Source: http://www.thefederalregister.com/d.p/2001-11-23-01-29152
Timestamp: 2013-12-12 04:14:13
Document Index: 397200089

Matched Legal Cases: ['art 7114', 'art 3944', 'art 6726', 'art 140', 'art 5250', 'art 1739', 'art 30206', 'art 514', 'art 9740', 'art 180', 'arts 722', 'art 702']

Regulatory Flexibility Program, Daily Rules, Proposed Rules, and Notices of the Federal Government
14 CFR Part 7114 CFR Part 3944 CFR Part 6726 CFR Part 140 CFR Part 5250 CFR Part 1739 CFR Part 30206 CFR Part 514 CFR Part 9740 CFR Part 180	Federal Register: November 23, 2001 (Volume 66, Number 226)
DOCID: FR Doc 01-29152
CFR Citation: 12 CFR Parts 722 and 742
ACTION: Credit unions:
SUBJECT CATEGORY: Regulatory Flexibility Program DATES: The rule is effective March 1, 2002.
DOCUMENT SUMMARY: The NCUA Board is issuing a final rule that will permit credit unions with advanced levels of net worth and consistently strong supervisory examination ratings to be exempt, in whole or in part, from certain NCUA regulations. The NCUA Board is also issuing a final amendment to the appraisal regulation to increase the dollar threshold from $100,000 to $250,000 for when an appraisal is required. This final rule and final amendment will reduce regulatory burden.
SUMMARY: Regulatory Flexibility Program, SUPPLEMENTAL INFORMATION
On March 16, 2000, the NCUA Board issued an advance notice of proposed rulemaking (ANPR) on a regulatory flexibility and exemption (RegFlex) program with a sixtyday comment period. 65 FR 15275 (March 22, 2000). The Board received seventyfour comments on the RegFlex concept. After reviewing the issues addressed by the commenters, the Board issued a Notice of Proposed Rulemaking (NPR) on March 8, 2001. 66 FR 15055 (March 15, 2001). Although the Board actually received over 1400 letters or email messages, NCUA staff credited multiple comment letters from the same credit union as one comment, for a total of 1304 comments on the proposed rule. Comments were received from 551 federal credit unions, 267 state
chartered credit unions, 438 credit union volunteers or members, 33 leagues, six national credit union trade associations, four realtors and associations, one bank trade association, one appraisal association, one insurance company, one law firm, and one construction company. In general, 1297 commenters supported the proposed regulation and many commenters supported the proposal as written. Many supporters encourage the NCUA Board to provide further regulatory flexibility in the future. A number of commenters recommended some changes to the proposed rule. Many commenters commended the Board for its bold initiative and most of them believe this regulatory approach will reduce regulatory burden and provide greater flexibility for those credit unions that have demonstrated a track record of safe and sound operations. Seventynine commenters believe that RegFlex credit unions will have a competitive advantage and fiftyeight of these commenters believe that wellmanaged credit unions deserve this advantage. Thirty
six commenters stated that RegFlex credit unions would not have a competitive advantage. Regarding risk to the National Credit Union Share Insurance Fund (NCUSIF), 184 commenters stated that the adoption of this proposal will not significantly increase risk. Most of these commenters believe no increase in risk will occur because healthy credit unions have the ability to manage any increased safety and soundness concerns. Two commenters believe the proposal will increase risk. Many commenters believe the regulation will encourage credit unions to become stronger financial institutions. Discussion
RegFlex Criteria
The first criterion for eligibility under this proposal, is that credit unions must have received a composite CAMEL code 1 or code 2 for two consecutive exams. The second criterion is that a credit union must have a net worth ratio of nine percent or greater, and be well
capitalized under NCUA's prompt corrective action regulations. 12 CFR Part 702. The NCUA Board believed the proposed criteria were generally sound and did not propose that a CAMEL 1 or 2 in management needs to be part of the criteria. One hundred and five commenters specifically supported the eligibility requirements as proposed. Twentytwo commenters specifically agreed with the NCUA Board that there should not be a separate management component for RegFlex eligibility. A few commenters stated that a credit union should have a 1 or 2 in management to be eligible for RegFlex. A few commenters suggested different eligibility requirements to obtain the benefits of RegFlex. One of these commenters requested the Board not only look at the net worth and CAMEL ratings of credit unions, but also look to how well they are serving their members and whether those members are satisfied. Almost all of the other commenters' suggestions retained some of the Board's proposal of either a CAMEL component or net worth ratios. While the Board agrees that service to members and member satisfaction are important issues for credit unions, these are not generally considered to be safety and soundness issues, and would not be easily measured criteria for purposes of RegFlex. The Board continues to believe that CAMEL ratings and net worth ratios are the best measures of how well a credit union is managed and how much risk it presents to the NCUSIF and the credit union system. That is, consistent with safety and soundness concerns, credit unions with advanced levels of net worth and consistently strong supervisory examination ratings have earned exemptions from certain NCUA Regulations.
Thirtytwo commenters stated that CAMEL ratings should not be used to determine eligibility because they can be used unfairly by examiners to keep credit unions out of the program. Many of these commenters believe that the CAMEL rating is arbitrary and [[Page 58657]]
subjective to the individual examiner. Three commenters suggested a different time period for maintaining the CAMEL component. Thirteen commenters suggested using call report data and financial statements instead of a CAMEL rating. As discussed above, the Board is retaining the requirement that a credit union must have received a composite CAMEL code 1 or code 2 for two consecutive exams. The Board understands the commenters' concerns that a credit union may be unfairly kept out of the program. However, the application process should help alleviate some of these concerns because a credit union that lacks the required CAMEL rating can still apply to be part of the program if it has sufficient net worth. In addition, if credit union management believes its CAMEL rating is being manipulated, it should ask the regional director to review the issue.
