One commenter specifically argued that Articles III and IV on 
member meetings and elections are overly prescriptive and need to be 
revisited with an eye toward facilitating governance procedures.
    Report 2: The NCUA issued a bylaws ANPR in March 2018 \23\ and a 
proposed rule with a request for comment in October 2018.\24\
---------------------------------------------------------------------------

    \23\ 83 FR 12283 (Mar. 21, 2018).
    \24\ 83 FR 56640 (Nov. 13, 2018).
---------------------------------------------------------------------------

12. Sec.  701.21--Loans to members and lines of credit to members
    Addresses: Payday Alternative Loans (PALs).
    Sections: 701.21(c)(7).
    Category: Improve.
    Degree of Effort: High.
    Degree of Impact: High.
    Report 1: Not Available.
    Comments: Not Available.
    Report 2: In June 2018 the NCUA proposed amendments to the NCUA's 
general lending rule to provide FCUs with an additional option to offer 
PALs.\25\ This proposal would not replace the current PALs rule (PALs 
I). Rather, it would be an alternative option, with different terms and 
conditions, for FCUs to offer PALs to their members. Specifically, this 
proposal (PALs II) would differ from PALs I by modifying the minimum 
and maximum amount of the loans, modifying the number of loans a member 
can receive in a rolling six-month period, eliminating the minimum 
membership requirement, and increasing the maximum maturity for these 
loans. The proposal would incorporate all other requirements of PALs I 
into PALs II. The NCUA also solicited advanced comment on the 
possibility of creating a third PALs loan program (PALs III), which 
could include different fee structures, loan features, maturities, and 
loan amounts. The comment period for this proposal closed on August 3, 
2018. The Task Force recommends that the NCUA evaluate

[[Page 65936]]

the comments received and explore the development of a PALS II final 
rule and potentially a PALS III proposal.
---------------------------------------------------------------------------

    \25\ 83 FR 25583 (June 4, 2018).
---------------------------------------------------------------------------

13. Sec.  701.21--Loans to members and lines of credit to members
    Addresses: Loan maturity limits for FCUs.
    Sections: 701.21(c)(4)(e), (f), & (g).
    Category: Clarify.
    Degree of Effort: Moderate.
    Degree of Impact: High.
    Report 1: 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 GAAP standard for a ``new loan'' 
is not subject to the maturity limits. In addition, consider providing 
longer maturity limits for 1- to 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.
    Comments: Approximately ten commenters offered general support for 
the recommendations. Approximately ten commenters supported co-locating 
the maturity limits. These commenters stated that having limits spread 
across the regulations is confusing and inefficient and felt that 
having all of the limits in one section will improve compliance. 
Several commenters specifically supported incorporating the legal 
opinion. These commenters felt this would provide clarity and 
consistency across the examination regions and help compliance. 
Approximately five commenters specifically supported longer maturity 
limits for 1- to 4- family real estate loans and other similar housing 
loans and elimination of the case-by-case exception. These commenters 
argued that longer maturity limits would allow credit unions to more 
effectively compete in the real estate lending market. One of these 
commenters felt that removing the case-by-case requirements is 
consistent with the NCUA's decision to give credit unions greater 
flexibility in making loans, provided such loans are consistent with 
prudent safety and soundness standards. Several other commenters 
specifically suggested amendments to the FCU Act's loan maturity 
provisions, including changes to designate 1- to 4- non-owner occupied 
loans as real estate loans rather than member business loans (MBLs).
    Report 2: The NCUA issued a proposed rule with a request for 
comment in August 2018 addressing the first report's 
recommendations.\26\
---------------------------------------------------------------------------

    \26\ 83 FR 39622 (Aug. 10, 2018).
---------------------------------------------------------------------------

    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.
    Report 1: 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.
    Comments: Approximately ten commenters agreed with the 
recommendation and offered general support. Two of these commenters 
stated that the recommendation will provide consistency for compliance 
purposes. One commenter supported the recommendation, but also asked 
for additional guidance and/or clarification as to the application of 
associated borrower in the commercial lending context. One commenter 
suggested moving this recommendation to Tier 3 so that resources can be 
used on more substantive relief.
    Report 2: The NCUA Board requested further comment on the single 
borrower and group of associated borrower limits in the August 2018 
proposal addressing loan maturities.\27\
---------------------------------------------------------------------------

    \27\ Id.
---------------------------------------------------------------------------

14. Part 722--Appraisals
    Addresses: Appraisals.
    Sections: 722.
    Category: Expand Relief.
    Degree of Effort: Moderate.
    Degree of Impact: High.
    Report 1: The NCUA should further explore issuing a rule to raise 
appraisal thresholds separately from the interagency process. In 
response to comments received through the Economic Growth and 
Regulatory Paperwork Reduction Act (EGRPRA) process, the 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, the 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 the NCUA's regulation for most real estate related loans, 
but also recognize a separate appraisal threshold of $1 million for 
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 the 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, the NCUA further 
explore issuing a rule to raise both thresholds separately from the 
interagency process.
    Comments: Approximately ten commenters specifically stated that 
they supported raising the commercial real estate threshold to 
$400,000. One commenter strongly opposed raising the commercial real 
estate threshold. The commenter argued that the federal banking 
agencies' proposal exemplified regulatory arbitrage, and contradicts 
regulators' concerns regarding the commercial real estate market and 
the quality of evaluations. The commenter felt that regulators should 
be calling for heightened due diligence by institutions, particularly 
for credit unions and small community/regional banks, which the 
commenter suggested are less likely to have robust collateral risk 
management policies, practices, and procedures. The commenter asserted 
that bank failures overwhelmingly occur amongst smaller institutions 
and are in large part due to poor commercial lending decisions. The 
commenter also cited a recent survey that purportedly indicated an 
overwhelming majority of those closest to this issue believe that the 
thresholds should remain at $250,000. The commenter said that, while 
they appreciate lender concerns about appraiser availability in some 
rural areas, a national policy should not be tailored around isolated 
conditions.

[[Page 65937]]

The commenter stated that any one real estate market may experience 
rapid growth, but that growth may increase the importance of 
appraisals, as real estate is prone to market fluctuations. The 
commenter further emphasized that during the EGRPRA process many bank 
representatives' appraisal concerns related to residential not 
commercial topics. To that point, the commenter noted that the number 
of commercial real estate appraisers has remained relatively steady in 
recent years as commercial lending activity has seen slight increases. 
The commenter concluded by saying that if the agencies proceed with the 
proposal the qualifications requirements for those completing 
evaluations should be raised or elevated to offset the safety and 
soundness risks caused by the increase in the threshold level.
    Approximately ten commenters specifically supported raising the 
threshold level for certain qualifying business loans (QBLs) to $1 
million like it is for banks. One of these commenters provided a 
lengthy historical discussion on the NCUA's appraisal waiver provision, 
Sec.  722.3(a)(9), and compared it to the FDIC's exemption for QBLs. 
The commenter analogized the need to remove the clunky waiver process 
to the NCUA's recent removal of the MBL waiver. One commenter opposed 
raising the QBL threshold. The commenter was pleased the EGRPRA review 
did not recommend an increase in the QBL threshold. The commenter said 
that this is consistent with statements made by banking sector 
representatives, who expressed little to no concern about the current 
threshold during several outreach meetings. The commenter also noted 
that many of the loans that would be impacted by a proposed increase in 
the owner-occupied threshold level are guaranteed by the Small Business 
Administration (SBA) and that currently the SBA requires an appraisal 
for all loans above $250,000.
    Approximately ten commenters offered support for the NCUA to act 
separately from the interagency appraisals working group. The 
commenters expressed that raising the appraisal thresholds outside of 
the current interagency process makes sense as credit unions and the 
NCUA's regulations differ from banks and the other agencies' 
regulations. The commenters said that the changes should maximize 
relief, be consistent with credit union practice, and quickly provide 
parity with the requirements applicable to banks on appraisals.
    Conversely, one commenter said that absent more information, the 
NCUA's withdrawal from the interagency rulemaking was concerning. The 
commenter noted that state and federal regulators have recognized that 
current appraisal requirements are in some cases overly burdensome 
without producing a measurable offsetting supervisory benefit. The 
commenter also observed that critique of the appraisal requirements was 
a prominent theme in response to the EGRPRA process. The commenter 
stated two primary concerns with the NCUA's withdrawal. First, the 
commenter said that the purpose of the Federal Financial Institutions 
Examination Council (FFIEC) is to coordinate consistent standards and 
that having divergent supervisory standards can cause complications 
when banks and credit unions interact in the marketplace. The commenter 
stated that the existing appraisal standard discrepancies have caused 
complication with loan participations, confused consumer/member 
borrowers, and confused loan officers. Second, the commenter was also 
concerned that when the NCUA has broken with its federal banking agency 
peers in the past it has been to impose unnecessarily higher standards 
on credit unions.
    Approximately three commenters stated the appraisals reforms should 
be made a priority. One of these commenters said that it was important 
to their state's credit unions. Another of these commenters stressed 
that this should be proposed as soon as feasible to afford credit 
unions the same regulatory flexibility that other depository 
institutions now have. A different commenter stated that the 
inconsistency of the appraisal requirements for business loans made by 
credit unions compared to banks is a top issue for credit unions.
    One commenter stated that the current thresholds limit the ability 
of credit unions to use more advantageous rules on appraisals from the 
secondary market. The commenter noted that Fannie Mae provides 
appraisal waivers for some home purchase loans when there is a 20% down 
payment and a prior appraisal was obtained under its Collateral 
Underwriter program. The commenter said that Freddie Mac has a similar 
approach. The commenter stated that certain new mortgage refinancing, 
such as when the borrower has at least 20% equity in the home and is 
not receiving cash as part of the transaction, generally no longer 
requires appraisals in the secondary market. The commenter urged the 
NCUA Board to consider these developments as it reviews the NCUA's 
appraisal requirements.
    Finally, one commenter encouraged dialogue with state regulators as 
changes are considered.
    Report 2: The NCUA issued a proposed rule with a request for 
comment in September 2018 addressing the first report's 
recommendations.\28\ The agency issued this proposal separately from 
the other banking agencies. The proposal would increase the threshold 
below which appraisals would not be required for non-residential real 
estate transactions from $250,000 to $1,000,000. For non-residential 
real estate transactions that would be exempted from the appraisal 
requirement as a result of the revised threshold, federally insured 
credit unions would still be required to obtain a written estimate of 
market value of the real estate collateral that is consistent with safe 
and sound lending practices. Additionally, the proposal would 
restructure Sec.  722.3 of the NCUA's appraisal regulation to clarify 
its requirements for the reader. Finally, the proposal would, 
consistent with the Economic Growth, Regulatory Relief, and Consumer 
Protection Act,\29\ exempt from the NCUA's appraisal regulation certain 
federally related transactions involving real estate where the property 
is located in a rural area, valued below $400,000, and no state 
certified or licensed appraiser is available.
---------------------------------------------------------------------------

    \28\ 83 FR 49857 (Oct. 3, 2018).
    \29\ Economic Growth, Regulatory Relief, and Consumer Protection 
Act, Public Law 115-174, 132 Stat. 1296 (2018).
---------------------------------------------------------------------------

15. 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.\30\
---------------------------------------------------------------------------

    \30\ Includes potential efficiencies and/or cost savings for 
NCUA.
---------------------------------------------------------------------------

    Report 1: Explore ways to implement the requirements of the FCU Act 
in the least costly way possible. While requiring fidelity coverage is 
statutorily mandated by the FCU Act, the 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 the NCUA's 
involvement in a credit union's operational decisions while remaining 
consistent with the FCU Act. This should be done separately from the 
Regulatory Reform Task Force process.
    Comments: Approximately five commenters agreed that credit unions 
should be able to make business decisions on required fidelity bond and 
insurance coverage. One commenter

[[Page 65938]]

suggested a working group that includes credit unions and insurers to 
update the rules to provide flexibility to make business decisions 
about bond coverage, particularly regarding the scope of coverage and 
deductibles. The commenter also felt that an ANPR would be useful to 
identify the range of issues before an actual proposal is developed. 
One commenter suggested that the NCUA move this to Tier 2 and focus on 
more pressing relief given the NCUA's recent legal opinion relative to 
this topic.\31\
---------------------------------------------------------------------------

