CUNA Comment Letter

Eligible Obligations

October 5, 1998

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

RE: Proposed Changes to 12 CFR 701.23(b), Eligible Obligations

Dear Ms. Baker:

The Credit Union National Association appreciates the opportunity to comment on the National Credit Union Administration Board's proposal regarding 701.23(b) of its Rules and Regulations concerning eligible obligations. CUNA represents more than 91% of our nation's 11,200 state and federal credit unions.

Under the Board's regulations, a federal credit union which routinely grants real estate loans may purchase such loans from any source for the purpose of including them in a pool of loans for sale in the secondary market. The Board's proposal includes an addition to Sec. 701.23(b)(1)(iv) to clarify that the federal credit union must include a "substantial portion" of its own loans in the pool and that the package of loans must be "sold promptly."

The Board's rationale for the change is that the authority to purchase nonmember loans in this context should be narrowly construed because the power to buy these loans is an incidental power. The Board also reasons that because the loans are those of nonmembers, federal credit unions should be expected to package and sell them as quickly as feasible. We support the Board's analysis and the addition of the proposed amendments, which reflect existing agency policy.

The Board seeks specific comments on whether the words "substantial portion" and "promptly" should be quantified and numeric limitations to further define these terms added to the regulation. The Supplementary Information notes that agency staff believe a reasonable figure for a "substantial portion" of a credit unions' loans would be 75%, based on the current practice of credit unions participating in the secondary market. Regarding "promptly," agency staff have recommended 120 days, apparently from the time of the purchase commitment. We think these numbers are useful as benchmarks but question whether it is necessary to add them to the regulation. If the Board does determine that these figures must be incorporated into the regulation, we urge the Board to provide a waiver or exception process on a case-by-case basis that will allow reasonable deviations to facilitate participation in the secondary market.

The Board is also amending Sec. 701.23(b)(3) to include indirect lending and leasing under certain conditions as exceptions to the 5% limit on the total unpaid balance of eligible obligations a federal credit union may purchase. Since 1995, CUNA has been on record as strongly supporting an exemption from the 5% limit for indirect lending and leasing arrangements. This amendment will help clear up any confusion regarding whether obligations under such programs must be treated as loans or as obligations subject to the 5% limit.

We do have two concerns with the proposal which we request the Board to address. In order for an obligation to be considered part of an indirect lending or leasing arrangement two conditions must be met. The purchasing federal credit union must make the final underwriting decision and review each application to ensure it complies with the credit union's policies. Also, the sales or lease contract must be assigned to the credit union "very soon" after being signed by the member and the dealer or leasing outlet.

Regarding the first condition, it would be helpful for the Board to clarify that a credit union may use a third party vendor to score applications based on the credit union's lending criteria to satisfy the requirement that the credit union review all applications and make the final credit decision. We also urge the Board to clarify that if credit scoring used by an auto dealer is consistent with a credit union's policies and practices, the use of such scoring in a loan assigned to a credit union meets the credit union's review requirement.

Concerning the second condition, the Board has requested comments on whether it should set a limit on the amount of time that may transpire before a lease or sales contract is assigned to the federal credit union. The Supplementary Information points out that the longer the period between the signing of the contract and its assignment, the more likely it is that the transaction will be viewed as the purchase of an eligible obligation and not as a loan. We do not think that a specific time frame needs to be added to the regulation. If, however, the Board does determine a time limit should be added, we urge the Board to allow for reasonable exceptions.

The Board is also a seeking comments on whether the types of loans that can be purchased from any source for purposes of pooling arrangements should include auto and credit card loans. We support this idea which should be given thorough consideration by the Board.

Again, thank you for the opportunity to share our views on these amendments. If you or Board staff have any questions about our comments, please do not hesitate to give me a call at 202-218-7769.

Sincerely,

Mary Mitchell Dunn
Associate General Counsel for
Regulatory Advocacy