CUNA Comment Letter

CREDIT UNION NATIONAL ASSOCIATION

May 22, 2000

Ms. Becky Baker
Secretary
National Credit Union Administration
1775 Duke Street
Alexandria, VA 22314-3428

Dear Ms. Baker:

The Credit Union National Association appreciates the opportunity to comment on the National Credit Union Administration Board's Advance Notice of Proposed Rulemaking regarding the Regulatory Flexibility and Exemption Program. The Credit Union National Association represents more than 90% of the nation's over 10,500 state and federal credit unions. Our comments were developed by the CUNA Federal Credit Union Subcommittee, chaired by Edwin Collins, President and CEO, Lockheed Georgia Employees Federal Credit Union.

CUNA Strongly Supports Regulatory Flexibility

CUNA views Regulatory Flexibility as one of the most important initiatives the agency has undertaken in recent years. We wholeheartedly commend NCUA Board Member Dennis Dollar for his vision and leadership in developing and advancing a Regulatory Flexibility program designed to allow healthy, well-managed credit unions to be exempt from some of NCUA's regulatory provisions that are not specifically required by law or only to be subject to those provisions on a limited basis. The final Reg-Flex rule will detail which regulations and requirements qualified credit unions would not have to follow.

CUNA's Recommendations To Enhance Regulatory Flexibility

The Advance Notice requests comments from credit unions and other interested parties on a variety of issues relating to the Regulatory Flexibility proposal. As requested by the proposal, our letter comments on the provisions of the proposal that would apply to Reg-Flex credit unions and offers recommendations that would apply to all federal credit unions. However, we encourage the agency to consider ways in which all the provisions of the Reg-Flex program could be applied to federal credit unions across the board. Also, we request that the agency address Reg-Flex in the context of state chartered credit unions. The Reg-Flex program has definite ramifications for state chartered credit unions, as state regulators have in the past followed NCUA's lead on regulatory issues.

CUNA recommends the following changes to enhance the program and provide additional meaningful regulatory relief for credit unions, consistent with the primary objective of the program, which is to provide regulatory flexibility without jeopardizing the safety and soundness of participating credit unions or the National Credit Union Share Insurance Fund.

Explanation of Our Recommendations

Qualification Process

As stated above, we encourage NCUA to expand the scope of the program to allow all federal credit unions to obtain some form of regulatory relief. Beginning on page 7, we address a number of recommendations that should apply to all such credit unions. First, this letter will discuss our recommendations regarding the Reg-Flex credit union provisions.

Regarding the requirements for Reg-Flex status, CUNA supports the requirement for a CAMEL 1 or 2 rating. However, we are concerned that the 9% net worth requirement is too stringent. We encourage the Board to allow credit unions that have net worth ratios of 7% or above to participate in all aspects of the program as they choose. If Reg-Flex is to be designed to function as an incentive for credit unions to maintain appropriate capital as well as to encourage innovation, consistent with safety and soundness, the net worth benchmark need be no higher than the well-capitalized requirement contained in the prompt corrective action regulation.

Under PCA, as Congress directed, a well-capitalized credit union must have at least a 7% net worth ratio. We do not believe it should be necessary for the agency to require a higher net worth level in order to participate in the Reg-Flex program when a 7% net worth ratio credit union is at the optimum net worth level for PCA. We believe a higher net worth requirement to qualify for the program would be inconsistent with the goals of the Reg-Flex plan, which is to alleviate regulatory burden. Also, a credit union should not be required to maintain a level of net worth higher than what is necessary under PCA in order to meet a program requirement that is not directly related to the objectives of PCA.

Regarding the approval process for the various aspects of Reg-Flex, we recommend that once the credit union is at 7% net worth, then it should qualify for all the provisions of the program, without specific approval from NCUA. If a credit union falls below 7% net worth, the credit union should be given a reasonable period of time to restore its capital before it must discontinue its participation under Reg-Flex provisions.

Reg-Flex and PCA

While the program is designed to afford well-capitalized credit unions under PCA favorable treatment under Reg-Flex, we recommend that the Board consider allowing Reg-Flex credit unions to qualify for beneficial treatment under PCA. One way this could be accomplished involves credit unions that might be complex and potentially have additional risk-based net worth requirements. Under the proposed PCA proposal for complex credit unions, a credit union would be complex if its real estate loans comprise 25% of its portfolio. Reg-Flex credit unions that are complex by virtue of their real estate loans should be complex only if such loans are 60% of their portfolios. We think that a well-managed, well-capitalized credit union could appropriately have some flexibility under PCA, without violating statutory requirements. We also believe that this recommendation would facilitate ALM decisions without jeopardizing PCA or Reg-Flex.

