Financial Innovation: Loan Participations, Eligible Obligations, and Notes of Liquidating Credit Unions, 67570-67601 [2023-20950]

Agencies

• National Credit Union Administration

[Federal Register Volume 88, Number 188 (Friday, September 29, 2023)]
[Rules and Regulations]
[Pages 67570-67601]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-20950]



[[Page 67569]]

Vol. 88

Friday,

No. 188

September 29, 2023

Part IV





 National Credit Union Administration





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12 CFR Parts 701 and 714





Financial Innovation: Loan Participations, Eligible Obligations, and 
Notes of Liquidating Credit Unions; Final Rule

Federal Register / Vol. 88, No. 188 / Friday, September 29, 2023 / 
Rules and Regulations

[[Page 67570]]


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NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Parts 701 and 714

[NCUA-2022-0185]
RIN 3133-AF49, 3133-AE96


Financial Innovation: Loan Participations, Eligible Obligations, 
and Notes of Liquidating Credit Unions

AGENCY: National Credit Union Administration (NCUA).

ACTION: Final rule.

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SUMMARY: The NCUA Board (Board) is amending the NCUA's regulations 
regarding the purchase of loan participations and the purchase, sale, 
and pledge of eligible obligations and other loans (including notes of 
liquidating credit unions). The final rule clarifies the NCUA's current 
regulations and provides additional flexibility for federally insured 
credit unions (FICUs) to make use of advanced technologies and 
opportunities offered by the financial technology (fintech) sector. The 
final rule also amends the NCUA's rule regarding loans to members and 
lines of credit to members by adding new provisions about indirect 
lending arrangements and indirect leasing arrangements. Finally, the 
final rule makes certain conforming changes and technical amendments to 
the NCUA's regulations. The Board does not view the conforming changes 
and technical amendments as substantive.

DATES: This final rule is effective October 30, 2023.

FOR FURTHER INFORMATION CONTACT: For policy questions: Naghi Khaled, 
Director of Credit Markets, the Office of Examination and Insurance, at 
(703) 518-6360; for legal questions: Frank Kressman, General Counsel, 
the Office of General Counsel, at (703) 518-6540; or by mail at 
National Credit Union Administration, 1775 Duke Street, Alexandria, VA 
22314.

SUPPLEMENTARY INFORMATION:

I. Background

A. Introduction

    On December 30, 2022, the Board issued a proposed rule to amend 
Sec. Sec.  701.21, 701.22, 701.23, and part 714 of the NCUA's 
regulations regarding the purchase of loan participations and the 
purchase, sale, and pledge of eligible obligations and other loans 
(including notes of liquidating credit unions).\1\ The Board intended 
the proposal to provide FICUs with additional flexibility to make use 
of advanced technologies and opportunities offered by the fintech 
sector. In addition, the proposed amendments were intended to clarify 
ambiguities related to loan participations and eligible obligations and 
shift from a prescriptive to a more principles-based approach in 
certain areas.
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    \1\ Note that the terms credit union, federal credit union, 
federally insured, state-chartered credit union, corporate credit 
union, and FICU are used throughout the document and are not 
necessarily interchangeable. Specifically, while Sec.  701.23 
applies to federal credit unions (FCUs) only, Sec.  701.22 applies 
to all federally insured consumer credit unions, and Sec.  701.21 
has provisions that apply to all federally insured credit unions.
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    The Board believes shifting to a more principles-based approach 
with respect to loan participations and eligible obligations is 
appropriate and will be beneficial to FICUs. The intent behind the 
final rule is to advance the NCUA's efforts to strike an appropriate 
balance between mitigating risk to the National Credit Union Share 
Insurance Fund (Share Insurance Fund), protecting credit union members, 
and fostering growth and stability in the credit union system by 
removing certain prescriptive limits and other qualifying conditions, 
and replacing them with risk-focused, principles-based requirements. 
The proposed shift to more principles-based requirements is intended to 
provide FICUs with additional flexibility to innovate in terms of how 
they manage their balance sheets while offering new or enhanced 
services to their members. The Board believes the proposed changes will 
increase FICUs' ability to engage in lending arrangements with other 
financial institutions and third parties, including fintech companies 
providing lending services, and expand their access to diverse loan 
origination channels, new markets, including the underserved, and 
potential new services for their members.

B. Summary of the Final Rule

    The Board is now amending the NCUA's regulations regarding the 
purchase of loan participations and the purchase, sale, and pledge of 
eligible obligations and other loans (including notes of liquidating 
credit unions). The final rule adopts the amendments largely as 
proposed with a few changes, which are discussed in the section-by-
section analysis of the preamble below. The final rule relocates and 
clarifies the NCUA's provisions regarding indirect lending and indirect 
leasing. The final rule also provides credit unions with additional 
flexibility to participate in loans acquired through indirect lending 
arrangements, allowing FICUs to use advanced technologies and 
opportunities offered by the fintech sector. In addition, the final 
rule removes certain prescriptive limitations and other qualifying 
requirements relating to eligible obligations and provides credit 
unions with additional flexibility to purchase eligible obligations of 
their members.
    Removing the prescriptive limitations and other qualifying 
requirements is intended to allow FCUs additional flexibility to engage 
with the advanced technologies and other opportunities offered by the 
fintech sector. The greater flexibility and individual autonomy will 
also allow FCUs to establish their own risk tolerance limits and 
governance policies for these activities provided they are safe and 
sound given the FCU's financial and operational capabilities, while 
codifying due diligence, risk assessment, compliance and other 
management processes that are consistent with the Board's long-standing 
expectations for safe, sound, fair, and affordable lending practices.
    As discussed in greater detail in the section-by-section analysis 
of the preamble, the final rule amends Sec.  701.21 of the NCUA's 
regulations to add new paragraph (c)(9) regarding indirect lending and 
indirect leasing arrangements. The new paragraph replaces the language 
defining indirect lending and indirect leasing arrangements under 
current Sec.  701.23(b)(4)(iv).
    The final rule also amends Sec.  701.22 of the NCUA's regulations. 
In particular, the final rule makes certain clarifying amendments to 
the introductory paragraph, and codifies NCUA Legal Opinion 15-0813, 
Loan Participations in Indirect Loans--Originating Lender.\2\ The 
codification of Legal Opinion 15-0813 clarifies that a FICU engaged in 
an indirect lending relationship can meet the definition of 
``originating lender'' under Sec.  701.22 of the NCUA's regulations, 
provided the FICU meets certain conditions. For purposes of Sec.  
701.22, a FICU is considered the originating lender if the FICU makes 
the final underwriting decision regarding the loan, and the loan is 
assigned to the purchaser very soon after the inception of the 
obligation to extend credit.
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    \2\ NCUA Legal Op. 15-0813 (Aug. 10, 2015) available at https://www.ncua.gov/regulation-supervision/legal-opinions/2015/loan-participations-indirect-loans-originating-lenders.
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    In addition, the final rule amends Sec.  701.23 of the NCUA's 
current regulations as follows:
     Makes clarifying and conforming amendments to the 
introductory paragraph.
     Removes the CAMELS ratings and well-capitalized 
requirements under

[[Page 67571]]

paragraph (b)(2) for FCU purchases of certain non-member loans from 
FICUs.
     Narrows the application of the 5-percent limit on the 
purchase of eligible obligations to cover only purchases of notes of 
liquidating credit unions.
     Adds safety and soundness requirements to paragraph 
(b)(6)(i)-(vi) concerning the purchase of eligible obligations, to 
offset risks associated with removing the CAMELS ratings and well-
capitalized requirements from paragraph (b)(2). Safety and soundness 
requirements would apply to all FCUs engaged in the purchase of 
eligible obligations and notes from a liquidating credit union. In 
particular, the final rule requires an FCU purchasing eligible 
obligations or notes from a liquidating credit union to comply with the 
following:
    [cir] Establish written, board-approved policies, risk assessments, 
and risk management processes that are commensurate with the size, 
scope, type, complexity, and level of risk posed by the planned 
purchase activities. These policies would include underwriting 
standards for the loans, ongoing performance and risk monitoring, 
including compliance risk, tailored to the types of loans purchased and 
the sellers as applicable, and portfolio concentration limits by loan 
types and risk categories in relation to net worth;
    [cir] Conduct due diligence on a seller prior to a purchase;
    [cir] Include certain contract language and provisions in the 
written loan purchase agreements (similar to the standards currently 
established for loan participation agreements under Sec.  701.22 of the 
NCUA's regulations); and
    [cir] Address in internal written purchase policies when a legal 
review of agreements or contracts will be performed to ensure that the 
legal and business interests of the credit union are protected against 
undue risk.
     Revises the definition of ``eligible obligation'' under 
paragraph (a)(1) to clarify the distinction between transactions 
treated as loan participations and those treated as eligible 
obligations.
     Revises the applicability of the 5-percent limitation 
under current paragraph (b)(4) to cover only ``notes'' purchased by an 
FCU from a liquidating credit union.
     Revises the ``grandfathered purchases'' section to include 
eligible obligation purchases that were executed before the effective 
date of this final rule, provided the purchases complied with the 
version of the rule that was effective at the time the transaction was 
executed, and subject to safety and soundness and other compliance 
considerations.
     Adds safety and soundness requirements to paragraph (c) 
concerning the sale of eligible obligations, requiring the selling FCU 
to do the following:
    [cir] Obtain a review and assessment of all applicable loan sale 
agreements or contracts to protect the FCU's legal and business 
interests; and
    [cir] Identify the specific loan(s) being sold either directly in 
the written loan sale agreement or through a document incorporated by 
reference into the loan sale agreement.
    The final rule also amends Sec.  714.9 of the NCUA's regulations to 
make certain non-substantive amendments related to changes to current 
Sec.  701.23(b)(4)(iv).
    Finally, the final rule also makes certain conforming changes and 
technical amendments in other sections of the NCUA's regulations. The 
Board does not view these additional conforming technical changes as 
substantive.

C. Effective Date

    Under the Administrative Procedure Act, the NCUA is generally 
required to provide a minimum of 30 days from the date of publication 
in the Federal Register before a final rule becomes effective.\3\ The 
final rule will become effective 30 days after the date of publication 
in the Federal Register so it can go into effect as quickly as possible 
to give credit unions prompt access to the numerous beneficial changes 
it makes.
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    \3\ 5 U.S.C. 553(d).
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II. Legal Authority

    Section 120(a) \4\ of the Federal Credit Union Act (Act) authorizes 
the Board to prescribe rules and regulations for the administration of 
the Act.\5\ Similarly, section 209 \6\ of the Act authorizes the Board 
to prescribe such rules and regulations as it may deem necessary or 
appropriate to carry out the share insurance provisions of subchapter 
II of the Act. In addition, section 206 of the Act provides the Board 
with broad authority to take enforcement action against a FICU or an 
``institution-affiliated party'' \7\ that is engaging or has engaged, 
or the Board has reasonable cause to believe is about to engage, in an 
unsafe or unsound practice in conducting the business of such credit 
union.\8\ Congress chose not to define ``unsafe or unsound practices'' 
in the Act, leaving determinations regarding which actions are unsafe 
or unsound to the Board.
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    \4\ 12 U.S.C. 1766(a) (The Board may prescribe rules and 
regulations for the administration of 12 U.S.C. chapter 14 
(including, but not by way of limitation, the merger, consolidation, 
and dissolution of corporations organized under the chapter). Any 
central credit union chartered by the Board shall be subject to such 
rules, regulations, and orders as the Board deems appropriate and, 
except as otherwise specifically provided in such rules, 
regulations, or orders, shall be vested with or subject to the same 
rights, privileges, duties, restrictions, penalties, liabilities, 
conditions, and limitations that would apply to all Federal credit 
unions under the chapter.).
    \5\ Sections 1751[dash]1795k.
    \6\ Section 1789(11) (providing in relevant part as follows: 
``In carrying out the purposes of this subchapter, the Board may--[. 
. .] prescribe such rules and regulations as it may deem necessary 
or appropriate to carry out the provisions of [12 U.S.C. 1781-
1790e].'').
    \7\ See section 1786(r) (providing that for purposes of the FCU 
Act, the term ``institution-affiliated party'' means--(1) any 
committee member, director, officer, or employee of, or agent for, 
an insured credit union; (2) any consultant, joint venture partner, 
and any other person as determined by the Board (by regulation or on 
a case-by-case basis) who participates in the conduct of the affairs 
of an insured credit union; and (3) any independent contractor 
(including any attorney, appraiser, or accountant) who knowingly or 
recklessly participates in--(A) any violation of any law or 
regulation; (B) any breach of fiduciary duty; or (C) any unsafe or 
unsound practice, which caused or is likely to cause more than a 
minimal financial loss to, or a significant adverse effect on, the 
insured credit union.).
    \8\ Section 1786.
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    Section 107(5)(E) of the Act authorizes FCUs to engage in 
participation lending with other credit unions, credit union 
organizations, or financial organizations in accordance with written 
policies of the credit union's board of directors.\9\ Section 107(5)(E) 
also provides that an FCU that originates a loan for which 
participation arrangements are made in accordance with this subsection 
shall retain an interest of at least 10 per centum of the face amount 
of the loan.\10\
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    \9\ Section 1757(5)(e).
    \10\ Id.
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    Section 107(13) of the Act authorizes FCUs, in accordance with 
rules and regulations prescribed by the Board, to purchase, sell, 
pledge, or discount or otherwise receive or dispose of, in whole or in 
part, any eligible obligation (as defined by the Board) of its 
members.\11\ In addition, section 107(13) authorizes FCUs, in 
accordance with rules and regulations prescribed by the Board, to 
purchase from any liquidating credit union notes made by individual 
members of the liquidating credit union at such prices as may be agreed 
upon by the board of directors of the liquidating credit union and the 
board of directors of the purchasing credit union, but no purchase may 
be made under authority of this paragraph if, upon the making of that 
purchase, the aggregate of the unpaid balances of notes purchased

[[Page 67572]]

under authority of this paragraph would exceed 5 per centum of the 
unimpaired capital and surplus of the credit union.\12\
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    \11\ Section 1757(13).
    \12\ Id.
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    Section 107(14) of the Act authorizes FCUs, subject to regulations 
of the Board, to sell all or a part of their assets to another credit 
union, to purchase all or part of the assets of another credit union, 
and to assume the liabilities of the selling credit union and those of 
its members.\13\
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    \13\ Section 1757(14).
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III. Section-by-Section Analysis of the Final Rule and Comments on the 
Proposal

    The NCUA received 42 unique comment letters on the proposed rule. 
In general, the overwhelming majority of commenters strongly supported 
the proposed rule and agreed with the NCUA regarding the need for and 
the rationale supporting the proposed changes. The commenters also 
agreed with the proposal's shift toward more principles-based 
regulations and suggested the proposed changes would allow credit 
unions to be nimble in the future. Accordingly, the Board is now 
issuing this final rule to adopt the amendments proposed with certain 
changes that are discussed in more detail in the parts of the preamble 
below corresponding with the amended sections.
    The NCUA has summarized the comments received that were within the 
scope of this rulemaking under the parts of the preamble below 
corresponding with the amended sections and subsections. The NCUA 
received many comments that were outside the scope of this rulemaking. 
The NCUA has read and is considering the comments beyond the scope of 
this rule for future rulemakings. Most of the comments received that go 
beyond the scope of the proposal, even if summarized, are not 
specifically responded to by the NCUA in the preamble to this final 
rule.

A. Part 701 Organization and Operation of Federal Credit Unions

    As discussed in more detail below, this final rule makes several 
changes to sections in part 701 of the NCUA's regulations. These 
changes clarify numerous provisions regarding loans to members and 
lines of credit to members under Sec.  701.21; loan participations 
under Sec.  701.22; and the purchase, sale, and pledge of eligible 
obligations under Sec.  701.23. In addition, the final rule amends the 
NCUA's current regulatory requirements under Sec. Sec.  701.22 and 
701.23. The amended requirements would provide FICUs expanded authority 
and autonomy to innovate and transact business with fintech companies 
and other institutions that provide services associated with the 
origination and sale of loans made to members of FICUs.
Public Comments
    Several commenters noted that the proposed changes would clarify 
credit unions' loan participation and eligible obligation authorities, 
benefiting not only credit unions but also NCUA examiners and various 
other stakeholders. In addition, many commenters expressly offered 
support for the proposal's general shift toward a more principles-based 
approach with respect to the NCUA's loan participation and eligible 
obligation regulations. One commenter suggested that prescriptive 
regulations, with fixed limits and rules, prevent credit unions from 
evolving with shifting market forces (e.g., the rise of fintechs). The 
commenter explained further that a principles-based approach to risk 
tolerance and appetite will provide the opportunity for credit union 
service organizations (CUSOs) to create comprehensive underwriting 
guidelines acceptable to all participating credit unions, which will 
allow credit unions to collectively compete against banks and other 
financial institutions and be more attractive to lending platform 
providers, original automotive equipment manufacturers, and point of 
sale retailers. Another commenter specifically asked that the Board not 
adopt new prescriptive definitions and regulations. The commenter 
requested further that all safety and soundness standards imposed in 
the final rule should be sufficiently flexible to permit credit unions 
to adopt internal written purchase policy provisions commensurate with 
the size, scope, type, complexity, and level of risk posed by their 
individual activities. Several commenters requested, generally, that 
the NCUA do more to clarify the rules, expand credit unions' authority 
in this area, or both.
Discussion
    Consistent with the strong support received from commenters, the 
Board is adopting the rule largely as proposed, for the reasons set 
forth in the notice of proposed rulemaking, with certain changes 
discussed in the section-by-section analysis below. In addition, 
several commenters requested additional clarification on certain 
aspects of the proposal. The NCUA has provided further clarifying 
guidance to credit unions where appropriate.

Section 701.21 Loans to Members and Lines of Credit to Members

Section 701.21(c) General Rules

    As discussed in more detail below, this final rule, as a conforming 
amendment, adds new provisions to Sec.  701.21 regarding indirect 
lending arrangements and indirect leasing arrangements. The new 
provisions take the place of a provision in current Sec.  701.23, which 
will be removed as part of this final rule.
Public Comments
    Most commenters offered support for the proposed changes to the 
NCUA's regulations regarding indirect lending and indirect leasing 
arrangements, agreed the proposed changes would provide additional 
clarification to affected parties, and supported moving the provisions 
to Sec.  701.21. Moreover, three commenters agreed with the NCUA's 
assessment that the proposed changes to the definitions of ``indirect 
lending arrangements'' and ``indirect leasing arrangements'' are 
unlikely to have a material impact on credit unions' existing and 
future indirect lending or indirect leasing arrangements. Another 
commenter agreed that the proposed definitions use language that, while 
generally similar to the language in current Sec.  701.23(b)(4)(iv), 
provides much needed, common-sense clarification to both terms.
Discussion
    Consistent with the support received from commenters on the 
proposal, the Board is adopting new paragraph (c)(9) to Sec.  701.21 
regarding the indirect loans and indirect leasing arrangements as 
proposed for the reasons set forth in the notice of proposed 
rulemaking. Although not raised by commenters, the final rule also adds 
language and a cross citation to Sec.  714.2(b) to direct readers to 
new Sec.  701.21(c)(9) and alert them to the relationship between 
paragraph (c)(9) and part 714 of the NCUA's regulations regarding 
leasing. No substantive change to the NCUA's regulations is intended by 
this addition. This addition is discussed in more detail in the part of 
the preamble associated with part 714 of the final rule.

New Sec.  701.21(c)(9) Indirect Lending and Indirect Leasing Agreements

    For reasons discussed in the preamble discussion on current Sec.  
701.23(b)(4), the NCUA is deleting current paragraph (b)(4)(iv) 
regarding indirect lending. Current Sec.  701.23(b)(4)(iv) excludes 
certain loans acquired through indirect lending arrangements and 
indirect leasing arrangements from the 5-percent

[[Page 67573]]

limit on the aggregate of the unpaid balance of certain loans purchased 
under Sec.  701.23. While the language excluding loans and leases 
acquired through indirect lending and indirect leasing arrangements is 
no longer needed in Sec.  701.23(b)(4), the definition of such 
arrangements is still relevant for purposes of other provisions in the 
NCUA's regulations. Under current paragraph (b)(4), and NCUA's long-
standing interpretation,\14\ loans acquired by an FCU pursuant to an 
indirect lending arrangement are considered loans made by the FCU under 
Sec.  701.21, rather than loans purchased under Sec.  701.23. 
Accordingly, the Board is adding new paragraph (c)(9) regarding 
indirect lending and indirect leasing arrangements to Sec.  701.21. The 
paragraph replaces the language defining indirect lending and indirect 
leasing arrangements under current Sec.  701.23(b)(4)(iv).
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    \14\ See, e.g., NCUA Legal Op. 97-0546 (Aug. 6, 1997), available 
at https://www.ncua.gov/regulation-supervision/legal-opinions/1997/indirect-lending.
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New Sec.  701.21(c)(9)(i) Definitions

    New Sec.  701.21(c)(9)(i) would define the terms ``indirect leasing 
arrangement'' and ``indirect lending arrangement'' for purposes of the 
NCUA's regulations. Current Sec.  701.23(b)(4)(iv) provides that an 
indirect lending or indirect leasing arrangement that is classified as 
a loan and not the purchase of an eligible obligation because the FCU 
makes the final underwriting decision, and the sales or lease contract 
is assigned to the FCU very soon after it is signed by the member and 
the dealer or leasing company, is excluded in calculating the 5-percent 
limit. The NCUA believes splitting the provision in paragraph 
(b)(4)(iv) into two definitions will help clarify the existing 
requirements. Accordingly, new Sec.  701.21(c)(9)(i) provides that the 
term indirect leasing arrangement means a written agreement to purchase 
leases from the leasing company where the purchaser makes the final 
underwriting decision, and the lease agreement is assigned to the 
purchaser very soon after it is signed by the member and the leasing 
company. New paragraph (c)(9)(i) would provide further that the term 
indirect lending arrangement means a written agreement to purchase 
loans from the loan originator where the purchaser makes the final 
underwriting decision regarding making the loan, and the loan is 
assigned to the purchaser very soon after the inception of the 
obligation to extend credit.
    Both new definitions would use language that is generally similar, 
but not identical, to the language in current Sec.  701.23(b)(4)(iv). 
The NCUA is revising the language used in current paragraph (b)(4)(iv) 
to clarify the different requirements that apply to indirect leasing 
arrangements and indirect lending arrangements. The amendments are not 
intended to change the current meaning of both terms. The Board 
specifically requested comment on whether proposed paragraph (c)(9) 
would have a material impact on credit unions' existing and future 
indirect lending arrangements, indirect leasing arrangements, or both.
Public Comments
    One commenter recommended clarifying the meaning of the phrase 
``inception of the obligation to extend credit.'' The commenter asked, 
as an example of its confusion about the meaning of the phrase, does 
this mean when the credit union verifies underwriting criteria, when 
the borrower has a sufficient credit score according to the credit 
union, or some other step in the process of extending credit?
Discussion
    The Board believes the phrase ``inception of the obligation to 
extend credit'' is clear and unambiguous. Merriam-Webster's Online 
Dictionary defines the term ``inception'' as ``an act, process, or 
instance of beginning: COMMENCEMENT.'' \15\ The inception of the 
obligation to extend credit, then, is the point in time when the 
indirect lender becomes obligated to extend credit to the borrower. As 
with all its rules, however, the Board will monitor implementation and 
provide additional clarifying guidance as it deems necessary.
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    \15\ Available at https://www.merriam-webster.com/dictionary/inception.
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    Should the Board further clarify the term ``final underwriting 
decision''? The Board invited comments in the proposal on what it means 
for the credit union to make the final underwriting decision regarding 
making the loan in an indirect lending arrangement. For example, should 
the rule specify that a credit union in an indirect lending arrangement 
must be involved or consulted at the time of the extension of credit? 
In the alternative, should the rule specify that a credit union can 
simply provide its underwriting standards to the other party in the 
indirect lending arrangement and clarify in the indirect lending 
agreement that only those loans meeting the credit union's underwriting 
standards will be accepted for funding? Would a credit union still be 
making the final underwriting decision if a third party includes 
significantly more underwriting criteria that are more restrictive, for 
example, than the credit union requires?
Public Comments
    In response to NCUA's question in the proposed rule preamble, two 
commenters responded that the NCUA should not define the phrase ``final 
underwriting decision.'' One of those commenters explained that the 
implementation of additional requirements through a definition could 
stifle innovation as new products are created and/or create unintended 
regulatory burden that may be unnecessary due to the specifics of the 
underwriting situation. Another commenter responded that, if the credit 
union has provided its guidelines or other underwriting criteria and 
has the ability to not approve or not fund a loan that does not meet 
its criteria, there is no need to make the definition more specific. A 
third commenter suggested that the current safety and soundness 
requirements are sufficient to enable a credit union to identify, 
isolate, and resolve any issues the credit union may later discover.
    On the other hand, two commenters asked that the NCUA define the 
phrase ``final underwriting decision.'' One of those commenters 
recommended the phrase be defined to avoid ambiguity or potential 
conflict with existing laws and regulations that require the loan 
originator to make the final underwriting decision, and situations 
involving prearranged underwriting and processing agreements between 
third-party originators and the purchasing credit unions. The commenter 
recommended further that the definition allow the seller (loan 
originator) to use the purchasing credit union's underwriting 
guidelines. Another commenter recommended defining the phrase to 
clarify that the purchasing FCU is considered to have made the ``final 
underwriting decision'' so long as the loan conforms to the FCU's pre-
approved underwriting criteria, even when a fintech company or other 
indirect lending partner adds additional, more restrictive underwriting 
criteria than the FCU requires. In the commenter's opinion, the 
indirect lending partner is acting as a facilitator on behalf of the 
credit union in such cases to provide credit enhancements and is not 
overriding the credit union's underwriting criteria. The commenter also 
suggested that indirect

[[Page 67574]]

lending partners weeding out bad loans in this fashion promotes safety 
and soundness by reducing credit risk to FCUs, whether the indirect 
lender uses an algorithm, natural persons' judgment, or both to provide 
such credit enhancements. To clarify this point, the commenter 
recommended the definition of ``final underwriting decision'' in Sec.  
701.21(c)(9)(i) provide as follows:
    The FCU makes the ``final underwriting decision'' so long as:

    (1) The FCU establishes by contract that the indirect lending 
partner must adhere to the underwriting standards set forth in the 
indirect lending agreement; these underwriting standards are 
typically included as an appendix or exhibit to the master agreement 
for the indirect lending relationship; and
    (2) The indirect lending partner can apply additional, more 
restrictive underwriting criteria that go above-and-beyond the FCU's 
underwriting requirements, whether those additional underwriting 
criteria are part of an automated loan underwriting system and/or 
are performed by a natural person individual who is not involved in 
the disbursement of loan funds.

