Federal Register / Vol. 71, No. 16 / Wednesday, January 25, 2006 / Rules and Regulations 4035 

1See Interpretive Ruling and Policy Statement 

95–1, 60 FR 14795 (March 20, 1995). 

2See 68 FR 32960, 32966 (June 3, 2003) and 68 

FR 56537, 56542, 56553 (Oct. 1, 2003). 

3Federal credit unions are permitted to invest in 

commercial mortgage-related securities issued by 

the government-sponsored enterprises (‘‘GSEs’’) 

enumerated in 12 U.S.C. 1757(7)(E). ‘‘Subject to 

such regulations as the Board may prescribe,’’ 12 

U.S.C. 1757(15)(B), federal credit unions also may 

invest in commercial mortgage-related securities of 

issuers other than GSEs. Section 742.4(a)(9) of the 

final rule prescribes conditions under which 

RegFlex credit unions may invest in commercial 

mortgage-related securities of non-GSEs. 

end June 30), and October (for quarterend September 30) of each year. 

* * * * * 

[FR Doc. 06–684 Filed 1–24–06; 8:45 am] 

BILLING CODE 7535–01–P 

NATIONAL CREDIT UNION 

ADMINISTRATION 

12 CFR Part 742 

Regulatory Flexibility Program 

AGENCY: National Credit Union 

Administration (NCUA). 

ACTION: Final Rule. 

SUMMARY: The National Credit Union 

Administration (NCUA) is modifying 

the eligibility criteria for its Regulatory 

Flexibility Program by reducing the 

minimum net worth, and extending the 

duration that it must be maintained, to 

qualify for the Program. Federallyinsured credit unions that qualify are 

exempt in whole or in part from a series 

of regulatory restrictions and also are 

allowed to purchase and hold an 

expanded range of eligible obligations. 

DATES: This rule is effective February 

24, 2006. 

FOR FURTHER INFORMATION CONTACT: 

Steven W. Widerman, Trial Attorney, 

Office of General Counsel, at 703/518–

6557; or Lynn K. Markgraf, Program 

Officer, Office of Examination and 

Insurance, at 703/518–6396. 

SUPPLEMENTARY INFORMATION: 

A. Background 

1. RegFlex Program Under Part 742 

The NCUA Board established a 

Regulatory Flexibility Program 

(‘‘RegFlex’’) in 2002 to exempt 

qualifying credit unions in whole or in 

part from a series of regulatory 

restrictions, and grants them additional 

powers. 12 CFR part 742 (2005); 66 FR 

58656 (Nov. 23, 2001). A credit union 

may qualify for RegFlex automatically 

or by application to the appropriate 

Regional Director. 

To qualify automatically for RegFlex, 

a credit union must have a composite 

CAMEL rating of ‘‘1’’ or ‘‘2’’ for two 

consecutive examination cycles and, 

under existing part 742, also must 

achieve a net worth ratio of 9 percent 

(200 basis points above the net worth 

ratio to be classified ‘‘well capitalized’’) 

for a single Call Reporting period. If the 

credit union is subject to a risk-based 

net worth (‘‘RBNW’’) requirement, 

however, the credit union’s net worth 

must surpass that requirement by 200 

basis points. 12 CFR 742.1 (2005). 

A credit union that is unable to 

qualify automatically for RegFlex may 

apply to the appropriate Regional 

Director for a RegFlex designation. To 

be eligible to apply, a credit union must 

either have a CAMEL rating of ‘‘3’’ or 

better or meet the present 9 percent net 

worth criterion, but not both. 12 CFR 

742.2 (2005). A Regional Director has 

the discretion to grant RegFlex relief in 

whole or in part to an eligible credit 

union. 

A federal credit union’s RegFlex 

authority can be lost or revoked. A 

credit union that qualified for RegFlex 

automatically is disqualified once it 

fails, as the result of an examination 

(but not a supervision contact), to meet 

either the CAMEL or net worth criteria 

in § 742.2(a). 12 CFR 742.6 (2005). 

RegFlex authority can be revoked by 

action of the Regional Director for 

‘‘substantive and documented safety 

and soundness reasons.’’ § 742.2(b) 

(2005). The decision to revoke is 

appealable to NCUA’s Supervisory 

Review Committee,1 and thereafter to 

the NCUA Board. 12 CFR 742.7 (2005). 

RegFlex authority ceases when that 

authority is lost or revoked (even if an 

appeal of a revocation is pending). Id.; 

12 CFR 742.6 (2005). But past actions 

taken under that authority are 

‘‘grandfathered,’’ i.e., they will not be 

disturbed or undone. 

2. RegFlex Relief 

As originally adopted, the RegFlex 

program gave qualifying credit unions 

relief from a variety of regulatory 

restrictions, 12 CFR 742.4(a) and 742.5 

(2005): 

• Fixed assets. The maximum limit 

on fixed assets (5 percent of shares and 

retained earnings), 12 CFR 701.36(c)(1). 

• Nonmember deposits. The 

maximum limit on non-member 

deposits (20 percent of total shares or 

$1.5 million, whichever is greater), 12 

CFR 701.32(b). 

• Charitable contributions. 

Conditions on making charitable 

contributions (relating to the charity’s 

location, activities and purpose, and 

whether the contribution is in the credit 

union’s best interest and is reasonable 

relative to its size and condition), 12 

CFR 701.25. 

• Discretionary control of 

investments. The maximum limit on 

investments over which discretionary 

control can be delegated (100 percent of 

credit union’s net worth), 12 CFR 

703.5(b)(1)(ii) and (2). 

