Organization and Operations of Federal Credit Unions

NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 701

Organization and Operations of Federal Credit Unions

AGENCY: National Credit Union Administration (NCUA).

ACTION: Notice of proposed rulemaking and request for comment.

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SUMMARY: The proposed rule clarifies certain provisions in NCUA's

regulation that sets forth the requirements for the purchase, sale and

pledge of eligible obligations. Currently, the regulation provides that

a federal credit union (FCU) may purchase real estate loans from any

source if it is granting real estate loans on an ongoing basis and the

purchase will facilitate the packaging of a pool of loans for sale on

the secondary market. The proposal clarifies that a pool must include a

substantial portion of the FCU's own loans and must be sold promptly.

Further, the proposed rule explains when the purchase of a member's

loan is not the purchase of an eligible obligation, but rather the

making of a direct loan.

DATES: Comments must be received by October 5, 1998.

ADDRESSES: Comments should be directed to Becky Baker, Secretary of the

Board. Mail or hand-deliver comments to: National Credit Union

Administration, 1775 Duke Street, Alexandria, Virginia 22314-3428. Fax

comments to (703) 518-6319. E-mail comments to [email protected].

Please send comments by one method only.

FOR FURTHER INFORMATION CONTACT: Mary F. Rupp, Staff Attorney, Office

of General Counsel, National Credit Union Administration, 1775 Duke

Street, Alexandria, Virginia 22314-3428 or telephone: (703) 518-6553.

SUPPLEMENTARY INFORMATION:

Background

On May 3, 1979, the NCUA Board adopted a final rule that allowed an

FCU to purchase real estate loans from any source if it is granting

real estate loans on an ongoing basis and the purchase will facilitate

the packaging of a pool of loans to be sold on the secondary market. 44

FR 27068 (May 9, 1979). The rule was based on three sections of the

Federal Credit Union Act (the Act): Secs. 107(5)(A)(i), 107(13) and

107(15). Section 107(13) authorizes an FCU to purchase, sell, pledge,

discount, or otherwise receive or dispose of in whole or in part, any

eligible obligations of its members. The proposed rule explained that,

although on its face Sec. 107(13) does not authorize the purchase of

nonmember real estate loans, ``[c]onsidering the Congressional intent

to allow credit unions to take advantage of secondary mortgage market

facilities, the Administration does not believe that Congress intended

107(13) to be an express prohibition on such purchases provided they

are authorized by other sections of the Act.'' 44 FR 60, 61 (January 2,

1979). The Board found this authority in the incidental powers clause,

Sec. 107(15), and the long term real estate lending power,

Sec. 107(5)(A)(i) of the Act. The Board believed that an FCU's power to

purchase nonmember real estate loans was incident to its power to make

long term real estate loans, because ``[i]n order to operate a

successful real estate program an FCU must have access to the secondary

market. This can best be done by pooling loans.'' 44 FR at 61. The

Board recognized that, for an FCU to pool loans to sell in the

secondary market, it would sometimes need to purchase nonmember loans

to complete its pool. The proposed rule restricted the purchase of

nonmember loans to the loans of other credit unions because the Board

was mindful of the ``restrictions placed on real estate lending by

Congress.'' 44 FR at 61. Although the final rule removed the

restriction that the nonmember loans be purchased from credit unions,

the Board remained concerned that this incidental power not be

interpreted too broadly and that the focus remain on making loans to

members.

The Board balanced ``the need for efficient access to the secondary

market against Congressional intent in restricting the real estate

loans'' of FCUs. 44 FR at 22070. The preamble to the final rule stated

that the FCU's ``board of directors must have adopted a policy of

granting long term real estate loans'' and must be granting them ``on

an on-going basis''; an FCU ``must include a substantial portion of its

own loans in the pool''; once a particular pool is sold, an FCU must

``grant more loans before a second pool can be assembled''; and

``Federal credit unions will be expected to sell or pledge obligations

purchased to package a pool of loans promptly. Arrangements to dispose

of such loans should generally be made in advance of their purchase by

obtaining a commitment from a buyer to purchase the pool of loans

before the pool is actually assembled.'' 44 FR at 27070.