    Several commenters did not expressly recommend defining the phrase 
``final underwriting decision,'' but did offer recommendations about 
how the term should be interpreted. Three commenters asked that credit 
unions be allowed to charge third-party partners with prescribed 
standards that must be met and manage the risk of the engagement 
through due diligence and oversight. One of those commenters asked 
further that credit unions then be allowed to choose to review loans 
before or after funding, depending on their comfort and experience with 
the third-party partner; the expectation being that the credit unions 
be familiar with the third party's underwriting standards and where 
those standards might be different (in more or less conservative ways) 
than their own. Finally, the commenter suggested that the adequacy of a 
credit union's due diligence and oversight of its third-party partners 
is a safety and soundness issue best left to examiners in the field. 
Another one of those commenters suggested that, if the NCUA needed to 
strengthen this part of the rule to justify making this change, it 
could consider also adding the following express requirements: (1) the 
underwriting standards must be within the credit union's approved 
underwriting and credit policies; (2) the underwriting standards must 
be clearly referenced in the representations and warranties of the 
agreement between the fintech/flow partner and the credit union and, if 
not met, require repurchase of the loans by the fintech/flow partner; 
and (3) the credit union must, as part of best practices and safety and 
soundness considerations, review and analyze the indirect loan pools 
prior to settlement or as soon as practical (for example, in the early 
part of the month subsequent to the month in which the loans were 
purchased) to ensure they are compliant with NCUA rules (for example, 
maturity limits, the statutory maximum interest rate, etc.) and meet 
the credit ``stips''/guidelines set forth in the agreement between the 
parties.
    Several commenters also recommend that, if the phrase ``final 
underwriting decision'' is defined, the NCUA not require that credit 
unions engaged in indirect lending be actively involved or consulted at 
the time a facilitating partner extends credit to borrowers on the 
credit union's behalf or limit the number of permissible facilitating 
partners. The commenters suggested such a requirement would be 
logistically challenging and could result in fewer loans being made 
through indirect lending arrangements.
Discussion
    The Board appreciates the detailed comments that were submitted 
regarding defining the phrase ``final underwriting decision.'' While 
the comments received in this area go beyond the scope of this 
rulemaking, the comments will be retained for consideration by the NCUA 
during future rulemakings relating to indirect lending.
    The NCUA has long used the act of underwriting a loan as a feature 
to distinguish between transactions where a FICU makes a loan and 
transactions where a FICU purchases a loan.\16\ In particular, in a 
1997 legal opinion the NCUA explained:
---------------------------------------------------------------------------

    \16\ See, e.g., NCUA Legal Op. 92-1203 (Jan. 5, 1993); NCUA 
Legal Op. 92-1203 (May 11, 1993); NCUA Legal Op. 97-0546 (Aug. 6, 
1997), available at https://ncua.gov/regulation-supervision/legal-opinions; and Sec.  701.23(b)(4)(iv).

    FCUs may participate in indirect lending arrangements under the 
authority to make loans to members, 12 U.S.C. 107(5); 12 CFR 701.21, 
rather than the authority to purchase eligible obligations, 12 
U.S.C. 107(13); 12 CFR 701.23, as long as two conditions are met. 
First, the FCU must make the final underwriting decision. That is, 
before the retailer and the member complete the loan or sales 
contract, the FCU must review the application and determine that the 
transaction conforms to its lending policies. This is because an FCU 
may not delegate its lending authority to a third party.\17\
---------------------------------------------------------------------------

    \17\ NCUA Legal Op. 97-0546.

By requiring the purchasing credit union to make the final underwriting 
decision in an indirect lending transaction, the NCUA ensures that the 
purchasing credit union is not relying on the due diligence of the loan 
seller who might otherwise have had a decreased interest in properly 
underwriting the loan knowing it would later be sold.
    The NCUA explained further in the same 1997 legal opinion that an 
eligible organization may use an automated credit scoring system to 
make its final underwriting decision so long as the ``score'' obtained 
from the automated system is the sole determinant for granting credit. 
When an eligible organization establishes the qualifying criteria for 
the automated scoring system, it is effectively making an advance 
decision on a particular application.\18\ So long as the party entering 
the borrower's application information does not exercise any judgment 
regarding that information, the score will be deemed to reflect the 
FCU's lending policies.\19\
---------------------------------------------------------------------------

    \18\ See id.; see also 63 FR 70997, 70997 (Dec. 23, 1998) 
(agreeing with commenters that credit or electronic scoring by a 
third-party vendor using the credit union's criteria is consistent 
with the FCU making the final underwriting decision).
    \19\ See id.
---------------------------------------------------------------------------

    Nothing in current Sec.  701.23(b)(4)(iv) or Sec.  701.21(c)(9)(i) 
of this the final rule, however, prohibits an indirect lending partner 
from having its own separate underwriting criteria, which it may use to 
screen borrowers before the credit union makes its final underwriting 
decision. An indirect lending partner may screen applicants for a loan 
using underwriting criteria from multiple lending partners; for 
example, criteria such as credit score, debt-to-income or debt service 
coverage ratios, collateral loan-to-value ratios, loan terms, and 
interest rates. In such cases, the determining factor is not what 
initial underwriting criteria the indirect lending partner may have 
used, but whether the credit union made the final underwriting 
decision. Thus, the indirect lending partner's initial underwriting 
criteria may differ from the credit union's underwriting criteria but 
the credit union must make the final underwriting decision to ensure 
the loan meets the credit union's underwriting criteria. The Board 
believes that what constitutes making a final underwriting decision may 
continue to evolve as credit unions implement artificial intelligence 
and machine learning based underwriting systems, as well as engage with 
fintech companies.
    In indirect lending situations not involving automated credit 
scoring systems, a credit union may not wait until after the inception 
of the

[[Page 67575]]

obligation to extend credit to review the loan application and 
determine whether the transaction conforms to its lending policies 
because the credit union then would not have made the final 
underwriting decision. A credit union should retain approval authority 
to engage in indirect lending (that is, employees or independent 
contractors working for the indirect lending partner cannot make the 
final underwriting decision on the credit union's behalf).\20\ For 
large loans, complex loans, or both, a credit union may grant 
preliminary approval of the loan based on the indirect lending 
partner's representations to the credit union's loan officer that the 
loan conforms to the credit union's underwriting policies. The credit 
union must then review the loan application and determine that the 
loan, the application, and the transaction conform to its lending 
policies before the credit union grants its final approval and before 
the loan proceeds are sent to the indirect lending partner.
---------------------------------------------------------------------------

    \20\ NCUA Legal Op. 97-0546.
---------------------------------------------------------------------------

    In all indirect lending transactions, credit unions should also 
retain the right to deny a loan should it discover the loan does not 
comply with the credit union's policies or standards upon receipt of 
the final paperwork. A credit union should document this ``right'' in 
the indirect lending agreement.
    Should the Board define the phrase ``very soon after''? The Board 
asked in the proposal whether additional clarification was needed such 
as adding certain parameters around the meaning of ``very soon after'' 
for the assignment of the loan or contract to the credit union. 
Examples given were within 7 days of the borrower executing the loan or 
contract or assignment prior to the first loan payment.
Public Comments
    Three commenters recommend not defining the phrase ``very soon 
after.'' One commenter suggested that using the language ``very soon 
after'' is appropriate and should not cause significant issues and that 
setting a specific period is not necessary. Another commenter 
acknowledged that timely assignment of a loan or sales contract should 
be a factor in ensuring a FICU or other eligible organization is 
prudently engaged in an indirect lending arrangement, but suggested the 
FICU or other eligible organization's adherence to relevant safety and 
soundness standards is far more determinative of any relevant risks 
that may accrue to the institution or the Share Insurance Fund. The 
commenter suggested further that a prescriptive loan or sales contract 
transfer timeline could undermine indirect lending partnerships the 
NCUA intends to promote. One commenter suggested that specifying a 
prescriptive period could be disruptive to the marketplace and put 
additional operational burdens on credit unions. The commenter also 
observed that each program between a fintech/flow partner and a credit 
union for a given loan category will have a cadence that is different 
(given purchase timing preferences and operational logistics) and that, 
if the timeframe set by regulation is too short, it could disrupt the 
credit union's pre-purchase settlement analysis and review process of 
the loan pool.
    Six commenters recommend defining the phrase ``very soon after'' to 
avoid confusion. Four of the commenters recommended providing a 
specific number of days following the borrower's execution of the loan 
or contract. One commenter suggested the specific number be 5 or 7 
business days but not a window that is excessive, such as 10 days. 
Another commenter suggested the number be 7 days. One commenter 
suggested the number be no more than 7 or 10 days. And one commenter 
suggested the number be 30 days or less.
    Two commenters recommend defining ``very soon after'' more 
generally to mean prior to the due date of the member's first loan 
payment (other than any down payment). Two commenters also recommended 
clarifying that the assignment can involve more than one party, such as 
if a fintech indirect lending partner uses one or more agents or 
subsidiaries to facilitate its operations prior to the loan being 
delivered to the credit union. One of those commenters suggested the 
changes discussed in this paragraph could be made to the rule by adding 
a new paragraph to proposed Sec.  701.21(c)(9)(i) that would provide as 
follows:

    The requirement that the loan be assigned to the purchaser very 
soon after the inception of the obligation to extend credit may be 
satisfied regardless of whether the assignment process undergoes 
multiple functional steps, with multiple entities, and including 
where the assignment is processed as part of a batch of loans, on a 
cyclical cadence or otherwise, so long as assignment occurs before 
the first loan payment following any down payment.

    Finally, one commenter suggested that if ``very soon after'' is 
defined, the definition should ensure that appropriate flexibility is 
given to address the various timeframes required to appropriately 
assign loans backed by different collateral types and to ensure a more 
forward-looking regulation that can help ensure future evolution as 
loan and lease products continue to change.
Discussion
    The Board appreciates the detailed comments that were submitted 
regarding defining the phrase ``very soon after.'' Defining the phrase 
in this final rule, however, would go beyond the scope of the proposal. 
Accordingly, the comments received on this issue have been shared with 
the Board, reviewed, and will be retained for consideration by the NCUA 
in future rulemakings relating to indirect lending.
    Several commenters expressed confusion regarding the NCUA's use of 
the term ``very soon after'' in the regulation. The term very soon 
after has been used but not defined in the NCUA's indirect lending 
regulation since 1998.\21\ The period that satisfies the ``very soon 
after'' \22\ element depends on the nature of the loan and the 
practical realities of assigning certain kinds of loans in the current 
marketplace and in accordance with prevailing industry standards.\23\ 
``Very soon after'' is determined on a case-by-case basis by loan type 
and in accordance with commercial reasonableness.\24\ The NCUA's 
longstanding position is that the sooner the assignment is made the 
more likely the point-of-sale retailer will be viewed as an indirect 
lender and not the originating lender.\25\ Historically, NCUA 
examination staff have generally used 7 days as a baseline for gauging 
whether a transaction meets the ``very soon after'' timeframe, but this 
has not been codified as a requirement. The longer the time between 
formation of the contract and assignment, the more likely the 
arrangement will be viewed as the purchase of a third-party loan rather 
than the making of a loan through indirect channels.\26\ The NCUA also

[[Page 67576]]

notes that the technology used in many indirect lending relationships 
today allows for an almost instantaneous assignment of loans.
---------------------------------------------------------------------------

    \21\ 63 FR 70997 (Dec. 23, 1998).
    \22\ The preamble to the 1998 proposal to amend the eligible 
obligations rule requested public comment on whether NCUA should 
specify a certain number of days as constituting ``very soon.'' 63 
FR 41976, 41977 (Aug. 6, 1998). After considering the comments, 
however, the NCUA Board determined not to specifically define it 
because the Board wanted to provide FCUs with flexibility under 
various circumstances. The NCUA Board also clarified that assignment 
of the loan means acceptance of the loan and not necessarily the 
physical receipt of the loan documentation, recognizing that 
acceptance and payment are often done electronically. However, 
physical receipt of the loan documents by the FCU should occur 
within a reasonable time following acceptance of the loan. 63 FR 
70997, 70998 (Dec. 23, 1998).
    \23\ NCUA Legal Op. 15-0813 (Aug. 10, 2015).
    \24\ Id.
    \25\ Id.
    \26\ 63 FR 41976, 41977 (Aug. 6, 1998).
---------------------------------------------------------------------------

    In addition, two commenters recommended defining ``very soon 
after'' in a way that clarifies that the requirement for a loan to be 
assigned to the purchaser very soon after the inception of the 
obligation to extend credit may be satisfied regardless of whether the 
assignment process undergoes multiple functional steps, with multiple 
entities, so long as the other requirements of 701.21(c)(9) are met and 
those steps occur before the loan is assigned. The Board appreciates 
this recommendation, but believes this clarification is unnecessary 
because the plain language of both current Sec.  701.23(b)(4)(iv) and 
Sec.  701.21(c)(9)(i) of the final rule are clear. Neither paragraph 
imposes a limitation on the number of functional steps or entities that 
are involved in the assignment process, provided the loan is assigned 
very soon after the inception of the obligation to extend credit and 
all other applicable requirements are met.
    Should the Board propose a separate indirect lending rule? The 
Board asked in the proposal whether the NCUA should establish an 
indirect lending rule. And if so, the Board asked what it should 
consider in any future indirect lending rulemaking. The Board also 
asked if a credit union should be considered the originating lender in 
cases where an intermediary is added to a loan transaction between the 
initial party extending credit and a credit union, including a third 
party facilitating the loan transaction. The NCUA received several 
inquiries from the credit union system related to CUSOs that work with 
other lenders to extend credit. The CUSOs in those cases then either 
receive an immediate assignment of the loans and/or act as a 
facilitator in immediately assigning loans further to credit unions, 
where the loans meet the credit unions' underwriting criteria.
Public Comments
    Two commenters responded in the negative to the NCUA's question 
about whether the agency should establish a separate indirect lending 
rule. One of those commenters recommended maintaining a principles-
based approach in this area and suggested such an approach requires no 
separate rule. The other commenter suggested there are numerous 
situations where a credit union would use a third party to assist in 
the origination of loans and a separate indirect lending rule would not 
change the overall impact of being considered the originating lender. 
One commenter recommended not undertaking a separate indirect lending 
rulemaking until the agency is able to evaluate and understand how 
credit unions and other credit union industry stakeholders react to any 
final rule the NCUA adopts related to this proposal. Finally, three 
commenters recommended a separate indirect lending rulemaking to 
provide greater clarity and encourage greater participation in this 
area. One of those commenters suggested further that a new indirect 
lending rulemaking could amplify participation and provide credit 
unions, financial service providers, and CUSOs greater opportunity to 
collaborate and impact member retention and growth.
Discussion
    The Board appreciates the detailed comments that were submitted 
regarding proposing a separate indirect lending rule. While the 
comments received in this area go beyond the scope of this rulemaking, 
the comments will be retained for consideration by the NCUA during 
future rulemakings relating to indirect lending.

New Sec.  701.21(c)(9)(ii) Indirect Lending

    New Sec.  701.21(c)(9)(ii), consistent with current Sec.  
701.23(b)(4)(iv), clarifies the difference between loans made pursuant 
to indirect lending arrangements under Sec.  701.21 and loans purchased 
under Sec.  701.23. Current Sec.  701.23(b)(4)(iv) excludes loans 
acquired pursuant to certain indirect lending arrangements from the 5-
percent limit under current paragraph (b)(4). Paragraph (b)(4)(iv) 
provides that an indirect lending or indirect leasing arrangement that 
is classified as a loan and not the purchase of an eligible obligation 
because the FCU makes the final underwriting decision, and the sales or 
lease contract is assigned to the FCU very soon after it is signed by 
the member and the dealer or leasing company, is excluded from 
calculating the 5-percent limit.\27\ As previously mentioned, current 
Sec.  701.23(b)(4)(iv) is removed by this final rule. Accordingly, new 
Sec.  701.21(c)(9)(ii) provides that a loan acquired pursuant to an 
indirect lending arrangement, and that meets the requirements of Sec.  
701.21, is classified as a loan and not the purchase of a loan for 
purposes of the NCUA's regulations, which are codified in chapter VII 
of title 12 of the Code of Federal Regulations.
---------------------------------------------------------------------------

    \27\ (emphasis added); see also, e.g., NCUA Legal Op. 97-0546 
(Aug. 6, 1997) (providing in relevant part as follows: ``FCUs may 
participate in indirect lending arrangements under the authority to 
make loans to members, 12 U.S.C. 107(5); 12 CFR701.21, rather than 
the authority to purchase eligible obligations, 12 U.S.C. 107(13); 
12 CFR 701.23, as long as two conditions are met. First, the FCU 
must make the final underwriting decision. That is, before the 
retailer and the member complete the loan or sales contract, the FCU 
must review the application and determine that the transaction 
conforms to its lending policies. This is because an FCU may not 
delegate its lending authority to a third party. Second, the 
retailer must assign the loan or sales contract to the FCU very soon 
after it is completed. Assignment close in time to the making of the 
loan allows the retailer to function as the facilitator of the loan 
while the FCU remains the true lender. As the time between 
completion and assignment of the loan lengthens, the FCU's payment 
to the retailer becomes the purchase of the loan rather than part of 
the processing of the loan.'').
---------------------------------------------------------------------------

Public Comments
    One commenter suggested clarifying in proposed Sec.  
701.21(c)(9)(ii) that for a loan to be classified as an ``indirect 
loan,'' it must meet the requirements of Sec.  701.21 and the FCU 
Act.28
---------------------------------------------------------------------------

    \28\ (emphasis added).
---------------------------------------------------------------------------

Discussion
    The Board believes the clarification requested above is 
unnecessary. The requirement that FICUs also comply with the Act is 
already clear under the NCUA's regulations given the authority for most 
of the provisions in the NCUA's regulations are derived directly from 
the Act itself. Moreover, adding such a statement in one provision 
within the NCUA's regulations, but not everywhere, could give the false 
impression that FICUs do not have to comply with the Act's requirements 
in places where the NCUA's regulations do not specifically require it. 
Accordingly, the final rule adopts the language proposed without change 
for the reasons set forth in the notice of proposed rulemaking.

New Sec.  701.21(c)(9)(iii) Indirect Leasing

    New Sec.  701.21(c)(9)(iii), consistent with current Sec. Sec.  
701.23(b)(4)(iv) and 714.9, clarifies the difference between leases 
made pursuant to indirect leasing arrangements under Sec.  714.2(b) 
\29\ and leases purchased under Sec.  701.23. Current Sec.  
701.23(b)(4)(iv) excludes leases acquired pursuant to certain indirect 
leasing arrangements from the 5-percent limit under current paragraph 
(b)(4). Paragraph (b)(4)(iv) provides that an indirect lending or 
indirect leasing arrangement that is classified as a loan and not the 
purchase of an eligible obligation because the FCU makes the

[[Page 67577]]

final underwriting decision, and the sales or lease contract is 
assigned to the FCU very soon after it is signed by the member and the 
dealer or leasing company, is excluded in calculating the 5-percent 
limitation.\30\ Similarly, current Sec.  714.9 provides that an FCU's 
indirect leasing arrangements are not subject to the eligible 
obligation limit if they satisfy the provisions of Sec.  
701.23(b)(3)(iv) that require that an FCU make the final underwriting 
decision and that the lease contract is assigned to the FCU very soon 
after it is signed by the member and the dealer or leasing company. 
Accordingly, new Sec.  701.21(c)(9)(iii) provides that a lease acquired 
pursuant to an indirect leasing arrangement, and that meets the 
requirements of part 714 of the NCUA's regulations, is classified as a 
lease and not the purchase of a lease for purposes of the NCUA's 
regulations, which are codified in chapter VII of title 12 of the Code 
of Federal Regulations.
---------------------------------------------------------------------------

    \29\ Section 714.2(b) (Providing: ``[An FCU] may engage in 
indirect leasing. In indirect leasing, a third party leases property 
to [the FCU's] member and [the FCU] then purchases that lease from 
the third party for the purpose of leasing the property to [the 
FCU's] member. [The FCU does] not have to purchase the leased 
property if [it complies] with the requirements of Sec.  714.3.'').
    \30\ Id. (emphasis added); see also 12 CFR 714.2(b) & 714.9; and 
NCUA Legal Op. 00-0811 (Nov. 2000) (providing in part as follows: 
``NCUA's leasing regulation recognizes that FCUs may engage in the 
leasing of personal property and does not distinguish between 
consumer and business leasing. 12 CFR part 714. The authority of 
FCUs to engage in secured lending is the basis for their authority 
to engage in leasing. Therefore, FCU leasing generally must comply 
with the statutory and regulatory requirements applicable to secured 
lending, including the member business loan rule. 12 CFR part 723. 
Our leasing regulation, however, notes exceptions from certain 
provisions of the lending rules that are not pertinent to leasing; 
for example, the interest rate ceilings. 12 CFR 714.10, 
701.21(c)(7). In a lease, the lessee's payments are periodic rental 
payments, not the repayment of principal and interest as in a 
loan.'').
---------------------------------------------------------------------------

Section 701.22 Loan Participations

    As discussed in more detail below, the final rule makes clarifying 
amendments to Sec.  701.22. These changes are primarily intended to 
clarify FCUs' authority to purchase loan participations and the 
requirements applicable to the purchase of loan participations by 
federally insured, state-chartered credit unions (FISCUs).
Public Comments
    Two commenters asked the NCUA to do more to reduce confusion 
regarding whether Sec. Sec.  701.22 or 701.23 applies to a particular 
transaction. One of those commenters recommended that the NCUA clarify 
in the loan participation and eligible obligation rules that purchasing 
FICUs have discretion to classify a partial interest in a loan under 
either Section 701.22 or 701.23 when the terms and conditions of the 
purchase meet the requirements of both rules.
Discussion
    The specific clarifications requested above would expand the 
authorities proposed beyond the scope of the proposed rule. As outlined 
in the notice of proposed rulemaking, one purpose of the amendments was 
to clarify ambiguities related to distinguishing between loan 
participations and eligible obligations. To facilitate this, the 
proposed definition of eligible obligation was revised to provide that 
an eligible obligation is a whole loan or part of a loan (other than a 
note held by a liquidating credit union) that does not meet the 
definition of a loan participation under Sec.  701.22(a). The Board 
believes the rule clarifies FICUs' authority to purchase partial loans 
under Sec.  701.23 given that the amended definition of ``eligible 
obligation'' expressly excludes the purchase of partial loans that meet 
the definition of a ``loan participation,'' as that term is defined 
under Sec.  701.22(a). An FCU is authorized under Sec. Sec.  701.22 and 
701.23 to purchase a loan or part of a loan only if it meets the 
definition of one of the following: (1) a ``loan participation,'' (2) 
an ``eligible obligation,'' or (3) a ``note of a liquidating credit 
union.'' \31\ For FCUs, a loan or partial loan purchased cannot meet 
the definitions of both an eligible obligation and a loan 
participation. Amending the final rule to provide otherwise would go 
beyond the scope of this rulemaking. For FISCUs, partial loan purchases 
that meet the definition of a ``loan participation'' must comply with 
the requirements of Sec.  741.225 and the applicable requirements of 
Sec.  701.22. Other types of loans purchased by FISCUs must meet the 
requirements of both state law and part 741 of the NCUA's regulations. 
Accordingly, the Board adopts the language originally proposed in Sec.  
701.22 without change for the reasons set forth in the notice of 
proposed rulemaking.
---------------------------------------------------------------------------

    \31\ Note, Sec.  741.8 requires prior approval for the purchase 
of certain types of loans and partial loans authorized under Sec.  
701.23(b).
---------------------------------------------------------------------------

    The purchase of part of a loan under Sec.  701.23 and the purchase 
of a loan participation under Sec.  701.22 are treated as separate and 
distinct transactions under the final rule. The purchase of part of a 
loan by an FCU, provided it meets the definition of an eligible 
obligation, is subject to the requirements and conditions of Sec.  
701.23. The purchase of a loan participation, as defined under Sec.  
701.22, by a FICU is subject to the requirements and conditions under 
the NCUA's loan participation rule. Credit unions must properly 
identify each transaction as either the purchase of an eligible 
obligation or the purchase of a loan participation at the time of 
purchase.

