RE: Regulatory Publication and Review Under the Economic Growth and Regulatory Paperwork Reduction Act (EGRPRA) of 1996

Dear Ms. Baker:

The Credit Union National Association (CUNA) is pleased to provide comments to the agency on the National Credit Union Administration (NCUA) Board's request for comments to identify outdated, unnecessary or burdensome regulatory requirements imposed on federally insured credit unions. NCUA and the other federal financial requlators 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 ten years. EGRPRA requires the NCUA and the other 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.

We understand that NCUA will seek comments on ten categories of its regulations that impose burden on federally-insured credit unions between now and the end of the cycle (2006). In this first round, NCUA is requesting comment on two categories of its regulations: applications and reporting as well as powers and activities. By way of background, CUNA is the largest credit union trade association representing more than 90% of our nation's 10,000 state and federal credit unions. Our comments are drawn from the input of CUNA's subcommittees and our member credit unions over the years as well as recommendations from CUNA's Renaissance Commission.

GENERAL COMMENTS

A number of years ago, CUNA would have had a longer list of recommended legislative and regulatory changes. However, in recent years, NCUA has greatly enhanced its 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.

CUNA applauds NCUA for its ongoing efforts with regard to its internal rolling review process, whereby NCUA reviews all of its existing rules every three years. Under the final Interpretive Ruling and Policy Statement (IRPS) published in May, NCUA will publish notice of the regulations under rolling review in a particular year far enough in advance of the review to give credit unions and other interested parties a meaningful opportunity for input as NCUA is conducting its review. The notice may be published on NCUA's website, in the Federal Register, or in other appropriate media as determined by the agency. This EGPRA review supplements and complements NCUA's internal review.

In addition, we commend the NCUA Board for approving the Regulatory Flexibility (Reg-Flex) Program to permit federal credit unions with strong net worth and consistently strong CAMEL ratings to be exempt, in whole or in part, from certain NCUA regulations, which was effective as of March 1, 2002. Credit unions that have expanded regulatory flexibility are exempted from some or all of the restrictions in NCUA's rules regarding: fixed assets; investment and deposit activities; charitable donations; payment on shares by public unit and nonmembers; and purchase, sale and pledge of eligible obligations. In addition, Reg-Flex credit unions will be able to purchase loans from other credit unions and keep those loans in their portfolios.

It is unfortunate that additional rules are not covered under Reg-Flex, primarily because they are required by statute. However, because the EGRPRA process entails review of both regulations and statutes for possible changes, we want to take this opportunity during the EGRPRA review process to work with NCUA to identify additional rules that should be covered under Reg-Flex in which statutory changes would be needed. Since this may entail a review of statutes that are not covered under the current review process, we would prefer to take some additional time to examine this issue and to work with NCUA between now and the end of the EGRPRA review process to identify possible statutory changes in this area.

Because the Federal Credit Union Bylaws (Bylaws) essentially operate as regulations for federal credit unions (FCUs), CUNA requests that the Bylaws be added to the list of review items in a future notice during this EGRPA review cycle.

CUNA RECOMMENDATIONS

We note that the order of the topics below follow the order presented by NCUA in the notice. In some topics we indicate that CUNA has no specific request for legislative or regulatory changes at the present time. However, we will continue to look at those areas for possible changes and may provide comments to NCUA prior to the end of this EGRPRA review cycle in 2006.

Applications and Reporting

Change in Official or Senior Executive Officer in Credit Unions that are Newly Chartered or in Troubled Condition

NCUA rules state that within ten days after receiving a notice of proposed change in an official or senior officer in a newly chartered or troubled federal credit union, the Regional Director will notify the credit union that either the notice is complete and ready for processing or that additional information is needed, which must be submitted within 30 days. If the additional information is not submitted, the Regional Director may make a decision based on the information received. The Regional Director will issue a decision within 30 days after receiving all the necessary information, and the request will be deemed approved if the Regional Director does not act within that time frame.

We believe NCUA should make troubled or newly chartered credit unions and their members a high priority. Any delay in responding to such a notice for a newly chartered credit union could cause a diminution in its momentum and focus, and a credit union in troubled condition needs to be able to respond quickly to the concerns that need to be addressed. Therefore, we believe that the rules should provide the Regional Director only five business days to determine if the notice is complete or if additional information is needed. We also suggest that the 30-day time frame for the approval or disapproval should be shortened as well.

