This section of the FEDERAL REGISTER

contains notices to the public of the proposed

issuance of rules and regulations. The

purpose of these notices is to give interested

persons an opportunity to participate in the

rule making prior to the adoption of the final

rules.

Proposed Rules Federal Register

41313

Vol. 62, No. 148

Friday, August 1, 1997

NATIONAL CREDIT UNION

ADMINISTRATION

12 CFR Parts 701, 722 and 723

Organization and Operations of

Federal Credit Unions; Appraisals; and

Member Business Loans

AGENCY: National Credit Union

Administration (NCUA).

ACTION: Notice of proposed rulemaking.

SUMMARY: The NCUA is proposing to

update, clarify and streamline its

existing rules concerning member

business loans and appraisals for

federally insured credit unions. The

intended effect of the proposal is to

reduce regulatory burden, maintain

safety and soundness, and expand the

number and type of business loans a

federal credit union may grant their

members.

DATES: Comments must be received on

or before September 30, 1997.

ADDRESSES: Direct comments to Becky

Baker, Secretary of the Board. Mail or

hand-deliver comments to: National

Credit Union Administration, 1775

Duke Street, Alexandria, Virginia 22314-

3428. Fax comments to (703) 518–6319.

Please send comments by one method

only.

FOR FURTHER INFORMATION CONTACT:

Michael J. McKenna, Staff Attorney,

Division of Operations, Office of

General Counsel, at the above address or

telephone: (703) 518–6540; or Roger

Blake, Program Officer, Division of

Supervision, Office of Examination and

Insurance, at the above address or

telephone: (703) 518-6360.

SUPPLEMENTARY INFORMATION:

A. Background

The NCUA Board adopted its first

member business loan rule in April

1987 due to increased amount of credit

union losses and failures attributed to

business lending activity. In response to

continued losses to credit unions and

the National Credit Union Share

Insurance Fund (NCUSIF) due to

member business loans, the NCUA

Board adopted a more restrictive

member business loan rule in

September 1991. In general, the results

of the 1991 revision have been very

positive. Nonetheless, experience with

the regulation indicates that there may

be a need for simplification,

clarification, and improvement. In

addition, NCUA is conducting a review

of its regulations pursuant to the

Regulatory Reinvention Initiative of the

Vice President’s National Performance

Review and the NCUA Board’s

Regulatory Relief Project.

In particular, NCUA is aware that

certain business and legal developments

make this a good time to review and

update the member business loan rule.

NCUA staff has over 5 years of

experience with implementing and

interpreting the regulation and believes

it can be improved. The purpose of this

notice of proposed rulemaking is to

identify, and request public comment

on reducing regulatory burden while

ensuring the safety and soundness of

federal credit unions and the NCUSIF.

In providing comments upon the

proposed rule, commentors should keep

in mind the needs of small credit

unions, especially community

development and low-income

designated credit unions, and their

members. In some cases, member

business loans provide an ideal means

for smaller credit unions to expand the

types of products and services offered to

their memberships and enhance their

members’ lives. For these types of credit

unions, member business loans may be

the best method to help the credit union

accommodate membership needs and

improve the community.

B. Section-by-Section Analysis

The most noticeable change in the

proposed revision is the use of a plain

English question and answer format.

The federal government is promoting

plain English to increase regulatory

comprehension and improve

compliance for users of regulations. An

intended consequence of this format,

other than anticipated compliance, is a

lessening of misunderstandings caused

by unclear standard regulatory language.

NCUA requests comments regarding the

new format and numbering system as

well as moving the rule from Part 701

to Part 723 of NCUA’s Regulations.

Proposed Section 723.1—What is a

Member Business Loan?

This section provides a definition of

a member business loan. A member

business loan is any loan, line of credit,

or letter of credit where the borrower

uses the proceeds for the following

purposes: commercial, corporate,

investment property, business venture,

or agricultural. This definition is

slightly different from the current rule

in that the proposal deletes the term

‘‘business’’ from ‘‘business investment

property’’. Investment property,

whether business related or other,

represents additional risk (beyond that

of standard consumer lending) that

credit unions must recognize and

control through adequate underwriting

standards and monitoring.

NCUA proposes to move all other

definitions to Section 723.19.

Proposed Section 723.1(b)—Exceptions

to the General Rule

This section sets forth the exceptions

to the definition of a member business

loan. NCUA is proposing to retain the

exceptions in the current rule and add

one new exception to the definition.

The proposed exception is for one other

loan fully secured by a lien on 1 to 4

family dwelling where the borrower

does not rely upon rental or business

income derived from that property to

repay the loan. This exception would

allow credit unions to make more than

one real estate loan to one borrower,

subject to the 15% limitation, without

triggering the member business rule

requirements. However, NCUA still

believes that, given the risks associated

with business lending, the source of

repayment should be proven and stable

and not related to any income produced

by the collateral of that loan.

To avoid any misunderstanding, the

Board is once again reiterating that a

federal credit union may finance a

future retirement home under the longterm mortgage authority. If at the time

the loan is made, the member’s intent is

to establish a new principal residence,

either immediately or some time in the

future, the federal credit union may

grant a long-term mortgage loan secured

by the second home. Under this

analysis, since the member intends to

occupy this residence as his or her

primary residence, the credit union may

grant a second home loan under the

long-term mortgage authority and the
41314 Federal Register / Vol. 62, No. 148 / Friday, August 1, 1997 / Proposed Rules

loan is exempt from the definition of a

member business loan.

The Board is requesting comments on

whether a loan fully secured by a lien

on a one to six family dwelling, that is

the borrower’s primary residence,

should be exempt from the definition of

a member business loan. It is the

Board’s understanding, that in some

urban locations, there are few, if any,

one to four family dwellings whereas

one to six family dwellings are more

common. The Board is considering this

change to provide an opportunity for

credit unions to help members renovate

properties and increase home

ownership by residents in low income

areas. The Board requests that

commentors address any additional risk

associated with such properties and

why this type of property should not be

considered a member business loan.

