Regulatory Reform Agenda

Court:National Credit Union Administration
Publication Date:21 Dec 2018
Record Number:2018-27473
Federal Register, Volume 83 Issue 245 (Friday, December 21, 2018)
[Federal Register Volume 83, Number 245 (Friday, December 21, 2018)]
                [Proposed Rules]
                [Pages 65926-65954]
                From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
                [FR Doc No: 2018-27473]
                [[Page 65925]]
                Vol. 83
                Friday,
                No. 245
                December 21, 2018
                Part IVNational Credit Union Administration-----------------------------------------------------------------------12 CFR Chapter VIIRegulatory Reform Agenda; Proposed Rule
                Federal Register / Vol. 83 , No. 245 / Friday, December 21, 2018 /
                Proposed Rules
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                NATIONAL CREDIT UNION ADMINISTRATION
                12 CFR Chapter VII
                Regulatory Reform Agenda
                AGENCY: National Credit Union Administration (NCUA).
                ACTION: Notice of regulatory review.
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                SUMMARY: The NCUA has established a Regulatory Reform Task Force (Task
                Force) to oversee the implementation of the agency's regulatory reform
                agenda. This is consistent with the spirit of the president's
                regulatory reform agenda and Executive Order 13777. Although the NCUA,
                as an independent agency, is not required to comply with Executive
                Order 13777, the agency chose to comply with its spirit and reviewed
                all of the NCUA's regulations to that end. The Task Force published and
                sought comment on its first report in August 2017. Having reviewed all
                of the comments received, the Task Force is publishing its second and
                final report.
                DATES: December 21, 2018.
                ADDRESSES: Office of General Counsel, National Credit Union
                Administration, 1775 Duke Street, Alexandria, Virginia 22314.
                FOR FURTHER INFORMATION CONTACT: Thomas I. Zells, Staff Attorney,
                Office of General Counsel, National Credit Union Administration, 1775
                Duke Street, Alexandria, Virginia 22314 or telephone: (703) 548-2478.
                SUPPLEMENTARY INFORMATION:
                Table of Contents
                I. Background
                 a. The NCUA's Regulatory Mission
                 b. The Regulatory Reform Agenda
                 c. This Document
                II. The Second Report
                 a. General Recommendations
                 b. The Consolidated Refined Blueprint
                 c. The Detailed Refined Blueprint and Summary of Comments
                I. Background
                a. The NCUA's Regulatory Mission
                 The NCUA, as a prudential regulator, is charged with protecting the
                safety and soundness of the credit union system and, in turn, the
                National Credit Union Share Insurance Fund (NCUSIF) and the taxpayer
                through regulation and supervision. The NCUA's mission is to ``provide,
                through regulation and supervision, a safe and sound credit union
                system, which promotes confidence in the national system of cooperative
                credit.'' \1\ Consistent with that mission, the NCUA has statutory
                responsibility for a wide variety of regulations that protect the
                credit union system, members, and the NCUSIF.
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                 \1\ https://www.ncua.gov/About/Pages/Mission-and-Vision.aspx.
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                b. The Regulatory Reform Agenda
                 The president has established a regulatory reform agenda and issued
                multiple executive orders designed to alleviate unnecessary regulatory
                burdens. The NCUA is not subject to these executive orders but has
                nonetheless chosen to comply with them in spirit. Executive Order
                13777, entitled ``Enforcing the Regulatory Reform Agenda,'' directs
                subject agencies to establish Regulatory Task Forces and to evaluate
                existing regulations to identify those that should be repealed,
                replaced, or modified. The Executive Order requires subject agencies
                to, at a minimum, attempt to identify regulations that:
                 1. Eliminate jobs, or inhibit job creation;
                 2. Are outdated, unnecessary, or ineffective;
                 3. Impose costs that exceed benefits;
                 4. Create a serious inconsistency or otherwise interfere with
                regulatory reform initiatives and policies;
                 5. Are inconsistent with the requirements of section 515 of the
                Treasury and General Government Appropriations Act, 2001 (44 U.S.C.
                3516 note), or the guidance issued pursuant to that provision, in
                particular those regulations that rely in whole or in part on data,
                information, or methods that are not publicly available or that are
                insufficiently transparent to meet the standard for reproducibility; or
                 6. Derive from or implement Executive Orders or other Presidential
                directives that have been subsequently rescinded or substantially
                modified.
                c. This Document
                 The NCUA established a Regulatory Reform Task Force (Task Force) in
                March 2017 to oversee the implementation of the agency's regulatory
                reform agenda. This is consistent with the spirit of the president's
                regulatory reform agenda and Executive Order 13777. Although the NCUA,
                as an independent agency, is not required to comply with Executive
                Order 13777, the agency chose to comply with its spirit and reviewed
                all of the NCUA's regulations to that end. The Task Force undertook an
                exhaustive review of the NCUA's regulations and issued its first draft
                report to Chairman McWatters in May 2017 and submitted it without
                change to the NCUA Board in June 2017. The first report outlined the
                Task Force's proposed review and reporting procedures and made numerous
                recommendations for the amendment or repeal of regulatory requirements
                that the Task Force believed to be outdated, ineffective, or
                excessively burdensome. On August 22, 2017 the NCUA published the
                substance of the Task Force's first report in the Federal Register and
                sought public comment.\2\
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                 \2\ 82 FR 39702 (Aug. 22, 2017).
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                 This document contains the Task Force's second and final report. As
                described more fully below, this report contains both general
                recommendations for the NCUA's regulatory reform agenda moving forward
                and a refined blueprint of the timeline for recommended regulatory
                changes. The NCUA began implementing Tier 1 of the regulatory reform
                agenda in May 2017. The agency aims to have commenced action on all
                Tier 1 recommendations by May 2019. The agency plans to initiate the
                implementation of Tier 2 and Tier 3 recommendations in May or June 2019
                and 2020, respectively.
                II. The Second Report
                a. General Recommendations
                i. Report Structure
                 The structure of this report closely tracks the structure of the
                first report. The Task Force has retained the effort/impact
                prioritization matrix used in the first report \3\ and has tried to
                structure the notice as similarly as possible. Along with a
                consolidated refined blueprint of the timeline for future regulatory
                actions, this report includes a detailed refined blueprint that
                provides the first report's recommendations, a general summary of
                comments received on the recommendations, and this report's
                recommendations. The Task Force does not intend to respond to the
                specific substance of commenters' recommendations in this report.
                Instead, this report is largely focused on setting the procedures
                governing the regulatory reform agenda as it moves forward and
                providing the refined timeline for completing the Task Force's
                recommendations. Commenters' substantive recommendations, while
                considered in the development of this report and its refined timeline,
                will be most helpful in shaping recommended actions as they are more
                fully developed. Commenter recommendations related to completed actions
                have been reviewed by the Task Force and will be considered in future
                rulemakings unless otherwise indicated.
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                 \3\ Id. at 39704.
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                 The NCUA will also separately publish a consolidated version of
                this report on the NCUA website. The
                [[Page 65927]]
                consolidated report will provide the Task Force's recommendations from
                the first report, the Task Force's updated recommendations, and the
                updated prioritizations.
                ii. Measuring Future Progress
                 As contemplated by both Executive Order 13777 and the first report,
                the Task Force recommends that the NCUA measure the agency's progress
                as it advances through the regulatory reform agenda. To best do this,
                the Task Force recommends that the NCUA publish on its website the
                outline of this report's refined blueprint, subject to needed future
                modifications, to be updated every six months to monitor progress. This
                outline should document whether the agency has published any documents
                related to the individual recommendations and whether any changes to
                the recommendation or refined blueprint timeline have been made.
                iii. The NCUA's Annual Regulatory Review
                 In the first report, the Task Force recommended suspending the NCUA
                Office of General Counsel's annual regulatory review until 2020.
                Approximately five commenters supported the temporary suspension.
                Several commenters opposed the suspension, noting that changes will
                likely occur between now and 2020, including to the NCUA Board
                composition. One of these commenters felt that the NCUA should maintain
                a formal mechanism for stakeholder insight into the effect of existing
                regulations on a contemporary basis and asked that the review be
                reinstated in January 2019 as Tier 1 is completed.
                 Based on commenter feedback, the Task Force has amended its
                recommendation. The Task Force recommends that the annual regulatory
                review resume in January 2019, via a notice published on the NCUA's
                website. The 2019 regulatory review will cover parts 700-710 of the
                NCUA's regulations. The Task Force believes the annual regulatory
                review plays an important role in giving stakeholders a continuing
                means of providing feedback as changes are made and take effect.
                b. The Consolidated Refined Blueprint
                 Report 1 and Report 2 Prioritization Comparison
                ----------------------------------------------------------------------------------------------------------------
                 Regulation Report 2 priority Report 1 priority Justification for change
                ----------------------------------------------------------------------------------------------------------------
                 Report 2 Tier 1
                ----------------------------------------------------------------------------------------------------------------
                1. Corporate Credit Unions......... Completed............. Tier 1................ N/A.
                2. Emergency Mergers............... Completed............. Tier 1................ N/A.
                3. Securitization.................. Completed............. Tier 1................ N/A.
                4. Supervisory Review Committee.... Completed............. Tier 1................ N/A.
                5. Appeals......................... Completed............. Tier 1................ N/A.
                6. Equity Distribution............. Completed............. Tier 1................ N/A.
                7. Capital Planning and Stress Completed............. Tier 1................ N/A.
                 Testing.
                8. Advertising..................... Completed............. Tier 1................ N/A.
                9. Field of Membership............. Completed............. Tier 1................ N/A.
                10. Risk-Based Capital Delay....... Completed............. Tier 1................ The risk-based capital rule
                 and............................... ...................... ...................... finalized in October 2018
                 Risk-Based Capital Substantive.... ...................... Tier 2................ addressed both the delay
                 and substantive
                 recommendations made in
                 the first report.
                11. FCU Bylaws..................... Proposed.............. Tier 1................ N/A.
                12. Payday Alternative Loans....... Proposed.............. Not in Report......... The Task Force believes the
                 proposed change will
                 provide additional
                 regulatory relief.
                13. Loans to Members: a. Loan Proposed.............. Tier 1................ N/A.
                 Maturity Limits, b. Single
                 borrower and Group of Associated
                 Borrowers Limit.
                14. Appraisals..................... Proposed.............. Tier 1................ N/A.
                15. Fidelity Bonds................. Proposed.............. Tier 1................ N/A.
                16. Supervisory Committee Audits Tier 1................ Tier 1................ N/A.
                 and Verification (Engagement
                 Letter, Target Date of Delivery).
                17. Supervisory Committee Audits Tier 1................ Tier 1................ N/A.
                 and Verification (Audit per
                 Supervisory Committee Guide).
                18. Subordinated Debt (formerly Tier 1................ Tier 2................ Subordinated debt (formerly
                 Alternative Capital). alternative capital) is a
                 priority for the Chairman,
                 the agency, and
                 commenters. As such, all
                 recommendations associated
                 with subordinated debt
                 were moved to Tier 1.
                19. Designation of Low Income Tier 1................ Tier 2................ Subordinated debt (formerly
                 Status; Acceptance of Secondary alternative capital) is a
                 Capital Accounts by Low-Income priority for the Chairman,
                 Designated Credit Unions. the agency, and
                 commenters. As such, all
                 recommendations associated
                 with subordinated debt
                 were moved to Tier 1.
                20. Borrowed Funds from Natural Tier 1................ Tier 2................ Subordinated debt (formerly
                 Persons. alternative capital) is a
                 priority for the Chairman,
                 the agency, and
                 commenters. As such, all
                 recommendations associated
                 with subordinated debt
                 were moved to Tier 1.
                21. Payment on Shares by Public Tier 1................ Tier 2................ Upon further consideration
                 Units and Nonmembers. and in response to
                 stakeholder feedback the
                 Task Force has moved this
                 recommendation from Tier 2
                 to Tier 1.
                22. Compensation in Connection with Tier 1................ Tier 1................ N/A.
                 Loans.
                [[Page 65928]]
                
                23. CUSOs.......................... Tier 1................ Tier 3................ The Task Force believes
                 that this recommendation
                 is appropriately placed in
                 Tier 1. The change should
                 be low effort and high
                 impact.
                24. Loan Interest Rate, Temporary Tier 1................ Tier 3................ The loan interest rate is a
                 Rate. priority for the Board,
                 the agency, and
                 commenters.
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                 Report 2 Tier 2
                ----------------------------------------------------------------------------------------------------------------
                1. Investment and Deposit Tier 2 (First Item)... Tier 2................ Upon further consideration
                 Activities. and in response to
                 stakeholder feedback the
                 Task Force has decided to
                 move this item to the top
                 of Tier 2.
                2. Loan Participations............. Tier 2................ Tier 2................ N/A.
                3. Purchase, Sale, and Pledge of Tier 2................ Tier 2................ N/A.
                 Eligible Obligations.
                4. Purchase of Assets and Tier 2................ Tier 2................ N/A.
                 Assumption of Liabilities.
                5. Third-Party Due Diligence Tier 2................ Tier 3................ These recommendations were
                 Requirements and. combined and put into Tier
                 2.
                 Third-Party Servicing of Tier 2................ Tier 1
                 Indirect Vehicle Loans.
                6. Payout priorities in Involuntary Tier 2................ Tier 3................ This recommendation will
                 Liquidation. help protect the NCUSIF
                 and higher prioritization
                 is appropriate.
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                 Report 2 Tier 3
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                1. Preemption of State Laws (Loans Tier 3................ Tier 3................ N/A.
                 to Members and Lines of Credit to
                 Members).
                2. Treasury Tax and Loan Tier 3................ Tier 3................ N/A.
                 Depositaries and Financial Agents
                 of the Government.
                3. Leasing......................... Tier 3................ Tier 3................ N/A.
                4. Central Liquidity Facility...... Tier 3................ Tier 3................ N/A.
                5. Maximum Borrowing Authority..... Tier 3................ Tier 3................ N/A.
                6. Special Reserve for Tier 3................ Tier 3................ N/A.
                 Nonconforming Investments.
                7. Security Program, Report of Tier 3................ Tier 3................ N/A.
                 Suspected Crimes, Suspicious
                 Transactions, Catastrophic Acts,
                 and Bank Secrecy Act Compliance.
                8. Records Preservation Program and Tier 3................ Tier 3................ N/A.
                 Appendices--Record Retention
                 Guidelines; Catastrophic Act
                 Preparedness Guidelines.
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                c. The Detailed Refined Blueprint and Summary of Comments
                 As discussed, this report contains both a refined blueprint for the
                timeline for implementing the Task Force's recommendations and a
                summary of the comments the NCUA received on the first report. The NCUA
                received nearly 50 comments on the first report. Commenters
                overwhelmingly supported the NCUA's regulatory reform agenda. It should
                be noted that comment tallies are only reflective of the number of
                commenters who directly addressed a specific recommendation or issue.
                Many commenters expressed general support for the first report or for
                wide-ranging review of a number of regulations.
                 The NCUA has completed ten of the first report's initial regulatory
                relief recommendations:
                 1. Corporate Credit Unions;
                 2. Emergency Mergers;
                 3. Securitization;
                 4. Supervisory Review Committee;
                 5. Appeals Procedures;
                 6. The Equity Distribution;
                 7. Capital Planning and Stress Testing;
                 8. Accuracy of Advertising and Notice of Insured Status;
                 9. Field of Membership; and
                 10. Risk-Based Capital.
                 Additionally, the NCUA has issued proposed rules or commenced
                action for five other recommendations:
                 1. Bylaws;
                 2. Loan Maturities;
                 3. The Single Borrower or Group of Associated Borrower Limit;
                 4. Appraisals;
                 5. Fidelity Bonds.
                 Nearly all commenters explicitly commended the NCUA's efforts to
                identify outdated, ineffective, or excessively burdensome requirements
                and ease regulatory burden while modernizing the NCUA's regulations.
                i. Tier 1 (First 24 Months)
                1. Completed Actions
                1. Part 704--Corporate Credit Unions
                 Addresses: Corporate Credit Unions.
                 Sections: 704.
                 Category: Improve.
                 Degree of Effort: Moderate.
                 Degree of Impact: Low.
                 Report 1: Amend capital standards for corporate credit unions to
                include expanding what constitutes Tier 1 Capital. For mergers, permit
                Tier 1 Capital to include generally accepted accounting principles
                (GAAP) equity acquired. Also, establish a retained earnings requirement
                of 2.50%, which, when achieved, will allow for all perpetual
                contributed capital to be included in Tier 1 Capital. The current rule
                for perpetual contributed capital would remain in effect until the
                retained earnings requirement is met.
                 Comments: The NCUA issued this final rule in November 2017.
                However,
                [[Page 65929]]
                a number of commenters either addressed the rulemaking or provided
                other substantive comments on part 704. Several commenters that
                submitted their comments prior to the November final rule's publication
                explicitly asked the NCUA to finalize the proposed rule. One of these
                commenters stated that the proposal provides corporate credit unions
                with greater flexibility in the calculation and treatment of capital
                and promotes increased certainty and stability in the credit union
                system. Several commenters agreed that expressly including merger-
                acquired GAAP equity as retained earnings would clarify that capital is
                available to cover losses, resulting in greater accounting transparency
                and reduced ambiguity. These commenters also supported counting
                perpetual contributed capital as Tier 1 Capital, especially given the
                confusion for credit union auditors evaluating potential perpetual
                contributed capital impairment. The commenters argued that the
                limitation of perpetual contributed capital for regulatory capital
                purposes undermines the full value of perpetual contributed capital to
                absorb losses during an economic event.
                 Approximately 15 commenters asked the NCUA to review part 704 in
                its entirety to explore modernization opportunities for the benefit of
                corporate credit unions and natural person members. The commenters
                argued that this would provide more relief by decreasing regulatory
                burden, increasing operational efficiency, and improving member
                services. One of these commenters stated that the NCUA revised part 704
                as a result of the financial crisis and consequently the corporate
                system has significantly contracted and consolidated. Another commenter
                argued for more regulatory relief and refinement of the rules governing
                corporate credit unions, and recommended that the NCUA: (1) Form a task
                force with state regulators to review future adjustments to the
                corporate credit union rules; (2) reintroduce meaningful dual
                chartering by eliminating unnecessary preemption of state rules,
                particularly with respect to corporate credit union governance; and (3)
                enhance the joint supervision of corporates and their risk to natural
                person credit unions by formalizing increased information sharing
                between the NCUA and the state regulators supervising the corporate
                credit unions' natural person credit union members.
                 As discussed below, commenters also recommended a number of more
                specific substantive changes to part 704.
                 One commenter noted that, relative to credit risk management, the
                NCUA limits investments in any single obligor to the greater of 25% of
                total capital or $5 million. Section 704.6(c)(2) provides several
                exceptions to the single-obligor limit, including an exception for
                credit card master trust asset-backed securities that allows for a
                higher limit of 50% of total capital in any single obligor. The
                commenter stated that other asset-backed securities utilize the master
                trust structures such as vehicle, equipment, and student loan master
                trusts. The commenter opined that, like credit card master trusts,
                these other master trusts offer larger asset pools and greater borrower
                and geographic diversity. The commenter further noted that many offer
                structural features that enhance the safety of the investments. The
                commenter asked that, given the described advantages of master trust
                asset-backed securities, the NCUA consider including these additional
                master trust asset-backed securities in the exception allowing for
                investments up to 50% of capital.
                 One commenter asked the NCUA to examine the concept of Weighted
                Average Life (WAL) as a tool for risk mitigation of government-issued
                or guaranteed securities. The commenter noted that, per the current
                rule, a corporate credit union must manage its financial assets to
                maintain a WAL of 2 years or less to be measured at month-end in the
                base case, and 2.25 years or less to be measured at month-end in a 50%
                prepayment speed slowdown scenario. The commenter observed that under
                Sec. 704.8(h) U.S. Government-issued or guaranteed securities are
                allowed a modest one-half WAL treatment. The commenter stated that
                government-guaranteed securities exhibit no credit risk, are highly
                liquid in the marketplace, serve as a buffer in economic stress
                scenarios, and are valuable collateral for liquidity in the capital
                markets and at the Federal Reserve Bank. The commenter argued that the
                one-half WAL treatment is not enough of a benefit or incentive for
                buying these securities. The commenter stated that they were not
                recommending that the NCUA Board revise the WAL measurement for credit-
                related securities, Sec. 704.8(f) and (g), but did recommend the
                factor in Sec. 704.8(h) be changed to make the WAL of government-
                issued and government-backed securities equal to a cash equivalent. The
                commenter asserted it is technically incorrect to assign WAL limits on
                government-guaranteed instruments.