    \31\ OGC Op. Ltr. 17-0959 (Sept. 26, 2017).
---------------------------------------------------------------------------

    Report 2: The NCUA issued a proposed rule with a request for 
comment in November 2018 addressing the first report's 
recommendations.\32\ The NCUA also issued a legal opinion addressing 
the permissibility of certain joint coverage provisions in fidelity 
bonds in September 2017.\33\
---------------------------------------------------------------------------

    \32\ 83 FR 59318 (Nov. 23, 2018).
    \33\ OGC Op. Ltr. 17-0959 (Sept. 26, 2017).
---------------------------------------------------------------------------

3. Future Actions
16. 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.
    Report 1: 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.
    Comments: Approximately five commenters offered general support for 
the recommendation. One commenter said that relief in this area is not 
a high priority and suggested a Tier 3 prioritization.
    Report 2: The Task Force recommends adopting the first report's 
recommendation and prioritization. A proposed rule addressing this 
recommendation will likely be issued during the first quarter of 2019.
17. 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.
    Report 1: Revise this provision to remove the reference to the 
NCUA's Supervisory Committee Audit Guide. In its place, include minimum 
standards a supervisory committee audit would be required to meet if 
the committee does not obtain a CPA opinion audit.
    Comments: Two commenters offered general support for the 
recommendations. Three commenters suggested that if the NCUA pursues 
this change, it should not impose additional compliance burdens and 
instead only simplify, clarify, and streamline the ``minimum 
standards'' required for supervisory committee audits. Another 
commenter argued that more substantial changes are needed. The 
commenter stated that while the NCUA applies some of part 715 to FISCUs 
by reference in Sec. Sec.  741.6 and 741.202, it is unclear which 
provisions of part 715 apply to FISCUs. The commenter asked the NCUA to 
clarify which requirements apply to FISCUs by fully incorporating the 
audit requirements applicable to FISCUs in part 741. The commenter also 
recommended that the NCUA separate the FCU Supervisory Committees' 
rules from FISCUs' audit requirements since not all FISCUs use 
supervisory committees in their governance structures or for audits. 
One commenter asked that this recommendation be moved to Tier 3 because 
relief in this area is not a high priority.
    Report 2: The Task Force recommends adopting the first report's 
recommendation and prioritization. A proposed rule addressing this 
recommendation will likely be issued during the first quarter of 2019.
18. Subordinated Debt (Formerly Alternative Capital)
    Addresses: Subordinated Debt.
    Sections: 702 generally.
    Category: Expand Authority.
    Degree of Effort: High.
    Degree of Impact: Low.
    Report 1: 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 FICUs could use in meeting capital standards. First, 
the NCUA Board should decide whether to make changes to the secondary 
capital regulation for low-income designated credit unions. Second, the 
NCUA 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.
    Comments: Approximately fifteen commenters offered general support 
for the recommendation. Several commenters suggested that the NCUA has 
the statutory authority to include alternative capital to satisfy the 
risk-based net worth requirement, and should do so. These commenters 
felt that an initial volume limit of 25% of retained earnings or 2% of 
total assets, whichever is greater, would be appropriate. Several other 
commenters said that alternative capital is necessary considering the 
RBC requirements. Another commenter argued that, in addition to 
allowing credit unions to use supplemental capital for RBC 
requirements, the NCUA should allow supplemental capital to be counted 
towards the current PCA capital requirements. The commenter said that 
the ability to raise supplemental capital provides the credit union 
industry and the NCUSIF additional layers of protection against 
unexpected losses.
    Approximately three of these commenters specifically said that they 
support efforts to explore additional sources of capital for purposes 
of net worth requirement calculations. These commenters felt 
supplemental capital should be permitted to count toward the risk-based 
net worth requirements. Several of these commenters suggested a 
supervisory approach that sets forth base requirements for issuance of 
capital instruments without specifying precisely how such broadly-
defined instruments would comply. The commenters stated that the focus 
instead should be on the approval process, similar to the Food and Drug 
Administration's drug monograph approval procedures.
    Another of these commenters urged the NCUA to promulgate a rule 
that incorporates the following principles: (1) Preserve the not-for-
profit, mutual member-owned and cooperative structure of credit unions 
and ensure that ownership interest remains with the members; (2) ensure 
that the capital structure of credit unions is not fundamentally 
changed; (3) provide a degree of permanence such that the sudden 
outflow of capital will not occur; (4) allow for a feasible means to 
augment supplemental capital; and (5) provide a solution with market 
viability.
    Several commenters stated that secondary capital and supplemental 
capital should be consolidated. One commenter felt that for 
supplemental capital to be effective it should: Transfer risk outside 
of the credit union system; be scalable and appropriate to the size and 
complexity of the credit union; and provide sufficient parity with the 
banks so as not to negatively impact investor

[[Page 65939]]

interest in credit union supplemental capital instruments. One 
commenter suggested that the NCUA create a pilot program for 
alternative capital, similar to the derivatives rule. The commenter 
believed that by piloting supplemental capital with a select group of 
well-capitalized, well-managed credit unions, the NCUA could 
efficiently monitor the program's effectiveness and glean best 
practices that could benefit the entire industry.
    At least eight commenters emphasized that this issue should be made 
a Tier 1 priority. One of these commenters argued that two years is too 
long to wait to be able to participate in capital markets. The 
commenter emphasized that credit unions are required to maintain the 
same capital ratios, sustain the same reserves, and pay for deposit 
insurance the same as any bank. Several commenters asked the NCUA to 
reaffirm its commitment to implement the rule prior to the 2019 RBC 
effective date. Several commenters expressed concern that the report is 
ambiguous as to whether the agency remains committed to a robust 
alternative capital rulemaking, which they deem contrary to previous 
statements from the NCUA linking alternative capital rulemaking to RBC. 
The commenters argued that substantial work and deliberation has 
already been done and to abdicate the progress made would squander one 
of the more significant, and long sought, regulatory relief 
opportunities before the NCUA.
    More specifically, one commenter took issue with the report stating 
that 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.'' The commenter said that 
the NCUA Board's public statements seem to show this affirmative 
decision has already been made and mentioned that substantial work has 
already been done to develop the rule. The commenter cited the RBC 
comment process, the 2017 alternative capital ANPR, and the 2007 
working group white paper as evidence of the work already done. The 
commenter asked the NCUA Board to move forward now to capitalize on 
this momentum. The commenter also emphasized that the NCUA, the NCUA 
Board, and the Chairman have consistently stated the intent to 
implement the supplemental capital rule prior to the RBC requirements' 
effective date and took issue with the report providing ``no compelling 
justification to reverse course.'' The commenter argued that 
abandonment of this initiative is inconsistent with the regulatory 
reform agenda's goals and while the report's effort/impact matrix makes 
sense generally, it falls short given the NCUA Board's consistent 
statements. The commenter further pointed to statements by the Chairman 
that suggest the rule would afford credit unions heightened opportunity 
to extend job-creating small business loans that strengthen the 
economic viability of Main Street. Additionally, the commenter 
reiterated that RBC requirements may impose significant regulatory 
burden if not accompanied by access to some form of supplemental 
capital. The commenter concluded that a well-designed supplemental 
capital rule would serve as a tool to help credit unions meet the new 
RBC requirements and would ensure that the RBC rules are comparable to 
other bank regulatory agencies as required by 12 U.S.C. 1790d(b)(1)(A).
    Another commenter was perplexed by alternative capital's Tier 2 
placement, especially since the NCUA has prioritized other PCA/net 
worth requirement related provisions in Tier 1. For example, the 
commenter argued that alternative capital's Tier 2 placement would make 
it unavailable for use in meeting risk-based net worth requirements 
until after the RBC rule's effective date. The commenter also took 
issue with the fact that the first report is ``ambiguous'' as to 
whether the agency remains committed to a robust alternative capital 
rulemaking. The commenter felt this contrary to repeated statements 
from the NCUA unequivocally linking an alternative capital rulemaking 
to RBC. The commenter said that alternative capital is an essential 
tool for both low-income designated credit unions and non-low-income 
designated complex credit unions to meet net worth thresholds. The 
commenter also cited an FAQ on the NCUA's website stating that the NCUA 
Board plans to move forward with a rule to allow supplemental capital 
to be counted in the RBC numerator before the rule's effective 
date.\34\ The commenter lamented that substantial work and deliberation 
has already been done, including, but not limited to: A 2007 whitepaper 
concluding supplemental capital was a worthwhile policy goal; 
solicitation of input on supplemental capital during the RBC comment 
process; a 2016 NCUA Board briefing on issues related to supplemental 
capital; a 2017 ANPR with over 100 supportive comments; and legislation 
introduced in Congress to provide alternative capital authority for all 
credit unions without regard to RBC standards. The commenter 
acknowledged that alternative capital is complex, but emphasized that 
state regulators, the NCUA, and many in the credit union system have 
been studying this issue and developing regulatory frameworks for well 
over a decade. The commenter asked the NCUA to commence rulemaking to 
enhance low-income designated credit union secondary capital rules and 
to establish supplemental capital for RBC.
---------------------------------------------------------------------------

    \34\ Frequently Asked Questions about NCUA's Risk-Based Capital 
Final Rule October 2015 (stating ``Q10. Will credit unions be 
authorized to raise supplemental capital for purposes of risk-based 
net worth? Yes. The NCUA Board plans in a separate proposed rule to 
address comments supporting additional forms of supplemental 
capital. As the risk-based capital final rule does not take effect 
until January 1, 2019, there is ample time for the NCUA Board to 
finalize a new rule to allow supplemental capital to be counted in 
the risk-based capital numerator before the effective date.''), 
available at https://www.ncua.gov/Legal/Documents/RBC/RBC-Final-Rule-FAQs.pdf.
---------------------------------------------------------------------------

    One commenter strongly disagreed that an alternative capital 
overhaul would have a low impact and instead felt alternative capital 
authority would have a substantial impact. The commenter argued that 
capital modernization is needed as credit unions face both external 
challenges such as economic cycles, social media and Bank Transfer Day, 
with no growth opportunities beyond retained earnings. The commenter 
said that the need for increased earnings through managed risk is 
stronger than ever and a critical component of capital modernization. 
The commenter stated that credit unions are seeking the ability to 
increase loan portfolios and other growth opportunities within the not-
for-profit cooperative structure. The commenter believed authority to 
issue and accept alternative capital is vital to safe-guarding the 
future of the credit union system and argued that unforeseen 
circumstances could strain a credit union's capital position to a point 
where the ability to quickly raise supplemental capital would be a 
valuable option. The commenter felt that increasing retained earnings, 
often the only current option, may not be sufficient in a severely 
stressed situation. The commenter suggested that alternative capital 
would also provide an additional source of protection for the NCUSIF.
    Report 2: Upon further consideration and in response to stakeholder 
feedback the Task Force moved this recommendation from Tier 2 to Tier 
1. Subordinated debt (formerly alternative capital) is a priority for 
the Chairman, the agency, and commenters. As such, all recommendations 
associated with subordinated debt were moved to Tier 1. All other 
aspects of this recommendation remain unchanged.