NCUA currently views this as a member

business loan since five of the six units

are likely to be rental units. Also,

commentors should keep in mind that

such loans would statutorily be limited

to twelve years.

The current rule exempts loans fully

secured by shares in the credit union or

deposits in other financial institutions.

NCUA believes the current regulation

may not be clear regarding the term

‘‘financial institutions’’ since the rule

does not define the term. Therefore,

NCUA proposes to clarify the term to

read ‘‘federally insured financial

institutions’’ since deposits in nonfederally insured institutions may

represent a greater risk of loss.

NCUA proposes to increase the dollar

threshold at which the rule applies from

$50,000 to $100,000. NCUA has

received many comments from credit

unions regarding vehicle loans and

vacation home loans that currently

bump up against the threshold and have

to be classified as business loans. NCUA

has also received many comments

regarding a situation where a member

had a loan that was exempted because

it was under the $50,000 threshold.

Subsequently, the member desired to

purchase an automobile for their

business and in the business’s name for

tax purposes. If the credit union made

the loan and the aggregate total of such

loans exceeded the $50,000 threshold,

then under the current regulation, the

second loan is considered to be a

member business loan. In essence, many

credit unions have avoided making a

good automobile loan because they are

not structured to make member business

loans. The increase in the exception

threshold should alleviate these types of

problems. Moreover, staff believes that

most credit unions can handle the

increased risk safely. However, NCUA

continues to expect that a credit union

will test ‘‘business related loans’’

against sound underwriting standards

and the borrower’s ability to repay,

regardless of whether an exception

applies.

Proposed Section 723.2—What Are the

Prohibited Activities?

NCUA is proposing no substantive

changes from the current rule except for

adding senior management employees

and officials to the provision prohibiting

equity agreements/joint ventures.

Proposed Section 723.3—What Are the

Requirements for Construction and

Development Lending?

This section sets forth the

requirements for construction and

development lending. NCUA is

proposing no substantive changes to this

section from the current rule. However,

NCUA wishes to clarify that member

construction and development loans

that are below the dollar limits

(individually and/or in the aggregate)

are not considered to be member

business loans for the purpose of this

rule. Thus, if a member has a

construction loan for $40,000, and no

other outstanding business type loans

(including unfunded business type lines

of credit), then the construction loan is

not a member business loan.

Nevertheless, given the increased risk

associated with these types of loans,

NCUA expects credit unions to have

adequate polices, procedures, and

monitoring systems in place to address

this type of lending.

Proposed Section 723.4—What Are the

Other Applicable Regulations?

This section merely describes the

other lending rules credit unions must

follow when granting member business

loans. NCUA is proposing no

substantive changes from the current

rule.

Proposed Section 723.5—How Do I

Implement a Member Business Loan

Program?

Many credit unions have informed

NCUA staff that they have not instituted

a member business loan program

because they could not meet the

requirement to have a person on staff

with two years of direct experience with

business lending. Credit unions stated

that they could not make certain vehicle

loans to small businesses because their

employees did not have experience in

making business loans. NCUA has never

required experience with business loans

in general but rather experience with

making loans the credit union intends to

grant. Hence, if a loan officer has

experience making vehicle loans to

consumers, he or she would also have

the requisite experience to make vehicle

loans for a business purpose. To clarify

the experience requirement, NCUA is

proposing to change the terminology in

the rule to ‘‘* * * at least two years

direct experience with the type of

lending the credit union will be

engaging in.’’ NCUA believes that if a

credit union has adequate policies,

controls, and monitoring in place,

employees with experience in the type

of lending for which the credit union

proposes to make business loans, it

should be able to make those loans.

Though a business automobile loan

represents more risk than a consumer

automobile loan, the credit union can

manage that risk through policies,

controls, and monitoring.

Credit unions do not have to hire staff

to meet the requirements of this section;

however, credit unions must ensure that

the expertise is available. They can meet

the experience requirement through

various approaches. For example, a

credit union can utilize the services of

a CUSO, an employee of another credit

union, an independent contractor, or

other third parties. However, the actual

decision to grant a loan must reside

with the credit union.

Proposed Section 723.6—What Must

Our Member Business Loan Policies

Address?

This section sets forth those items that

credit unions must address in their

written business loan policies. The

proposal retains many of the

requirements contained in the current

regulation but they are now located in

two sections, 723.6 and 723.7. The

proposal adds a new requirement for

credit unions to review financial

statements. NCUA believes that, just

periodically updating financial

statements, is not sufficient. The

benefits of updating this information

come from the process of reviewing and

analyzing this information.

The proposal also changes the term

‘‘appraisals’’ to ‘‘determination of

value.’’ The current wording implies, or

emphasizes, that member business loans

center around real estate lending. The

proposed wording clarifies that,

whether a member business loan is for

real estate or non-real estate, credit

unions must meet the collateral

requirements. The proposal also

changes the term ‘‘title search’’ to

‘‘determination of ownership’’ for the

same reason.

The proposal also clarifies that

maturity of a member business loan may

not exceed 12 years. Several credit

unions have inquired about the
Federal Register / Vol. 62, No. 148 / Friday, August 1, 1997 / Proposed Rules 41315

permissibility of structuring member

business loans as 12-year-or less balloon

notes, with the idea of refinancing the

balloon for another 12 years. It is

permissible to use a balloon payment

method to finance business loans

provided that this type of financing is

not being used to circumvent the 12

year maturity restriction imposed by the

Federal Credit Union Act.

Proposed Section 723.7—What Other

Items Must the Member Business Loan

Policy Address?