Although the preamble to the final rule discusses the requirements

that a pool must include a substantial portion of the credit union's

own loans and must be sold promptly, questions on these points have

arisen from time to time. NCUA has responded, through legal opinion

letters and provisions in the Accounting Manual for Credit Unions, that

FCUs must meet these conditions. Accounting Manual for Federal Credit

Unions, Sec. 6030.4. The Board believes it will be helpful to FCUs to

clarify these existing requirements by having them set out in the

regulation, itself. FCUs and persons involved in advising them often

review regulations pertaining to particular activities and, with this

amendment, it will be easier for FCUs to be informed about the

requirements for the purchase of eligible obligations without

consulting other sources for guidance.

The Act and NCUA's regulations limit the aggregate unpaid balance

of eligible obligations purchased to 5% of the unimpaired capital and

surplus of the purchaser. 12 U.S.C. 1757(13) and 12 CFR 701.23(b)(3).

The current regulation specifically exempts from the 5% limitation

student and real estate loans purchased under paragraphs (b)(1)(iii)

and (iv) and eligible obligations purchased under paragraph (b)(1)(i)

that are refinanced by the purchasing credit union so that they are

loans it is empowered to grant. 12 CFR 701.23(b)(3). There has been

some confusion as to whether FCUs participating in indirect lending and

leasing must account for these as eligible obligations subject to the

5% limitation or if they may treat them as loans.

[[Page 41977]]

General Counsel opinion letters have stated that indirect lending

and indirect leasing arrangements may be treated as loans if certain

conditions are met. The proposed rule lists the conditions, so that

FCUs can determine if a transaction qualifies as a loan or the purchase

of an eligible obligation.

Proposal

The Board proposes to amend Sec. 701.23(b)(1)(iv) by clarifying

that a pool of loans, as used in that subsection, must include a

substantial portion of the FCU's own loans and must be sold promptly.

This clarification mirrors what is currently stated in the Accounting

Manual. Accounting Manual for Federal Credit Unions, Sec. 6030.4. To

provide a more concrete measure for compliance, the Board has

considered substituting specific numbers to measure what is meant by

``substantial'' and ``promptly'' in the proposed rule. Agency staff

with expertise in the secondary market has suggested that, in order for

an FCU's pool of loans to be considered to contain a ``substantial

portion of its own loans,'' a reasonable measure would be at least 75%.

Staff believes this figure represents current practice amongst FCUs

participating in the secondary market. FCUs participating in the

secondary market normally only need a small percentage of nonmember

loans to complete the pool. Further, because FCUs do not have the

express statutory authority to purchase nonmember loans, the Board

continues to interpret this provision narrowly. It should only be used

by an FCU that is granting member real estate loans on an ongoing

basis, pooling the loans and selling them on the secondary market, as a

mechanism to complete a pool. It should not be a mechanism for FCUs to

circumvent the lending restrictions on loans to nonmembers.

Regarding the period that FCUs can hold the pool of loans, FCUs

will be expected to sell them ``promptly'' because they will be

purchasing loans of nonmembers, loans they could not grant. The 1979

preamble states that ``[a]rrangements should generally be made in

advance of their purchase by obtaining a commitment from a buyer to

purchase the pool of loans before the pool is actually assembled.'' 44

FR at 27070. Agency staff has suggested that 120 days is adequate time

given the commitment period from purchasers in the secondary market.

Although specific numbers provide a more definitive measure, they

remove flexibility which may be useful in certain circumstances. The

Board is interested in receiving comments on whether specific numbers

should be used and, if so, what numbers are reasonable.