Field of Membership/Chartering

NCUA is to be commended for its commitment to providing opportunities for people throughout the United States, from all walks of life, to have access to credit union services. The amendments to the agency's field of membership policies (IRPS No. 03-1), adopted in the spring of 2003, reflect the agency's efforts to provide field of membership opportunities within the constraints imposed by the Federal Credit Union Act (FCU Act). CUNA urges NCUA to consider the following additional regulatory and legislative changes to the provisions added by the Credit Union Membership Access Act (CUMAA):

• In the FCU Act, restore to NCUA the authority to approve voluntary mergers regardless of the federal credit union's size.

• Eliminate the undefined "local" community test in the statute.

• Provide NCUA with the statutory flexibility to determine what select groups outside of the boundaries of a community credit union can nevertheless be served by the community credit union.

• Eliminate the presumption in the statute that a group over 3,000 may be able to form its own credit union, requiring a special analysis and consideration.

• In the FCU Act, leave it to each credit union as to how to define "family" and "household."

• Support legislation to state that commercial banks and thrift institutions have no standing to challenge in court NCUA's field of membership policies that implement the FCU Act constraints imposed by Congress.

• Support legislation to allow FCUs to provide check cashing and money transfer services to non-members.

• Review the "reasonable proximity" test in the regulations to factor in the reality of electronic delivery of services.

All of these recommendations would require legislative changes, except the last one, which would only require regulatory changes.

Fees Paid by Federal Credit Unions

The operating fee paid by FCUs is impacted by the determination of the overhead transfer rate. NCUA uses the overhead transfer rate to calculate and allocate actual administrative and overhead expenses associated with the insurance-related functions of the National Credit Union Share Insurance Fund (NCUSIF).

The process for determining the rate must be fair, equitable and efficient for the agency, the NCUSIF and (most notably) state and federal credit unions alike. The NCUA Board needs to fully communicate its analysis and proposal regarding the overhead transfer rate to the credit union community 60 days prior to setting a new overhead transfer rate. CUNA will take the opportunity to further elaborate on this issue during the NCUA budget hearing this month.

Conversion of Insured Credit Unions to Mutual Savings Banks

The Credit Union Membership Access Act (CUMAA) amended the previous statutory provisions regarding conversions. Prior to CUMAA, NCUA was given considerable flexibility to regulate in this area but now the agency must follow specific requirements included in the Act.

NCUA's prior rule provided that a conversion must be approved by a majority of all of the members of the credit union. Under CUMAA, only a majority of the members who actually vote on the proposed conversion need to approve the conversion. This can lead to absurd results. For example, Chairman Dennis Dollar noted at the September 2003 Board meeting that a conversion can be approved by just 200 members of a credit union with 200,000 total members.

At the September 2003 meeting, the Board voted unanimously on a proposal to amend the current rules regarding the conversion of credit unions to thrifts. The proposal is intended to improve the disclosures that are given to members prior to the vote on whether to convert. These disclosures will focus on the benefits that will accrue to management and the risk to the members' ownership interest if the credit union converts to a thrift.

While we recognize that the board and members of a credit union have the right to choose for themselves the type of charter their institution will have, CUNA staunchly believes that consumers' financial interests are much better served by credit unions than by other types of financial institutions. CUNA supports the approach of providing members with more disclosures to ensure that they have sufficient knowledge in order to make an informed decision. Not only does CUNA support more disclosure to credit union members, but we also support a return to the pre-1998 rule providing that a conversion must be approved by a majority of all of the members of the credit union.

Mergers of Federally Insured Credit Unions; Voluntary Termination or Conversion of Insured Status

The Financial Accounting Standards Board (FASB) soon is expected to issue proposed guidance that would require the acquiring credit union in a merger of two or more credit unions to treat the merger as a purchase rather than a pooling of interests (a simple combination of balance sheets, as has been the historical practice). CUNA vigorously opposes this change. We recommend that NCUA seriously consider deviating from the expected FASB requirement and permit merging credit unions to continue to account for a merger using the pooling method.

Applications for Insurance

• As a general comment here, it makes sense, given recent
  technological advances, for NCUA to digitize applications (a "digital
  package" of electronic forms), which could include applications for
  insurance.

• Here are three issues with regard to Form 5300 - Call Report:

• Make filing as easy as possible (electronic filing with edits checks,
  etc.); Minimize changes to the Call Report - these are especially
  burdensome for small credit unions; and

• Improve the quality of instructions.