This section sets forth the remaining

issues that written loan policies must

address, including loan-to-value ratios

and the requirement for the personal

liability and guarantee of the member.

The current rule states that ‘‘[u]nless a

credit union loan program was in

existence prior to January 1, 1992, and

is granted an exemption by the regional

director, loans shall be granted on a

fully secured basis by collateral.’’

Section 701.21(h)(2)(ii)(A). NCUA is

proposing to expand the waiver for this

section by eliminating the requirement

that the member business loan program

be in existence prior to January 1, 1992.

This would permit credit unions that

recently initiated member business loan

programs to seek an exemption from the

loan-to-value ratios.

The NCUA Board is also proposing to

increase the second lien limitation from

70% to 80% for collateral loan-to-value

ratios. The 70% limit is not competitive

in today’s market. NCUA believes the

increase represents little additional risk

but does provide added flexibility for

credit unions. The proposal also

clarifies that private mortgage insurance

for first liens with a loan-to-value ratio

exceeding 80% applies only to real

estate loans.

Proposed Section 723.8—How Much

May One Member, or a Group of

Associated Members, Borrow?

This section sets forth the aggregate

amount of outstanding member business

loans that credit unions may grant to

one member, or a group of associated

members. Unless NCUA grants a waiver,

the current rule limits the aggregate

amount of outstanding business loans to

any one member or group of associated

members to 15% of the credit union’s

reserves (less the Allowance for Loan

Losses account) or $75,000, whichever

is higher. With the increase of the

general exception dollar limit to

$100,000, there must be a corresponding

increase to $100,000 for the aggregate

limit.

NCUA has received inquiries about

loan participations in regard to business

loan limits. In those situations where

the credit union sold the participation

without recourse, the amount sold

would not be included when calculating

the 15% limit to one borrower.

However, if the credit union sold the

participation with recourse (that is, the

selling credit union essentially retains a

contingent liability), it would include

the amount sold when calculating the

15% limit.

Proposed Section 723.9—How Do I

Calculate the Aggregate 15% Limit?

The current rule states that if any

portion of a member business loan is

secured by shares in the credit union, or

a deposit in another financial

institution, or fully or partially insured

or guaranteed by, or subject to an

advance commitment to purchase by

any agency of the federal government or

of a state or any of its political

subdivisions, such portion is not used

in calculating the 15% limit. NCUA is

proposing no substantive change to the

current rule on the calculation of the

15% limit. Some credit unions have

asked NCUA staff whether the partial

guarantee by a federal agency includes

loans guaranteed by the Small Business

Administration. The amount of the loan

guaranteed by the Small Business

Administration is not used in

calculating the 15% limit. Credit unions

must continue to meet its due diligence

requirements regarding the underlying

Small Business Administration loan.

For consistency with proposed

section 723.1(b), NCUA is proposing to

change the term ‘‘financial institution’’

in this section to ‘‘federally insured

financial institution’’.

Proposed Section 723.10—What Loan

Limit Waivers Are Available?

The current rule provides for a waiver

from: (1) the maximum loan amount to

one borrower or associated group of

members; (2) loan-to-value ratios; and

(3) construction and development

lending. Except for the previously

discussed expansion of the waiver on

loan-to-value ratios, NCUA is proposing

no substantive change to the current

rule on what loan limit exceptions are

available.

Proposed Section 723.11—How Do I

Obtain an Available Waiver?

This section describes the information

that credit unions must submit to the

Regional Director with their waiver

request. NCUA is proposing no

substantive changes to what the current

rule requires.

Proposed Section 723.12—What Will

NCUA Do With My Waiver Request?

This section addresses what the

Regional Director considers in

reviewing the waiver request and how

the waiver is processed. Many regional

directors typically consider not only the

credit union’s historical CAMEL rating,

but also that rating’s components. Such

a review is a prudent practice and

provides more information than simply

the CAMEL rating. The proposal would

require that the Regional Director

consider the composites to the CAMEL

rating and not simply the overall

CAMEL rating. In assessing risk, the

Regional Director will determine if any

safety and soundness concerns are

raised due to granting the waiver.

The proposal increases the number of

days from 30 to 60 that a Regional

Director has to act on a waiver request.

It also eliminates the automatic waiver

approval if a region does not take action

on a request within the specified time

frame. NCUA believes, that with the

increase in the types of waivers

available in the proposal, regions will

have more requests to process. Hence,

the regions will need more time to

process the requests adequately.

Proposed Section 723.13—What

Options Are Available to Us if the

Regional Director Denies Our Waiver

Request, or a Portion of it?

Under the current rule, a credit union

can appeal the denial of its request to

the NCUA Board. NCUA proposes no

substantive changes to this area.

Proposed Section 723.14—How Do I

Reserve for Potential Losses?

Consistent with the current rule, this

section addresses the criteria for

determining the classification of loans.

NCUA proposes no substantive change

to the loan classification. However,

NCUA proposes to move the current

Appendix of Section 701.21(h) to this

proposed section.

Proposed Section 723.15—How Much

Must I Reserve for Potential Losses?

This section provides a schedule a

credit union must use to reserve for

classified loans. NCUA proposes no

substantive changes to this schedule

from the current rule. However, NCUA

is proposing to clarify the meaning of

this section by stating that this is the

minimum amount when establishing the

reserve percentage. This is simply a

clarification so that a credit union will

not misinterpret the stated percentages

as an absolute.
41316 Federal Register / Vol. 62, No. 148 / Friday, August 1, 1997 / Proposed Rules

Proposed Section 723.16—What Are

The Recordkeeping Requirements?

Consistent with the current rule, a

credit union must separately identify

member business loans in its records

and financial reports. NCUA proposes

no substantive change to this

requirement from the current rule.

