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

41976

Vol. 63, No. 151

Thursday, August 6, 1998

NATIONAL CREDIT UNION

ADMINISTRATION

12 CFR Part 701

Organization and Operations of

Federal Credit Unions

AGENCY: National Credit Union

Administration (NCUA).

ACTION: Notice of proposed rulemaking

and request for comment.

SUMMARY: The proposed rule clarifies

certain provisions in NCUA’s regulation

that sets forth the requirements for the

purchase, sale and pledge of eligible

obligations. Currently, the regulation

provides that a federal credit union

(FCU) may purchase real estate loans

from any source if it is granting real

estate loans on an ongoing basis and the

purchase will facilitate the packaging of

a pool of loans for sale on the secondary

market. The proposal clarifies that a

pool must include a substantial portion

of the FCU’s own loans and must be

sold promptly. Further, the proposed

rule explains when the purchase of a

member’s loan is not the purchase of an

eligible obligation, but rather the

making of a direct loan.

DATES: Comments must be received by

October 5, 1998.

ADDRESSES: Comments should be

directed 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. E-mail

comments to boardmail@ncua.gov.

Please send comments by one method

only.

FOR FURTHER INFORMATION CONTACT:

Mary F. Rupp, Staff Attorney, Office of

General Counsel, National Credit Union

Administration, 1775 Duke Street,

Alexandria, Virginia 22314–3428 or

telephone: (703) 518–6553.

SUPPLEMENTARY INFORMATION:

Background

On May 3, 1979, the NCUA Board

adopted a final rule that allowed an

FCU to purchase real estate loans from

any source if it is granting real estate

loans on an ongoing basis and the

purchase will facilitate the packaging of

a pool of loans to be sold on the

secondary market. 44 FR 27068 (May 9,

1979). The rule was based on three

sections of the Federal Credit Union Act

(the Act): §§ 107(5)(A)(i), 107(13) and

107(15). Section 107(13) authorizes an

FCU to purchase, sell, pledge, discount,

or otherwise receive or dispose of in

whole or in part, any eligible obligations

of its members. The proposed rule

explained that, although on its face

§ 107(13) does not authorize the

purchase of nonmember real estate

loans, ‘‘[c]onsidering the Congressional

intent to allow credit unions to take

advantage of secondary mortgage market

facilities, the Administration does not

believe that Congress intended 107(13)

to be an express prohibition on such

purchases provided they are authorized

by other sections of the Act.’’ 44 FR 60,

61 (January 2, 1979). The Board found

this authority in the incidental powers

clause, § 107(15), and the long term real

estate lending power, § 107(5)(A)(i) of

the Act. The Board believed that an

FCU’s power to purchase nonmember

real estate loans was incident to its

power to make long term real estate

loans, because ‘‘[i]n order to operate a

successful real estate program an FCU

must have access to the secondary

market. This can best be done by

pooling loans.’’ 44 FR at 61. The Board

recognized that, for an FCU to pool

loans to sell in the secondary market, it

would sometimes need to purchase

nonmember loans to complete its pool.

The proposed rule restricted the

purchase of nonmember loans to the

loans of other credit unions because the

Board was mindful of the ‘‘restrictions

placed on real estate lending by

Congress.’’ 44 FR at 61. Although the

final rule removed the restriction that

the nonmember loans be purchased

from credit unions, the Board remained

concerned that this incidental power

not be interpreted too broadly and that

the focus remain on making loans to

members.

The Board balanced ‘‘the need for

efficient access to the secondary market

against Congressional intent in

restricting the real estate loans’’ of

FCUs. 44 FR at 22070. The preamble to

the final rule stated that the FCU’s

‘‘board of directors must have adopted

a policy of granting long term real estate

loans’’ and must be granting them ‘‘on

an on-going basis’’; an FCU ‘‘must

include a substantial portion of its own

loans in the pool’’; once a particular

pool is sold, an FCU must ‘‘grant more

loans before a second pool can be

assembled’’; and ‘‘Federal credit unions

will be expected to sell or pledge

obligations purchased to package a pool

of loans promptly. Arrangements to

dispose of such loans should generally

be made in advance of their purchase by

obtaining a commitment from a buyer to

purchase the pool of loans before the

pool is actually assembled.’’ 44 FR at

27070.