• Zero-coupon securities. The 

maximum limit on the maturity length 

of zero-coupon securities (10 years), 12 

CFR 703.16(b). 

• ‘‘Stress testing’’ of investments. The 

mandate to ‘‘stress test’’ securities 

holdings to assess the impact of a 300- 

basis points shift in interest rates, 12 

CFR 703.12(c) (2001). 

• Purchase of eligible obligations. 

Restrictions on the purchase of eligible 

obligations, 12 CFR 701.23(b), thus 

expanding the range of loans RegFlex 

credit unions could purchase and hold 

as long as they are loans those credit 

unions would be authorized to make 

(auto, credit card, member business, 

student and mortgage loans, as well as 

loans of a liquidating credit union up to 

5 percent of the purchasing credit 

union’s unimpaired capital and 

surplus). 

With the overhaul of parts 703 

(investments) and 723 (member 

business loans) in 2003,2 RegFlex credit 

unions received further relief from the 

following restrictions: 

• Member business loans. The 

requirement that principals personally 

guarantee and assume liability for 

member business loans. 12 CFR 

723.7(b). 

• Borrowing repurchase transactions. 

The maturity limit on investments 

purchased with the proceeds of a 

borrowing repurchase transaction. 12 

CFR 703.13(d)(3). 

• Commercial mortgage-related 

securities. The restriction on purchasing 

commercial mortgage-related securities 

of issuers other than the governmentsponsored enterprises.3 12 CFR 

703.16(d). 

3. 2005 Proposed Rule 

In 2005, the NCUA Board reassessed 

the RegFlex program to ensure its 

availability to credit unions that are 

least likely to encounter safety and 

soundness problems, thus minimizing 

the risk of loss to the Share Insurance 

Fund. Experience indicates that such 

credit unions consistently maintain a 

high net worth ratio and a high CAMEL 

rating. Accordingly, the NCUA Board 

issued a proposed rule reducing from 9 

to 7 percent the minimum net worth 

ratio to qualify for RegFlex, but 

extending from one to six quarters the 

period the minimum net worth must be 

maintained to qualify. 70 FR 43769 (July 


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4036 Federal Register / Vol. 71, No. 16 / Wednesday, January 25, 2006 / Rules and Regulations 

4 June 2005 Call Report data indicates that 74 

percent of all RegFlex credit unions have a net 

worth in excess of 11 percent—fully 200 basis 

points above the qualifying minimum net worth. In 

contrast, only 6 percent of RegFlex credit unions 

have a net worth of 9.5 percent or less—within fifty 

basis points of the qualifying minimum net worth. 

5The Credit Union Regulatory Improvements Act 

of 2005, H.R. 2317, 109th Cong. § 101 (2005), 

currently pending before Congress, contains a 

proposal to reduce the minimum net worth for the 

‘‘well capitalized’’ net worth category to 5 percent. 

6A credit union that is unable to maintain the 

minimum net worth for six consecutive quarters 

still would be eligible to apply to the appropriate 

Regional Director for a RegFlex designation 

provided the credit union is rated a CAMEL ‘‘2’’ or 

better. 

7A net worth ratio of 6.99 percent or lower 

triggers a single PCA requirement: to make quarterly 

transfers of earnings to net worth. 12 U.S.C. 

1790d(e); 12 CFR 702.201(a). A net worth ratio of 

5.99 percent or below triggers three additional PCA 

mandatory supervisory actions: a freeze on assets, 

a freeze on member business lending, and the 

requirement to submit a Net Worth Restoration 

Plan. 12 U.S.C. 1790d(f)–(g); 12 CFR 702.202(a). 

29, 2005). The proposed rule also 

eliminated the need for NCUA to notify 

a credit union that qualifies 

automatically for RegFlex. Id. 

NCUA received sixteen comments in 

response to the proposed rule—eight 

from federally-chartered credit unions, 

two from State-chartered credit unions, 

two from State credit union leagues, one 

from a credit union industry trade 

association, and three from banking 

industry trade associations. These 

comments, as well as comments 

suggesting revisions beyond those 

introduced in the proposed rule, are 

addressed below. 

B. Analysis of Comments on Proposed 

Rule 

1. Minimum Qualifying Net Worth 

Existing part 742 required a credit 

union to achieve a net worth of 9 

percent—200 basis points in excess of 

the 7 percent net currently needed to be 

classified ‘‘well capitalized’’ 4—to 

qualify for RegFlex automatically or by 

application. The proposed rule reduced 

the qualifying minimum net worth 

classification to ‘‘well capitalized,’’

which presently requires a minimum 

net worth of 7 percent. 12 U.S.C. 

1790d(c)(1)(A)(i). Credit unions that are 

subject to an RBNW requirement would 

qualify for RegFlex if they remained 

‘‘well capitalized’’ after applying the 

RBNW requirement. See 12 U.S.C. 

1790d(c)(1)(A)(ii). 

Eleven commenters endorsed 

reducing the minimum qualifying net 

worth to the ‘well capitalized’ net worth 

category. Of these, two favored an 

absolute 200 basis point reduction to 7 

percent because linking the reduction to 

the ‘‘well capitalized’’ category would 

allow the minimum qualifying net 

worth to fluctuate automatically with 

any PCA-driven adjustment to the 

minimum net worth for that category. 