                 One commenter noted that Sec. 704.8 limits the WAL of corporate
                credit unions' financial assets and asserted that the NCUA's WAL
                thresholds for corporates were intentionally designed to limit a
                corporate's services to natural person credit unions to short-term
                liquidity lending and payments system services. The commenter recalled
                that the NCUA noted at the time that the WAL provision was essential in
                the absence of cash-flow mismatch test requirements. The commenter said
                that neither natural person credit unions nor other financial
                institutions have explicit limitations on the WAL of the asset side of
                their balance sheets.\4\ The commenter conceded that, as the corporate
                system restructured in the aftermath of the corporate crisis, such
                regulatory shaping of the marketplace, and restrictions on corporate
                credit union growth and operations, were arguably necessary to contain
                risk. However, the commenter also argued that these same limitations
                restrict corporate credit union service to natural person credit
                unions, which in turn may be hindering the ability of some natural
                person credit unions to remain competitive in the marketplace. In
                addition to the WAL restrictions, the commenter noted that corporate
                credit unions are also limited to 180 days maturity on secured
                borrowings. The commenter contended that, taken together, the WAL and
                secured borrowing provisions limit corporates' ability to provide term
                lending and other liquidity management services to natural person
                credit unions. The commenter further observed that natural person
                credit unions have limited choices to find those essential services
                elsewhere, noting that the Federal Reserve discount window is generally
                a lender of last resort, and credit union membership in the Federal
                Home Loan Bank (FHLB) system may be more limited than commonly
                understood. The commenter concluded that, while the commenter and state
                regulators remain keenly aware of the severity of the corporate crisis
                and understand the importance of the lessons learned, the future of the
                corporate system cannot be solely controlled by a crisis mindset. The
                commenter also suggested the formation of a joint working group to help
                identify the proper regulatory balance.
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                 \4\ The commenter stated that ``[n]atural person credit union
                WAL of assets is factored into Prompt Corrective Action (PCA) net
                worth calculations, but are not limited by the PCA. See 12 CFR
                702.105-107.''
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                 Another commenter argued that a corporate credit union that has
                been granted Part 1 expanded authority should have more flexibility in
                the WAL requirement than base or base plus corporate credit unions. The
                commenter argued that since a Part 1 corporate has
                [[Page 65930]]
                a stronger developed infrastructure and higher capital requirements,
                such as a minimum leverage ratio of 6%, permission to increase the WAL
                in the base case and stressed scenario should be allowed. The commenter
                recommended the calculation be tiered to reflect a correlation to the
                required higher leverage ratios. The commenter said that, for example,
                a Part 1 corporate with: a 6% leverage ratio should be permitted to
                have a 2.5 year WAL in the base and 2.75 year WAL in the 50% slower
                prepayment scenario; a 7% leverage ratio should be permitted to have a
                3.5 year WAL in the base and 4.0 year WAL in the 50% slower prepayment
                scenario; and an 8% leverage ratio should be permitted to have a 4.5
                year WAL in the base and 5.0 year WAL in the 50% slower prepayment
                scenario. The commenter noted that Part 1 corporates are required to
                have more developed risk mitigation tools as part of their
                infrastructure in addition to stronger capital ratios. The commenter
                felt higher capital ratios are a good assessment of the safety and
                soundness of any financial institution and should correlate with the
                amount of risk a corporate should take. The commenter concluded that
                the additional regulatory flexibility within the WAL calculation is
                commensurate with the additional required capital and stronger
                infrastructure.
                 One commenter, a Part 1 corporate credit union, said that they
                would welcome the opportunity to expand their investment authority
                related to credit risk to correlate with the stronger capital position.
                The commenter would like to be able to buy investment grade
                subordinated secured asset-backed securities and would like parity with
                investment grade unsecured corporate debt, which is currently permitted
                under Part 1. The commenter argued parity would allow Part 1 corporates
                an investment opportunity that has the same credit rating and the same
                credit risk regardless of subordination. The commenter suggested
                subordinated investments within the secured asset-backed sector should
                be limited to only those sectors that are highly mature, such as credit
                cards, auto loans and FFELP-backed student loans. The commenter also
                asserted that a lower credit rating investment in these sectors is
                arguably less risky than the highest rating investment in a less
                mature, esoteric sector that does not have a proven track record
                through a business cycle.
                 The same commenter observed that part 704 has different definitions
                for credit risk for Part 1 versus base plus authorities. Specifically,
                the commenter noted that under Part 1 a purchase must be of
                ``investment grade'' whereas for base plus a purchase must only have a
                ``minimal amount of credit risk.'' The commenter pointed out that a
                distinction has been made for credit risk as it applies to Part 1
                versus base plus, but the standard for investment action plans remains
                the same for both expanded authorities. The commenter stated that
                investment action plans are defined as required when the investment
                presents more than a minimal amount of credit risk. The commenter
                suggested this infers that an investment purchased under Part 1 as
                ``investment grade'' would be considered subject to an investment
                action plan immediately after purchase. The commenter did not believe
                this was the NCUA's intent and asked that this be clarified to remove
                any ambiguity.
                 Another commenter suggested that there should be a way for a
                corporate credit union to make a minimal investment in a company
                without the company being classified a corporate credit union service
                organization (CUSO). The commenter stated that many companies shun
                corporate credit union investment dollars due to the regulatory
                constraints of becoming a corporate CUSO, having to primarily serve
                credit unions and to follow the various regulatory restrictions of part
                704. The commenter said that without the opportunity to invest in
                companies, a corporate credit union cannot direct or participate in the
                direction of new products or services. The commenter argued that the
                intent of an investment in such a company is not measured by a return
                as it is with traditional investments (securities) but instead is an
                opportunity to help bring new technologies, products, and services to
                credit union members.
                 One commenter requested that the NCUA make a technical correction.
                The commenter noted that changes to the member business lending rule
                caused references in Sec. 704.7(e)(3) to Sec. 723.1(b) and former
                Sec. 723.16 to no longer be valid, leaving the rules for a loan to a
                member that is not a credit union or a corporate CUSO unclear.
                 Report 2: The NCUA issued a final rule related to the first
                report's recommendations in November 2017.\5\ Part 704 is scheduled to
                be reviewed again as part of the Office of General Counsel's 2019
                annual regulatory review.
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                 \5\ 82 FR 55497 (Nov. 22, 2017).
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                2. Appendix B to Part 701--Chartering and Field of Membership Manual
                 Addresses: Emergency Mergers.
                 Sections: Appendix 1 to Appendix B to Part 701.
                 Category: Improve.
                 Degree of Effort: Moderate.
                 Degree of Impact: Moderate.\6\
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                 \6\ Includes potential efficiencies and/or cost savings for
                NCUA.
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                 Report 1: Revise the definition of the term ``in danger of
                insolvency'' for emergency merger purposes to provide a standard that
                better protects the NCUSIF. First, for two of the three current net
                worth-based categories, extend the time period in which a credit
                union's net worth is projected to either render it insolvent or drop
                below two percent from 24 to 30 months and from 12 to 18 months,
                respectively. Additionally, add a fourth category to the three existing
                net worth-based categories of the definition, to include credit unions
                that have been granted or received assistance under section 208 of the
                Federal Credit Union Act (FCU Act) within the last 15 months.
                 Comments: Approximately ten commenters offered support for the
                recommendations. Several commenters indicated the recommendation would
                make it easier for emergency mergers to occur and further protect the
                NCUSIF. One commenter said the recommended changes would allow the NCUA
                to better identify credit unions in danger of insolvency and give
                acquiring credit unions more time to step in and resolve troubled
                credit unions. Several commenters noted that, while they supported the
                increased flexibility, they objected to any regulatory regime that
                would result in rigid guidelines forcing credit union mergers. The
                commenters asked the NCUA to avoid any inflexible, one-size-fits-all
                rubric to resolve financially challenged institutions. One commenter
                felt the 208 assistance program had a poor track record in preventing
                credit union insolvency and urged the NCUA to explore ways to either
                improve the program's success rate or to seek more effective remedies
                to help struggling credit unions.
                 Report 2: The NCUA issued a final rule related to the first
                report's recommendations in December 2017.\7\ No further action is
                being considered by the NCUA Board at this time. Part 701 is scheduled
                to be reviewed again as part of the Office of General Counsel's 2019
                annual regulatory review.
                ---------------------------------------------------------------------------
                 \7\ 82 FR 60283 (Dec. 20, 2017).
                ---------------------------------------------------------------------------
                3. Securitization
                 Addresses: Securitization.
                 Sections: 721.
                 Category: Expand Authority.
                 Degree of Effort: High.
                 Degree of Impact: Low.
                [[Page 65931]]
                 Report 1: Issue a legal opinion letter authorizing federal credit
                unions (FCUs) to issue and sell securities under their incidental
                powers authority. Also, finalize the safe harbor rule proposed in 2014
                regarding the treatment by the NCUA Board, as liquidating agent or
                conservator of a federally insured credit union (FICU), of financial
                assets transferred by the credit union in connection with a
                securitization or a participation.
                 Comments: Approximately ten commenters offered general support for
                the recommendations. One commenter asked the NCUA to issue guidance to
                permit CUSOs to serve as aggregators of the mortgages underlying the
                securities. The commenter specifically reiterated the following points
                that it raised in a previously submitted letter: ``(1) Expand the
                eligibility of loans beyond those originated by the securitizing credit
                union, in particular, by permitting the use of purchased loans needed
                to complete a pool as well as allowing the aggregation of loans by
                CUSOs; (2) provide flexibility in the levels of residual and retained
                interests in securitized assets that a credit union may hold; (3)
                authorize credit unions to have special purpose vehicles with the
                authority to enter into derivative transactions; and (4) provide
                additional clarifications on the types of securitization transactions
                in which credit unions may engage.''
                 Several commenters requested new guidance as soon as possible.
                Another commenter urged the NCUA to work with the industry to develop
                guidance on an accelerated timeline. The commenter reasoned that
                building an effective securitization program takes time and investment
                in people and systems; thus, it is vital to have a clear understanding
                of any limitations on the type of activities a credit union can
                undertake. As part of this guidance, the commenter also suggested the
                NCUA set guidelines to allow well qualified credit unions, or their
                CUSOs, to serve as loan aggregators. The commenter felt that loan
                aggregation is a natural and necessary role within the financial
                services industry that should be extended to credit unions. Another
                commenter asked to work with the NCUA to develop the guidance through a
                working or advisory group established to allow credit unions and
                securitization experts to help identify key issues and concerns.
                 Report 2: The NCUA implemented the first report's recommendations
                through its June 2017 safe harbor final rule,\8\ and its June 21, 2017
                legal opinion letter regarding the authority to issue and sell
                securities.\9\ Additionally, the Office of Examination and Insurance is
                currently developing guidance on asset securitization for credit
                unions. The NCUA is also evaluating whether any additional regulation,
                guidance, or supervision will be necessary.
                ---------------------------------------------------------------------------
                 \8\ 82 FR 29699 (June 30, 2017).
                 \9\ Asset Securitization Authority, NCUA OGC Op. Ltr. 17-0670
                (June 21, 2017), available at https://www.ncua.gov/regulation-supervision/Pages/rules/legal-opinions/2017/asset-securitization-authority.pdf.
                ---------------------------------------------------------------------------
                4. Supervisory Review Committee
                 Addresses: Supervisory Review Committee.
                 Sections: 746, Subpart A.
                 Category: Improve.
                 Degree of Effort: High.
                 Degree of Impact: Low.
                 Report 1: Expand and formalize procedures by which FICUs may secure
                review of material supervisory determinations by the NCUA's Supervisory
                Review Committee (SRC). Broaden the jurisdiction of the SRC to more
                closely conform to the practices of the other federal financial
                institution regulatory agencies. Expand the pool of agency personnel
                who will serve on the SRC and implement an optional, intermediate level
                of review by the Director of the NCUA's Office of Examination and
                Insurance before a matter is considered by the SRC.
                 Comments: Approximately five commenters offered specific support
                for the recommendations. One commenter commended the SRC reforms and
                the NCUA's commitment to consider including appeals information in the
                agency's Annual Report. Another commenter supported the final rule, but
                still desired additional improvements that were not finalized, such as
                consistent review panels and review of CAMEL 1 and 2 component scores.
                Several other commenters expressed appreciation for the NCUA's
                willingness to provide several opportunities for review of material
                supervisory determinations from a program office. These commenters
                welcomed the additions of the intermediate SRC and the opportunity for
                oral argument before the NCUA Board directly. However, these commenters
                did contend that, given the nature of the regulator/regulated
                relationship, an independent review option should also be available.
                Further, the commenters felt the rule should allow for a request for
                oral hearing up until the final disposition, reasoning that as a credit
                union works through a complaint it may determine an oral hearing is
                appropriate and it should be able to request one up until an appeal
                decision is made.
                 Report 2: The NCUA issued a final rule related to the first
                report's recommendations in October 2017.\10\ No further action is
                being considered by the NCUA Board at this time. Part 746 is scheduled
                to be reviewed again as part of the Office of General Counsel's 2020
                annual regulatory review.
                ---------------------------------------------------------------------------
                 \10\ 82 FR 50270 (Oct. 30, 2017).
                ---------------------------------------------------------------------------
                5. Appeals
                 Addresses: Appeals.
                 Sections: 746, Subpart B.
                 Category: Improve.
                 Degree of Effort: High.
                 Degree of Impact: Low.
                 Report 1: Consolidate procedures currently imbedded in various
                substantive regulations by which parties affected by an adverse
                determination at the regional or program office level may appeal that
                determination to the NCUA Board. Exclude formal enforcement actions and
                certain other subject areas. Establish uniform procedural guidelines to
                govern appeals and provide an avenue by which appellants may request
                the opportunity to appear in person before the NCUA Board. Matters that
                are excluded from the proposed new rule either require a formal hearing
                on the record in accordance with the Administrative Procedure Act
                (e.g., formal enforcement actions and certain creditor claims in
                liquidation) or are already governed by separate, discrete procedures
                (e.g., enforcement measures under prompt corrective action or material
                supervisory determinations reviewable by the SRC). Appeals of matters
                that are delegated by rule to an officer or position below the NCUA
                Board for final, binding agency action are also excluded.
                 Comments: Approximately ten commenters offered general support for
                the recommendations. One of these commenters commended the reforms and
                the NCUA's commitment to considering the inclusion of appeals
                information in the agency's Annual Report. Another commenter strongly
                supported the consolidation and improvement of procedures regarding
                appeals of adverse determinations. The NCUA does not have direct
                supervisory authority over CUSOs; however, one commenter said that the
                NCUA's exercise of de facto supervision over CUSOs means CUSOs should
                also have the ability to appeal adverse determinations made by NCUA
                examiners through the CUSO review process.
                 A handful of the supportive commenters noted that they appreciate
                the improved process, but felt the agency should provide a mechanism
                for
                [[Page 65932]]
                collection of exam feedback on the performance of individual examiners.
                These commenters argued that independent, ongoing, and confidential
                surveys should be processed and compiled by an external third party,
                free from public repercussion. The commenters felt that such a process
                would be advantageous for the NCUA by demonstrating education,
                training, and consistency metrics, as well as assisting in the merit
                pay process. The commenters said that most industries have successfully
                implemented client satisfaction methodologies to support data-driven
                decision making. Finally, one commenter supported this measure, but
                asked for reconsideration of additional changes, including expedited
                appeals when time is of the essence.
                 Report 2: The NCUA issued a final rule related to the first
                report's recommendations in October 2017.\11\ No further action is
                being considered by the NCUA Board at this time. Part 746 is scheduled
                to be reviewed again as part of the Office of General Counsel's 2020
                annual regulatory review.
                ---------------------------------------------------------------------------
                 \11\ 82 FR 50288 (Oct. 30, 2017).
                ---------------------------------------------------------------------------
                6. Part 741--Requirements for Insurance
                 Addresses: National Credit Union Share Insurance Fund Equity
                Distributions.
                 Sections: 741.4; 741.13.
                 Category: Improve.
                 Degree of Effort: Low.
                 Degree of Impact: High.
                 Report 1: Revise this section of the regulation to preclude a
                credit union that has already converted to another form of insurance
                from receiving a subsequently declared NCUSIF dividend. Currently, if a
                credit union terminates insurance before a premium is declared it does
                not pay, but if it terminates insurance before a dividend is declared
                but within the same calendar year it receives the dividend. This is
                unfair to credit unions that remain insured.
                 Comments: A handful of commenters specifically supported the
                recommendation. Two of these commenters expected the same principles to
                be applied to 2018 Temporary Corporate Credit Union Stabilization Fund
                rebates. A third commenter strongly supported the recommendation,
                noting that the bright line proposed seems fairer to FICUs than the
                practice in existence at the time of the comment. The commenter
                emphasized that it is inherently inequitable to let credit unions
                terminate insurance coverage mid-year, and thereby avoid the risks of a
                premium assessment or capitalization deposit increase for the remaining
                months of that year, and still reward them with equity distributions at
                year-end. That practice, the commenter argued, disadvantages FICUs that
                remain insured throughout the calendar year and bear the risks others
                may avoid. The commenter also felt that FICUs considering terminating
                federal share insurance coverage should factor the risk of missing out
                on a year-end equity distribution into their decision.
                 Conversely, a handful of commenters opposed the recommendation. One
                commenter asked the NCUA to apportion any potential distributions based
                on the total amount of assessments paid by the FICU and suggested a
                FICU's proportionate share of a future equity distribution be
                determined by measuring the average of its four quarter-end insured
                share balances reported during the year applicable to the distribution.
                Several of the commenters reiterated concerns they had previously
                raised during the equity distribution method comment period. One of
                these commenters strongly urged the NCUA to forego any efforts related
                to this provision. The commenter felt that it is unclear how this
                provision would impact future equity distributions as they relate to
                the Corporate Resolution Program. The commenter noted that, at the time
                of the comment, if a FICU terminates federal share insurance coverage
                during the calendar year the credit union is entitled to receive an
                equity distribution, which is based on the insured shares as of the
                last day of the most recently ended reporting period and then reduced
                by the number of months remaining in the calendar year. The commenter
                applauded the simple and fair logic of that approach. Finally, another
                commenter reiterated objections to changes to Sec. 741.4 that would
                deprive a credit union of a pro rata NCUSIF dividend share for a year
                in which that credit union was NCUSIF insured for at least part of the
                year.
                 Separately, several commenters argued that the NCUSIF's normal
                operating level can and should return to its historical 1.30% over the
                next several years. The commenters felt that, as the regulatory reform
                agenda moves forward in eliminating duplicative and outdated compliance
                burdens, continued stability will further ameliorate additional
                concerns regarding the NCUSIF's normal operating level. Another
                commenter expressed continued concern over the 1.39% normal operating
                level, arguing the increase is significant deviation from the NCUA's
                proven, successful policy. The commenter urged the NCUA to re-evaluate
                the normal operating level and to set it at 1.34% for a temporary
                period, followed by a return to the traditional 1.30% level. The
                commenter said that this historical policy dictated that the NCUSIF's
                equity ratio would be countercyclical, rising in good times so that
                premiums would not be necessary at the troughs of a recession.
                 Report 2: The NCUA issued a final rule related to the first
                report's recommendations in February 2018.\12\ Under the final rule, a
                financial institution must file at least one quarterly Call Report
                within the current calendar year to be eligible to receive an NCUSIF
                equity distribution. This requirement applies to all potential
                beneficiaries of an NCUSIF equity distribution including FICUs that
                terminate federal share insurance coverage through conversion, merger,
                or liquidation. No further action is being considered by the NCUA Board
                at this time. Part 741 is scheduled to be reviewed again as part of the
                Office of General Counsel's 2020 annual regulatory review.
                ---------------------------------------------------------------------------
                 \12\ 83 FR 7954 (Feb. 23, 2018).
                ---------------------------------------------------------------------------
                7. Part 702--Capital Adequacy
                 Addresses: Capital Planning and Stress Testing.
                 Sections: 702.501-702.506.
                 Category: Expand Relief.
                 Degree of Effort: Moderate.
                 Degree of Impact: Moderate.\13\
                ---------------------------------------------------------------------------
                 \13\ Includes potential efficiencies and/or cost savings for
                NCUA.
                ---------------------------------------------------------------------------
                 Report 1: Explore raising the threshold for required stress testing
                to an amount greater than $10 billion, and assigning responsibility for
                conducting stress testing to the credit unions.
                 Comments: Several commenters offered general support for the
                recommendations. Commenters' substantive recommendations focused on
                narrowing the rule's applicability. Several commenters suggested
                raising the threshold to a significantly higher value, reasoning that
                since most credit unions are well under the $10 billion threshold
                currently, but have room to grow, a higher threshold would better
                reflect macroeconomic realities than an inflexible dollar amount. These
                commenters also argued that large credit unions are best equipped to
                internally self-conduct these exercises, with reports to examiners,
                given that, unlike the banking agencies, NCUA staff are not
                consistently involved in large institution contingency exercises. One
                commenter asked the NCUA to consider Congressional efforts to raise the
                bank stress testing threshold to $250 billion. Several other commenters
                argued that,
                [[Page 65933]]
                given research indicating that the asset size of an institution is
                insufficient to determine riskiness, the proposal should be expanded to
                provide relief for more credit unions.\14\ One commenter argued that
                stress testing has become overly burdensome and has added unnecessary
                cost to the NCUA and affected credit unions, particularly considering
                the overall financial strength of the credit unions impacted by the
                rule.