CUNA would welcome the opportunity to provide a detailed list of the
areas that seem to be the most confusing for credit unions.

• There are two areas that could add value with regard to the Call
  Report: a breakout of cash equivalents into corporate and non-
  corporate investments and an addition of off balance sheet data that
  would allow monitoring of interest rate swaps.

Conversion to a State-Chartered Credit Union

CUNA has no specific recommendations at this time regarding NCUA's rules on conversion to a state-chartered credit union.

Purchase of Assets and Assumption of Liabilities

Loan packaging and securitization should be supported and encouraged by NCUA. Over the past several years, many credit unions (especially those that do not offer mortgages) have seen very weak loan demand and/or loan portfolio declines. At the same time strong savings growth has caused investment portfolios to increase dramatically. In many cases, the resulting pressure on spreads could be abated if credit unions had better access to securitized loans. Similarly, the nearly 20 percent of credit unions that have loan-to-share ratios of 80 percent or more could more efficiently and effectively serve members while maintaining adequate liquidity.

Powers and Activities

Loans to Members and Lines of Credit to Members

• We urge NCUA to review preemption language in its regulations to determine if it adequately responds to numerous court cases challenging state laws.

• The FCU Act requires approval of the FCU's board of directors in any case in which the aggregate of loans to an official and loans on which the official serves as endorser or guarantor exceed $20,000 plus pledged shares. CUNA believes the statute should allow the FCU's board to set the limit or the limit should be increased in the statute.

• CUNA also believes that the 12-year loan maturity limit in the FCU Act should be eliminated and that the determination of loan maturities should be left to the business judgment of FCUs. As an interim step, the loan maturity limit could be raised to 15 years.

• NCUA should have greater flexibility to adjust the usury ceiling, making it easier for credit unions to serve the underserved.

• The FCU Act should be amended to allow FCUs to sell negotiable checks (including travelers checks) and money orders and to cash checks and money orders for nonmembers. In addition, FCUs should be permitted to provide wire transfer services to nonmembers.

Participation Loans

In July 2003, NCUA published a proposal to update and clarify the agency's loan participation rule, and CUNA submitted a comment letter in response to this proposal. CUNA will reserve further comment on these regulations until NCUA has published the final loan participation rule.

Borrowed Funds From Natural Persons

CUNA has no specific recommendations at this time regarding NCUA's rules on borrowed funds from natural persons, typically referred to as certificates of indebtedness.

Statutory Lien

In our view, the statutory lien rule would be improved by clarifying the types of shares accounts to which statutory liens apply and the types of accounts to which such liens do not apply. For example, set-off applies to most share accounts, but not to Individual Retirement Accounts (IRAs). It would be helpful to indicate in the rule if statutory liens apply to IRAs, Keoghs, etc.

In addition, the rule could use further clarification with regard to the enforcement provisions. Specifically, it states in one provision that "... a federal credit union may enforce its statutory lien against a member's account(s) by debiting funds in the account and applying them to the extent of any of the member's outstanding financial obligations." Then in a subsequent provision it states, "A federal credit union need not obtain a court judgment on the member's debt, nor exercise the equitable right of set-off, prior to enforcing its statutory lien against the member's account." These two provisions appear confusing because the equitable right of set-off is the same as debiting funds in the account and then applying them to the loan balance.

Leasing

Requirement of a full assignment of the lease in an indirect leasing arrangement

We believe that credit unions should determine for themselves whether obtaining a full assignment is necessary to protect their interests. The Office of the Comptroller's (OCC) leasing rules do not require full assignment. The OCC rules require a perfected lien and treat the end user lessee as the obligor.

The decision to obtain a full assignment should be based on the credit union's business practices. Some credit unions may very well decide that a full assignment is the best method to maintain full control of any situation that may arise, especially in the case of default and vehicle disposition.

The 25% unguaranteed residual value limit

Under current leasing rules for federal credit unions, the estimated residual value may not exceed 25% of the original cost of the leased property, unless the amount above 25% is guaranteed. The unguaranteed residual value limitation is too restrictive and would place credit unions at a competitive disadvantage with other financial institutions.