As the proposed rule acknowledged, 

should Congress by statute adjust the 

minimum net worth to be classified 

‘‘well capitalized’’ under PCA,5 the 

minimum qualifying net worth for 

RegFlex would change accordingly. 70 

FR at 43797 n.4. Such an adjustment to 

the minimum net worth to be ‘‘well 

capitalized’’ under PCA would reflect 

Congress’s judgment that it is 

unnecessary for credit unions at or 

above that net worth level to undertake 

any PCA whatsoever to improve their 

financial health. Following that lead, 

there is no compelling reason why 

NCUA should require credit unions to 

meet a higher standard to obtain the 

benefits of RegFlex than that set by 

Congress to be free of PCA—whether it 

is higher or lower than the present 7 

percent—especially now that part 742 

requires the minimum qualifying net 

worth to be maintained for 6 

consecutive quarters. 

Among the banking industry trade 

associations that commented, three 

oppose any reduction at all in the 

present 9 percent minimum qualifying 

net worth for RegFlex on the 

assumption that it would impair the 

financial strength of the credit union 

industry. Absent an explanation to 

support this blanket assumption, there 

is no evidence to indicate that the 

flexibility permitted under RegFlex for 

‘‘well capitalized’’ credit unions would 

significantly increase the risk to the 

Share Insurance Fund. On the contrary, 

credit unions in that net worth category 

generally have a sufficient margin of 

safety to withstand unexpected events 

and normal business cycle fluctuations. 

Another bank commenter urged 

reversing course and increasing the 

minimum qualifying net worth to ‘‘the 

standard for ‘‘well capitalized’’ as 

established by the FDIC Improvement 

Act [FDICIA, 12 U.S.C. 1831o] of ten 

percent.’’ This commenter is comparing 

apples to oranges in two respects. First, 

ten percent is the ‘‘total risk-based 

capital ratio’’ that FDICIA regulations 

require of a ‘well capitalized’

institution; the ‘‘leverage ratio’’ required 

of such an institution—the equivalent of 

the ‘‘net worth ratio’’ for credit unions—

is five percent. 57 FR 44866, 44878 

(Sept 29, 1992); 12 CFR 325.103(b)(1). 

Second, FDICIA applies to PCA for all 

Federally-insured financial institutions 

except credit unions. Congress specified 

separate net worth criteria exclusively 

for the PCA net worth categories it 

established for credit unions. 12 U.S.C. 

1790d(c)(1). The NCUA Board prefers to 

follow the minimum net worth Congress 

established for ‘‘well capitalized’’ credit 

unions: 7 percent. 12 U.S.C. 

1790d(c)(1)(A)(i). Accordingly, the final 

rule reduces the minimum qualifying 

net worth for RegFlex to the ‘‘well 

capitalized’’ net worth category. 

§ 742.2(a)(2). 

2. Minimum Qualifying Net Worth 

Duration 

Existing part 742 required a credit 

union to achieve the minimum 

qualifying net worth for just a single 

quarter. § 742.2 (2005). The proposed 

rule requires a credit union to maintain 

the minimum qualifying net worth for 

six consecutive quarters 6 (coinciding 

with the average eighteen-month 

examination schedule that applies to 

most RegFlex qualifying credit unions). 

70 FR at 43797–43798. 

The reason for extending the duration 

of the minimum qualifying net worth is 

that a single quarter’s ‘‘snapshot’’ of net 

worth is too fleeting to be evidence of 

sustained superior performance; only 

successive ‘‘snapshots’’ of net worth 

would suffice to demonstrate such 

performance. From a risk standpoint, 

the proposed rule strikes a proper 

balance—compensating for the 

decreased minimum qualifying net 

worth by substantially extending the 

number of quarters that the minimum 

qualifying net worth must be 

maintained. 

As the proposed rule explained by 

way of example: With no limit on the 

amount of fixed assets it can acquire, a 

RegFlex credit union is entitled to build 

or purchase a new building that 

increases its aggregate fixed assets to an 

inordinate proportion of total assets. If 

however, in the very next quarter, that 

credit union no longer qualifies for 

RegFlex due to a decline in net worth, 

part 742’s ‘‘grandfathering’’ provision, 

12 CFR 742.8 (2005), would entitle the 

ex-RegFlex credit union to keep the 

building, as well as the burden of 

absorbing the expenses of maintenance, 

debt service and depreciation, etc., thus 

putting profitability and net worth at 

risk. 

Before this final rule, the ex-RegFlex 

credit union would have a net worth 

cushion of at least 200 basis points to 

absorb losses due to expenses of 

maintaining its fixed assets.7 But once 

this final rule reduces the minimum 

qualifying net worth, that cushion no 

longer exists. Credit unions that 

demonstrate sustained superior 

performance as evidenced by a 

qualifying net worth ratio lasting over a 

series of quarters, instead of just one, 

will be better equipped to prepare for 


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Federal Register / Vol. 71, No. 16 / Wednesday, January 25, 2006 / Rules and Regulations 4037 

8Appraisal requirements, 12 CFR 723.3(a); 

aggregate construction and development loan 

limits, § 723.3(a); minimum borrower equity 

requirements for construction and development 

loans, § 723.3(a); loan-to-value ratio requirements, 

§ 723.7(a); maximum unsecured loans to one 

member or group, § 723.7(c)(2); maximum aggregate 

unsecured loan limit, § 723.7(c)(3); and maximum 

aggregate outstanding MBL balance to any one 

member or group, § 723.8. 

and manage the risks to profitability and 

net worth. 