[[Page 65940]]

19. 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.
    Report 1: 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.
    Comments: In response to this recommendation, six commenters were 
supportive of alternative capital generally. One commenter said that 
more credit unions are looking to take advantage of the economic 
opportunities of secondary capital. The commenter stated that although 
it is a comparatively small field now, amendments could offer a new 
avenue for low-income designated credit unions that are hesitant due to 
regulatory barriers to find new sources of capital and help to provide 
services for chronically underserviced communities. The commenter felt 
that improving regulatory clarity and reducing the burden of the 
approval process could benefit low-income designated credit unions and 
the communities they serve.
    Another commenter argued that secondary capital accounts should be 
controlled by state law for FISCUs, including those seeking a low-
income designation by their state regulatory agency. The commenter 
believed that the limits Sec. Sec.  701.32 and 701.34 place on FISCUs 
pursuant to Sec.  741.204 are unnecessarily preemptive and unduly 
burdensome. The commenter felt that while secondary capital accounts do 
not count toward regulatory capital requirements for non-low-income 
designated credit unions, the ability to offer the accounts is not 
inherently unsafe and unsound, and therefore should be subject to state 
law.
    Report 2: Upon further consideration and in response to stakeholder 
feedback the Task Force moved this recommendation from Tier 2 to Tier 
1. Subordinated debt (formerly alternative capital) is a priority for 
the Chairman, the agency, and commenters. As such, all recommendations 
associated with subordinated debt were moved to Tier 1. All other 
aspects of this recommendation remain unchanged.
20. 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.
    Report 1: Recommend revising this section of the regulation to 
comprehensively address the borrowing authority for FCUs. See the 
January 2017 ANPR on alternative capital for a discussion on this 
subject. Also, see recommended changes to part 702. A comprehensive 
borrowing rule could provide clarity and certainty needed to support 
supplemental capital.
    Comments: Several commenters said that a comprehensive borrowing 
rule could provide clarity to support supplemental capital concerns, 
but cautioned against imposing additional regulatory burdens. These 
commenters stated that any rule should retain flexibility for credit 
unions to structure the offering in a cost-effective manner, regardless 
of the nature of the capital instrument, be it equity or subordinated 
debt. One commenter suggested the NCUA implement a pilot program 
similar to the derivatives rule. The commenter felt that a pilot 
program would yield best practices that could benefit the entire 
industry. The commenter recognized that statutory amendments may be 
necessary to provide meaningful alternative capital options for all 
credit unions, but suggested that a revised regulatory capital 
framework would still offer increased flexibility to credit unions that 
must meet the NCUA's risk-based net worth requirement. One commenter 
asked for a Tier 1 prioritization.
    Report 2: Upon further consideration and in response to stakeholder 
feedback the Task Force has moved this recommendation from Tier 2 to 
Tier 1. Subordinated debt (formerly alternative capital) is a priority 
for the Chairman, the agency, and commenters. As such, all 
recommendations associated with subordinated debt were moved to Tier 1. 
All other aspects of this recommendation remain unchanged.
21. 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.
    Report 1: Raise the nonmember deposit limit from 20% to 50%. As the 
functional equivalent of borrowing, this will parallel the ability of 
credit unions to borrow from any source up to 50% of paid-in and 
unimpaired capital and surplus per Sec.  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.
    Comments: Approximately five commenters offered general support for 
the recommendation. Several commenters noted that they support the 
development and preservation of community development credit unions and 
the use of the NCUA's statutory authority to support and encourage 
their growth. These commenters felt that raising the nonmember deposit 
limit to 50% would be a positive step. One commenter believed that 
raising the limit would allow credit unions to establish deeper 
relationships with political subdivisions and other public units, such 
as cities and counties. Another commenter noted that concerns regarding 
the limit have caused many to shy away from or unnecessarily limit a 
strategic source of liquidity. The commenter stated that, as is the 
case for loan participations, the use of the national wholesale market 
on both the liability side of the balance sheet as well as the asset 
side allows credit unions to manage certain risks with greater 
precision and provides for the ability to take advantage of liquidity 
sources that may allow for expansion of services while competing on a 
level playing field. One commenter stated that these types of 
transactions are functional equivalents to borrowings and should be 
subject to the same limits. Another commenter asked that the NCUA 
provide an exemption to any state regulatory authority that seeks to 
set a higher limit. Finally, several commenters asked for a Tier 1 
prioritization.
    Report 2: Upon further consideration and in response to stakeholder 
feedback the Task Force has moved this recommendation from Tier 2 to 
Tier 1. All other aspects of this recommendation remain unchanged.
22. 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.
    Report 1: Modify to provide flexibility with respect to senior 
executive compensation plans that incorporate lending as part of a 
broad and balanced

[[Page 65941]]

set of organizational goals and performance measures.
    Comments: Approximately ten commenters offered general support for 
the recommendation. One commenter supported allowing the flexibility to 
structure senior executive compensation plans to incorporate lending 
incentives. The commenter felt that such plans will help credit unions 
compete more effectively for talent and align organizational goals more 
closely with individual incentives. Another commenter supported the 
recommendation, but encouraged the NCUA to add stipulations that would 
require loan delinquencies to be given consideration so that the 
quality of the loans is measured. Several commenters argued that de 
minimis thresholds should apply in any assessment of compensation, 
either discretionary or compulsory.
    Multiple commenters asked the NCUA to clarify how the agency 
interprets ``overall financial performance'' in Sec.  
701.21(c)(8)(iii). One of these commenters stated that, despite the 
rule's allowance for covered employees to receive compensation based on 
the credit union's ``overall financial performance,'' credit unions and 
examiners sometimes disagree regarding compensation programs that 
appear to meet this requirement. Another commenter stated that two 
provisions in particular create confusion and unduly limit well managed 
credit unions' ability to provide incentives for good performance: (1) 
Section 701.21(c)(8)(iii)(B) permits bonuses and compensation to an 
employee but it must be based on the ``overall financial performance'' 
of the credit union, rather than being tied to the performance of their 
department or individual function; and (2) Section 
701.21(c)(8)(iii)(C), under which a bonus or incentive may be provided 
to an employee in connection with lending performance, but the employee 
cannot be a senior management official. According to the commenter, the 
1995 final rule's preamble states that the rule allows FCUs to pay: 
``(1) to any employee, including a senior management employee, an 
incentive or bonus based on the overall financial performance of the 
credit union.'' The commenter argued that, while the regulatory text 
does not specifically include the ``including senior management'' 
language in subsection (iii)(b), the preambles of the proposal and 
final rules make clear the intention to include senior management in 
the exception. According to the commenter, the 1995 final rule did not 
articulate any specific concerns to warrant the exclusion of senior 
management from the overall financial performance exception.
    One commenter did not support the incentive compensation proposal.
    Report 2: The Task Force recommends adopting the first report's 
recommendation and prioritization.
23. 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.
    Report 1: 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'' \35\ or that are ``providing services which are associated 
with the routine operations of credit unions.'' \36\
---------------------------------------------------------------------------

    \35\ 12 U.S.C. 1757(5)(D).
    \36\ 12 U.S.C. 1757(7)(I).
---------------------------------------------------------------------------

    Comments: A handful of commenters offered very general support for 
increasing and enhancing CUSO permissible activities. Several 
commenters that supported expanding CUSO permissible activities argued 
that, for many credit unions, the use of CUSOs will be essential as the 
need to seek operational efficiencies intensifies and credit unions 
face increasing competitive pressure from a variety of depository and 
non-depository financial service providers, such as fintechs. The 
commenters indicated that CUSOs provide a means for credit unions to 
address challenges related to changing consumer expectations and the 
need for technologies to better serve credit union members. Another 
commenter suggested that the NCUA abandon the preapproved list of CUSO 
activities and permit credit unions to invest in or loan to CUSOs 
offering products and services generally incidental to credit union 
business.
    One commenter asked the NCUA to allow limited FCU investment in a 
FISCU CUSO even if that FISCU CUSO engages in activities not 
permissible for an FCU. The commenter argued that de minimis exposure 
should not rise to the level of being considered circumvention of FCU 
permissible activity provisions and suggested that this change would 
expand the opportunities for system collaboration and innovation.
    Approximately five commenters asked that the NCUA expand and 
clarify CUSOs' loan origination powers. Commenters suggested that the 
NCUA expand permissible activities in Sec.  712.5 to include ``loan 
origination of all types of loans that may be provided by a credit 
union.'' The commenters noted that with this addition the specific 
origination authority for business loans, consumer mortgage loans, 
student loans, and credit card loans could be deleted. Several of these 
commenters also suggested the NCUA make it clear that CUSOs are able to 
make, purchase, or sell any types of loans that credit unions can make 
on their own. Several commenters wrote extensively on this issue.
    One of these commenters believed that CUSOs can play a pivotal role 
as credit unions turn increasingly to collaborative solutions in 
lending to reduce costs and compete with non-credit union loan 
aggregators. The commenter said that if CUSOs cannot be loan 
aggregators, credit unions will be at the mercy of non-credit union 
loan aggregators who are not willing to deal with the membership 
requirements. The commenter noted that credit unions are currently 
excluded from participation in the loan aggregation networks that more 
consumers are turning to for loans, especially for auto loans. The 
commenter argued that the fact that some types of loans are permitted 
to be originated by CUSOs and some are not seems based on historical 
happenstance rather than any sound policy. The commenter, along with 
several other commenters, stated that Sec.  712.5 is a categorical list 
of pre-approved activities a CUSO may provide and not meant to be an 
exclusive laundry list of activities. However, the ``categories'' of 
loan origination services CUSOs are permitted to provide are not 
categories of services by themselves and create confusion in the 
industry. To demonstrate this, the commenter noted that ``business loan 
origination'' has meant for years that CUSOs can originate and hold 
``business loans'' and asked if this precludes a CUSO from originating 
``commercial loans.'' Similarly, the commenter asked if ``consumer 
mortgage loan origination'' precludes the origination of home equity 
loans or lines of credit. The commenter emphasized that selective 
lending power can be awkward and confusing.
    The commenter suggested the time is appropriate to expand CUSO 
lending powers. The commenter argued that CUSOs should have the power 
to ``originate and hold all types of loans credit unions can make.'' 
The commenter believed that this change would create an unambiguous, 
rational, and highly defensible lending services definition for CUSO 
powers and would correct a policy that the commenter felt

[[Page 65942]]

authorizes certain lending powers for CUSOs and excludes others without 
a rational basis. More specifically, the commenter suggested that the 
NCUA amend Sec.  712.5 by deleting references to the origination of 
business loans, consumer mortgage loans, student loans and credit card 
loans (Sec.  712.5(c), (d), (n), and (s)) and adding the power to 
``originate and hold loans, including the authority to buy and sell 
participation interests in such loans'' as a new Sec.  712.5(c).
    A handful of commenters emphasized that the ability for CUSOs to 
package and sell loans to investment buyers is critical to credit 
unions moving forward, particularly if Fannie Mae and Freddie Mac are 
eliminated or their presence in the marketplace is reduced. The 
commenters felt that to continue cost effectively providing home loans 
that put the borrowers first, credit unions need to participate in the 
securitization market. The commenters stressed that secured loan 
investment packages require scale in order to make them affordable and 
attractive in the marketplace and noted that, except for a limited few, 
credit unions do not have sufficient loan volume to create single 
issuer loan packages. The commenters encouraged the NCUA to explore the 
ability of multiple credit unions to combine to sell their loans in 
multi-issuer packages with cross-indemnifications. The commenters 
concluded that enabling this cooperative activity would be a 
significant contributor to future financial health and stability for 
the industry.
    Approximately five commenters provided comments addressing CUSO 
examinations. Several of these commenters provided general statements 
that CUSOs should not be subject to full examinations. Several other 
commenters asked the NCUA to revise the current approach to safety and 
soundness supervision of credit union CUSO investments and suggested it 
is best performed through the credit union supervisory framework, not 
the direct supervision of CUSOs themselves. The Task Force notes that 
the NCUA does not directly regulate or supervise CUSOs, but instead 
supervises credit unions' CUSO investments through the credit union 
supervisory framework.
    Several commenters asked the NCUA to stop exercising de facto exam 
powers over CUSOs. The commenters described these exams as compelling 
CUSOs to report directly to the NCUA and comply with NCUA directives 
through the credit union owners and felt this was an exercise of power 
without specific congressional authority. The commenters asked the NCUA 
to revise the regulations in a manner that leaves no doubt that the 
agency is acting both within its authority and consistently with the 
need for safety and soundness supervision of credit union CUSO 
investments. The commenters also suggested that the NCUA use this 
regulatory review process to continue to compile necessary data on the 
investment of credit unions in CUSOs through the registry, but 
discontinue conducting de facto examinations in the form of CUSO 
reviews.
    One commenter said that if the NCUA elects to continue to exercise 
de facto supervision over CUSOs, the agency should formally advise the 
Bureau of Consumer Financial Protection (BCFP) of that fact. The 
commenter noted that the BCFP administers the Secure and Fair 
Enforcement for Mortgage Licensing Act and the licensing and 
registration of mortgage loan originators (MLOs). The commenter said 
that prior to the passage of the most recent CUSO regulation, the NCUA 
advised the BCFP that it did not have the power to regulate CUSOs. The 
commenter said that this resulted in MLOs in the CUSOs providing 
mortgage lending services having to be licensed and not registered. The 
commenter explained that in multi-state situations, this means that 
MLOs and the CUSOs may have to be licensed in many states and incur 
greatly increased expenses and regulatory burden. The commenter 
requested the NCUA's assistance, should it continue to conduct de facto 
CUSO examinations in the form of CUSO reviews, in informing the BCFP 
that the NCUA exercises sufficient supervision over CUSOs to justify 
that CUSOs be exempt from the licensing requirements and the MLOs in 
CUSOs qualify for registration.
    Several commenters said that they believe the percentage credit 
unions can invest in CUSOs should be increased. The Task Force notes 
that the FCU Act limits FCU CUSO investments to the 1% of paid-in and 
unimpaired capital and surplus currently permitted by Sec.  712.2(a) of 
the NCUA's regulations.\37\
---------------------------------------------------------------------------