The Board proposes amending Sec. 701.23(b)(3) by reorganizing it so

that the current exceptions to the 5% limit are listed in separate

subsections and the indirect lending and leasing exception is added to

the list. The new provision sets forth the conditions for classifying

an indirect lending or leasing arrangement as a loan. First, the FCU

must make the final underwriting decision. This means that the FCU must

actually review the application and determine that the transaction

conforms to its lending or leasing policies. Second, the sales or lease

contract must be assigned to the FCU very soon after it is signed by

the member and the dealer or leasing company. In some programs, the

assignment will occur immediately. In others, the assignment will occur

the next business day. 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. The NCUA Board is interested in receiving comment on

whether a specific number of days should be substituted for ``very

soon'' and, if so, what number is reasonable.

Request for Additional Comment

Section 701.23(b)(1)(iii) and (iv), with certain restrictions,

allows an FCU to purchase student and real estate loans from any source

if the FCU is pooling them for sale on the secondary market. The NCUA

Board is also interested in receiving comment on whether the types of

loans that can be purchased from any source for purposes of creating

pools for sale should be expanded to include auto and credit card

loans. Comments on this issue will assist the Board in determining

whether to propose regulatory changes to include auto and credit card

loans.

REGULATORY PROCEDURES

Regulatory Flexibility Act

The Regulatory Flexibility Act requires the NCUA to prepare an

analysis to describe any significant economic effect any regulation may

have on a substantial number of small credit unions, meaning those

under $1 million in assets. The NCUA Board has determined and certifies

that the proposed rule if adopted will not have a significant economic

impact on a substantial number of small credit unions. The reason for

this determination is that it is highly unlikely that small credit

unions would be engaged in pooling real estate loans for sale on the

secondary market. Accordingly, the NCUA Board has determined that a

Regulatory Flexibility Analysis is not required.

Executive Order 12612

Executive Order 12612 requires NCUA to consider the effect of its

actions on state interests. The proposed amendments will only apply to

federal credit unions. Section 741.8(b)(1) specifically exempts state

chartered federally insured credit unions from 701.23(b)(1)(iv).

Proposed Sec. 701.23(b)(v) only applies to FCUs.

Paperwork Reduction Act

The proposal does not impose any additional paperwork requirements

on FCUs.

List of Subjects in 12 CFR Part 701

Credit unions, Eligible obligations.

By the National Credit Union Administration Board on July 30,

1998.

Becky Baker,

Secretary of the Board.

Accordingly, NCUA proposes to amend 12 CFR part 701 as follows:

PART 701--ORGANIZATION AND OPERATIONS OF FEDERALLY-INSURED CREDIT

UNIONS

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

follows:

Authority: 12 U.S.C. 1752(5), 1755, 1756, 1757, 1759, 1761a,

1761b, 1766, 1767, 1782, 1784, 1787, 1789 and 1798. Section 701.6 is

also authorized by 31 U.S.C. 3717. Section 701.31 is also authorized

by 15 U.S.C. 1601 et seq.; 42 U.S.C. 1981 and 3601-3610. Section

701.35 is also authorized by 42 U.S.C. 4311-4312.

2. Amend Sec. 701.23 by adding a sentence to the end of paragraph

(b)(1)(iv) and by revising paragraph (b)(3) to read as follows:

Sec. 701.23 Purchase, sale and pledge of eligible obligations.

* * * * *

(b) * * *

(1) * * *

(iv) * * * A pool must include a substantial portion of the credit

union's own loans and must be sold promptly.

* * * * *

(3) The aggregate of the unpaid balance of eligible obligations

purchased under paragraph (b) of this section cannot exceed 5% of the

unimpaired capital and surplus of the purchaser. The following can be

excluded in calculating this 5% limitation:

(i) Student loans purchased in accordance with paragraph

(b)(1)(iii) of this section;

[[Page 41978]]

(ii) Real estate loans purchased in accordance with paragraph

(b)(1)(iv) of this section;

(iii) Eligible obligations purchased in accordance with paragraph

(b)(1)(i) of this section that are refinanced by the purchaser so that

it is a loan it is empowered to grant; and

(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.

* * * * *

[FR Doc. 98-20952 Filed 8-5-98; 8:45 am]

BILLING CODE 7535-01-P