CUNA Regulatory Comment Call


March 13, 2001

NCUA Board Seeks Second Round of Comments on Reg-Flex – Credit Unions are URGED to Comment

(Major Proposal for Federal Credit Unions)

EXECUTIVE SUMMARY

The National Credit Union Administration Board is seeking comments on a proposed Regulatory Flexibility Program for federal credit unions that, as CUNA President and CEO Dan Mica stated, is a "good first step toward regulatory relief." If adopted, the program would allow certain credit unions to be exempt from some of NCUA's regulatory provisions that are not specifically required by law or only be subject to those provisions on a limited basis. The objective of the program is to provide regulatory flexibility without jeopardizing the safety and soundness of participating credit unions or the National Credit Union Share Insurance Fund.

(Click here to go directly to the highlights of the proposal.)

The proposed Reg-Flex is a major undertaking for NCUA and indicates the agency, under NCUA Board Chairman Dennis Dollar, wants to take a different approach to regulation that will minimize government interference while enabling credit unions to develop innovative and attractive products and services. Click here to see the proposed rule.

Comments on the new proposal are due May 14, 2001. Please submit your comments to CUNA by the end of April. We encourage you to use CUNA’s Operation Comment to help draft your letter and then send it directly to NCUA, CUNA and your league. You can access Operation Comment by clicking here.

You can also fax your responses to CUNA at 202-371-8240; e-mail them to Associate General Counsel Mary Dunn at mdunn@cuna.com or to Assistant General Counsel Jeffrey Bloch at jbloch@cuna.com; or mail them to Mary or Jeff in c/o CUNA’s Regulatory Advocacy Department, 805 15th Street, NW, Suite 300, Washington, DC 20005.

Only 77 comment letters were received by the agency on the Advance Notice of Proposed Rulemaking on Reg-Flex issued by the NCUA Board this time last year. It is essential that credit unions let the agency, the leagues and CUNA know that NCUA is certainly on the right track with this approach to regulation. Of course, we really want to hear from you with additional ideas you have for expanding Reg-Flex. Banker groups have repeatedly opposed efforts to reduce regulatory constraints for credit unions; and even some well-meaning officials at NCUA tend to be critical of regulatory relief. CUNA and the leagues urge all federal credit unions to read the Reg-Flex proposal and decide whether it can be expanded and how, consistent with the Federal Credit Union Act and safety and soundness. Then, use CUNA’s key points under Operation Comment to write and send your letter. Quantity does matter!! Of course, the most effective letters are those that come from the heart and are based on each credit union official’s experiences.

Originally part of the Reg-Flex program, the NCUA Board has decided to proposal increasing the threshold for an appraisal for a real estate loan and for a member business loan involving real estate for all credit unions. While all the federal financial regulators are required to have an appraisal rule, currently NCUA’s regulation is the most stringent, requiring appraisals for real estate loans of $100,000 or more. While NCUA is considering raising this level to $250,000 for real estate and member business loans involving real estate, NCUA would still require a written estimate of market value and NCUA could require an appraisal "whenever necessary to address safety and soundness concerns."

Highlights of the Reg-Flex Proposal

Which Credit Unions Could Qualify for Reg-Flex

  • To qualify for Reg-Flex treatment, a credit union must:
  • Have a CAMEL rating of 1 or 2 in at least two consecutive exams; and
  • Have a net worth ratio of at least 9%.
  • If "complex" under PCA, the credit union must have 200 basis points over its risk-based net worth requirements or a net worth of 9%, whichever is higher.


  • The proposal has been changed from the one issued last year. Originally NCUA would have required a Reg-Flex credit union to have a CAMEL 1 or 2 rating in Management as well as in its overall rating. This requirement has been dropped.

How CUs Would Obtain the Exemption

  • Eligibility would be automatic, as soon as the criteria are met.


