65926 Federal Register / Vol. 83, No. 245 / Friday, December 21, 2018 / Proposed Rules 

1https://www.ncua.gov/About/Pages/Missionand-Vision.aspx. 

2 82 FR 39702 (Aug. 22, 2017). 

3 Id. at 39704. 

NATIONAL CREDIT UNION 

ADMINISTRATION 

12 CFR Chapter VII 

Regulatory Reform Agenda 

AGENCY: National Credit Union 

Administration (NCUA). 

ACTION: Notice of regulatory review. 

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. 

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

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. 

The NCUA will also separately 

publish a consolidated version of this 

report on the NCUA website. The 


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consolidated report will provide the 

Task Force’s recommendations from the 

first report, the Task Force’s updated 

recommendations, and the updated 

prioritizations. 

ii. Measuring Future Progress 

As contemplated by both Executive 

Order 13777 and the first report, the 

Task Force recommends that the NCUA 

measure the agency’s progress as it 

advances through the regulatory reform 

agenda. To best do this, the Task Force 

recommends that the NCUA publish on 

its website the outline of this report’s 

refined blueprint, subject to needed 

future modifications, to be updated 

every six months to monitor progress. 

This outline should document whether 

the agency has published any 

documents related to the individual 

recommendations and whether any 

changes to the recommendation or 

refined blueprint timeline have been 

made. 

iii. The NCUA’s Annual Regulatory 

Review 

In the first report, the Task Force 

recommended suspending the NCUA 

Office of General Counsel’s annual 

regulatory review until 2020. 

Approximately five commenters 

supported the temporary suspension. 

Several commenters opposed the 

suspension, noting that changes will 

likely occur between now and 2020, 

including to the NCUA Board 

composition. One of these commenters 

felt that the NCUA should maintain a 

formal mechanism for stakeholder 

insight into the effect of existing 

regulations on a contemporary basis and 

asked that the review be reinstated in 

January 2019 as Tier 1 is completed. 

Based on commenter feedback, the 

Task Force has amended its 

recommendation. The Task Force 

recommends that the annual regulatory 

review resume in January 2019, via a 

notice published on the NCUA’s 

website. The 2019 regulatory review 

will cover parts 700–710 of the NCUA’s 

regulations. The Task Force believes the 

annual regulatory review plays an 

important role in giving stakeholders a 

continuing means of providing feedback 

as changes are made and take effect. 

b. The Consolidated Refined Blueprint 

REPORT 1 AND REPORT 2 PRIORITIZATION COMPARISON

Regulation Report 2 priority Report 1 priority Justification for change 

Report 2 Tier 1 

1. Corporate Credit Unions ................................... Completed ............. Tier 1 ..................... N/A. 

2. Emergency Mergers .......................................... Completed ............. Tier 1 ..................... N/A. 

3. Securitization ..................................................... Completed ............. Tier 1 ..................... N/A. 

4. Supervisory Review Committee ........................ Completed ............. Tier 1 ..................... N/A. 

5. Appeals ............................................................. Completed ............. Tier 1 ..................... N/A. 

6. Equity Distribution ............................................. Completed ............. Tier 1 ..................... N/A. 

7. Capital Planning and Stress Testing ................ Completed ............. Tier 1 ..................... N/A. 

8. Advertising ......................................................... Completed ............. Tier 1 ..................... N/A. 

9. Field of Membership ......................................... Completed ............. Tier 1 ..................... N/A. 

10. Risk-Based Capital Delay ...............................

and 

Risk-Based Capital Substantive ........................

Completed .............

...............................

Tier 1 .....................

Tier 2 

The risk-based capital rule finalized in October 

2018 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 Maturity Limits, 

b. Single borrower and Group of Associated 

Borrowers Limit.

Proposed ............... Tier 1 ..................... N/A. 

14. Appraisals ........................................................ Proposed ............... Tier 1 ..................... N/A. 

15. Fidelity Bonds .................................................. Proposed ............... Tier 1 ..................... N/A. 

16. Supervisory Committee Audits and 

Verification (Engagement Letter, Target Date of 

Delivery).

Tier 1 ..................... Tier 1 ..................... N/A. 