701.22 Introductory Paragraph

    The introductory paragraph to current Sec.  701.22 sets forth the 
scope and limitations of the section. The NCUA Board added the 
introductory paragraph to Sec.  701.22 as part of a final rule it 
approved in 2013 (2013 Final Rule).\32\ The introductory paragraph was 
intended to clarify several issues related to the scope and 
applicability of Sec.  701.22. In particular, the 2013 Final Rule is 
explained as follows in the remainder of this paragraph. The 
introductory text clarified the scope of the rule and helped 
distinguish a loan participation under Sec.  701.22 from an eligible 
obligation under Sec.  701.23. Further, it clarified that the rule 
applies to a consumer FICU's purchase of a loan participation where the 
borrower is not a member of that credit union. The introductory text 
goes on to state that generally, an FCU's purchase, in whole or in 
part, of its member's loan is covered by NCUA's eligible obligations 
rule at Sec.  701.23. Additionally, by a cross-reference to Part 741 of 
NCUA's regulations, the rule also was made applicable to consumer 
FISCUs. The Board noted that corporate credit unions are subject to the 
loan participation requirements set forth in Part 704 and, therefore, 
are not subject to Sec.  701.22 of NCUA's regulations.\33\
---------------------------------------------------------------------------

    \32\ 78 FR 37946 (June 25, 2013).
    \33\ Id. at 37948.
---------------------------------------------------------------------------

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

[[Page 67578]]

paragraph provides that the section does not apply to corporate credit 
unions as defined in part 704.
    In the 2013 Final Rule, the Board added a similar introductory 
paragraph to Sec.  701.23 regarding the purchase, sale, and pledge of 
eligible obligations to clarify the scope of that section and 
distinguish loan participations from eligible obligations. The 
provisions included in that introductory paragraph are discussed in 
detail later in the part of the preamble about the introductory 
paragraph to Sec.  701.23.
    Since adopting the prefatory language in both sections, the NCUA 
has received inquiries from NCUA examiners, FICUs, fintech companies, 
and other parties who have expressed confusion about how to interpret 
many of these provisions. This confusion has led to inconsistent 
reporting of loan interests by FICUs and uncertainty about which of the 
two sections, Sec.  701.22 or Sec.  701.23, to apply to certain 
transactions, particularly innovative programs that have been designed 
by FICUs after 2013. In addition, the Board is concerned that continued 
confusion about lines of authority in this area could discourage FICUs 
from entering into certain safe, sound, and compliant loan 
participation, purchase, or sale agreements that are within their 
statutory authority.
    One significant issue with the introductory paragraph to current 
Sec.  701.22 that parties have raised is when a FICU's partial loan 
purchase is subject to that section. Parties have cited the continuing 
contractual obligation qualifier as a source of confusion. The fourth 
sentence in the introductory paragraph provides that the section 
applies only to a FICU's purchase of a loan participation where the 
borrower is not a member of that credit union and where a continuing 
contractual obligation between the seller and purchaser is 
contemplated.\34\ The fifth sentence in the paragraph provides further 
that, generally, an FCU's purchase of all or part of a loan made to one 
of its own members, subject to a limited exception for certain well-
capitalized FCUs in Sec.  701.23(b)(2), where no continuing contractual 
obligation between the seller and purchaser is contemplated, is 
governed by Sec.  701.23 of this part.\35\ Similarly, the introductory 
paragraph to Sec.  701.23 provides that Sec.  701.23 governs an FCU's 
purchase, sale, or pledge of all or part of a loan to one of its own 
members, subject to a limited exception for certain well-capitalized 
FCUs, where no continuing contractual obligation between the seller and 
purchaser is contemplated.\36\
---------------------------------------------------------------------------

    \34\ Emphasis added.
    \35\ Emphasis added.
    \36\ Emphasis added.
---------------------------------------------------------------------------

    In practice, however, purchase agreements, regardless of whether 
the transactions involve the purchase of an eligible obligation or a 
loan participation, frequently contain some form of continuing 
contractual obligation between the buyer and the seller, including 
representations and warranties regarding the loans and loan repurchase 
agreements, servicing agreements, and other similar types of ongoing 
obligations set forth under the agreements. The Board believes the 
continuing contractual obligation clauses in the fourth and fifth 
sentences in the introductory paragraphs to current Sec.  701.22 are 
unnecessary when determining whether a loan purchase agreement 
qualifies as either a loan participation or an eligible obligation.
    In addition to the concerns explained above, the clause where the 
borrower is not a member of that credit union in the first part of the 
fourth sentence of the introductory paragraph conflicts with another 
provision in Sec.  701.22. This language could be misinterpreted to 
suggest that Sec.  701.22 does not apply to a partial loan purchase 
where the borrower is a member of the purchasing credit union, even 
when the transaction otherwise meets the definition of a loan 
participation under Sec.  701.22. This clause directly conflicts with 
the more specific requirement in Sec.  701.22(b)(4), which provides 
that the borrower must become a member of one of the participating 
credit unions before the purchasing FICU purchases a participation 
interest in the loan. The NCUA has long interpreted the more specific 
language in paragraph (b)(4) as controlling and has applied the 
requirements of Sec.  701.22 to partial loan purchases where the 
purchase meets the definition of a loan participation and the borrower 
is a member of the purchasing FICU.
    Accordingly, the NCUA believes the removal of this clause will 
serve to clarify and reduce confusion when Sec.  701.22 applies to 
certain transactions. As part of the 2022 proposed rule, the Board 
requested comment on whether deleting the fourth and fifth sentences in 
the introductory paragraph to current Sec.  701.22 would clarify when 
the section applies to certain transactions.
    The NCUA recognizes that whether the purchase of a partial loan is 
a loan participation under Sec.  701.22 or a loan purchase under Sec.  
701.23 may still be uncertain in some instances even if these sentences 
are removed. The NCUA believes, however, that other provisions in Sec.  
701.22, such as the definition of loan participation and the conditions 
outlined in paragraph (b), make clear which transactions are subject to 
the requirements of Sec.  701.22.
    As discussed in more detail in the part of the preamble below 
regarding Sec.  701.23, the Board is also deleting the continuing 
contractual obligations sentence in current Sec.  701.23. The Board 
intends the deletion to work in conjunction with the changes to the 
introductory paragraph to current Sec.  701.22.
    The Board proposed no other changes to the introductory paragraph 
to current Sec.  701.22. Another provision in the introductory 
paragraph that is often misread, however, is the sentence providing 
that Sec.  701.22 does not apply to the purchase of an investment 
interest in a pool of loans. That sentence is intended to clarify that 
the purchase of such investment interests, to the extent they are 
permitted, are governed by part 703 of the NCUA's regulations for FCUs 
(and under part 741 of the NCUA's regulations and as authorized under 
state law for FISCUs) and not Sec.  701.22. This continues to be the 
case under this proposal. The NCUA notes further that this 
qualification to the section makes clear that Sec.  701.22 neither 
applies to nor authorizes FICU investments in either asset-backed 
securities or the purchase of other similar investment interests in 
pools of loans.\37\ The requirements of Sec.  701.22 apply to each 
individual loan in which a FICU purchases a loan participation 
interest.\38\
---------------------------------------------------------------------------

    \37\ Emphasis added.
    \38\ See, e.g., NCUA Legal Op. 18-0133 (March 2018), available 
at https://www.ncua.gov/regulation-supervision/legal-opinions/2018/loan-participations.
---------------------------------------------------------------------------

    The final rule amends the introductory text of Sec.  701.22 to 
provide the following: First, Sec.  701.22 applies only to loan 
participations as defined in paragraph (a). Second, Sec.  701.22 does 
not apply to the purchase of an investment interest in a pool of loans. 
Third, Sec.  701.22 establishes the requirements a FICU must satisfy to 
purchase a participation in a loan. Fourth, FISCUs are required by 
Sec.  741.225 to comply with the loan participation requirements of the 
section. Fifth, Sec.  701.22 does not apply to corporate credit unions, 
as that term is defined in Sec.  704.2.
Public Comments
    Four commenters stated generally that they supported the proposed 
changes to the introductory paragraph because the changes will reduce 
confusion and better enable credit unions to evaluate

[[Page 67579]]

new loan participation opportunities without reducing credit unions' 
loan participation authorities or increasing risks to individual credit 
unions or the Share Insurance Fund. Four commenters stated that they 
supported deleting the ``continuing contractual obligation'' clauses in 
the introductory paragraph. In addition, one commenter recommended 
removing the sentence in the introductory paragraph regarding the 
restriction of corporate credit unions purchasing loan participations 
from eligible organizations. The commenter explained that this issue is 
covered in section 704 appendix B, which requires part IV authority be 
granted by the NCUA for corporates to purchase participations. The 
commenter recommended further that corporate credit unions be allowed 
to purchase loan participations from FICUs by removing this sentence 
and eliminating the Part IV authority requiring separate application 
and approval for any purchase authority. The commenter suggested that 
corporate credit unions act as a liquidity provider for credit unions 
and being allowed to purchase loan participations with fewer 
restrictions would provide much needed liquidity and improve the 
overall safety and soundness for the credit union system.
Discussion
    Commenters generally supported the proposed changes to the 
introductory paragraph to Sec.  701.22, with one commenter suggesting 
additional changes that go beyond the scope of the proposed rule. While 
the Board appreciates that comment, the NCUA did not propose allowing 
corporate credit unions to purchase loan participations from FICUs by 
removing the last sentence of the current introductory paragraph and 
eliminating the Part IV authority requiring separate application and 
approval for any purchase authority. The NCUA will retain the comment, 
however, for consideration as part of future rulemakings related to 
loan participations or corporate credit union purchase authorities. 
Given the NCUA received no comments in opposition to the proposed 
changes, the Board is adopting the changes in this final rule as 
proposed for the reasons set forth in the notice of proposed 
rulemaking.
    Defining the term ``investment interest in a pool of loans''? The 
Board asked in the proposal whether it should define the term ``an 
investment in a pool of loans'' in a future rulemaking. And, if so, the 
Board asked how the term should be defined and why.
Public Comments
    Three commenters responded in the affirmative to the NCUA's 
question. One commenter recommended clarifying that the restrictions in 
Sec.  701.22 (containing the memberization requirement for FCUs) do not 
apply to an investment in a pool of loans. Another commenter suggested 
the phrase is confusing as currently used and does not provide 
information regarding what options credit unions may have to invest in 
these types of transactions. The commenter asked, as an example, would 
this include the ability to invest in a ``pool'' or ``fund'' of 
subordinated debt loans made to credit unions? In the commenter's 
opinion, credit unions should be allowed to purchase a percentage of a 
pool of loans that credit unions are allowed to originate.
Discussion
    The Board appreciates the comments received and will retain them 
for consideration as part of future rulemaking efforts related to this 
area of the NCUA's regulations.

Section 701.22(a)

    The final rule adds a second sentence to the current definition of 
``originating lender'' in Sec.  701.22(a) to codify and further clarify 
a 2015 NCUA legal opinion (2015 Opinion) regarding loan participations 
in indirect loans.\39\ The NCUA's 2013 Final Rule amended the loan 
participation regulation to, among other things, clarify that the 
originating lender must participate in the loan throughout the life of 
the loan.\40\ In the 2013 Final Rule, the NCUA explained that this 
requirement derives from sections 107(5) and (5)(E) \41\ of the 
Act.\42\ Section 107(5) provides in relevant part that an FCU shall 
have the power to participate with other credit unions, credit union 
organizations, or financial organizations in making loans to credit 
union members.\43\ Section 107(5)(E) requires further that 
participation loans with other credit unions, credit union 
organizations, or financial organizations shall be in accordance with 
written policies of the FCU's board of directors, provided that an FCU 
that originates a loan for which participation arrangements are made in 
accordance with this subsection shall retain an interest of at least 10 
per centum of the face amount of the loan.\44\ While the statutory 
requirements of section 107(5)(E) primarily pertain to FCUs involved in 
loan participations, the Board chose, for safety and soundness reasons, 
to extend most of the requirements in Sec.  701.22 to cover all FICUs 
as part of the 2013 Final Rule.\45\
---------------------------------------------------------------------------

    \39\ NCUA Legal Op. 15-0813 (Aug. 10, 2015) available at https://www.ncua.gov/regulation-supervision/legal-opinions/2015/loan-participations-indirect-loans-originating-lenders.
    \40\ 78 FR 37946, 37949 (June 25, 2013) (providing verbatim 
that, ``[t]he proposed rule revised the definitions of `originating 
lender' and `loan participation' to clarify that the originating 
lender must participate in the loan throughout the life of the 
loan.''); see also Sec.  701.22(a) (providing in relevant part that, 
loan participation means a loan where one or more eligible 
organizations participate pursuant to a written agreement with the 
originating lender, and the written agreement requires the 
originating lender's continuing participation throughout the life of 
the loan. (emphasis added)).
    \41\ Sec.  1757(5) and (5)(E).
    \42\ See 76 FR 79548, 79549 (Dec. 22, 2011); and 78 FR 37946, 
37949 (June 25, 2013) (providing that the requirement that credit 
unions only participate with the originating lender derives from the 
FCU Act's requirement for originating FCUs to retain at least a 10 
percent interest in the face amount of all loans they participate 
out. Moreover, the Board interprets the authority in the FCU Act for 
credit unions to participate in loans ``with'' other lenders to 
contemplate a shared, continuing lending arrangement. Simply put, 
the rule requires an originating lender to remain part of the 
participation arrangement and to retain a continuing interest in the 
loan in order to be a true participant. Otherwise, the transaction 
is not a loan participation but more akin to the sale of an eligible 
obligation.).
    \43\ 12 U.S.C. 1757(5) (emphasis added).
    \44\ Section 1757(5)(E) (emphasis added).
    \45\ See 76 FR 79548, 79548 (Dec. 22, 2011) (Explaining in part 
that loan participations [. . .] create more systemic risk to the 
share insurance fund (NCUSIF) due to the resulting interconnection 
between participants. For example, large volumes of participated 
loans in the system tied to a single originator, borrower, or 
industry or serviced by a single entity have the potential to impact 
multiple credit unions if a problem arises. Additionally, as both 
federal credit unions (FCUs) and federally insured, state-chartered 
credit unions (FISCUs) actively engage in loan participations, it is 
important to the safety and soundness of the NCUSIF that all 
federally insured credit unions (FICUs) adhere to the same minimum 
standards for engaging in loan participations. The Board believes 
such standards are necessary to ensure the NCUSIF consistently 
recognizes and accounts for the risks associated with the purchase 
of loan participations. Finally, during examinations and other FICU 
contacts, the agency has encountered confusion concerning the 
application of the current loan participation rule regarding the 
entities and transactions subject to the rule.); and 78 FR 37946, 
37947 & 37955 (June 25, 2013); and Sec.  741.225.
---------------------------------------------------------------------------

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

    The 2013 Final Rule requires an originating lender to remain 
part of the participation arrangement and to retain a continuing 
interest in the loan in order to be a true participant. Otherwise, 
the transaction is not a loan participation but more akin to the 
sale of an eligible obligation. As the Board noted in 1991, 
permitting the sale of participation interests in eligible 
obligations will blur the distinction between loan participations 
and loan purchases and sales, arguably

[[Page 67580]]

circumventing the purpose of the loan participation and eligible 
obligations rules. Additionally, the Board believes the continued 
participation of the lender that initially originated the loan is 
integral to a safe and sound participation arrangement. In 1991, the 
Board expressed its concern that a lender may have a decreased 
interest in properly underwriting a loan if they know they can later 
reduce their risk by selling participation interests in it. The 
requirement for the originating lender's continued participation in 
a loan participation arrangement is intended to address this safety 
and soundness concern.\46\
---------------------------------------------------------------------------

    \46\ 78 FR 37946, 37948 & 37949 (emphasis added) (providing also 
that in granting [loan participation authority to FCUs], Congress 
expressed its intent to enhance the ability of FCUs to serve their 
members' loan demands. Congress also expressed, however, that 
originating FCUs must maintain discipline in the origination 
process. [. . . T]he loan participation authority must not be so 
broad that loan participations may be originated from any source. [. 
. .]); 56 FR 15034, 15034-15035 (April 15, 1991) (providing that 
NCUA has interpreted the term ``participation loan'' to mean 
arrangements made prior to disbursements of the loan proceeds. In 
the preamble to the proposed rule, the Board stated that this 
interpretation may be too restrictive and proposed deleting it. [. . 
.] One commenter noted that this change will blur the distinction 
between loan participations and loan purchases and sales. [. . .] 
There are two basic safety and soundness concerns with the proposed 
change. FCUs may have a decreased interest in properly underwriting 
a loan if they know they can later reduce their risk by selling 
participation interests in it. Alternatively, FCUs interested in 
obtaining a participation after the loan is made may not properly 
investigate the loan and may instead rely on the original 
participants to have properly underwritten the loan. FCUs may jump 
in without a proper due diligence review. [. . .] Accordingly, the 
NCUA Board declines to adopt the proposed change and will continue 
to require a written commitment to participate in a loan precede 
final disbursement.); see also 68 FR 39866, 39867 (July 3, 2003); 68 
FR 75110 (Dec. 30, 2003); and H.R. Rep. No. 95-23, at 12 (1977), 
reprinted in 1977 U.S.C.C.A.N. 115.

    As explained in more detail below, these concerns are fully 
accounted for under the 2015 Opinion and this rulemaking by limiting 
the interpretation to indirect loans and requiring that such loans meet 
the same general requirements applicable to indirect loans made by FCUs 
under current Sec.  701.23(b)(4)(iv).
    The 2013 Final Rule responded to concerns raised by commenters 
regarding the proposed definition of ``originating lender'' and its 
application in situations where a CUSO underwrites and processes a 
loan, but the FICU funds the loan. In response to this feedback the 
Board provided the following explanation:

    These commenters observed that a CUSO often serves as an 
originator in name only and, thus, is not the most appropriate party 
to regard as the originating lender for the purposes of the rule. 
For example, loans may be underwritten and processed by a CUSO, but 
funded by its owner credit union. The Board acknowledged that this 
CUSO model is not uncommon within the industry and permissible under 
Sec.  712.5. For purposes of this final rule, it was the Board's 
intent that the originating lender is the entity with which the 
borrower initially or originally contracts for the loan.\47\
---------------------------------------------------------------------------

    \47\ 78 FR 37949-37950 (emphasis added).

    As noted, the Board's responses to commenters in the 2013 Final 
Rule regarding the definition of originating lender were limited to 
situations in which a FICU purchased a loan from a CUSO that had 
underwritten the loan. The Board did not discuss the application of the 
definition of originating lender to CUSOs or other entities in the 
context of indirect lending arrangements in which a purchasing FICU 
underwrites the loan and makes the final underwriting decision. 
Accordingly, the application of the definition of originating lender to 
CUSOs or other entities in the context of indirect lending arrangements 
was left unaddressed in the 2013 Final Rule and open to later 
interpretation by the NCUA, which is what it did 2 years later in the 
2015 Opinion discussed in more detail in the following paragraphs.
    The NCUA has long used the act of underwriting a loan as a feature 
to distinguish between transactions where a FICU makes a loan and 
transactions where a FICU purchases a loan.\48\ In particular, in a 
1997 legal opinion the NCUA explained as follows:
---------------------------------------------------------------------------

    \48\ See, e.g., NCUA Legal Op. 92-1203 (Jan. 5, 1993); NCUA 
Legal Op. 92-1203 (May 11, 1993); NCUA Legal Op. 97-0546 (Aug. 6, 
1997), available at https://ncua.gov/regulation-supervision/legal-opinions; and Sec.  701.23(b)(4)(iv).

    FCUs may participate in indirect lending arrangements under the 
authority to make loans to members, 12 U.S.C. 107(5); 12 CFR 701.21, 
rather than the authority to purchase eligible obligations, 12 
U.S.C. 107(13); 12 CFR 701.23, as long as two conditions are met. 
First, the FCU must make the final underwriting decision. That is, 
before the retailer and the member complete the loan or sales 
contract, the FCU must review the application and determine that the 
transaction conforms to its lending policies. This is because an FCU 
may not delegate its lending authority to a third party. Second, the 
retailer must assign the loan or sales contract to the FCU very soon 
after it is completed. Assignment close in time to the making of the 
loan allows the retailer to function as the facilitator of the loan 
while the FCU remains the true lender. As the time between 
completion and assignment of the loan lengthens, the FCU's payment 
to the retailer becomes the purchase of the loan rather than part of 
the processing of the loan.\49\
---------------------------------------------------------------------------

    \49\ NCUA Legal Op. 97-0546 (emphasis added).

    By requiring the purchasing credit union to make the final 
underwriting decision in an indirect lending transaction, the NCUA 
ensured that the purchasing credit union was not relying on the due 
diligence of the loan seller who might otherwise have had a decreased 
interest in properly underwriting the loan knowing that it would later 
be sold. Moreover, under the NCUA's loan participation regulation, the 
originating lender is required to retain at least a 5-percent interest 
in any participation for the life of the loan.\50\ Accordingly, where 
an eligible organization makes a loan through an indirect lending 
arrangement there is no greater risk of incentives for lax or improper 
underwriting for purposes of Sec.  701.22 than if the eligible 
organization had processed and funded the loan itself.
---------------------------------------------------------------------------

    \50\ Sec.  701.22(d)(4)(ii) (``The interest that the originating 
lender will retain in the loan to be participated. If the 
originating lender is a federal credit union, the retained interest 
must be at least 10 percent of the outstanding balance of the loan 
through the life of the loan. If the originating lender is any other 
type of eligible organization, the retained interest must be at 
least 5 percent of the outstanding balance of the loan through the 
life of the loan, unless a higher percentage is required under state 
law.'').
---------------------------------------------------------------------------

    Furthermore, as discussed in the 1997 legal opinion quoted above, 
the NCUA has long distinguished between indirect loans, made under 
section 107(5) \51\ of the FCU Act and Sec.  701.21 of the NCUA's 
regulations, and eligible obligations purchased under section 107(13) 
\52\ of the FCU Act and Sec.  701.23 of the NCUA's regulations.\53\ For 
over 25 years the NCUA has treated indirect loans--as defined under 
current Sec.  701.23(b)(4)(iv)--made by a credit union to be separate 
and distinct from eligible obligations. Accordingly, while permitting 
the sale of participation interests in eligible obligations might blur 
the distinction between loan participations and loan purchases and 
sales and circumvent the purpose of the loan participation and eligible 
obligation rules, allowing the sale of participation interests in 
indirect loans presents no such risk.
---------------------------------------------------------------------------

    \51\ Sec.  1757(5).
    \52\ Sec.  1757(13).
    \53\ NCUA Legal Op. 97-0546.
---------------------------------------------------------------------------

    Working within the regulatory and interpretative history discussed 
above, the NCUA determined in the 2015 Opinion that an ``eligible 
organization'' \54\ may be considered the ``originating lender'' for 
purposes of Sec.  701.22 where the eligible organization generated the 
loan through an ``indirect lending arrangement '' \55\ with a retailer

[[Page 67581]]

such as an auto dealer.\56\ Current Sec.  701.22(a) defines the term 
``originating lender'' as ``the participant with which the borrower 
initially or originally contracts for a loan and who, thereafter or 
concurrently with the funding of the loan, sells participations to 
other lenders.'' \57\ The 2015 Opinion explained that, in indirect 
lending arrangements with a retailer such as an auto dealer, the 
retailer is acting as an agent of the eligible organization and is 
simply performing as an administrative functionary processing a loan 
for the eligible organization, and the retailer's activities are part 
and parcel of, and an extension of, the eligible organization's lending 
operations. In this context, the 2015 Opinion concluded that the 
retailer is not acting as a separate lender generating loans for itself 
and then selling those loans to an eligible organization. Rather, the 
retailer is a facilitator that is part of the eligible organization's 
loan processing mechanism, and the eligible organization is the de 
facto originating lender and, therefore, the originating lender for 
purposes of the NCUA's loan participation rule.
---------------------------------------------------------------------------

    \54\ Id. (providing in relevant part as follows: ``Eligible 
organization means a credit union, credit union organization, or 
financial organization.'').
    \55\ See Sec.  701.23(b)(4)(iv) (``An indirect lending or 
indirect leasing arrangement that is classified as a loan and not 
the purchase of an eligible obligation because the Federal credit 
union makes the final underwriting decision and the sales or lease 
contract is assigned to the Federal credit union very soon after it 
is signed by the member and the dealer or leasing company.'') 
(emphasis added).
    \56\ NCUA Legal Op. 15-0813.
    \57\ Id. (providing in relevant part, ``[o]riginating lender 
means the participant with which the borrower initially or 
originally contracts for a loan and who, thereafter or concurrently 
with the funding of the loan, sells participations to other 
lenders.'').
---------------------------------------------------------------------------