                ---------------------------------------------------------------------------
                 \14\ The commenters cited recent proposals by federal banking
                regulators and the Office of Financial Research's report, ``Size
                Alone is not Sufficient to Identify Systemically Important Banks,''
                to support their position.
                ---------------------------------------------------------------------------
                 Report 2: On April 25, 2018, the NCUA issued a final rule \15\
                amending its stress testing regulations, which, among other things,
                raised the threshold for required stress testing to a minimum of $15
                billion, and assigned responsibility for conducting stress testing to
                covered credit unions. No further action is being considered by the
                NCUA Board at this time. Part 702 is scheduled to be reviewed again as
                part of the Office of General Counsel's 2019 annual regulatory review.
                ---------------------------------------------------------------------------
                 \15\ 83 FR 17901 (Apr. 25, 2018).
                ---------------------------------------------------------------------------
                8. Part 740--Accuracy of Advertising and Notice of Insured Status
                 Addresses: Accuracy of Advertising and Notice of Insured Status.
                 Sections: 740.
                 Category: Expand Relief.
                 Degree of Effort: Moderate.
                 Degree of Impact: High.
                 Report 1: Revise certain provisions of the NCUA's advertising rule
                to provide regulatory relief to FICUs. The current draft NPRM proposes
                to allow FICUs to use a fourth version of the official advertising
                statement, ``Insured by NCUA.'' The draft also expands a current
                exemption from the advertising statement requirement regarding radio
                and television advertisements and eliminates the requirement to include
                the official advertising statement on statements of condition required
                to be published by law. Finally, it requests comment about whether the
                regulation should be modified to accommodate advertising via new types
                of social media, mobile banking, text messaging and other digital
                communication platforms, including Twitter and Instagram. Changes made
                based on this final request would need to be part of a separate
                rulemaking.
                 Comments: Approximately ten commenters generally supported the
                recommendations and an increased parity with banks. Approximately five
                commenters specifically supported expanding the radio/television
                exemption to 30 seconds. Several commenters supported eliminating the
                requirement for the advertising statement on statements of conditions.
                Approximately five commenters specifically supported updates to the
                rule to accommodate social media and urged that any new or modified
                rules should ensure credit unions retain maximum flexibility and the
                ability to take advantage of new technologies. Several commenters
                specifically supported the fourth version of the advertising statement.
                 One commenter asked the NCUA to take steps to emphasize that part
                740 preempts state advertising restrictions for FCUs and federally
                insured, state-chartered credit unions (FISCUs). The commenter said
                that, for example, at a minimum, any modifications to these rules
                should retain the first sentence of part 740: ``[T]his part applies to
                all federally insured credit unions.'' The commenter further added that
                additional revisions to bolster the preemptive force of part 740 could
                provide additional clarity for both FCUs and FISCUs and ensure that all
                credit unions operate under fair and consistent advertising rules.
                 One commenter suggested that the final rule should be much more
                expansive. Several commenters emphasized that this rule is a priority
                to them. One of these commenters asked the NCUA to make the fourth
                advertising statement and the 30 second exemption effective immediately
                following the proposed rule's comment closing date.
                 One commenter found the changes unneeded, reasoning that saving a
                few characters on social media is a non-issue and not worthy of Tier 1
                status, especially since Twitter doubled its character limits.
                 Report 2: The NCUA issued a final rule related to the first
                report's recommendations in April 2018.\16\ No further action is being
                considered by the NCUA Board at this time. Part 740 is scheduled to be
                reviewed again as part of the Office of General Counsel's 2020 annual
                regulatory review.
                ---------------------------------------------------------------------------
                 \16\ 83 FR 17910 (Apr. 25, 2018).
                ---------------------------------------------------------------------------
                9. Appendix B to Part 701--Chartering and Field of Membership Manual
                 Addresses: Field of Membership.
                 Sections: Appendix B to Part 701.
                 Category: Expand Authority.
                 Degree of Effort: Moderate.
                 Degree of Impact: Moderate.
                 Report 1: Revise the chartering and field of membership rules to
                give applicants for community-charter approval, expansion or conversion
                the option, in lieu of a presumptive community, to submit a narrative
                to establish common interests or interaction among residents of the
                area it proposes to serve, thus qualifying the area as a well-defined
                local community. Add public hearings for determining well-defined local
                communities with populations over 2.5 million. Remove the population
                limit on a community consisting of a statistical area or a portion
                thereof. Finally, when such an area is subdivided into metropolitan
                divisions, permit a credit union to designate a portion of the area as
                its community without regard to division boundaries.
                 Comments: Approximately ten commenters offered general support for
                the proposal. Several commenters opposed the public hearing requirement
                for determining well-defined local communities with populations over
                2.5 million. One of these commenters felt that while such hearings may
                be warranted in the case of a narrative application, the requirement
                seemed capricious in the case of a well-defined presumptive community
                application based on a Combined Statistical Area or Metropolitan
                Statistical Area. Another of these commenters felt this is a technical
                legal issue for which public input is neither necessary nor
                appropriate. A handful of commenters supported removing the population
                limit on a community consisting of a statistical area or a portion
                thereof. One of these commenters said that the NCUA should approve
                field of membership requests based on the FCU's demonstrated ability to
                serve members within a community, regardless of population, rather than
                on an arbitrary cap. At least one commenter supported allowing
                designation of a portion of a statistical area as a community without
                regard to metropolitan division boundaries. Another commenter asked the
                NCUA to consider additional improvements, including: Deadlines for FOM
                amendment requests, increased transparency in the decision making
                process, and streamlined charter conversions and notification
                requirements.
                 Report 2: The NCUA issued a final rule related to the first
                report's recommendations in June 2018.\17\ Specifically, the final rule
                allows the option for an applicant to submit a narrative to establish
                the existence of a well-defined local community instead of limiting the
                applicant to a presumptive statistical community. Also, the NCUA Board
                will hold a public hearing for narrative applications where the
                [[Page 65934]]
                proposed community exceeds a population of 2.5 million people. Further,
                for communities that are subdivided into metropolitan divisions, the
                NCUA Board will permit an applicant to designate a portion of the area
                as its community without regard to division boundaries. The NCUA Board
                expressly declined to increase the population limit for presumptive
                statistical communities. The final rule became effective September 1,
                2018.\18\ Part 701 is scheduled to be reviewed again as part of the
                Office of General Counsel's 2019 annual regulatory review.
                ---------------------------------------------------------------------------
                 \17\ 83 FR 30289 (June 28, 2018).
                 \18\ The NCUA has appealed the U.S. District Court for the
                District of Columbia's ruling on the October 2016 field of
                membership rule.
                ---------------------------------------------------------------------------
                10. Part 702--Capital Adequacy
                 Addresses: Risk-Based Capital.
                 Sections: 702.
                 Category: Improve.
                 Degree of Effort: Low.
                 Degree of Impact: High.\19\
                ---------------------------------------------------------------------------
                 \19\ Includes potential efficiencies and/or cost savings for
                NCUA.
                ---------------------------------------------------------------------------
                 Report 1 (Delay): Consider extending the January 1, 2019,
                implementation date to avoid needing to develop call report and system
                changes while this rule is under review. This will also allow time for
                the agency to more closely coincide changes with the implementation of
                the new current expected credit loss (CECL) accounting standard and
                consider any changes in risk-based capital standards for community
                banks currently being considered by the federal banking agencies.\20\
                Considerations include changing the definition of complex to narrow the
                applicability of the rule, allowing for credit unions with high net
                worth ratios to be exempt, and simplifying the overall risk category
                and weighting scheme.
                ---------------------------------------------------------------------------
                 \20\ CECL (current expected credit loss) is a new accounting
                standard adopted by the Financial Accounting Standards Board (FASB)
                affecting how credit unions account for losses and related reserves
                for financial instruments. The FASB effective date of CECL
                applicable to credit unions is 2021.
                ---------------------------------------------------------------------------
                 Report 1 (Substantive): Considerations include changing the
                definition of complex to narrow the applicability of the rule, allowing
                for credit unions with high net worth ratios to be exempt, and
                simplifying the overall risk category and weighting scheme. These
                amendments need to be coordinated with any amendments to supplemental
                and secondary capital, which need to be coordinated with any amendments
                to the borrowing rule.
                 Comments: Approximately 15 commenters offered comments supporting
                delay of the RBC rule. Several commenters specifically supported
                delaying implementation of the rule so that the NCUA can revisit the
                need for it as adopted.
                 Approximately five commenters cited the concurrent timeline for
                implementation of the new CECL standard as a factor necessitating
                delay. One of these commenters reasoned that aligning these dates would
                provide additional time for capital planning and, to the degree deemed
                appropriate, potential alignment with community bank capital standards.
                The commenter felt such a delay would be high impact and low effort and
                consistent with Executive Order 13777's spirit. Another commenter asked
                that the NCUA provide to credit unions any economic analysis it has
                conducted on the impact of the CECL standard, which the commenter
                believed will likely compound compliance issues for RBC covered credit
                unions when it takes effect.
                 Approximately ten commenters cited system integration and call
                report update issues as factors necessitating delay. Several of these
                commenters said that compliance requirements have not been adequately
                noticed to provide system integration updates. Another commenter
                emphasized that without delay credit unions will be challenged to make
                required call report and system changes as the rule remains under
                review. One commenter stated that internal adjustments and
                implementation of new call report instructions take considerable
                resources with each change. The commenter felt that delaying the
                effective date and preventing a series of smaller and possibly
                conflicting changes that need to be readjusted over the next year will
                save credit unions time and resources. Several commenters said that
                delay and further study should be one of the agency's highest
                priorities. The commenters reasoned that, given the January 2019
                effective date, credit unions must begin planning for and altering
                operations as early as the second quarter of 2018 and strongly urged
                the NCUA to announce a delay as soon as possible. The commenters
                stressed that the longer the NCUA waits to delay the rule, the higher
                the likelihood that credit union operations will be affected. Another
                commenter said that delay is necessary to give credit unions more time
                to review the rule and to give the NCUA more time to develop the
                necessary call report changes. The commenter suggested the call report
                should be modernized to reduce reporting burdens and give regulators
                better tools for on-site exams and off-site monitoring.
                 Approximately ten commenters asked the NCUA to narrowly tailor and
                simplify the rule. Approximately five commenters specifically asked the
                NCUA to narrow the complex credit union definition. Approximately five
                commenters specifically supported reducing the applicability of RBC and
                risk-weights to all smaller credit unions. Another commenter asked
                that, if the rule is retained, the NCUA further consider the rule's
                scope and a complex credit union definition that is not so dependent on
                asset size. One commenter asked the NCUA to raise the threshold to at
                least $500 million. The commenter reasoned that the RBC requirements
                are supposed to give larger institutions greater flexibility while
                appropriately addressing system risk posed by larger institutions,
                goals the commenter does not believe a $100 million threshold
                satisfies.
                 Approximately five commenters suggested the NCUA simplify the
                overall risk category and weighting scheme. Another commenter asked the
                NCUA to revisit the rule in light of the other federal banking
                agencies' current review of simplified capital standards for community
                banks.
                 Approximately five commenters asked the NCUA to exempt credit
                unions with high net worth ratios. One of these commenters asked the
                NCUA to study further whether RBC requirements should be applied to
                natural person credit unions and whether credit unions with high net
                worth ratios should be exempt from the RBC requirements. Another of
                these commenters suggested that the NCUA could implement an ``off-
                ramp'' from RBC requirements for well-capitalized credit unions similar
                to the CHOICE Act provision.\21\ Approximately five commenters stressed
                that RBC requirements should be narrowly tailored to capture only the
                appropriate risk profiles intended. The commenters said that credit
                unions are unique and vary in terms of asset class, lending activities,
                and membership fields and cautioned against a one-size-fits-all
                approach or methodology that would subject credit unions to undue
                regulatory burden that fails to appropriately address their activities.
                ---------------------------------------------------------------------------
                 \21\ Financial CHOICE Act of 2017, H.R. 10, 115th Cong. (2017).
                ---------------------------------------------------------------------------
                 Approximately five commenters, in addressing the RBC
                recommendations, said that supplemental capital should be permitted to
                count towards credit unions' RBC requirements, to the extent they must
                be met. One of these commenters asked that, if the NCUA's 2015 RBC
                final rule is revised or retained instead of repealed, alternative
                [[Page 65935]]
                capital authority be provided to help covered credit unions meet the
                new RBC requirements. Another commenter stated that, regardless of any
                RBC delay, the alternative capital rulemaking should proceed now under
                Tier 1. The commenter said that the rulemaking is especially necessary
                because credit unions will need time to plan for and adopt new
                alternative capital options so they can manage their balance sheets
                prior to any RBC effective date.
                 Several commenters asked the NCUA to adjust its RBC standards to
                accommodate the credit union model as opposed to the banking model,
                which the standards are based on. One of these commenters suggested
                that the NCUA should review European standards which take into account
                the cooperative model. The commenter suggested that, if the NCUA lacks
                the authority to make these changes, it should request such authority
                from Congress.
                 One commenter provided a substantial comment arguing that the NCUA
                should incorporate the findings and actions of other federal banking
                agencies. The commenter cited a previous letter sent to the NCUA noting
                that the federal banking agencies issued a joint proposal to reduce
                regulatory burden by simplifying capital rules. The commenter said that
                the banking agencies proposed, in part, to simplify the threshold
                deduction for mortgage servicing assets (MSAs). The commenter stated
                that this would include raising the limit for MSAs from 10% of common
                equity tier I capital to 25%, where any MSAs that exceed that limit
                would be deducted from regulatory capital. The commenter felt that,
                while the federal banking agencies' proposal would maintain MSA risk
                weight at 250%, this move clearly demonstrates the commitment to reduce
                regulatory capital burdens. The commenter said that the NCUA could take
                comparable measures to ease capital requirements, such as a reduced
                risk-weighting for MSAs and CUSOs, as well as the disparate weighting
                of mortgages based on concentration.
                 Another commenter asked the NCUA to discard the 2015 RBC final rule
                and return to the previous one because the prior form of RBC is
                consistent with prompt corrective action (PCA) requirements under the
                FCU Act. The commenter also noted, however, that bank regulators are
                increasingly wary of RBC and some economists doubt its usefulness. The
                commenter cited a 2013 Mercatus Center study that the commenter said
                concluded that RBC is not an effective predictor of bank performance.
                The commenter also asked the NCUA to reconsider whether a higher RBC
                requirement for well-capitalized credit unions, compared to the one for
                adequately-capitalized credit unions, is justified given the language
                of the FCU Act under PCA, which the commenter believed conclusively
                precludes this result.
                 At least ten commenters specifically suggested that substantive
                amendments to RBC are a priority. One commenter stated that Tier 2
                prioritization for substantive changes was acceptable, provided the
                NCUA delay RBC's implementation by at least 24-months. Another
                commenter recommended that the NCUA classify the Task Force
                recommendations as Tier 1 and accelerate the process to provide
                meaningful regulatory relief as soon as possible. Several commenters
                said that reconsideration of many aspects of the RBC rule should be a
                top priority.
                 Report 2: After careful consideration and review, the NCUA issued a
                final rule related to the first report's recommendations in October
                2018.\22\ The final rule delayed the effective date of the RBC rule
                until January 1, 2020, and amended the definition of ``complex'' credit
                union for risk-based capital purposes, resulting in an increase in the
                asset threshold from $100 million to $500 million. Part 702 is
                scheduled to be reviewed again as part of the Office of General
                Counsel's 2019 annual regulatory review.
                ---------------------------------------------------------------------------
                 \22\ 83 FR 55467 (Nov. 6, 2018).
                ---------------------------------------------------------------------------
                2. Proposed Actions
                11. Appendix A to Part 701--Federal Credit Union Bylaws
                 Addresses: FCU Bylaws.
                 Sections: Appendix A to Part 701.
                 Category: Improve.
                 Degree of Effort: High.
                 Degree of Impact: High.
                 Report 1: Recommend using an advance notice of proposed rulemaking
                (ANPR) and forming a working group to update the FCU bylaws. The FCU
                bylaws have not been significantly updated in nearly a decade and need
                to be modernized; the modernization is likely to be complex enough to
                require a working group approach.
                 Comments: Approximately five commenters offered general support for
                the recommendation. Several other commenters stated that bylaws should
                be optional, with credit unions permitted to use their own bylaws.
                Those commenters cautioned that the NCUA should not impose new and
                additional regulatory compliance or reporting burdens. One supportive
                commenter noted its previous calls for the NCUA to issue a proposed
                rulemaking or ANPR to implement the 2014 FCU Bylaws working group's
                recommendations, including amending the required number of members
                needed on matters relating to special meetings and board nominations.
                Another commenter felt that NCUA's prior approval of all bylaw changes
                is unnecessary when an after the fact notice to the region should
                suffice, particularly for changes already approved for other credit
                unions. The commenter also believed that sanctions for failure to
                comply with bylaws are overly harsh and unnecessary for most credit
                unions. One commenter specifically argued that Articles III and IV on
                member meetings and elections are overly prescriptive and need to be
                revisited with an eye toward facilitating governance procedures.
                 Report 2: The NCUA issued a bylaws ANPR in March 2018 \23\ and a
                proposed rule with a request for comment in October 2018.\24\
                ---------------------------------------------------------------------------
                 \23\ 83 FR 12283 (Mar. 21, 2018).
                 \24\ 83 FR 56640 (Nov. 13, 2018).
                ---------------------------------------------------------------------------
                12. Sec. 701.21--Loans to members and lines of credit to members
                 Addresses: Payday Alternative Loans (PALs).
                 Sections: 701.21(c)(7).
                 Category: Improve.
                 Degree of Effort: High.
                 Degree of Impact: High.
                 Report 1: Not Available.
                 Comments: Not Available.
                 Report 2: In June 2018 the NCUA proposed amendments to the NCUA's
                general lending rule to provide FCUs with an additional option to offer
                PALs.\25\ This proposal would not replace the current PALs rule (PALs
                I). Rather, it would be an alternative option, with different terms and
                conditions, for FCUs to offer PALs to their members. Specifically, this
                proposal (PALs II) would differ from PALs I by modifying the minimum
                and maximum amount of the loans, modifying the number of loans a member
                can receive in a rolling six-month period, eliminating the minimum
                membership requirement, and increasing the maximum maturity for these
                loans. The proposal would incorporate all other requirements of PALs I
                into PALs II. The NCUA also solicited advanced comment on the
                possibility of creating a third PALs loan program (PALs III), which
                could include different fee structures, loan features, maturities, and
                loan amounts. The comment period for this proposal closed on August 3,
                2018. The Task Force recommends that the NCUA evaluate
                [[Page 65936]]
                the comments received and explore the development of a PALS II final
                rule and potentially a PALS III proposal.
                ---------------------------------------------------------------------------
                 \25\ 83 FR 25583 (June 4, 2018).
                ---------------------------------------------------------------------------
                13. Sec. 701.21--Loans to members and lines of credit to members
                 Addresses: Loan maturity limits for FCUs.
                 Sections: 701.21(c)(4)(e), (f), & (g).
                 Category: Clarify.
                 Degree of Effort: Moderate.
                 Degree of Impact: High.
                 Report 1: Combine all the maturity limitations into one section.
                Current maturity limits are confusing because they are not all co-
                located. Also, incorporate the legal opinion with respect to
                modifications to make it clear a lending action (like a troubled debt
                restructuring) that does not meet the GAAP standard for a ``new loan''
                is not subject to the maturity limits. In addition, consider providing
                longer maturity limits for 1- to 4-family real estate loans and other
                loans (such as home improvement and mobile home loans) permitted by 12
                U.S.C. 1757(5)(A)(i) and (ii) and removing the ``case-by-case''
                exception the NCUA Board can provide.
                 Comments: Approximately ten commenters offered general support for
                the recommendations. Approximately ten commenters supported co-locating
                the maturity limits. These commenters stated that having limits spread
                across the regulations is confusing and inefficient and felt that
                having all of the limits in one section will improve compliance.
                Several commenters specifically supported incorporating the legal
                opinion. These commenters felt this would provide clarity and
                consistency across the examination regions and help compliance.
                Approximately five commenters specifically supported longer maturity
                limits for 1- to 4- family real estate loans and other similar housing
                loans and elimination of the case-by-case exception. These commenters
                argued that longer maturity limits would allow credit unions to more
                effectively compete in the real estate lending market. One of these
                commenters felt that removing the case-by-case requirements is
                consistent with the NCUA's decision to give credit unions greater
                flexibility in making loans, provided such loans are consistent with
                prudent safety and soundness standards. Several other commenters
                specifically suggested amendments to the FCU Act's loan maturity
                provisions, including changes to designate 1- to 4- non-owner occupied
                loans as real estate loans rather than member business loans (MBLs).