Proposed Section 723.17—What

Additional Steps do Federally Insured

State Chartered Credit Unions Have to

Perform?

NCUA believes it is important for

state supervisory authorities to remain

aware of, and involved in, member

business loan activity in federally

insured state chartered credit unions.

Therefore, this new section would

require federally insured state chartered

credit unions to obtain written approval

for a waiver from their state supervisory

authority prior to submitting the waiver

request to NCUA.

Proposed Section 723.18—How Can a

State Supervisory Authority Develop

and Implement a Member Business

Loan Regulation?

In the current rule, a federally insured

state charter credit union may be

exempt from NCUA’s member business

rule if the state had adopted a

substantially equivalent regulation as

determined by the NCUA board. The

Board believes that this process has

been effective. However, in order to

provide better guidance to the states, the

regulation identifies the minimum

requirements that they must address for

a rule to be deemed substantially

equivalent.

Proposed Section 723.19—Definitions

NCUA is proposing a general

definition section at the end of the rule.

NCUA is proposing to clarify the Loanto-Value ratio by including terminology

that requires the inclusion of unfunded

commitments and/or lines of credit

when determining the aggregate sum.

C. Other Proposed Revisions—Reducing

Regulatory Burden

Under the current rule, all loans, lines

of credit, or letters of credit that meet

the definition of a member business

loan must be separately identified in the

records of the credit union and be

reported as such in financial and

statistical reports required by the

NCUA. NCUA believes that this

information is already collected, and

readily available, through the 5300 Call

Report. The current requirement

imposes an unnecessary burden on

credit unions and, therefore, the NCUA

Board is proposing to delete this

monitoring requirement.

The current rule requires credit

unions to provide periodic disclosure to

credit union members of the number

and aggregate dollar amount of member

business loans. NCUA believes the

language is ambiguous and does not

serve any true safety or soundness issue

or concern. Therefore, the NCUA Board

proposes to delete this requirement.

The current Section 701.21(c)(5) of

NCUA’s Regulations references the

member business loan section. Due to

the proposed change to the member

business loan rule numbering system,

NCUA proposes to update 701.21(c)(5)

to reference the appropriate sections of

the proposed rule.

D. Part 722—Appraisals

A number of credit unions have

suggested that a credit union should be

able to obtain a waiver from the

appraisal requirement for member

business loans. They argue that, since

the appraisal requirement for business

loans is significantly lower for credit

unions (threshold is $50,000) than for

banks (threshold is $250,000) that credit

unions are at a severe competitive

disadvantage in making business loans

to people of modest means.

Furthermore, they suggest that in some

instances an appraisal is practically

meaningless. One example they have

provided is the requirement for an

appraisal on a business loan to construct

a church. Another example where an

appraisal may be unnecessary is where

the loan-to-value ratio is extremely low

due to property ownership interests

such as borrowing a small amount to

improve property that is already

completely owned by the member.

The NCUA Board continues to believe

that, for credit unions engaging in

business lending that involves real

estate, their greatest single risk

protection is a licensed or certified

appraisal to support the loan-to-value

ratio. However, the Board is willing to

provide for a waiver from the appraisal

requirement because there may be a

small number of loans that credit unions

may grant where the appraisal

requirement is an unnecessary burden.

The church loan scenario is a good

example of where an appraisal may not

be necessary.

When reviewing the waiver request,

the Regional Director will consider: (1)

the reason for the waiver of the

appraisal requirement; (2) the credit

union’s written business loan policies;

(3) an analysis of the credit union’s

prior experience making member

business loans; and (4) written

documentation provided by the credit

union which may indicate present value

(such as tax assessments, market

analysis, etc.).

E. Regulatory Procedures

Regulatory Flexibility Act

The Regulatory Flexibility Act

requires NCUA to prepare an analysis to

describe any significant economic

impact any proposed regulation may

have on a substantial number of small

entities (primarily those under $1

million in assets). The proposed

member business loan rule would

reduce existing regulatory burdens. In

addition, most small credit unions do

not grant member business loans.

Therefore, the NCUA Board has

determined and certifies that the

proposed amendment, if adopted, will

not have a significant economic impact

on a substantial number of small credit

unions. Accordingly, the Board has

determined that a Regulatory Flexibility

Analysis is not required.

Paperwork Reduction Act

NCUA has determined that several

requirements of this proposal constitute

collections of information under the

Paperwork Reduction Act. The

requirements are that FICUs: (1) develop

written loan polices; (2) provide waiver

requests in writing. These sections are

necessary to ensure the safety and

soundness of credit unions involved in

business lending as well as process

requests for waivers. Other aspects of

this proposal reduce the paperwork

requirements in the current rule.

It is NCUA’s view that the time it

takes a credit union to develop written

loan policies is not a burden created by

this regulation but is the usual and

customary practice in the normal

operations of a business entity. The

paperwork burdens created by this rule

is the written request for a waiver.

NCUA estimates that it should take a

credit union an average of 2 hours to

develop a written waiver request. NCUA

estimates that it will receive 50 waiver

requests in any given year. The annual

reporting burden would be 100 hours to

comply with this requirement. The total

annual burden hours imposed by the

proposed rule is 100 hours.

The Paperwork Reduction Act of 1995

and regulations of the Office of

Management and Budget (OMB) require

that the public be provided an

opportunity to comment on information

collection requirements, including an

agency’s estimate of the burden of the

collection of information.

The NCUA Board invites comment

on: (1) whether the collection of the

information is necessary for the proper

performance of the functions of NCUA,
Federal Register / Vol. 62, No. 148 / Friday, August 1, 1997 / Proposed Rules 41317

including whether the information will

have practical utility; (2) the accuracy of

NCUA’s estimate of the burden of the

collection of information, including the

validity of the methodology and

assumptions used; (3) ways to enhance

the quality, utility, and clarity of the

information to be collected; and (4)

ways to minimize the burden of

collection of information on those who

are to respond, including through the

use of appropriate automated electronic,

mechanical, or other technological

collection techniques or other forms of

information technology; e.g., permitting

electronic submission of responses.