Although the preamble to the final

rule discusses the requirements that a

pool must include a substantial portion

of the credit union’s own loans and

must be sold promptly, questions on

these points have arisen from time to

time. NCUA has responded, through

legal opinion letters and provisions in

the Accounting Manual for Credit

Unions, that FCUs must meet these

conditions. Accounting Manual for

Federal Credit Unions, § 6030.4. The

Board believes it will be helpful to FCUs

to clarify these existing requirements by

having them set out in the regulation,

itself. FCUs and persons involved in

advising them often review regulations

pertaining to particular activities and,

with this amendment, it will be easier

for FCUs to be informed about the

requirements for the purchase of eligible

obligations without consulting other

sources for guidance.

The Act and NCUA’s regulations limit

the aggregate unpaid balance of eligible

obligations purchased to 5% of the

unimpaired capital and surplus of the

purchaser. 12 U.S.C. 1757(13) and 12

CFR 701.23(b)(3). The current regulation

specifically exempts from the 5%

limitation student and real estate loans

purchased under paragraphs (b)(1)(iii)

and (iv) and eligible obligations

purchased under paragraph (b)(1)(i) that

are refinanced by the purchasing credit

union so that they are loans it is

empowered to grant. 12 CFR

701.23(b)(3). There has been some

confusion as to whether FCUs

participating in indirect lending and

leasing must account for these as

eligible obligations subject to the 5%

limitation or if they may treat them as

loans.
Federal Register / Vol. 63, No. 151 /Thursday, August 6, 1998 / Proposed Rules 41977

General Counsel opinion letters have

stated that indirect lending and indirect

leasing arrangements may be treated as

loans if certain conditions are met. The

proposed rule lists the conditions, so

that FCUs can determine if a transaction

qualifies as a loan or the purchase of an

eligible obligation.

Proposal

The Board proposes to amend

§ 701.23(b)(1)(iv) by clarifying that a

pool of loans, as used in that subsection,

must include a substantial portion of the

FCU’s own loans and must be sold

promptly. This clarification mirrors

what is currently stated in the

Accounting Manual. Accounting

Manual for Federal Credit Unions,

§ 6030.4. To provide a more concrete

measure for compliance, the Board has

considered substituting specific

numbers to measure what is meant by

‘‘substantial’’ and ‘‘promptly’’ in the

proposed rule. Agency staff with

expertise in the secondary market has

suggested that, in order for an FCU’s

pool of loans to be considered to contain

a ‘‘substantial portion of its own loans,’’

a reasonable measure would be at least

75%. Staff believes this figure

represents current practice amongst

FCUs participating in the secondary

market. FCUs participating in the

secondary market normally only need a

small percentage of nonmember loans to

complete the pool. Further, because

FCUs do not have the express statutory

authority to purchase nonmember loans,

the Board continues to interpret this

provision narrowly. It should only be

used by an FCU that is granting member

real estate loans on an ongoing basis,

pooling the loans and selling them on

the secondary market, as a mechanism

to complete a pool. It should not be a

mechanism for FCUs to circumvent the

lending restrictions on loans to

nonmembers.

Regarding the period that FCUs can

hold the pool of loans, FCUs will be

expected to sell them ‘‘promptly’’

because they will be purchasing loans of

nonmembers, loans they could not

grant. The 1979 preamble states that

‘‘[a]rrangements should generally be

made in advance of their purchase by

obtaining a commitment from a buyer to

purchase the pool of loans before the

pool is actually assembled.’’ 44 FR at

27070. Agency staff has suggested that

120 days is adequate time given the

commitment period from purchasers in

the secondary market.

Although specific numbers provide a

more definitive measure, they remove

flexibility which may be useful in

certain circumstances. The Board is

interested in receiving comments on

whether specific numbers should be

used and, if so, what numbers are

reasonable.

The Board proposes amending

§ 701.23(b)(3) by reorganizing it so that

the current exceptions to the 5% limit

are listed in separate subsections and

the indirect lending and leasing

exception is added to the list. The new

provision sets forth the conditions for

classifying an indirect lending or leasing

arrangement as a loan. First, the FCU

must make the final underwriting

decision. This means that the FCU must

actually review the application and

determine that the transaction conforms

to its lending or leasing policies.