  • A federal credit union can apply to its NCUA Regional Director for Reg Flex designation for all or some of the flexibility provided under the proposal if it falls under one of the following three categories:
  • The credit union is a CAMEL 3 (or CAMEL 1 or 2 for less than 2 consecutive cycles) with a net worth of over 9%; or
  • The credit union is a CAMEL 1 or 2 with net worth under 9%; or
  • The credit union is "complex" under PCA and its risk-based net worth level is lower than 9% or 200 basis points over its risk-based net worth requirements.
  • Allowing credit unions that do not automatically qualify to apply for Reg-Flex status was not included in the earlier proposal.


  • Once the rule is effective, NCUA will notify all eligible credit unions. After that, notification of eligibility will occur after an application for a Reg-Flex designation or as part of an exam.

Specific Rules Identified

NCUA has identified several regulations from which Reg-Flex credit unions would be exempt. These are:

  • Fixed assets limits. Under the current rules, a federal credit union must apply to NCUA for approval if it wants to invest in aggregate total fixed assets in an amount that exceeds 5% of shares and retained earnings. Reg-Flex credit unions would not have to seek such a waiver.

    NCUA is seeking comment on other options regarding fixed assets, including the possibility of allowing a credit union with a higher net worth to have a higher fixed assets limit. The Board is also seeking comments on whether the rule should be structured so that there is a tiered limit on fixed assets for all federal credit unions.

    The proposal states that a federal credit union would still have to comply with Sec. 701.36(d) that states when real property is acquired for future expansion, partial utilization must be accomplished with 3 years, unless otherwise approved in writing by NCUA. The conflict of interest provisions in Sec. 701.36(e) that apply to agreements with a maturity of one year or more to acquire or lease premises would also still be in effect. Those provisions require prior written approval from NCUA if the premises will be acquired from a director, committee member or senior management employee of the credit union, the immediate family member of any such individual or other listed entities.

  • Investments. Investment provisions from which Reg-Flex credit unions would be exempt are quarterly stress testing for complex securities, Sec. 703.90(c); removing or modifying the 100%-of-net-capital limits on discretionary delegation of investments to third parties, Sec. 703.40(c)(6); and extending the current maturity limit on zero coupon investments, now at under 10 years, Sec. 703.110(d).

    Although NCUA sought comment on waiving or modifying the prohibition on stripped, mortgage-backed securities, residual interests in CMOs/REMICs, mortgage serving rights, commercial mortgage-related securities or small business-related securities, this has not been incorporated into the new Reg-Flex proposal.

  • Charitable donations. Currently, federal credit unions are limited to providing charitable donations to organizations located in or conducting activities in a community in which the credit union has a place of business. The credit union's board must approve the donation, based on a determination that the gift is in the best interests of the credit union and is a reasonable amount. NCUA is suggesting that Reg-Flex credit unions could be exempted entirely from these restrictions. NCUA is also seeking comments on whether all federal credit unions should be exempt.

  • Shares of Public Units and Nonmembers. Currently, maximum shares of public units and nonmember shares (for low-income credit unions) are limited to 20% of total shares of the federal credit union or $1.5 million, whichever is greater. NCUA is proposing that Reg-Flex credit unions could be exempted from these limits.

  • Purchase, Sale and Pledge of Eligible Obligations. NCUA is proposing that a Reg-Flex credit union could purchase any auto loan, credit card loan, member business loan, student or mortgage loan from any other credit union, as long as it was a loan the credit union was empowered to grant.

Losing Reg-Flex Status

  • Under the proposal, eligibility may be lost in two ways. One is if the credit union no longer meets the criteria regarding net worth and CAMEL rating. Second, a regional director "for substantive and documented safety and soundness reasons" may revoke Reg-Flex authority in whole or in part. The credit union must be given written note, along with the regional director’s reasons.


  • Any action by a credit union under Reg-Flex status will be grandfathered, although NCUA has the authority to require a credit union to divest its investments or assets for substantive safety and soundness reasons.

Appealing the Loss of Status

  • A credit union has 60 days from the date of the regional director's determination revoking the Reg-Flex authority to appeal to the NCUA Supervisory Review Committee. The regional director’s determination remains in effect until the Committee issues a different ruling. A credit union may appeal the Committee’s decision within 60 days.