OMB is required to make a decision

concerning the collection of information

contained in these proposed regulations

between 30 and 60 days after

publication of this document in the

Federal Register. Therefore, a comment

to OMB is best assured of having its full

effect if OMB receives it within 30 days

of publication. This does not affect the

deadline for the public to comment to

the NCUA Board on the proposed

regulation.

Organizations and individuals

desiring to submit comments on the

information collection requirements

should direct them to the Office of

Information and Regulatory Affairs,

OMB, Room 10235, New Executive

Officer Building, Washington, D.C.

20503; Attention: Alex Hunt, Desk

Officer for NCUA. Comments must also

be sent to NCUA, 1775 Duke Street,

Alexandria, VA 22314–3428; Attention:

Betty May, Paperwork Reduction Act

Coordinator, Telephone No. (703) 518–

6410; Fax No. (703) 518–6433; E-Mail

Address: BETTYM@NCUA.GOV.

Comments should be postmarked by

September 30, 1997. All comments

submitted in response to these proposed

regulations will be available for public

inspection, during and after the

comment period, at NCUA’s Central

Office, 6th Floor, Law Library, 1775

Duke Street, Alexandria, VA between

the hours of 9 a.m. and 1 p.m., Monday

through Friday of each week except

federal holidays, and by appointment

through the Law Librarian at telephone

no. (703) 518–6540.

Executive Order 12612

Executive Order 12612 requires

NCUA to consider the effect of its

actions on state interests. The proposed

rule would, as does the current rule,

apply to all federally insured credit

unions, including federally insured

state-chartered credit unions. However,

since the proposed rule reduces

regulatory burdens, NCUA has

determined that the proposed rule does

not constitute a ‘‘significant regulatory

action’’ for purposes of the Executive

Order. NCUA welcomes comment on

means and methods to coordinate with

the state credit union supervisors

regarding achievement of shared goals

involving viability, flexibility, parity,

conformity, and safety and soundness

regarding member business loans.

List of Subjects

12 CFR Part 701

Credit, Credit unions, Insurance,

Reporting and recordkeeping

requirements, Surety bonds.

12 CFR Part 722

Appraisals, Credit, Credit unions,

Mortgages, Reporting and recordkeeping

requirements, State-certified and Statelicensed appraisers.

12 CFR Part 723

Credit, Credit unions, Reporting and

recordkeeping requirements.

By the National Credit Union

Administration Board on July 23, 1997.

Becky Baker,

Secretary of the Board.

For the reasons set forth in the

preamble, it is proposed that 12 CFR

chapter VII be amended as follows:

PART 701—ORGANIZATION AND

OPERATION OF FEDERAL CREDIT

UNIONS

1. The authority citation for Part 701

continues to read as follows:

Authority: 12 U.S.C. 1752(5), 1755, 1756,

1757, 1759, 1761a, 1761b, 1766, 1767, 1782,

1784, 1787, 1789. Section 701.6 is also

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

is also authorized by 15 U.S.C. 1601 et seq.;

42 U.S.C. 1861 and 3601–3610. Section

701.35 is also authorized by 42 U.S.C. 4311–

4312.

2. Section 701.21 is amended in

paragraph (c)(5) by revising

‘‘§ 701.21(h)(1)(i)’’ to read ‘‘§ 723.1 of

this chapter’’ and ‘‘§ 701.21(h)(2)(ii)’’ to

read ‘‘§§ 723.8 and 723.9 of this

chapter’’.

§ 701.21 [Amended]

3. Section 701.21(h) is removed and

reserved.

PART 722—APPRAISALS

4. The authority citation for part 722

continues to read as follows:

Authority: 12 U.S.C. 1766, 1789 and 3339.

5. Section 722.3 is amended by

removing ‘‘or’’ at the end of paragraph

(a)(7), by removing the period at the end

of paragraph (a)(8)(ii) and adding ‘‘; or’’

in its place, and by adding a new

paragraph (a)(9) to read as follows:

§ 722.3 Appraisals required; transactions

requiring a State certified or licensed

appraiser.

(a) * * *

(9) The regional director has granted

a waiver from the appraisal requirement

for a loan meeting the definition of a

member business loan.

* * * * *

6. Part 723 is added to read as follows:

PART 723—MEMBER BUSINESS

LOANS

Sec.

723.1 What is a member business loan?

723.2 What are the prohibited activities?

723.3 What are the requirements for

construction and development lending?

723.4 What are the other applicable

regulations?

723.5 How do you implement a member

business loan program?

723.6 What must your member business loan

policy address?

723.7 What are the collateral and security

requirements?

723.8 How much may one member, or a

group of associated members, borrow?

723.9 How do you calculate the aggregate

15% limit?

723.10 What loan limit waivers are

available?

723.11 How do you obtain a waiver?

723.12 What will NCUA do with my waiver

request?

723.13 What options are available to us if the

Regional Director denies our waiver

request, or a portion of it?

723.14 How do I reserve for potential losses?

723.15 How much must I reserve for

potential losses?

723.16 What are the recordkeeping

requirements?

723.17 What additional steps do federally

insured state chartered credit unions

have to perform?

723.18 How can a State Supervisory

Authority develop and enforce a Member

Business Loan Regulation?

723.19 Definitions.

Authority: 12 U.S.C. 1756, 1757, 1766,

1785, 1789.

§ 723.1 What is a member business loan?

(a) General rule. A member business

loan includes any loan, line of credit, or

letter of credit where the borrower uses

the proceeds for the following purposes:

(1) Commercial;

(2) Corporate;

(3) Investment property;

(4) Business venture; or

(5) Agricultural.