Second, the sales or lease contract must

be assigned to the FCU very soon after

it is signed by the member and the

dealer or leasing company. In some

programs, the assignment will occur

immediately. In others, the assignment

will occur the next business day. The

longer the time between the formation

of the contract and its assignment, the

more likely the program will be viewed

as involving the purchase of an eligible

obligation rather than the making of a

loan. The NCUA Board is interested in

receiving comment on whether a

specific number of days should be

substituted for ‘‘very soon’’ and, if so,

what number is reasonable.

Request for Additional Comment

Section 701.23(b)(1)(iii) and (iv), with

certain restrictions, allows an FCU to

purchase student and real estate loans

from any source if the FCU is pooling

them for sale on the secondary market.

The NCUA Board is also interested in

receiving comment on whether the

types of loans that can be purchased

from any source for purposes of creating

pools for sale should be expanded to

include auto and credit card loans.

Comments on this issue will assist the

Board in determining whether to

propose regulatory changes to include

auto and credit card loans.

REGULATORY PROCEDURES

Regulatory Flexibility Act

The Regulatory Flexibility Act

requires the NCUA to prepare an

analysis to describe any significant

economic effect any regulation may

have on a substantial number of small

credit unions, meaning those under $1

million in assets. The NCUA Board has

determined and certifies that the

proposed rule if adopted will not have

a significant economic impact on a

substantial number of small credit

unions. The reason for this

determination is that it is highly

unlikely that small credit unions would

be engaged in pooling real estate loans

for sale on the secondary market.

Accordingly, the NCUA Board has

determined that a Regulatory Flexibility

Analysis is not required.

Executive Order 12612

Executive Order 12612 requires

NCUA to consider the effect of its

actions on state interests. The proposed

amendments will only apply to federal

credit unions. Section 741.8(b)(1)

specifically exempts state chartered

federally insured credit unions from

701.23(b)(1)(iv). Proposed § 701.23(b)(v)

only applies to FCUs.

Paperwork Reduction Act

The proposal does not impose any

additional paperwork requirements on

FCUs.

List of Subjects in 12 CFR Part 701

Credit unions, Eligible obligations.

By the National Credit Union

Administration Board on July 30, 1998.

Becky Baker,

Secretary of the Board.

Accordingly, NCUA proposes to

amend 12 CFR part 701 as follows:

PART 701—ORGANIZATION AND

OPERATIONS OF FEDERALLYINSURED 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 and 1798. 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. 1981 and 3601–3610.

Section 701.35 is also authorized by 42

U.S.C. 4311–4312.

2. Amend § 701.23 by adding a

sentence to the end of paragraph

(b)(1)(iv) and by revising paragraph

(b)(3) to read as follows:

§ 701.23 Purchase, sale and pledge of

eligible obligations.

* * * * *

(b) * * *

(1) * * *

(iv) * * * A pool must include a

substantial portion of the credit union’s

own loans and must be sold promptly.

* * * * *

(3) The aggregate of the unpaid

balance of eligible obligations

purchased under paragraph (b) of this

section cannot exceed 5% of the

unimpaired capital and surplus of the

purchaser. The following can be

excluded in calculating this 5%

limitation:

(i) Student loans purchased in

accordance with paragraph (b)(1)(iii) of

this section;
41978 Federal Register / Vol. 63, No. 151 /Thursday, August 6, 1998 / Proposed Rules

(ii) Real estate loans purchased in

accordance with paragraph (b)(1)(iv) of

this section;

(iii) Eligible obligations purchased in

accordance with paragraph (b)(1)(i) of

this section that are refinanced by the

purchaser so that it is a loan it is

empowered to grant; and

(iv) An indirect lending or indirect

leasing arrangement that is classified as

a loan and not the purchase of an

eligible obligation because the federal

credit union makes the final

underwriting decision and the sales or

lease contract is assigned to the federal

credit union very soon after it is signed

by the member and the dealer or leasing

company.