                 Report 2: The NCUA issued a proposed rule with a request for
                comment in August 2018 addressing the first report's
                recommendations.\26\
                ---------------------------------------------------------------------------
                 \26\ 83 FR 39622 (Aug. 10, 2018).
                ---------------------------------------------------------------------------
                 Addresses: Single borrower and group of associated borrowers limit.
                 Sections: 701.21(c)(5); 701.22(a) & (b)(5); 723.2 & 723.4(c).
                 Category: Clarify.
                 Degree of Effort: Low.
                 Degree of Impact: High.
                 Report 1: Combine single borrower (and group of associated
                borrowers) limits into one provision. Currently these limits are
                interspersed in the general loan, loan participation and member
                business lending regulations. It would provide clarity and consistency
                to incorporate all references in one location.
                 Comments: Approximately ten commenters agreed with the
                recommendation and offered general support. Two of these commenters
                stated that the recommendation will provide consistency for compliance
                purposes. One commenter supported the recommendation, but also asked
                for additional guidance and/or clarification as to the application of
                associated borrower in the commercial lending context. One commenter
                suggested moving this recommendation to Tier 3 so that resources can be
                used on more substantive relief.
                 Report 2: The NCUA Board requested further comment on the single
                borrower and group of associated borrower limits in the August 2018
                proposal addressing loan maturities.\27\
                ---------------------------------------------------------------------------
                 \27\ Id.
                ---------------------------------------------------------------------------
                14. Part 722--Appraisals
                 Addresses: Appraisals.
                 Sections: 722.
                 Category: Expand Relief.
                 Degree of Effort: Moderate.
                 Degree of Impact: High.
                 Report 1: The NCUA should further explore issuing a rule to raise
                appraisal thresholds separately from the interagency process. In
                response to comments received through the Economic Growth and
                Regulatory Paperwork Reduction Act (EGRPRA) process, the NCUA joined
                with the other banking agencies to establish an interagency task force
                to consider whether changes in the appraisal threshold are warranted.
                The task force is now drafting a proposed rule to relieve certain
                appraisal burdens. In particular, the proposal would increase the
                appraisal threshold from $250,000 to $400,000 for ``commercial real
                estate loans'' where repayment is dependent primarily on the sale of
                real estate or rental income derived from the real estate. In contrast
                to the other agencies' appraisal regulations, the NCUA's appraisal
                regulation does not currently distinguish, with respect to the
                appraisal threshold requirement, between different types of real estate
                secured loans. Under 12 CFR part 722, the dollar threshold for any real
                estate secured loan is $250,000; loans above that amount must be
                supported by an appraisal performed by a state certified appraiser. The
                banking agencies' current appraisal regulations have the same $250,000
                threshold as the NCUA's regulation for most real estate related loans,
                but also recognize a separate appraisal threshold of $1 million for
                certain real estate related business loans that are not dependent on
                the sale of, or rental income derived from, real estate as the primary
                source of income (hereinafter, qualifying business loans). If the NCUA
                joins the task force in issuing this joint proposed rule defining and
                raising the threshold for ``commercial real estate loans,'' the agency
                will likely also need to address the appraisal threshold for
                ``qualifying business loans'' in a subsequent rulemaking. Recommend
                that, instead of joining the joint proposed rule, the NCUA further
                explore issuing a rule to raise both thresholds separately from the
                interagency process.
                 Comments: Approximately ten commenters specifically stated that
                they supported raising the commercial real estate threshold to
                $400,000. One commenter strongly opposed raising the commercial real
                estate threshold. The commenter argued that the federal banking
                agencies' proposal exemplified regulatory arbitrage, and contradicts
                regulators' concerns regarding the commercial real estate market and
                the quality of evaluations. The commenter felt that regulators should
                be calling for heightened due diligence by institutions, particularly
                for credit unions and small community/regional banks, which the
                commenter suggested are less likely to have robust collateral risk
                management policies, practices, and procedures. The commenter asserted
                that bank failures overwhelmingly occur amongst smaller institutions
                and are in large part due to poor commercial lending decisions. The
                commenter also cited a recent survey that purportedly indicated an
                overwhelming majority of those closest to this issue believe that the
                thresholds should remain at $250,000. The commenter said that, while
                they appreciate lender concerns about appraiser availability in some
                rural areas, a national policy should not be tailored around isolated
                conditions.
                [[Page 65937]]
                The commenter stated that any one real estate market may experience
                rapid growth, but that growth may increase the importance of
                appraisals, as real estate is prone to market fluctuations. The
                commenter further emphasized that during the EGRPRA process many bank
                representatives' appraisal concerns related to residential not
                commercial topics. To that point, the commenter noted that the number
                of commercial real estate appraisers has remained relatively steady in
                recent years as commercial lending activity has seen slight increases.
                The commenter concluded by saying that if the agencies proceed with the
                proposal the qualifications requirements for those completing
                evaluations should be raised or elevated to offset the safety and
                soundness risks caused by the increase in the threshold level.
                 Approximately ten commenters specifically supported raising the
                threshold level for certain qualifying business loans (QBLs) to $1
                million like it is for banks. One of these commenters provided a
                lengthy historical discussion on the NCUA's appraisal waiver provision,
                Sec. 722.3(a)(9), and compared it to the FDIC's exemption for QBLs.
                The commenter analogized the need to remove the clunky waiver process
                to the NCUA's recent removal of the MBL waiver. One commenter opposed
                raising the QBL threshold. The commenter was pleased the EGRPRA review
                did not recommend an increase in the QBL threshold. The commenter said
                that this is consistent with statements made by banking sector
                representatives, who expressed little to no concern about the current
                threshold during several outreach meetings. The commenter also noted
                that many of the loans that would be impacted by a proposed increase in
                the owner-occupied threshold level are guaranteed by the Small Business
                Administration (SBA) and that currently the SBA requires an appraisal
                for all loans above $250,000.
                 Approximately ten commenters offered support for the NCUA to act
                separately from the interagency appraisals working group. The
                commenters expressed that raising the appraisal thresholds outside of
                the current interagency process makes sense as credit unions and the
                NCUA's regulations differ from banks and the other agencies'
                regulations. The commenters said that the changes should maximize
                relief, be consistent with credit union practice, and quickly provide
                parity with the requirements applicable to banks on appraisals.
                 Conversely, one commenter said that absent more information, the
                NCUA's withdrawal from the interagency rulemaking was concerning. The
                commenter noted that state and federal regulators have recognized that
                current appraisal requirements are in some cases overly burdensome
                without producing a measurable offsetting supervisory benefit. The
                commenter also observed that critique of the appraisal requirements was
                a prominent theme in response to the EGRPRA process. The commenter
                stated two primary concerns with the NCUA's withdrawal. First, the
                commenter said that the purpose of the Federal Financial Institutions
                Examination Council (FFIEC) is to coordinate consistent standards and
                that having divergent supervisory standards can cause complications
                when banks and credit unions interact in the marketplace. The commenter
                stated that the existing appraisal standard discrepancies have caused
                complication with loan participations, confused consumer/member
                borrowers, and confused loan officers. Second, the commenter was also
                concerned that when the NCUA has broken with its federal banking agency
                peers in the past it has been to impose unnecessarily higher standards
                on credit unions.
                 Approximately three commenters stated the appraisals reforms should
                be made a priority. One of these commenters said that it was important
                to their state's credit unions. Another of these commenters stressed
                that this should be proposed as soon as feasible to afford credit
                unions the same regulatory flexibility that other depository
                institutions now have. A different commenter stated that the
                inconsistency of the appraisal requirements for business loans made by
                credit unions compared to banks is a top issue for credit unions.
                 One commenter stated that the current thresholds limit the ability
                of credit unions to use more advantageous rules on appraisals from the
                secondary market. The commenter noted that Fannie Mae provides
                appraisal waivers for some home purchase loans when there is a 20% down
                payment and a prior appraisal was obtained under its Collateral
                Underwriter program. The commenter said that Freddie Mac has a similar
                approach. The commenter stated that certain new mortgage refinancing,
                such as when the borrower has at least 20% equity in the home and is
                not receiving cash as part of the transaction, generally no longer
                requires appraisals in the secondary market. The commenter urged the
                NCUA Board to consider these developments as it reviews the NCUA's
                appraisal requirements.
                 Finally, one commenter encouraged dialogue with state regulators as
                changes are considered.
                 Report 2: The NCUA issued a proposed rule with a request for
                comment in September 2018 addressing the first report's
                recommendations.\28\ The agency issued this proposal separately from
                the other banking agencies. The proposal would increase the threshold
                below which appraisals would not be required for non-residential real
                estate transactions from $250,000 to $1,000,000. For non-residential
                real estate transactions that would be exempted from the appraisal
                requirement as a result of the revised threshold, federally insured
                credit unions would still be required to obtain a written estimate of
                market value of the real estate collateral that is consistent with safe
                and sound lending practices. Additionally, the proposal would
                restructure Sec. 722.3 of the NCUA's appraisal regulation to clarify
                its requirements for the reader. Finally, the proposal would,
                consistent with the Economic Growth, Regulatory Relief, and Consumer
                Protection Act,\29\ exempt from the NCUA's appraisal regulation certain
                federally related transactions involving real estate where the property
                is located in a rural area, valued below $400,000, and no state
                certified or licensed appraiser is available.
                ---------------------------------------------------------------------------
                 \28\ 83 FR 49857 (Oct. 3, 2018).
                 \29\ Economic Growth, Regulatory Relief, and Consumer Protection
                Act, Public Law 115-174, 132 Stat. 1296 (2018).
                ---------------------------------------------------------------------------
                15. Part 713--Fidelity Bond and Insurance Coverage
                 Addresses: Fidelity Bond and Insurance Coverage.
                 Sections: 713.
                 Category: Improve.
                 Degree of Effort: High.
                 Degree of Impact: High.\30\
                ---------------------------------------------------------------------------
                 \30\ Includes potential efficiencies and/or cost savings for
                NCUA.
                ---------------------------------------------------------------------------
                 Report 1: Explore ways to implement the requirements of the FCU Act
                in the least costly way possible. While requiring fidelity coverage is
                statutorily mandated by the FCU Act, the NCUA's objective should be to
                allow a credit union to make a business decision based on their own
                product and service needs. This will effectively reduce the NCUA's
                involvement in a credit union's operational decisions while remaining
                consistent with the FCU Act. This should be done separately from the
                Regulatory Reform Task Force process.
                 Comments: Approximately five commenters agreed that credit unions
                should be able to make business decisions on required fidelity bond and
                insurance coverage. One commenter
                [[Page 65938]]
                suggested a working group that includes credit unions and insurers to
                update the rules to provide flexibility to make business decisions
                about bond coverage, particularly regarding the scope of coverage and
                deductibles. The commenter also felt that an ANPR would be useful to
                identify the range of issues before an actual proposal is developed.
                One commenter suggested that the NCUA move this to Tier 2 and focus on
                more pressing relief given the NCUA's recent legal opinion relative to
                this topic.\31\
                ---------------------------------------------------------------------------
                 \31\ OGC Op. Ltr. 17-0959 (Sept. 26, 2017).
                ---------------------------------------------------------------------------
                 Report 2: The NCUA issued a proposed rule with a request for
                comment in November 2018 addressing the first report's
                recommendations.\32\ The NCUA also issued a legal opinion addressing
                the permissibility of certain joint coverage provisions in fidelity
                bonds in September 2017.\33\
                ---------------------------------------------------------------------------
                 \32\ 83 FR 59318 (Nov. 23, 2018).
                 \33\ OGC Op. Ltr. 17-0959 (Sept. 26, 2017).
                ---------------------------------------------------------------------------
                3. Future Actions
                16. Part 715--Supervisory Committee Audits and Verification
                 Addresses: Engagement letter, target date of delivery.
                 Sections: 715.9(c)(6).
                 Category: Remove.
                 Degree of Effort: Low.
                 Degree of Impact: High.
                 Report 1: Revise this section of the regulation to remove the
                specific ``120 days from the date of calendar or fiscal year-end under
                audit (period covered)'' reference from this section. Recommend the
                target date of the engagement letter be presented so the ``credit union
                can meet the annual audit requirement.'' This allows credit unions to
                negotiate the target date of delivery with the person or firm they
                contract with, but also ensures they meet the audit requirement per the
                FCU Act. This would also alleviate the need for a waiver.
                 Comments: Approximately five commenters offered general support for
                the recommendation. One commenter said that relief in this area is not
                a high priority and suggested a Tier 3 prioritization.
                 Report 2: The Task Force recommends adopting the first report's
                recommendation and prioritization. A proposed rule addressing this
                recommendation will likely be issued during the first quarter of 2019.
                17. Part 715--Supervisory Committee Audits and Verification
                 Addresses: Audit per Supervisory Committee Guide.
                 Sections: 715.7(c).
                 Category: Clarify.
                 Degree of Effort: Moderate.
                 Degree of Impact: High.
                 Report 1: Revise this provision to remove the reference to the
                NCUA's Supervisory Committee Audit Guide. In its place, include minimum
                standards a supervisory committee audit would be required to meet if
                the committee does not obtain a CPA opinion audit.
                 Comments: Two commenters offered general support for the
                recommendations. Three commenters suggested that if the NCUA pursues
                this change, it should not impose additional compliance burdens and
                instead only simplify, clarify, and streamline the ``minimum
                standards'' required for supervisory committee audits. Another
                commenter argued that more substantial changes are needed. The
                commenter stated that while the NCUA applies some of part 715 to FISCUs
                by reference in Sec. Sec. 741.6 and 741.202, it is unclear which
                provisions of part 715 apply to FISCUs. The commenter asked the NCUA to
                clarify which requirements apply to FISCUs by fully incorporating the
                audit requirements applicable to FISCUs in part 741. The commenter also
                recommended that the NCUA separate the FCU Supervisory Committees'
                rules from FISCUs' audit requirements since not all FISCUs use
                supervisory committees in their governance structures or for audits.
                One commenter asked that this recommendation be moved to Tier 3 because
                relief in this area is not a high priority.
                 Report 2: The Task Force recommends adopting the first report's
                recommendation and prioritization. A proposed rule addressing this
                recommendation will likely be issued during the first quarter of 2019.
                18. Subordinated Debt (Formerly Alternative Capital)
                 Addresses: Subordinated Debt.
                 Sections: 702 generally.
                 Category: Expand Authority.
                 Degree of Effort: High.
                 Degree of Impact: Low.
                 Report 1: As a follow up to the ANPR issued in January 2017, the
                NCUA Board should consider whether to propose a rule on alternative
                forms of capital FICUs could use in meeting capital standards. First,
                the NCUA Board should decide whether to make changes to the secondary
                capital regulation for low-income designated credit unions. Second, the
                NCUA Board should decide whether or not to authorize credit unions to
                issue supplemental capital instruments that would only count towards
                the risk-based net worth requirement.
                 Comments: Approximately fifteen commenters offered general support
                for the recommendation. Several commenters suggested that the NCUA has
                the statutory authority to include alternative capital to satisfy the
                risk-based net worth requirement, and should do so. These commenters
                felt that an initial volume limit of 25% of retained earnings or 2% of
                total assets, whichever is greater, would be appropriate. Several other
                commenters said that alternative capital is necessary considering the
                RBC requirements. Another commenter argued that, in addition to
                allowing credit unions to use supplemental capital for RBC
                requirements, the NCUA should allow supplemental capital to be counted
                towards the current PCA capital requirements. The commenter said that
                the ability to raise supplemental capital provides the credit union
                industry and the NCUSIF additional layers of protection against
                unexpected losses.
                 Approximately three of these commenters specifically said that they
                support efforts to explore additional sources of capital for purposes
                of net worth requirement calculations. These commenters felt
                supplemental capital should be permitted to count toward the risk-based
                net worth requirements. Several of these commenters suggested a
                supervisory approach that sets forth base requirements for issuance of
                capital instruments without specifying precisely how such broadly-
                defined instruments would comply. The commenters stated that the focus
                instead should be on the approval process, similar to the Food and Drug
                Administration's drug monograph approval procedures.
                 Another of these commenters urged the NCUA to promulgate a rule
                that incorporates the following principles: (1) Preserve the not-for-
                profit, mutual member-owned and cooperative structure of credit unions
                and ensure that ownership interest remains with the members; (2) ensure
                that the capital structure of credit unions is not fundamentally
                changed; (3) provide a degree of permanence such that the sudden
                outflow of capital will not occur; (4) allow for a feasible means to
                augment supplemental capital; and (5) provide a solution with market
                viability.
                 Several commenters stated that secondary capital and supplemental
                capital should be consolidated. One commenter felt that for
                supplemental capital to be effective it should: Transfer risk outside
                of the credit union system; be scalable and appropriate to the size and
                complexity of the credit union; and provide sufficient parity with the
                banks so as not to negatively impact investor
                [[Page 65939]]
                interest in credit union supplemental capital instruments. One
                commenter suggested that the NCUA create a pilot program for
                alternative capital, similar to the derivatives rule. The commenter
                believed that by piloting supplemental capital with a select group of
                well-capitalized, well-managed credit unions, the NCUA could
                efficiently monitor the program's effectiveness and glean best
                practices that could benefit the entire industry.
                 At least eight commenters emphasized that this issue should be made
                a Tier 1 priority. One of these commenters argued that two years is too
                long to wait to be able to participate in capital markets. The
                commenter emphasized that credit unions are required to maintain the
                same capital ratios, sustain the same reserves, and pay for deposit
                insurance the same as any bank. Several commenters asked the NCUA to
                reaffirm its commitment to implement the rule prior to the 2019 RBC
                effective date. Several commenters expressed concern that the report is
                ambiguous as to whether the agency remains committed to a robust
                alternative capital rulemaking, which they deem contrary to previous
                statements from the NCUA linking alternative capital rulemaking to RBC.
                The commenters argued that substantial work and deliberation has
                already been done and to abdicate the progress made would squander one
                of the more significant, and long sought, regulatory relief
                opportunities before the NCUA.
                 More specifically, one commenter took issue with the report stating
                that the ``Board should decide whether or not to authorize credit
                unions to issue supplemental capital instruments that would only count
                towards the risk-based net worth requirement.'' The commenter said that
                the NCUA Board's public statements seem to show this affirmative
                decision has already been made and mentioned that substantial work has
                already been done to develop the rule. The commenter cited the RBC
                comment process, the 2017 alternative capital ANPR, and the 2007
                working group white paper as evidence of the work already done. The
                commenter asked the NCUA Board to move forward now to capitalize on
                this momentum. The commenter also emphasized that the NCUA, the NCUA
                Board, and the Chairman have consistently stated the intent to
                implement the supplemental capital rule prior to the RBC requirements'
                effective date and took issue with the report providing ``no compelling
                justification to reverse course.'' The commenter argued that
                abandonment of this initiative is inconsistent with the regulatory
                reform agenda's goals and while the report's effort/impact matrix makes
                sense generally, it falls short given the NCUA Board's consistent
                statements. The commenter further pointed to statements by the Chairman
                that suggest the rule would afford credit unions heightened opportunity
                to extend job-creating small business loans that strengthen the
                economic viability of Main Street. Additionally, the commenter
                reiterated that RBC requirements may impose significant regulatory
                burden if not accompanied by access to some form of supplemental
                capital. The commenter concluded that a well-designed supplemental
                capital rule would serve as a tool to help credit unions meet the new
                RBC requirements and would ensure that the RBC rules are comparable to
                other bank regulatory agencies as required by 12 U.S.C. 1790d(b)(1)(A).
                 Another commenter was perplexed by alternative capital's Tier 2
                placement, especially since the NCUA has prioritized other PCA/net
                worth requirement related provisions in Tier 1. For example, the
                commenter argued that alternative capital's Tier 2 placement would make
                it unavailable for use in meeting risk-based net worth requirements
                until after the RBC rule's effective date. The commenter also took
                issue with the fact that the first report is ``ambiguous'' as to
                whether the agency remains committed to a robust alternative capital
                rulemaking. The commenter felt this contrary to repeated statements
                from the NCUA unequivocally linking an alternative capital rulemaking
                to RBC. The commenter said that alternative capital is an essential
                tool for both low-income designated credit unions and non-low-income
                designated complex credit unions to meet net worth thresholds. The
                commenter also cited an FAQ on the NCUA's website stating that the NCUA
                Board plans to move forward with a rule to allow supplemental capital
                to be counted in the RBC numerator before the rule's effective
                date.\34\ The commenter lamented that substantial work and deliberation
                has already been done, including, but not limited to: A 2007 whitepaper
                concluding supplemental capital was a worthwhile policy goal;
                solicitation of input on supplemental capital during the RBC comment
                process; a 2016 NCUA Board briefing on issues related to supplemental
                capital; a 2017 ANPR with over 100 supportive comments; and legislation
                introduced in Congress to provide alternative capital authority for all
                credit unions without regard to RBC standards. The commenter
                acknowledged that alternative capital is complex, but emphasized that
                state regulators, the NCUA, and many in the credit union system have
                been studying this issue and developing regulatory frameworks for well
                over a decade. The commenter asked the NCUA to commence rulemaking to
                enhance low-income designated credit union secondary capital rules and
                to establish supplemental capital for RBC.