Eight commenters endorsed the 

proposal to extend the duration of the 

minimum qualifying net worth from 1 to 

6 quarters. Allowing for a one-quarter 

downward fluctuation, a commenter 

contended that 5 out of 6 quarters 

would suffice to demonstrate sustained 

superior performance. Two commenters 

believe that goal would be met by 

maintaining the minimum qualifying 

net worth for 4 quarters. Finally, 

overlooking the ‘‘single snapshot’’

problem, one commenter insisted on 

leaving the duration at a single quarter, 

believing that low net worth is not an 

indicator of greater risk if a credit union 

is otherwise well-operated. 

A 4-quarter net worth duration was 

considered, as was the suggested ‘‘5 out 

of 6 quarters’’ formulation. To 

adequately compensate for reducing the 

minimum qualifying net worth, the 

NCUA Board has concluded that a 

duration of 6 consecutive quarters 

provides the most compelling evidence 

of sustained superior performance. 

Further, the 6-quarter duration 

coincides with NCUA’s Risk-Based 

Examination Scheduling Program 

(explained in section 4. below). 

Therefore, the final rule adopts the 6- 

quarter duration for the minimum 

qualifying net worth. § 742.2(a)(2). 

3. Notification to Automatically 

Qualifying Credit Unions 

Existing part 742 requires NCUA to 

notify a credit union on three occasions: 

when it first qualifies automatically for 

RegFlex; during an examination to 

confirm that it still qualifies or has 

become ineligible; and after it applies to 

the appropriate Regional Director for a 

RegFlex designation. § 742.3 (2005). The 

proposed rule eliminated the 

requirement to notify credit unions that 

qualify automatically for RegFlex, but 

left intact the requirement to notify a 

credit union that has applied for 

RegFlex designation whether it has been 

granted or denied. 70 FR at 43798. As 

the proposed rule explained, the 

requirement to notify credit unions that 

qualify automatically was redundant 

because the minimum qualifying worth 

and CAMEL criteria are discrete and as 

apparent to credit unions themselves as 

to NCUA. Id. The seven commenters 

who addressed this modification 

unanimously endorsed it. Therefore, the 

final rule eliminates the requirement to 

notify credit unions that qualify 

automatically for RegFlex. 

4. RegFlex Relief 

No substantive revisions at all were 

proposed for the RegFlex relief (fully 

described in section A.2. above) that 

part 742 already provides. However, in 

response to the proposed rule’s 

invitation, NCUA received two 

comments suggesting further 

substantive RegFlex relief. 

Member Business Loans. Noting that 

RegFlex already exempts qualifying 

credit unions from requiring principals 

to personally guarantee member 

business loans (‘‘MBLs’’), 12 CFR 

723.10(e), a commenter recommended 

expanding this relief to waive the other 

seven member business loan 

requirements and restrictions that can 

be waived upon request under part 

723.8 12 CFR 723.10(a)–(d) and (f)–(h). 

The NCUA Board continues to believe 

that these MBL requirements and 

restrictions are not proper candidates 

for RegFlex relief due to their 

complexity and the potential for 

negative financial impact if improperly 

utilized. For these reasons, it is 

important that waivers of these 

restrictions and requirements be 

carefully supported and evaluated on a 

case-by-case basis—a function best 

performed at the Regional Office level. 

Fixed Assets. Noting that RegFlex 

credit unions are not bound by the 

maximum limit on fixed assets (5 

percent of shares and retained earnings), 

12 CFR 701.36(c)(1), two commenters 

recommended also exempting them 

from the requirement to partially utilize 

within 3 years any real property 

acquired for future expansion. 12 CFR 

701.36(d)(1). One commenter would 

extend this exemption to all RegFlex 

credit unions; the other would extend it 

only to those that remain within the 5 

percent limit on fixed assets. Noting that 

in 2001 credit unions were granted the 

‘‘incidental power’’ to sell or lease 

excess capacity, 12 CFR 721.3(d), 

another commenter advocated further 

relief from the § 701.36 fixed asset 

restrictions because ‘‘credit unions with 

the proven track record necessary for 

RegFlex should have the discretion to 

plan for the retention or disposition of 

unused assets as it deems appropriate.’’

Neither of these recommendations is 

adopted in the final rule because both 

disregard the goal of the fixed asset 

limitations: that a credit union should 

acquire real property primarily to 

occupy and use for its own operation—

not for real estate speculation or 

leasing—which it should be able to do 

within three years of acquiring it. In this 

regard, it makes no difference whether 

or not a RegFlex credit union surpasses 

the 5 percent limit on fixed assets. 

Frequency of examinations. Because 

they present relatively fewer safety and 

soundness issues, one commenter 

suggested that RegFlex credit unions be 

examined less frequently than other 

credit unions, and charged a reduced 

operating fee. Because one function 

(oversight) polices the other (regulatory 

compliance), it has always been NCUA 

policy to avoid linking the examination 

process with regulatory relief initiatives. 

However, most RegFlex credit unions 

already are on extended examination 

cycles because they qualify for NCUA’s 

Risk-Based Examination Scheduling 

Program. See NCUA Letter to Federal 

Credit Unions No. 01–FCU–05 issued 

August 2001. Two of the six criteria for 

this Program require a CAMEL rating of 

‘‘1’’ or ‘‘2’’ and a ‘‘well capitalized’’ net 

worth classification, just as the RegFlex 

Program does. Credit unions in the RiskBased Examination Scheduling Program 

can be examined as little as twice in a 

thirty-six month period and on average 

are examined once every 18 months 

(coinciding with the 6-quarter duration 

for the minimum qualifying net worth 

for RegFlex), instead of annually. 

