CUNA Comment Letter

EGRPRA Review - Rules Regarding Directors/Officers/Employees and Rules of Procedure

October 5, 2005

Ms. Mary Rupp
Secretary of the Board
National Credit Union Administration
1775 Duke Street
Alexandria, VA 22314-3428

Re:    Fifth EGRPRA Notice

Dear Ms. Rupp:

The Credit Union National Association (CUNA) is pleased to provide comments on NCUA’s fifth request for comments to identify outdated, unnecessary or burdensome regulatory requirements imposed on federally insured credit unions. NCUA and the other federal financial regulators are required by a 1996 paperwork reduction law (Economic Growth and Regulatory Paperwork Reduction Act or EGRPRA) to review their regulations at least once every 10 years. The Act requires the regulators to categorize the regulations, publish the categories for comment, report to Congress on any significant issues raised by the comments and eliminate unnecessary regulations. The regulatory categories that are the subject of this latest request include the rules addressing: directors, officers and employees; liquidation; and NCUA procedures regarding adjudication proceedings. By way of background, CUNA represents approximately 90% of the nation’s nearly 8,900 state and federal credit unions that serve nearly 87 million members.

SUMMARY OF CUNA’S COMMENTS

DISCUSSION

We commend the NCUA board for its continued efforts to minimize regulatory burden for credit unions and to provide increased flexibility for well-run credit unions within the bounds of safety and soundness, including through the EGRPRA process as well as the agency’s internal rolling regulatory review.

Currently, both the Credit Union Regulatory Improvements Act (CURIA) of 2005 (H.R. 2317) and the Financial Services Regulatory Relief Act of 2005 (H.R. 3505) have been introduced in the U.S. House of Representatives. The bills contain a number of provisions that would greatly assist in reducing regulatory burden and in providing additional flexibility through regulatory reform measures, which CUNA wholeheartedly endorses and has vigorously pursued. We applaud NCUA’s leadership on this legislation, and we appreciate the opportunity to work with NCUA, Treasury and Congress in pursuing this important legislation.

CUNA has some recommendations to make to further these regulatory and statutory burden reduction efforts:

Benefits for Employees of Federal Credit Unions
Section (c) of NCUA’s rule on benefits for employees of Federal credit unions (Section 701.19) allows a federal credit union (FCU) investing to fund an employee benefit plan to purchase an investment that would otherwise be impermissible if the investment is directly related to the FCU’s obligation or potential obligation under the employee benefit plan and the federal credit holds the investment only for as long as it has such obligation under the employee benefit plan. As discussed below, we feel this “directly related” approach results in limiting credit union options, rather than enhancing them.

In previous legal opinion letters, NCUA has utilized its long-standing test that examines “whether a federal credit union is acting pursuant to its authority to provide retirement benefits to employees”. We urge NCUA to revitalize this standard and substitute it for the “directly related” test in the rule. For example, this issue could be important in the context of Sec. 457(b) deferred compensation plans, in which the benefit is typically determined by contributions to the employee’s account, adjusted by investment earnings. In such plans, earnings do not always coincide with a particular investment product and thus may not be permissible under a “directly related” test as provided in NCUA’s rule. If the “directly related” test is not changed, then we request that the rule be modified to clarify that such plans would be permissible.

Loans and Lines of Credit to Officials
In NCUA’s rules on loans and lines of credit to officials (Section 701.21), Subsection (1) "prohibits preferential [loan] treatment of officials". Subsection (2) defines "official" as "any member of the board of directors, credit committee or supervisory committee." The compensation provisions in NCUA’s rules concerning reimbursement, insurance and indemnification of officials and employees (Section 701.33) recognize a distinction of compensating only one member of a federal credit union’s (FCU’s) board "for performing the duties or responsibilities of the board”, thereby allowing employees serving on the board to be compensated as employees rather than board members. However, Section 701.21(d) does not include that distinction. As a result, although employee interest rate discounts are clearly permissible, a CEO who sits on an FCU's board is not permitted to receive the same discounted interest rate offered to other employees of the credit union. We think this result is contrary to the intent of the rule.

If NCUA believes there would be a conflict of interest, the agency could seek comments on whether the rule should require the CEO to recuse himself/herself from any board discussions of employee interest rate discounts.

Fidelity Bond and Insurance Coverage
CUNA generally supports NCUA’s proposal, issued in May, to revise the agency’s fidelity bond and insurance coverage regulation (Part 713) to increase the maximum deductible to $1 million for credit unions that are qualified under the agency’s RegFlex Program and have assets of over $200 million. As we have previously, we also recommend that NCUA employ net worth standards under prompt corrective action to permit, for example, well-capitalized credit unions to qualify for the higher deductible. CUNA supports a waiver process under which credit unions that no longer qualify for the higher deductible could have more than the 30 days in the proposal to obtain the required coverage. The proposal would also increase the minimum bond coverage for credit unions with assets over $500 million and for credit union with assets of less than $4 million. CUNA suggests that there should also be a process under which credit unions on a case-by-case basis could apply for and receive an exemption from the requirement for additional coverage or receive more time to meet the new coverage requirements.

Thank you for the opportunity to comment. If you have any questions about this letter, please contact me by phone at (202) 508-6743 or by e-mail at corr@cuna.com.

Sincerely,

Catherine Orr
Senior Regulatory Counsel
Credit Union National Association