Additional Issues

Credit unions should feel free to raise with NCUA other suggestions they have for Reg-Flex, such as fidelity bond requirements, the use of audits for some or all examination components, and ANY other recommendation you feel NCUA should consider to improve the regulatory environment for federal credit unions.

NCUA states that changes to field of membership requirements, expanding the definition of "low-income" to include more groups, and member business loan requirements regarding loans to one borrower, personal liability, construction and development lending are not candidates for consideration under Reg-Flex at this time. However, we believe NOTHING should be off the table and if you have good arguments as to why these and other recommendations should be included, please share them NCUA, CUNA and your league.

CUNA's Federal Subcommittee, chaired by Edwin Collins, President of Lockheed Georgia Employees Federal Credit Union, will be developing CUNA's comment letter on Reg-Flex. It is vital that credit unions weigh-in on this issue.

QUESTIONS TO CONSIDER

  • Do you agree that a healthy credit union should be able to qualify for additional regulatory flexibility in the manner NCUA is proposing?













  • Will such a program encourage a credit union to remain healthy or to take unmitigated risks?













  • Do you agree with the criteria NCUA is proposing for eligibility - CAMEL 1 or 2 rating for two consecutive exams, a net worth ratio of at least 9%, and meeting risk-based net worth requirements? If not, what should the criteria be?













  • Do you agree with the underlying assumption of Reg-Flex that credit unions that qualify based on the proposed criteria have a proven track record and necessary net worth to mitigate any risks the Reg-Flex program may present?













  • Would credit unions that qualify for Reg-Flex have an unfair competitive advantage over those that did not qualify?













  • Do you agree that a Regional Director in his or her sole discretion should be able to revoke a Reg-Flex designation, without advance notice?













  • Do you agree that the fixed assets rule should be included in Reg-Flex?













  • Should a Reg-Flex credit union be required to have a plan to fully utilize any fixed assets it leases?













  • Do you agree that Reg-Flex credit unions should be exempted from some investment requirements?













  • Do you agree with the ones NCUA has identified for Reg-Flex treatment -- quarterly stress testing, discretionary delegation of investments to third parties, and extended maturities for zero coupon investments?













  • What about investments such as stripped, mortgage-backed securities and others that are now prohibited?













  • Are there specific risks associated with these investment activities that the Reg-Flex programs would address?













  • Are there other provisions of the investment reg that should be included in Reg-Flex?













  • Do you agree with the other areas NCUA has identified for Reg-Flex?

    Charitable Donations Yes _____ No ______

    Shares for Public Units and Nonmembers Yes _____ No ______

    Eligible Obligations Yes _____ No ______


    Comments:













  • Do you support the proposed threshold for appraisals?













  • Should Reg-Flex credit unions be exempt from leasing restrictions?













  • Should Reg-Flex credit unions have different exam cycles or other more favorable exam treatment than other credit unions?













  • What guidance should examiners be given to ensure credit unions are not discouraged from managing additional risk? Should peer comparisons be eliminated? Should delinquencies and charge-off rates be less important to the examiner?













  • Are there other areas you feel should be included in Reg-Flex, such as expanding the definition of low-income group to include more groups in a credit union's field of membership?













  • What about member business loan requirements that are not statutory (the asset limit on MBLs is required by law)?













  • What about the use of audits for all or part of an exam?













  • Do you think that NCUA should permit some flexibility in dealing with the regulations it identified as part of Reg-Flex for all covered credit unions and not just those that qualify for Reg-Flex?













Eric Richard • General Counsel • (202) 508-6742 • erichard@cuna.com
Mary Mitchell Dunn • SVP & Associate General Counsel • (202) 508-6736 • mdunn@cuna.com
Jeffrey Bloch • Assistant General Counsel • (202) 508-6732 • jbloch@cuna.com
Catherine Orr • Senior Regulatory Counsel • (202) 508-6743 • corr@cuna.com
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