    \37\ 12 U.S.C. 1757(7)(I).
---------------------------------------------------------------------------

    Another commenter noted that they support review of the CUSO 
regulation and said that they felt the January 2016 changes were 
punitive and excessive in light of the relatively low risk CUSOs pose 
to the system and went beyond the NCUA's authority. The commenter 
believed that the current rule burdens CUSO operations and limits 
credit unions' abilities to use CUSOs to maximize their services. The 
commenter said that, for example, the rule established elaborate 
reporting of CUSO activities to the NCUA and includes a list of high 
risk CUSO activities such as payroll processing that subject CUSOs to 
additional requirements. The commenter asked the NCUA to reconsider 
these requirements. The commenter also asked the NCUA to reconsider the 
need for the ``costly CUSO Registry.'' Additionally, the commenter said 
that they did not support the NCUA's past efforts to obtain statutory 
authority over CUSOs and other third-party service providers. The 
commenter stated that they appreciate that the current NCUA Board is 
not pressing Congress for such authority. The commenter felt that such 
authority would be an unnecessary expansion of the agency, would result 
in higher costs to credit unions, and would divert the agency from its 
primary mission of supervising and regulating credit unions.
    One commenter asked the NCUA to reorganize the CUSO rules to co-
locate FISCU applicable provisions or move the FISCU applicable 
provisions to part 741 to eliminate confusion as to which provisions 
apply to FISCUs.
    One commenter suggested that there should be a way for a corporate 
credit union to make a minimal investment in a company without treating 
it as a corporate CUSO. The commenter stated that many companies shun 
corporate credit union investment dollars due to the regulatory 
constraints of becoming a corporate CUSO, having to primarily serve 
credit unions and to follow the various regulatory restrictions of part 
704. The commenter said that without the opportunity to invest in 
companies, a corporate credit union cannot direct or participate in the 
direction of new products or services. The commenter argued that the 
intent of an investment in such a company is not measured by a return 
as it is with traditional investments (securities) but instead is an 
opportunity to help bring new technologies, products, and services to 
credit union members.
    Finally, a commenter, noting their strong belief in the economies 
of scale and other advantages that CUSOs confer to credit unions, asked 
the NCUA to increase the prioritization of CUSO reform. The commenter 
recommended that the NCUA Board publish an ANPR in 2018 that solicits 
ideas and other feedback.
    Report 2: Upon further consideration and in response to stakeholder 
feedback the Task Force has moved this recommendation from Tier 3 to 
Tier 1. After reviewing the degree of effort and the potential impact, 
the Task Force believes that this recommendation is

[[Page 65943]]

more appropriately placed in Tier 1. The change should be low effort 
and high impact. The NCUA plans to issue a 2019 proposed rule on 
allowing CUSOs to originate any loan that a credit union may provide.
24. 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.\38\
---------------------------------------------------------------------------

    \38\ Includes potential efficiencies and/or cost savings for 
NCUA.
---------------------------------------------------------------------------

    Report 1: 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.
    Comments: Several commenters offered general support for the 
recommendations. A handful of commenters urged the NCUA to further 
explore options, including eliminating the maximum interest rate. 
Approximately five commenters noted that the loan interest rate ceiling 
has stayed at 18% since 1987 and felt it makes sense to study whether 
future rate changes should be tied to a domestic index. One of these 
commenters felt such a change would give much-needed elasticity to a 
rate cap that hasn't changed since 1987 despite dramatic economic 
swings. Another commenter felt that a variable rate could result in 
more certainty for FCUs regarding future loan rate ceilings and would 
facilitate credit union lending and overall planning.
    One commenter suggested amending the ceiling to a 15% spread over 
prime, and articulated a belief that this action would help credit 
unions reduce interest rate risk. The commenter said that the NCUA has 
urged credit unions to be vigilant in identifying and managing interest 
rate risk and felt this action would go a long way towards helping 
credit unions reduce risk. The commenter believed that adjusting the 
interest rate cap so it floats with the level of prime would provide 
regulatory relief to the entire industry because it would benefit any 
credit union that makes variable rate loans to its members. The 
commenter said that, absent this relief, credit unions will either 
absorb margin compression, which places more capital at risk, or scale 
back lending to certain segments of the population. The commenter felt 
that this relief would enable credit unions to remain competitive, 
serve a broader spectrum of their members, and better manage risk and 
capital. The commenter concluded that this would provide relief for 
credit unions and reduce risk to the NCUSIF because the industry would 
be better positioned to absorb rising interest rates.
    Several commenters said that removal of a specific means for 
notifications is appropriate given the pace of development in modern 
communication technology. The commenters believed that, to that end, 
the NCUA should take steps to ensure the application of this principle 
to all aspects of credit unions' communications, including advocating 
that credit unions have the flexibility to contact their members via 
modern communications.
    Several commenters asked the NCUA to move the recommendation to 
Tier 1. One of the commenters urged the NCUA to make this its top 
priority given rising rates and the expectation the Federal Reserve 
Board will continue to raise rates in 2018.
    Report 2: Upon further consideration and in response to stakeholder 
feedback the Task Force has moved this recommendation from Tier 3 to 
Tier 1. In addition to being a priority for commenters, the loan 
interest rate is a priority for the Board. As such, the NCUA plans to 
issue a 2019 ANPR to solicit further input.
4. Other Commenter Suggestions for Tier 1
    One commenter asked the NCUA to eliminate the readily marketable 
collateral standard in the new MBL rule. The commenter said that 
readily marketable collateral is a legal term of art that has not 
previously been imposed on credit unions. The commenter stated that, in 
determining whether to classify collateral as ``readily marketable,'' 
the Office of the Comptroller of the Currency has focused on an 
instrument's fungibility, trading ease, the ability to obtain reliable 
price quotations on a daily basis, and trading of the instruments 
through a regulated market. The commenter noted that, unlike banks, 
which the commenter said can easily obtain and utilize such collateral, 
credit unions typically do not often deal with collateral that 
satisfies the above criteria. The commenter said that this has resulted 
in some credit unions being unable to engage in MBLs that they were 
previously authorized to engage in, notwithstanding the fact that one 
of the primary purposes of the NCUA's MBL reforms was to give credit 
unions greater flexibility to make MBLs provided doing so was 
consistent with a credit union's risk profile and expertise. The 
commenter concluded that the NCUA should exercise its regulatory power 
to remove the readily marketable collateral standard and instead 
mandate that a credit union only be allowed to make such loans based on 
sound and prudent underwriting standards backed by adequate collateral. 
The commenter suggested a Tier 1 prioritization for this 
recommendation.
    Several commenters asked for changes related to the restoration of 
accrual status on member business loan workouts. The commenters 
recommended clarifying appendix B to part 741, the interpretive ruling 
and policy statement on loan workouts, non-accrual policy, and 
regulatory reporting of troubled debt restructured loans. More 
specifically, the commenters recommended the NCUA align its policy 
pursuant to restoration to accrual status on member business loan 
workouts with those of other federal bank regulators. The commenters 
said that the NCUA's rules require a repayment period of six 
consecutive payments while banking agencies require only six 
consecutive months. The commenter stated that the NCUA's more 
restrictive term creates difficulties with credits with annual 
payments. The commenters said that under the NCUA's structure a credit 
could be in non-accrual status for six years despite strong performance 
in the case of an annual credit. The commenters asked the NCUA to 
reconsider whether the more stringent repayment requirement for credit 
union commercial accrual status remains necessary. One of these 
commenters noted that semi-annual or annual payment schedules are 
commonly found in agricultural purpose MBLs. The commenters suggested a 
Tier 1 prioritization for this recommendation.
ii. Tier 2 (Year 3)
1. Part 703--Investment and Deposit Activities
    Addresses: Investment and Deposit Activities.
    Sections: 703.
    Category: Improve & Expand.
    Degree of Effort: High.
    Degree of Impact: High.
    Report 1: 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 
FISCUs as well). See the appendix for details on modifying this 
regulation.
    Investments Comments: Approximately ten commenters offered

[[Page 65944]]

explicit support for the expansion of investment authority, removal of 
unnecessary restrictions not required by the FCU Act, and a principles-
based approach. Several of these commenters said that these changes 
would allow credit unions to reduce risk and perform better. Several 
more of these commenters said that in order to be competitive in 
today's financial services marketplace credit unions should be 
permitted to invest in a broad range of investment alternatives, 
subject to the decision-making control of their member directors. These 
commenters said that amending this section could give credit unions 
access to professionally-managed, separate-account investments with 
greater transparency than is afforded via permitted mutual funds. 
Several other commenters argued that if the FCU Act allows a type of 
investment, a credit union should be able to consider its purchase 
based on its balance sheet needs, risk appetite, and safety and 
soundness position. One commenter suggested that any approved rule 
changes should be accompanied by similar guidance and training for 
examiners to help ensure principles-based changes are permitted.
    One commenter stated that a principles-based approach may enhance 
permissible investment options available to credit unions to fund 
executive and employee benefit programs that help retain and attract 
quality employees. Another commenter argued that a more principles-
based approach will allow credit unions to tailor their investment 
activities to their individual portfolio needs. The commenter also 
concluded that allowing further authority will strengthen the board and 
senior management's ability to consider the best options based on 
individual circumstances.
    Several commenters stated that they support the removal of the 
prescriptive due diligence requirements applicable toward investment 
advisors and broker-dealers, given the nature of those business models, 
and instead requiring credit unions to perform due diligence.
    One commenter encouraged the creation of a working group that 
includes credit union officials and investment advisors. The commenter 
also suggested the development of an ANPR to provide a foundation for a 
comprehensive update of part 703. The commenter further recommended 
that the NCUA consider investment authority for community banks as it 
reviews new flexibility for credit unions.
    Approximately five commenters asked the NCUA to permit credit 
unions to purchase mortgage servicing rights. Approximately five 
commenters asked the NCUA to allow credit unions to invest in municipal 
bonds without limitation. One of these commenters said that the blanket 
limitations on municipal security exposure only hamper credit unions 
that are able to appropriately measure, understand, and deal with the 
risks specific to these investments, which the commenter stated are 
quite common in other financial institutions. The commenter argued that 
the ability to take some credit risk in the investment portfolio allows 
credit unions to maintain needed earnings while reducing other 
portfolio risks, such as interest rate risk. The commenter stated that 
some credit unions have suffered material losses and/or lost revenue 
due to this unnecessary limit. The commenter also said that the limit 
does not factor risk considerations for general obligation versus 
revenue securities as is considered in the FCU Act (revenue issues 
having a limit versus general obligations having none), nor does it 
consider the effect of other credit enhancement factors, such as 
sinking fund provisions. One commenter prioritized and strongly 
supported removing limits on zero-coupon investments. The commenter 
felt that change would provide credit unions with added flexibility to 
manage their investment portfolios as they seek to offset risk. Another 
commenter objected to requiring a minimum of investment grade for all 
investments and argued it would increase regulatory burden.
    One commenter asked the NCUA to expand investment authority to 
include other asset classes important for risk diversification and 
portfolio performance. The commenter asked the NCUA to explore 
authorizing the purchasing of: Investment-grade corporate debt; auto 
and other consumer debt asset-backed securities; and mortgage servicing 
rights assets. The commenter argued that for a credit union with 
sufficient resources, knowledge, systems, and procedures to handle the 
risks, there is no reason why investing in investment-grade corporate 
debt and asset-backed securities products should be prohibited. The 
commenter felt that authorization would promote the overall efficiency 
of credit union industry investment holdings since these asset classes 
are important for risk diversification and portfolio performance. The 
commenter argued that empirical data shows that a reasonable allocation 
to these assets classes provides diversification benefits such that the 
return series is less risky, not more risky. The commenter did advise 
that they are not aware of the legal landscape and the effort 
authorization would require. The commenter also said that credit unions 
are already in the mortgage servicing business and many are already 
large holders of these assets. The commenter noted, however, that many 
credit unions also may desire to shed the asset, possibly because of 
concerns over the asset's risk profile or the economic barriers to 
building an efficient servicing operation. The commenter concluded that 
allowing for transacting could promote the greater efficiency of the 
overall system.
    Several commenters asked that at least some of the part 703 changes 
be moved to Tier 1. One of these commenters specifically asked that the 
recommendations in Subpart A numbers 1, 5, 7, 9, and 16 be moved to 
Tier 1.
    Derivatives Comments: Approximately five commenters explicitly 
supported removal of the preapproval requirements for derivatives and 
replacement with a notification requirement. One commenter opposed 
removal of the pre-approval requirement and replacement with a notice 
requirement. The commenter felt that at this point it is important for 
the NCUA to ensure that a credit union is sophisticated enough to 
purchase derivatives.
    One of the supportive commenters commended efforts to widen the 
rule's applicability and said that the replacement of the application 
process with a notification requirement and the removal of the volume-
based limits are a step forward in promoting a more efficient interest 
rate risk management process. Several of the supportive commenters also 
supported the removal of limits on permissible off-balance sheet 
hedging instruments and expanding eligible collateral to include agency 
debt. These commenters felt that these changes would allow more credit 
unions to effectively manage interest rate risk, subject to appropriate 
supervisory intervention. Another commenter suggested that the 
authorization of two instruments, Eurodollar futures and interest rate 
swap futures, would improve hedging efficiency and effectiveness.
    One commenter noted that the NCUA has not reviewed the derivatives 
rule since it was issued in 2014 and asked that review of the rule be 
made a priority. The commenter said that the combination of the 
suspended annual regulatory review and the Tier 2 classification defers 
consideration until