    The 2015 Opinion explained further that a loan purchased by an 
eligible organization must satisfy two conditions to be classified as 
an ``indirect loan'' and not the purchase of a loan.\58\ First, the 
eligible organization must make the final underwriting decision 
regarding the loan. In other words, a loan must be underwritten by the 
purchasing eligible organization before completion of the loan or sales 
contract.\59\ An eligible organization may use an automated credit 
scoring system to make its final underwriting decision as long as the 
``score'' obtained from the automated system is the sole determinant 
for granting credit.\60\ When an eligible organization establishes the 
qualifying criteria for the automated scoring system, it is effectively 
making an advance decision on a particular application.\61\ So long as 
the party entering the borrower's application information does not 
exercise any judgment regarding that information, the score will be 
deemed to reflect the FCU's lending policies.\62\
---------------------------------------------------------------------------

    \58\ See Sec.  701.22(b)(4)(iv); see also NCUA Legal Op. 15-
0813; and 78 FR 37946, 37949 (explaining that ``a lender `may have a 
decreased interest in properly underwriting a loan if they know they 
can later reduce their risk by selling participation interests in 
it.' '').
    \59\ See id.
    \60\ See NCUA Legal Op. 97-0546.
    \61\ See id.
    \62\ See id.
---------------------------------------------------------------------------

    Second, the sales contract must be assigned to the eligible 
organization very soon after it is signed by the borrower and the 
dealer.\63\ As explained in a separate NCUA legal opinion, assignment 
close in time to the making of the loan allows the retailer to function 
as the facilitator of the loan while the eligible organization remains 
the true lender.\64\ The length of time that satisfies ``very soon 
after'' depends on the nature of the loan and the practical realities 
of assigning certain kinds of loans in the current marketplace and in 
accordance with prevailing industry standards.\65\ While ``very soon 
after'' is generally determined on a case-by-case basis by loan type 
and in accordance with commercial reasonableness, the longer the time 
between the formation of the contract and its assignment, the more 
likely the program will be viewed as involving the purchase of an 
eligible obligation rather than the making of a loan.\66\
---------------------------------------------------------------------------

    \63\ Emphasis added.
    \64\ See NCUA Legal Op. 97-0546.
    \65\ The preamble to the 1998 proposal to amend the eligible 
obligations rule requested public comment on whether the NCUA should 
specify a certain number of days as constituting ``very soon.'' 63 
FR 41976, 41977 (Aug. 6, 1998). After considering the comments, 
however, the NCUA Board determined not to specifically define it 
because it wanted to provide FCUs with flexibility under various 
circumstances. The NCUA Board also clarified that assignment of the 
loan means acceptance of the loan and not necessarily the physical 
receipt of the loan documentation, recognizing that acceptance and 
payment are often done electronically. However, physical receipt of 
the loan documents by the FCU should occur within a reasonable time 
following acceptance of the loan. 63 FR 70997, 70998 (Dec. 23, 
1998); see also NCUA Legal Op. 97-0546 (Aug. 6, 1997) (Concluding 
that an indirect lending arrangement where the retailer made a loan 
and assigned it to the purchasing credit union within one business 
day met the ``very soon after'' timing requirement.).
    \66\ 63 FR 41976, 41977 (Aug. 6, 1998).
---------------------------------------------------------------------------

    The Board believes that codifying the 2015 Opinion will clarify the 
loan participations rule and facilitate further growth in credit 
unions' purchase and sale of indirect loan participations. Industry 
data shows significant growth in credit unions engaging in indirect 
lending programs, which have become an important channel for credit 
unions to extend services to their members and provide a viable source 
of income to support their growth.
    Since 2015, FICUs have experienced large growth in indirect lending 
programs as reflected in Table 1. The $336.8 billion outstanding 
balance of indirect loans as of 2022 more than doubled the 2015 year-
end loan balance.\67\
---------------------------------------------------------------------------

    \67\ NCUA Call Report data for all FICUs from the 4th quarter of 
2015 through the 2nd quarter of 2022.
---------------------------------------------------------------------------

    During the past 7 years, FICUs' indirect lending activities had 
double-digit increases (ranging from 14 percent to 21 percent) year 
over year between 2016 and 2018, and a low single-digit increase in 
2019 and 2020.\68\ The speed of growth went back to double digits in 
2021 and 2022, with FICUs reporting an aggregate 30.93 percent increase 
during 2022.\69\ The share of indirect loans outstanding in FICUs' 
total loan portfolio increased from 17.35 percent in 2015 to 21.22 
percent in 2018, and reached 22.36 percent as of 2022.\70\
---------------------------------------------------------------------------

    \68\ NCUA Call Report data for all FICUs from the 4th quarter of 
2015 through the 4th quarter of 2021.
    \69\ NCUA Call Report data for all FICUs from the 4th quarter of 
2015 through the 4th quarter of 2022.
    \70\ Id.
---------------------------------------------------------------------------

    Furthermore, between 2015 and 2022, the delinquency rate on the 
indirect lending program was relatively stable, ranging from 0.77 
percent to 0.47 percent, while the net charge-off rate ranged between 
0.70 percent and 0.24 percent.\71\
---------------------------------------------------------------------------

    \71\ Id.

                                 Table 1--FICU Indirect Lending Activities \72\
----------------------------------------------------------------------------------------------------------------
         (in $ million)             2015      2016      2017      2018      2019      2020      2021      2022
----------------------------------------------------------------------------------------------------------------
Total Outstanding Indirect Loans   136,583   165,171   194,016   221,477   228,559   233,161   257,271   336,845
% Year over Year Growth.........     20.29     20.93     17.46     14.15      3.20      2.01     10.34     30.93
% Indirect Loans Outstanding/        17.35     19.00     20.27     21.22     20.63     20.05     20.50     22.36
 Total Loans....................
Total Del. Indirect Loans (>=60        988     1,264     1,391     1,494     1,513     1,291     1,198     2,479
 Days)..........................
% Loans Delinquent >=60 Days/         0.72      0.77      0.72      0.67      0.66      0.55      0.47      0.74
 Total Indirect Loans...........
Net Indirect Loan Charge-Offs...       782       997     1,264     1,318     1,354     1,129       594       903

[[Page 67582]]

 
% Net Charge-Offs/Avg Indirect        0.63      0.66      0.70      0.63      0.60      0.49      0.24      0.30
 Loans..........................
----------------------------------------------------------------------------------------------------------------

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

    \72\ Id.
---------------------------------------------------------------------------

    Where an indirect loan is underwritten by the purchasing eligible 
organization before the loan is made and the loan is transferred to the 
eligible organization very soon after the inception of the obligation 
to extend credit, the Board believes there is little risk the loan will 
not be underwritten to the eligible organization's standards. 
Accordingly, the final rule amends current Sec.  701.22(a) by adding to 
the end of the definition of ``originating lender'' a second clarifying 
sentence providing that the originating lender includes a participant 
that acquires a loan through an indirect lending arrangement as defined 
under Sec.  701.21(c)(9). Proposed paragraph (c)(9) provides in 
relevant part that indirect lending arrangement means a written 
agreement to purchase loans from the loan originator where the 
purchaser makes the final underwriting decision regarding making the 
loan, and the loan is assigned to the purchaser very soon after the 
inception of the obligation to extend credit.
    The Board requested comment in the proposal on whether there are 
certain types of transactions that should be excluded from the 
interpretation above. In particular, the Board asked whether there are 
transactions in which eligible organizations acquire loans through 
indirect lending arrangements, but the third parties making the loans 
do not act as administrative functionaries processing the loan on 
behalf of the eligible organizations, and the third parties' activities 
are not part and parcel, and an extension, of the eligible 
organizations' lending operations. If there are transactions of this 
type, commenters were asked to explain why they should be excluded and 
provide information about the transactions and the specific activities 
undertaken by the parties.
Public Comments
    All comments received on this issue supported revising the 
definition of ``originating lender'' to codify the 2015 Opinion. One 
commenter recommended the NCUA amend the definition of ``originating 
lender'' further to recognize and separate the functions of the 
originator, initial lender and subsequent owner/purchaser. The 
commenter also recommended amending the definition to recognize the 
different point in time of the legal ownership of the loan even though 
such lending decisions are made in compliance with the underwriting 
stipulations of the credit union that buys the loan after the initial 
funding of the loan by the fintech/flow partner. The commenter 
suggested these additional changes are important because they would (a) 
follow the legal ownership of the loan, (b) place the responsibility on 
the originator to comply with the requisite regulations--for example, 
Consumer Financial Protection Bureau (CFPB) reporting--and (c) if 
future regulatory requirements are placed on the originator, there 
would be no confusion about which party is responsible for complying 
with such requirements. In the commenter's opinion, the fintech 
originator should have responsibility for complying with regulations 
and the credit union's due diligence should include an extensive review 
of the originator's policies and procedures to ensure compliance with 
all regulations.
    Another commenter asked that the NCUA clarify further in the 
definition whether both the indirect loan source (e.g., dealer) and the 
purchasing credit union are ``originators,'' because the current 
language could cause interpretive confusion and raise questions as to 
Call Report instructions and other areas regarding what the scope of 
origination is versus other types of indirect lending, such as 
correspondent mortgage lending. The commenter explained that the 
language ``from the loan originator'' in the definition suggests that 
when a broker closes a loan in the credit union's name it is not an 
indirect loan, while prior interpretations have suggested that it might 
be. The commenter recommended, in particular, that the NCUA not use the 
word ``originator'' in the definition as it relates to sources of 
indirect loans because it introduces confusion about the meanings of 
terms under the 2015 Opinion and prior doctrine.
Discussion
    The comments received regarding the changes to the definition of 
``originating lender'' all generally supported the proposed change. The 
NCUA did, however, receive comments requesting additional changes to 
the proposed definition of ``originating lender'' and the associated 
definition of ``indirect lending arrangement'' in Sec.  
701.21(c)(9)(i). Those additional changes go beyond the scope of the 
proposed rule and will be retained for consideration by the NCUA during 
future rulemakings relating to indirect lending. Accordingly, the final 
rule adopts the changes to the definition of ``originating lender'' in 
Sec.  701.22(a) as proposed for the reasons set forth in the notice of 
proposed rulemaking.
    Some commenters requested additional clarification regarding the 
relationship between the originating lender and indirect lender. The 
term ``originating lender'' is defined in the final rule as the 
participant with which the borrower initially or originally contracts 
for a loan and who, thereafter, concurrently with the funding of the 
loan, sells participations to other lenders. Originating lender 
includes a participant that acquires a loan through an indirect lending 
arrangement as defined under Sec.  701.21(c)(9). The term ``loan 
participation'' is defined as a loan where one or more eligible 
organizations participate pursuant to a written agreement with the 
originating lender, and the written agreement

[[Page 67583]]

requires the originating lender's continuing participation throughout 
the life of the loan. For purposes of the NCUA's regulations, a FICU 
acquiring a loan through an indirect lending arrangement is the 
originating lender. The acquiring FICU, however, may not be considered 
the originator under other applicable state laws, federal laws, or 
both. In such cases, the acquiring FICU is generally required to comply 
with all applicable laws.
    Under Sec.  701.22(b), a FICU may purchase a participation interest 
in a loan from an eligible organization only if the loan is one the 
purchasing credit union is empowered to grant and certain additional 
conditions are satisfied. Both the current rule and this final rule 
limit purchases of loan participations to purchases from eligible 
organizations. An ``eligible organization'' is defined in the current 
and final rule as a credit union, credit union organization, or 
financial organization. The term ``financial organization'' is defined 
under the current and final rule as any federally chartered or 
federally insured financial institution and any state or federal 
government agency and its subdivisions. This final rule makes no 
changes to either definition. The term ``financial organization'' 
includes participants outside the credit union industry, including 
federally chartered and federally insured financial institutions, such 
as banks, and state and federal government agencies and their 
subdivisions.\73\ In addition, the current and final rule's definition 
of ``eligible organization'' includes non-federally insured or non-
federally chartered credit unions through the definition's use of the 
term ``credit union.'' \74\
---------------------------------------------------------------------------

    \73\ 78 FR 37946, 37948 (June 25, 2013).
    \74\ Id. at 37949.
---------------------------------------------------------------------------

    Additional concerns? The Board requested comment in the proposal on 
whether there are other factors, changes, safety and soundness, or 
compliance implications the NCUA should consider related to the 
proposed amendments to the definition of ``originating lender.'' The 
Board asked further whether there are structural, safety and soundness, 
or compliance concerns that would warrant considering that the addition 
of intermediaries in loan origination transactions, including CUSOs, 
precludes a credit union assignee from being considered the originating 
lender under the revised definition in the proposed rule. Finally, the 
Board asked whether there are any additional safety and soundness or 
compliance implications concerning the proposed definition of 
``originating lender'' that the Board should consider.
Public Comments
    One commenter responded that, in many instances, CUSOs assist 
credit unions with various aspects of the loan origination process. The 
commenter explained that CUSOs may provide specific expertise (such as 
in member business loans) or other services to assist in credit unions 
making appropriate decisions; however, the credit union is still 
funding the loan according to its own guidelines (or as agreed upon 
through a CUSO) and should be considered the originating lender.
Discussion
    The Board appreciates the comment above and notes that the final 
rule does not affect the ability of CUSOs to provide loan support 
services to FICUs under part 712 of the NCUA's regulations and that 
simply providing loan support services does not necessarily change what 
entity is the originating lender.

Section 701.22(e) Temporary Regulatory Relief in Response to COVID-19

    From April 21, 2020, to December 31, 2022, Sec.  701.22(e) of the 
NCUA's regulations provided that, notwithstanding paragraph (b)(5)(ii) 
of Sec.  701.22, during the period commencing on April 21, 2020, and 
concluding on December 31, 2022, the aggregate amount of loan 
participations that may be purchased from any one originating lender 
shall not exceed the greater of $5,000,000 or 200 percent of the FICU's 
net worth.\75\ The Board approved Sec.  701.22(e) to help ensure that 
FICUs remained operational and had sufficient liquidity during the 
COVID-19 pandemic.\76\ The Board concluded, at the time, that the 
amendments would provide FICUs with the necessary flexibility in a 
manner consistent with the NCUA's responsibility to maintain the safety 
and soundness of the credit union system.\77\ As provided in paragraph 
(e), the temporary regulatory relief provided under the paragraph 
expired on December 31, 2022. Because the temporary regulatory relief 
has expired, the Office of the Federal Register removed paragraph (e) 
shortly after December 31, 2022, as part of its regular review and 
editing process.
---------------------------------------------------------------------------

    \75\ Emphasis added.
    \76\ See 85 FR 22010 (April 21, 2020); 85 FR 83405 (Dec. 22, 
2020) (extending paragraph (e) through Dec. 31, 2021); and 86 FR 
72517 (Dec. 22, 2021) (extending paragraph (e) through Dec. 31, 
2022).
    \77\ 85 FR 22010, 22010 (April 21, 2020).
---------------------------------------------------------------------------

Public Comments
    Three commenters recommended the NCUA extend or permanently adopt 
expired section 701.22(e)'s higher loan participation purchasing 
threshold. One of the commenters suggested that loan participation 
agreements generally have high fixed costs and comparatively modest 
variable costs so a $10 million loan participation agreement does not 
require significantly more due diligence or post-closing resources, 
from either a loan originator or potential loan participation interest 
purchasers, than a $2 million loan participation agreement. 
Consequently, individual loan participation interests generally 
represent larger rather than smaller capital commitments. Another 
commenter suggested that the United States is currently entering a 
period of declining liquidity access, raising concerns among FICUs 
about their ability to access liquidity. The commenter suggested the 
relief provided in Sec.  701.22(e) would be more useful now than it was 
during the pandemic as the liquidity tightness the credit unions see 
now is due to the business cycle. The commenter suggested further that 
a permanent variation of this rule would not harm the safety and 
soundness of the credit union system, and as such, it asked the NCUA to 
reconsider removing this rule. One of the commenters suggested raising 
the aggregate amount of loan participations that may be purchased may 
decrease overall risks because it allows individual credit unions to 
develop relationships and trust with each other with ongoing 
transactions that reduce costs and risks for both.
    Five commenters recommended the NCUA eliminate the limit on the 
aggregate amount of loan participations that may be purchased from any 
one originating lender altogether.
Discussion
    The Board appreciates the comments that were submitted regarding 
expiration of the temporary regulatory relief under Sec.  701.22(e). 
The temporary regulatory relief provided under paragraph (e) expired on 
December 31, 2022. The Board may consider approving temporary 
regulatory relief again in the future if circumstances warrant.
    Benefits of the temporary regulatory relief. The Board requested 
comments on the impact, if any, that was experienced due to the 
flexibilities provided in the temporary rule; whether the temporary 
rule had any effect on the participation markets; and whether there are 
safety and soundness or

[[Page 67584]]

compliance implications related to the expiration of the flexibilities.
Public Comments
    One commenter responded to the NCUA's questions by stating that the 
change did not have a material effect on credit unions because it was 
temporary in nature but noted that the change did allow some credit 
unions to manage their balance sheets in a more effective manner during 
the relief period. The commenter suggested further that credit unions 
that benefited from the temporary regulatory relief may now be unable 
to work with those sellers/buyers again even though they have 
established strong relationships due to expiration of the temporary 
regulatory relief.
Discussion
    The Board appreciates the comment that was submitted regarding the 
benefits of the temporary regulatory relief under Sec.  701.22(e). The 
Board may consider approving temporary regulatory relief again in the 
future if circumstances warrant.
    Other comments on the loan participation rule. The Board also 
invited other recommendations it should consider in the loan 
participation rule. For example, the Board asked whether it should 
consider replacing prescriptive limits with principles-based 
requirements, consider removing the limit on the amount of loan 
participations that could be purchased from any one originating lender 
under current Sec.  701.22(b)(5)(ii), or both.
Public Comments
    One commenter responded to the NCUA's questions by stating that 
eliminating the prescriptive limits and replacing them with principles-
based requirements allows credit unions the most flexibility in 
managing their balance sheets. The commenter suggested that credit 
unions have proven the ability to manage their risk levels with many 
other prescriptive limits being removed.
Discussion
    The Board appreciates the comment above and will consider replacing 
prescriptive limits with more principles-based requirements where 
appropriate in future rulemakings.

Section 701.23 Purchase, Sale, and Pledge of Loans

    As discussed in more detail in this portion of the preamble, this 
final rule makes several changes to current Sec.  701.23 of the NCUA's 
regulations. These changes are intended to clarify numerous provisions 
regarding the purchase, sale, and pledge of eligible obligations. The 
changes also provide FCUs expanded authority and autonomy to innovate 
and transact business with fintech companies and other institutions 
that provide services associated with the origination and sale of loans 
made to members of FCUs.
    In addition, the final rule adds new headings to a number of 
subparagraphs under Sec.  701.23. The addition of these headings is a 
non-substantive change to both the current regulation and proposed 
Sec.  701.23, which is intended to add consistency to the section as 
well as make the section more reader friendly. In addition to the other 
changes discussed in this part of the preamble, the final rule adds the 
following new headings to Sec.  701.23. Paragraph (b)(1) is amended to 
add the heading purchase of obligations from any source. Paragraph 
(b)(1)(i) is amended to add the heading eligible obligations. Paragraph 
(b)(1)(ii) is amended to add the heading notes of a liquidating credit 
union's individual members. Paragraph (b)(1)(iii) is amended to add the 
heading student loans. Paragraph (b)(1)(iv) is amended to add the 
heading real estate-secured loans. Paragraph (b)(3) is amended to add 
the heading other requirements. Paragraph (b)(4) is amended to add the 
heading five-percent limitation. Paragraph (b)(5) retains the heading 
grandfathered purchases from the current rule. Paragraph (b)(6) is 
amended to add the heading written purchase policies. Paragraph (h)(1) 
is amended to add the heading expanded purchase authority.
Public Comments
    Several commenters specifically offered strong support for the 
proposed edits to Sec.  701.23. One commenter agreed that removing some 
of the limits in the current regulation will greatly improve credit 
union activity with eligible obligations and allow members to be served 
within the industry without incremental risk being placed on the Share 
Insurance Fund. Another commenter suggested that the clarifying 
language on eligible obligations and removal of the prescriptive 
limitations will eliminate ambiguity on the interpretation regarding 
permissible activities. Another commenter supported the proposed 
changes but thought more should be done to reduce confusion regarding 
whether Sec. Sec.  701.22 or 701.23 applies to a particular 
transaction. One commenter stated that FISCUs should also benefit from 
this rule pursuant to state credit union act parity statutes. The 
commenter recommended finalizing the amendments to Sec.  701.23 as 
proposed. The commenter, however, also recommended that the NCUA 
clarify in the loan participation and eligible obligation rules that a 
purchasing FICU has discretion to classify a partial interest in a loan 
under either Section 701.22 or 701.23 when the terms and conditions of 
the purchase meet the requirements of both rules. As an alternative, 
the commenter requested that, even if credit unions are obligated to 
designate a transaction as a loan participation or eligible obligation 
at or near the time of the sale/purchase (for example on a subsequent 
Call Report), credit unions be given discretion to change that 
designation at a later time if they choose so long as the terms and 
conditions of the purchase meet the requirements of both rules. The 
commenter suggested this change could be made by adding new paragraphs 
to Sec. Sec.  701.22 and .23 providing as follows:

    Each FICU that is party to a transaction may choose to 
categorize it as either a transaction under this rule [Sec.  701.22 
or Sec.  701.23], or alternatively as a transaction under [Sec.  
701.22 or Sec.  701.23], and may designate it as such as necessary 
(for example on a Call Report). FICUs that are party to the same 
transaction do not have to categorize or designate the transaction 
in the same manner, and FICUs retain discretion to recategorize and 
redesignate the transaction from time to time.

Discussion
    Consistent with the strong support received from commenters, the 
Board is adopting the changes to Sec.  701.23 largely as proposed, for 
the reasons set forth in the notice of proposed rulemaking, with 
certain changes that are discussed in the section-by-section analysis 
below. The changes and clarifications requested in the comments above 
would expand the authorities proposed beyond the scope of the proposed 
rule. Thus, the comments will be retained for consideration in future 
rulemakings relating to loan purchases.

