[Federal Register: November 21, 2007 (Volume 72, Number 224)]
[Rules and Regulations]
[Page 65441-65443]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr21no07-1]
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Rules and Regulations
Federal Register
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[[Page 65441]]
NATIONAL CREDIT UNION ADMINISTRATION
12 CFR Part 701
RIN 3133-AD37
Purchase, Sale, and Pledge of Eligible Obligations
AGENCY: National Credit Union Administration (NCUA).
ACTION: Final rule.
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SUMMARY: NCUA is amending its rule governing the purchase, sale, and
pledge of eligible obligations by adding a conflict of interest
provision substantially similar to the conflict of interest provision
in NCUA's general lending rule. This addition will help ensure that
decisions by a federal credit union (FCU) regarding the purchase, sale,
and pledge of eligible obligations are made with the FCU's best
interests in mind.
DATES: This final rule is effective December 21, 2007.
FOR FURTHER INFORMATION CONTACT: Annette Tapia or Frank Kressman, Staff
Attorneys, Office of General Counsel, at the above address or telephone
(703) 518-6540.
SUPPLEMENTARY INFORMATION:
A. Background
The NCUA continually reviews its regulations to ``update, clarify
and simplify existing regulations and eliminate redundant and
unnecessary provisions.'' NCUA Interpretive Rulings and Policy
Statement (IRPS) 87-2, Developing and Reviewing Government Regulations.
Under IRPS 87-2, NCUA conducts a rolling review of one-third of its
regulations each year, involving both internal review and public
comment. NCUA's 2006 review produced a recommendation to include a
conflict of interest provision in the eligible obligations rule similar
to the one in NCUA's general lending rule. 12 CFR 701.21(c)(8), 12 CFR
701.23.
B. Discussion
Generally, the eligible obligations rule implements the statutory
provisions limiting the purchase, sale, and pledging of an eligible
obligation, which is defined by the NCUA Board as a loan or group of
loans. 12 U.S.C. 1757(13); 12 CFR 701.23. Subject to certain
exceptions, the rule provides that an FCU may purchase eligible
obligations, which the regulation defines as loans made to a member by
another lender, from any source as long as the loans are ones the FCU
is empowered to grant, up to an amount equal to 5% of its unimpaired
capital and surplus. 12 CFR 701.23(b)(1). Exceptions in the rule
include purchasing nonmember student and real estate secured loans for
purposes of completing a loan pool for sale on the secondary market. In
addition, loans purchased to complete a pool and loans purchased as
part of an indirect lending or indirect leasing program are exempt from
the 5% limit on eligible obligations.
The Board issued a proposed rule, with request for comments, to add
a conflict of interest provision to the eligible obligations rule that
is similar to the conflict provision in NCUA's general lending
regulation. 72 FR 35207 (June 27, 2007), 12 CFR 701.21(c)(8)(i). The
Board believes eligible obligation transactions, which involve the
buying and selling of member loans, potentially present the same kinds
of conflicts of interest as where an FCU is the original lender to its
member. The proposal provided that an official, employee, or their
immediate family members may not receive, directly or indirectly, any
commission, fee or other compensation in connection with an eligible
obligations transaction. The proposal was intended to help ensure FCUs
make decisions concerning the purchase and sale of eligible obligations
based on appropriate business considerations rather than any personal
benefit to insiders.
C. Summary of Comments
NCUA received only five comments: Two from credit union trade
associations, two from state leagues, and one from an FCU.
One of the trade associations stated it did not support the rule
because NCUA had not supported ``the need'' for the rule, why it was
proposed, or ``what problems it sought to address.'' The other trade
association stated it recognized that ``self-dealing and insider
benefit should not be a motivating factor in a credit union's
business'' and generally supported the rule, emphasizing its strong
support for the exceptions in the rule that allow various permissible
payments.