Examination Relief

We encourage NCUA to afford examination relief to Reg-Flex credit unions. Such relief could be very important to such credit unions without jeopardizing safety and soundness. We recommend that NCUA allow Reg-Flex credit unions to receive examinations on an 18-month cycle, rather than the normal, 12-month cycle. We do not believe this will affect safety and soundness as NCUA receives timely call report data designed to identify problems. If NCUA determines that an annual exam is necessary, then we recommend that the agency limit the scope for Reg-Flex credit unions. This could be done by alternating limited-scope exams with a full exam every other year. For the limited scope exams, we recommend that NCUA authorize examiners to rely on financial audit reports and call reports for Reg-Flex credit unions, rather than on-site exams.

Mortgage Lending Limits

While the agency does not have a hard and fast rule as to what percentage of a credit union's assets or its portfolio may be in mortgage loans, there is a 25% guideline that, according to credit unions, some examiners still enforce as if it were a rule. While we question the need for this guideline in general, we believe it should not be applied to Reg-Flex credit unions. The 25% limit has little relationship to safety and soundness for most credit unions involved in mortgage lending, but certainly less for well-managed, highly capitalized credit unions, such as those which qualify for Reg-Flex.

JLoan Maturities

The Federal Credit Union Act provides that residential real state loans may be made with maturities of up to 30 years or longer as set by the NCUA Board. The regulation provides that maturities on such loans may be of up to 40 years, or longer as permitted on a case-by case basis. Similarly, the statute states that mobile home loans, second mortgages and home improvement loans may have maturities of up to 15 years or a longer period and the regulation provides a 20 year maturity. We recommend that NCUA allow Reg-Flex credit union boards to set maturity limits on these loans which they determine are prudent and appropriate for their operations. This would allow such credit unions to avoid seeking permission from NCUA to exceed the maturities established in the regulation. This is appropriate in light of the proven track record of the Reg-Flex credit unions in the management of risk and the accumulation of net worth.

Member Business Loan Rule Restrictions

Credit unions involved in member business lending and those that contemplate such lending programs for their members must comply with the statutory restrictions on aggregate MBL limits (the lesser of 1.75 times the credit union's net worth or 12.25% of the credit union's total assets.) While NCUA has no authority to change those limits, it does have the power to remove limitations that are not expressly required by the statute. For Reg-Flex credit unions we recommend that the MBL rule be reduced to the statutory requirements, thus eliminating or substantially reducing restrictions on construction and development lending; collateral requirements; limits on outstanding MBL loans to one borrower; loan-to-value ratios; personal liability; and appraisal requirements. We also encourage you to reconsider whether a federal credit union may amend its charter to reflect that it was organized for the purpose of making member business loans, and thus qualify for an exemption from the aggregate MBL limits.

Investments

The proposal raises several issues regarding investments. NCUA requests comments as to whether quarterly stress testing of individual complex securities under Section 703-90 should be waived or modified for Reg-Flex credit unions. We believe this requirement should be waived for such credit unions, which have demonstrated their ability to manage their operations by virtue of their high net worth ratios and CAMEL ratings, which qualified them for Reg-Flex.

We also concur that Reg-Flex credit unions should not be subject to the 100% limits on the discretionary delegation of investments to third parties, with the understanding the credit union's board is fully aware of the delegation and its fiduciary duty to monitor such delegation. In addition, we believe that Reg-Flex credit unions should not be subject to the maturity limits on zero coupon investments. Likewise, we support authority for Reg-Flex credit unions to engage in stripped, mortgage backed securities, residual interests in CMOs/REMICS, mortgage servicing rights, commercial mortgage related securities and small business-related securities.

We also point that that NCUA has yet to implement several statutory provisions that Congress enacted to expand credit unions' investment authority. These amendments permit credit unions to invest in mortgage-related products, including mortgage-related securities and in commercial mortgage securities. We urge NCUA to implement these provisions to allow credit unions to avail themselves of the statutory authority Congress granted to them.

Fixed Assets

CUNA supports the proposed changes to eliminate the aggregate limits on investments in fixed assets and to remove the limitations on when a credit union must utilize real property obtained for expansion, as well as for "abandoned premises."

Eligible Obligations

The Board is seeking comments on whether credit unions that meet the Reg-Flex tests should be allowed to purchase any auto loan, credit card loan, member business loan, student loan or mortgage loan from any other credit union, if it is a loan the purchasing credit union has the authority to make. We strongly support this change. We also recommend the NCUA Board expand the authority of credit unions to purchase loans, in addition to mortgage loans, from credit union service organizations, as long as the credit union is authorized to make such a loan.

Public Unit Funds

It is our understanding that the while the FDIC insures public fund deposits in banks in states such as Florida where the state statue requires a pooling of insurance coverage for the public funds, the National Credit Union Share Insurance Fund does not cover such pooled-coverage funds. We urge NCUA to follow FDIC's position on this issue and allow NCUSIF coverage for these funds.

Also regarding public unit funds, the statute provides NCUA the authority to limit public unit deposits, but it does not require that the limit be 20% of total shares or $1.5 million, whichever is greater. We support increasing the limit and eliminating the steps a federal credit union must take to accept public unit funds in excess of 20% of total shares.