(b) Exceptions to the general rule. The

following are not member business

loans:

(1) Loan(s) fully secured by a lien on

a 1 to 4 family dwelling that is the

member’s primary residence;

(2) One other loan fully secured by a

lien on a 1 to 4 family dwelling that

does not rely upon rental or business
41318 Federal Register / Vol. 62, No. 148 / Friday, August 1, 1997 / Proposed Rules

income derived from that property for

repayment;

(3) Loan(s) fully secured by shares in

the credit union or deposits in other

federally insured financial institutions;

(4) Loan(s) to a member or an

associated member which, when added

together, are less than $100,000;

(5) Loan(s) where a federal or state

agency (or its political subdivision):

fully insures repayment; or fully

guarantees repayment; or provides an

advance commitment to purchase in

full;

nd

(6) Loan(s) granted by a corporate

credit union to another credit union

under part 704 of this chapter.

§ 723.2 What are the prohibited activities?

(a) Senior management employees.

You must not make a member business

loan to the following:

(1) Any member of the board of

directors who is compensated as such;

(2) Your chief executive officer

(typically this individual holds the title

of President or Treasurer/Manager);

(3) Any assistant chief executive

officers (e.g., Assistant

President, Vice President, or Assistant

Treasurer/Manager);

(4) Your chief financial officer

(Comptroller); or

(5) Any associated member or

immediate family member of anyone

listed in paragraphs (a)(1) through (4) of

this section.

(b) Equity agreements/joint ventures.

You may not grant a member business

loan where a portion of the amount of

income received by the credit union,

senior management employees, or

officials in conjunction with the loan is

tied to the profit or sale of the business

or commercial endeavor for which the

loan is made.

§ 723.3 What are the requirements for

construction and development lending?

Unless the Regional Director grants an

exemption, loans granted for the

construction or development of

commercial or residential property are

subject to the following additional

requirements:

(a) The aggregate of all construction

and development loans must not exceed

15 percent of reserves, (excluding the

Allowance for Loan Losses account). To

determine the aggregate, you may

exclude any portion of a loan:

(1) Secured by shares in the credit

union;

(2) Secured by deposits in another

federally insured financial institution;

(3) Fully or partially insured or

guaranteed by any agency of the federal

government, state, or its political

subdivisions; or

(4) Subject to an advance commitment

to purchase by any agency of the federal

government, state, or its political

subdivisions;

(b) The borrower must have a

minimum of 35 percent equity interest

in the project being financed; and

(c) The funds for these projects may

be released only after on-site, written

inspections by independent, qualified

personnel and according to a

preapproved draw schedule and any

other conditions as set forth in the loan

documentation.

§ 723.4 What are the other applicable

regulations?

The provisions of § 701.21(a) through

(g) of this chapter apply to member

business loans to the extent they are

consistent with this part.

§ 723.5 How do you implement a member

business loan program?

The board of directors must adopt

specific business loan policies and

review them at least annually. The

board must also utilize the services of

an individual with at least two years

direct experience with the type of

lending the credit union will be

engaging in.

§ 723.6 What must your member business

loan policy address?

At a minimum, your policy must

address the following:

(a) The types of business loans you

will make;

(b) Your trade area;

(c) The maximum amount of your

assets, in relation to reserves, that you

will invest in business loans;

(d) The maximum amount of your

assets, in relation to reserves, that you

will invest in a given category or type

of business loan;

(e) The maximum amount of your

assets, in relation to reserves, that you

will loan to any one member or group

of associated members, subject to

§ 723.8;

(f) The qualifications and experience

of personnel (minimum of 2 years)

involved in making and administering

business loans;

(g) A requirement to analyze and

document the ability of the borrower to

repay the loan;

(h) Receipt, periodic updating, and

review of financial statements and other

documentation, including tax returns;

(i) A requirement for sufficient

documentation supporting each request

to extend credit, or increase an existing

loan or line of credit (except where the

board of directors finds that the

documentation requirements are not

generally available for a particular type

of business loan and states the reasons

for those findings in the credit union’s

written policies). At a minimum, your

documentation must include the

following:

(1) Balance sheet;

(2) Cash flow analysis;

(3) Income statement;

(4) Tax data;

(5) Leveraging; and

(6) Comparison with industry average

or similar analysis;

(j) The collateral requirements,

including, but not limited to:

(1) Loan-to-value ratios;

(2) Determination of value;

(3) Determination of ownership;

(4) Steps to secure various types of

collateral; and

(5) How often the credit union will

reevaluate the value and marketability

of collateral;

(k) The interest rates and maturities of

business loans (maturity may not exceed

12 years);

(l) General loan procedures which

include:

(1) Loan monitoring;

(2) Servicing and follow-up; and

(3) Collection;

(m) Identification of those individuals

prohibited from receiving member

business loans.

§ 723.7 What are the collateral and

security requirements?

(a) Unless your NCUA Regional

Director grants a waiver, all member

business loans must be secured by

collateral as follows:

Lien Minimum loan to value requirements

All ............. LTV ratios cannot exceed 95%.

First .......... You may grant a LTV ratio in

excess of 80 percent only

where the value in excess of

80 percent is covered through:

in regards to real estate member business loans, acquisition of private mortgage or

equivalent type insurance provided by an insurer acceptable to the credit union (where

available); insurance or guarantees by, or subject to advance commitment to purchase by, an agency of the

Federal government; or insurance or guarantees by, or

subject to advance commitment to purchase by, an

agency of a state or any of its

political subdivisions.

First .......... LTV ratios up to 80%.

Second ..... LTV ratios up to 80%.