17. Supervisory Committee Audits and 

Verification (Audit per Supervisory Committee 

Guide).

Tier 1 ..................... Tier 1 ..................... N/A. 

18. Subordinated Debt (formerly Alternative Capital).Tier 1 ..................... Tier 2 ..................... 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. 

19. Designation of Low Income Status; Acceptance of Secondary Capital Accounts by LowIncome Designated Credit Unions.Tier 1 ..................... Tier 2 ..................... 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. 

20. Borrowed Funds from Natural Persons .......... Tier 1 ..................... Tier 2 ..................... 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. 

21. Payment on Shares by Public Units and Nonmembers.Tier 1 ..................... Tier 2 ..................... Upon further consideration and in response to 

stakeholder feedback the Task Force has 

moved this recommendation from Tier 2 to 

Tier 1. 

22. Compensation in Connection with Loans ....... Tier 1 ..................... Tier 1 ..................... N/A. 


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REPORT 1 AND REPORT 2 PRIORITIZATION COMPARISON—Continued 

Regulation Report 2 priority Report 1 priority Justification for change 

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 Rate .............. Tier 1 ..................... Tier 3 ..................... The loan interest rate is a priority for the Board, 

the agency, and commenters. 

Report 2 Tier 2 

1. Investment and Deposit Activities ..................... Tier 2 (First Item) .. Tier 2 ..................... Upon further consideration 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 Eligible Obligations.Tier 2 ..................... Tier 2 ..................... N/A. 

4. Purchase of Assets and Assumption of Liabilities.Tier 2 ..................... Tier 2 ..................... N/A. 

5. Third-Party Due Diligence Requirements and .. Tier 2 ..................... Tier 3 ..................... These recommendations were combined and put 

into Tier 2. 

Third-Party Servicing of Indirect Vehicle 

Loans.

Tier 2 ..................... Tier 1 

6. Payout priorities in Involuntary Liquidation ....... Tier 2 ..................... Tier 3 ..................... This recommendation will help protect the 

NCUSIF and higher prioritization is appropriate. 

Report 2 Tier 3 

1. Preemption of State Laws (Loans to Members 

and Lines of Credit to Members).

Tier 3 ..................... Tier 3 ..................... N/A. 

2. Treasury Tax and Loan Depositaries and Financial Agents of the Government.Tier 3 ..................... Tier 3 ..................... N/A. 

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 Nonconforming Investments.Tier 3 ..................... Tier 3 ..................... N/A. 

7. Security Program, Report of Suspected 

Crimes, Suspicious Transactions, Catastrophic 

Acts, and Bank Secrecy Act Compliance.

Tier 3 ..................... Tier 3 ..................... N/A. 

8. Records Preservation Program and Appendices—Record Retention Guidelines; Catastrophic Act Preparedness Guidelines.Tier 3 ..................... Tier 3 ..................... N/A. 

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, 


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4The 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.’’ 

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 assetbacked 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 monthend 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 § 704.8(h) U.S. Governmentissued 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, § 704.8(f) and (g), but did 

recommend the factor in § 704.8(h) be 

changed to make the WAL of 

government-issued and governmentbacked 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 § 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. 

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 


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5 82 FR 55497 (Nov. 22, 2017). 

6 Includes potential efficiencies and/or cost 

savings for NCUA. 

7 82 FR 60283 (Dec. 20, 2017). 

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 assetbacked 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 § 704.7(e)(3) to § 723.1(b) 

and former § 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. 

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

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. 

3. Securitization 

Addresses: Securitization. 

Sections: 721. 

Category: Expand Authority. 

Degree of Effort: High. 

Degree of Impact: Low. 


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8 82 FR 29699 (June 30, 2017). 

9Asset 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-securitizationauthority.pdf. 10 82 FR 50270 (Oct. 30, 2017). 

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. 

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. 

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 


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11 82 FR 50288 (Oct. 30, 2017). 

12 83 FR 7954 (Feb. 23, 2018). 

13 Includes potential efficiencies and/or cost 

savings for NCUA. 

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. 

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 yearend. 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 § 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. 

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

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, 


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14The 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. 

15 83 FR 17901 (Apr. 25, 2018). 16 83 FR 17910 (Apr. 25, 2018). 17 83 FR 30289 (June 28, 2018). 