Section 701.23 Introductory Paragraph

    The Board added the introductory paragraph to Sec.  701.23 as part 
of the 2013 Final Rule.\78\ The introductory paragraph was added to 
clarify several issues related to the scope and applicability of Sec.  
701.23. In particular, the 2013 Final Rule explained that the rule 
added introductory text to Sec.  701.23 to clarify the scope of Sec.  
701.23 and to distinguish transactions under Sec.  701.23 from 
transactions covered by Sec.  701.22. The 2013 Final Rule explained 
further that RegFlex provides a limited

[[Page 67585]]

exception to the general requirement that an FCU's purchase, sale, or 
pledge of all or part of a loan must be to one of its own members.\79\ 
Specifically, the 2013 final rule explained that the exception permits 
FCUs that meet the well-capitalized standard to buy loans from other 
FICUs without regard to whether the loans are eligible obligations of 
the purchasing FCU's members or the members of a liquidating credit 
union. The 2013 Final Rule also explained that it made a parallel 
conforming amendment to the introductory text to Sec.  701.22 in this 
regard.\80\
---------------------------------------------------------------------------

    \78\ 78 FR 37946 (June 25, 2013).
    \79\ 12 CFR 701.23(b)(2).
    \80\ 78 FR 37954-37955.
---------------------------------------------------------------------------

    The introductory paragraph to current Sec.  701.23 includes three 
sentences. The first sentence provides that the section governs an 
FCU's purchase, sale, or pledge of all or part of a loan to one of its 
own members where no continuing contractual obligation is contemplated 
between the seller and the purchaser. The first sentence also notes 
that there is a limited exception to the membership requirement for 
certain well-capitalized FCUs. The second sentence elaborates on the 
membership requirement by providing that the borrower must be a member 
of the purchasing FCU before the purchase is made, except as provided 
in current Sec.  701.23(b)(2). The third sentence provides broadly that 
an FCU may not purchase a non-member loan to hold in its portfolio.
    Since amending Sec.  701.23 as part of the 2013 Final Rule, the 
NCUA has received numerous inquiries from NCUA examiners, FCUs, fintech 
companies, and other parties who have expressed confusion about how to 
interpret these provisions. This confusion has led to inconsistent 
reporting of loan interests by FCUs and uncertainty regarding which of 
the two sections, Sec.  701.22 or Sec.  701.23, applies to certain 
transactions, particularly innovative programs that have been designed 
by FICUs after 2013. In addition, the Board is concerned that continued 
confusion about when a borrower is required to be a member under Sec.  
701.23 could discourage FCUs from entering into certain safe and sound 
loan purchase, sale, and pledge agreements that are within their 
statutory authority.
    The clause in the first sentence of the introductory paragraph to 
current Sec.  701.23, which provides ``where no continuing contractual 
obligation between the seller and purchaser is contemplated,'' 
continues to be a source of confusion for examiners and the credit 
union system. As previously mentioned, loan purchase agreements, 
regardless of whether the transactions involve the purchase of an 
eligible obligation or a loan participation, frequently contain some 
form of continuing contractual obligation between the buyer and the 
seller, including representations and warranties regarding the loans 
and loan repurchase agreements, servicing agreements, and other similar 
types of ongoing obligations. Accordingly, the final rule deletes the 
continuing contractual obligations clause in current Sec.  701.23. The 
Board intends this deletion to work in conjunction with the proposed 
changes to the introductory paragraph to current Sec.  701.22.
    The final rule also removes the clause in the first sentence of the 
introductory paragraph to current Sec.  701.23 referring to the limited 
exception for well-capitalized FCUs. As discussed in more detail 
subsequently in the part of the preamble on Sec.  701.23(b)(2), the 
final rule removes the well-capitalized requirements for FCU purchases 
of certain non-member loans from FICUs. Accordingly, deleting the 
clause in the introductory paragraph referring to the limited exception 
for well-capitalized FCUs is a necessary conforming amendment.
    The second sentence in the introductory paragraph to current Sec.  
701.23 provides that for purchases of eligible obligations, except as 
described in paragraph (b)(2) of the section, the borrower must be a 
member of the purchasing FCU before the purchase is made. As discussed 
previously, there are express exceptions to the membership requirement 
under paragraph (b)(1) as well as under paragraph (b)(2). For example, 
paragraphs (b)(1)(iii) and (iv) authorize FCUs to buy non-member loans 
to complete a pool of loans for resale. Accordingly, the final rule 
amends the second sentence in the introductory paragraph to current 
Sec.  701.23 to provide that for purchases of eligible obligations, 
except as described under paragraph (b) of the section, the borrower 
must be a member of the purchasing FCU before the purchase is made.
    The third sentence in the introductory paragraph to current Sec.  
701.23 provides that an FCU may not purchase a non-member loan to hold 
in its portfolio. This prohibition appears to have originally been 
intended to address FCU purchases of non-member loans to complete pools 
of loans for resale, as authorized for real estate-secured loans and 
federally guaranteed student loans under current Sec.  
701.23(b)(1)(iii) and (iv). The prohibition on retaining the non-member 
loans in portfolio goes together with the authority in paragraphs 
(b)(1)(iii) and (iv) because those provisions allow an FCU to buy such 
non-member loans solely to complete a pool of loans for resale. The 
second sentence in current Sec.  701.23(b)(1)(iv) further confirms this 
relationship by providing that a pool must include a substantial 
portion of the credit union's members' loans and must be sold 
promptly.\81\ For other purchases of non-member loans under current 
Sec.  701.23, the authority is not tied to a plan or requirement to 
resell the loans being purchased. Prohibiting the FCU from retaining 
the loans in portfolio, as the current wording in the undesignated 
introductory paragraph implies, unnecessarily restricts FCUs' authority 
to purchase and hold non-member loans from FICUs under current Sec.  
701.23(b)(1)(ii) \82\ and (b)(2). Accordingly, the final rule deletes 
the third sentence in the introductory paragraph to Sec.  701.23, 
providing that an FCU may not purchase a non-member loan to hold in its 
portfolio.
---------------------------------------------------------------------------

    \81\ Emphasis added.
    \82\ Authorizing FCUs to purchase eligible obligations of a 
liquidating credit union's individual members, from the liquidating 
credit union.
---------------------------------------------------------------------------

    For the reasons outlined in the preceding paragraphs, the final 
rule amends the introductory text of Sec.  701.23 to provide that the 
section governs an FCU's purchase, sale, or pledge of all or part of a 
loan to one of its own members, subject to certain exceptions. The 
introductory paragraph provides further that for purchases of eligible 
obligations, except as otherwise described under paragraph (b) of Sec.  
701.23, the borrower must be a member of the purchasing FCU before the 
purchase is made.
Public Comments
    Three commenters specifically expressed their support for the 
clarifying amendments to the introductory paragraph to Sec.  701.23. 
Another commenter offered support for removing the following sentence: 
``A federal credit union may not purchase a non-member loan to hold in 
its portfolio.'' And one commenter recommended amending the second 
sentence of the introductory paragraph to clarify that an FCU may 
purchase certain eligible obligations prior to the borrower becoming a 
member of the purchasing FCU under Sec. Sec.  701.23(b)(1) and 
701.23(b)(2).
Discussion
    The comments received on the changes to the introductory paragraph 
to 701.23 were strongly supportive. The

[[Page 67586]]

comment requesting that the Board allow purchases of certain eligible 
obligations prior to the borrower becoming a member goes beyond the 
scope of the proposal. Accordingly, the Board is adopting the changes 
to the introductory paragraph as proposed for the reasons set forth in 
the notice of proposed rulemaking.

Section 701.23(a) Definitions

    The final rule, in addition to other changes discussed below, 
amends current Sec.  701.23(a) to add the heading ``Definitions'' to 
the paragraph and remove the numbering from the individual definitions 
under paragraph (a). These changes are intended to avoid errors and 
confusion when definitions in paragraph (a), which may be cross 
referenced elsewhere in the NCUA's regulations, are added or removed. 
Accordingly, the individual definitions included under Sec.  701.23(a) 
are listed in alphabetical order but not numbered individually.
    Eligible obligation.
    The final rule amends the definition of eligible obligation under 
Sec.  701.23(a) to clearly distinguish between an eligible obligation 
and a note held by a liquidating credit union. Current Sec.  701.23(a) 
defines the term ``eligible obligation'' broadly to mean a loan or 
group of loans, which includes the notes of a liquidating credit 
union.\83\ As explained in the part of the preamble on Sec.  
701.23(b)(4), the statutory 5-percent limitation on the aggregate of 
the unpaid balance of notes purchased under Sec.  701.23 applies only 
to notes of liquidating credit unions and not to eligible obligations 
as that term is generally used under section 107(13) \84\ of the Act. 
Accordingly, the final rule amends the definition of eligible 
obligation to clarify that the term does not include a note held by a 
liquidating credit union.\85\
---------------------------------------------------------------------------

    \83\ See, e.g., Sec. Sec.  701.23(b)(1)(ii), (b)(2)(ii), and 
(b)(4).
    \84\ Section 1757(13) (authorizing FCUs, in accordance with 
rules and regulations prescribed by the Board, to purchase, sell, 
pledge, or discount or otherwise receive or dispose of, in whole or 
in part, any eligible obligations (as defined by the Board) of its 
members and to purchase from any liquidating credit union notes made 
by individual members of the liquidating credit union at such prices 
as may be agreed upon by the board of directors of the liquidating 
credit union and the board of directors of the purchasing credit 
union, but no purchase may be made under authority of this paragraph 
if, upon the making of that purchase, the aggregate of the unpaid 
balances of notes purchased under authority of this paragraph would 
exceed 5 per centum of the unimpaired capital and surplus of the 
credit union[.]).
    \85\ The new definition of eligible obligation excludes notes 
held by a liquidating credit union.
---------------------------------------------------------------------------

    The final rule also amends the definition of eligible obligation to 
clarify that the term includes a whole loan or part of a loan. The NCUA 
has long held the position that the term ``eligible obligation'' 
includes loans, in whole or in part, provided the loan does not meet 
the definition of a loan participation under Sec.  701.22(a).\86\ The 
Board believes that the amended definition of an eligible obligation 
will provide clarity and reduce confusion in the credit union system 
concerning when a transaction involving a loan purchased in part (a 
partial loan) meets the regulatory definition of an eligible 
obligation. Many credit union officials find the current eligible 
obligations rule unclear, specifically when attempting to determine 
which rule applies to a loan purchased in part. The amended definition 
will help FCU officials to differentiate between transactions involving 
partial loan purchases that meet the definition of an eligible 
obligation under Sec.  701.23 and transactions involving partial loan 
purchases that meet the definition of a loan participation under Sec.  
701.22.
---------------------------------------------------------------------------

    \86\ See 78 FR 37946, 37948 (June 25, 2013) (providing in part 
as follows: ``[The introductory paragraph to Sec.  701.22] clarifies 
that the [section] applies to a [consumer] FICU's purchase of a loan 
participation where the borrower is not a member of that credit 
union. Generally, an FCU's purchase, in whole or in part, of its 
member's loan is covered by NCUA's eligible obligations rule at 
Sec.  701.23.'' The 2013 Final Rule also notes in FN 2 that there is 
``a limited exception for certain well-capitalized federal credit 
unions to purchase, subject to certain conditions, non-member 
eligible obligations from a FICU. 12 CFR 701.23(b)(2).''); see also, 
12 U.S.C. 1757(13) (providing in part that an FCU shall have power, 
``in accordance with rules and regulations prescribed by the Board, 
to purchase, sell, pledge, or discount or otherwise receive or 
dispose of, in whole or in part, any eligible obligations (as 
defined by the Board) of its members.'' (emphasis added)).
---------------------------------------------------------------------------

    Current Sec.  701.22(a) provides that loan participation means a 
loan where one or more eligible organizations participate pursuant to a 
written agreement with the originating lender, and the written 
agreement requires the originating lender's continuing participation 
throughout the life of the loan. For example, if an FCU purchases a 
partial loan that does not meet the definition of loan participation 
under amended Sec.  701.22(a), then the transaction may still be 
permissible provided it meets the definition of an ``eligible 
obligation'' under amended Sec.  701.23(a) and meets the requirements 
under that section.
    The final rule also amends the definition of ``eligible 
obligation'' to remove the words ``group of loans.'' The words are 
redundant because the term ``eligible obligation'' is used in its 
plural form, eligible obligations, throughout proposed and current 
Sec.  701.23 to indicate where the section authorizes or applies to the 
purchase of one or more loans. The Board believes removing the phrase 
``group of loans,'' in conjunction with the other changes discussed in 
this proposal, will clarify the definition of eligible obligation. 
Accordingly, for all the reasons discussed above, proposed Sec.  
701.23(a) would provide that eligible obligation means a whole loan or 
part of a loan (other than a note held by a liquidating credit union) 
that does not meet the definition of a loan participation under Sec.  
701.22(a).
Public Comments
    Four commenters specifically expressed support for the revised 
definition of eligible obligation as proposed. Two commenters 
recommended further clarifying the definition of eligible obligation. 
One of those commenters explained that further defining the term would 
allow credit unions the ability to understand the accounting and loss 
reserve ramifications on how the loan is sold. The commenter also asked 
the following two clarifying questions: (1) If a credit union sells a 
tranche in a portfolio of loans would this constitute an eligible 
obligation? And (2) what if a credit union sold just the interest 
portion of a loan?
Discussion
    The comments received on the revised definition of eligible 
obligation were generally supportive. Two commenters did request 
further clarifying the definition; however one commenter did not 
specify what aspects of the proposed definition were confusing or how 
the definition could be clarified. The other commenter asked questions, 
which are addressed below. Given the lack of objections to the proposed 
definition, other than general requests for further clarification, the 
Board is adopting the definition of eligible obligation as proposed for 
the reasons set forth in the notice of proposed rulemaking.
    Regarding the commenter's questions about selling a tranche in a 
portfolio of loans or only selling the interest receivable of a loan, 
the transaction must qualify for derecognition under generally accepted 
accounting principles (GAAP). Additionally, when a loan is sold in part 
under either Sec. Sec.  701.22 or 701.23 of the NCUA's regulations, the 
transaction must meet the definition of a participation interest under 
GAAP.\87\ This definition is applied at a loan level and not at the

[[Page 67587]]

portfolio level. If an interest in a loan is sold and does not meet the 
definition of a participation interest under GAAP, in general, the 
transaction must be recorded as a secured borrowing. To meet the 
definition of a participation interest under GAAP, the transferor 
generally must sell a pro-rata share of principal and interest, except 
for market-based servicing fees. While the commenter did not provide 
sufficient details in their questions for the Board to provide 
definitive answers, the transactions would likely not qualify as the 
sale of a participation interest under GAAP and, therefore, generally 
are not covered by either Sec. Sec.  701.22 or 701.23 of the NCUA's 
regulations. In general, the purchaser must record the asset regardless 
of whether the seller qualifies for derecognition under GAAP.
---------------------------------------------------------------------------

    \87\ Note that the definition of a participation interest under 
GAAP (see ASC 860-10-40-6A) is not the same as the definition of a 
loan participation under Sec.  701.22 of the NCUA's regulations.
---------------------------------------------------------------------------

    Liquidating credit union.
    The final rule adds a definition of liquidating credit union to 
Sec.  701.23(a) to identify the point in time when a credit union 
becomes a liquidating credit union for purposes of applying the 5-
percent limitation in Sec.  701.23(b)(4). The term ``liquidating credit 
union'' is used but not defined in current Sec.  701.23 because the 
section does not distinguish between eligible obligations and notes of 
liquidating credit unions for purposes of calculating the 5-percent 
limitation on the aggregate of the unpaid balance of loans purchased 
under current Sec.  701.23(b)(1) and (b)(2)(ii). As explained in more 
detail later in the part of the preamble about proposed Sec.  
701.23(b)(4), under this final rule, the 5-percent limitation applies 
only to notes purchased from liquidating credit unions, making it 
necessary for the NCUA to specify the point in time when a credit union 
meets the definition of a liquidating credit union. Consistent with 
Congress' use of the broad term ``credit union'' in section 107(13) of 
the FCU Act, the definition of liquidating credit union would include 
both liquidating FICUs and liquidating credit unions not insured by the 
NCUA.\88\
---------------------------------------------------------------------------

    \88\ See Section 1757(13) (providing authority ``to purchase 
from any liquidating credit union notes made by individual members 
of the liquidating credit union at such prices as may be agreed upon 
by the board of directors of the liquidating credit union and the 
board of directors of the purchasing credit union, but no purchase 
may be made under authority of this paragraph if, upon the making of 
that purchase, the aggregate of the unpaid balances of notes 
purchased under authority of this paragraph would exceed 5 per 
centum of the unimpaired capital and surplus of the credit union;'' 
(emphasis added).).
---------------------------------------------------------------------------

    Accordingly, the final rule provides that liquidating credit union 
means, (1) in the case of a voluntary liquidation, a credit union is a 
liquidating credit union as of the date the members vote to approve 
liquidation; and (2) in the case of an involuntary liquidation, a 
credit union is a liquidating credit union as of the date the board of 
directors is served an order of liquidation issued by either the NCUA 
or the state supervisory authority.
Public Comments
    Four commenters expressed general support for adding the proposed 
definition of liquidating credit union.
Discussion
    Given the support received from commenters, and the lack of 
objections, the Board is adopting the definition of liquidating credit 
union as proposed.
    Should other terms be defined? The Board requested comment on 
whether there are additional terms used in Sec.  701.23, such as 
``empowered to grant,'' that it should consider defining or further 
clarifying in future rulemakings.
Public Comments
    Two commenters responded that the NCUA should not define the term 
``empowered to grant.'' One of the commenters explained that the term 
should remain undefined so it can be sufficiently flexible to fully 
incorporate credit unions' currently recognized lending authorities and 
all those the NCUA recognizes in the future. On the other hand, one 
commenter responded that the term ``empowered to grant'' should be 
defined. The commenter explained that the term has a particular bearing 
on credit union activity under Sec.  701.22 and Sec.  701.23 and has 
been addressed in several NCUA legal opinion letters over the years. 
The commenter recommended that the NCUA solicit specific feedback on 
what should and should not fall within the scope of ``empowered to 
grant.''
    One commenter asked that the NCUA define the term ``notes'' to 
avoid any future confusion regarding the purchase of notes of 
liquidating credit unions. Another commenter specifically recommended 
the term ``notes'' not be defined or clarified further.
Discussion
    The Board appreciates the detailed comments submitted regarding 
defining additional terms in Sec.  701.23. While the comments received 
in this area go beyond the scope of this rulemaking, the comments will 
be retained for consideration by the NCUA during future rulemakings 
relating to the purchase, sale, and pledge of eligible obligations and 
notes of liquidating credit unions.
    In October 2004, the NCUA issued a legal opinion letter explaining 
that ``the phrase `empowered to grant' as used in [the] NCUA's 
regulations refers to the authority of an FCU to make the type of loans 
permitted by the [FCU Act], NCUA regulations, FCU Bylaws, and its own 
internal policies.'' \89\ The letter goes on to explain that the phrase 
``empowered to grant'' does not include a membership requirement.\90\
---------------------------------------------------------------------------

    \89\ OGC Op. 04-0713 (Oct. 25, 2004); see also OGC Op. 02-0824 
(Nov. 5, 2002) (noting that an FCU is not empowered to grant a loan 
with a prepayment penalty); and OGC Op. 01-1023 (Nov. 28, 2001) 
(noting that if an FICU meets all other requirements of the NCUA's 
regulations, the fact that the credit union has not itself granted 
the type of loan in question does not mean it is not empowered to 
grant such a loan.).
    \90\ Id.
---------------------------------------------------------------------------

Section 701.23(b) Purchase of Loans

    Current Sec.  701.23(b) would be amended, as discussed in more 
detail later in this preamble, to make certain substantive changes and 
to implement clarifying and conforming changes consistent with 
amendments to other subsections. The final rule amends the heading to 
current Sec.  701.23(b) to clarify which transactions are covered under 
the paragraph. The Board believes that this would result in only a 
minor technical change to current Sec.  701.23(b). The heading for 
current paragraph (b) is ``Purchase.'' The final rule adds the words 
``of loans'' after the word ``purchase'' to better clarify the type of 
transactions this section would apply to, that being the purchase of 
loans. Accordingly, the paragraph heading for proposed Sec.  701.23(b) 
would be revised to read ``Purchase of loans.''

Section 701.23(b)(1)

Section 701.23(b)(1)(ii)

    Current Sec.  701.23(b)(1)(ii) authorizes FCUs to purchase certain 
eligible obligations of a liquidating credit union's individual members 
from the liquidating credit union. As explained previously in the part 
of the preamble on Sec.  701.23(a) regarding the definition of eligible 
obligation, notes of liquidating credit unions would no longer be 
included within the definition of eligible obligations. Consistent with 
that change, this final rule amends current Sec.  701.23(b)(1)(ii) to 
remove the references to eligible obligations and authorize FCUs to 
purchase notes of a liquidating credit union's individual members from 
the liquidating credit union. Accordingly, Sec.  701.233(b)(1)(ii) is 
amended to provide that an FCU may, subject to the requirements in 
Sec.  701.23, purchase notes of a liquidating credit union's individual 
members, from the liquidating credit union.

[[Page 67588]]

Public Comments
    One commenter suggested that it understands keeping the 5-percent 
limitation on the purchase of these types of notes but believed the 
limitation could be eliminated because of (a) the relative rarity of 
liquidations, and (b) the NCUA's role in approval of purchase and 
assumption transactions to select those who can manage safety and 
soundness concerns.
Discussion
    Section 107(13) of the FCU Act, which authorizes the purchases of 
notes of a liquidating credit union's members, provides that no 
purchase may be made under authority of this paragraph if, upon the 
making of that purchase, the aggregate of the unpaid balances of notes 
purchased under authority of this paragraph would exceed 5 per centum 
of the unimpaired capital and surplus of the credit union. Accordingly, 
the Board is adopting the changes to Sec.  701.23(b)(4) and retaining 
the 5-percent limitation as proposed for the reasons set forth in the 
notice of proposed rulemaking.

Section 701.23(b)(1)(iv)

    The word ``mortgage'' is misspelled in the first sentence of 
current Sec.  701.23(b)(1)(iv). The final rule amends Sec.  
701.23(b)(1)(iv) to correct that misspelling. No substantive changes 
are made to current paragraph (b)(1)(iv).

Section 701.23(b)(2) Purchase of Obligations From a FICU

    The final rule amends current Sec.  701.23(b)(2) to remove the 
CAMELS rating requirement and the capital classification requirements 
in the introductory paragraph. Current Sec.  701.23(b)(2) provides that 
an FCU that received a composite CAMELS rating of ``1'' or ``2'' for 
the last two (2) full examinations and maintained a capital 
classification of ``well capitalized'' under part 702 of the chapter 
for the six (6) immediately preceding quarters may purchase and hold 
certain obligations, provided that it would be empowered to grant them. 
The final rule provides FCUs additional authority to purchase loans by 
removing the CAMELS rating and capital classification requirements.
    The CAMELS rating and capital classification requirements were 
added to the NCUA's regulations as part of a 2001 final rule regarding 
the NCUA's RegFlex program.\91\ The 2001 final rule explained, in 
response to commenters suggestions that the requirements be removed, as 
follows:
---------------------------------------------------------------------------

    \91\ 66 FR 58656 (Nov. 23, 2001).

    The Board continues to believe that CAMEL ratings and net worth 
ratios are the best measures of how well a credit union is managed 
and how much risk it presents to the NCUSIF and the credit union 
system. That is, consistent with safety and soundness concerns, 
credit unions with advanced levels of net worth and consistently 
strong supervisory examination ratings have earned exemptions from 
certain NCUA Regulations.\92\
---------------------------------------------------------------------------

    \92\ 66 FR 58656.

    FCUs have generally managed their loan purchase, sale, and pledge 
activity well since the addition of the CAMELS and capital requirements 
and continue to do so. Approximately 12 percent of FCUs were engaged in 
the purchase, sale, or pledge of loans during 2022.\93\
---------------------------------------------------------------------------

    \93\ NCUA Call Report data for all FCUs as of the 2nd quarter of 
2022.
---------------------------------------------------------------------------

    Additionally, the Board notes that this purchase authority is 
limited to purchases from a FICU. Therefore, the loans able to be 
purchased under this authority are already in the federally insured 
credit union system. Moving the obligation from one FICU to another 
FICU generally is not expected to result in a significant increase to 
the Share Insurance Fund's risk exposure.
    Further, the current CAMELS and net worth restrictions are only 
applicable to a small segment of the credit union system given that the 
vast majority of FCUs have a CAMELS composite rating of 1 or 2 and are 
well-capitalized.\94\ Expansion of this authority would allow slightly 
more FCUs to purchase obligations from a FICU, potentially creating 
additional revenue and capital for the purchaser and providing an 
additional outlet for selling FICUs, creating additional liquidity 
channels in the credit union system.
---------------------------------------------------------------------------

    \94\ As of June 30, 2023, over 97 percent of FCUs were well-
capitalized. Additionally, 78.5 percent of FCUs were rated a CAMELS 
composite 1 or 2 and these credit unions represented 95 percent of 
total FCU assets.
---------------------------------------------------------------------------

    The NCUA believes any increased risk associated with removing the 
CAMELS rating and capital classification requirements in current Sec.  
701.23 would also be minimized by the addition of the proposed 
principles-based due diligence, risk assessment, and risk management 
requirements. Accordingly, the final rule amends the introductory 
paragraph to Sec.  701.23(b)(2) to provide that an FCU may purchase and 
hold certain obligations if it would be empowered to grant them.
Public Comments
    Twenty-six commenters offered their support for eliminating the 
CAMELS rating and capital classification requirements for the reasons 
provided in the proposal. One commenter suggested the change would 
allow a greater flow of funds between FCUs and FISCUs. The commenter 
suggested further that credit unions with CAMELS ratings of three and 
lower are negatively impacted by their current inability to access this 
market and allowing purchases of these obligations will help move them 
into a higher CAMELS rating. Another commenter suggested the proposed 
change will allow more FCUs to purchase obligations from a FICU, 
potentially creating additional revenue and capital for the purchaser 
and providing an additional outlet for selling FICUs, creating 
additional liquidity channels in the credit union system. Several 
commenters suggested that the proposed change will make sure smaller 
credit unions can also gain access to these loans and obtain some much-
needed additional return on assets. The commenters also suggested the 
proposed change will allow larger credit unions to manage balance sheet 
risk by selling some of these loans to other credit unions without 
jeopardizing their relationships with non-credit union originators.
Discussion
    Given the strong support expressed by commenters, and the lack of 
objections, the Board is adopting the changes to Sec.  701.23(b)(2) as 
proposed for the reasons set forth in the notice of proposed 
rulemaking.

Section 701.23(b)(2)(ii) Notes of a Liquidating Credit Union

    Current Sec.  701.23(b)(2)(ii) authorizes FCUs to purchase certain 
eligible obligations of a liquidating credit union without regard to 
whether they are obligations of the liquidating credit union's 
individual members. As explained earlier in the part of the preamble on 
Sec.  701.23(a) regarding the definition of eligible obligation, under 
this final rule notes of liquidating credit unions would no longer be 
included within the definition of eligible obligation. Consistent with 
that change, this final rule amends current Sec.  701.23(b)(2)(ii) to 
remove the words ``eligible obligations'' and ``obligations'' and 
authorize FCUs to purchase notes of a liquidating credit union without 
regard to whether they are notes of the liquidating credit union's 
individual members.

