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; 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 You may also contact us if you have questions or would like a copy of the ANPR.


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.


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.


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:


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.


Leagues and credit unions should feel free to fax their responses to CUNA at 202-371-8240; e-mail them to Mary Dunn at 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 •
Mary Mitchell Dunn • SVP & Associate General Counsel • (202) 508-6736 •
Jeffrey Bloch • Assistant General Counsel • (202) 508-6732 •
Catherine Orr • Senior Regulatory Counsel • (202) 508-6743 •