                ---------------------------------------------------------------------------
                 \34\ Frequently Asked Questions about NCUA's Risk-Based Capital
                Final Rule October 2015 (stating ``Q10. Will credit unions be
                authorized to raise supplemental capital for purposes of risk-based
                net worth? Yes. The NCUA Board plans in a separate proposed rule to
                address comments supporting additional forms of supplemental
                capital. As the risk-based capital final rule does not take effect
                until January 1, 2019, there is ample time for the NCUA Board to
                finalize a new rule to allow supplemental capital to be counted in
                the risk-based capital numerator before the effective date.''),
                available at https://www.ncua.gov/Legal/Documents/RBC/RBC-Final-Rule-FAQs.pdf.
                ---------------------------------------------------------------------------
                 One commenter strongly disagreed that an alternative capital
                overhaul would have a low impact and instead felt alternative capital
                authority would have a substantial impact. The commenter argued that
                capital modernization is needed as credit unions face both external
                challenges such as economic cycles, social media and Bank Transfer Day,
                with no growth opportunities beyond retained earnings. The commenter
                said that the need for increased earnings through managed risk is
                stronger than ever and a critical component of capital modernization.
                The commenter stated that credit unions are seeking the ability to
                increase loan portfolios and other growth opportunities within the not-
                for-profit cooperative structure. The commenter believed authority to
                issue and accept alternative capital is vital to safe-guarding the
                future of the credit union system and argued that unforeseen
                circumstances could strain a credit union's capital position to a point
                where the ability to quickly raise supplemental capital would be a
                valuable option. The commenter felt that increasing retained earnings,
                often the only current option, may not be sufficient in a severely
                stressed situation. The commenter suggested that alternative capital
                would also provide an additional source of protection for the NCUSIF.
                 Report 2: Upon further consideration and in response to stakeholder
                feedback the Task Force moved this recommendation from Tier 2 to Tier
                1. Subordinated debt (formerly alternative capital) is a priority for
                the Chairman, the agency, and commenters. As such, all recommendations
                associated with subordinated debt were moved to Tier 1. All other
                aspects of this recommendation remain unchanged.
                [[Page 65940]]
                19. Sec. 701.34--Designation of Low Income Status; Acceptance of
                Secondary Capital Accounts by Low-Income Designated Credit Unions
                 Addresses: Designation of low income status; Acceptance of
                secondary capital accounts by low-income designated credit unions.
                 Sections: 701.34.
                 Category: Improve.
                 Degree of Effort: High.
                 Degree of Impact: Low.
                 Report 1: See the January 2017 ANPR on alternative capital for the
                broad range of changes that need to be made to this regulation to
                relocate capital treatment to part 702 and address securities law
                issues, issuance and redemption standards, etc.
                 Comments: In response to this recommendation, six commenters were
                supportive of alternative capital generally. One commenter said that
                more credit unions are looking to take advantage of the economic
                opportunities of secondary capital. The commenter stated that although
                it is a comparatively small field now, amendments could offer a new
                avenue for low-income designated credit unions that are hesitant due to
                regulatory barriers to find new sources of capital and help to provide
                services for chronically underserviced communities. The commenter felt
                that improving regulatory clarity and reducing the burden of the
                approval process could benefit low-income designated credit unions and
                the communities they serve.
                 Another commenter argued that secondary capital accounts should be
                controlled by state law for FISCUs, including those seeking a low-
                income designation by their state regulatory agency. The commenter
                believed that the limits Sec. Sec. 701.32 and 701.34 place on FISCUs
                pursuant to Sec. 741.204 are unnecessarily preemptive and unduly
                burdensome. The commenter felt that while secondary capital accounts do
                not count toward regulatory capital requirements for non-low-income
                designated credit unions, the ability to offer the accounts is not
                inherently unsafe and unsound, and therefore should be subject to state
                law.
                 Report 2: Upon further consideration and in response to stakeholder
                feedback the Task Force moved this recommendation from Tier 2 to Tier
                1. Subordinated debt (formerly alternative capital) is a priority for
                the Chairman, the agency, and commenters. As such, all recommendations
                associated with subordinated debt were moved to Tier 1. All other
                aspects of this recommendation remain unchanged.
                20. Sec. 701.38--Borrowed Funds From Natural Persons
                 Addresses: Borrowed funds from natural persons.
                 Sections: 701.38.
                 Category: Clarify/Expand.
                 Degree of Effort: High.
                 Degree of Impact: Moderate.
                 Report 1: Recommend revising this section of the regulation to
                comprehensively address the borrowing authority for FCUs. See the
                January 2017 ANPR on alternative capital for a discussion on this
                subject. Also, see recommended changes to part 702. A comprehensive
                borrowing rule could provide clarity and certainty needed to support
                supplemental capital.
                 Comments: Several commenters said that a comprehensive borrowing
                rule could provide clarity to support supplemental capital concerns,
                but cautioned against imposing additional regulatory burdens. These
                commenters stated that any rule should retain flexibility for credit
                unions to structure the offering in a cost-effective manner, regardless
                of the nature of the capital instrument, be it equity or subordinated
                debt. One commenter suggested the NCUA implement a pilot program
                similar to the derivatives rule. The commenter felt that a pilot
                program would yield best practices that could benefit the entire
                industry. The commenter recognized that statutory amendments may be
                necessary to provide meaningful alternative capital options for all
                credit unions, but suggested that a revised regulatory capital
                framework would still offer increased flexibility to credit unions that
                must meet the NCUA's risk-based net worth requirement. One commenter
                asked for a Tier 1 prioritization.
                 Report 2: Upon further consideration and in response to stakeholder
                feedback the Task Force has moved this recommendation from Tier 2 to
                Tier 1. Subordinated debt (formerly alternative capital) is a priority
                for the Chairman, the agency, and commenters. As such, all
                recommendations associated with subordinated debt were moved to Tier 1.
                All other aspects of this recommendation remain unchanged.
                21. Sec. 701.32--Payment on Shares by Public Units and Nonmembers
                 Addresses: Payment on shares by public units and nonmembers.
                 Sections: 701.32.
                 Category: Expand.
                 Degree of Effort: Low.
                 Degree of Impact: Moderate.
                 Report 1: Raise the nonmember deposit limit from 20% to 50%. As the
                functional equivalent of borrowing, this will parallel the ability of
                credit unions to borrow from any source up to 50% of paid-in and
                unimpaired capital and surplus per Sec. 1757(9) of the FCU Act. A
                credit union is required to be low-income designated to accept
                nonmember deposits, limiting the institutions that can engage in this
                activity.
                 Comments: Approximately five commenters offered general support for
                the recommendation. Several commenters noted that they support the
                development and preservation of community development credit unions and
                the use of the NCUA's statutory authority to support and encourage
                their growth. These commenters felt that raising the nonmember deposit
                limit to 50% would be a positive step. One commenter believed that
                raising the limit would allow credit unions to establish deeper
                relationships with political subdivisions and other public units, such
                as cities and counties. Another commenter noted that concerns regarding
                the limit have caused many to shy away from or unnecessarily limit a
                strategic source of liquidity. The commenter stated that, as is the
                case for loan participations, the use of the national wholesale market
                on both the liability side of the balance sheet as well as the asset
                side allows credit unions to manage certain risks with greater
                precision and provides for the ability to take advantage of liquidity
                sources that may allow for expansion of services while competing on a
                level playing field. One commenter stated that these types of
                transactions are functional equivalents to borrowings and should be
                subject to the same limits. Another commenter asked that the NCUA
                provide an exemption to any state regulatory authority that seeks to
                set a higher limit. Finally, several commenters asked for a Tier 1
                prioritization.
                 Report 2: Upon further consideration and in response to stakeholder
                feedback the Task Force has moved this recommendation from Tier 2 to
                Tier 1. All other aspects of this recommendation remain unchanged.
                22. Sec. 701.21--Loans to Members and Lines of Credit to Members
                 Addresses: Compensation in connection with loans.
                 Sections: 701.21(c)(8).
                 Category: Clarify.
                 Degree of Effort: Low.
                 Degree of Impact: Moderate/High.
                 Report 1: Modify to provide flexibility with respect to senior
                executive compensation plans that incorporate lending as part of a
                broad and balanced
                [[Page 65941]]
                set of organizational goals and performance measures.
                 Comments: Approximately ten commenters offered general support for
                the recommendation. One commenter supported allowing the flexibility to
                structure senior executive compensation plans to incorporate lending
                incentives. The commenter felt that such plans will help credit unions
                compete more effectively for talent and align organizational goals more
                closely with individual incentives. Another commenter supported the
                recommendation, but encouraged the NCUA to add stipulations that would
                require loan delinquencies to be given consideration so that the
                quality of the loans is measured. Several commenters argued that de
                minimis thresholds should apply in any assessment of compensation,
                either discretionary or compulsory.
                 Multiple commenters asked the NCUA to clarify how the agency
                interprets ``overall financial performance'' in Sec.
                701.21(c)(8)(iii). One of these commenters stated that, despite the
                rule's allowance for covered employees to receive compensation based on
                the credit union's ``overall financial performance,'' credit unions and
                examiners sometimes disagree regarding compensation programs that
                appear to meet this requirement. Another commenter stated that two
                provisions in particular create confusion and unduly limit well managed
                credit unions' ability to provide incentives for good performance: (1)
                Section 701.21(c)(8)(iii)(B) permits bonuses and compensation to an
                employee but it must be based on the ``overall financial performance''
                of the credit union, rather than being tied to the performance of their
                department or individual function; and (2) Section
                701.21(c)(8)(iii)(C), under which a bonus or incentive may be provided
                to an employee in connection with lending performance, but the employee
                cannot be a senior management official. According to the commenter, the
                1995 final rule's preamble states that the rule allows FCUs to pay:
                ``(1) to any employee, including a senior management employee, an
                incentive or bonus based on the overall financial performance of the
                credit union.'' The commenter argued that, while the regulatory text
                does not specifically include the ``including senior management''
                language in subsection (iii)(b), the preambles of the proposal and
                final rules make clear the intention to include senior management in
                the exception. According to the commenter, the 1995 final rule did not
                articulate any specific concerns to warrant the exclusion of senior
                management from the overall financial performance exception.
                 One commenter did not support the incentive compensation proposal.
                 Report 2: The Task Force recommends adopting the first report's
                recommendation and prioritization.
                23. Part 712--Credit Union Service Organizations (CUSOs)
                 Addresses: Credit Union Service Organizations (CUSOs).
                 Sections: 712.
                 Category: Remove & Expand.
                 Degree of Effort: Low.
                 Degree of Impact: High.
                 Report 1: Recommend examining the CUSO regulation and evaluating
                the permissible activities in light of the FCU Act permitting CUSOs
                ``whose business relates to the daily operations of the credit unions
                they serve'' \35\ or that are ``providing services which are associated
                with the routine operations of credit unions.'' \36\
                ---------------------------------------------------------------------------
                 \35\ 12 U.S.C. 1757(5)(D).
                 \36\ 12 U.S.C. 1757(7)(I).
                ---------------------------------------------------------------------------
                 Comments: A handful of commenters offered very general support for
                increasing and enhancing CUSO permissible activities. Several
                commenters that supported expanding CUSO permissible activities argued
                that, for many credit unions, the use of CUSOs will be essential as the
                need to seek operational efficiencies intensifies and credit unions
                face increasing competitive pressure from a variety of depository and
                non-depository financial service providers, such as fintechs. The
                commenters indicated that CUSOs provide a means for credit unions to
                address challenges related to changing consumer expectations and the
                need for technologies to better serve credit union members. Another
                commenter suggested that the NCUA abandon the preapproved list of CUSO
                activities and permit credit unions to invest in or loan to CUSOs
                offering products and services generally incidental to credit union
                business.
                 One commenter asked the NCUA to allow limited FCU investment in a
                FISCU CUSO even if that FISCU CUSO engages in activities not
                permissible for an FCU. The commenter argued that de minimis exposure
                should not rise to the level of being considered circumvention of FCU
                permissible activity provisions and suggested that this change would
                expand the opportunities for system collaboration and innovation.
                 Approximately five commenters asked that the NCUA expand and
                clarify CUSOs' loan origination powers. Commenters suggested that the
                NCUA expand permissible activities in Sec. 712.5 to include ``loan
                origination of all types of loans that may be provided by a credit
                union.'' The commenters noted that with this addition the specific
                origination authority for business loans, consumer mortgage loans,
                student loans, and credit card loans could be deleted. Several of these
                commenters also suggested the NCUA make it clear that CUSOs are able to
                make, purchase, or sell any types of loans that credit unions can make
                on their own. Several commenters wrote extensively on this issue.
                 One of these commenters believed that CUSOs can play a pivotal role
                as credit unions turn increasingly to collaborative solutions in
                lending to reduce costs and compete with non-credit union loan
                aggregators. The commenter said that if CUSOs cannot be loan
                aggregators, credit unions will be at the mercy of non-credit union
                loan aggregators who are not willing to deal with the membership
                requirements. The commenter noted that credit unions are currently
                excluded from participation in the loan aggregation networks that more
                consumers are turning to for loans, especially for auto loans. The
                commenter argued that the fact that some types of loans are permitted
                to be originated by CUSOs and some are not seems based on historical
                happenstance rather than any sound policy. The commenter, along with
                several other commenters, stated that Sec. 712.5 is a categorical list
                of pre-approved activities a CUSO may provide and not meant to be an
                exclusive laundry list of activities. However, the ``categories'' of
                loan origination services CUSOs are permitted to provide are not
                categories of services by themselves and create confusion in the
                industry. To demonstrate this, the commenter noted that ``business loan
                origination'' has meant for years that CUSOs can originate and hold
                ``business loans'' and asked if this precludes a CUSO from originating
                ``commercial loans.'' Similarly, the commenter asked if ``consumer
                mortgage loan origination'' precludes the origination of home equity
                loans or lines of credit. The commenter emphasized that selective
                lending power can be awkward and confusing.
                 The commenter suggested the time is appropriate to expand CUSO
                lending powers. The commenter argued that CUSOs should have the power
                to ``originate and hold all types of loans credit unions can make.''
                The commenter believed that this change would create an unambiguous,
                rational, and highly defensible lending services definition for CUSO
                powers and would correct a policy that the commenter felt
                [[Page 65942]]
                authorizes certain lending powers for CUSOs and excludes others without
                a rational basis. More specifically, the commenter suggested that the
                NCUA amend Sec. 712.5 by deleting references to the origination of
                business loans, consumer mortgage loans, student loans and credit card
                loans (Sec. 712.5(c), (d), (n), and (s)) and adding the power to
                ``originate and hold loans, including the authority to buy and sell
                participation interests in such loans'' as a new Sec. 712.5(c).
                 A handful of commenters emphasized that the ability for CUSOs to
                package and sell loans to investment buyers is critical to credit
                unions moving forward, particularly if Fannie Mae and Freddie Mac are
                eliminated or their presence in the marketplace is reduced. The
                commenters felt that to continue cost effectively providing home loans
                that put the borrowers first, credit unions need to participate in the
                securitization market. The commenters stressed that secured loan
                investment packages require scale in order to make them affordable and
                attractive in the marketplace and noted that, except for a limited few,
                credit unions do not have sufficient loan volume to create single
                issuer loan packages. The commenters encouraged the NCUA to explore the
                ability of multiple credit unions to combine to sell their loans in
                multi-issuer packages with cross-indemnifications. The commenters
                concluded that enabling this cooperative activity would be a
                significant contributor to future financial health and stability for
                the industry.
                 Approximately five commenters provided comments addressing CUSO
                examinations. Several of these commenters provided general statements
                that CUSOs should not be subject to full examinations. Several other
                commenters asked the NCUA to revise the current approach to safety and
                soundness supervision of credit union CUSO investments and suggested it
                is best performed through the credit union supervisory framework, not
                the direct supervision of CUSOs themselves. The Task Force notes that
                the NCUA does not directly regulate or supervise CUSOs, but instead
                supervises credit unions' CUSO investments through the credit union
                supervisory framework.
                 Several commenters asked the NCUA to stop exercising de facto exam
                powers over CUSOs. The commenters described these exams as compelling
                CUSOs to report directly to the NCUA and comply with NCUA directives
                through the credit union owners and felt this was an exercise of power
                without specific congressional authority. The commenters asked the NCUA
                to revise the regulations in a manner that leaves no doubt that the
                agency is acting both within its authority and consistently with the
                need for safety and soundness supervision of credit union CUSO
                investments. The commenters also suggested that the NCUA use this
                regulatory review process to continue to compile necessary data on the
                investment of credit unions in CUSOs through the registry, but
                discontinue conducting de facto examinations in the form of CUSO
                reviews.
                 One commenter said that if the NCUA elects to continue to exercise
                de facto supervision over CUSOs, the agency should formally advise the
                Bureau of Consumer Financial Protection (BCFP) of that fact. The
                commenter noted that the BCFP administers the Secure and Fair
                Enforcement for Mortgage Licensing Act and the licensing and
                registration of mortgage loan originators (MLOs). The commenter said
                that prior to the passage of the most recent CUSO regulation, the NCUA
                advised the BCFP that it did not have the power to regulate CUSOs. The
                commenter said that this resulted in MLOs in the CUSOs providing
                mortgage lending services having to be licensed and not registered. The
                commenter explained that in multi-state situations, this means that
                MLOs and the CUSOs may have to be licensed in many states and incur
                greatly increased expenses and regulatory burden. The commenter
                requested the NCUA's assistance, should it continue to conduct de facto
                CUSO examinations in the form of CUSO reviews, in informing the BCFP
                that the NCUA exercises sufficient supervision over CUSOs to justify
                that CUSOs be exempt from the licensing requirements and the MLOs in
                CUSOs qualify for registration.
                 Several commenters said that they believe the percentage credit
                unions can invest in CUSOs should be increased. The Task Force notes
                that the FCU Act limits FCU CUSO investments to the 1% of paid-in and
                unimpaired capital and surplus currently permitted by Sec. 712.2(a) of
                the NCUA's regulations.\37\
                ---------------------------------------------------------------------------
                 \37\ 12 U.S.C. 1757(7)(I).
                ---------------------------------------------------------------------------
                 Another commenter noted that they support review of the CUSO
                regulation and said that they felt the January 2016 changes were
                punitive and excessive in light of the relatively low risk CUSOs pose
                to the system and went beyond the NCUA's authority. The commenter
                believed that the current rule burdens CUSO operations and limits
                credit unions' abilities to use CUSOs to maximize their services. The
                commenter said that, for example, the rule established elaborate
                reporting of CUSO activities to the NCUA and includes a list of high
                risk CUSO activities such as payroll processing that subject CUSOs to
                additional requirements. The commenter asked the NCUA to reconsider
                these requirements. The commenter also asked the NCUA to reconsider the
                need for the ``costly CUSO Registry.'' Additionally, the commenter said
                that they did not support the NCUA's past efforts to obtain statutory
                authority over CUSOs and other third-party service providers. The
                commenter stated that they appreciate that the current NCUA Board is
                not pressing Congress for such authority. The commenter felt that such
                authority would be an unnecessary expansion of the agency, would result
                in higher costs to credit unions, and would divert the agency from its
                primary mission of supervising and regulating credit unions.
                 One commenter asked the NCUA to reorganize the CUSO rules to co-
                locate FISCU applicable provisions or move the FISCU applicable
                provisions to part 741 to eliminate confusion as to which provisions
                apply to FISCUs.
                 One commenter suggested that there should be a way for a corporate
                credit union to make a minimal investment in a company without treating
                it as a corporate CUSO. The commenter stated that many companies shun
                corporate credit union investment dollars due to the regulatory
                constraints of becoming a corporate CUSO, having to primarily serve
                credit unions and to follow the various regulatory restrictions of part
                704. The commenter said that without the opportunity to invest in
                companies, a corporate credit union cannot direct or participate in the
                direction of new products or services. The commenter argued that the
                intent of an investment in such a company is not measured by a return
                as it is with traditional investments (securities) but instead is an
                opportunity to help bring new technologies, products, and services to
                credit union members.
                 Finally, a commenter, noting their strong belief in the economies
                of scale and other advantages that CUSOs confer to credit unions, asked
                the NCUA to increase the prioritization of CUSO reform. The commenter
                recommended that the NCUA Board publish an ANPR in 2018 that solicits
                ideas and other feedback.
                 Report 2: Upon further consideration and in response to stakeholder
                feedback the Task Force has moved this recommendation from Tier 3 to
                Tier 1. After reviewing the degree of effort and the potential impact,
                the Task Force believes that this recommendation is
                [[Page 65943]]
                more appropriately placed in Tier 1. The change should be low effort
                and high impact. The NCUA plans to issue a 2019 proposed rule on
                allowing CUSOs to originate any loan that a credit union may provide.