Extended examination cycles do not 

justify charging a reduced operating fee 

to those credit unions within the RiskBased Examination Scheduling 

Program. The number and frequency of 

on-site examination contacts is but one 

factor in assessing the fee. While the 

frequency of contacts may decrease, the 

number of hours to conduct 

examinations does not necessarily 

decline. Particularly since the inception 

of the Risk-Based Examination Program 

in 2002, more and more examiner time 

and resources are devoted to off-site 

monitoring and to analysis of quarterly 

Call Report and other data. 

5. Other Comments 

Minimum qualifying CAMEL rating. 

One commenter suggested that CAMEL 

ratings should not be a criterion for 

RegFlex eligibility because ‘‘this allows 

too much examiner control.’’ Instead, 

the commenter suggests basing RegFlex 

eligibility on a credit union’s success in 

providing ‘‘better services, lower loan 

rates, and/or higher dividends.’’ While 

these are all essential ingredients for 

member satisfaction, they are not 

necessarily indicia of a credit union’s 

safety and soundness and are not 

subject to uniform, objective 

measurement. The NCUA Board 

maintains that CAMEL ratings, 

combined with quarterly net worth 


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4038 Federal Register / Vol. 71, No. 16 / Wednesday, January 25, 2006 / Rules and Regulations 

ratios, are the best measures of safety 

and soundness and, in turn, indicate 

how much risk a credit union presents 

to the Share Insurance Fund. 

To qualify automatically for RegFlex, 

part 742 requires the minimum CAMEL 

rating to be met in both of the two most 

recent examinations. Attempting to 

relax this requirement, another 

commenter suggested requiring a credit 

union to achieve the minimum 

qualifying CAMEL rating in either of the 

two most recent examinations. In 

practice, this proposal would 

automatically qualify a credit union for 

RegFlex after achieving the minimum 

qualifying CAMEL rating for just a 

single quarter—precisely the ‘‘single 

snapshot’’ problem that formerly 

affected the minimum qualifying net 

worth for RegFlex (addressed in section 

B.1. above). To avoid that problem with 

the CAMEL criterion, the final rule 

leaves intact the requirement that the 

minimum qualifying CAMEL rating 

must be met for two consecutive 

examination cycles. § 742.2(a)(1). 

To be sure, some credit unions will be 

unable to automatically qualify for 

RegFlex due to an insufficient CAMEL 

rating. For them, the final rule preserves 

the option to apply to the appropriate 

Regional Director, on the basis of 

sufficient net worth alone, for a RegFlex 

designation. 12 CFR 742.2(b)(2). 

RegFlex for FISCUs. One commenter 

lamented that RegFlex is not available to 

Federally-insured State-chartered credit 

unions (‘‘FISCUs’’). Regulatory relief is, 

in fact, available to FISCUs but not from 

NCUA. Only one of the regulatory 

restrictions that RegFlex moderates 

applies to FISCUs: the limit on 

nonmember deposits in 12 CFR 

701.32(b). 12 CFR 741.204(a). The rest 

apply to Federally-chartered credit 

unions only. As a matter of policy, 

NCUA does not assume the authority to 

extend regulatory relief to FISCUs; that 

relief is the province of the appropriate 

State Supervisory Authority (‘‘SSA’’). 

However, to ensure that SSAs have the 

opportunity to grant equivalent relief to 

their FISCUs, NCUA notifies the SSAs 

when RegFlex moderates for Federallychartered credit unions a regulation that 

also applies to FISCUs. Some SSAs have 

granted equivalent relief from the limit 

on nonmember deposits. 

Informal suggestions for additional 

relief. A commenter proposed 

establishing an informal procedure, 

outside the formal rulemaking process, 

for ‘‘credit unions to submit their ideas 

regarding additional exemptions’’

through NCUA Regional Offices to the 

Office of General Counsel ‘‘for inclusion 

in future rule changes to the RegFlex 

program.’’ No such procedure is 

necessary, however, because NCUA 

welcomes feedback on ways to reduce 

regulatory burden generally and to 

improve specific regulations. Feedback 

on specific regulations is routinely 

routed to staff responsible for future 

rulemaking on that regulation. 

‘‘Grandfathering’’ past actions. Both 

existing part 742 and the proposed rule 

provide that neither the disqualification 

from, nor revocation of, RegFlex 

authority will undo past actions duly 

undertaken in reliance on RegFlex 

authority. One commenter contends that 

this ‘‘grandfathering’’ of past actions 

should be allowed only when the credit 

union succeeds in restoring its RegFlex 

designation ‘‘within a meaningful 

period of time (4 to 8 quarters)’’; 

otherwise, the credit union should be 

required to divest its past RegFlex 

actions. Divestiture is a safety and 

soundness remedy imposed on a caseby-case basis. Since NCUA has the 

authority to require a credit union to 

divest its investments or assets for 

substantive safety and soundness 

reasons, there is no need to mandate 

divestiture within uniform deadline. 

Appeal of denial of RegFlex 

designation. The proposed rule left 

intact the right to appeal Regional 

Director decisions revoking a RegFlex 

designation to NCUA’s Supervisory 

Review Committee. § 742.7 (2005). A 

commenter urged that the final rule 

extend that right to Regional Director 

decisions denying an application for a 

RegFlex designation. Supervisory 

Review Committee jurisdiction is 

limited by law to ‘‘material supervisory 

determinations.’’ 12 U.S.C. 4806(a). 