Section 701.23(b)(3)

Section 701.23(b)(3)(ii)

    The final rule amends the requirement in current Sec.  
701.23(b)(3)(ii) that written agreements and schedules of loans be 
retained by the purchaser. Current Sec.  701.23(b)(3)(ii) provides that 
a written agreement and a schedule of the eligible obligations covered 
by the

[[Page 67589]]

agreement are retained in the purchaser's office. Under the final rule, 
the purchasing FCU must still retain the written loan purchase 
agreement and a schedule of the eligible obligations covered by the 
agreement but is no longer required to retain the documents in the 
purchaser's office.
    The Board acknowledges the requirement for the FCU to retain the 
written loan purchase agreement and schedule of the eligible 
obligations in the purchaser's office could imply that the written loan 
purchase agreement and schedule be retained in a hard-copy format, 
which is outdated given the current digital environment. An FCU might 
choose to store its records in electronic format, in the cloud, or 
housed in off-site servers or databases. An FCU must still make the 
loan purchase agreement and schedule of the eligible obligations 
covered by the agreement available upon request by the NCUA.\95\ Credit 
unions that have some or all of their records maintained by an off-site 
data processor are considered to be in compliance for the storage of 
those records if the service agreement specifies the data processor 
safeguards against the simultaneous destruction of production and back-
up information.\96\ Accordingly, Sec.  701.23(b)(3)(ii) of the final 
rule provides that a written agreement and a schedule of the eligible 
obligations covered by the agreement are retained by the purchaser.
---------------------------------------------------------------------------

    \95\ See Sec.  749.2.
    \96\ See appendix A to part 749.
---------------------------------------------------------------------------

    This change will align this requirement with the NCUA's regulations 
and guidelines for FICUs on records preservation programs. Under part 
749, the NCUA does not require or recommend a particular format for 
record retention. If the credit union stores records on microfilm, 
microfiche, or in an electronic format, the stored records must be 
accurate, reproducible, and accessible to an NCUA examiner.\97\ If 
records are stored on the credit union premises, they should be 
immediately accessible upon the examiner's request; if records are 
stored by a third party or off site, then they should be made available 
to the examiner within a reasonable time after the examiner's 
request.\98\ The credit union must maintain the necessary equipment or 
software to permit an examiner to review and reproduce stored records 
upon request. The credit union should also ensure that the reproduction 
is acceptable for submission as evidence in a legal proceeding.\99\
---------------------------------------------------------------------------

    \97\ See 12 CFR 749.5.
    \98\ 12 CFR part 749, app. A.
    \99\ See generally part 749; and NCUA Legal Op. 07-0812 (Jan. 
2008), available at https://www.ncua.gov/regulation-supervision/legal-opinions/2008/electronic-retention-records.
---------------------------------------------------------------------------

Public Comments
    Two commenters specifically offered support for aligning the 
requirements in Sec. Sec.  701.23(b)(3)(ii), (c)(2), and (d)(1)(iii) 
with the electronic record availability and preservation standards 
outlined in part 749 of the NCUA's regulations.
Discussion
    Given the strong support expressed by commenters, and the lack of 
objections, the Board is adopting the changes to Sec.  
701.23(b)(3)(ii), (c)(2), and (d)(1)(iii) as proposed for the reasons 
set forth in the notice of proposed rulemaking. Note also that current 
Sec.  749.5 provides that, where NCUA regulations require credit unions 
to retain certain writings, records or information, credit unions may 
use any format that accurately reflects the information in the record, 
is accessible to all persons entitled to access by statute, regulation 
or rule of law, and is capable of being reproduced by transmission, 
printing, or otherwise. Section 749.5 provides further that the credit 
union must maintain the necessary equipment or software to permit an 
examiner to access the records during the examination process.

Section 701.23(b)(4)

    The final rule amends current Sec.  701.23(b)(4), which limits the 
aggregate unpaid balance of certain eligible obligations purchased by 
an FCU to a maximum of 5 percent of the FCU's unimpaired capital and 
surplus. Under the final rule, the 5-percent limitation applies solely 
to notes of a liquidating credit union purchased by an FCU from the 
liquidating credit union. As discussed in the following paragraphs, the 
Board has determined this change would remove a regulatory limit to the 
purchase of eligible obligations that the FCU Act does not require. The 
Board believes adequate safety and soundness of eligible obligations 
purchases can be accomplished through principles-based regulation 
rather than a one-size-fits-all limitation.
    Section 701.23 provides both the regulatory authority for purchases 
of eligible obligations by an FCU and the limitations. Under the 
current rule, the 5-percent limitation applies to eligible obligations 
purchased by an FCU under Sec.  701.23(b)(1) and (b)(2)(ii). In 
general, current paragraph (b)(1) authorizes an FCU to purchase (1) 
eligible obligations of its members; (2) eligible obligations of a 
liquidating credit union's members from the liquidating credit union; 
and (3) student loans and real estate-secured loans from any source to 
facilitate the purchasing FCU's packaging of a pool of such loans to be 
sold or pledged on the secondary market. Current paragraph (b)(2)(ii), 
which is on purchases from FICUs, authorizes an FCU to purchase the 
``eligible obligations of a liquidating credit union without regard to 
whether they are obligations of the liquidating credit union's 
members.''
    The statutory source of the 5-percent limitation is section 107(13) 
of the Act.\100\ Section 107 generally enumerates the powers of FCUs, 
and paragraph (13) authorizes an FCU to make certain loan purchases. 
Specifically, paragraph (13) provides the following authority, 
verbatim: in accordance with rules and regulations prescribed by the 
Board, to purchase, sell, pledge, or discount or otherwise receive or 
dispose of, in whole or in part, any eligible obligations (as defined 
by the Board) of its members and to purchase from any liquidating 
credit union notes made by individual members of the liquidating credit 
union at such prices as may be agreed upon by the board of directors of 
the liquidating credit union and the board of directors of the 
purchasing credit union, but no purchase may be made under authority of 
this paragraph if, upon the making of that purchase, the aggregate of 
the unpaid balances of notes purchased under authority of this 
paragraph would exceed 5 per centum of the unimpaired capital and 
surplus of the credit union.\101\
---------------------------------------------------------------------------

    \100\ 12 U.S.C. 1757(13).
    \101\ Id. (emphasis added).
---------------------------------------------------------------------------

    Section 107(13) applies to the purchase of two mutually exclusive 
categories of loans-- ``eligible obligations'' (as that term may be 
defined by the Board) of the purchasing FCU's members and the ``notes'' 
of a liquidating credit union made to the liquidating credit union's 
members. The 5-percent limitation, however, applies solely to the 
second category of loans; that is, the notes of a liquidating credit 
union to its members. The statutory language specifies that ``no 
purchase may be made . . . if, upon the making of that purchase, the 
aggregate of the unpaid balances of notes purchased under authority of 
this paragraph would exceed 5 per centum of the unimpaired capital and 
surplus of the credit union.'' \102\ The 5-percent limitation is 
specific to the ``aggregate unpaid

[[Page 67590]]

balances of notes'' \103\ purchased ``under authority of this 
paragraph'' (that is, paragraph (13) of section 107). As italicized in 
the preceding quotes, the only notes authorized to be purchased 
pursuant to section 107(13) are those of a liquidating credit union to 
its members. Notwithstanding the ambiguity introduced by the reference 
to the entire ``paragraph'' (13) in the context of the 5-percent 
limitation, the following term ``notes'' narrows the required scope of 
its application to purchases from a liquidating credit union.
---------------------------------------------------------------------------

    \102\ Emphasis added.
    \103\ Emphasis added.
---------------------------------------------------------------------------

    Despite the statutory wording, current Sec.  701.23 does not 
distinguish between eligible obligations and notes. Section 107(13) of 
the FCU Act empowers the NCUA to define the term ``eligible 
obligation.'' The NCUA has exercised this discretion by opting to 
jointly treat notes and other eligible obligations as the same type of 
instrument under its regulations. Both are encompassed in the 
regulatory definition of the term ``eligible obligation,'' which is 
defined to be ``a loan or group of loans.'' \104\ Under the final rule, 
the 5-percent limitation applies solely to an FCU's purchase of the 
notes of a liquidating credit union. The limitation will not apply to 
other loans purchased by an FCU under the authority of section 107(13).
---------------------------------------------------------------------------

    \104\ 12 CFR 701.23(a).
---------------------------------------------------------------------------

    The final rule also amends the definition of eligible obligations 
to reflect the revised scope of the 5-percent limitation. As discussed 
previously, the final rule revises the definition of eligible 
obligation to mean ``a whole loan or part of a loan (other than a note 
held by a liquidating credit union) that does not meet the definition 
of a loan participation under Sec.  701.22(a).'' \105\
---------------------------------------------------------------------------

    \105\ Under the current definition of eligible obligation, there 
may be instances where the notes of the liquidating credit union 
members are also eligible obligations of the members of the 
purchasing FCU. The 5-percent limitation will apply to these loans 
as they fall within the more specific category of eligible 
obligations purchased from a liquidating credit union.
---------------------------------------------------------------------------

    The Board acknowledges that the current scope of the 5-percent 
limitation reflects or implies an alternate legal reading of the 
statutory language, which the Board recognizes as a plausible reading. 
The alternate reading hinges on the language providing that ``no 
purchase may be made under authority of this paragraph.'' The term 
``this paragraph'' encompasses paragraph (13) of section 107 in its 
entirety. This reading applies the 5-percent limitation to all 
instruments (eligible obligations and notes) purchased pursuant to 
paragraph (13). The current regulation reflects such an interpretation, 
and the Board has made past statements in support of this reading.\106\ 
This rulemaking constitutes a reconsideration of the NCUA's prior 
position. As noted, the NCUA has determined that the regulatory change 
made by this final rule is more consistent with the language of the FCU 
Act and is more aligned with the different safety and soundness 
considerations with respect to eligible obligations in general and 
notes purchased from a liquidating credit union.
---------------------------------------------------------------------------

    \106\ For example, the preamble to the 1979 final rule 
implementing the NCUA's eligible obligations authority contained the 
following statement: ``The Administration feels that the language of 
Section 107(13) is clear, and that the best interpretation is that 
adopted in the proposed rule'' (that is, the currently codified 
regulatory text). 44 FR 27068, 27070 (May 9, 1979).
---------------------------------------------------------------------------

    This new reading is better supported by accepted canons of 
statutory construction. The statutory construction canon of 
``consistent usage'' logically presumes that different words denote 
different ideas.\107\ Accordingly, the use of the terms ``eligible 
obligations'' and ``notes'' is intended to distinguish between two 
mutually exclusive categories of loans. Further, the canon holds that 
``a word or phrase is presumed to bear the same meaning throughout a 
text.'' \108\ The use of the word ``notes'' in paragraph 107(13) is 
appropriately interpreted consistently and exclusively to reference 
only notes made by a liquidating credit union to its members.
---------------------------------------------------------------------------

    \107\ Antonin Scalia & Bryan A. Garner, Reading Law: The 
Interpretation of Legal Texts, 148 (2012).
    \108\ Id.
---------------------------------------------------------------------------

    This reading also aligns with the ``surplusage'' canon of statutory 
interpretation. Under this canon, ``every word and every provision is 
to be given effect if possible.'' \109\ ``No word should be ignored. 
None should needlessly be given an interpretation that causes it to 
duplicate another provision or have no consequence.'' \110\ This 
interpretation accounts for language subsequent to ``under authority of 
this paragraph'' that modifies the clause's scope. This subsequent 
language specifies that the prohibition applies only ``if, upon the 
making of that purchase, the aggregate of the unpaid balances of notes 
purchased under authority of this paragraph would exceed 5 per centum 
of the unimpaired capital and surplus of the credit union.'' Thus, the 
limit's application is required only with respect to the purchase of 
``notes,'' which, as stated previously, is appropriately narrowed to 
solely cover loans made by liquidating credit unions to their members. 
Reading the statute to require application of the 5-percent limitation 
to ``eligible obligations'' conflates the terms ``notes'' and 
``eligible obligations,'' despite the different terminology Congress 
enacted. The effect of treating the terms as duplicative is to 
effectively ignore the use of the term ``notes,'' which should be 
separately considered under the surplusage canon.
---------------------------------------------------------------------------

    \109\ Id. at 145.
    \110\ Id.
---------------------------------------------------------------------------

    It also bears noting that the stated rationale for original 
enactment of the 5-percent limitation does not apply to the purchase of 
eligible obligations. The 5-percent limitation language in section 
107(13) of the Act was added by Congress in 1968 and referred solely to 
notes of liquidating credit unions at that time because that statute 
did not refer to purchases of eligible obligations.\111\ That language 
is identical to the current version of the statutory text and continues 
to refer solely to ``notes'' of liquidating credit unions. Prior to the 
amendment, FCUs lacked express statutory authority to purchase the 
loans of liquidating credit unions. As a result, liquidating credit 
unions were hampered in their efforts to dispose of their assets to 
repay their members. The Senate report accompanying the legislation 
explained that the change would ``greatly increase the market for the 
notes of liquidating credit unions and will prevent liquidating credit 
unions from having to go outside the credit union movement to liquidate 
their assets.'' \112\ However, Congress was also mindful of the risks 
that might be posed in purchasing the loans of credit unions compelled 
to liquidate due to poor management decisions.\113\ As a result, it 
opted to limit the ability of an FCU to purchase notes of liquidating

[[Page 67591]]

credit unions to 5 percent of its unimpaired capital and surplus.\114\
---------------------------------------------------------------------------

    \111\ Public Law 90-375 (approved July 5, 1968) (Providing 
authority, in accordance with rules and regulations prescribed by 
the Director, to purchase from any liquidating credit union notes 
made by individual members of the liquidating credit union at such 
prices as may be agreed upon by the board of directors of the 
liquidating credit union and the board of directors of the 
purchasing credit union, but no purchase may be made under authority 
of this paragraph if, upon the making of that purchase, the 
aggregate of the unpaid balances of notes purchased under authority 
of this paragraph would exceed 5 per centum of the unimpaired 
capital and surplus of the credit union. (emphasis added)).
    \112\ S. Rep. No. 1265, 90th Cong., 2d Sess., at 2 (June 18, 
1968).
    \113\ Statement of J. Deane Gannon, Director, Bureau of Federal 
Credit Unions, Social Security Administration, Department of Health, 
Education and Welfare, FCU Act Amendments, Subcommittee on Financial 
Institutions of the Comm. on Banking and Currency, at 11-12 (May 24, 
1968).
    \114\ H.R. Rep. No. 1372 (May 9, 1968).
---------------------------------------------------------------------------

    The express authority to purchase eligible obligations was later 
added to the text of section 107(13) in 1977.\115\ The legislative 
history from that time shows the amendment was intended to provide FCUs 
with flexibility to use secondary market facilities to enhance 
liquidity, especially in relation to real estate loans.\116\ The 
purchase by an FCU of loans made to its own members is not analogous 
to, and does not pose the same inherent risk that, purchasing the notes 
of a liquidating credit union does. Accordingly, it is reasonable that 
Congress would elect not to mandate a limit on the ability of an FCU to 
make such purchases. This supposition is supported by Congress' 
decision to use the new term ``eligible obligations'' (and in granting 
the NCUA broad authority to define this term), rather than simply 
revising the existing scope of the term ``notes'' to include member 
loans. Further, the legislative history accompanying enactment of the 
1977 amendments does not make any mention of the 5-percent limitation 
being applicable to eligible obligations.
---------------------------------------------------------------------------

    \115\ Public Law 95-22 (approved Apr. 19, 1977).
    \116\ H.R. Rep. No. 95-23, at 16 (Feb. 22, 1977).
---------------------------------------------------------------------------

    The 1977 legislative history in several instances also refers to 
the amendment granting FCUs the ability to purchase the ``notes'' of 
its members. One could infer from this that the term ``eligible 
obligations'' was intended to be read synonymously with ``notes.'' 
\117\ This reading appears at least plausible because the broad 
category of ``notes'' could be seen to encompass various debt 
instruments, including notes or written documents evidencing a member's 
eligible obligations. Such a reading, however, is not required and is 
inferior to the interpretation the Board is proposing in this rule for 
two reasons. First, Congress ultimately opted to use the term 
``eligible obligations'' in the statutory amendment that was enacted. 
The codified text supersedes non-binding statements in the legislative 
record.\118\ Second, and as discussed earlier, accepted canons of 
statutory construction favor an interpretation that provides individual 
terms with their own individual meaning.
---------------------------------------------------------------------------

    \117\ See, for example, 123 Cong. Rec. H 1521-32, at H-1524 
(Daily ed. March 1, 1977) (Describing the amendment as providing for 
the ``Purchase and sale of notes of members.''); H.R. Rep. No. 95-
23, at 16 (Feb. 22, 1977) (also describing amendment as pertaining 
to the ``Purchase and sale of notes''); and Statement of C. Austin 
Montgomery, Administrator, National Credit Union Administration 
Before the Subcommittee on Financial Institutions Supervision, 
Regulation and Insurance Committee on Banking, Finance, and Urban 
Affairs, House of Representatives, 95th Cong. 27 (1977) (``Temporary 
liquidity problems experienced by credit unions might be resolved by 
selling or pledging notes'').
    \118\ Scalia & Garner, supra note 7 at 64 (``[T]he purpose must 
be derived from the text, not from extrinsic sources such as 
legislative history or an assumption about the legal drafter's 
desires'').
---------------------------------------------------------------------------

    For the preceding reasons, the NCUA has determined that the 
regulatory change made by this final rule is more consistent with the 
language of the FCU Act. The NCUA also has determined that the 
amendment will not pose a safety and soundness risk due to the addition 
of principles-based risk management requirements. By amending the 
current rule to narrow the application of the 5-percent limitation to 
the aggregate of the unpaid balances of loans purchased from any source 
to instead apply to only the ``notes'' of a liquidating credit union, 
the Board intends to allow FCUs greater capacity, flexibility, and 
individual autonomy to establish their own risk tolerance limits for 
the amount of the loans of its members that can be purchased from any 
source other than a liquidating credit union. This includes other 
financial institutions, fintech companies, third-party loan acquisition 
channels such as CUSOs, and other loan-originating retailers.
    While the narrower interpretation of section 107(13) of the Act 
will remove the existing limit on the amount of eligible obligations 
that an FCU could purchase, establishing risk management expectations 
will reduce potential risk to the Share Insurance Fund while allowing 
FCUs more flexibility in how they manage their eligible obligation 
purchase activities. New Sec.  701.23(b)(6), which is discussed in 
detail later in the part of the preamble on paragraph (b)(6), would 
outline minimum risk management standards that must be included in the 
written loan purchase policy for any FCU that plans to purchase 
eligible obligations. The Board believes these risk management 
standards should be part of the normal business practices at well-run 
FCUs that engage in the purchase of eligible obligations and, as such, 
should not represent an additional burden. It is the Board's view that 
the proposed changes would allow well-run FCUs more autonomy and 
flexibility in how they conduct their business. Provided the FCU can 
demonstrate and document that its loan purchase activity does not 
present a material risk to the viability or solvency of the FCU through 
the standards established in Sec.  701.23(b)(6), the FCU should be able 
to establish its own internal standards to meet its business needs and 
the needs of its members.
    The final rule amends current Sec.  701.23(b)(4) to remove the 
exclusions provided in paragraphs (b)(4)(i) through (iv) and revises 
the current language to apply the 5-percent limit only to notes 
purchased from liquidating credit unions. While the narrower 
interpretation of section 107(13) of the FCU Act will remove the 
existing restriction on the amount of eligible obligations an FCU could 
purchase, the new risk management requirements will minimize the 
potential increase in risk to the Share Insurance Fund, while allowing 
FCUs more flexibility in how they manage their loan purchase 
activities. Accordingly, Sec.  701.23(b)(4) is revised to provide that 
the aggregate of the unpaid balance of notes purchased under paragraphs 
(b)(1)(ii) and (b)(2)(ii) of Sec.  701.23 shall not exceed 5 percent of 
the unimpaired capital and surplus of the purchaser.
    The Board invited comments concerning the proposed narrowing the 
application of the 5-percent limitation to only apply to the aggregate 
amount of ``notes'' that can be purchased by an FCU from a liquidating 
credit union.
Public Comments
    Twenty-seven commenters specifically offered support for narrowing 
the 5-percent limitation to cover only notes of liquidating credit 
unions for the reasons provided in the proposal. Three commenters 
suggested the proposed change will allow credit unions, possibly 
through CUSOs and other collaborations, to build strong relationships 
with fintech companies, giving FICUs more tools to allow them to be a 
part of the lending system as it has evolved with the use of 
technology.
Discussion
    Given the strong support expressed by commenters, and the lack of 
objections, the Board is adopting the changes to Sec.  701.23(b)(4) as 
proposed for the reasons discussed earlier and in the notice of 
proposed rulemaking.

Section 701.23(b)(5) Grandfathered Purchases

    The final rule amends current Sec.  701.23(b)(5) to broaden the 
grandfathering provision in paragraph (b)(5). Current Sec.  
701.23(b)(5) provides that, subject to safety and soundness 
considerations, an FCU may hold any of the loans described in paragraph 
(b)(2) of this section provided it was authorized to purchase the loan 
and purchased the loan before July 2, 2012. The Board believes the 
revisions made by this final rule will avoid placing undue burden on 
FCUs that were operating in compliance with the

[[Page 67592]]

existing rule and avoid disrupting the existing eligible obligations 
market by forcing widespread divestments of the eligible obligations 
currently held in FCU loan portfolios. While the grandfathering 
provision will allow FCUs to continue to hold eligible obligations that 
were purchased prior to the effective date of this rule, it does not 
exempt FCUs from conducting and updating risk assessments, establishing 
concentration limits, or monitoring the ongoing condition of an FCU's 
eligible obligation loan portfolio.
    Accordingly, the final rule amends Sec.  701.23(b)(5) to provide 
that, subject to safety and soundness considerations, an FCU may hold 
any of the loans described in paragraph (b) of this section that were 
acquired before the effective date of the final rule approved by the 
Board; provided the transaction complied with Sec.  701.23 at the time 
the transaction was executed.
Public Comments
    One commenter specifically offered support for the proposed 
revisions to Sec.  701.23(b)(5). The commenter stated that FCUs that 
have operated in compliance with the recently expired Sec.  701.23(i) 
and the NCUA's other regulatory requirements should not be forced to 
divest from their prudently purchased eligible obligations.
Discussion
    Given the support expressed above, and the lack of objections, the 
Board is adopting the changes to Sec.  701.23(b)(5) as proposed for the 
reasons set forth in the notice of proposed rulemaking.