One of the state leagues, while stating it agrees with ``the
concept of avoiding conflicts of interest,'' thought it was ``an
important issue'' that credit unions should address in an internal
policy or guidelines. This same commenter stated it was not aware
``that there are any outstanding concerns,'' did not see the need for
the rule and, therefore, did not support it. The other state league
that commented stated that, although it knew ``of no immediate need for
a conflict of interest provision regarding'' eligible obligations, it
believed ``the clarity provided for in the proposed change benefits all
affected parties and will help ensure that decisions * * * [are for]
sound business considerations rather than any personal benefit to
insiders.''
The FCU stated it did not feel the rule was necessary to ensure
that FCUs make appropriate business decisions, questioned the need for
the regulation, and contended the rule ``introduced an additional
regulatory burden.'' This commenter asked, if the rule is finalized,
that it be narrowly interpreted so as not to inhibit certain activities
common in the secondary market and offered the example of credit union
attendance at conferences with secondary market participants that
include meals. This commenter stated the rule should be interpreted as
applicable on a ``per transaction basis,'' meaning the determination
should be whether there is prohibited compensation tied to the purchase
or sale of a particular loan or group of loans.
Contrary to assertions in a couple of the comment letters, the
Board believes the proposal clearly stated the basis for the proposed
amendment: ``The Board believes eligible obligation transactions, which
involve the buying and selling of member loans, potentially present the
same kinds of conflicts of interest as where an FCU is the original
lender to its member. For that reason, the Board proposes to add a
conflict of interest
[[Page 65442]]
provision * * * similar to the conflict of interest provision in NCUA's
general lending rule.'' 72 FR 35207, 35208 (June 27, 2007). Some
commenters appear to equate the ``need'' for a rule with instances or
evidence of actual problems having occurred. The Board has recognized
the potential for conflicts in eligible obligations transactions
exists, just as in general lending, and, therefore, believes it should
not wait for inappropriate transactions to occur to establish a
``need'' for a conflicts provision. The amendment is essentially and
simply a rule of conduct and does not create any additional regulatory
burden, for example, by affecting the current limitations on eligible
obligation purchases or requiring FCUs undertake any additional record
keeping or disclosures. Finally, the Board concludes having a conflict
of interest provision in the eligible obligations rule paralleling the
provision in the general lending rule is good regulatory structure and,
as one commenter noted, adds clarity beneficial to all parties engaging
in eligible obligation transactions with FCUs.
The Board notes it intends the conflict of interest provision to
remove the incentive for personal gain at the credit union's expense in
connection with an eligible obligations transaction. For example, the
rule does not prohibit a credit union employee from attending a
secondary market conference for information gathering and other
business purposes to enhance the credit union's ability to engage in
prudent eligible obligations transactions. Rather, the rule will be
interpreted in the context of particular transactions and seeks to
prevent purchases of loans that are not in the credit union's best
interest. The rule accomplishes this by prohibiting personal economic
incentives, such as fees or commissions, from being part of a
transaction. NCUA reiterates that there are numerous exceptions built
into the rule that allow employees to receive compensation for their
eligible obligations activities under controlled circumstances.
The Board adopts the proposed conflict of interest provision for
the eligible obligations rule without change as a final rule.
Regulatory Procedures
Regulatory Flexibility Act
The Regulatory Flexibility Act requires NCUA to prepare an analysis
to describe any significant economic impact a rule may have on a
substantial number of small credit unions (those under ten million
dollars in assets). This rule adds a conflict of interest provision to
the eligible obligations rule. There is minimal regulatory burden
associated with this and the rule will not have a significant economic
impact on a substantial number of small credit unions. Therefore, a
regulatory flexibility analysis is not required.
Paperwork Reduction Act
NCUA has determined that this rule will not increase paperwork
requirements under the Paperwork Reduction Act of 1995 and regulations
of the Office of Management and Budget.