These include determinations relating to 

examination ratings (CAMEL ‘‘3’’, ‘‘4’’

and ‘‘5’’ in the case of credit unions), 

adequacy of loan loss reserves, and loan 

classifications of significant loans. 12 

U.S.C. 4806(f)(1)(A); 60 FR at 14799. 

The denial of a RegFlex designation—

as opposed to revocation of RegFlex 

authority for ‘‘substantive, documented 

safety and soundness reasons’’ (which 

has happened only once)—does not rise 

to the level of a ‘‘material supervisory 

decision’’ because the designation is 

essentially a privilege. As an 

accommodation to eligible credit unions 

that do not qualify automatically for 

RegFlex, part 742 extends the 

opportunity to apply for a RegFlex 

designation. It is up to the applicant to 

subjectively demonstrate that it is 

entitled to RegFlex relief despite not 

qualifying under the objective net worth 

and CAMEL criteria. Because evaluating 

such applications is necessarily a 

subjective exercise, the NCUAB believes 

it is appropriate for the Regional 

Director to have the final say, without 

recourse to an appeal. 

Regulatory Procedures 

Regulatory Flexibility Act 

The Regulatory Flexibility Act (RFA) 

requires NCUA to prepare an analysis 

describing any significant economic 

impact a proposed regulation may have 

on a substantial number of small credit 

unions. NCUA considers credit unions 

having less than ten million dollars 

($10,000,000) to be small for purposes of 

the RFA. The final rule reduces the 

minimum net worth, while increasing 

the duration that it must be maintained, 

to qualify for RegFlex, without imposing 

any additional regulatory burden. The 

final rule will not have a significant 

economic impact on a substantial 

number of small credit unions. Thus, a 

Regulatory Flexibility Analysis is not 

required. 

Paperwork Reduction Act 

NCUA has determined that the final 

rule will not increase paperwork 

requirements under the Paperwork 

Reduction Act of 1995 and regulations 

of the Office of Management and 

Budget. 

Executive Order 13132 

Executive Order 13132 encourages 

independent regulatory agencies to 

consider the impact of their regulatory 

actions on State and local interests. 

NCUA, an independent regulatory 

agency as defined in 44 U.S.C. 3502(5), 

voluntarily adheres to the fundamental 

federalism principles addressed by the 

executive order. Neither this final rule 

nor the regulations it relaxes has a 

substantial direct effect on the States, on 

the relationship between the national 

government and the States, or on the 

distribution of power and 

responsibilities among the various 

levels of government. Accordingly, the 

final rule does not constitute a policy 

that has federalism implications for 

purposes of the Executive Order. 

Small Business Regulatory Enforcement 

Fairness Act 

The Small Business Regulatory 

Enforcement Fairness Act of 1996 (Pub. 

L. 104–121) provides generally for 

congressional review of agency rules. A 

reporting requirement is triggered in 

instances where NCUA issues a final 

rule as defined by Section 551 of the 

Administrative Procedures Act, 5 U.S.C. 

551. NCUA submitted the rule to the 

Office of Management and Budget, 

which has determined that it is not 

major for purposes of the Small 

Business Regulatory Enforcement 

Fairness Act of 1996. 


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Federal Register / Vol. 71, No. 16 / Wednesday, January 25, 2006 / Rules and Regulations 4039 

Treasury and General Government 

Appropriations Act, 1999 

NCUA has determined that the final 

rule will not affect family well-being 

within the meaning of section 654 of the 

Treasury and General Appropriations 

Act, 1999, Public Law 105–277, 112 

Stat. 2681 (1998). 

List of Subjects in 12 CFR Part 742 

Credit unions, Reporting and 

recordkeeping requirements. 

By the National Credit Union 

Administration Board on January 19, 2006. 

Mary F. Rupp, 

Secretary of the Board. 

■ For the reasons set forth above, 12 

CFR part 742 is revised to read as 

follows: 

PART 742—REGULATORY 

FLEXIBILITY PROGRAM 

Sec. 

742.1 Regulatory Flexibility Program. 

742.2 Criteria to qualify for RegFlex 

designation. 

742.3 Loss and revocation of RegFlex 

designation. 

742.4 RegFlex relief. 

Authority: 12 U.S.C. 1756, 1766. 

§ 742.1 Regulatory Flexibility Program. 

NCUA’s Regulatory Flexibility 

Program (RegFlex) exempts from all or 

part of the NCUA regulatory restrictions 

identified elsewhere in this part credit 

unions that demonstrate sustained 

superior performance as measured by 

CAMEL rating and net worth 

classification. RegFlex credit unions 

also are authorized to purchase and 

hold an expanded range of obligations. 

§ 742.2 Criteria to qualify for RegFlex 

designation. 

(a) Automatic qualification. A credit 

union automatically qualifies for 

RegFlex designation, without formal 

notification, when it has: 

(1) CAMEL. Received a composite 

CAMEL rating of ‘‘1’’ or ‘‘2’’ for the two 

(2) preceding examinations; and 

(2) Net worth. Maintained a net worth 

classification of ‘‘well capitalized’’

under part 702 of this chapter for six (6) 

consecutive preceding quarters or, if 

subject to a risk-based net worth 

(RBNW) requirement under part 702 of 

this chapter, has remained ‘‘well 

capitalized’’ for six (6) consecutive 

preceding quarters after applying the 

applicable RBNW requirement. 

