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: Final rule.

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SUMMARY: The NCUA is incorporating into its regulations the agency's

longstanding interpretation that federal credit unions can permit a

nonmember to assume a member's long-term residential real estate loan

in conjunction with the nonmember's purchase of the member's principal

residence.

EFFECTIVE DATE: January 25, 1999.

ADDRESSES: National Credit Union Administration, 1775 Duke Street,

Alexandria, Virginia 22314-3428.

FOR FURTHER INFORMATION CONTACT: Michael J. McKenna, Staff Attorney,

Division of Operations, Office of General Counsel, at the above address

or telephone: (703) 518-6540.

SUPPLEMENTARY INFORMATION:

A. Background

Since 1977, federal credit unions have had the authority to offer

long-term real estate loans to finance a member's principal residence.

12 U.S.C. 1757(A)(i). NCUA's implementing regulation for this authority

is set forth at 12 CFR 701.21(g).

In 1985, the NCUA Board issued Interpretive Ruling and Policy

Statement 85-3 (IRPS 85-3). 50 FR 51840 (December 20, 1985). IRPS 85-3

stated that, incidental to a federal credit union's authority to make

long-term real estate loans to members, a federal credit union may

permit assumptions, by either members or nonmembers, under the terms

and conditions specified in the loan agreement and consistent with the

Federal Credit Union Act and NCUA's Regulations. The NCUA Board also

stated that, in the case of a nonmember assumption, there must be no

new money lent to the borrower and no extension of the original

maturity date specified in the loan agreement with the member.

NCUA has a policy of periodically reviewing its regulations to

``update, clarify and simplify existing regulations and eliminate

redundant and unnecessary provisions.'' IRPS 87-2, Developing and

Reviewing Government Regulations. As part of its regulatory review

program, NCUA reviewed its IRPS to determine their current

effectiveness. As a result of that review, the NCUA Board stated that

it planned to incorporate IRPS 85-3 into NCUA's Regulations. 62 FR

11773 (March 13, 1997). The Board's goal is to increase regulatory

effectiveness by making it easier for credit unions to locate

applicable rules regarding real estate lending. Accordingly, at 63 FR

41978 (August 6, 1998), the NCUA Board proposed to add a new paragraph

to Sec. 701.21(g) that incorporated IRPS 85-3 so that this provision on

nonmember assumption of loans will be in the same place with the other

regulatory provisions regarding real estate lending. Although the

language is slightly different, the policy set forth in the proposed

amendment was, for all practical purposes, identical to the policy set

forth in IRPS 85-3.

B. Comments

Five comments were received. Comments were received from one

federal credit union, two state leagues, one national credit union

trade association, and one bank trade association. Except for the bank

trade association, the commenters strongly supported the proposal.

The preamble to the proposed rule, just as IRPS 85-3, stated that a

federal credit union cannot grant an assumption of a loan to a

nonmember if the underlying intent of the original loan to

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the member was to grant an assumption by a nonmember immediately or

soon after making the original loan. One commenter stated that

``intent'' is an elusive standard and requested that NCUA provide

further guidance in the preamble to the final regulation as to how

examiners will construct a showing that a loan was originally granted

with the intention that it would be assumed by a nonmember. Intent to

conduct such a sham transaction is difficult to define. The question of

whether there was an improper intent will depend on the facts in a

particular case. An example of a suspicious transaction would be one in

which a member receives a real estate loan from the credit union and

within a short period of time, contracts to sell the property to a

nonmember who wants to assume the loan. Although there may be a

legitimate reason for this action, NCUA will review the transaction to

ensure that it was not done to circumvent the restrictions on providing

services to nonmembers.

One commenter requested that NCUA extend the assumption of a loan

by a nonmember to automobile loans when the individual who is assuming

the loan is either the co-signer or co-owner of the automobile. The

NCUA Board does not believe this authority should be extended in this

situation since the practice and process of assuming real estate loans

is fundamentally different in complexity, maturity, and value than a

situation involving automobile loans. In addition, the NCUA Board does

not see a great need for extending this assumption authority to

automobile loans.

Regulatory Procedures

Regulatory Flexibility Act

The Regulatory Flexibility Act requires NCUA to prepare an analysis

to describe any significant economic impact any proposed regulation may

have on a substantial number of small entities (primarily those under

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

the final amendment will not have a significant economic impact on a

substantial number of small credit unions. Accordingly, the Board has

determined that a Regulatory Flexibility Analysis is not required.

Paperwork Reduction Act

NCUA has determined that the final amendment does not increase

paperwork requirements under the Paperwork Reduction Act of 1995 and

regulations of the Office of Management and Budget.

Executive Order 12612

Executive Order 12612 requires NCUA to consider the effect of its

actions on state interests. The final amendment only applies to federal

credit unions. NCUA has determined that the final amendment does not

constitute a significant regulatory action for the purposes of the

Executive Order.

Congressional Review

The Office of Management and Budget has determined that this is not

a major rule.

List of Subjects in 12 CFR Part 701

Credit, Credit unions, Insurance, Mortgages, Reporting and

recordkeeping requirements, Surety bonds.

By the National Credit Union Administration Board on December

17, 1998.

Becky Baker,

Secretary of the Board.

For the reasons set forth in the preamble, 12 CFR Part 701 is

amended as follows:

PART 701--ORGANIZATION AND OPERATIONS OF FEDERAL 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, and 1789. Section 701.6 is also

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

15 U.S.C. 1601 et seq., 42 U.S.C. 1861 and 42 U.S.C. 3601-3610.

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

2. Section 701.21 is amended by adding a new paragraph (g)(7) to

read as follows:

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

* * * * *

(g) * * *

(7) Assumption of real estate loans by nonmembers. A federal credit

union may permit a nonmember to assume a member's mortgage loan in

conjunction with the nonmember's purchase of the member's principal

residence, provided that the nonmember assumes only the remaining

unpaid balance of the loan, the terms of the loan remain unchanged, and

there is no extension of the original maturity date specified in the

loan agreement with the member. An assumption is impermissible if the

original loan was made with the intent of having a nonmember assume the

loan.

* * * * *

[FR Doc. 98-33945 Filed 12-23-98; 8:45 am]

BILLING CODE 7535-01-U