[[Page 65945]]

2020 at the earliest. The commenter argued that this designation 
``creates a serious inconsistency or otherwise interferes with 
regulatory reform initiatives and policies,'' which is one of the 
criteria of Executive Order 13777. Further, the commenter disagreed 
that the effort associated with revising this rule is high. The 
commenter reasoned that the derivatives volume limits appear in a 
narrow section of part 703 and the invention of these artificial limits 
created more work than removing them would. The commenter did not 
understand why, given the Task Force acknowledged that the impact of 
revising this rule would be high, it is not a Tier 1 proposal--high 
impact and low effort. The commenter concluded by urging the NCUA to at 
least fix the weighted average remaining maturity notional (WARMN) 
limit immediately if the agency delays review of the entire rule.
    Several commenters asked the NCUA to immediately eliminate the 
volume-based limits. One of these commenters argued that the 
derivatives volume limits, particularly the WARMN, have no parallel in 
the regulatory practice of any other FFIEC regulator, nor any state 
regulatory body of which the commenter is aware. The commenter also 
said that, similarly, the fair value limit threshold of negative 25% of 
regulatory net worth is arbitrary and is not evidence that a credit 
union has failed to hedge its assets properly. The commenter said that 
failure to manage interest rate risk, created by serving members' needs 
through long-term real estate lending, is the greatest mid- to long- 
term financial threat facing credit unions, and therefore, the NCUSIF. 
The commenter felt that credit unions and the NCUSIF have been 
fortunate to have gone through a sustained period of low interest 
rates, but luck is not a risk-mitigation strategy. The commenter cited 
the following to evidence that the need for hedging is significant: 49% 
of credit union loans are real estate loans, a portfolio that continues 
to grow at 10% per year; only 15% of credit union mortgage loans are 
adjustable rate loans; and 33% of credit union assets are long-term, 
whereas only 4% of credit union deposits are longer than three years. 
The commenter felt that part 703 already provides the governance and 
approval framework required to ensure that credit unions do not use 
derivatives for speculative purposes or in ways that inadvertently 
create harm to their net worth. The commenter argued that the 
derivatives volume limits do not reduce risk and said that, to the 
contrary, they limit the capacity of credit unions to adequately hedge 
the interest rate risk inherent in their business practice, thereby 
creating risk to the credit unions and the NCUSIF.
    The commenter continued by arguing that tying notional value limits 
to a small multiple of net worth, as opposed to the amount of long-term 
assets the FCU holds, fails to match permissible risk mitigation to the 
risk created by holding those long-term assets. The commenter said that 
if an FCU has 10% net worth and mixes its swaps between 5 and 10 years 
to cover the longer-end of its fixed-rate loan portfolio, a 100% WARMN 
means the FCU cannot have notional swaps of more than 13.33% of assets. 
The commenter concluded that such a limit is sufficient if the FCU has 
long-term assets limited to 25-30% of its assets, but it is probably 
insufficient if an FCU has more long-term assets. As an example, the 
commenter said that a credit union with 60% of its assets in mortgage 
loans should be permitted to hedge at least 50% of this amount with 
long-term swaps, or roughly 25% of assets (or 250% of net worth). The 
commenter said that if instead the credit union can only hedge 13.33% 
of assets, as short-term rates rise sooner than assets mature, the 
credit union's net worth can quickly dissipate, given the fact that a 
large share of the long-term assets are largely un-hedged. The 
commenter said that, put more simply, the current WARMN limit means 
that a credit union with 10% net worth can only hedge 10% of its 
balance sheet with 10 year pay-fixed interest rate swaps. The commenter 
argued that this is simply insufficient for the large percentage of 
credit unions engaged in mortgage lending. The commenter believed that 
the current WARMN limit dramatically increases interest rate risk for 
the credit union system overall. The commenter finished by stating that 
the industry cannot wait two to three more years with nothing more than 
a hope that unhedged interest rates will remain stable and low.
    Two commenters provided detailed comments advocating that the NCUA 
allow credit unions to invest in mutual funds that have access to the 
same interest rate risk mitigating derivatives as credit unions.
    One of these commenters suggested that mutual funds could be 
effective in mitigating interest rate risk by engaging in limited 
derivative activities. The commenter noted that Sec.  703.100(b)(2) of 
the NCUA's regulations specifically excludes mutual funds that contain 
derivatives from being a permissible FCU investment. The commenter felt 
that mutual fund managers with a high level of derivatives expertise 
and a well-developed derivatives program infrastructure could help 
mitigate the portion of interest rate risk attributable to credit 
unions' indirect investments. The commenter stated that mutual funds 
marketed to credit unions and restricted to FCU permissible investments 
should be expected to encounter risks similar to those faced by FCUs 
themselves. The commenter said that those risks, including interest 
rate risk, are passed on to shareholder credit unions if left 
unmitigated by the portfolios. The commenter recommended that the NCUA 
clarify that mutual funds have access to the same interest rate risk 
mitigating derivatives as credit unions themselves. The commenter 
believed that this broad, comprehensive view of interest rate risk 
mitigation would ultimately reduce risk to the NCUSIF. The commenter 
suggested that the NCUA explicitly state that, in addition to investing 
in all other FCU-permissible investments, mutual funds that possess an 
NCUA-approved level of financial sophistication, risk management, and 
operational capabilities (and market to credit union investors) may 
invest in permitted derivatives to mitigate the inherent risks of those 
other FCU-permissible investments. The commenter felt this change could 
be implemented with a low degree of effort given the regulatory and 
compliance infrastructure a mutual fund registered under the Investment 
Company Act of 1940 already has in place, but could have a significant 
impact given the limited number of credit unions that have been granted 
derivative authority to date.
    The other commenter asked the NCUA to allow credit unions to invest 
in mutual funds offered by Management Investment Companies (MICs). The 
commenter said that the MIC would be the entity receiving NCUA 
derivatives authority as opposed to numerous individual credit unions. 
The commenter suggested that the NCUA could modify regulations to 
incorporate requirements for individual credit union investors 
utilizing any MIC issued funds with derivative authorities (policies, 
procedures, etc.). According to the commenter, the MIC would be 
registered under the Investment Company Act of 1940 and the Securities 
Act of 1933. From this perspective, the commenter said that the MIC 
would fall under the SEC's regulatory scope. The commenter noted that 
the existing regulatory framework of the mutual fund industry includes 
considerable oversight at the time of registration, as well as frequent 
ongoing reporting requirements. The commenter said that,

[[Page 65946]]

as they understand it, this reporting includes an annual prospectus, 
annual and semi-annual reports and other requirements related to 
various changes which occur during the interim. The commenter concluded 
that with this approach a credit union could invest in mutual funds 
that obtained derivatives authority from the NCUA. The commenter said 
that the intention would not be to create a fund invested entirely in 
derivatives, but to allow approved MICs the ability to utilize 
derivative tools to manage the interest rate risk within the fund. The 
commenter suggested that, as opposed to credit unions investing in 
individual securities with embedded interest rate, a credit union could 
utilize a fund as an alternative investment tool. The commenter noted 
that investing in such a fund would not grant any additional derivative 
authority to a credit union. The commenter concluded that this solution 
could: Increase the number of credit unions that could afford to 
participate and receive the benefits of derivative tools; allow access 
for credit unions with assets less than $250 million; reduce the cost 
of participating in the program; utilize the expertise of regulated 
third parties; provide less of a resource drain on NCUA staff; and 
retain for the NCUA the direct ability to set and monitor requirements 
of third-party vendors. The commenter felt that this could be an 
important risk management tool.
    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.
    Report 1: Recommend moving Sec.  701.21(i) to part 703 Subpart B--
Derivatives Authority to have all options/derivatives authority in one 
section.
    Comments: Two commenters offered general support for the 
recommendation, noting that they support all conforming clarifications 
to ensure that regulations are clear, consistent, and where appropriate 
bundled in relevant and rational sections. One commenter opposed this 
recommendation and the recommendation to rename 703 Subpart B 
``Derivatives and Hedging Authority.'' The commenter felt that the 
changes add complexity, which is contrary to the intent of the 
regulatory reform agenda. One commenter asked that it be deprioritized 
since it is a procedural change that the commenter does not believe 
will afford significant relief.
    Report 2: Upon further consideration and in response to stakeholder 
feedback the Task Force has moved this recommendation to the top of 
Tier 2 and the NCUA plans to take action related to this recommendation 
in 2019. The Task Force has also merged into the investments 
recommendation the separate recommendation to move Sec.  701.21(i) to 
part 703 Subpart B--Derivatives Authority so that all options/
derivatives authority in one section. The Task Force also emphasizes 
that the FCU Act prevents the NCUA from offering all of the relief 
credit unions are seeking in this area. All other aspects of these 
recommendations remain unchanged.
2. Sec.  701.22--Loan Participations
    Addresses: The 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% of the FICU's net worth (unless waived).
    Sections: 701.22(b)(5)(ii); 701.22(c).
    Category: Remove.
    Degree of Effort: Low.
    Degree of Impact: High.
    Report 1: Remove the prescriptive limit on the aggregate amount of 
loan participations that may be purchased from one originating lender. 
Replace with a requirement that 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% of net 
worth. Eliminates the need for the waiver provision in Sec.  701.22(c).
    Comments: Approximately 15 commenters offered support for 
eliminating the prescriptive limit on the aggregate amount of loan 
participations that may be purchased from any one originating lender 
and allowing credit unions to establish limits within a board approved 
policy. One commenter asked the NCUA to provide coordinated training 
and guidance for examiners if the recommendation is adopted to avoid an 
exam defaulting to the previous prescriptive standard.
    Another commenter stated that they felt this proposal was well-
reasoned. The commenter said that the credit risk associated with an 
individual loan and the concentration risk from a high aggregate single 
borrower exposure are more significant risks to the NCUSIF than those 
associated with overexposure to a properly vetted originating lender. 
The commenter felt that the current limitation has the adverse and 
unintended effect of forcing credit unions to pursue loans from new, 
unfamiliar, and in some cases less qualified and experienced 
originators simply to avoid an arbitrary cap. The commenter believed 
that such pursuits result in an inefficient use of internal resources 
to conduct proper and ongoing originator due diligence, which if not 
done properly will result in additional risk within a credit union's 
portfolio. The commenter concluded that allowing each credit union to 
establish its own sensible policy limit on the aggregate amount of loan 
participations purchased from a single originating lender will bring 
needed flexibility and encourage credit unions to customize their 
participation loan programs to their own size, needs, and appetite for 
risk.
    Another commenter observed that under the MBL rule the NCUA treats 
certain purchased loan participations as MBLs, including for risk 
weighting under the RBC rule. The commenter said that if the 
participation involves a loan to a member of the purchasing credit 
union, even though the loan was originated by the selling credit union, 
the interest in the participation must be counted as an MBL by the 
purchasing credit union. The commenter felt that this treatment is not 
justified and encouraged the NCUA to reconsider it as it reviews this 
regulation. The commenter said that, in light of the provisions that 
apply to loan participations under the MBL rule, the loan 
participations rule could benefit from the approach proposed for 
eligible obligations (strip away requirements not required by the FCU 
Act and consolidate provisions in one place in the regulations).
    One commenter noted that the conflict of interest provisions 
regarding the use of third parties to review a loan participation could 
be clearer as to when the third party can actually acquire an interest 
in the loan participation.
    Several commenters asked that this be made a priority and moved to 
Tier 1. One commenter argued that the recommendations require 
relatively low effort, involve removing prescriptive limits or 
otherwise streamlining requirements, and would help credit unions 
manage their balance sheets more effectively. The commenter reasoned 
that removing unnecessary prescriptive limits and elements that are 
contrary to modern holistic balance sheet funds management theory would 
provide some credit unions risk management options that may be too late 
in three years when the market environment may have changed further.
    Report 2: The Task Force recommends adopting the first report's 
recommendation and prioritization, with an understanding that the FCU 
Act