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. 

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. 

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, statechartered 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 nonissue 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. 

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 


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18The NCUA has appealed the U.S. District Court 

for the District of Columbia’s ruling on the October 

2016 field of membership rule. 

19 Includes potential efficiencies and/or cost 

savings for NCUA. 

20CECL (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. 

21Financial CHOICE Act of 2017, H.R. 10, 115th 

Cong. (2017). 

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. 

10. Part 702—Capital Adequacy 

Addresses: Risk-Based Capital. 

Sections: 702. 

Category: Improve. 

Degree of Effort: Low. 

Degree of Impact: High.19

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. 

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-sizefits-all approach or methodology that 

would subject credit unions to undue 

regulatory burden that fails to 

appropriately address their activities. 

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 


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22 83 FR 55467 (Nov. 6, 2018). 

23 83 FR 12283 (Mar. 21, 2018). 

24 83 FR 56640 (Nov. 13, 2018). 

25 83 FR 25583 (June 4, 2018). 

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 wellcapitalized 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. 

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

12. § 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 sixmonth 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 


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26 83 FR 39622 (Aug. 10, 2018). 

27 Id. 

the comments received and explore the 

development of a PALS II final rule and 

potentially a PALS III proposal. 

13. § 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

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

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. 


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28 83 FR 49857 (Oct. 3, 2018). 

29Economic Growth, Regulatory Relief, and 

Consumer Protection Act, Public Law 115–174, 132 

Stat. 1296 (2018). 

30 Includes potential efficiencies and/or cost 

savings for NCUA. 

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, § 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 nonresidential real estate transactions from 

$250,000 to $1,000,000. For nonresidential 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 § 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. 

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

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 


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31OGC Op. Ltr. 17–0959 (Sept. 26, 2017). 

32 83 FR 59318 (Nov. 23, 2018). 

33OGC Op. Ltr. 17–0959 (Sept. 26, 2017). 

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

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

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 §§ 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 riskbased 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 riskbased 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 


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Federal Register / Vol. 83, No. 245 / Friday, December 21, 2018 / Proposed Rules 65939 

34Frequently 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 riskbased capital numerator before the effective date.’’), 

available at https://www.ncua.gov/Legal/ 

Documents/RBC/RBC-Final-Rule-FAQs.pdf. 

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 wellcapitalized, 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 riskbased 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 jobcreating 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-lowincome 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 lowincome designated credit union 

secondary capital rules and to establish 

supplemental capital for RBC. 

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 safeguarding 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. 


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19. § 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 §§ 701.32 and 701.34 place on 

FISCUs pursuant to § 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. § 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. § 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 § 1757(9) of the FCU Act. A 

credit union is required to be lowincome 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. § 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 


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35 12 U.S.C. 1757(5)(D). 

36 12 U.S.C. 1757(7)(I). 

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 § 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

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 § 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 noncredit 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 § 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 


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37 12 U.S.C. 1757(7)(I). 

authorizes certain lending powers for 

CUSOs and excludes others without a 

rational basis. More specifically, the 

commenter suggested that the NCUA 

amend § 712.5 by deleting references to 

the origination of business loans, 

consumer mortgage loans, student loans 

and credit card loans (§ 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 

§ 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 multiissuer packages with crossindemnifications. 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 multistate 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 

§ 712.2(a) of the NCUA’s regulations.37

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 


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38 Includes potential efficiencies and/or cost 

savings for NCUA. 

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. § 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

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, nonaccrual 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 principlesbased 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 


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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, separateaccount 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 principlesbased 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 brokerdealers, 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 preapproval 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 


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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 volumebased 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 riskmitigation 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 longterm, 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 § 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 welldeveloped 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, 


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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 thirdparty 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 

§ 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 

§ 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. § 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 § 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 


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39See 12 U.S.C. 1757(7)(E), 1757(13), and 

1757(14). 

prevents the NCUA from offering all of 

the relief credit unions are seeking. 

3. § 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

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 riskappropriate, 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 

§ 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. § 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 nonFICU 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 § 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. § 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 thirdparty 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 


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40 Includes potential efficiencies and/or cost 

savings for the NCUA. 

