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May 22, 2000

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

Re: National Credit Union Administration; Regulatory Flexibility and Exemption Program; 12 CFR Part 742; 65 Federal Register 15275; March 22, 2000.

Dear Ms. Baker:

The National Credit Union Administration ("NCUA") in its Advance Notice of Proposed Rulemaking ("ANPR") is seeking comment on exempting qualifying credit unions from certain regulatory provisions. The ANPR is divided into two areas:

1. Criteria for exempting credit unions from certain regulatory provisions; and
2. Regulatory provisions which should be subject to regulatory flexibility.

It is the belief of NCUA that qualifying credit unions, which have exhibited a history of safety and soundness, may be exempted from certain non-statutory regulations.

The American Bankers Association ("ABA") appreciates the opportunity to comment on this ANPR. The ABA brings together all categories of banking institutions to best represent the interests of this rapidly changing industry. Its membership - which includes community, regional and money center banks and holding companies, as well as savings associations, trust companies and savings banks - makes ABA the largest banking trade association in the country.

The ANPR asks a series of questions with regard to the criteria to qualify a credit union for regulatory flexibility ("RegFlex"). NCUA proposes that a credit union meet two criteria for eligibility. The first is that the credit union has to have been rated a CAMEL 1 or 2 for two consecutive exam cycles (with a CAMEL code of 1 or 2 in management). The second criterion is that the credit union has a net worth of 9 percent of assets or higher. If these two criteria are met, then a credit union is eligible to participate in RegFlex.

The ABA believes the eligibility criteria are moving in the right direction, but additional modifications are needed.

First, NCUA should make it explicit that the CAMEL code of 1 or 2 in management should also be for two consecutive exam cycles. By requiring a two consecutive exam cycle CAMEL rating of 1 or 2 in management, this would indicate that the credit union has adequate internal controls and management systems to maintain the financial integrity of the credit union.

Second, the fact that a credit union receives a CAMEL rating of 1 or 2 in management along with an overall CAMEL rating of 1 or 2 does not mean that the credit union has risk management systems in place to engage in expanded activities. The credit union needs to have effective risk management models. This will maintain the safety and soundness of the credit union and the National Credit Union Share Insurance Fund ("NCUSIF"). These risk management models should include: (1) policies, procedures, and limits; (2) the identification, measurement, and reporting of risk exposures; and (3) a system of internal controls.

Finally, just because a credit union meets the RegFlex eligibility requirements, it should not automatically be exempted from all or specified parts of the identified regulatory provisions. Rather, the credit union should apply for formal approval to engage in these RegFlex activities with the appropriate NCUA regional office. This will improve NCUA's ability to monitor the activities of credit unions and ensure that credit union's management has developed a business plan and is able to manage the risk posed by this RegFlex activity (see comment on fixed asset ownership rule below). This will permit the NCUA to perform its function as a safety and soundness regulator.

NCUA has identified various non-statutory provisions from which a qualifying credit union may be exempted. The ABA is concerned about several of the recommended exemptions.

NCUA proposes that qualified credit unions be exempted from the regulatory cap on the ownership of fixed assets. Currently, the regulation limits the ownership of fixed assets to 5 percent of total assets. NCUA justifies the relaxation of the restriction based upon NCUA's current practice of granting waivers to the cap to credit unions with strong capital ratios and proven records of risk management. Moreover, NCUA cites that the time delays associated with the waiver process deters a credit union from extending services to some members in its field of membership and also, extending services to underserved areas.

The ABA believes that credit unions should not be granted carte blanche expansion in their investments in fixed assets just because they have a net worth position in excess of 9 percent and a CAMEL rating of 1 or 2. NCUA needs to evaluate whether the credit union has the management systems in place to handle a higher level of investment in fixed assets. As credit union's investments in fixed assets increase, so does the degree of operating and, usually, financial leverage. As leverage increases, this increases the risk exposure of the credit union - cash flows may not be sufficient to meet expenses. NCUA needs to ensure that credit unions have the internal controls and management expertise in place to maintain the financial integrity of the credit union and NCUSIF. Additionally, for credit unions that meet these eligibility requirements, ABA recommends a fixed asset ownership cap of 10 percent of assets.

ABA believes that the credit union's board of directors should determine the nature and size of charitable contributions to be made by the credit union. While the board would not necessarily have to vote on each charitable donation, the board should have a clearly articulated policy with regard to charitable contributions. The members of the board of directors are the elected representatives of the member owners, not management. To give management the discretion to make such determinations would erode the members' control over the credit union. Many times the interests of management are not aligned with the interests of the owners/members, thereby creating principal-agent conflicts.

Additionally, NCUA should retain the requirement that limits recipients to charitable donations to organizations located in or conducting activities in a community in which the FCU has a place of business, particularly since credit unions are not subject to the Community Reinvestment Act.

"Current regulation limits the maximum amount of all public unit and nonmember shares to 20 percent of total shares or $1.5 million, whichever is greater." The NCUA is seeking comment as to whether to exempt these shares (public unit and nonmember) from the regulatory restrictions. If the regulatory restriction is lifted, it should only apply to low-income credit unions. To allow credit unions other than low-income to accept nonmember shares would break the already tenuous relationship of "member savings funding member loans," which is a basis for credit unions' tax-exemption.

Moreover, nonmember and public unit shares are more volatile than member shares. Therefore, there is a greater potential for the credit union to be subject to increased stress if these funds suddenly depart the credit union, especially if these funds are a large component of the credit union's source of funds. As we saw with the S&L crisis of the 1980s, non-core deposits played an important role in increasing the cost to taxpayers.

The NCUA Board seeks comment on whether qualifying credit unions can purchase any auto loan, credit card loan, member business loan, student loan or mortgage loan from any other credit union as long as they are loans the purchasing credit union is empowered to grant. In the past, NCUA has required credit unions that purchased loans such as mortgages to do so for the purpose of putting together a large enough pool to facilitate the sale of the loans on the secondary market. To allow credit unions to hold these loans in portfolio is contrary to NCUA's historical position.

Moreover, the ABA views this proposal as an attempt to circumvent the field of membership rules. The ABA has long maintained that the only loans that one credit union can purchase from another credit union are where there is an overlap in the membership. Only in this instance is the member eligible to belong to both credit unions. This proposal represents the further obliteration of the façade that credit unions have any type of a common bond.

In conclusion, the ABA wishes to thank NCUA for the opportunity to comment on this proposed rule in its developmental stages. The ABA reserves the right to make additional comments on this rule as new information becomes available. If the staff at NCUA has any questions, please contact the undersigned.

Sincerely,

Keith J. Leggett

Questions? Please contact Keith Leggett for more information.

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