* * * * *

[FR Doc. 98–20952 Filed 8–5–98; 8:45 am]

BILLING CODE 7535–01–P

NATIONAL CREDIT UNION

ADMINISTRATION

12 CFR Part 701

Organization and Operations of

Federal Credit Unions

AGENCY: National Credit Union

Administration (NCUA).

ACTION: Notice of proposed rulemaking.

SUMMARY: The NCUA is proposing to

incorporate into its regulations the

agency’s longstanding interpretation

that federal credit unions can permit a

nonmember to assume a member’s longterm residential real estate loan in

conjunction with the nonmember’s

purchase of the member’s principal

residence.

DATES: Comments must be received on

or before October 5, 1998.

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.

SUPPLEMENTARY INFORMATION: Since

1977, federal credit unions have had the

authority to offer long-term real estate

loans to finance a member’s principal

residence. 12 U.S.C. 1757(A)(i). NCUA’s

implementing regulation for this

authority is set forth at 12 CFR

701.21(g).

In 1985, the NCUA Board issued

Interpretive Ruling and Policy

Statement 85–3 (IRPS 85–3). 50 FR

51840 (December 20, 1985). IRPS 85–3

stated that, incidental to a federal credit

union’s authority to make long-term real

estate loans to members, a federal credit

union may permit assumptions, by

either members or nonmembers, under

the terms and conditions specified in

the loan agreement and consistent with

the Federal Credit Union Act and

NCUA’s Regulations. The Board also

stated that, in the case of a nonmember

assumption, there must be no new

money lent to the borrower and no

extension of the original maturity date

specified in the loan agreement with the

member.

NCUA has a policy of periodically

reviewing its regulations to ‘‘update,

clarify and simplify existing regulations

and eliminate redundant and

unnecessary provisions.’’ IRPS 87–2,

Developing and Reviewing Government

Regulations. As part of its regulatory

review program, NCUA reviewed its

IRPS to determine their current

effectiveness. As a result of that review,

the NCUA Board stated that it planned

to incorporate IRPS 85–3 into NCUA’s

Regulations. 62 FR 11773 (March 13,

1997) and 62 FR 50245 (September 25,

1997). The Board’s goal is to increase

regulatory effectiveness by making it

easier for credit unions to locate

applicable rules regarding real estate

lending. Accordingly, the Board is

proposing to add a new paragraph to

Section 701.21(g) that will incorporate

IRPS 85–3 so that this provision on

nonmember assumption of loans will be

in the same place with the other

regulatory provisions regarding real

estate lending. Although the language is

slightly different, the policy set forth in

the proposed amendment is, for all

practical purposes, identical to the

policy set forth in IRPS 85–3.

This proposal does not authorize a

refinancing by a nonmember. Further,

this proposal, just as IRPS 85–3, does

not permit a federal credit union to

grant an assumption of a loan to a

nonmember if the underlying intent of

the original loan to the member was to

grant an assumption by a nonmember

immediately or soon after making the

original loan. NCUA would view such a

transaction as a sham and will not

permit federal credit unions to

circumvent the restriction on lending to

nonmembers. NCUA will review

assumptions by nonmembers during the

examination process. Federal credit

unions engaging in such sham

transactions will be subject to NCUA’s

administrative enforcement process.

This proposal does not require a

federal credit union to permit

nonmember assumption of real estate

loans. A federal credit union’s loan

agreements can provide that a loan is

immediately due and payable if the

member’s residence securing the loan is

sold.

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 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 the

proposed amendments do not increase

paperwork requirements under the

Paperwork Reduction Act of 1995 and

regulations of the Office of Management

and Budget.

Executive Order 12612

Executive Order 12612 requires

NCUA to consider the effect of its

actions on state interests. The proposal

only applies to federal credit unions.

NCUA has determined that the

proposed amendment does not

constitute a significant regulatory action

for the purposes of the Executive Order.

List of Subjects in 12 CFR Part 701

Credit, Credit unions, Insurance,

Mortgages, Reporting and recordkeeping

requirements, Surety bonds.

By the National Credit Union

Administration Board on July 30, 1998.

Becky Baker,

Secretary of the Board.

For the reasons set forth in the

preamble, it is proposed that 12 CFR

Part 701 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, and 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 42 U.S.C. 3601–3610.

Section 701.35 is also authorized by 42 U.S.C

4311–4312.