[[Page 65947]]

prevents the NCUA from offering all of the relief credit unions are 
seeking.
3. 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.
    Report 1: 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.\39\
---------------------------------------------------------------------------

    \39\ See 12 U.S.C. 1757(7)(E), 1757(13), and 1757(14).
---------------------------------------------------------------------------

    Comments: Approximately ten commenters offered general support for 
the recommendations. Several commenters said that the removal of 
supervisory ratings and limitations beyond the statutory scope will aid 
credit unions in their member service business by reducing regulatory 
burden. The commenters felt that providing credit unions with the 
unlimited ability to purchase, sell, and pledge eligible member 
obligations is in the spirit of the credit union business model. One 
commenter opined that current limits to purchasing eligible obligations 
may only exacerbate the challenges facing credit unions that are 
struggling for earnings and/or risk diversification and take away much 
needed opportunities that could otherwise be part of a strategic aspect 
to cure concerns. The commenter said that waivers take time and rely on 
examiners recognizing the strategic importance/appropriateness of the 
request.
    One commenter stated that the NCUA has the authority to allow 
credit unions to purchase whole loans from non-credit unions and argued 
that credit unions ought to have broad authority to purchase loans from 
other originators, particularly other federally insured depositories. 
The commenter argued that purchasing loans from other financial 
institutions can be a risk-appropriate, well-priced alternative to 
purchasing low-yielding, over-priced securities.
    Another commenter said that, although the recommendation lacks 
detail, they would support a revised rule that allows for any credit 
union to purchase an eligible obligation that has been originated by a 
FICU, regardless of whether it is an obligation of its members. The 
commenter believed such a rule would not bring new risk into the 
system, yet would provide purchasing and selling FICUs with more market 
options, which ultimately would lower the cost for consumers.
    Finally, one commenter asked the NCUA to clean up the language in 
Sec.  701.23, which it believes to be the single most confusing 
regulation governing FCU powers.
    Several commenters also asked that the recommendations be moved to 
Tier 1. One commenter contended that since the regulation was part of 
the Office of General Counsel's 2015 regulatory review revisions should 
be considered in 2018. Another commenter argued that the 
recommendations require relatively low effort, involve removing 
prescriptive limits or otherwise streamlining requirements, and would 
help credit unions manage their balance sheets more effectively. The 
commenter reasoned that removing unnecessary prescriptive limits and 
elements that are contrary to modern holistic balance sheet funds 
management theory would provide some credit unions risk management 
options that may be too late in three years when the market environment 
may have changed further.
    Report 2: The Task Force recommends adopting the first report's 
recommendation and prioritization.
4. 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.
    Report 1: Review this regulation to determine if NCUA approval is 
really needed in purchasing loans and assuming liabilities from market 
participants other than FICUs. 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 transactions not material to the 
acquirer) is an inordinate burden for the institution and the NCUA.
    Comments: Approximately ten commenters offered general support for 
the recommendation and felt prior approval an unnecessary burden. 
Several commenters agreed that requiring agency approval in every case 
might be an inordinate burden, especially since credit unions already 
have broad authority to make loans, buy investments and other assets, 
and enter into transactions that create liabilities. Several commenters 
said that credit unions should retain the broad flexibility and 
authority to lend, purchase, and sell assets and liabilities, not 
subject to NCUA approval in all cases. These commenters welcomed review 
to determine whether NCUA approvals are necessary in deals between 
credit unions and other non-FICU market participants.
    One commenter argued that preapproval should not be required for a 
FISCU purchase of liabilities from a non-FICU. The commenter believed 
that the NCUA's approval for such transactions has never materially 
contributed to the transaction's safety and soundness and argued that 
there is no indication that a non-FICU, regulated by a state regulator, 
is less safe than an FCU. Another commenter argued that nothing in 
Title II of the FCU Act gives the NCUA the authority to proscribe the 
loan purchase powers of a FISCU. The commenter asked the NCUA to 
eliminate the loan seller restrictions governing FISCUs in Sec.  741.8. 
Finally, several commenters asked that this recommendation be moved to 
Tier 1.
    Report 2: The Task Force recommends adopting the first report's 
recommendation and prioritization, with an understanding that the FCU 
Act prevents the NCUA from offering all of the relief credit unions are 
seeking.
5. 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.
    Report 1: Add a comprehensive third-party due diligence regulation 
and remove and/or relocate such provisions from other regulations.
    Comments: A handful of commenters supported increased clarity and 
simplification, but cautioned that no new or additional regulatory 
burdens should be imposed. One of these commenters was concerned that 
``comprehensive'' implies additional regulations. This commenter said 
that vendor due diligence is a priority for credit unions as more 
services become more complex requiring the use of specialized vendors. 
However, the commenter felt that the current regulations achieve the 
NCUA's desired goal of a safe and sound credit union system. One 
commenter agreed with a review of what they believed to be considerable 
and burdensome due diligence requirements. This commenter generally 
agreed with consolidating due diligence requirements in one rule, but 
did not think the agency should regulate how credit unions meet their 
due

[[Page 65948]]

diligence obligations. The commenter said that any revised due 
diligence rule should not be overly prescriptive, but should focus on 
allowing credit unions to determine how best to vet third parties.
    Several other commenters felt the recommendation did not provide 
sufficient information to comment. One of these commenters said that 
they would oppose any recommendation that would increase NCUA authority 
over third-party vendors. The commenter believed that would 
significantly increase credit unions' costs. Another of these 
commenters stated that they have a robust due diligence program and do 
not support additional regulatory burden aimed at reinventing the 
third-party services landscape. The commenter argued that such action 
would run contrary to Executive Order 13777.
    Addresses: Third-party servicing of indirect vehicle loans.
    Sections: 701.21(h).
    Category: Remove.
    Degree of Effort: Low.
    Degree of Impact: Moderate.
    Report 1: 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.
    Comments: Approximately ten commenters offered general support for 
the recommendations. One of these commenters specifically noted that 
the recommendations will assist compliance. Several commenters offered 
support, but were concerned that a ``comprehensive'' regulation would 
lead to overly burdensome requirements. One of these commenters asked 
the NCUA to focus on clarifying and condensing existing third-party due 
diligence requirements. Another of these commenters expressed their 
desire that the NCUA ensure that credit unions maintain control over 
the direction of their institution and are not intimidated by examiners 
who may micromanage credit union contracts.
    One commenter supported the Tier 1 prioritization. Another 
commenter asked that once the comprehensive guidance related to third-
party management is developed all references to third-party due 
diligence be consolidated into a single provision requiring credit 
unions establish policies for managing third-party relationships.
    Report 2: Upon further consideration and in response to stakeholder 
feedback the Task Force has combined these recommendations in Tier 2 to 
avoid bifurcating rulemakings addressing third-party management.
6. 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.\40\
---------------------------------------------------------------------------

    \40\ Includes potential efficiencies and/or cost savings for the 
NCUA.
---------------------------------------------------------------------------

    Report 1: Revise the payout priorities to make unsecured creditors 
pari passu with the NCUSIF. Currently, unsecured creditors are senior 
to the NCUSIF.
    Comments: A handful of commenters generally supported the 
recommendation. Several of these commenters felt that the 
recommendation would help the larger credit union industry. One 
commenter noted that while the recommendation lacked detail, they 
support it because it could further protect the NCUSIF.
    Report 2: Upon further consideration and in response to stakeholder 
feedback the Task Force has moved this recommendation from Tier 3 to 
Tier 2. The Task Force believes this recommendation will help to 
protect the NCUSIF and higher prioritization is appropriate.
iii. Tier 3 (Year 4+)
1. 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.
    Report 1: Enhance federal preemption where possible and 
appropriate. FCUs 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.
    Comments: Approximately ten commenters offered general support for 
the recommendations. One of these commenters asked the NCUA to clarify 
the scope of preemption as it applies to FISCUs, not just FCUs. 
Approximately five of the commenters emphasized the potential 
beneficial impact on credit unions in multi-state situations. These 
commenters emphasized that multi-state lenders face regulatory overlap 
and additional burden. They felt that providing greater clarity on 
where federal law applies through regulation would provide regulatory 
relief. One commenter said that any opportunity to ensure and clarify 
for credit unions the supremacy of federal lending laws is welcome and 
long overdue. Another commenter said that determining whether a state 
law is preempted is difficult and they would appreciate any additional 
or explicit guidance. One commenter emphasized that preemption to 
facilitate operations can help reduce compliance burdens and produce 
cost savings. The commenter noted that it supported the NCUA's view of 
its preemption authority and encouraged the agency to consider 
preemption broadly while being mindful of consumer and state authority 
concerns.
    Several commenters felt that preemption should be made a priority. 
These commenters recommended elevating the recommendation to either 
Tier 1 or Tier 2. A few commenters did caution the NCUA to make sure 
that federal preemption of applicable state laws and regulations is 
narrowly tailored so as not to undermine a state supervisory structure. 
The commenters said that since many credit unions opt for state 
charters based on their members' business needs, any federal legal 
preemption should not unduly burden the compliance obligations of 
credit unions who have not sought the degree of federal oversight 
imposed.
    Report 2: The Task Force recommends adopting the first report's 
recommendation and prioritization.
2. 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.
    Category: Remove/Improve.
    Degree of Effort: Moderate.
    Degree of Impact: Low.
    Report 1: Determine if this regulation remains relevant and 
necessary.
    Comments: Several commenters thought this regulation irrelevant, 
unnecessary, and no longer applicable.
    Report 2: The Task Force recommends eliminating this regulation.
3. Part 714--Leasing
    Addresses: Leasing.
    Sections: 714.
    Category: Improve.
    Degree of Effort: Moderate.
    Degree of Impact: Undetermined.
    Report 1: Review this regulation to identify if any changes or 
improvements are needed.
    Comments: Approximately five commenters encouraged relief to 
provide flexibility and inspire more leasing. One of these commenters 
noted