                24. Sec. 701.21--Loans to Members and Lines of Credit to Members
                 Addresses: Loan interest rate, temporary rate.
                 Sections: 701.21(c)(7)(ii).
                 Category: Expand/Clarify.
                 Degree of Effort: Moderate.
                 Degree of Impact: Low.\38\
                ---------------------------------------------------------------------------
                 \38\ Includes potential efficiencies and/or cost savings for
                NCUA.
                ---------------------------------------------------------------------------
                 Report 1: Research the possibility of using a variable rate instead
                of a fixed, temporary rate. Also, remove the specific means for
                notifying credit unions to preserve future flexibility in sending
                notices in the most efficient and suitable manner available.
                 Comments: Several commenters offered general support for the
                recommendations. A handful of commenters urged the NCUA to further
                explore options, including eliminating the maximum interest rate.
                Approximately five commenters noted that the loan interest rate ceiling
                has stayed at 18% since 1987 and felt it makes sense to study whether
                future rate changes should be tied to a domestic index. One of these
                commenters felt such a change would give much-needed elasticity to a
                rate cap that hasn't changed since 1987 despite dramatic economic
                swings. Another commenter felt that a variable rate could result in
                more certainty for FCUs regarding future loan rate ceilings and would
                facilitate credit union lending and overall planning.
                 One commenter suggested amending the ceiling to a 15% spread over
                prime, and articulated a belief that this action would help credit
                unions reduce interest rate risk. The commenter said that the NCUA has
                urged credit unions to be vigilant in identifying and managing interest
                rate risk and felt this action would go a long way towards helping
                credit unions reduce risk. The commenter believed that adjusting the
                interest rate cap so it floats with the level of prime would provide
                regulatory relief to the entire industry because it would benefit any
                credit union that makes variable rate loans to its members. The
                commenter said that, absent this relief, credit unions will either
                absorb margin compression, which places more capital at risk, or scale
                back lending to certain segments of the population. The commenter felt
                that this relief would enable credit unions to remain competitive,
                serve a broader spectrum of their members, and better manage risk and
                capital. The commenter concluded that this would provide relief for
                credit unions and reduce risk to the NCUSIF because the industry would
                be better positioned to absorb rising interest rates.
                 Several commenters said that removal of a specific means for
                notifications is appropriate given the pace of development in modern
                communication technology. The commenters believed that, to that end,
                the NCUA should take steps to ensure the application of this principle
                to all aspects of credit unions' communications, including advocating
                that credit unions have the flexibility to contact their members via
                modern communications.
                 Several commenters asked the NCUA to move the recommendation to
                Tier 1. One of the commenters urged the NCUA to make this its top
                priority given rising rates and the expectation the Federal Reserve
                Board will continue to raise rates in 2018.
                 Report 2: Upon further consideration and in response to stakeholder
                feedback the Task Force has moved this recommendation from Tier 3 to
                Tier 1. In addition to being a priority for commenters, the loan
                interest rate is a priority for the Board. As such, the NCUA plans to
                issue a 2019 ANPR to solicit further input.
                4. Other Commenter Suggestions for Tier 1
                 One commenter asked the NCUA to eliminate the readily marketable
                collateral standard in the new MBL rule. The commenter said that
                readily marketable collateral is a legal term of art that has not
                previously been imposed on credit unions. The commenter stated that, in
                determining whether to classify collateral as ``readily marketable,''
                the Office of the Comptroller of the Currency has focused on an
                instrument's fungibility, trading ease, the ability to obtain reliable
                price quotations on a daily basis, and trading of the instruments
                through a regulated market. The commenter noted that, unlike banks,
                which the commenter said can easily obtain and utilize such collateral,
                credit unions typically do not often deal with collateral that
                satisfies the above criteria. The commenter said that this has resulted
                in some credit unions being unable to engage in MBLs that they were
                previously authorized to engage in, notwithstanding the fact that one
                of the primary purposes of the NCUA's MBL reforms was to give credit
                unions greater flexibility to make MBLs provided doing so was
                consistent with a credit union's risk profile and expertise. The
                commenter concluded that the NCUA should exercise its regulatory power
                to remove the readily marketable collateral standard and instead
                mandate that a credit union only be allowed to make such loans based on
                sound and prudent underwriting standards backed by adequate collateral.
                The commenter suggested a Tier 1 prioritization for this
                recommendation.
                 Several commenters asked for changes related to the restoration of
                accrual status on member business loan workouts. The commenters
                recommended clarifying appendix B to part 741, the interpretive ruling
                and policy statement on loan workouts, non-accrual policy, and
                regulatory reporting of troubled debt restructured loans. More
                specifically, the commenters recommended the NCUA align its policy
                pursuant to restoration to accrual status on member business loan
                workouts with those of other federal bank regulators. The commenters
                said that the NCUA's rules require a repayment period of six
                consecutive payments while banking agencies require only six
                consecutive months. The commenter stated that the NCUA's more
                restrictive term creates difficulties with credits with annual
                payments. The commenters said that under the NCUA's structure a credit
                could be in non-accrual status for six years despite strong performance
                in the case of an annual credit. The commenters asked the NCUA to
                reconsider whether the more stringent repayment requirement for credit
                union commercial accrual status remains necessary. One of these
                commenters noted that semi-annual or annual payment schedules are
                commonly found in agricultural purpose MBLs. The commenters suggested a
                Tier 1 prioritization for this recommendation.
                ii. Tier 2 (Year 3)
                1. Part 703--Investment and Deposit Activities
                 Addresses: Investment and Deposit Activities.
                 Sections: 703.
                 Category: Improve & Expand.
                 Degree of Effort: High.
                 Degree of Impact: High.
                 Report 1: Revise the regulation to remove unnecessary restrictions
                on investment authorities not required by the FCU Act, and provide a
                principles-based approach focused on governance for investing activity.
                Also, remove the pre-approval requirement for derivatives authority and
                substitute with a notice requirement (coheres this to part 741 for
                FISCUs as well). See the appendix for details on modifying this
                regulation.
                 Investments Comments: Approximately ten commenters offered
                [[Page 65944]]
                explicit support for the expansion of investment authority, removal of
                unnecessary restrictions not required by the FCU Act, and a principles-
                based approach. Several of these commenters said that these changes
                would allow credit unions to reduce risk and perform better. Several
                more of these commenters said that in order to be competitive in
                today's financial services marketplace credit unions should be
                permitted to invest in a broad range of investment alternatives,
                subject to the decision-making control of their member directors. These
                commenters said that amending this section could give credit unions
                access to professionally-managed, separate-account investments with
                greater transparency than is afforded via permitted mutual funds.
                Several other commenters argued that if the FCU Act allows a type of
                investment, a credit union should be able to consider its purchase
                based on its balance sheet needs, risk appetite, and safety and
                soundness position. One commenter suggested that any approved rule
                changes should be accompanied by similar guidance and training for
                examiners to help ensure principles-based changes are permitted.
                 One commenter stated that a principles-based approach may enhance
                permissible investment options available to credit unions to fund
                executive and employee benefit programs that help retain and attract
                quality employees. Another commenter argued that a more principles-
                based approach will allow credit unions to tailor their investment
                activities to their individual portfolio needs. The commenter also
                concluded that allowing further authority will strengthen the board and
                senior management's ability to consider the best options based on
                individual circumstances.
                 Several commenters stated that they support the removal of the
                prescriptive due diligence requirements applicable toward investment
                advisors and broker-dealers, given the nature of those business models,
                and instead requiring credit unions to perform due diligence.
                 One commenter encouraged the creation of a working group that
                includes credit union officials and investment advisors. The commenter
                also suggested the development of an ANPR to provide a foundation for a
                comprehensive update of part 703. The commenter further recommended
                that the NCUA consider investment authority for community banks as it
                reviews new flexibility for credit unions.
                 Approximately five commenters asked the NCUA to permit credit
                unions to purchase mortgage servicing rights. Approximately five
                commenters asked the NCUA to allow credit unions to invest in municipal
                bonds without limitation. One of these commenters said that the blanket
                limitations on municipal security exposure only hamper credit unions
                that are able to appropriately measure, understand, and deal with the
                risks specific to these investments, which the commenter stated are
                quite common in other financial institutions. The commenter argued that
                the ability to take some credit risk in the investment portfolio allows
                credit unions to maintain needed earnings while reducing other
                portfolio risks, such as interest rate risk. The commenter stated that
                some credit unions have suffered material losses and/or lost revenue
                due to this unnecessary limit. The commenter also said that the limit
                does not factor risk considerations for general obligation versus
                revenue securities as is considered in the FCU Act (revenue issues
                having a limit versus general obligations having none), nor does it
                consider the effect of other credit enhancement factors, such as
                sinking fund provisions. One commenter prioritized and strongly
                supported removing limits on zero-coupon investments. The commenter
                felt that change would provide credit unions with added flexibility to
                manage their investment portfolios as they seek to offset risk. Another
                commenter objected to requiring a minimum of investment grade for all
                investments and argued it would increase regulatory burden.
                 One commenter asked the NCUA to expand investment authority to
                include other asset classes important for risk diversification and
                portfolio performance. The commenter asked the NCUA to explore
                authorizing the purchasing of: Investment-grade corporate debt; auto
                and other consumer debt asset-backed securities; and mortgage servicing
                rights assets. The commenter argued that for a credit union with
                sufficient resources, knowledge, systems, and procedures to handle the
                risks, there is no reason why investing in investment-grade corporate
                debt and asset-backed securities products should be prohibited. The
                commenter felt that authorization would promote the overall efficiency
                of credit union industry investment holdings since these asset classes
                are important for risk diversification and portfolio performance. The
                commenter argued that empirical data shows that a reasonable allocation
                to these assets classes provides diversification benefits such that the
                return series is less risky, not more risky. The commenter did advise
                that they are not aware of the legal landscape and the effort
                authorization would require. The commenter also said that credit unions
                are already in the mortgage servicing business and many are already
                large holders of these assets. The commenter noted, however, that many
                credit unions also may desire to shed the asset, possibly because of
                concerns over the asset's risk profile or the economic barriers to
                building an efficient servicing operation. The commenter concluded that
                allowing for transacting could promote the greater efficiency of the
                overall system.
                 Several commenters asked that at least some of the part 703 changes
                be moved to Tier 1. One of these commenters specifically asked that the
                recommendations in Subpart A numbers 1, 5, 7, 9, and 16 be moved to
                Tier 1.
                 Derivatives Comments: Approximately five commenters explicitly
                supported removal of the preapproval requirements for derivatives and
                replacement with a notification requirement. One commenter opposed
                removal of the pre-approval requirement and replacement with a notice
                requirement. The commenter felt that at this point it is important for
                the NCUA to ensure that a credit union is sophisticated enough to
                purchase derivatives.
                 One of the supportive commenters commended efforts to widen the
                rule's applicability and said that the replacement of the application
                process with a notification requirement and the removal of the volume-
                based limits are a step forward in promoting a more efficient interest
                rate risk management process. Several of the supportive commenters also
                supported the removal of limits on permissible off-balance sheet
                hedging instruments and expanding eligible collateral to include agency
                debt. These commenters felt that these changes would allow more credit
                unions to effectively manage interest rate risk, subject to appropriate
                supervisory intervention. Another commenter suggested that the
                authorization of two instruments, Eurodollar futures and interest rate
                swap futures, would improve hedging efficiency and effectiveness.
                 One commenter noted that the NCUA has not reviewed the derivatives
                rule since it was issued in 2014 and asked that review of the rule be
                made a priority. The commenter said that the combination of the
                suspended annual regulatory review and the Tier 2 classification defers
                consideration until
                [[Page 65945]]
                2020 at the earliest. The commenter argued that this designation
                ``creates a serious inconsistency or otherwise interferes with
                regulatory reform initiatives and policies,'' which is one of the
                criteria of Executive Order 13777. Further, the commenter disagreed
                that the effort associated with revising this rule is high. The
                commenter reasoned that the derivatives volume limits appear in a
                narrow section of part 703 and the invention of these artificial limits
                created more work than removing them would. The commenter did not
                understand why, given the Task Force acknowledged that the impact of
                revising this rule would be high, it is not a Tier 1 proposal--high
                impact and low effort. The commenter concluded by urging the NCUA to at
                least fix the weighted average remaining maturity notional (WARMN)
                limit immediately if the agency delays review of the entire rule.
                 Several commenters asked the NCUA to immediately eliminate the
                volume-based limits. One of these commenters argued that the
                derivatives volume limits, particularly the WARMN, have no parallel in
                the regulatory practice of any other FFIEC regulator, nor any state
                regulatory body of which the commenter is aware. The commenter also
                said that, similarly, the fair value limit threshold of negative 25% of
                regulatory net worth is arbitrary and is not evidence that a credit
                union has failed to hedge its assets properly. The commenter said that
                failure to manage interest rate risk, created by serving members' needs
                through long-term real estate lending, is the greatest mid- to long-
                term financial threat facing credit unions, and therefore, the NCUSIF.
                The commenter felt that credit unions and the NCUSIF have been
                fortunate to have gone through a sustained period of low interest
                rates, but luck is not a risk-mitigation strategy. The commenter cited
                the following to evidence that the need for hedging is significant: 49%
                of credit union loans are real estate loans, a portfolio that continues
                to grow at 10% per year; only 15% of credit union mortgage loans are
                adjustable rate loans; and 33% of credit union assets are long-term,
                whereas only 4% of credit union deposits are longer than three years.
                The commenter felt that part 703 already provides the governance and
                approval framework required to ensure that credit unions do not use
                derivatives for speculative purposes or in ways that inadvertently
                create harm to their net worth. The commenter argued that the
                derivatives volume limits do not reduce risk and said that, to the
                contrary, they limit the capacity of credit unions to adequately hedge
                the interest rate risk inherent in their business practice, thereby
                creating risk to the credit unions and the NCUSIF.
                 The commenter continued by arguing that tying notional value limits
                to a small multiple of net worth, as opposed to the amount of long-term
                assets the FCU holds, fails to match permissible risk mitigation to the
                risk created by holding those long-term assets. The commenter said that
                if an FCU has 10% net worth and mixes its swaps between 5 and 10 years
                to cover the longer-end of its fixed-rate loan portfolio, a 100% WARMN
                means the FCU cannot have notional swaps of more than 13.33% of assets.
                The commenter concluded that such a limit is sufficient if the FCU has
                long-term assets limited to 25-30% of its assets, but it is probably
                insufficient if an FCU has more long-term assets. As an example, the
                commenter said that a credit union with 60% of its assets in mortgage
                loans should be permitted to hedge at least 50% of this amount with
                long-term swaps, or roughly 25% of assets (or 250% of net worth). The
                commenter said that if instead the credit union can only hedge 13.33%
                of assets, as short-term rates rise sooner than assets mature, the
                credit union's net worth can quickly dissipate, given the fact that a
                large share of the long-term assets are largely un-hedged. The
                commenter said that, put more simply, the current WARMN limit means
                that a credit union with 10% net worth can only hedge 10% of its
                balance sheet with 10 year pay-fixed interest rate swaps. The commenter
                argued that this is simply insufficient for the large percentage of
                credit unions engaged in mortgage lending. The commenter believed that
                the current WARMN limit dramatically increases interest rate risk for
                the credit union system overall. The commenter finished by stating that
                the industry cannot wait two to three more years with nothing more than
                a hope that unhedged interest rates will remain stable and low.
                 Two commenters provided detailed comments advocating that the NCUA
                allow credit unions to invest in mutual funds that have access to the
                same interest rate risk mitigating derivatives as credit unions.
                 One of these commenters suggested that mutual funds could be
                effective in mitigating interest rate risk by engaging in limited
                derivative activities. The commenter noted that Sec. 703.100(b)(2) of
                the NCUA's regulations specifically excludes mutual funds that contain
                derivatives from being a permissible FCU investment. The commenter felt
                that mutual fund managers with a high level of derivatives expertise
                and a well-developed derivatives program infrastructure could help
                mitigate the portion of interest rate risk attributable to credit
                unions' indirect investments. The commenter stated that mutual funds
                marketed to credit unions and restricted to FCU permissible investments
                should be expected to encounter risks similar to those faced by FCUs
                themselves. The commenter said that those risks, including interest
                rate risk, are passed on to shareholder credit unions if left
                unmitigated by the portfolios. The commenter recommended that the NCUA
                clarify that mutual funds have access to the same interest rate risk
                mitigating derivatives as credit unions themselves. The commenter
                believed that this broad, comprehensive view of interest rate risk
                mitigation would ultimately reduce risk to the NCUSIF. The commenter
                suggested that the NCUA explicitly state that, in addition to investing
                in all other FCU-permissible investments, mutual funds that possess an
                NCUA-approved level of financial sophistication, risk management, and
                operational capabilities (and market to credit union investors) may
                invest in permitted derivatives to mitigate the inherent risks of those
                other FCU-permissible investments. The commenter felt this change could
                be implemented with a low degree of effort given the regulatory and
                compliance infrastructure a mutual fund registered under the Investment
                Company Act of 1940 already has in place, but could have a significant
                impact given the limited number of credit unions that have been granted
                derivative authority to date.
                 The other commenter asked the NCUA to allow credit unions to invest
                in mutual funds offered by Management Investment Companies (MICs). The
                commenter said that the MIC would be the entity receiving NCUA
                derivatives authority as opposed to numerous individual credit unions.
                The commenter suggested that the NCUA could modify regulations to
                incorporate requirements for individual credit union investors
                utilizing any MIC issued funds with derivative authorities (policies,
                procedures, etc.). According to the commenter, the MIC would be
                registered under the Investment Company Act of 1940 and the Securities
                Act of 1933. From this perspective, the commenter said that the MIC
                would fall under the SEC's regulatory scope. The commenter noted that
                the existing regulatory framework of the mutual fund industry includes
                considerable oversight at the time of registration, as well as frequent
                ongoing reporting requirements. The commenter said that,
                [[Page 65946]]
                as they understand it, this reporting includes an annual prospectus,
                annual and semi-annual reports and other requirements related to
                various changes which occur during the interim. The commenter concluded
                that with this approach a credit union could invest in mutual funds
                that obtained derivatives authority from the NCUA. The commenter said
                that the intention would not be to create a fund invested entirely in
                derivatives, but to allow approved MICs the ability to utilize
                derivative tools to manage the interest rate risk within the fund. The
                commenter suggested that, as opposed to credit unions investing in
                individual securities with embedded interest rate, a credit union could
                utilize a fund as an alternative investment tool. The commenter noted
                that investing in such a fund would not grant any additional derivative
                authority to a credit union. The commenter concluded that this solution
                could: Increase the number of credit unions that could afford to
                participate and receive the benefits of derivative tools; allow access
                for credit unions with assets less than $250 million; reduce the cost
                of participating in the program; utilize the expertise of regulated
                third parties; provide less of a resource drain on NCUA staff; and
                retain for the NCUA the direct ability to set and monitor requirements
                of third-party vendors. The commenter felt that this could be an
                important risk management tool.
                 Addresses: Put option purchases in managing increased interest rate
                risk for real estate loans produced for sale on the secondary market.
                 Sections: 701.21(i).
                 Category: Clarify.
                 Degree of Effort: Low.
                 Degree of Impact: High.
                 Report 1: Recommend moving Sec. 701.21(i) to part 703 Subpart B--
                Derivatives Authority to have all options/derivatives authority in one
                section.
                 Comments: Two commenters offered general support for the
                recommendation, noting that they support all conforming clarifications
                to ensure that regulations are clear, consistent, and where appropriate
                bundled in relevant and rational sections. One commenter opposed this
                recommendation and the recommendation to rename 703 Subpart B
                ``Derivatives and Hedging Authority.'' The commenter felt that the
                changes add complexity, which is contrary to the intent of the
                regulatory reform agenda. One commenter asked that it be deprioritized
                since it is a procedural change that the commenter does not believe
                will afford significant relief.
                 Report 2: Upon further consideration and in response to stakeholder
                feedback the Task Force has moved this recommendation to the top of
                Tier 2 and the NCUA plans to take action related to this recommendation
                in 2019. The Task Force has also merged into the investments
                recommendation the separate recommendation to move Sec. 701.21(i) to
                part 703 Subpart B--Derivatives Authority so that all options/
                derivatives authority in one section. The Task Force also emphasizes
                that the FCU Act prevents the NCUA from offering all of the relief
                credit unions are seeking in this area. All other aspects of these
                recommendations remain unchanged.
                2. Sec. 701.22--Loan Participations
                 Addresses: The limit on the aggregate amount of loan participations
                that may be purchased from any one originating lender not to exceed the
                greater of $5 million or 100% of the FICU's net worth (unless waived).
                 Sections: 701.22(b)(5)(ii); 701.22(c).
                 Category: Remove.
                 Degree of Effort: Low.
                 Degree of Impact: High.
                 Report 1: Remove the prescriptive limit on the aggregate amount of
                loan participations that may be purchased from one originating lender.