(b) Borrowers, other than a not for

profit organization as defined by the

Internal Revenue Service Code (26

U.S.C. 501) or those where the regional

director grants a waiver; must provide

their personal liability and guarantee.
Federal Register / Vol. 62, No. 148 / Friday, August 1, 1997 / Proposed Rules 41319

(c) Federally insured credit unions are

exempt from the provisions of

paragraphs (a) and (b) of this section

with respect to credit card line of credit

programs offered to nonnatural person

members that are limited to routine

purposes normally made available

under those programs.

§ 723.8 How much may one member, or a

group of associated members, borrow?

The aggregate amount of outstanding,

member business loans to any one

member or group of associated members

must not exceed the greater of:

(a) 15% of the credit union’s reserves

(excluding the Allowance for Loan

Losses account); or

(b) $100,000; or

(c) An amount approved by the credit

union’s NCUA Regional Director.

§ 723.9 How do I calculate the aggregate

15% limit?

(a) Step 1. Calculate the numerator by

adding together the total outstanding

balance of member business loans to

any one member, or group of associated

members. From this amount, subtract

any portion:

(1) Secured by shares in the credit

union;

(2) Secured by deposits in another

federally insured financial institution;

(3) Fully or partially insured or

guaranteed by any agency of the Federal

government, state, or its political

subdivisions;

(4) Subject to an advance commitment

to purchase by any agency of the

Federal government, state, or its

political subdivisions.

(b) Step 2. Divide the numerator by all

reserves, excluding the Allowance for

Loan Losses account.

§ 723.10 What loan limit waivers are

available?

You make seek a waiver in the

following areas:

(a) Loan-to-value ratios;

(b) Maximum loan amount to one

borrower or associated group of

borrowers; and

(c) Construction and development

loan limits.

§ 723.11 How do I obtain a waiver?

To obtain a waiver, you must provide

your NCUA Regional Director:

(a) A copy of your business lending

policy;

(b) The higher limit sought;

(c) An explanation of the need to raise

the limit;

(d) Documentation supporting your

ability to manage this activity; and

(e) An analysis of the credit union’s

prior experience making member

business loans, including as a

minimum:

(1) The history of loan losses and loan

delinquency;

(2) Volume and cyclical or seasonal

patterns;

(3) Diversification;

(4) Concentrations of credit to one

borrower or group of associated

borrowers in excess of 15 percent of

reserves (excluding the Allowance for

Loan Losses account);

(5) Underwriting standards and

practices;

(6) Types of loans grouped by purpose

and collateral; and

(7) The qualifications of personnel

responsible for underwriting and

administering member business loans.

§ 723.12 What will NCUA do with my

waiver request?

Your Regional Director will:

(a) Review the information you

provided in your request;

(b) Evaluate the level of risk to your

credit union;

(c) Consider your credit union’s

historical CAMEL composite and

component ratings when evaluating

your request; and

(d) Notify you of the action taken

within 60 calendar days of receiving

your request.

§ 723.13 What options are available to us

if the Regional Director denies our waiver

request, or a portion of it?

You may appeal the Regional

Director’s decision in writing to the

NCUA Board. Your appeal must include

all information requested in § 723.11

and why you disagree with your

Regional Director’s decision.

§ 723.14 How do I reserve for potential

losses?

Non-delinquent loans may be

classified based on factors such as the

adequacy of analysis and supporting

documentation. You must classify

potential loss loans as either

substandard, doubtful, or loss. The

criteria for determining the

classification of loans are:

(a) Substandard. Loan is inadequately

protected by the current sound worth

and paying capacity of the obligor or of

the collateral pledged, if any. Loans

classified must have a well-defined

weakness or weaknesses that jeopardize

the liquidation of debt. They are

characterized by the distinct possibility

that the credit union will sustain some

loss if the deficiencies are not corrected.

Loss potential, while existing in the

aggregate amount of substandard loans,

does not have to exist in individual

loans classified substandard.

(b) Doubtful. A loan classified

doubtful has all the weaknesses

inherent in one classified substandard,

with the added characteristic that the

weaknesses make collection or

liquidation in full, on the basis of

currently existing facts, conditions, and

values, highly questionable and

improbable. The possibility of loss is

extremely high, but because of certain

important and reasonably specific

pending factors which may work to the

advantage and strengthening of the loan,

its classification as an estimated loss is

deferred until its more exact status may

be determined. Pending factors include:

proposed merger, acquisition, or

liquidation actions; capital injection;

perfecting liens on collateral; and

refinancing plans.

(c) Loss. Loans classified loss are

considered uncollectible and of such

little value that their continuance as

loans is not warranted. This

classification does not necessarily mean

that the loan has absolutely no recovery

or salvage value, but rather, it is not

practical or desirable to defer writing off

this basically worthless asset even

though partial recovery may occur in

the future.

§ 723.15 How much must I reserve for

potential losses?

The following schedule sets the

minimum amount you must reserve for

classified loans:

Classification Amount required

Substandard ..... 10% of outstanding amount

unless other factors

(e.g., history of such

loans at the credit union)

indicate a greater or

lesser amount is appropriate.

Doubtful ............ 50% of the outstanding

amount.

Loss .................. 100% of the outstanding

amount.

§ 723.16 What are the recordkeeping

requirements?

You must separately identify member

business loans in your records and in

the aggregate on your financial reports.

§ 723.17 What additional steps do federally

insured state chartered credit unions have

to perform?

When requesting a waiver from your

Regional Director, federally insured

state chartered credit unions must first

submit their request to their state

supervisory authority. If the state

supervisory authority approves the

request, the credit union must forward

its request, with the state supervisory

authority’s written approval, to its

Regional Director.
41320 Federal Register / Vol. 62, No. 148 / Friday, August 1, 1997 / Proposed Rules

§ 723.18 How can a State Supervisory

Authority develop and enforce a Member

Business Loan Regulation?

