CUNA Regulatory Comment Call


July 28, 1999

Corporate Credit Unions

NCUA is requesting comments on an advance notice of proposed rulemaking (ANPR) on the rules governing corporate credit unions (Corporates). These comments will assist NCUA in developing a proposed rule, which should be completed early next year.

Comments are due within 120 days after the rule is published in the Federal Register, which should be in the next few days. Please submit your comments to CUNA by November 17. Please feel free to fax your responses to CUNA at 202-371-8240; e-mail them to CUNA's Senior Vice President and Associate General Counsel Mary Dunn at mdunn@cuna.com; or mail them to Mary in c/o CUNA's Regulatory Advocacy Department, 805 15th Street, NW, Suite 300, Washington, DC 20005. You may also send responses to CUNA's Assistant General Counsel Jeffrey Bloch at the same fax number and mail address or by email at jbloch@cuna.com. You may also contact us if you have questions or would like a copy of the ANPR.

BRIEF BACKGROUND

The Corporates are governed under Part 704 of NCUA's Rules and Regulations. On March 1, 1997, NCUA issued a final rule revising Part 704. At the time the final rule was issued, NCUA directed the Office of Corporate Credit Unions (OCCU) to present a report on the rule within 18 months. The deadline was extended and in February 1999, OCCU provided its report to the NCUA Board. The report was based on informal comments from 12 Corporates, the Association of Corporate Credit Unions, the National Association of State Credit Union Supervisors, OCCU, and NCUA's Office of Investment Services.

As described below, the ANPR requests comments on many issues raised as a result of OCCUs review. Although NCUA will accept comments on other sections of Part 704, commenters are encouraged to focus on the issues described in the ANPR. There will be an opportunity to provide additional comments on Part 704 when the proposed rule is released early next year.

DESCRIPTION OF THE ANPR

Asset-backed Securities

NCUA is requesting comment on the definition of asset-backed security (ABS), which has been the subject of confusion. One specific issue raised by NCUA in this area is the permissibility of foreign investments. The definition of ABS does not specifically prohibit securities with foreign collateral. However, under NCUA's Part 704, Appendix B, Corporates are only permitted to make foreign investments if they have expanded authority under Part III.

Membership Capital

Part 704 allows for an adjustment period during which the membership capital account can be adjusted in relation to a specific measure. NCUA is requesting comment on whether the rule should require a specific measure. One example mentioned in the ANPR is requiring the membership capital account to be adjusted in order to equal at least one percent of the member credit unions' assets as of December 31st of the prior year. Comment is also requested on whether a minimum capital level should be established.

Comment is also requested on whether the rule should require specific adjustment periods or if this should be left to the Corporate to establish, with disclosure to the member when the account is opened. NCUA staff believes an annual or semi-annual adjustment period would be appropriate.

Paid-in Capital

NCUA is requesting comment on whether the requirement of NCUA approval of nonmember paid-in capital should apply if the nonmember is a credit union. Comment is specifically requested on the benefits or disadvantages of such a proposal, how the reporting process should be implemented, and how this should be treated under generally accepted accounting principles (GAAP).

The current rule provides that paid-in capital cannot exceed reserves and undivided earnings. Comment is requested on whether this limitation should be revised or eliminated. If eliminated, comments should address whether the various regulatory limitations that are tied to reserves and undivided earnings and paid-in capital should be revisited.

Unmatched Embedded Options

NCUA believes it may be necessary to include a definition of "unmatched embedded options" and is requesting comment on this issue.

Lending

The current rule permits Corporates to enter into loan participation agreements only with another Corporate. NCUA is requesting comment on whether this authority should be expanded and has raised the following issues that should be considered:

  • the permissibility of participation loans with entities other than Corporates;
  • the impact of participation loans with non-Corporates on a Corporate's banker's bank exemption from Regulation D reserve requirements;
  • the impact of participation loans on a Corporate's liquidity position;
  • whether the making of participation loans requires the establishment of additional reserves;
  • whether the Corporates should be allowed to participate in business and consumer loans;
  • whether Corporates have the expertise to underwrite and participate in business and consumer loans.

Services

Under § 704.12, Corporates may provide services only to its members, with the exception of correspondent services to non-member natural person credit union branch offices operating in the geographic area defined in the Corporates' charter. NCUA is requesting comment on whether this section should be eliminated. The result would be that defined fields of membership would be eliminated for federal Corporates.

NCUA is also requesting comment on the definition of "correspondent services," and encourages commenters to provide examples of appropriate correspondent services.