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 thirdparty 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

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. § 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. § 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 


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41 12 U.S.C. 1795c(b)(2). 42 Id. § 1795e(a)(1). 

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 

§ 725.2 to include a definition of a 

correspondent. The commenter also 

asked the NCUA to modify § 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 § 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 § 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. 

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 § 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. 

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. 


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43There 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. 

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

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 


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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: Colocating all rules applicable to FISCUs; 

amendments to the definition of loan-tovalue 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 § 703.3 

Fine tune section to focus on investment activities and not on balance sheet activities. E.g., remove (c) and (d), IRR and liquidity, 

since those items should be addressed in the IRR and liquidity 

policies.

Reduces burden on credit unions by not requiring IRR and liquidity policies in the investment policy. Also should help credit 

unions focus on balance sheet risk. 

2 ......... Discretionary Control Over Investments and Investment Advisor § 703.5(b)(1)(ii), § 703.5(b)(2)—(Net worth limit) 

Remove 100 percent of net worth limit for delegated discretionary 

control. Would need to add language to ensure credit unions 

have provided investment advisors with investment guidelines 

that contain: Duration/average life targets, permissible investments, and investment limits.

This would allow credit unions to have professionally managed, 

separate-account, investments without imposing a limit. There 

are no limits on mutual funds where the credit union has less 

control of what the manager invests in. Separate-account delegated discretionary programs have considerably more transparency than mutual funds. 

3 ......... Discretionary Control Over Investments and Investment Advisor § 703.5(b)(3)—(Due diligence) 

Remove prescriptive due diligence requirements and simply state 

the credit union must perform due diligence on the investment 

advisor.

This section is too prescriptive for a credit union to perform due 

diligence. It also does not focus on the investment advisor’s 

ability to manage investments for the credit union. 

4 ......... Credit Analysis § 703.6—(Due diligence) 

Modify exception to credit analysis requirements to only securities 

guaranteed by the entities listed in the section.

This will make it clear that NCUA requires credit analysis for investments not guaranteed, but 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 § 703.6—(Maximum credit risk) 

Require a minimum of investment grade for all investments .......... Sets a minimum expectation of credit worthiness for all investments purchased under the part 703 investment authority. 

6 ......... Credit Analysis § 703.6—(Credit union process and people) 

A credit union, or its investment advisor, must have sufficient resources, knowledge, systems, and procedures to handle the 

risks and risk management (e.g., IRR modeling) of the investments it purchases.

This establishes the basic standard for a credit union to purchase 

an investment. This will allow for a loosening of part 703 since 

NCUA has established standards to purchase investments that 

may have been prohibited or restricted in the past. 

7 ......... Broker-Dealers—§ 703.8(b)—(Due diligence) 

Remove prescriptive due diligence requirements and simply state 

the credit union must perform due diligence on the broker-dealer.

This section is too prescriptive for a broker-dealer that doesn’t 

provide advice. May want to specify standards for broker-dealers that provide advice to credit unions. 

8 ......... Monitoring Non-Security Investments § 703.10—(Reporting requirements) 

Remove this section ......................................................................... Unduly prescriptive. 


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INVESTMENTS—PART 703 SUBPART A—Continued 

Item Change Rationale 

9 ......... Valuing Securities § 703.11(a) & (d)—(Due diligence) 

Combine sections and remove the reference to two price 

quotations. The requirement should be that the credit union use 

market inputs to determine if the purchase is at a reasonable 

market price.

Currently too prescriptive. A principled approach conforms more 

to market convention. 

10 ....... Valuing Securities § 703.11(c)—(Due diligence) 

Remove this section ......................................................................... Unnecessary. This should be dictated by GAAP. 

11 ....... Monitoring Securities § 703.12(a)—(Reporting requirements) 

Move to and combine with § 703.11 ................................................ Streamlines part 703. 

12 ....... Monitoring Securities § 703.12(b), (c) and (d)—(Reporting requirements) 

Remove these sections and 703.12(a) will be combined with part 

703.11.

Unduly prescriptive. 

13 ....... Permissible Investment Activities and Permissible Investments § 703.13 and § 703.14 

Merge these sections and add language from the FCU Act for 

permissible investments.