New Sec.  701.23(b)(6)

    The final rule adds new paragraph (b)(6) to Sec.  701.23, which 
sets forth basic due diligence, risk assessment, and risk management 
requirements that must be addressed in an FCU's internal written 
purchase policies.\119\ An FCU's board of directors is responsible for 
planning, directing, and controlling the FCU's activities. To fulfill 
these duties, the board of directors must establish adequate policies 
to ensure the credit union operates safely and soundly and in 
compliance with applicable laws and regulations. The introductory 
paragraph to new Sec.  701.23(b)(6) provides that the purchases of 
eligible obligations and notes of liquidating credit unions must comply 
with the purchasing FCU's internal written purchase policies, which 
must contain certain provisions.
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    \119\ A credit union's written loan purchase policies may be 
incorporated into the written lending policies required under Sec.  
741.3(b)(2).
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    The specific policy requirements, which are discussed in detail 
below, are part of the basic fiduciary responsibilities and duties 
required of boards of directors.\120\ The requirements in the final 
rule address the basic elements necessary to administer a safe and 
sound loan purchase program.
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    \120\ See Sec. Sec.  701.4(b)(4), 701.21(c)(2), and 741.3(b)(2).
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    As discussed previously, the Board is adding new requirements under 
Sec.  701.23(b)(6) to mitigate the risk of removing certain regulatory 
limits on the purchase of loans by FCUs. The requirements are crafted 
to promote safe and sound loan purchase programs, which are intended to 
protect credit unions and the Share Insurance Fund. These requirements 
continue the Board's long-standing expectations for FCUs that purchase 
loans to appropriately identify and mitigate undue risk, while also 
providing FCUs greater flexibility to establish their own risk 
tolerance limits. These requirements are intended to mitigate 
unintended consequences related to the removal of the prescriptive 
requirements in current Sec.  701.23(b)(2). The prescriptive 
requirements in current paragraph (b)(2), in some cases, resulted in 
FCUs managing their lending practices and balance sheets to regulatory 
restrictions instead of broader considerations for safe and sound 
lending practices.
    The new requirements added by this final rule provide credit unions 
with expanded flexibility to develop loan purchase policies that are 
commensurate with the size, scope, type, complexity, and level of risk 
posed by the planned loan purchase activities. The new requirements are 
intended to provide principles-based requirements that are useful for 
credit unions of any size or complexity to implement the appropriate 
level of due diligence, risk assessment, and management.
    When determining whether to start a loan purchase program and 
developing related written policies, credit unions should consider 
whether the loan purchase activities being contemplated are consistent 
with the FCU's overall business strategy and risk tolerances and 
financial and operational capabilities. Loan purchase, sale, or pledge 
activities that are inconsistent with the FCU's risk tolerance levels, 
represent undue risk in relation to the credit union's financial 
capacity, or beyond management's ability to manage can pose material 
risks to an FCU's financial or operational condition.
    The risk management expectations outlined in this final rule 
reflect key components of long-standing supervisory expectations as 
communicated to credit unions through NCUA Letters to Credit Unions 
(LCU), Supervisory Letters, and the Examiner's Guide.
    The Board requested comment on the following: (1) The new written 
purchase policy requirements in paragraph (b)(6) of the rule; (2) the 
principles-based due diligence, risk assessment, and risk management 
requirements and whether they are sufficient to offset the risk 
associated with removing the CAMELS rating and ``well capitalized'' 
requirements for a credit union to purchase and hold eligible 
obligations from a FICU; and (3) whether there are other principles-
based safety and soundness or compliance criteria the Board should 
consider that would mitigate the risk of removing certain prescriptive 
requirements from the rule.
Public Comments
    Several commenters offered general support for the proposed due 
diligence requirements. One commenter suggested that most, if not all, 
of these requirements are already done as a matter of course. Another 
commenter believed the proposed requirements will help limit prudential 
risks associated with FCUs' investments in eligible obligations in a 
safe and sound manner. In response to a question in the proposed rule 
preamble for commenters, one commenter stated that additional safety 
and soundness criteria (beyond those included in the proposed rule) 
would not be helpful or mitigate risk further. The commenter 
recommended, however, that the limits imposed under Sec.  701.23 should 
be comparable to those imposed on loan participation transactions; for 
example, instituting a limit in line with the loan participation limit 
of an amount of net worth to one seller. The commenter suggested that 
this change would simplify any confusion for both buyers and sellers of 
eligible obligations and allow examiners to compare to a benchmark when 
reviewing credit unions who purchase eligible obligations. One 
commenter recommended that each safety and soundness standard adopted 
in the final rule be sufficiently flexible to permit credit unions to 
adopt internal written purchase policy provisions that are commensurate 
with the size, scope, type, complexity, and level of risk posed by 
their individual eligible obligation activities.
    Several commenters provided thoughts and recommendations regarding 
specific proposed due diligence requirements. One commenter suggested 
that requiring written purchase policies and established portfolio 
concentration limits seems

[[Page 67593]]

prudent and valuable to ensure appropriate consideration by credit 
unions engaging in eligible obligation activity.
    One commenter suggested that requiring a legal review of agreements 
seems unnecessary, as most credit unions already use legal counsel for 
the drafting or review of agreements, and those that do not perhaps 
have adequate internal expertise or expect to engage in a certain 
activity in such a modest way that it poses no material risk. The 
commenter suggested further that the requirement for legal review seems 
overly intrusive to a credit union's responsibility to understand and 
manage its risks. Another commenter recommended the NCUA further 
clarify the differences in what is required in the legal agreements for 
loan participations and eligible obligation purchases. The commenter 
noted that some of the requirements in the respective provisions (Sec.  
701.22(d) for loan participation agreements and proposed new Sec.  
701.23(b)(6)(iv) for eligible obligation agreements) are similar and 
yet worded differently. The commenter provided as an example that the 
requirements in Sec. Sec.  701.22(d)(4)(i) and 701.23(b)(6)(iv)(A) to 
identify the specific loans being purchased, and the requirement in the 
loan participation rule at Sec.  701.22(d)(1) that the agreement be 
properly executed under applicable law, do not appear at all in the 
proposed eligible obligation rule's new language, although proposed 
Sec.  701.23 does require a legal review of the eligible obligations 
purchase. To address these types of differences, the commenter 
recommended the following additions: (1) clarifying which of the loan 
participation agreement requirements also apply to eligible obligations 
(depending on whether servicing is retained or released) and (2) 
specifying whether there are additional (or fewer) obligations that 
apply to loan participations versus eligible obligations, including 
specifically what those differences are. To effectuate this change, the 
commenter recommended adding language to Sec.  701.23(b)(6)(iv) as 
follows:
    Require that the written purchase agreement include, in the case of 
a servicing released transaction:
    The following requirements referenced in the loan participation 
rule (Sec.  701.22): [__].
    The following additional requirements not referenced in the loan 
participation rule (Sec.  701.22): [__].
    Require that the written purchase agreement include, in the case of 
a servicing retained transaction:
    The following requirements referenced in the loan participation 
rule (Sec.  701.22): [__].
    The following additional requirements not referenced in the loan 
participation rule (Sec.  701.22): [__].
    One commenter suggested that partnering with responsible third 
parties is often what is most suitable for the credit union and their 
members. The commenter encouraged the NCUA to refresh its view on 
conflicts-of-interest and shift to something more like ``credit unions 
relying on third party underwriting performed by the seller or an agent 
of the seller could be operating in an unsafe and unsound manner and 
should establish and demonstrate clear risk management and oversight 
protocols.''
Discussion
    In recognition of the general support from commenters for this 
proposed change, the Board is adopting the revisions as proposed for 
the reasons set forth in the notice of proposed rulemaking. The Board 
does not believe that performing a legal review of the written purchase 
or sales agreements is burdensome because, as noted by one commenter, 
most credit unions already carry out such reviews. Additionally, while 
legal reviews may need to be conducted to ensure that the legal and 
business interests of the credit union are protected against undue 
risk, the final rule does not specify when legal reviews are required, 
only that the credit union's internal written purchase policies must 
address when a legal review of agreements or contracts will be 
performed to ensure that the legal and business interests of the credit 
union are protected against undue risk. This requirement should be 
based on the results of the due diligence and risk assessment processes 
completed for the planned activity. The determination as to when such a 
legal review would be required should be commensurate with the size, 
scope, type, complexity, and level of risk posed by the planned 
activity covered by the written agreement and contract.
    When it is decided that a legal review by counsel is required, the 
credit union's attorneys should review the written agreement or 
contract to ensure that its legal and business interests are protected. 
The review should include the terms, recourse and risk-sharing 
arrangements, loan administration and controls. The credit union's 
attorneys should also make sure the board of directors and management 
clearly understand the rights and responsibilities of each party. For 
example, the review should indicate which party bears the costs of 
collateral disposition, and whether there are recourse arrangements, or 
a commitment for the purchasing credit union to make additional loan 
purchases and describe the interest being purchased. The legal review 
should also ensure that the requirements for a written loan purchase 
agreement under section Sec.  701.23 are adequately addressed and that 
the agreement complies with all state and federal laws. The legal 
review should address loan and collateral documentation and information 
that the seller is required to share with the purchasing credit union, 
status reports on payments and interest accrual, exit strategies or 
termination clauses, procedures for modifying loan terms, notification 
of adverse loan events, collection procedures if servicing rights are 
retained by the seller, turnover in key staff of the seller or 
servicer, and other provisions necessary to effectively manage credit 
risk.
    The credit union's board of directors and senior management should 
exercise their right to negotiate the terms of any agreements or 
contracts to make them mutually fair and equitable. Further, a credit 
union should understand what actions it may take if the contract is 
breached, or the seller, any sub-servicers, or sub-contractors are not 
performing as expected. The written loan purchase agreement is a 
critical component of any third-party transaction or relationship, and 
thus, a legal review is a key element in the overall risk mitigation 
and management process.

New Sec.  701.23(b)(6)(i)

    New Sec.  701.23(b)(6)(i) requires FCUs to perform due diligence on 
the seller, and any applicable counterparties, before purchasing an 
eligible obligation. Conducting due diligence on third parties is a 
long-standing expectation for credit unions engaging in third-party 
relationships and when introducing new loan programs and products, as 
noted in NCUA LCU 01-CU-20 (November 2001), NCUA LCU 08-CU-26 (November 
2008), and NCUA LCU 10-CU-03 (March 2010).\121\
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    \121\ Available at https://ncua.gov/regulation-supervision/letters-credit-unions-other-guidance.
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    On several occasions, third-party relationships with credit unions 
have resulted in financial stress due to unexpected costs, legal 
disputes, and asset losses. Due diligence reviews are important because 
they assist credit unions in risk identification and mitigation when 
engaging with outside parties in a new loan program and when

[[Page 67594]]

enhancing services to members. Failure to complete adequate due 
diligence can result in the acquisition of loan volumes that exceed the 
board's risk appetite or credit union's financial capacity, loan types 
that go beyond management's ability to manage, or loan types or volume 
that exceed the capabilities of current loan processing and management 
information systems. The use of third parties can add complexity and 
additional risk to a credit union's activities and may also expose the 
credit union to consumer compliance and other legal risks. For example, 
failure to conduct adequate due diligence could lead to an FCU entering 
into agreements with a third party that does not have the ability to 
fulfill its contractual obligations. This could lead to disruptions in 
member service, uncollected payments on loans, and potential losses if 
the third party fails to remit funds that are due to the purchasing 
FCU.
    The responsibility to perform appropriate due diligence remains 
with the FCU's board of directors and management and cannot be 
outsourced. Overreliance on the due diligence information provided by a 
third party without independent review by the FCU's board and 
management could result in unsafe and unsound practices.
    The final rule allows FCUs the flexibility to determine the level 
and depth of due diligence reviews that are necessary based on the 
level of risk posed by the loans being purchased and the third-party 
relationships. Several factors may be considered when determining the 
appropriate nature of due diligence for third-party loan purchases and 
programs, including the following:
     the transaction's complexity;
     the purchasing FCU's internal lending policies and 
procedures;
     the transaction's size relative to the FCU's existing loan 
portfolio, concentrations, and net worth level; and
     the purchasing FCU's management and staff expertise 
regarding the types of loans being purchased.
    Additionally, FCUs can take a tiered approach when establishing 
their due diligence processes in their loan purchase policies. For 
example, when conducting background checks the FCU can determine how 
best to assess a third party's business reputation, potential conflicts 
of interest, experience, and compliance with federal and state laws, 
rules, and regulations based on the type of relationship with the third 
party and its risk exposure.
    Accordingly, new Sec.  701.23(b)(6)(i) provides that the purchasing 
FCU's written purchase policy must require that the purchasing FCU 
conduct due diligence on the seller of the loans and other 
counterparties to the transaction prior to the purchase.
New Sec.  701.23(b)(6)(ii)
    New Sec.  701.23(b)(6)(ii) requires FCUs to establish risk 
assessment and risk management processes for purchase activities. 
Conducting risk assessments and implementing risk management processes 
reflect the NCUA's long-standing expectation that credit unions 
incorporate these activities in relationships with third parties as 
outlined in NCUA LCU 07-CU-13 (April 2008), Evaluating Third-Party 
Relationships; NCUA LCU 22-CU-05 (March 2022), CAMELS Rating System; 
and NCUA Letter to FCUs 02-FCU-09 (March 2002), Risk-Focused 
Examination Program.\122\ The purchase of loans can provide an FCU with 
a wide range of benefits, including achieving strategic loan growth, 
managing liquidity, adjusting risk exposures, and enhancing the 
services provided to members. However, an FCU that starts a new lending 
program, including the purchase or sale of loans, or engages with third 
parties without fully understanding the associated risks, may expose 
itself to credit, interest rate, liquidity, transaction, compliance, 
strategic, or reputation risk. Risk assessments allow credit unions to 
better understand the risk involved in new products and services to 
ensure the board has effective processes in place to control the risk. 
Not understanding these associated risks may result in the FCU 
operating outside of the board's risk appetite and can result in 
elevated risk to the Share Insurance Fund. FCUs are ultimately 
responsible for safeguarding member assets and ensuring sound 
operations.
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    \122\ Available at https://ncua.gov/regulation-supervision/letters-credit-unions-other-guidance.
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    Adequate risk management processes include ongoing monitoring and 
oversight of the loan purchase program. This includes formal reporting 
to the board of directors and the FCU's senior management, which will 
ensure the board is able to fulfill its duties. An FCU's management 
reporting should be timely and commensurate with the size, complexity, 
and risk exposure of the FCU. For example, the board of directors 
should be informed when targets are met or exceeded, or limits 
breached. Reports should also consist of appropriate information that 
the board of directors and management could use to make informed 
decisions and take timely corrective action when warranted. For 
effective governance, an FCU's board of directors and senior management 
must understand the nature and level of risk associated with the FCU's 
purchased loan portfolio and program and receive periodic updates and 
reports on its performance.
    The final rule provides FCUs the flexibility to tailor their risk 
assessment and management processes to fit within their governance 
framework and other operations, while providing a basic framework to 
follow when developing their initial and ongoing risk assessment and 
management processes. Accordingly, new Sec.  701.23(b)(6)(ii) provides 
that the purchasing FCU's internal written purchase policies must 
establish risk assessment and risk management process requirements that 
are commensurate with the size, scope, type, complexity, and level of 
risk posed by the planned loan purchase activities.

New Sec.  701.23(b)(6)(iii)

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

[[Page 67595]]

underwriting standards that adequately address how to analyze a 
borrower's ability to repay their loan and the support provided by 
collateral are a basic tenet of lending and help ensure that the FCU 
will be repaid, which protects its members and the Share Insurance 
Fund. Without appropriate underwriting standards, an FCU will not be 
able to accurately assess its risk of credit loss. Originating or 
purchasing loans to high credit risk borrowers without appropriately 
understanding and planning for that risk can result in unexpectedly 
high loss rates that negatively impact earnings and net worth, which 
may impair the viability of the credit union and pose a risk to the 
Share Insurance Fund. A lack of adequate underwriting standards can 
also result in adverse risk selection, whereby high credit risk 
borrowers are only able to obtain loans from institutions with lax 
underwriting, resulting in the FCU attracting borrowers with a much 
higher risk of default.
    An FCU engaging in loan purchases should conduct an independent 
credit analysis and assessment of the borrower's creditworthiness and 
ability-to-repay, the support provided by collateral if relied on as 
part of the credit decision, and changes to the risk profile of the 
purchased loans. A purchasing FCU should not rely on the underwriting 
and analysis performed by the seller, or work performed by other third-
party underwriters on behalf of a seller. To do so is an unsafe and 
unsound practice.
    An FCU can leverage its current internal underwriting policies for 
similar loan types when developing its loan purchase policies. 
Performing credit and collateral analysis as if it were the originator 
should result in purchased loans that are consistent with the board of 
director's overall business strategy, risk tolerances, and credit 
quality standards. To the extent a purchasing FCU relies on a third 
party's credit models for credit decisions, the purchasing FCU should 
perform due diligence on the credit model. An FCU is not prohibited 
from relying on a qualified and independent third party to perform 
model validation. However, the purchasing FCU should review the model 
validation to determine if it is sufficient.
    The purchasing FCU's internal loan purchase policies should outline 
and identify the loan types that are acceptable for purchase. For 
example, acceptable loan types could include residential real estate 
(one-to-four family or multi-family first lien and/or junior lien), 
solar loans, automobile loans, student loans, unsecured loans, out-of-
territory loans, commercial loans, or government guaranteed loans 
(guaranteed and/or unguaranteed portion).
    The loan purchase policy should address the level and depth of the 
underwriting and analysis that is required for loan purchase activities 
based on the specific loan category, type, size, complexity, and risk 
profile of the borrower. The proposed rule allows flexibility to 
establish those parameters, while providing a basic framework for FCUs 
to follow when developing their policies.
    Accordingly, new Sec.  701.23(b)(6)(iii) provides that the 
purchasing FCU's internal written purchase policies must establish 
underwriting and ongoing monitoring standards that are commensurate 
with the size, scope, type, complexity, and level of risk posed by the 
loan purchase activities. Amended paragraph (b)(6)(iii) would provide 
further that underwriting and ongoing monitoring standards must address 
the borrower's creditworthiness and ability to repay, and the support 
provided by collateral if the collateral was used as part of the credit 
decision.

New Sec.  701.23(b)(6)(iv)

    New Sec.  701.23(b)(6)(iv) provides that the purchasing FCU's 
internal written purchase policy must require that the written purchase 
agreements include certain language. A well-written loan purchase 
agreement can minimize conflicts between the FCU and other parties to 
the agreement. The Board believes that any written loan purchase 
agreement must clearly delineate the roles, duties, and obligations of 
the seller, the purchasing FCU, servicer, and any other parties 
associated with the agreement, as applicable. The final rule 
establishes minimum provisions that any well-written loan purchase 
agreement must address.
    The written loan purchase agreement is a critical component of any 
third-party relationship. In addition to establishing the rights and 
obligations of each party to the loan agreement, it should clearly 
address how the relationship operates. The written loan purchase 
agreement should fully describe the roles and responsibilities of all 
parties to the agreement, including any subcontractors. A well-written 
loan purchase agreement should address dispute resolution, requirements 
for any ongoing credit information if necessary for the loan type, 
remedies upon loan default and bankruptcy, which party bears the costs 
of collateral disposition, whether there are recourse arrangements for 
early pay-off, and if there is an obligation for the purchasing FCU to 
make any additional purchases or credit advances.
    The purchasing FCU's board of directors and senior management 
should understand that they may have limited control over credit 
decisions for loans purchased in part, including, for example, 
limitations on the ability of the purchasing FCU to participate in loan 
modifications, act on defaulted loans, or decline to make additional 
advances if the purchasing FCU deems such advances are not prudent in 
relation to the loan quality. The written loan agreement must address 
these circumstances, and other conditions under which the parties to 
the agreement may replace the servicer if services are not performed in 
accordance with the terms of the written loan purchase agreement. The 
purchasing FCU must also know the location and custodian for the 
original loan documents if the original loan documents are not required 
to be transferred to the purchasing FCU as part of the loan purchase 
transaction. The purchasing FCU could be required to provide the 
original loan documents to various parties involved in the 
administration and collection of the purchased loans. Therefore, the 
purchasing FCU needs to know where the original documents are located 
and whom to contact if the FCU needs to obtain the documents.
    The written loan purchase agreement must, prior to the loan 
purchase transaction, identify the specific loan or loans purchased, 
and the interest purchased. A loan purchase transaction may involve a 
single or multiple loans, purchased in whole or in part. The 
documentation, for example, can be as simple as an addendum or schedule 
identifying each loan, provided the addendum or schedule is 
incorporated by reference into the loan purchase agreement. This 
provision clarifies in the existing rule that the loan purchase 
transaction involves the purchase of an individual loan or loans, and 
it is not the purchase of an investment interest in a pool of loans. 
FICUs should also keep in mind the requirements under GAAP for 
participation interests, which were discussed earlier in the part of 
the preamble about the changes to Sec.  701.23(a).
    Accordingly, for the reasons outlined in this portion of the 
preamble, new Sec.  701.23(b)(6)(iv) provides that the purchasing FCU's 
internal written purchase policy must require that the written purchase 
agreement include the specific loans purchased (either directly in the 
agreement or through a document that is incorporated by reference into

[[Page 67596]]

the agreement); the location and custodian for the original loan 
documents; an explanation of the duties and responsibilities of the 
seller, servicer, and all parties with respect to all aspects of the 
loans being purchased, including servicing, default, foreclosure, 
collection, and other matters involving the ongoing administration of 
the loans, if applicable; and the circumstances and conditions under 
which the parties to the agreement may replace the servicer when the 
seller retains the servicing rights for the loans being purchased, if 
applicable.

New Sec.  701.23(b)(6)(v)

    New Sec.  701.23(b)(6)(v) requires that FCUs establish certain 
portfolio concentration limits. Excessive concentration risk can 
severely impact the financial condition of an FCU. High concentrations 
in areas experiencing economic distress could result in significant 
losses exceeding an FCU's net worth. An FCU's board of directors and 
senior management have the responsibility to identify, manage, monitor, 
and control the risks facing the FCU, including concentration risk. FCU 
management must know what their concentration risks are and be able to 
demonstrate appropriate risk management and mitigation practices to 
minimize the risk of significant financial condition decline. 
Accordingly, new Sec.  701.23(b)(6)(v) provides that a purchasing FCU's 
internal written purchase policies must establish portfolio 
concentration limits by loan type and risk category in relation to net 
worth that are commensurate with the size, scope, and complexity of the 
credit union's loan purchases. New paragraph (b)(6)(v) provides further 
that the policy limits must consider the potential impact of loan 
concentrations on the purchasing credit union's earnings, loan loss 
reserves, and net worth.
    An FCU's loan purchase policy should establish credit underwriting 
and administration requirements that address the risks and 
characteristics unique to the loan types permitted for purchase. An 
FCU's loan purchase policy concentration limits should be considered 
for the aggregate amount of total purchased loans, for each loan type, 
risk factor, or category permitted. For example, concentration limits 
can be set by loan or collateral type but may also be set by associated 
borrower, origination channel, geographic area, or other risk category 
as applicable.
    An FCU's board of directors should establish concentration risk 
limits commensurate with its net worth levels and consider how the 
limits fit into the overall strategic plan of the FCU. When credit 
union loan portfolios are concentrated in a small number of loan 
products that are significantly exposed to similar or correlated risk 
factors, a single event can impact a large portion of the loan 
portfolio and result in elevated losses that, if not managed 
appropriately, can lead to the credit union's failure. Since the year 
2000, more than 50 percent of the NCUA's postmortems and material loss 
reviews have cited concentration risk as a central component of credit 
union failures. An FCU's board of directors should use a comprehensive 
perspective when developing loan purchase concentration policy limits, 
including identifying outside forces (such as economic or housing price 
uncertainty) that would affect the ability to manage concentration 
risk. The parameters set by the board of directors should be specific 
to each portfolio and should include limits on loan types and third-
party relationship exposure, at a minimum. The concentration risk 
limits should correlate to the FCU's overall growth objectives, 
financial targets, and net worth plan. The concentration risk limits 
set forth in the FCU's policy should be closely linked to those 
codified in related policies, including, but not limited to, real 
estate loans, member business loans, asset/liability management, and 
investment policies. Concentrations that exceed net worth must be 
monitored carefully, and the board of directors should document an 
adequate rationale for undertaking that level of risk.\123\
---------------------------------------------------------------------------

    \123\ See attachment to NCUA Letter to FICUs 10-CU-03 (March 
2010) available at https://www.ncua.gov/files/letters-credit-unions/LCU2010-03Encl.pdf.
---------------------------------------------------------------------------

New Sec.  701.23(b)(6)(vi)

    New Sec.  701.23(b)(6)(vi) addresses when a legal review of 
agreements or contracts would be required. The written loan purchase 
agreement is a critical component of the third-party relationship and, 
as such, the requirement for a legal review is a key element in the 
overall risk mitigation and management process. By obtaining legal 
advice regarding third-party contracts, an FCU can ensure its legal and 
business interests are appropriately protected, and the board of 
directors and senior management understand the risks, rights, and 
responsibilities of each party to the written loan purchase agreement. 
Accordingly, new Sec.  701.23(b)(6)(vi) provides that an FCU's internal 
written purchase policy must address when a legal review of agreements 
or contracts will be performed to ensure that the legal and business 
interests of the credit union are protected against undue risk.
    A legal review of the written loan purchase agreements and 
contracts will help an FCU ensure that the board of directors and 
senior management understand the rights and responsibilities of each 
party. For example, the review could identify which party bears the 
costs of collateral disposition, whether there are recourse 
arrangements, or whether the agreement includes a commitment for the 
purchasing FCU to make additional loan purchases and describe the 
interest being purchased. A legal review may also reduce a credit 
union's legal, compliance, or reputation risk by ensuring that the 
written loan purchase agreement complies with all applicable state and 
federal laws.
    Further, an FCU should understand what actions it may take if the 
contract is breached or services are not performed as expected. For 
example, the legal review could determine if the written loan purchase 
agreements include recourse language that requires a seller to buy back 
loans with missing documents, made outside of policy, or otherwise not 
in conformance with representations and warranties. The written loan 
purchase agreement is a critical component of the third-party 
relationship and, as such, a legal review is a key element in the 
overall risk mitigation and management process.

Section 701.23(c) Sale

    The final rule makes a non-substantive conforming change to current 
Sec.  701.23(c)(1). In addition, the final rule makes certain 
substantive changes to paragraph (c)(2) and adds new paragraphs (c)(3) 
and (4), which are discussed in more detail in the following 
paragraphs. No changes are made in the introductory sentence to current 
Sec.  701.23(c).

Section 701.23(c)(1)

    As required by the changes discussed in the following paragraphs, 
the final rule makes a conforming amendment to current Sec.  
701.23(c)(1). The conforming amendment removes the ``and'' at the end 
of the provision to allow for an additional provision to be added under 
Sec.  701.23(c)(2). No substantive change to this provision is 
intended.
Public Comments
    One commenter recommended amending proposed Sec.  701.23(c)(1) to 
provide that ``the Board or a committee of the Board assigned with that 
responsibility by the Board approves the sale.'' The commenter 
suggested it is not

[[Page 67597]]

necessarily an investment committee that would normally be dealing with 
loan issues--indeed, an overarching asset liability management 
committee, or a lending committee, or an executive committee, could 
each be tasked with such a role as within their core activities and 
competencies--and various institutions use different names for their 
committees, and the reference to ``investment committee'' is highly 
specific.
Discussion
    The Board did not propose substantive changes to Sec.  
701.23(c)(1), so the changes suggested above would go beyond the scope 
of this rulemaking. The comments will be retained, however, for 
consideration in future rulemakings related to Sec.  701.23. 
Accordingly, the Board adopts the changes to paragraph (c)(1) as 
proposed for the reasons set forth in the notice of proposed 
rulemaking.