(a) The NCUA Board may exempt a

federally insured state chartered credit

union from NCUA’s Member Business

Rule in this part if the state has adopted

a rule substantially equivalent to

NCUA’s rule in this part. In a

substantially equivalent determination,

the Board reviews whether the state

regulation minimizes the risk and

accomplishes the overall objectives of

NCUA’s member business rule in this

part. Specifically, the Board will focus

its equivalency review on the definition

of:

(1) A member business loan;

(2) Loan to one borrower limits;

(3) Written loan policies;

(4) Collateral and security

requirements;

(5) Construction and development

lending; and

(6) Loans to senior management.

(b) To receive a substantially

equivalent determination, the State

Supervisory Authority must submit

their rule to the NCUA regional office.

After reviewing the rule, the region will

forward the request to the NCUA Board

for final determination.

§ 723.19 Definitions.

For purposes of this part, the

following definitions apply:

Associated member is any member

with a shared ownership, investment, or

other pecuniary interest in a business or

commercial endeavor with the

borrower.

Construction or development loan is a

financing arrangement for acquiring

property or rights to property, including

land or structures, with the intent to

convert it to income-producing property

such as: residential housing for rental or

sale; commercial use; industrial use; or

similar uses.

Immediate family member is a spouse

or other family member living in the

same household.

Loan-to-value ratio is the aggregate

amount of all sums borrowed

(outstanding balances plus any

unfunded commitment/line of credit)

from all sources on an item of collateral

divided by the market value of the

collateral used to secure the loan.

Reserves are all reserves, including

the Allowance for Loan Losses and

Undivided Earnings or surplus.

[FR Doc. 97–19936 Filed 7–31–97; 8:45 am]

BILLING CODE 7535–01–P

DEPARTMENT OF TRANSPORTATION

Federal Aviation Administration

14 CFR Part 39

[Docket No. 97–ANE–16]

RIN 2120–AA64

Airworthiness Directives; Precision

Airmotive Corporation Carburetors

AGENCY: Federal Aviation

Administration, DOT.

ACTION: Notice of proposed rulemaking

(NPRM).

SUMMARY: This document proposes the

supersedure of an existing airworthiness

directive (AD), applicable to Precision

Airmotive Corporation carburetors, that

currently requires the inspection of

those carburetors equipped with a twopiece venturi at each annual inspection

to determine if the primary venturi is

loose or missing, and requires the

replacement of a two-piece venturi with

a one-piece venturi within 48 months

after the effective date of the existing

AD. This action would eliminate the

requirement to install a one-piece

venturi, and allows the installation of a

one-piece venturi on affected

carburetors as an optional terminating

action; or, requires repetitive

inspections of a two-piece venturi on

affected carburetors. This AD would

also add an additional carburetor model,

and requires the installation of a new

fuel nozzle on certain carburetors when

a one-piece venturi is installed. This

proposal is prompted by service

difficulty reports describing engines that

fail to attain rated power, run rough, or

experience power loss after installation

of a one-piece venturi in accordance

with the existing AD, and by incidents

of forced landings of aircraft powered by

engines modified to comply with the

existing AD. The actions specified by

the proposed AD are intended to

prevent disruption of fuel flow to the

engine resulting in failure to attain rated

power, power loss in flight, and forced

landings.

DATES: Comments must be received by

September 30, 1997.

ADDRESSES: Submit comments in

triplicate to the Federal Aviation

Administration (FAA), New England

Region, Office of the Assistant Chief

Counsel, Attention: Rules Docket No.

97–ANE–16, 12 New England Executive

Park, Burlington, MA 01803-5299.

Comments may also be sent via the

Internet using the following address: ‘‘9-

ad-engineprop@faa.dot.gov’’. Comments

sent via the Internet must contain the

docket number in the subject line.

Comments may be inspected at this

location between 8:00 a.m. and 4:30

p.m., Monday through Friday, except

Federal holidays.

The service information referenced in

the proposed rule may be obtained from

Precision Airmotive Corporation, 3220

100th Street SW., Building E, Everett,

WA 98204; telephone (206) 353–8181,

fax (206) 348–3545. This information

may be examined at the FAA, New

England Region, Office of the Assistant

Chief Counsel, 12 New England

Executive Park, Burlington, MA.

FOR FURTHER INFORMATION CONTACT:

Richard Simonson, Aerospace Engineer,

Seattle Aircraft Certification Office,

FAA, Transport Airplane Directorate,

1601 Lind Avenue, SW, Renton, WA

98055–4056; telephone (425) 227–2597,

fax (425) 227–1181.

SUPPLEMENTARY INFORMATION:

Comments Invited

Interested persons are invited to

participate in the making of the

proposed rule by submitting such

written data, views, or arguments as

they may desire. Communications

should identify the rules docket number

and be submitted in triplicate to the

address specified above. All

communications received on or before

the closing date for comments, specified

above, will be considered before taking

action on the proposed rule. The

proposals contained in this notice may

be changed in light of the comments

received.

Comments are specifically invited on

the overall regulatory, economic,

environmental, and energy aspects of

the proposed rule. All comments

submitted will be available, both before

and after the closing date for comments,

in the Rules Docket for examination by

interested persons. A report

summarizing each FAA-public contact

concerned with the substance of this

proposal will be filed in the Rules

Docket.

Commenters wishing the FAA to

acknowledge receipt of their comments

submitted in response to this notice

must submit a self-addressed, stamped

postcard on which the following

statement is made: ‘‘Comments to

Docket Number 97–ANE–16.’’ The

postcard will be date stamped and

returned to the commenter.

Availability of NPRMs

Any person may obtain a copy of this

NPRM by submitting a request to the

FAA, New England Region, Office of the

Assistant Chief Counsel, Attention:

Rules Docket No. 97–ANE–16, 12 New