Streamlines rule and provides full investment authority allowed 

under the Act. 

14 ....... Permissible Investment Activities § 703.13(d)—(Borrowing repurchase transactions) 

Allow mismatch permissible in § 703.20 as the ‘‘base’’ permissible 

activity.

A 30 day mismatch is low risk. 

15 ....... Permissible Investments § 703.14(a)—(Permissible indices for variable rate investments) 

Expand permissible indices for credit unions that have sufficient 

resources, knowledge, systems, and procedures to handle the 

risks of the investment. Ability to model the investment for IRR 

should be required.

This could provide credit unions with investments that they could 

benefit from and not pose a risk to the NCUSIF. 

16 ....... Permissible Investments § 703.14(e)—(Muni bond limits) 

Remove limitations on municipal exposure ..................................... This limit is unnecessary. Credit unions should determine limits. 

17 ....... Permissible Investments § 703.14(h)—(Mortgage note repurchase transactions) 

Limits will be reviewed to determine if they are appropriate ........... Limits may need to be increased or eliminated. 

18 ....... Permissible Investments § 703.14(i)—(Zero coupon investment restrictions) 

Remove limits on zero-coupon investments .................................... Interest rate and 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 § 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 § 703.15—(Short Sales) 

Review regulatory history on the prohibition of short sales ............. Restriction may be reconsidered. 

21 ....... Prohibited Investments § 703.16(a)—(Mortgage servicing rights) 

Determine if mortgage servicing rights (MSRs) are permissible for 

credit unions to purchase per the FCU Act. If so, there should 

be consideration given to permit the purchase of MSRs.

Buying MSRs from other credit unions may offer efficiencies in the 

credit union system. 

22 ....... Prohibited Investments § 703.16(b)—(Exchangeable, IO and PO MBS) 


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INVESTMENTS—PART 703 SUBPART A—Continued 

Item Change Rationale 

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 § 703.18 

Remove sections that will no longer apply based on other 

changes in the rule.

Some parts of the section may not apply due to other changes in 

the rule. 

24 ....... Investment Pilot Program § 703.19 

Remove this section ......................................................................... Pilot programs will no longer be needed with the proposed 

changes. 

25 ....... Request for Additional Authority § 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 Subpart B permissible derivative products This would consolidate into one place all permissible derivative 

activities. 

2 ......... ‘‘Move’’ European financial options contract in 703.14(g) to 703.102(a) 

Move the product to the Subpart B permissible derivative products This would consolidate into one place all 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 703.14(k)(1), move 703.14(k)(2) to 

703.100 and move 703.14(k)(3) to 703.102.

Would provide more clarity on hedging activities for TBA, Dollar 

Rolls, etc. 

5 ......... ‘‘Modify’’ Derivatives Application process to ‘‘Notification’’ 

Remove the FCU application requirements and replace with a 

‘‘Notification’’. This would require changes to § 703.108, 

§ 703.109, § 703.110, § 703.111, § 703.112.

The ‘‘Notification’’ requirements would include providing NCUA 

with at least 60 day notice before initially engaging in a Derivative transaction. 

6 ......... ‘‘Remove’’ Derivatives Regulatory Limits 

Remove the volume limits on derivatives activity. This would require changes to § 703.103, § 703.105, Appendix A.Will be better supported as part of supervision guidance and possible use as scoping metrics. 

7 ......... ‘‘Expand’’ Eligible Collateral for Margining 

Expand the eligible collateral in 703.104(a)(2)(iii) to include Agency Debt (Ginnie Mae Securities).This is an acceptable practice and should have been in the Final 

Rule. 

8 ......... ‘‘Modify’’ Eligibility (only part) 

Remove or change 703.108(b) to require notice but not pre-approval, and re-evaluate the CAMEL and asset size eligibility criteria.Allows for more credit unions to use derivatives to manage interest rate risk subject to supervisory intervention 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. 


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65954 Federal Register / Vol. 83, No. 245 / Friday, December 21, 2018 / Proposed Rules 

DERIVATIVES—PART 703 SUBPART B AND RELATED ITEMS—Continued 

Item Change Rationale 

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 


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