Regulatory Reform Agenda

 
CONTENT
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 IV
National Credit Union Administration
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12 CFR Chapter VII
Regulatory Reform Agenda; Proposed Rule
Federal Register / Vol. 83 , No. 245 / Friday, December 21, 2018 /
Proposed Rules
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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
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             Regulation                 Report 2 priority       Report 1 priority      Justification for change
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                                                 Report 2 Tier 1
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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
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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.
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    \7\ 82 FR 60283 (Dec. 20, 2017).
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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).
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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.
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    \25\ 83 FR 25583 (June 4, 2018).
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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.
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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