We believe that NCUA should adopt a flexible approach. An example is the OCC's approach, which allows banks to invest in operating leases up to an amount of ten percent of its assets, without the restriction regarding residual value limits. By way of background, when banks were first provided authority to invest in leases, they were limited to unguaranteed estimated residual values of no greater than 25 percent. However, banks were given an additional authority to engage in personal property leasing under the Competitive Equality Banking Act of 1987 (CEBA). Under this additional authority, banks are permitted to invest ten percent of their net assets in leases that do not meet the full-payout test. These "CEBA leases" are not subject to the 25 percent unguaranteed residual value limit. We also want to note that in a final rule regarding personal property leasing issued in 1996, the OCC noted that banks did not believe that a modification of the 25 percent residual value limit that was already in place was necessary because banks have the ability to use their CEBA leasing authority instead.

We believe that NCUA should follow a similar approach and provide more flexibility regarding the residual value limits. Leasing transactions differ based on such factors as the length of the lease term and the property that is involved. The length of the term and the varying rates at which different vehicles depreciate may both affect the decision regarding the appropriate residual value. Credit unions should have discretion to review these factors to make their own determinations, with the assistance of accepted residual leasing guides.

At the May 2000 NCUA Board meeting, the Board voted to retain the 25% threshold but questioned whether this was legally required. We urge NCUA to now revisit this issue and provide more flexibility with regard to this requirement, and we would welcome the opportunity to discuss this issue further.

Member Business Loans (MBLs)

CUNA commends NCUA for continuing its efforts to promote business lending by many credit unions under safe and sound regulatory conditions, especially for the NCUA Board's actions on September 24, 2003 in approving a number of amendments to Section 723, governing member business loans (MBLs). CUNA urges NCUA to consider the following suggestions for future regulatory action and for recommendations to Congress:

• Eliminate the business lending cap that is in the FCU Act and leave to NCUA authority to write the appropriate regulations to address safety and soundness concerns; or at a minimum, raise the 12.25% business lending cap in the statute. In no case should credit unions operate with more restrictive aggregate business lending limits than those applicable to thrift institutions.

• Eliminate or increase the 12-year maturity limitation on MBLs in the FCU Act.

• Eliminate from the statute, or at a minimum increase to at least $100,000, the definition of what size loan becomes subject to the member business loan statutory and regulatory restrictions.

• If across-the-board statutory relief cannot be provided for member business loans, evaluate whether more targeted relief should be provided to lending to certain sectors such as agricultural and faith-based loans.

• Consider whether additional regulatory latitude may be provided in the area of residential mortgage lending in Section 701.21 when the borrowing is basically for personal investment rather than truly for business enterprise purposes.

• Consider whether there needs to be a dollar ceiling on unsecured member business loans incorporated into the regulation (retaining only on the 2.5% of net worth limit) and whether there needs to be any regulatory limit on the aggregate unsecured member business loans a credit union can make.

• Better align the agency's member business loan regulatory requirements with the requirements of the Small Business Administration loan programs.

• Consider additional flexibility that should be provided with respect to the regulatory loan-to-value limitation for MBLs.

The first four suggestions would require legislative changes; and the last 4 suggestions would require regulatory changes.

Maximum Borrowing

At the September 2003 NCUA Board meeting, the Board unanimously voted to issue a proposal allowing state-chartered credit unions to apply for a waiver from current borrowing limitations. Under current NCUA rules, the maximum borrowing limit is 50 percent of paid-in and unimpaired capital and surplus. The limitation for federal credit unions, which also is 50 percent, is set by the Federal Credit Union Act, which cannot be changed by NCUA.

The proposal will allow state-chartered credit unions to apply for a waiver up to the amount permitted under state law or by the state regulator. CUNA will provide more detailed comments during the comment period following the issuance of this proposed rule.

Investment and Deposit Activities

Flexible investment authority for FCUs is critical to their ability to serve their members and meet the demands of a changing financial marketplace. CUNA's Renaissance Commission has identified a number of restricted investment activities in which relief could be meaningful. These activities include investments such as:

• Asset-backed securities;
• Short-term corporate commercial paper;
• Corporate notes and bonds;
• Non-agency mortgage-backed securities;
• Shares and stock of other financial institutions; and
• Real estate investment trusts.

We would welcome the opportunity to work with NCUA to pursue the regulatory and statutory changes that would be needed in order to provide this flexibility.

Currently, FCUs can delegate to a third party discretionary control over the purchase and sale of investments up to 100 percent of the FCU's net capital. Reg-Flex eligible FCUs are exempt from this limitation, and we urge NCUA to remove this limitation for all FCUs.