                Replace with a requirement that the credit union establish a limit in
                their policy, and tie into proposed new universal standards for third-
                party due diligence with heightened standards if it exceeds 100% of net
                worth. Eliminates the need for the waiver provision in Sec. 701.22(c).
                 Comments: Approximately 15 commenters offered support for
                eliminating the prescriptive limit on the aggregate amount of loan
                participations that may be purchased from any one originating lender
                and allowing credit unions to establish limits within a board approved
                policy. One commenter asked the NCUA to provide coordinated training
                and guidance for examiners if the recommendation is adopted to avoid an
                exam defaulting to the previous prescriptive standard.
                 Another commenter stated that they felt this proposal was well-
                reasoned. The commenter said that the credit risk associated with an
                individual loan and the concentration risk from a high aggregate single
                borrower exposure are more significant risks to the NCUSIF than those
                associated with overexposure to a properly vetted originating lender.
                The commenter felt that the current limitation has the adverse and
                unintended effect of forcing credit unions to pursue loans from new,
                unfamiliar, and in some cases less qualified and experienced
                originators simply to avoid an arbitrary cap. The commenter believed
                that such pursuits result in an inefficient use of internal resources
                to conduct proper and ongoing originator due diligence, which if not
                done properly will result in additional risk within a credit union's
                portfolio. The commenter concluded that allowing each credit union to
                establish its own sensible policy limit on the aggregate amount of loan
                participations purchased from a single originating lender will bring
                needed flexibility and encourage credit unions to customize their
                participation loan programs to their own size, needs, and appetite for
                risk.
                 Another commenter observed that under the MBL rule the NCUA treats
                certain purchased loan participations as MBLs, including for risk
                weighting under the RBC rule. The commenter said that if the
                participation involves a loan to a member of the purchasing credit
                union, even though the loan was originated by the selling credit union,
                the interest in the participation must be counted as an MBL by the
                purchasing credit union. The commenter felt that this treatment is not
                justified and encouraged the NCUA to reconsider it as it reviews this
                regulation. The commenter said that, in light of the provisions that
                apply to loan participations under the MBL rule, the loan
                participations rule could benefit from the approach proposed for
                eligible obligations (strip away requirements not required by the FCU
                Act and consolidate provisions in one place in the regulations).
                 One commenter noted that the conflict of interest provisions
                regarding the use of third parties to review a loan participation could
                be clearer as to when the third party can actually acquire an interest
                in the loan participation.
                 Several commenters asked that this be made a priority and moved to
                Tier 1. One commenter argued that the recommendations require
                relatively low effort, involve removing prescriptive limits or
                otherwise streamlining requirements, and would help credit unions
                manage their balance sheets more effectively. The commenter reasoned
                that removing unnecessary prescriptive limits and elements that are
                contrary to modern holistic balance sheet funds management theory would
                provide some credit unions risk management options that may be too late
                in three years when the market environment may have changed further.
                 Report 2: The Task Force recommends adopting the first report's
                recommendation and prioritization, with an understanding that the FCU
                Act
                [[Page 65947]]
                prevents the NCUA from offering all of the relief credit unions are
                seeking.
                3. Sec. 701.23--Purchase, Sale, and Pledge of Eligible Obligations
                 Addresses: Purchase, sale, and pledge of eligible obligations.
                 Sections: 701.23.
                 Category: Clarify & Expand.
                 Degree of Effort: Moderate.
                 Degree of Impact: High.
                 Report 1: Simplify and combine all the authority to purchase loans
                and other assets into one section, and provide full authority
                consistent with the FCU Act. Eligible obligations of the credit union's
                members should have no limit. Remove CAMEL rating and other limitations
                not required by the FCU Act.\39\
                ---------------------------------------------------------------------------
                 \39\ See 12 U.S.C. 1757(7)(E), 1757(13), and 1757(14).
                ---------------------------------------------------------------------------
                 Comments: Approximately ten commenters offered general support for
                the recommendations. Several commenters said that the removal of
                supervisory ratings and limitations beyond the statutory scope will aid
                credit unions in their member service business by reducing regulatory
                burden. The commenters felt that providing credit unions with the
                unlimited ability to purchase, sell, and pledge eligible member
                obligations is in the spirit of the credit union business model. One
                commenter opined that current limits to purchasing eligible obligations
                may only exacerbate the challenges facing credit unions that are
                struggling for earnings and/or risk diversification and take away much
                needed opportunities that could otherwise be part of a strategic aspect
                to cure concerns. The commenter said that waivers take time and rely on
                examiners recognizing the strategic importance/appropriateness of the
                request.
                 One commenter stated that the NCUA has the authority to allow
                credit unions to purchase whole loans from non-credit unions and argued
                that credit unions ought to have broad authority to purchase loans from
                other originators, particularly other federally insured depositories.
                The commenter argued that purchasing loans from other financial
                institutions can be a risk-appropriate, well-priced alternative to
                purchasing low-yielding, over-priced securities.
                 Another commenter said that, although the recommendation lacks
                detail, they would support a revised rule that allows for any credit
                union to purchase an eligible obligation that has been originated by a
                FICU, regardless of whether it is an obligation of its members. The
                commenter believed such a rule would not bring new risk into the
                system, yet would provide purchasing and selling FICUs with more market
                options, which ultimately would lower the cost for consumers.
                 Finally, one commenter asked the NCUA to clean up the language in
                Sec. 701.23, which it believes to be the single most confusing
                regulation governing FCU powers.
                 Several commenters also asked that the recommendations be moved to
                Tier 1. One commenter contended that since the regulation was part of
                the Office of General Counsel's 2015 regulatory review revisions should
                be considered in 2018. Another commenter argued that the
                recommendations require relatively low effort, involve removing
                prescriptive limits or otherwise streamlining requirements, and would
                help credit unions manage their balance sheets more effectively. The
                commenter reasoned that removing unnecessary prescriptive limits and
                elements that are contrary to modern holistic balance sheet funds
                management theory would provide some credit unions risk management
                options that may be too late in three years when the market environment
                may have changed further.
                 Report 2: The Task Force recommends adopting the first report's
                recommendation and prioritization.
                4. Sec. 741.8--Purchase of Assets and Assumption of Liabilities
                 Addresses: Purchase of assets and assumption of liabilities.
                 Sections: 741.8.
                 Category: Improve.
                 Degree of Effort: Moderate.
                 Degree of Impact: Moderate.
                 Report 1: Review this regulation to determine if NCUA approval is
                really needed in purchasing loans and assuming liabilities from market
                participants other than FICUs. Credit unions already have relatively
                broad authority to make loans, buy investments and other assets, and
                enter into transactions that create liabilities. Requiring NCUA
                approval in all cases (including transactions not material to the
                acquirer) is an inordinate burden for the institution and the NCUA.
                 Comments: Approximately ten commenters offered general support for
                the recommendation and felt prior approval an unnecessary burden.
                Several commenters agreed that requiring agency approval in every case
                might be an inordinate burden, especially since credit unions already
                have broad authority to make loans, buy investments and other assets,
                and enter into transactions that create liabilities. Several commenters
                said that credit unions should retain the broad flexibility and
                authority to lend, purchase, and sell assets and liabilities, not
                subject to NCUA approval in all cases. These commenters welcomed review
                to determine whether NCUA approvals are necessary in deals between
                credit unions and other non-FICU market participants.
                 One commenter argued that preapproval should not be required for a
                FISCU purchase of liabilities from a non-FICU. The commenter believed
                that the NCUA's approval for such transactions has never materially
                contributed to the transaction's safety and soundness and argued that
                there is no indication that a non-FICU, regulated by a state regulator,
                is less safe than an FCU. Another commenter argued that nothing in
                Title II of the FCU Act gives the NCUA the authority to proscribe the
                loan purchase powers of a FISCU. The commenter asked the NCUA to
                eliminate the loan seller restrictions governing FISCUs in Sec. 741.8.
                Finally, several commenters asked that this recommendation be moved to
                Tier 1.
                 Report 2: The Task Force recommends adopting the first report's
                recommendation and prioritization, with an understanding that the FCU
                Act prevents the NCUA from offering all of the relief credit unions are
                seeking.
                5. Sec. TBD--Third-Party Due Diligence Requirements
                 Addresses: Third-party due diligence requirements.
                 Sections: TBD.
                 Category: Simplify & Improve.
                 Degree of Effort: Moderate.
                 Degree of Impact: High.
                 Report 1: Add a comprehensive third-party due diligence regulation
                and remove and/or relocate such provisions from other regulations.
                 Comments: A handful of commenters supported increased clarity and
                simplification, but cautioned that no new or additional regulatory
                burdens should be imposed. One of these commenters was concerned that
                ``comprehensive'' implies additional regulations. This commenter said
                that vendor due diligence is a priority for credit unions as more
                services become more complex requiring the use of specialized vendors.
                However, the commenter felt that the current regulations achieve the
                NCUA's desired goal of a safe and sound credit union system. One
                commenter agreed with a review of what they believed to be considerable
                and burdensome due diligence requirements. This commenter generally
                agreed with consolidating due diligence requirements in one rule, but
                did not think the agency should regulate how credit unions meet their
                due
                [[Page 65948]]
                diligence obligations. The commenter said that any revised due
                diligence rule should not be overly prescriptive, but should focus on
                allowing credit unions to determine how best to vet third parties.
                 Several other commenters felt the recommendation did not provide
                sufficient information to comment. One of these commenters said that
                they would oppose any recommendation that would increase NCUA authority
                over third-party vendors. The commenter believed that would
                significantly increase credit unions' costs. Another of these
                commenters stated that they have a robust due diligence program and do
                not support additional regulatory burden aimed at reinventing the
                third-party services landscape. The commenter argued that such action
                would run contrary to Executive Order 13777.
                 Addresses: Third-party servicing of indirect vehicle loans.
                 Sections: 701.21(h).
                 Category: Remove.
                 Degree of Effort: Low.
                 Degree of Impact: Moderate.
                 Report 1: Revise this section to eliminate the portfolio limits and
                related waiver provision. A single, comprehensive third-party due
                diligence regulation would address the minimum expectations for credit
                unions using any servicers.
                 Comments: Approximately ten commenters offered general support for
                the recommendations. One of these commenters specifically noted that
                the recommendations will assist compliance. Several commenters offered
                support, but were concerned that a ``comprehensive'' regulation would
                lead to overly burdensome requirements. One of these commenters asked
                the NCUA to focus on clarifying and condensing existing third-party due
                diligence requirements. Another of these commenters expressed their
                desire that the NCUA ensure that credit unions maintain control over
                the direction of their institution and are not intimidated by examiners
                who may micromanage credit union contracts.
                 One commenter supported the Tier 1 prioritization. Another
                commenter asked that once the comprehensive guidance related to third-
                party management is developed all references to third-party due
                diligence be consolidated into a single provision requiring credit
                unions establish policies for managing third-party relationships.
                 Report 2: Upon further consideration and in response to stakeholder
                feedback the Task Force has combined these recommendations in Tier 2 to
                avoid bifurcating rulemakings addressing third-party management.
                6. Part 709--Involuntary Liquidation of Federal Credit Unions and
                Adjudication of Creditor Claims Involving Federally Insured Credit
                Unions in Liquidation
                 Addresses: Payout priorities in involuntary liquidation.
                 Sections: 709.5.
                 Category: Clarify.
                 Degree of Effort: Low.
                 Degree of Impact: Low.\40\
                ---------------------------------------------------------------------------
                 \40\ Includes potential efficiencies and/or cost savings for the
                NCUA.
                ---------------------------------------------------------------------------
                 Report 1: Revise the payout priorities to make unsecured creditors
                pari passu with the NCUSIF. Currently, unsecured creditors are senior
                to the NCUSIF.
                 Comments: A handful of commenters generally supported the
                recommendation. Several of these commenters felt that the
                recommendation would help the larger credit union industry. One
                commenter noted that while the recommendation lacked detail, they
                support it because it could further protect the NCUSIF.
                 Report 2: Upon further consideration and in response to stakeholder
                feedback the Task Force has moved this recommendation from Tier 3 to
                Tier 2. The Task Force believes this recommendation will help to
                protect the NCUSIF and higher prioritization is appropriate.
                iii. Tier 3 (Year 4+)
                1. Sec. 701.21--Loans to Members and Lines of Credit to Members
                 Addresses: Preemption of state laws.
                 Sections: 701.21(b).
                 Category: Simplify & Improve.
                 Degree of Effort: Moderate.
                 Degree of Impact: High.
                 Report 1: Enhance federal preemption where possible and
                appropriate. FCUs that are multi-state lenders still are subject to a
                variety of state laws that create overlap and additional regulatory
                burden. Enhancing preemption where possible and appropriate may help
                reduce overlap and burden.
                 Comments: Approximately ten commenters offered general support for
                the recommendations. One of these commenters asked the NCUA to clarify
                the scope of preemption as it applies to FISCUs, not just FCUs.
                Approximately five of the commenters emphasized the potential
                beneficial impact on credit unions in multi-state situations. These
                commenters emphasized that multi-state lenders face regulatory overlap
                and additional burden. They felt that providing greater clarity on
                where federal law applies through regulation would provide regulatory
                relief. One commenter said that any opportunity to ensure and clarify
                for credit unions the supremacy of federal lending laws is welcome and
                long overdue. Another commenter said that determining whether a state
                law is preempted is difficult and they would appreciate any additional
                or explicit guidance. One commenter emphasized that preemption to
                facilitate operations can help reduce compliance burdens and produce
                cost savings. The commenter noted that it supported the NCUA's view of
                its preemption authority and encouraged the agency to consider
                preemption broadly while being mindful of consumer and state authority
                concerns.
                 Several commenters felt that preemption should be made a priority.
                These commenters recommended elevating the recommendation to either
                Tier 1 or Tier 2. A few commenters did caution the NCUA to make sure
                that federal preemption of applicable state laws and regulations is
                narrowly tailored so as not to undermine a state supervisory structure.
                The commenters said that since many credit unions opt for state
                charters based on their members' business needs, any federal legal
                preemption should not unduly burden the compliance obligations of
                credit unions who have not sought the degree of federal oversight
                imposed.
                 Report 2: The Task Force recommends adopting the first report's
                recommendation and prioritization.
                2. Sec. 701.37--Treasury Tax and Loan Depositaries and Financial
                Agents of the Government
                 Addresses: Treasury tax and loan depositaries and financial agents
                of the Government.
                 Sections: 701.37.
                 Category: Remove/Improve.
                 Degree of Effort: Moderate.
                 Degree of Impact: Low.
                 Report 1: Determine if this regulation remains relevant and
                necessary.
                 Comments: Several commenters thought this regulation irrelevant,
                unnecessary, and no longer applicable.
                 Report 2: The Task Force recommends eliminating this regulation.
                3. Part 714--Leasing
                 Addresses: Leasing.
                 Sections: 714.
                 Category: Improve.
                 Degree of Effort: Moderate.
                 Degree of Impact: Undetermined.
                 Report 1: Review this regulation to identify if any changes or
                improvements are needed.
                 Comments: Approximately five commenters encouraged relief to
                provide flexibility and inspire more leasing. One of these commenters
                noted
                [[Page 65949]]
                that the leasing rule was adopted in 2000 and, while there may not be
                the need for numerous changes, it is appropriate that the NCUA review
                the rule, which the commenter believed to be overly detailed and
                oriented toward micromanagement. The commenter stated that, for
                example, the rule controls the amount of the estimated residual value a
                credit union may rely upon to satisfy the full payout lease
                requirement, which is 25% of the original cost of the leased property
                unless the amount above that is guaranteed. The commenter felt this
                kind of detail about the mechanics of a leasing program would be more
                appropriately determined by the credit union.
                 Several commenters said that credit unions should have the
                flexibility to run their business as best suits their members' needs.
                These commenters argued that the leasing regulations should be reduced
                to allow more credit unions, other than the largest, to engage in this
                activity if it is appropriate to their business needs. The commenters
                felt that credit unions are uniquely positioned to provide creative,
                tailored lease terms that give members greater flexibility in personal
                leases.
                 Report 2: The Task Force recommends adopting the first report's
                recommendation and prioritization.
                4. Part 725--National Credit Union Administration Central Liquidity
                Facility (CLF)
                 Addresses: National Credit Union Administration Central Liquidity
                Facility (CLF).
                 Sections: 725.
                 Category: Clarify.
                 Degree of Effort: Moderate.
                 Degree of Impact: Moderate.
                 Report 1: Update this regulation to streamline, facilitate the use
                of correspondents, and reduce minimum collateral requirements for
                certain loans/collateral.
                 Comments: Approximately five commenters provided comments offering
                support and substantive recommendations. Several commenters stated that
                they support updates that reduce minimum collateral requirements as
                well as facilitate the use of correspondents. As detailed more fully
                below, one commenter provided a number of substantive recommendations.
                 The commenter said that for the past several years, the corporate
                credit union community has worked closely with the CLF in order to
                provide operational efficiency with advances, repayments, and
                collateral management through a correspondent agreement with each
                corporate credit union. As such, the commenter asked that the NCUA
                amend Sec. 725.2 to include a definition of a correspondent. The
                commenter also asked the NCUA to modify Sec. 725.19 to reflect a
                market-based approach to collateral values. The commenter noted that
                current CLF collateral requirements call for a blanket net book value
                equal to at least 110% of advances and for certain types of collateral,
                i.e. marketable securities, CLF collateral values compare unfavorably
                to the Federal Reserve Board discount window and the Federal Home Loan
                Banks. Additionally, the commenter requested that the NCUA eliminate
                various references to dates in part 725 that are outdated.
                 The commenter also suggested the NCUA consider amending Sec.
                725.4(a)(2), which requires an agent member to purchase capital stock
                for all of its member natural person credit unions, in conjunction with
                a change to Sec. 304(b)(2) of the FCU Act,\41\ to allow the purchase
                of capital stock on behalf of a select group of member credit unions.
                The commenter noted that as corporate credit unions recapitalized their
                balance sheets following the crisis, the purchase of CLF capital stock
                for all member credit unions was thought to be prohibitively expensive
                by the corporate community. The commenter believed that the suggested
                changes would enable more natural person credit unions to access
                liquidity from the CLF during periods of tight liquidity.
                ---------------------------------------------------------------------------
                 \41\ 12 U.S.C. 1795c(b)(2).
                ---------------------------------------------------------------------------
                 The commenter also thought that corporate credit unions should have
                the ability to borrow directly from the CLF for liquidity purposes, and
                requested that the NCUA consider modifications to part 725 in
                conjunction with efforts to modernize the FCU Act in order to allow CLF
                advances directly to corporate credit unions. The commenter noted that
                during the financial crisis the CLF instituted several programs,
                including the Credit Union System Investment Program, which provided
                access to liquidity for select corporate credit unions. The commenter
                said that these programs required an advance from the CLF to a natural
                person credit union, following which the natural person credit union
                invested proceeds of the advance in a note issued by the corporate
                credit union and guaranteed by the NCUSIF pursuant to the Temporary
                Corporate Credit Union Liquidity Guarantee Program. The commenter
                argued that, while these transactions facilitated liquidity to
                corporate credit unions, the transactions were complex and costly.
                 The commenter also noted that they object to Sec. 306(a)(1) of the
                FCU Act,\42\ which reads in part ''the Board shall not approve an
                application for credit the intent of which is to expand credit union
                portfolios.'' The commenter argued that all advances expand a credit
                union's portfolio and the determination of whether or not an advance
                serves a liquidity purpose should be left up to the CLF.
                ---------------------------------------------------------------------------
                 \42\ Id. Sec. 1795e(a)(1).
                ---------------------------------------------------------------------------
                 A separate commenter asked the NCUA to review the authority for the
                CLF as well as its role and function. The commenter opined that the CLF
                was designed to be an important and useful facility that provides
                access to liquidity for those credit unions that could demonstrate the
                need and repay their borrowings. The commenter also stated that the CLF
                provides credit unions with a reliable resource for contingency funding
                needs. The commenter said that despite the CLF's past role, it
                currently has only 269 regular members and has no loans. The commenter
                believed that the CLF can be a useful facility that credit unions may
                utilize for liquidity when interest rates begin to rise again and asked
                the NCUA to work with Congress to restructure the CLF, ease
                requirements for credit unions to be members, and extend the range of
                borrowing opportunities.
                 One commenter specifically supported the Tier 3 categorization.
                Another commenter, citing the CLF's role during the financial crisis,
                felt part 725 warrants a higher priority.
                 Report 2: The Task Force recommends adopting the first report's
                recommendation and prioritization, with an understanding that the FCU
                Act prevents the NCUA from offering all of the relief credit unions are
                seeking.
                5. Part 741--Requirements for Insurance
                 Addresses: Maximum borrowing authority.
                 Sections: 741.2.
                 Category: Remove.
                 Degree of Effort: Low.
                 Degree of Impact: Low.
                 Report 1: Remove the 50% borrowing limit for FISCUs and the related
                waiver provision. State law should govern in this area.
                 Comments: Approximately five commenters offered general support for
                the recommendation. One commenter specifically supported the Tier 3
                categorization.