(b) Application for designation. A 

credit union that does not automatically 

qualify under paragraph (a) of this 

section may apply for a RegFlex 

designation, which may be granted in 

whole or in part upon notification by 

the appropriate Regional Director, 

provided the credit union has either: 

(1) CAMEL. Received a composite 

CAMEL rating of ‘‘3’’ or better for the 

preceding examination; or 

(2) Net worth. Maintained a net worth 

classification of ‘‘well capitalized’’

under part 702 of this chapter for less 

than six (6) consecutive quarters or, if 

subject to an RBNW requirement under 

part 702 of this chapter, has remained 

‘‘well capitalized’’ for less than six (6) 

consecutive preceding quarters after 

applying the applicable RBNW 

requirement. 

§ 742.3 Loss and revocation of RegFlex 

designation. 

(a) Loss of authority. RegFlex 

authority is lost when a credit union 

that qualified automatically under the 

CAMEL and net worth criteria in 

§ 742.2(a) no longer meets either of 

those criteria. Once the authority is lost, 

the credit union may no longer claim 

the exemptions and authority set forth 

in § 742.4. 

(b) Revocation of authority. The 

Regional Director may revoke a credit 

union’s RegFlex authority under § 742.2, 

in whole or in part, for substantive, 

documented safety and soundness 

reasons. When revoking RegFlex 

authority, the regional director must 

give written notice to the credit union 

stating the reasons for the revocation. 

The revocation is effective upon the 

credit union’s receipt of notice from the 

Regional Director. 

(c) Appeal of revocation. A credit 

union has 60 days from the date of the 

regional director’s determination to 

revoke RegFlex authority to appeal the 

action, in whole or in part, to NCUA’s 

Supervisory Review Committee. The 

Regional Director’s determination will 

remain in effect unless and until the 

Supervisory Review Committee issues a 

different determination. If the credit 

union is dissatisfied with the decision 

of the Supervisory Review Committee, 

the credit union has 60 days from the 

date of the Committee’s decision to 

appeal to the NCUA Board. 

(d) Grandfathering of past actions. 

Any action duly taken in reliance upon 

RegFlex authority will not be affected or 

undone by subsequent loss or 

revocation of that authority. Any actions 

exercised after RegFlex authority is lost 

or revoked must comply with all 

applicable regulatory requirements and 

restrictions. Nothing in this part shall 

affect NCUA’s authority to require a 

credit union to divest its investments or 

assets for substantive safety and 

soundness reasons. 

§ 742.4 RegFlex Relief. 

(a) Exemptions. RegFlex credit unions 

are exempt from the following 

regulatory restrictions: 

(1) Charitable contributions. Section 

701.25 of this chapter concerning 

charitable contributions; 

(2) Nonmember deposits. Section 

701.32(b) and (c) of this chapter 

concerning the maximum amount of 

non-member deposits a credit union can 

accept; and 

(3) Fixed assets. Section 701.36(a), (b) 

and (c) of this chapter concerning the 

maximum amount of fixed assets a 

credit union can acquire; 

(4) Member business loans. Section 

723.7(b) of this chapter concerning the 

personal liability and guarantee of 

principals for member business loans. 

(5) Discretionary control of 

investments. Section 703.5(b)(1)(ii) and 

(2) of this chapter concerning the 

maximum amount of investments over 

which discretionary control can be 

delegated; 

(6) ‘‘Stress testing’’ of investments. 

Section 703.12(c) of this chapter 

concerning ‘‘stress testing’’ of securities 

holdings to assess the impact of an 

extreme interest rate shift; 

(7) Zero-coupon securities. Section 

703.16(b) of this chapter concerning the 

maximum maturity length of zerocoupon securities; 

(8) Borrowing repurchase 

transactions. Section 703.13(d)(3) of this 

chapter, concerning the maturity of 

investments a credit union purchases 

with the proceeds received in a 

borrowing repurchase transaction, 

provided the value of the investments 

that mature later than the borrowing 

repurchase transaction does not exceed 

100 percent of the federal credit union’s 

net worth; 

(9) Commercial mortgage related 

security. Section 703.16(d) of this 

chapter prohibiting the purchase of a 

commercial mortgage related security of 

an issuer other than a governmentsponsored enterprise enumerated in 12 

U.S.C. 1757(7)(E), provided: 

(i) The security is rated in one of the 

two highest rating categories by at least 

one nationally-recognized statistical 

rating organization; 

(ii) The security meets the definition 

of mortgage related security as defined 

in 15 U.S.C. 78c(a)(41) and the 

definition of commercial mortgage 

related security as defined in § 703.2 of 

this chapter; 

(iii) The security’s underlying pool of 

loans contains more than 50 loans with 

no one loan representing more than 10 

percent of the pool; and 

(iv) The aggregate total of commercial 

mortgage related securities purchased 


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4040 Federal Register / Vol. 71, No. 16 / Wednesday, January 25, 2006 / Rules and Regulations 

by the Federal credit union does not 

exceed 50 percent of its net worth. 