NCUA prohibits the purchasing of an investment with the proceeds from a borrowing transaction if the purchased investment matures after the maturity of the borrowing repurchase transaction. This restriction does not apply to RegFlex credit unions, and we urge NCUA to lift this restriction for all FCUs. We do not believe that removing this prohibition will raise liquidity or safety and soundness concerns, which has been the justification for imposing the prohibition.

Fixed Assets

CUNA has no specific recommendations at this time regarding NCUA's rules on fixed assets.

Credit Union Service Organizations (CUSOs)

With respect to the statutory provisions on credit union service organizations (CUSOs), we believe the one percent limit on FCU investments in CUSOs should be eliminated as well as the one percent limit on loans from FCUs to CUSOs. NCUA should be given authority to set any necessary limits on FCU investments in CUSOs and on loans from FCUs to CUSOs; or, at a minimum, both of those limits should be increased to five percent.

Payment of Shares By Public Units and Nonmembers and Designation of Low Income Status: Receipt of Secondary Capital Accounts By Low-Income Designated Credit Unions

We believe NCUA should remove the regulatory provisions limiting the amount of deposits from nonmembers that FCUs serving predominantly low-income members may receive to 20 percent of the total shares of the FCU, unless the credit union receives a waiver from NCUA. The waiver process is a significant paperwork burden for low-income designated credit unions; further, the waiver process is unnecessary given NCUA's Prompt Corrective Action (PCA) and other rules regulating the assets of credit unions. Some credit unions believe the provisions limiting nonmember deposits are inconsistently applied by the various regions. Finally, those provisions chill the inflow of philanthropic and other corporate investment in low-income and minority credit unions.

With regard to secondary capital accounts by low-income designated credit unions, NCUA should amend the rules in order to provide greater disclosure (transparency) to investors who currently find it difficult to determine if their investment is being adequately preserved by the credit union. In addition, the structure of the secondary capital account product needs to be improved. Under the current regulations, there is no possibility of restoring the secondary capital to its original value if the credit union returns to robust health. The present structure is disadvantageous to investors because the money remains at risk; NCUA can take the money in case of the credit union's insolvency. The present structure is disadvantageous to the credit union because the amount of the account that the credit union can count on its books as equity decreases every year. The 20 percent that no longer counts as equity for the credit union each year should be returned to the investors.

Share, Share Draft, and Share Certificate Accounts

With regard to dividends paid on shares, Section 117 of the FCU Act requires that "[i]f the par value of a share exceeds $5, dividends shall be paid on all funds in the regular share account once a full share has been purchased." We believe this statutory restriction is unnecessary and urge that this requirement be deleted from the FCU Act.

Treasury and Tax Loan Depositories; Depositories and Financial Agents of the Government

CUNA has no specific recommendations at this time regarding NCUA's rules on Treasury and tax loan depositories; depositories and financial agents of the government.

Refund of Interest

CUNA has no specific recommendations at this time regarding NCUA's rules on refund of interest.

Incidental Powers

We urge NCUA to support legislation to permit FCUs to operate full service trust departments if they so choose.

Charitable Contributions and Donations

Under Section 701.22, an FCU may make charitable contributions and donations to recipients not organized for profit that are located in or conduct activities in a community in which the credit union has a place of business or to organizations that are tax-exempt under Section 501 (c)(3) of the Internal Revenue Code and operate primarily to promote and develop credit unions. We believe that the geographic limitation should be removed from this rule. It is not the principal place of business that determines a credit union's community; it is the members they serve. A credit union could have members spread out over a large area --in several communities or states or nationwide --and yet have one principal place of business. Such a credit union should be able to make donations in any community in which it has members.

Credit Union Service Contracts

CUNA has no specific recommendations at this time regarding NCUA's rules on credit union service contracts.

Purchase, Sale and Pledge of Eligible Obligations

The FCU Act provides that FCUs may not purchase any eligible obligations of its members if that purchase would cause the aggregate of the unpaid balances of notes purchased to exceed five percent of the unimpaired capital and surplus of the credit union. We recommend eliminating the five percent limit in the statute and providing NCUA the authority to establish any limits necessary for safety and soundness purposes.

If you have any questions regarding this letter, please contact Associate General Counsel Mary Dunn or me at (202) 638-5777.

Sincerely,
Jeffrey Bloch
Assistant General Counsel
Credit Union National Association