[[Page 65949]]

that the leasing rule was adopted in 2000 and, while there may not be 
the need for numerous changes, it is appropriate that the NCUA review 
the rule, which the commenter believed to be overly detailed and 
oriented toward micromanagement. The commenter stated that, for 
example, the rule controls the amount of the estimated residual value a 
credit union may rely upon to satisfy the full payout lease 
requirement, which is 25% of the original cost of the leased property 
unless the amount above that is guaranteed. The commenter felt this 
kind of detail about the mechanics of a leasing program would be more 
appropriately determined by the credit union.
    Several commenters said that credit unions should have the 
flexibility to run their business as best suits their members' needs. 
These commenters argued that the leasing regulations should be reduced 
to allow more credit unions, other than the largest, to engage in this 
activity if it is appropriate to their business needs. The commenters 
felt that credit unions are uniquely positioned to provide creative, 
tailored lease terms that give members greater flexibility in personal 
leases.
    Report 2: The Task Force recommends adopting the first report's 
recommendation and prioritization.
4. 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.
    Report 1: Update this regulation to streamline, facilitate the use 
of correspondents, and reduce minimum collateral requirements for 
certain loans/collateral.
    Comments: Approximately five commenters provided comments offering 
support and substantive recommendations. Several commenters stated that 
they support updates that reduce minimum collateral requirements as 
well as facilitate the use of correspondents. As detailed more fully 
below, one commenter provided a number of substantive recommendations.
    The commenter said that for the past several years, the corporate 
credit union community has worked closely with the CLF in order to 
provide operational efficiency with advances, repayments, and 
collateral management through a correspondent agreement with each 
corporate credit union. As such, the commenter asked that the NCUA 
amend Sec.  725.2 to include a definition of a correspondent. The 
commenter also asked the NCUA to modify Sec.  725.19 to reflect a 
market-based approach to collateral values. The commenter noted that 
current CLF collateral requirements call for a blanket net book value 
equal to at least 110% of advances and for certain types of collateral, 
i.e. marketable securities, CLF collateral values compare unfavorably 
to the Federal Reserve Board discount window and the Federal Home Loan 
Banks. Additionally, the commenter requested that the NCUA eliminate 
various references to dates in part 725 that are outdated.
    The commenter also suggested the NCUA consider amending Sec.  
725.4(a)(2), which requires an agent member to purchase capital stock 
for all of its member natural person credit unions, in conjunction with 
a change to Sec.  304(b)(2) of the FCU Act,\41\ to allow the purchase 
of capital stock on behalf of a select group of member credit unions. 
The commenter noted that as corporate credit unions recapitalized their 
balance sheets following the crisis, the purchase of CLF capital stock 
for all member credit unions was thought to be prohibitively expensive 
by the corporate community. The commenter believed that the suggested 
changes would enable more natural person credit unions to access 
liquidity from the CLF during periods of tight liquidity.
---------------------------------------------------------------------------

    \41\ 12 U.S.C. 1795c(b)(2).
---------------------------------------------------------------------------

    The commenter also thought that corporate credit unions should have 
the ability to borrow directly from the CLF for liquidity purposes, and 
requested that the NCUA consider modifications to part 725 in 
conjunction with efforts to modernize the FCU Act in order to allow CLF 
advances directly to corporate credit unions. The commenter noted that 
during the financial crisis the CLF instituted several programs, 
including the Credit Union System Investment Program, which provided 
access to liquidity for select corporate credit unions. The commenter 
said that these programs required an advance from the CLF to a natural 
person credit union, following which the natural person credit union 
invested proceeds of the advance in a note issued by the corporate 
credit union and guaranteed by the NCUSIF pursuant to the Temporary 
Corporate Credit Union Liquidity Guarantee Program. The commenter 
argued that, while these transactions facilitated liquidity to 
corporate credit unions, the transactions were complex and costly.
    The commenter also noted that they object to Sec.  306(a)(1) of the 
FCU Act,\42\ which reads in part ''the Board shall not approve an 
application for credit the intent of which is to expand credit union 
portfolios.'' The commenter argued that all advances expand a credit 
union's portfolio and the determination of whether or not an advance 
serves a liquidity purpose should be left up to the CLF.
---------------------------------------------------------------------------

    \42\ Id. Sec.  1795e(a)(1).
---------------------------------------------------------------------------

    A separate commenter asked the NCUA to review the authority for the 
CLF as well as its role and function. The commenter opined that the CLF 
was designed to be an important and useful facility that provides 
access to liquidity for those credit unions that could demonstrate the 
need and repay their borrowings. The commenter also stated that the CLF 
provides credit unions with a reliable resource for contingency funding 
needs. The commenter said that despite the CLF's past role, it 
currently has only 269 regular members and has no loans. The commenter 
believed that the CLF can be a useful facility that credit unions may 
utilize for liquidity when interest rates begin to rise again and asked 
the NCUA to work with Congress to restructure the CLF, ease 
requirements for credit unions to be members, and extend the range of 
borrowing opportunities.
    One commenter specifically supported the Tier 3 categorization. 
Another commenter, citing the CLF's role during the financial crisis, 
felt part 725 warrants a higher priority.
    Report 2: The Task Force recommends adopting the first report's 
recommendation and prioritization, with an understanding that the FCU 
Act prevents the NCUA from offering all of the relief credit unions are 
seeking.
5. Part 741--Requirements for Insurance
    Addresses: Maximum borrowing authority.
    Sections: 741.2.
    Category: Remove.
    Degree of Effort: Low.
    Degree of Impact: Low.
    Report 1: Remove the 50% borrowing limit for FISCUs and the related 
waiver provision. State law should govern in this area.
    Comments: Approximately five commenters offered general support for 
the recommendation. One commenter specifically supported the Tier 3 
categorization.
    Report 2: The Task Force recommends adopting the first report's 
recommendation and prioritization.

[[Page 65950]]

6. 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.
    Report 1: Remove as no longer necessary and not consistent with 
GAAP.\43\
---------------------------------------------------------------------------

    \43\ There are 11 FISCUs from 8 different states that report a 
total of $4.4 million in this account on the Call Report as of 
December 31, 2016.
---------------------------------------------------------------------------

    Comments: Several commenters agreed with the recommendation. One 
commenter stated that a low prioritization is appropriate.
    Report 2: The Task Force recommends adopting the first report's 
recommendation and prioritization.
7. 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.
    Report 1: 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.
    Comments: Approximately 15 commenters asked the NCUA to reform the 
Bank Secrecy Act (BSA) regulations and suggested the NCUA work with the 
Department of the Treasury and other regulators to support meaningful 
changes to minimize the costs and problems encountered in meeting BSA 
and anti-money laundering (AML) requirements. Several other commenters 
emphasized that BSA and AML compliance remain substantial issues and 
urged the NCUA to minimize compliance burdens. Another commenter noted 
that BSA compliance is a huge burden in paying for systems, training, 
and personnel. Several commenters also asked the NCUA to work with the 
Treasury and the Financial Crimes Enforcement Network (FinCEN) to 
eliminate burden from duplication in BSA requirements.
    Approximately five commenters asked that the threshold for Currency 
Transaction Reports (CTRs) and Suspicious Activity Reports (SARs) be 
raised to a minimum of $20,000 to provide relief, ensure that only 
effective useful data is transmitted, and allow field examiners to 
provide consistent guidance during exams. Commenters noted that the 
current threshold has remained unchanged since 1972 and that the 
threshold would be over if $50,000 if adjusted for inflation. Several 
commenters requested that the SAR and CTR forms be combined into one 
form submission.
    Another commenter asked that the NCUA promote better communication 
over mandatory reporting. The commenter stated that credit unions often 
file defensive SARs, which are of little use to law enforcement, to 
avoid compliance failures. The commenter believed reforms to promote 
open communication between law enforcement and credit unions would 
allow the system to function like Congress intended. The commenter also 
argued that enforcement of FinCEN regulations by the NCUA, without 
direct law enforcement feedback, is cumbersome and should be changed.
    Another commenter suggested significantly curtailing customer due 
diligence requirements and eliminating redundant SARs filings for 
corporate credit unions. One commenter suggested that FinCEN and 
federal law enforcement should consider awarding a percentage, such as 
10%, of fines or awards to credit unions in civil and criminal actions 
when those institutions' filings were instrumental in a case. The 
commenter believed that incentivizing better filings would result in 
better quality SARs, greater compliance, and the alleviation of some of 
the high costs of BSA compliance.
    One commenter asked the NCUA to relax its requirement for monthly 
reporting of SAR activity to the board. The commenter stated that there 
is no statutory requirement that mandates monthly reporting and asked 
the NCUA to allow credit unions to report SAR filings promptly to the 
board, with promptly defined as the next regularly scheduled board 
meeting or at least quarterly.
    Approximately five commenters offered support for a working group. 
Another commenter specifically supported the use of an ANPR. Several 
commenters said the NCUA should persuade FinCEN, other financial 
regulators, and Congress to reform some of the BSA inefficiencies.
    Approximately 15 commenters asked that part 748 be made a priority. 
One commenter noted their appreciation for the NCUA's effort to reform 
BSA compliance procedures, but articulated a belief that substantive 
changes must originate from FinCEN and Congress. Another commenter 
asked the NCUA to explain all exam policies and priorities, 
particularly new ones, and provide the information in one ``examination 
issues'' location on the agency's website and in agency documents, such 
as letters to credit unions and examiners' guides.
    Report 2: The Task Force recommends adopting the first report's 
recommendation and prioritization. Further, the Task Force emphasizes 
that the NCUA has limited authority in this area. Many of the changes 
requested by commenters fall outside of the NCUA's purview. The Task 
Force does note that the NCUA continues to participate in interagency 
work in this area.
8. 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.
    Report 1: 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.
    Comments: Approximately 15 commenters stated that the record 
retention guidelines are unclear and conflicting. One of these 
commenters noted that, while the rule states that any records not 
explicitly mentioned as vital records do not need to be maintained 
permanently and can be destroyed periodically as determined by the 
credit union, other parts of the NCUA's regulations have record 
retention requirements. The commenter included two examples. First, 
under part 749 certain supervisory committee documents are not vital 
records and are subject to periodic destruction; yet under part 715 
certain supervisory committee documents must be retained until the 
completion of the next verification process. Second, merger documents 
are not explicitly listed as permanent records in part 749; however, 
the NCUA's Credit Union Merger Procedures and Merger Forms Manual 
states that the continuing credit union must maintain all documents and 
records related to a merger. Another commenter agreed with the review 
and noted that some retention requirements lack a termination date. 
Several commenters asked the NCUA to update part 749 to reflect and 
adapt to technology record maintenance changes.
    Approximately 15 commenters asked that changes to this regulation 
be made

[[Page 65951]]

a priority. Conversely, one commenter felt the changes would have 
negligible benefit and agreed with the Tier 3 prioritization. Several 
commenters asked the NCUA to develop a working group. One commenter 
specifically supported using an ANPR to frame the numerous issues.
    Report 2: The Task Force recommends adopting the first report's 
recommendation and prioritization.
iv. Other Comments
1. Timeline
    Several commenters asked that the four year timeline be 
accelerated. One commenter agreed with reassessing the timelines based 
on credit union feedback. Another commenter asked the NCUA to consider 
the implementation timelines for these changes, noting that credit 
unions and the NCUA will require substantial transition time to conform 
to new or changed regulations. The commenter asked that examiner 
training be emphasized to avoid implementation inconsistencies.
2. Prioritizations Generally
    One commenter asked the Task Force to use a taxonomic system with 
Tier 1, Class A regulations receiving highest priority, followed by 
Tier 1, Class B regulations, and so forth.
3. Other
    Other suggestions included: Co-locating all rules applicable to 
FISCUs; amendments to the definition of loan-to-value in part 723; 
formation of a Credit Union Advisory Council; flood insurance 
amendments; suggestions for how to better comply with Executive Orders 
13771 and 13777; investment in fintech companies; clarity and parity 
for financing of pre-sold construction homes; changes to the PALs 
program; and more.
d. Appendix to Section III--Part 703 Recommendations Details