(b) Purchase of obligations from a 

FICU. A RegFlex credit union is 

authorized to purchase and hold the 

following obligations, provided that it 

would be empowered to grant them: 

(1) Eligible obligations. Eligible 

obligations pursuant to § 701.23(b)(1)(i) 

of this chapter without regard to 

whether they are obligations of its 

members, provided they are purchased 

from a federally-insured credit union 

only; 

(2) Student loans. Student loans 

pursuant to § 701.23(b)(1)(iii) of this 

chapter, provided they are purchased 

from a federally-insured credit union 

only; 

(3) Mortgage loans. Real-state secured 

loans pursuant to 701.23(b)(1)(iv) of this 

chapter, provided they are purchased 

from a federally-insured credit union 

only; 

(4) Eligible obligations of a liquidating 

credit union. Eligible obligations of a 

liquidating credit union pursuant to 

§ 701.23(b)(1)(ii) of this chapter without 

regard to whether they are obligations of 

the liquidating credit union’s members, 

provided that such purchases do not 

exceed 5 percent (5%) of the 

unimpaired capital and surplus of the 

purchasing credit union. 

[FR Doc. 06–685 Filed 1–24–06; 8:45 am] 

BILLING CODE 7535–01–P 

DEPARTMENT OF TRANSPORTATION 

Federal Aviation Administration 

14 CFR Part 39 

[Docket No. FAA–2005–22793; Directorate 

Identifier 2005–NM–161–AD; Amendment 

39–14462; AD 2006–02–10] 

RIN 2120–AA64 

Airworthiness Directives; Bombardier 

Model CL–600–2B19 (Regional Jet 

Series 100 & 440) Airplanes 

AGENCY: Federal Aviation 

Administration (FAA), Department of 

Transportation (DOT). 

ACTION: Final rule. 

SUMMARY: The FAA is adopting a new 

airworthiness directive (AD) for certain 

Bombardier Model CL–600–2B19 

(Regional Jet Series 100 & 440) 

airplanes. This AD requires replacing 

the Gask-O-Seal in the coupling of the 

refuel/defuel shut-off valves. This AD 

results from a report that Gask-O-Seals 

that did not incorporate an integral 

restrictor to limit fuel flow rate and fuel 

pressure during refueling were installed 

on certain airplanes. We are issuing this 

AD to prevent a buildup of excessive 

static charge, which could create an 

ignition source inside the fuel tank. 

DATES: This AD becomes effective 

March 1, 2006. 

The Director of the Federal Register 

approved the incorporation by reference 

of a certain publication listed in the AD 

as of March 1, 2006. 

ADDRESSES: You may examine the AD 

docket on the Internet at http:// 

dms.dot.gov or in person at the Docket 

Management Facility, U.S. Department 

of Transportation, 400 Seventh Street 

SW., Nassif Building, room PL–401, 

Washington, DC. 

Contact Bombardier, Inc., Canadair, 

Aerospace Group, P.O. Box 6087, 

Station Centre-ville, Montreal, Quebec 

H3C 3G9, Canada, for service 

information identified in this AD. 

FOR FURTHER INFORMATION CONTACT: 

Rocco Viselli, Aerospace Engineer, 

Airframe and Propulsion Branch, ANE–

171, FAA, New York Aircraft 

Certification Office, 1600 Stewart 

Avenue, Suite 410, Westbury, New York 

11590; telephone (516) 228–7331; fax 

(516) 794–5531. 

SUPPLEMENTARY INFORMATION: 

Examining the Docket 

You may examine the airworthiness 

directive (AD) docket on the Internet at 

http://dms.dot.gov or in person at the 

Docket Management Facility office 

between 9 a.m. and 5 p.m., Monday 

through Friday, except Federal holidays. 

The Docket Management Facility office 

(telephone (800) 647–5227) is located on 

the plaza level of the Nassif Building at 

the street address stated in the 

ADDRESSES section. 

Discussion 

The FAA issued a notice of proposed 

rulemaking (NPRM) to amend 14 CFR 

part 39 to include an AD that would 

apply to certain Bombardier Model CL–

600–2B19 (Regional Jet Series 100 & 

440) airplanes. That NPRM was 

published in the Federal Register on 

October 27, 2005 (70 FR 61920). That 

NPRM proposed to require replacing the 

Gask-O-Seal in the coupling of the 

refuel/defuel shut-off valves. 

Comments 

We provided the public the 

opportunity to participate in the 

development of this AD. We have 

considered the single comment 

received. 

Request To Reference Latest Issue of 

Service Bulletin 

One commenter requests that the 

NPRM reference Bombardier Alert 

Service Bulletin A601R–28–064, 

Revision ‘A,’ dated September 15, 2005 

(Bombardier Alert Service Bulletin 

A601R–28–064, dated April 21, 2005, 

was referenced as the appropriate 

source of service information for doing 

the actions in the NPRM). The 

commenter notes that Revision ‘A’ of 

the alert service bulletin is the latest 

issue with updated information. 

We agree with the commenter. The 

actions in Revision ‘A’ of the alert 

service bulletin are essentially the same 

as the actions in the original issue. We 

have revised this AD to reference 

Revision ‘A’ of the alert service bulletin. 

We have also added paragraph (g) to this 

AD to give credit for actions done in 

accordance with the original issue of the 

alert service bulletin and reidentified 

subsequent paragraphs accordingly. 

Conclusion 

We have carefully reviewed the 

available data, including the comment 

received, and determined that air safety 

and the public interest require adopting 

the AD with the changes described 

previously. We have determined that 

these changes will neither increase the 

economic burden on any operator nor 

increase the scope of the AD. 

Costs of Compliance 

The following table provides the 

estimated costs for U.S. operators to 

comply with this AD. 

ESTIMATED COSTS

Action Work 

hours 

Average 

labor rate 

per hour 

Parts Cost per 

airplane 

Number of U.S.- 

registered 

airplanes 

Fleet cost 

Replacement ............................................................................ 1 $65 $0 $65 720 $46,800 


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