                 Report 2: The Task Force recommends adopting the first report's
                recommendation and prioritization.
                [[Page 65950]]
                6. Part 741--Requirements for Insurance
                 Addresses: Special reserve for nonconforming investments.
                 Sections: 741.3(a)(2).
                 Category: Remove.
                 Degree of Effort: Low.
                 Degree of Impact: Technical Amendment.
                 Report 1: Remove as no longer necessary and not consistent with
                GAAP.\43\
                ---------------------------------------------------------------------------
                 \43\ There are 11 FISCUs from 8 different states that report a
                total of $4.4 million in this account on the Call Report as of
                December 31, 2016.
                ---------------------------------------------------------------------------
                 Comments: Several commenters agreed with the recommendation. One
                commenter stated that a low prioritization is appropriate.
                 Report 2: The Task Force recommends adopting the first report's
                recommendation and prioritization.
                7. Part 748--Security Program, Report of Suspected Crimes, Suspicious
                Transactions, Catastrophic Acts, and Bank Secrecy Act Compliance
                 Addresses: Security Program, Report of Suspected Crimes, Suspicious
                Transactions, Catastrophic Acts, and Bank Secrecy Act Compliance.
                 Sections: 748.
                 Category: Improve.
                 Degree of Effort: Moderate.
                 Degree of Impact: High.
                 Report 1: Review this regulation to identify if any changes or
                improvements are needed. Recommend using an ANPR and forming a working
                group due to the complexity.
                 Comments: Approximately 15 commenters asked the NCUA to reform the
                Bank Secrecy Act (BSA) regulations and suggested the NCUA work with the
                Department of the Treasury and other regulators to support meaningful
                changes to minimize the costs and problems encountered in meeting BSA
                and anti-money laundering (AML) requirements. Several other commenters
                emphasized that BSA and AML compliance remain substantial issues and
                urged the NCUA to minimize compliance burdens. Another commenter noted
                that BSA compliance is a huge burden in paying for systems, training,
                and personnel. Several commenters also asked the NCUA to work with the
                Treasury and the Financial Crimes Enforcement Network (FinCEN) to
                eliminate burden from duplication in BSA requirements.
                 Approximately five commenters asked that the threshold for Currency
                Transaction Reports (CTRs) and Suspicious Activity Reports (SARs) be
                raised to a minimum of $20,000 to provide relief, ensure that only
                effective useful data is transmitted, and allow field examiners to
                provide consistent guidance during exams. Commenters noted that the
                current threshold has remained unchanged since 1972 and that the
                threshold would be over if $50,000 if adjusted for inflation. Several
                commenters requested that the SAR and CTR forms be combined into one
                form submission.
                 Another commenter asked that the NCUA promote better communication
                over mandatory reporting. The commenter stated that credit unions often
                file defensive SARs, which are of little use to law enforcement, to
                avoid compliance failures. The commenter believed reforms to promote
                open communication between law enforcement and credit unions would
                allow the system to function like Congress intended. The commenter also
                argued that enforcement of FinCEN regulations by the NCUA, without
                direct law enforcement feedback, is cumbersome and should be changed.
                 Another commenter suggested significantly curtailing customer due
                diligence requirements and eliminating redundant SARs filings for
                corporate credit unions. One commenter suggested that FinCEN and
                federal law enforcement should consider awarding a percentage, such as
                10%, of fines or awards to credit unions in civil and criminal actions
                when those institutions' filings were instrumental in a case. The
                commenter believed that incentivizing better filings would result in
                better quality SARs, greater compliance, and the alleviation of some of
                the high costs of BSA compliance.
                 One commenter asked the NCUA to relax its requirement for monthly
                reporting of SAR activity to the board. The commenter stated that there
                is no statutory requirement that mandates monthly reporting and asked
                the NCUA to allow credit unions to report SAR filings promptly to the
                board, with promptly defined as the next regularly scheduled board
                meeting or at least quarterly.
                 Approximately five commenters offered support for a working group.
                Another commenter specifically supported the use of an ANPR. Several
                commenters said the NCUA should persuade FinCEN, other financial
                regulators, and Congress to reform some of the BSA inefficiencies.
                 Approximately 15 commenters asked that part 748 be made a priority.
                One commenter noted their appreciation for the NCUA's effort to reform
                BSA compliance procedures, but articulated a belief that substantive
                changes must originate from FinCEN and Congress. Another commenter
                asked the NCUA to explain all exam policies and priorities,
                particularly new ones, and provide the information in one ``examination
                issues'' location on the agency's website and in agency documents, such
                as letters to credit unions and examiners' guides.
                 Report 2: The Task Force recommends adopting the first report's
                recommendation and prioritization. Further, the Task Force emphasizes
                that the NCUA has limited authority in this area. Many of the changes
                requested by commenters fall outside of the NCUA's purview. The Task
                Force does note that the NCUA continues to participate in interagency
                work in this area.
                8. Part 749--Records Preservation Program and Appendices--Record
                Retention Guidelines; Catastrophic Act Preparedness Guidelines
                 Addresses: Records Preservation Program and Appendices--Record
                Retention Guidelines; Catastrophic Act Preparedness Guidelines.
                 Sections: 749.
                 Category: Improve.
                 Degree of Effort: Moderate.
                 Degree of Impact: High.
                 Report 1: Review this regulation to identify if any changes or
                improvements are needed. Recommend using an ANPR and forming a working
                group due to the complexity.
                 Comments: Approximately 15 commenters stated that the record
                retention guidelines are unclear and conflicting. One of these
                commenters noted that, while the rule states that any records not
                explicitly mentioned as vital records do not need to be maintained
                permanently and can be destroyed periodically as determined by the
                credit union, other parts of the NCUA's regulations have record
                retention requirements. The commenter included two examples. First,
                under part 749 certain supervisory committee documents are not vital
                records and are subject to periodic destruction; yet under part 715
                certain supervisory committee documents must be retained until the
                completion of the next verification process. Second, merger documents
                are not explicitly listed as permanent records in part 749; however,
                the NCUA's Credit Union Merger Procedures and Merger Forms Manual
                states that the continuing credit union must maintain all documents and
                records related to a merger. Another commenter agreed with the review
                and noted that some retention requirements lack a termination date.
                Several commenters asked the NCUA to update part 749 to reflect and
                adapt to technology record maintenance changes.
                 Approximately 15 commenters asked that changes to this regulation
                be made
                [[Page 65951]]
                a priority. Conversely, one commenter felt the changes would have
                negligible benefit and agreed with the Tier 3 prioritization. Several
                commenters asked the NCUA to develop a working group. One commenter
                specifically supported using an ANPR to frame the numerous issues.
                 Report 2: The Task Force recommends adopting the first report's
                recommendation and prioritization.
                iv. Other Comments
                1. Timeline
                 Several commenters asked that the four year timeline be
                accelerated. One commenter agreed with reassessing the timelines based
                on credit union feedback. Another commenter asked the NCUA to consider
                the implementation timelines for these changes, noting that credit
                unions and the NCUA will require substantial transition time to conform
                to new or changed regulations. The commenter asked that examiner
                training be emphasized to avoid implementation inconsistencies.
                2. Prioritizations Generally
                 One commenter asked the Task Force to use a taxonomic system with
                Tier 1, Class A regulations receiving highest priority, followed by
                Tier 1, Class B regulations, and so forth.
                3. Other
                 Other suggestions included: Co-locating all rules applicable to
                FISCUs; amendments to the definition of loan-to-value in part 723;
                formation of a Credit Union Advisory Council; flood insurance
                amendments; suggestions for how to better comply with Executive Orders
                13771 and 13777; investment in fintech companies; clarity and parity
                for financing of pre-sold construction homes; changes to the PALs
                program; and more.
                d. Appendix to Section III--Part 703 Recommendations Details
                 Investments--Part 703 Subpart A
                ------------------------------------------------------------------------
                 Item Change Rationale
                ------------------------------------------------------------------------
                1.............. Investment Policies Sec. 703.3
                 --------------------------------------------------------
                 Fine tune section to focus Reduces burden on credit
                 on investment activities unions by not requiring
                 and not on balance sheet IRR and liquidity
                 activities. E.g., remove policies in the
                 (c) and (d), IRR and investment policy. Also
                 liquidity, since those should help credit unions
                 items should be addressed focus on balance sheet
                 in the IRR and liquidity risk.
                 policies.
                ------------------------------------------------------------------------
                2.............. Discretionary Control Over Investments and Investment
                 Advisor Sec. 703.5(b)(1)(ii), Sec. 703.5(b)(2)--
                 (Net worth limit)
                 --------------------------------------------------------
                 Remove 100 percent of net This would allow credit
                 worth limit for delegated unions to have
                 discretionary control. professionally managed,
                 Would need to add language separate-account,
                 to ensure credit unions investments without
                 have provided investment imposing a limit. There
                 advisors with investment are no limits on mutual
                 guidelines that contain: funds where the credit
                 Duration/average life union has less control of
                 targets, permissible what the manager invests
                 investments, and in. Separate-account
                 investment limits. delegated discretionary
                 programs have
                 considerably more
                 transparency than mutual
                 funds.
                ------------------------------------------------------------------------
                3.............. Discretionary Control Over Investments and Investment
                 Advisor Sec. 703.5(b)(3)--(Due diligence)
                 --------------------------------------------------------
                 Remove prescriptive due This section is too
                 diligence requirements and prescriptive for a credit
                 simply state the credit union to perform due
                 union must perform due diligence. It also does
                 diligence on the not focus on the
                 investment advisor. investment advisor's
                 ability to manage
                 investments for the
                 credit union.
                ------------------------------------------------------------------------
                4.............. Credit Analysis Sec. 703.6--(Due diligence)
                 --------------------------------------------------------
                 Modify exception to credit This will make it clear
                 analysis requirements to that NCUA requires credit
                 only securities guaranteed analysis for investments
                 by the entities listed in not guaranteed, but
                 the section. issued by, agencies.
                 Currently the rule would
                 not require a credit
                 analysis for a Fannie Mae
                 loss sharing bond or an
                 unguaranteed subordinate
                 tranche of a Freddie Mac
                 multi-family mortgage
                 security.
                ------------------------------------------------------------------------
                5.............. Credit Analysis Sec. 703.6--(Maximum credit risk)
                 --------------------------------------------------------
                 Require a minimum of Sets a minimum expectation
                 investment grade for all of credit worthiness for
                 investments. all investments purchased
                 under the part 703
                 investment authority.
                ------------------------------------------------------------------------
                6.............. Credit Analysis Sec. 703.6--(Credit union process and
                 people)
                 --------------------------------------------------------
                 A credit union, or its This establishes the basic
                 investment advisor, must standard for a credit
                 have sufficient resources, union to purchase an
                 knowledge, systems, and investment. This will
                 procedures to handle the allow for a loosening of
                 risks and risk management part 703 since NCUA has
                 (e.g., IRR modeling) of established standards to
                 the investments it purchase investments that
                 purchases. may have been prohibited
                 or restricted in the
                 past.
                ------------------------------------------------------------------------
                7.............. Broker-Dealers--Sec. 703.8(b)--(Due diligence)
                 --------------------------------------------------------
                 Remove prescriptive due This section is too
                 diligence requirements and prescriptive for a broker-
                 simply state the credit dealer that doesn't
                 union must perform due provide advice. May want
                 diligence on the broker- to specify standards for
                 dealer. broker-dealers that
                 provide advice to credit
                 unions.
                ------------------------------------------------------------------------
                8.............. Monitoring Non-Security Investments Sec. 703.10--
                 (Reporting requirements)
                 --------------------------------------------------------
                 Remove this section........ Unduly prescriptive.
                ------------------------------------------------------------------------
                [[Page 65952]]
                
                9.............. Valuing Securities Sec. 703.11(a) & (d)--(Due
                 diligence)
                 --------------------------------------------------------
                 Combine sections and remove Currently too
                 the reference to two price prescriptive. A
                 quotations. The principled approach
                 requirement should be that conforms more to market
                 the credit union use convention.
                 market inputs to determine
                 if the purchase is at a
                 reasonable market price.
                ------------------------------------------------------------------------
                10............. Valuing Securities Sec. 703.11(c)--(Due diligence)
                 --------------------------------------------------------
                 Remove this section........ Unnecessary. This should
                 be dictated by GAAP.
                ------------------------------------------------------------------------
                11............. Monitoring Securities Sec. 703.12(a)--(Reporting
                 requirements)
                 --------------------------------------------------------
                 Move to and combine with Streamlines part 703.
                 Sec. 703.11.
                ------------------------------------------------------------------------
                12............. Monitoring Securities Sec. 703.12(b), (c) and (d)--
                 (Reporting requirements)
                 --------------------------------------------------------
                 Remove these sections and Unduly prescriptive.
                 703.12(a) will be combined
                 with part 703.11.
                ------------------------------------------------------------------------
                13............. Permissible Investment Activities and Permissible
                 Investments Sec. 703.13 and Sec. 703.14
                 --------------------------------------------------------
                 Merge these sections and Streamlines rule and
                 add language from the FCU provides full investment
                 Act for permissible authority allowed under
                 investments. the Act.
                ------------------------------------------------------------------------
                14............. Permissible Investment Activities Sec. 703.13(d)--
                 (Borrowing repurchase transactions)
                 --------------------------------------------------------
                 Allow mismatch permissible A 30 day mismatch is low
                 in Sec. 703.20 as the risk.
                 ``base'' permissible
                 activity.
                ------------------------------------------------------------------------
                15............. Permissible Investments Sec. 703.14(a)--(Permissible
                 indices for variable rate investments)
                 --------------------------------------------------------
                 Expand permissible indices This could provide credit
                 for credit unions that unions with investments
                 have sufficient resources, that they could benefit
                 knowledge, systems, and from and not pose a risk
                 procedures to handle the to the NCUSIF.
                 risks of the investment.
                 Ability to model the
                 investment for IRR should
                 be required.
                ------------------------------------------------------------------------
                16............. Permissible Investments Sec. 703.14(e)--(Muni bond
                 limits)
                 --------------------------------------------------------
                 Remove limitations on This limit is unnecessary.
                 municipal exposure. Credit unions should
                 determine limits.
                ------------------------------------------------------------------------
                17............. Permissible Investments Sec. 703.14(h)--(Mortgage
                 note repurchase transactions)
                 --------------------------------------------------------
                 Limits will be reviewed to Limits may need to be
                 determine if they are increased or eliminated.
                 appropriate.
                ------------------------------------------------------------------------
                18............. Permissible Investments Sec. 703.14(i)--(Zero coupon
                 investment restrictions)
                 --------------------------------------------------------
                 Remove limits on zero- Interest rate and
                 coupon investments. liquidity risk should be
                 managed from a balance
                 sheet standpoint. This
                 appears to try to manage
                 it from an individual
                 security standpoint. This
                 limit is unnecessary.
                ------------------------------------------------------------------------
                19............. Permissible Investments Sec. 703.14(j)(3)--
                 (Commercial mortgage related securities)
                 --------------------------------------------------------
                 Remove this section........ Not realistic in the
                 current market place.
                 Furthermore, having a
                 large number of loans was
                 actually a negative in
                 many CMRS deals prior to
                 2007. Less attention was
                 paid to the smaller loans
                 that were poorly
                 underwritten versus the
                 larger loans in the deal.
                ------------------------------------------------------------------------
                20............. Prohibited Investment Activities Sec. 703.15--(Short
                 Sales)
                 --------------------------------------------------------
                 Review regulatory history Restriction may be
                 on the prohibition of reconsidered.
                 short sales.
                ------------------------------------------------------------------------
                21............. Prohibited Investments Sec. 703.16(a)--(Mortgage
                 servicing rights)
                 --------------------------------------------------------
                 Determine if mortgage Buying MSRs from other
                 servicing rights (MSRs) credit unions may offer
                 are permissible for credit efficiencies in the
                 unions to purchase per the credit union system.
                 FCU Act. If so, there
                 should be consideration
                 given to permit the
                 purchase of MSRs.
                ------------------------------------------------------------------------
                22............. Prohibited Investments Sec. 703.16(b)--(Exchangeable,
                 IO and PO MBS)
                 --------------------------------------------------------
                [[Page 65953]]
                
                 Remove this section........ A credit union should be
                 able to purchase interest-
                 only and principal-only
                 investments if it has
                 sufficient resources,
                 knowledge, systems, and
                 procedures to handle the
                 risks and risk management
                 (e.g., IRR modeling) of
                 the investments it
                 purchases.
                ------------------------------------------------------------------------
                23............. Grandfathered Investments Sec. 703.18
                 --------------------------------------------------------
                 Remove sections that will Some parts of the section
                 no longer apply based on may not apply due to
                 other changes in the rule. other changes in the
                 rule.
                ------------------------------------------------------------------------
                24............. Investment Pilot Program Sec. 703.19
                 --------------------------------------------------------
                 Remove this section........ Pilot programs will no
                 longer be needed with the
                 proposed changes.
                ------------------------------------------------------------------------
                25............. Request for Additional Authority Sec. 703.20
                 --------------------------------------------------------
                 Remove this section........ Will no longer be needed
                 with the removal or
                 alignment of the
                 restrictions in other
                 sections.
                ------------------------------------------------------------------------
                 Derivatives--Part 703 Subpart B and Related Items
                ------------------------------------------------------------------------
                 Item Change Rationale
                ------------------------------------------------------------------------
                1.............. ``Move'' Put-option purchases in managing increased
                 interest rate risk for real estate loans produced for
                 sale
                 on the secondary market, in 701.21(i) to 703.102(a)
                 --------------------------------------------------------
                 Move the product to the This would consolidate
                 Subpart B permissible into one place all
                 derivative products. permissible derivative
                 activities.
                ------------------------------------------------------------------------
                2.............. ``Move'' European financial options contract in
                 703.14(g) to 703.102(a)
                 --------------------------------------------------------
                 Move the product to the This would consolidate
                 Subpart B permissible into one place all
                 derivative products. permissible derivative
                 activities.
                ------------------------------------------------------------------------
                3.............. ``Rename'' 703 Subpart B from ``Derivatives Authority''
                 to ``Derivatives and Hedging Authority''
                 --------------------------------------------------------
                 Name change................ Would widen the rule to
                 address off balance sheet
                 hedging instruments that
                 are permissible.
                ------------------------------------------------------------------------
                4.............. ``Move and Modify'' Derivatives section in 703.14(k) to
                 703 Subpart B
                 --------------------------------------------------------
                 With the move, remove Would provide more clarity
                 703.14(k)(1), move on hedging activities for
                 703.14(k)(2) to 703.100 TBA, Dollar Rolls, etc.
                 and move 703.14(k)(3) to
                 703.102.
                ------------------------------------------------------------------------
                5.............. ``Modify'' Derivatives Application process to
                 ``Notification''
                 --------------------------------------------------------
                 Remove the FCU application The ``Notification''
                 requirements and replace requirements would
                 with a ``Notification''. include providing NCUA
                 This would require changes with at least 60 day
                 to Sec. 703.108, Sec. notice before initially
                 703.109, Sec. 703.110, engaging in a Derivative
                 Sec. 703.111, Sec. transaction.
                 703.112.
                ------------------------------------------------------------------------
                6.............. ``Remove'' Derivatives Regulatory Limits
                 --------------------------------------------------------
                 Remove the volume limits on Will be better supported
                 derivatives activity. This as part of supervision
                 would require changes to guidance and possible use
                 Sec. 703.103, Sec. as scoping metrics.
                 703.105, Appendix A.
                ------------------------------------------------------------------------
                7.............. ``Expand'' Eligible Collateral for Margining
                 --------------------------------------------------------
                 Expand the eligible This is an acceptable
                 collateral in practice and should have
                 703.104(a)(2)(iii) to been in the Final Rule.
                 include Agency Debt
                 (Ginnie Mae Securities).
                ------------------------------------------------------------------------
                8.............. ``Modify'' Eligibility (only part)
                 --------------------------------------------------------
                 Remove or change 703.108(b) Allows for more credit
                 to require notice but not unions to use derivatives
                 pre-approval, and re- to manage interest rate
                 evaluate the CAMEL and risk subject to
                 asset size eligibility supervisory intervention
                 criteria. if they are not equipped
                 to manage it properly.
                ------------------------------------------------------------------------
                9.............. ``Modify'' Notification requirement for FISCUs
                 --------------------------------------------------------
                 Change 741.219(b).......... Make consistent with FCU
                 notification
                 requirements.
                ------------------------------------------------------------------------
                [[Page 65954]]
                
                10............. ``Remove'' Pilot Program Participants
                 --------------------------------------------------------
                 Change 703.113............. Not relevant anymore.
                ------------------------------------------------------------------------
                 By the National Credit Union Administration Board on December
                13, 2018.
                Gerard Poliquin,
                Secretary of the Board.
                [FR Doc. 2018-27473 Filed 12-20-18; 8:45 am]
                 BILLING CODE 7535-01-P