Section 701.23(c)(2)

    The final rule amends current Sec.  701.23(c)(2) to change the 
retention requirements for the written agreement and schedule of 
eligible obligations sold by an FCU. The Board believes that this would 
result in only a minor technical change to current Sec.  701.23(c)(2). 
Under the final rule, the FCU selling the eligible obligations will 
still be required to retain the written loan sales agreement and a 
schedule of the eligible obligations covered by the agreement. The 
Board acknowledges the requirement for the FCU to retain the written 
loan sales agreement and schedule of the eligible obligations in the 
seller's office could imply that the written loan sales agreement and 
schedule be retained in a hard-copy format, which is outdated given the 
current digital environment. An FCU might choose to store its records 
in electronic format, in the cloud, or housed in off-site servers or 
databases.
    This change will align Sec.  701.23(c)(2) with the NCUA's 
regulations and guidelines for FICUs on records preservation programs. 
Under part 749, the NCUA does not require or recommend a particular 
format for record retention. If the credit union stores records on 
microfilm, microfiche, or in an electronic format, the stored records 
must be accurate, reproducible, and accessible to an NCUA 
examiner.\124\ If records are stored on the credit union premises, they 
should be immediately accessible upon the examiner's request; if 
records are stored by a third party or off site, then they should be 
made available to the examiner within a reasonable time after the 
examiner's request. The credit union must maintain the necessary 
equipment or software to permit an examiner to review and reproduce 
stored records upon request. The credit union should also ensure that 
the reproduction is acceptable for submission as evidence in a legal 
proceeding.\125\ Accordingly, Sec.  701.23(c)(2) of the final rule 
provides that a written agreement, and a schedule of the eligible 
obligations covered by the agreement, is retained by the selling credit 
union that identifies the specific loans being sold either directly in 
the agreement or through a document that is incorporated by reference 
into the agreement.
---------------------------------------------------------------------------

    \124\ See 12 CFR 749.5.
    \125\ See generally part 749; and NCUA Legal Op. 07-0812 (Jan. 
2008), available at https://www.ncua.gov/regulation-supervision/legal-opinions/2008/electronic-retention-records.
---------------------------------------------------------------------------

New Sec.  701.23(c)(3)

    The final rule adds new paragraph (c)(3) to Sec.  701.23 to require 
a legal review of the written agreement to protect the legal and 
business interests of the selling FCU. A legal review of the written 
loan sales agreements and contracts will help an FCU ensure that the 
board of directors and senior management understand the rights and 
responsibilities of each party. For example, the legal review would 
make clear which party bears the costs of collateral disposition, 
whether there are recourse arrangements, whether the agreement includes 
a commitment for the purchasing credit union to make additional loan 
purchases, and whether the agreement describes the interest being 
purchased. The legal review would also ensure that the written loan 
sales agreement complies with all applicable state and federal laws, 
helping to minimize a credit union's legal, compliance, and reputation 
risk. The legal review should address loan and collateral documentation 
and information that the selling party is required to share with the 
purchasing party, status reports on payments and interest accrual, exit 
strategies, procedures for modifying loan terms, notification of 
adverse loan events, and collection procedures if servicing rights are 
retained by the seller. Further, an FCU should understand what actions 
it may take if the contract is breached or services are not performed 
as expected. The written loan sales agreement is a critical component 
of the third-party relationship and, as such, the requirement for a 
legal review is a key element in the overall risk mitigation and 
management process.
    Accordingly, new Sec.  701.23(c)(3) requires a legal review of the 
written agreement is completed that includes the terms, recourse, and 
risk-sharing arrangements, and, as applicable, loan administration and 
controls, to ensure that the selling FCU's legal and business interests 
are protected from undue risks.
Public Comments
    One commenter noted their support for the proposed legal review 
requirement in Sec.  701.23(c)(3) regarding the sale of eligible 
obligations for the reasons provided in the proposal. Another commenter 
suggested that requiring a legal review of agreements seems 
unnecessary, as most credit unions already use legal counsel for the 
drafting or review of agreements, and those that do not perhaps have 
adequate internal expertise or expect to engage in a certain activity 
in such a modest way that it poses no material risk. The commenter 
suggested further that the requirement for legal review seems overly 
intrusive to a credit union's responsibility to understand and manage 
its risks.
Discussion
    In response to comments received, the Board is adopting the changes 
to Sec.  701.23(c)(3) as proposed, for the reasons set forth in the 
notice of proposed rulemaking, with one amendment. After reviewing the 
comments, the Board agrees that there may be types of routine 
agreements that do not require legal review by an attorney and that 
FCUs should be responsible for understanding and managing their own 
risks. In recognition of this, the final rule removes the word 
``legal'' the first place it appears in proposed Sec.  701.23(c)(3). 
This change allows FCUs to determine, consistent with safety and 
soundness, what level of review is required to ensure that the selling 
FCU's legal and business interests are protected from undue risks. For 
example, for most complex transactions FCUs must perform a legal review 
of the agreements because only a qualified attorney can reasonably 
ensure that the selling FCU's legal and business interests are 
protected in such situations. On the other hand, for routine 
transactions involving simple agreements, review by a non-attorney 
member of the FCU's staff may be all that is necessary to ensure that 
the selling FCU's legal and business interests are protected. 
Accordingly, Sec.  701.23(c)(3) of the final rule requires that a 
review of the written agreement is completed that includes the terms, 
recourse, and risk-sharing arrangements, and, as applicable, loan 
administration

[[Page 67598]]

and controls, to ensure that the selling FCU's legal and business 
interests are protected from undue risks.

Section 701.23(d) Pledge

    The final rule amends current Sec.  701.23(d)(1)(iii) to amend the 
retention requirements for agreements covering eligible obligations 
pledged by an FCU. The Board believes that this will result in only a 
minor technical change to current Sec.  701.23(d)(1)(iii). Under the 
final rule, the FCU pledging the eligible obligations would still be 
required to retain the written agreement covering the pledging 
arrangement. The Board acknowledges the requirement for the FCU that 
pledges the eligible obligations to retain the written agreement in the 
office could imply that the written agreement should be retained in a 
hard-copy format, which is outdated given the current digital 
environment. An FCU might choose to store its records in electronic 
format, in the cloud, or housed in off-site servers or databases. The 
Board's intent is that the FCU that pledges the eligible obligations 
make the written agreement covering the pledging arrangement available 
upon request.\126\
---------------------------------------------------------------------------

    \126\ See Sec.  749.2.
---------------------------------------------------------------------------

    This change will align this requirement with the NCUA's regulations 
and guidelines for FICUs on records preservation programs. Under part 
749, the NCUA does not require or recommend a particular format for 
record retention. If the credit union stores records on microfilm, 
microfiche, or in an electronic format, the stored records must be 
accurate, reproducible, and accessible to an NCUA examiner.\127\ If 
records are stored on the credit union premises, they should be 
immediately accessible upon the examiner's request; if records are 
stored by a third party or off site, then they should be made available 
to the examiner within a reasonable time after the examiner's request. 
The credit union must maintain the necessary equipment or software to 
permit an examiner to review and reproduce stored records upon request. 
The credit union should also ensure that the reproduction is acceptable 
for submission as evidence in a legal proceeding.\128\
---------------------------------------------------------------------------

    \127\ See 12 CFR 749.5.
    \128\ See generally part 749; and NCUA Legal Op. 07-0812 (Jan. 
2008), available at https://www.ncua.gov/regulation-supervision/legal-opinions/2008/electronic-retention-records.
---------------------------------------------------------------------------

    Accordingly, Sec.  701.23(d)(1)(iii) of the final rule requires 
that a written agreement covering the pledging arrangement is retained 
by the credit union that pledges the eligible obligations.

Section 701.23(g) Payments and Compensation

    The final rule amends current Sec.  701.23(g) by adding a paragraph 
heading. The Board believes that this amendment will result in only a 
minor technical change to paragraph (g). The amended rule would add the 
three-word descriptive heading ``Payments and compensation'' for this 
section of the rule but does not add any additional requirements or 
make any other changes. Accordingly, Sec.  701.23(g) has the paragraph 
heading ``Payments and compensation.''

Section 701.23(i) Temporary Regulatory Relief in Response to COVID-19

    The final rule does not extend the regulatory relief in Sec.  
701.23(i) that the Board approved in April of 2020 in response to 
COVID-19. Paragraph (i) provided that, notwithstanding Sec.  701.23(b), 
during the period commencing on April 21, 2020, and concluding on 
December 31, 2022, an FCU may: purchase, in whole or in part, and 
within the limitations of the board of directors' written purchase 
policies, any eligible obligations pursuant to paragraph (b)(1)(i) and 
(b)(2)(i) without regard to whether they are loans the credit union is 
empowered to grant or are refinancing to ensure the obligations are 
ones the purchasing credit union is empowered to grant; and purchase 
and hold the obligations described in Sec.  701.23(b)(2)(i) through 
(iv) if the FCU's CAMELS composite rating is ``1,'' ``2,'' or ``3.'' 
\129\ This temporary relief sunset on December 31, 2022, and was 
removed from the NCUA's regulations by the Office of the Federal 
Register shortly thereafter as part of their regular editing and review 
process.
---------------------------------------------------------------------------

    \129\ Emphasis added.
---------------------------------------------------------------------------

Public Comments
    One commenter recommended the NCUA study the extent to which the 
flexibility provided in the expired temporary regulatory relief was 
used by credit unions, along with any increased risk associated with 
transactions made that would not otherwise have been permitted and 
consider providing such regulatory relief to address future system 
challenges that may not necessarily rise to the level of the COVID-19 
pandemic.
Discussion
    The Board appreciates the comments that were submitted regarding 
expiration of the temporary regulatory relief under Sec.  701.23(g). 
The temporary regulatory relief provided under paragraph (g) expired on 
December 31, 2022. The Board will consider approving temporary 
regulatory relief again in the future if circumstances warrant.

B. Part 714--Leasing

Section 714.2(b)

    In the proposal, the Board requested comment on the placement of 
the definition of indirect leasing arrangement in Sec.  701.21, as 
opposed to part 714 of the NCUA's regulations. In particular, the Board 
requested comments on whether stakeholders would find it clearer or 
more user-friendly to codify the definition of indirect leasing 
arrangement in part 714. The Board received no comments directly in 
response to this question.
    Although not raised by commenters, the Board believes the 
relationship between the indirect leasing provisions in Sec.  701.21 
and part 714 should be clarified by pointing out the relationship 
between the two sections to readers of part 714. To do this, the final 
rule adds brief language and a cross citation to the first sentence in 
Sec.  714.2(b) pointing readers to Sec.  701.21(c)(9) and helping them 
to make the connection between the two sections. No substantive change 
to the NCUA's regulations is intended by adding this clarifying cross 
citation. Accordingly, the first sentence in Sec.  714.2(b), as 
amended, provides that an FCU may engage in indirect leasing as 
described under Sec.  701.21(c)(9) of the NCUA's regulations.

Section 714.9 [Removed and Reserved]

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

[[Page 67599]]

and reserves the blank section for future use.

IV. Regulatory Procedures

Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) generally requires that, in 
connection with a final rulemaking, an agency prepare and make 
available for public comment a final regulatory flexibility analysis 
that describes the impact of the final rule on small entities. A 
regulatory flexibility analysis is not required, however, if the agency 
certifies that the rule will not have a significant economic impact on 
a substantial number of small entities (defined for purposes of the RFA 
to include credit unions with assets less than $100 million) \130\ and 
publishes its certification and a short, explanatory statement in the 
Federal Register together with the rule.
---------------------------------------------------------------------------

    \130\ See 80 FR 57512 (Sept. 24, 2015).
---------------------------------------------------------------------------

    The Board fully considered the potential economic impact of the 
changes made by this final rule during its development. As noted in the 
preamble, the final rule clarifies the NCUA's current regulations and 
provides additional flexibilities to FICUs, making it easier to take 
advantage of advanced technologies and opportunities offered by the 
fintech sector.
    The final rule does not impose any new significant burden on FICUs 
and may ease some existing requirements. Small FICUs are not obligated 
to buy and sell eligible obligations and loan participations. 
Additionally, while the final rule introduces risk management and due 
diligence policy expectations, FICUs have the flexibility to tailor 
required processes and policies to fit within their existing governance 
framework and commensurate with their size and complexity. Accordingly, 
the NCUA certifies that this final rule will not have a significant 
economic impact on a substantial number of small FICUs.

Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (PRA) applies to rulemakings in 
which an agency by rule creates a new paperwork burden on regulated 
entities or modifies an existing burden.\131\ For purposes of the PRA, 
a paperwork burden may take the form of a reporting, disclosure, or 
recordkeeping requirement, each referred to as an information 
collection. The NCUA may not conduct or sponsor, and the respondent is 
not required to respond to, an information collection unless it 
displays a currently valid Office of Management and Budget (OMB) 
control number.
---------------------------------------------------------------------------

    \131\ 44 U.S.C. 3507(d).
---------------------------------------------------------------------------

    The rule as previously published contains information collections 
in the form of a written policy requirement and a transaction 
documentation requirement, covered by OMB control numbers 3133-0127 
(Purchase, Sale, and Pledge of Eligible Obligations) and 3133-
0141(Organization and Operations of Federal Credit Unions--Loan 
Participation). The proposed changes to part 701 did not affect the 
burdens under OMB Control Numbers 3133-0127 and 3133-0141. Adjustments 
to the burdens reflect a reduction in the current number of credit 
unions or to reflect a more accurate response rate per respondent. 
Under OMB Control Number 3133-0127, the number of respondents 
decreased; thereby, decreasing the burden to 1,830 annual hours. The 
NCUA estimates that the burden will increase, however, under OMB 
Control Number 3133-0141 by 4,994 annual burden hours because the 
responses per respondent will likely increase.

Executive Order 13132

    Executive Order 13132 encourages independent regulatory agencies to 
consider the impact of their actions on state and local interests. The 
NCUA, an independent regulatory agency as defined in 44 U.S.C. 3502(5), 
voluntarily complies with the principles of the executive order to 
adhere to fundamental federalism principles. This final rule would 
reduce regulatory burdens on, and expand the authority of, federally 
insured credit unions, including federally insured, state-chartered 
consumer credit unions to purchase certain loans and loan 
participations. It may have, to some degree, a direct effect on the 
states, on the relationship between the federal government and the 
states, or on the distribution of power and responsibilities among the 
various levels of government. It does not, however, rise to the level 
of material impact for purposes of Executive Order 13132.

Assessment of Federal Regulations and Policies on Families

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

Small Business Regulatory Enforcement Fairness Act (Congressional 
Review Act)

    The Small Business Regulatory Enforcement Fairness Act of 1996 
(Pub. L. 104-121) (SBREFA) generally provides for congressional review 
of new agency rules that qualify as ``major'' under criteria specified 
in the Act.\132\ Analysis performed by the Office of the Chief 
Economist (OCE) at NCUA indicates the rule falls well short of 
qualifying as a ``major'' by those criteria. As required by SBREFA, the 
NCUA is submitting this final rule and its economic impact analysis to 
the Office of Management and Budget for concurrence on the ``not 
major'' determination. The NCUA also will file all other appropriate 
congressional reports.
---------------------------------------------------------------------------

    \132\ 5 U.S.C. 801-804.
---------------------------------------------------------------------------

List of Subjects

12 CFR Part 701

    Advertising, Aged, Civil rights, Credit, Credit unions, Fair 
housing, Individuals with disabilities, Insurance, Marital status 
discrimination, Mortgages, Religious discrimination, Reporting and 
recordkeeping requirements, Sex discrimination, Signs and symbols, 
Surety bonds.

12 CFR Part 714

    Credit unions, Leasing, Reporting and recording keeping 
requirements.

    By the National Credit Union Administration Board on September 
21, 2023.
Melane Conyers-Ausbrooks,
Secretary of the Board.

    For the reasons discussed in the preamble, the Board amends 12 CFR 
parts 701 and 714 as follows:

PART 701--ORGANIZATION AND OPERATION OF FEDERAL CREDIT UNIONS

0
1. The authority citation for part 701 continues to read as follows:

    Authority: 12 U.S.C. 1752(5), 1755, 1756, 1757, 1758, 1759, 
1761a, 1761b, 1766, 1767, 1782, 1784, 1785, 1786, 1787, 1788, 1789. 
Section 701.6 is also authorized by 15 U.S.C. 3717. Section 701.31 
is also authorized by 15 U.S.C. 1601 et seq.; 42 U.S.C. 1981 and 
3601-3610. Section 701.35 is also authorized by 42 U.S.C. 4311-4312.


0
2. Amend Sec.  701.21 by adding paragraph (c)(9) to read as follows:


Sec.  701.21  Loans to members and lines of credit to members.

* * * * *
    (c) * * *
    (9) Indirect lending and indirect leasing arrangements--(i) 
Definitions.

[[Page 67600]]

For purposes of this chapter, the following definitions apply:
    Indirect leasing arrangement means a written agreement to purchase 
leases from the leasing company where the purchaser makes the final 
underwriting decision, and the lease agreement is assigned to the 
purchaser very soon after it is signed by the member and the leasing 
company.
    Indirect lending arrangement means a written agreement to purchase 
loans from the loan originator where the purchaser makes the final 
underwriting decision regarding making the loan, and the loan is 
assigned to the purchaser very soon after the inception of the 
obligation to extend credit.
    (ii) Indirect lending. A loan acquired pursuant to an indirect 
lending arrangement, and that meets the requirements of this section, 
is classified as a loan and not the purchase of a loan for purposes of 
this chapter.
    (iii) Indirect leasing. A lease acquired pursuant to an indirect 
leasing arrangement, and that meets the requirements of part 714 of 
this chapter, is classified as a lease and not the purchase of a lease 
for purposes of this chapter.
* * * * *

0
3. Amend Sec.  701.22 by:
0
a. Revising the introductory text; and
0
b. Revising the definition of ``Originating lender'' in paragraph (a).
    The revisions read as follows:


Sec.  701.22   Loan participations.

    This section applies only to loan participations as defined in 
paragraph (a) of this section. It does not apply to the purchase of an 
investment interest in a pool of loans. This section establishes the 
requirements a federally insured credit union must satisfy to purchase 
a participation in a loan. Federally insured, state-chartered credit 
unions are required by Sec.  741.225 of this chapter to comply with the 
loan participation requirements of this section. This section does not 
apply to corporate credit unions, as that term is defined in Sec.  
704.2 of this chapter.
    (a) * * *
    Originating lender means the participant with which the borrower 
initially or originally contracts for a loan and who, thereafter or 
concurrently with the funding of the loan, sells participations to 
other lenders. Originating lender includes a participant that acquires 
a loan through an indirect lending arrangement as defined under Sec.  
701.21(c)(9).
* * * * *

0
4. Amend Sec.  701.23 by:
0
a. Revising the introductory text, paragraph (a), the heading to 
paragraph (b);
0
b. Adding a heading to paragraph (b)(1) and (b)(1)(i);
0
c. Revising paragraph (b)(1)(ii);
0
d. Adding a heading to paragraphs (b)(1)(iii) and (iv);
0
e. Removing the word ``mortage'' from the first sentence in paragraph 
(b)(1)(iv) and adding in its place the word ``mortgage'';
0
f. Revising paragraphs (b)(2) introductory text, and (b)(2)(ii);
0
g. Adding a heading to paragraph (b)(3);
0
h. Revising paragraph (b)(3)(ii), and (b)(4) and (5);
0
i. Adding paragraph (b)(6);
0
j. Revising paragraphs (c)(1) and (2);
0
k. Adding paragraph (c)(3);
0
l. Revising paragraph (d)(1)(iii); and
0
m. Adding a heading to paragraphs (g) and (h)(1). The revisions and 
additions read as follows:


Sec.  701.23  Purchase, sale, and pledge of loans.

    This section governs a Federal credit union's purchase, sale, or 
pledge of all or part of a loan to one of its own members, subject to 
certain exceptions. For purchases of eligible obligations, except as 
otherwise described under paragraph (b) of this section, the borrower 
must be a member of the purchasing Federal credit union before the 
purchase is made.
    (a) Definitions. For purposes of this section:
    Eligible obligation means a whole loan or part of a loan (other 
than a note held by a liquidating credit union) that does not meet the 
definition of a loan participation under Sec.  701.22(a).
    Liquidating credit union means:
    (i) In the case of a voluntary liquidation, a credit union is a 
liquidating credit union as of the date the members vote to approve 
liquidation.
    (ii) In the case of an involuntary liquidation, a credit union is a 
liquidating credit union as of the date the board of directors is 
served an order of liquidation issued by either the NCUA or the state 
supervisory authority.
    Student loan means a loan granted to finance the borrower's 
attendance at an institution of higher education or at a vocational 
school, which is secured by and on which payment of the outstanding 
principal and interest has been deferred in accordance with the 
insurance or guarantee of the Federal Government, of a state 
government, or any agency of either.
    (b) Purchase of loans. (1) Purchase of obligations from any source. 
* * *
    (i) Eligible obligations. * * *
    (ii) Notes of a liquidating credit union's individual members. 
Notes of a liquidating credit union's individual members, from the 
liquidating credit union;
    (iii) Student loans. * * *
    (iv) Real estate-secured loans. * * *
* * * * *
    (2) Purchases of obligations from a FICU. A Federal credit union 
may purchase and hold the following obligations, provided that it would 
be empowered to grant them:
* * * * *
    (ii) Notes of a liquidating credit union. Notes of a liquidating 
credit union, without regard to whether they are notes of the 
liquidating credit union's members;
* * * * *
    (3) Other requirements. * * *
    (ii) A written agreement and a schedule of the eligible obligations 
covered by the agreement are retained by the purchaser; and
* * * * *
    (4) Five-percent limitation. The aggregate of the unpaid balance of 
notes purchased under paragraphs (b)(1)(ii) and (b)(2)(ii) of this 
section shall not exceed 5 percent of the unimpaired capital and 
surplus of the purchaser.
    (5) Grandfathered purchases. Subject to safety and soundness 
considerations, a Federal credit union may hold any of the loans 
described in paragraph (b) of this section that were acquired before 
October 30, 2023; provided the transaction complied with this section 
at the time the transaction was executed.
    (6) Written purchase policies. Purchases of eligible obligations 
and notes of liquidating credit unions must comply with the purchasing 
Federal credit union's internal written purchase policies, which must:
    (i) Require that the purchasing Federal credit union conduct due 
diligence on the seller of the loans and other counterparties to the 
transaction prior to the purchase.
    (ii) Establish risk assessment and risk management process 
requirements that are commensurate with the size, scope, type, 
complexity, and level of risk posed by the planned loan purchase 
activities.
    (iii) Establish internal underwriting and ongoing monitoring 
standards that are commensurate with the size, scope, type, complexity, 
and level of risk posed by the loan purchase activities. Underwriting 
and ongoing monitoring standards must address the borrower's 
creditworthiness and ability to repay, and the support provided by 
collateral if the collateral was used as part of the credit decision.

[[Page 67601]]

    (iv) Require that the written purchase agreement include:
    (A) The specific loans being purchased (either directly in the 
agreement or through a document that is incorporated by reference into 
the agreement);
    (B) The location and custodian for the original loan documents;
    (C) An explanation of the duties and responsibilities of the 
seller, servicer, and all parties with respect to all aspects of the 
loans being purchased, including servicing, default, foreclosure, 
collection, and other matters involving the ongoing administration of 
the loans, if applicable; and
    (D) The circumstances and conditions under which the parties to the 
agreement may replace the servicer when the seller retains the 
servicing rights for the loans being purchased, if applicable.
    (v) Establish portfolio concentration limits by loan type and risk 
category in relation to net worth that are commensurate with the size, 
scope, and complexity of the credit union's loan purchases. The policy 
limits must consider the potential impact of loan concentrations on the 
purchasing credit union's earnings, loan loss reserves, and net worth.
    (vi) Address when a legal review of agreements or contracts will be 
performed to ensure that the legal and business interests of the credit 
union are protected against undue risk.
    (c) * * *
    (1) The board of directors or investment committee approves the 
sale;
    (2) A written agreement, and a schedule of the eligible obligations 
covered by the agreement, is retained by the selling credit union that 
identifies the specific loans being sold either directly in the 
agreement or through a document that is incorporated by reference into 
the agreement; and
    (3) A review of the written agreement is completed that includes 
the terms, recourse, and risk-sharing arrangements, and, as applicable, 
loan administration and controls, to ensure that the selling Federal 
credit union's legal and business interests are protected from undue 
risks.
    (d) * * *
    (1) * * *
    (iii) A written agreement covering the pledging arrangement is 
retained by the credit union that pledges the eligible obligations.
* * * * *
    (g) Payments and compensation--* * *
    (h) Additional authority--(1) Expanded purchase authority. * * *
* * * * *

PART 714--LEASING

0
5. The authority citation for part 714 continues to read as follows:

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


0
6. Amend Sec.  714.2 by revising paragraph (b) to read as follows:


Sec.  714.2  What are the permissible leasing arrangements?

* * * * *
    (b) You may engage in indirect leasing as described under Sec.  
701.21(c)(9) of this chapter. In indirect leasing, a third party leases 
property to your member and you then purchase that lease from the third 
party for the purpose of leasing the property to your member. You do 
not have to purchase the leased property if you comply with the 
requirements of Sec.  714.3.
* * * * *


Sec.  714.9  [Removed and Reserved]

0
7. Remove and reserve Sec.  714.9.

[FR Doc. 2023-20950 Filed 9-28-23; 8:45 am]
BILLING CODE 7535-01-P