                     Investments--Part 703 Subpart A
------------------------------------------------------------------------
      Item                  Change                     Rationale
------------------------------------------------------------------------
1..............              Investment Policies Sec.   703.3
                --------------------------------------------------------
                 Fine tune section to focus   Reduces burden on credit
                  on investment activities     unions by not requiring
                  and not on balance sheet     IRR and liquidity
                  activities. E.g., remove     policies in the
                  (c) and (d), IRR and         investment policy. Also
                  liquidity, since those       should help credit unions
                  items should be addressed    focus on balance sheet
                  in the IRR and liquidity     risk.
                  policies.
------------------------------------------------------------------------
2..............   Discretionary Control Over Investments and Investment
                   Advisor Sec.   703.5(b)(1)(ii), Sec.   703.5(b)(2)--
                                     (Net worth limit)
                --------------------------------------------------------
                 Remove 100 percent of net    This would allow credit
                  worth limit for delegated    unions to have
                  discretionary control.       professionally managed,
                  Would need to add language   separate-account,
                  to ensure credit unions      investments without
                  have provided investment     imposing a limit. There
                  advisors with investment     are no limits on mutual
                  guidelines that contain:     funds where the credit
                  Duration/average life        union has less control of
                  targets, permissible         what the manager invests
                  investments, and             in. Separate-account
                  investment limits.           delegated discretionary
                                               programs have
                                               considerably more
                                               transparency than mutual
                                               funds.
------------------------------------------------------------------------
3..............   Discretionary Control Over Investments and Investment
                        Advisor Sec.   703.5(b)(3)--(Due diligence)
                --------------------------------------------------------
                 Remove prescriptive due      This section is too
                  diligence requirements and   prescriptive for a credit
                  simply state the credit      union to perform due
                  union must perform due       diligence. It also does
                  diligence on the             not focus on the
                  investment advisor.          investment advisor's
                                               ability to manage
                                               investments for the
                                               credit union.
------------------------------------------------------------------------
4..............       Credit Analysis Sec.   703.6--(Due diligence)
                --------------------------------------------------------
                 Modify exception to credit   This will make it clear
                  analysis requirements to     that NCUA requires credit
                  only securities guaranteed   analysis for investments
                  by the entities listed in    not 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.   703.6--(Maximum credit risk)
                --------------------------------------------------------
                 Require a minimum of         Sets a minimum expectation
                  investment grade for all     of credit worthiness for
                  investments.                 all investments purchased
                                               under the part 703
                                               investment authority.
------------------------------------------------------------------------
6..............  Credit Analysis Sec.   703.6--(Credit union process and
                                          people)
                --------------------------------------------------------
                 A credit union, or its       This establishes the basic
                  investment advisor, must     standard for a credit
                  have sufficient resources,   union to purchase an
                  knowledge, systems, and      investment. This will
                  procedures to handle the     allow for a loosening of
                  risks and risk management    part 703 since NCUA has
                  (e.g., IRR modeling) of      established standards to
                  the investments it           purchase investments that
                  purchases.                   may have been prohibited
                                               or restricted in the
                                               past.
------------------------------------------------------------------------
7..............      Broker-Dealers--Sec.   703.8(b)--(Due diligence)
                --------------------------------------------------------
                 Remove prescriptive due      This section is too
                  diligence requirements and   prescriptive for a broker-
                  simply state the credit      dealer that doesn't
                  union must perform due       provide advice. May want
                  diligence on the broker-     to specify standards for
                  dealer.                      broker-dealers that
                                               provide advice to credit
                                               unions.
------------------------------------------------------------------------
8..............    Monitoring Non-Security Investments Sec.   703.10--
                                 (Reporting requirements)
                --------------------------------------------------------
                 Remove this section........  Unduly prescriptive.
------------------------------------------------------------------------

[[Page 65952]]

 
9..............      Valuing Securities Sec.   703.11(a) & (d)--(Due
                                        diligence)
                --------------------------------------------------------
                 Combine sections and remove  Currently too
                  the reference to two price   prescriptive. A
                  quotations. The              principled approach
                  requirement should be that   conforms more to market
                  the credit union use         convention.
                  market inputs to determine
                  if the purchase is at a
                  reasonable market price.
------------------------------------------------------------------------
10.............    Valuing Securities Sec.   703.11(c)--(Due diligence)
                --------------------------------------------------------
                 Remove this section........  Unnecessary. This should
                                               be dictated by GAAP.
------------------------------------------------------------------------
11.............     Monitoring Securities Sec.   703.12(a)--(Reporting
                                       requirements)
                --------------------------------------------------------
                 Move to and combine with     Streamlines part 703.
                  Sec.   703.11.
------------------------------------------------------------------------
12.............   Monitoring Securities Sec.   703.12(b), (c) and (d)--
                                 (Reporting requirements)
                --------------------------------------------------------
                 Remove these sections and    Unduly prescriptive.
                  703.12(a) will be combined
                  with part 703.11.
------------------------------------------------------------------------
13.............     Permissible Investment Activities and Permissible
                        Investments Sec.   703.13 and Sec.   703.14
                --------------------------------------------------------
                 Merge these sections and     Streamlines rule and
                  add language from the FCU    provides full investment
                  Act for permissible          authority allowed under
                  investments.                 the Act.
------------------------------------------------------------------------
14.............    Permissible Investment Activities Sec.   703.13(d)--
                            (Borrowing repurchase transactions)
                --------------------------------------------------------
                 Allow mismatch permissible   A 30 day mismatch is low
                  in Sec.   703.20 as the      risk.
                  ``base'' permissible
                  activity.
------------------------------------------------------------------------
15.............   Permissible Investments Sec.   703.14(a)--(Permissible
                          indices for variable rate investments)
                --------------------------------------------------------
                 Expand permissible indices   This could provide credit
                  for credit unions that       unions with investments
                  have sufficient resources,   that they could benefit
                  knowledge, systems, and      from and not pose a risk
                  procedures to handle the     to the NCUSIF.
                  risks of the investment.
                  Ability to model the
                  investment for IRR should
                  be required.
------------------------------------------------------------------------
16.............    Permissible Investments Sec.   703.14(e)--(Muni bond
                                          limits)
                --------------------------------------------------------
                 Remove limitations on        This limit is unnecessary.
                  municipal exposure.          Credit unions should
                                               determine limits.
------------------------------------------------------------------------
17.............    Permissible Investments Sec.   703.14(h)--(Mortgage
                               note repurchase transactions)
                --------------------------------------------------------
                 Limits will be reviewed to   Limits may need to be
                  determine if they are        increased or eliminated.
                  appropriate.
------------------------------------------------------------------------
18.............   Permissible Investments Sec.   703.14(i)--(Zero coupon
                                 investment restrictions)
                --------------------------------------------------------
                 Remove limits on zero-       Interest rate and
                  coupon investments.          liquidity risk should be
                                               managed from a balance
                                               sheet standpoint. This
                                               appears to try to manage
                                               it from an individual
                                               security standpoint. This
                                               limit is unnecessary.
------------------------------------------------------------------------
19.............       Permissible Investments Sec.   703.14(j)(3)--
                         (Commercial mortgage related securities)
                --------------------------------------------------------
                 Remove this section........  Not realistic in the
                                               current market place.
                                               Furthermore, 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 Activities Sec.   703.15--(Short
                                          Sales)
                --------------------------------------------------------
                 Review regulatory history    Restriction may be
                  on the prohibition of        reconsidered.
                  short sales.
------------------------------------------------------------------------
21.............     Prohibited Investments Sec.   703.16(a)--(Mortgage
                                     servicing rights)
                --------------------------------------------------------
                 Determine if mortgage        Buying MSRs from other
                  servicing rights (MSRs)      credit unions may offer
                  are permissible for credit   efficiencies in the
                  unions to purchase per the   credit union system.
                  FCU Act. If so, there
                  should be consideration
                  given to permit the
                  purchase of MSRs.
------------------------------------------------------------------------
22.............  Prohibited Investments Sec.   703.16(b)--(Exchangeable,
                                      IO and PO MBS)
                --------------------------------------------------------

[[Page 65953]]

 
                 Remove this section........  A credit union should be
                                               able to purchase interest-
                                               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.
------------------------------------------------------------------------
23.............          Grandfathered Investments Sec.   703.18
                --------------------------------------------------------
                 Remove sections that will    Some parts of the section
                  no longer apply based on     may not apply due to
                  other changes in the rule.   other changes in the
                                               rule.
------------------------------------------------------------------------
24.............           Investment Pilot Program Sec.   703.19
                --------------------------------------------------------
                 Remove this section........  Pilot programs will no
                                               longer be needed with the
                                               proposed changes.
------------------------------------------------------------------------
25.............       Request for Additional Authority Sec.   703.20
                --------------------------------------------------------
                 Remove this section........  Will no longer be 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 purchases in managing increased
                   interest rate risk for real estate loans produced for
                                           sale
                   on the secondary market, in 701.21(i) to 703.102(a)
                --------------------------------------------------------
                 Move the product to the      This would consolidate
                  Subpart B permissible        into one place all
                  derivative products.         permissible derivative
                                               activities.
------------------------------------------------------------------------
2..............      ``Move'' European financial options contract in
                                  703.14(g) to 703.102(a)
                --------------------------------------------------------
                 Move the product to the      This would consolidate
                  Subpart B permissible        into one place all
                  derivative products.         permissible derivative
                                               activities.
------------------------------------------------------------------------
3..............  ``Rename'' 703 Subpart B from ``Derivatives Authority''
                         to ``Derivatives and Hedging Authority''
                --------------------------------------------------------
                 Name change................  Would widen the rule to
                                               address off balance sheet
                                               hedging instruments that
                                               are permissible.
------------------------------------------------------------------------
4..............  ``Move and Modify'' Derivatives section in 703.14(k) to
                                       703 Subpart B
                --------------------------------------------------------
                 With the move, remove        Would provide more clarity
                  703.14(k)(1), move           on hedging activities for
                  703.14(k)(2) to 703.100      TBA, Dollar Rolls, etc.
                  and move 703.14(k)(3) to
                  703.102.
------------------------------------------------------------------------
5..............       ``Modify'' Derivatives Application process to
                                     ``Notification''
                --------------------------------------------------------
                 Remove the FCU application   The ``Notification''
                  requirements and replace     requirements would
                  with a ``Notification''.     include providing NCUA
                  This would require changes   with at least 60 day
                  to Sec.   703.108, Sec.      notice before initially
                  703.109, Sec.   703.110,     engaging in a Derivative
                  Sec.   703.111, Sec.         transaction.
                  703.112.
------------------------------------------------------------------------
6..............          ``Remove'' Derivatives Regulatory Limits
                --------------------------------------------------------
                 Remove the volume limits on  Will be better supported
                  derivatives activity. This   as part of supervision
                  would require changes to     guidance and possible use
                  Sec.   703.103, Sec.         as scoping metrics.
                  703.105, Appendix A.
------------------------------------------------------------------------
7..............        ``Expand'' Eligible Collateral for Margining
                --------------------------------------------------------
                 Expand the eligible          This is an acceptable
                  collateral in                practice and should have
                  703.104(a)(2)(iii) to        been in the Final Rule.
                  include Agency Debt
                  (Ginnie Mae Securities).
------------------------------------------------------------------------
8..............             ``Modify'' Eligibility (only part)
                --------------------------------------------------------
                 Remove or change 703.108(b)  Allows for more credit
                  to require notice but not    unions to use derivatives
                  pre-approval, and re-        to manage interest rate
                  evaluate the CAMEL and       risk subject to
                  asset size eligibility       supervisory intervention
                  criteria.                    if they are not equipped
                                               to manage it properly.
------------------------------------------------------------------------
9..............       ``Modify'' Notification requirement for FISCUs
                --------------------------------------------------------
                 Change 741.219(b)..........  Make consistent with FCU
                                               notification
                                               requirements.
------------------------------------------------------------------------

[[Page 65954]]

 
10.............           ``Remove'' Pilot Program Participants
                --------------------------------------------------------
                 Change 703.113.............  Not relevant anymore.
------------------------------------------------------------------------


    By the National Credit Union Administration Board on December 
13, 2018.
Gerard Poliquin,
Secretary of the Board.
[FR Doc. 2018-27473 Filed 12-20-18; 8:45 am]
 BILLING CODE 7535-01-P