Leasing

We believe that credit unions, particularly Reg-Flex credit unions, should have more leeway to engage in leasing arrangements. In that connection, we urge NCUA to permit Reg-Flex credit unions to be exempt from the 25% percent unguaranteed residual value limit, which would put them in a more favorable competitive position with other financial institutions which have more flexibility in this area.

Expanding into Low-Income Areas

We support incentives that would encourage a credit union to expand to incorporate low-income areas where feasible and in all members' best interests. This would include consideration of the proposal to freeze a credit union's asset base for purposes of determining its annual operating fee to NCUA. However, we would not support a requirement that a credit union must first meet agency-set service requirements in order to qualify for Reg-Flex status.

Field of Membership

Throughout the development of NCUA's field of membership policy under the Credit Union Membership Access Act, we have taken the position that a federal credit union is not required by law to have 6% net worth to add groups to its field of membership. Our comment letter to NCUA on the new Field of Membership manual stated that view. More specifically, the term, "adequately" is not defined under the field of membership provisions of the Credit Union Membership Access Act (12 USC 1759(f)(2)(B)) and does not necessarily have to be set at 6% for purposes of permitting credit unions to add new groups. We urge NCUA to consider a definition for FOM purposes that gives credit unions more flexibility without ignoring the requirement for adequate capital.

Charitable Donations

We believe all federal credit unions should be exempt from the requirement regarding charitable donations. Currently, recipients of charitable donations from federal credit unions must be organizations that are in or engaging in activities in a community in which the credit union is conducting business. We think this policy is outdated and should be removed for all federal credit unions. A complete exemption would not raise any appreciable safety and soundness concerns.

Records Retention and Storage

Several legal opinion letters from NCUA have stated that credit unions must retain original loan documents, as opposed to recording them onto a laser disk imaging system and then destroying the originals. CUNA urges NCUA to consider removing federal regulatory barriers that limit the ability of a federal credit union to use such a system for all loan documents and records.

Record retention requirements for federal credit unions are addressed in the Accounting Manual, which has been deregulated. Nonetheless, examiners require federal credit unions to maintain a number of records enumerated in the manual on a permanent basis, such as individual statements or ledgers for share and loan accounts. Also, minutes of board meetings, credit committee meetings, supervisory committee meetings, periodic statements to members, and applications for membership are among the records that must be retained permanently n paper form or on microfilm, according to the Accounting Manual. We urge NCUA to review the entire subject of recordkeeping, including what a credit union must keep on a permanent basis and which formats may be used to store records, with an eye toward eliminating unnecessary requirements and facilitating a credit union's ability to use current technology to meet its record retention requirements.

Appraisals

A number of credit unions have expressed concern about NCUA's appraisal requirements. We see no rationale for NCUA's real estate or member business loan appraisal requirements to apply to loans that are substantially smaller than loans for which an appraisal is required by the federal banking regulators. On this issue, NCUA should follow the lead of the banking regulators and increase the level of loans for which an appraisal is required from over $100,000 (($50,000) for member business loans) to $250,000. Also, an appraisal should not be required, even if additional funds are advanced, if there are no changes in the loan's collateral. These are longstanding CUNA positions, and we encourage the Board to adopt these important changes regarding appraisals.

Group Purchasing and Incidental Powers

Group purchasing and incidental powers are the subject of a separate proposal under review by NCUA. However, allowing credit unions to innovate and keep up with the financial markets should definitely be a cornerstone of the Regulatory Flexibility program.

In that connection, we want to reiterate our strongest support, as we did in two recent comment letters on incidental powers that credit unions should have a broad array of authority to participate on the Internet and provide Internet services to members via a credit union's website. We also believe credit unions should be entitled to offer access to third party services to their members via a portal accessed from their websites and be able to receive income from the service provider. There is nothing we can find in the Federal Credit Union Act that precludes this result and to rule otherwise, we believe, will dramatically limit the ability of credit unions to serve their members in the future.

CUSOs

The Board has indicated that it plans to review the credit union service organization regulations, and we applaud this effort. We believe NCUA could dramatically reduce the burden of the CUSO regulation and facilitate credit union service to members by removing the laundry list of preapproved activities for a CUSO and merely stating that in order for a federal credit union to participate in a CUSO, the CUSO's activities must be related to the routine operations of federal credit unions. The Federal Credit Union Act does not define the structure of a CUSO, and we think it is unnecessary for NCUA to do so. Also, we believe credit unions should be permitted to invest in or loan to CUSOs that do not primarily serve credit unions or their membership, as the Federal Credit Union Act does not require this limitation.

In conclusion, we urge the Board to proceed with the Reg-Flex initiative, incorporating CUNA's recommendations. We believe this is an outstanding program that can benefit credit unions as well as the agency. Thank you again for the opportunity to share our views. Please feel free to contact CUNA's General Counsel Eric Richard or me at 202-682-4200 if additional information about our comments would be useful.

Sincerely,

Mary Mitchell Dunn
Associate General Counsel and
Senior Vice President

Cc: All Three NCUA Board Members
CUNA Federal Credit Union Subcommittee