Audit Requirements

NCUA is requesting comment on whether a Corporate, when processing transactions for others as a service organization, should be required to obtain a Statement of Auditing (SAS) 70 Report, Reports on the Processing of Transactions by Service Organizations. If the SAS 70 Report should be required, comment is requested on whether it should be required only for Corporates above a certain asset size.

There are two types of SAS 70 Reports: 1) a report on controls placed in operation; and 2) a report on controls placed in operation and tests of operating effectiveness. If the SAS 70 Report should be required, comment is requested on whether Part 704 should specify which type of report the Corporate must obtain.

Fidelity Bond Coverage

NCUA is requesting comment on whether fidelity bond coverage should be optional. In lieu of a fidelity bond, comment is requested on what types of criteria should be utilized to determine if appropriate protections exist for Corporates and their members.

Wholesale Corporate Credit Unions

NCUA is requesting comment on whether there is a need for separate requirements for wholesale Corporates and, if there is a need, whether the existing requirements are appropriate.

Appendix B – Expanded Authorities and Requirements

NCUA is requesting comment on the existing investment authorities under each expanded authority section and recommendations for any additional investment powers. Comment is also requested on the existing minimum credit ratings for the investments permitted under the Part I, II, and III expanded authority levels.

Comment is requested on allowing Corporates with Part III expanded authority to invest in foreign ABS and foreign corporate debt obligations. NCUA would also appreciate comments regarding additional foreign investments that should be permitted for Part III Corporates.

Part IV expanded authority allows Corporates to engage in derivatives transactions. NCUA is requesting guidance in this area. Comment is specifically requested on whether Corporates without Part IV expanded authority should be permitted to use derivatives to reduce risk reduction by entering into a contractual arrangement with a Corporate that has Part IV expanded authority.

QUESTIONS TO CONSIDER REGARDING NCUA'S CORPORATE CREDIT UNION PROPOSAL

  • Would the definition of "asset backed security" be more useful if it were amended to exclude securities with foreign collateral unless the Corporate has Part III expanded authority?








  • Should the membership capital account be adjusted in relation to a specific measure? Should there be a minimum capital level? Should the adjustment period be specified in the rule or should Corporates be permitted to establish the adjustment period? If specified in the rule, should the adjustment period be more frequent than annually or semi-annually?








  • What are the benefits or disadvantages of eliminating the requirement of NCUA approval of nonmember paid-in capital if the nonmember is a credit union? How should the reporting process be implemented and how should it be treated under GAAP? Should the provision that paid-in capital cannot exceed reserves and undivided earnings be eliminated or revised. If this provision should be eliminated, should the regulatory limitations that are tied to reserves and undivided earnings and paid-in capital be revised?








  • What should be the definition of "unmatched embedded options?"








  • Should participation loans with entities other than Corporates be permitted? What would the impact of this be with regard to the banker's bank exemption from Regulation D requirements? What would the impact of this be on the Corporate's liquidity position? Should this require additional reserves? Should Corporates be allowed to participate in business and consumer loans? Do Corporates have the expertise to underwrite and participate in business and consumer loans?








  • What concerns or benefits would result if NCUA eliminated the section of the rules that generally requires Corporates to provide services only to its members, with the result that defined fields of membership would be eliminated for federal Corporates? Would eliminating a defined field of membership for Corporates remove an essential element of what a credit union is? What suggestions do you have that would clarify the meaning of "correspondent services?" What are some specific examples of "correspondent services?"








  • Should Corporates, when processing transactions for others as a service organization, be required to obtain an SAS 70 Report? If so, should this only be required for Corporates above a certain asset size? Should the rule specify which type of SAS 70 Report the Corporate must obtain?








  • Should fidelity bond coverage be optional for Corporates. In lieu of a fidelity bond, what types of criteria should be used to determine if appropriate protections exist for Corporates and their members? Should maintaining a specific capital level be one of the criteria?








  • Is there a need for separate regulatory requirements for wholesale Corporates? If so, are the existing requirements appropriate?








  • Do you have any recommendations for additional investment powers that should be provided under any of the expanded authority provisions? Are the existing minimum credit ratings for the investments permitted under the Part I, II, and III expanded authority levels appropriate?








  • Should Corporates with Part III expanded authority be permitted to make additional types of foreign investments than what is currently allowed? Specifically, should such Corporates be permitted to invest in foreign ABS and foreign debt obligations?








  • Should Corporates without Part IV expanded authority be permitted to use derivatives to reduce risk by entering into a contractual arrangement with a Corporate that has Part IV expanded authority?








Leagues and credit unions should feel free to fax their responses to CUNA at 202-371-8240; e-mail them to Mary Dunn at mdunn@cuna.com or mail them to CUNA's Regulatory Advocacy Department, Suite 300, 805 15th Street, NW, Washington, DC 20005. Thank you!!

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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