Executive Order 13132
Executive Order 13132 encourages independent regulatory agencies to
consider the impact of their actions on state and local interests. In
adherence to fundamental federalism principles, NCUA, an independent
regulatory agency as defined in 44 U.S.C. 3502(5), voluntarily complies
with the executive order. This final rule will not have a substantial
direct effect on the states, on the relationship between the national
government and the states, or on the distribution of power and
responsibilities among the various levels of government. NCUA has
determined that this rule does not constitute a policy that has
federalism implications for purposes of the executive order.
The Treasury and General Government Appropriations Act, 1999--
Assessment of Federal Regulations and Policies on Families
NCUA has determined that this rule will not affect family well-
being within the meaning of section 654 of the Treasury and General
Government Appropriations Act, 1999, Pub. L. 105-277, 112 Stat. 2681
(1998).
Small Business Regulatory Enforcement Fairness Act
The Small Business Regulatory Enforcement Fairness Act of 1996
(Pub. L. 104-121) (SBREFA) provides generally for a congressional
review of agency rules. A reporting requirement is triggered in
instances where NCUA issues a final rule as defined by Section 551 of
the Administrative Procedure Act. 5 U.S.C. 551. The Office of
Management and Budget has determined this rule is not a major rule for
purposes of SBREFA. As required by SBREFA, NCUA will file the
appropriate reports with Congress and the General Accounting Office so
this rule may be reviewed.
List of Subjects in 12 CFR Part 701
Conflict of interests, credit unions, eligible obligations, loans.
By the National Credit Union Administration Board on November
15, 2007.
Mary Rupp,
Secretary of the Board.
0
For the reasons discussed above, NCUA amends 12 CFR part 701 as
follows:
PART 701--ORGANIZATION AND OPERATIONS OF FEDERAL CREDIT UNIONS
0
1. The authority citation for part 701 continues to read as follows:
Authority: 12 U.S.C. 1752(5), 1755, 1756, 1757, 1759, 1761a,
1761b, 1766, 1767, 1782, 1784, 1787, and 1789. Section 701.6 is also
authorized by 31 U.S.C. 3717. Section 701.31 is also authorized by
15 U.S.C. 1601 et seq., 42 U.S.C. 1861 and 42 U.S.C. 3601-3610.
Section 701.35 is also authorized by 42 U.S.C. 4311-4312.
0
2. Section 701.23 is amended by adding new paragraph (g) to read as
follows:
Sec. 701.23 Purchase, sale, and pledge of eligible obligations.
* * * * *
(g)(1) Conflicts of interest. No federal credit union official,
employee, or their immediate family member may receive, directly or
indirectly, any compensation in connection with that credit union's
purchase, sale, or pledge of an eligible obligation under the
provisions of Sec. 701.23.
(2) Permissible payments. This section does not prohibit:
(i) A federal credit union's payment of salary to employees;
(ii) A federal credit union's payment of an incentive or bonus to
an employee based on the credit union's overall financial performance;
(iii) A federal credit union's payment of an incentive or bonus to
an employee, other than a senior management employee, in connection
with that credit union's purchase, sale or pledge of an eligible
obligation. This payment is permissible if the board of directors
establishes a written policy and internal controls for the incentive or
bonus program and monitors compliance with the policy and controls at
least annually; and
(iv) Payment by a person other than the federal credit union of
compensation to a volunteer official, non-senior management employee,
or their immediate family member, for a service or activity performed
outside the credit union provided that the federal credit union, the
official, employee, or
[[Page 65443]]
their immediate family member has not made a referral.
(3) Business associates and family members. All transactions under
this section with business associates or family members not
specifically prohibited by paragraph (g)(1) of this section must be
conducted at arm's length and in the interest of the federal credit
union.
(4) Definitions. The definitions in Sec. 701.21(c)(8)(ii) of this
part apply to this section.
[FR Doc. E7-22709 Filed 11-20-07; 8:45 am]
BILLING CODE 7535-01-P