Regarding the net worth requirement, 485 commenters believe the nine percent net worth requirement should be decreased. Four hundred and fiftysix of these commenters stated the net worth requirement should be seven percent and sixteen of these commenters stated that the net worth requirement should be eight percent. The remaining commenters offered varying numbers. As discussed above, the Board is retaining the requirement that a credit union must have a net worth ratio of nine percent or greater, and be wellcapitalized under NCUA's prompt corrective action regulations. The ability to build capital, which is demonstrated by the cushion of 200 basis points, represents a significant decrease in risk to both the credit union and the NCUSIF. Some of the reasons for this 200 basis point cushion are to minimize the risk of engaging in the expanded authority permitted by the RegFlex program as well as to minimize PCA implications. The Board continues to believe that the 200 basis point margin provides a sufficient margin of safety for RegFlex credit unions to withstand unexpected events and normal business fluctuations.
Net Worth Requirement for Complex Credit Unions
The NCUA Board proposed a different net worth requirement for complex credit unions: Nine percent or 200 basis points over their risk based net worth (RBNW) requirements, whichever is greater. This net worth requirement is beyond the ``wellcapitalized'' threshold established by prompt corrective action (PCA). The NCUA Board stated that a significant margin of safety for complex credit unions is afforded by net worth ratios exceeding general requirements, especially when combined with stable, high CAMEL ratings. Thirtytwo commenters approved of the higher standard for ``complex'' credit unions. Nineteen commenters stated that the trigger should be the same for all types of credit unions. Three commenters stated that a credit union that is 200 basis points over its net worth requirement for PCA should qualify for RegFlex, even if they do not have nine percent net worth. A few commenters suggested that the alternative measure for complex credit unions should be deleted. A few other commenters suggested different triggers for complex credit unions. One commenter stated that examiners should determine the net worth requirement for the purpose of RegFlex eligibility. The Board continues to believe that a 200 basis point margin over the minimum level required of a noncomplex credit union will provide a sufficient, but not excessive, safety cushion to keep credit unions from ``bouncing'' in and out of RegFlex eligibility. Credit unions that meet the definition of ``complex'' under PCA do so because of additional balance sheet risk. In order to provide the safety cushion and risk mitigation RegFlex contemplates, a higher net worth level is needed. Again, as with noncomplex credit unions, a 200 basis point cushion over the minimum level for a complex credit union to be classified as wellcapitalized is considered to be a sufficient safety cushion to keep these credit union from ``bouncing'' in and out of RegFlex eligibility. The NCUA Board has made some minor modifications in the language in the final rule in Secs. 742.1 and 742.2 to make it consistent with the language in NCUA's prompt corrective action regulations.
RegFlex Process
The NCUA Board proposed an automatic exemption for credit unions meeting the eligibility requirements. The Board noted that, as credit unions become eligible for RegFlex, NCUA will notify credit unions of their eligibility, generally, during the examination process. Four hundred and sixtyone commenters believe the exemption should be automatic for credit unions that qualify, just as the Board proposed. A few commenters believe approval should be automatic with a notification to NCUA by the credit union. A few commenters stated that the process should not be automatic and that the credit union should apply to NCUA for approval. The NCUA Board believes that an automatic exemption is consistent with the spirit of the RegFlex concept and will not require any application for these credit unions meeting the criteria. As credit unions become eligible for RegFlex, NCUA will notify credit unions of their eligibility, generally, during the examination process.
The NCUA Board also proposed an application process for credit unions that meet only one of the two stated criteria to allow more credit unions to have RegFlex authority while maintaining the safety and soundness considerations that are fundamental to the program. The NCUA Board proposed that if a credit union is a CAMEL 3 (or CAMEL 1 or 2 for less than two consecutive cycles) with a net worth in excess of nine percent or if the credit union is a CAMEL 1 or 2 with a net worth under nine percent (or if complex, its risk based net worth level is lower than nine percent or 200 basis points over their risk based net worth requirements), a credit union can apply to the regional director for a RegFlex designation. Twentyfive commenters supported an application process for credit unions that meet only one of the two eligibility criteria. A few of these commenters would only allow credit unions that meet the CAMEL criteria to use the application process. These commenters believe that the CAMEL component is a better indicator of safety and soundness than the net worth criteria. Two commenters did not support the application process. A number of commenters that addressed this issue requested that the rule state the criteria the regional director will consider when making this determination. The NCUA Board continues to believe that the RegFlex authority should be extended to as many credit unions as possible while maintaining the safety and soundness considerations that are fundamental to the program. Therefore, the NCUA Board is retaining in the final rule the application process described above. The regional director will review the application in relation to the criteria that was not met for RegFlex, that is, net worth level or safety and soundness issues that resulted in a lower CAMEL rating. In the case of a credit union not meeting the new worth level, the regional director will review past, present and projected future performance, from both a managerial and financial perspective, to determine RegFlex approval. For those credit unions that meet net worth levels but not CAMEL rating requirements, the regional director's review will focus on the magnitude and resolution of the [[Page 58658]]
issues that resulted in the lower CAMEL rating.
The proposal stated that a regional director, in