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Code · REGISTER · 2006-06-28 · National Credit Union Administration · Rules and Regulations

Rules and Regulations. Final rule

13,391 words·~61 min read·/register/2006/06/28/06-5702

A research copy — for the controlling text, always check the official state or federal source. Not legal advice.

BILLING CODE 6450-01-P NATIONAL CREDIT UNION ADMINISTRATION 12 CFR Parts 701 and 741 Third-Party Servicing of Indirect Vehicle Loans AGENCY: National Credit Union Administration. ACTION: Final rule. SUMMARY: The National Credit Union Administration
(NCUA)is issuing a final rule to regulate purchases by federally insured credit unions of indirect vehicle loans serviced by third-parties. The rule limits the aggregate amount of these loans serviced by any single third-party to a percentage of the credit union's net worth. The rule ensures that federally insured credit unions do not undertake undue risk with these purchases. DATES: This rule is effective July 28, 2006. FOR FURTHER INFORMATION CONTACT: Paul Peterson, Staff Attorney, Division of Operations, Office of General Counsel, at
(703)518-6540; Matthew Biliouris, Program Officer, Office of Examination and Insurance, at
(703)518-6360; or Steve Sherrod, Division of Capital Markets Director, Office of Capital Markets and Planning, at
(703)518-6620. SUPPLEMENTARY INFORMATION: A. Background In December 2005, the Board issued for public comment a proposed rule establishing concentration limits for indirect automobile loans and loan participations serviced by third-party servicers. 70 FR 75753 (Dec. 21, 2005). As stated in the preamble to the proposed rule, the Board recognizes indirect lending has certain advantages for credit unions, such as growth in membership and loans, but is concerned some credit unions may involve themselves in indirect, outsourced programs—meaning programs in which a third party manages a credit union's relationship with automobile dealers and, because the third party handles loan servicing, with the credit union's members as well—without undertaking adequate due diligence, implementing appropriate controls, and having sufficient experience with a third party servicer. The Board proposed to limit the aggregate amount of outsourced loans and participations in outsourced loans a credit union may purchase from any one servicer to 50 percent of the credit union's net worth. After 30 months of experience with a particular servicer, the limit increases to 100 percent of net worth. The proposal exempted federally-insured depositories and wholly-owned subsidiaries of those depositories from the definition of servicer. The proposal also included a process and requirements for a credit union to request a waiver from the concentration limits from its regional director. Briefly summarized, this final rule retains the concentration limits, the servicer exemptions, and the waiver provision as proposed but, in response to public comments, the Board has made certain changes in the final rule. The final rule includes an additional exemption for certain credit union service organization
(CUSO)servicers and excludes loans in which the servicer and its affiliates were not involved in the origination process from the concentration limits. These changes, while not affecting the rule's substantive and procedural rationales, are beneficial to credit unions by narrowing the rule's scope and impact. The final rule also includes a 45-day time period for a regional director to act on waiver requests and provides for an appeal to the NCUA Board. These changes are discussed in more detail in the following section on public comments. B. Public Comments on the Proposed Rule NCUA received 27 comment letters from a variety of sources, including a state supervisory authority (SSA), credit unions, credit union trade organizations, and vendors involved in third-party servicing. The following summary categorizes the comments into general comments about the rule and comments about specific provisions with the Board's response to comments, as appropriate. General Comments Several commenters believe this rulemaking is a good idea. One commenter stated “NCUA's concerns are valid, and its proposal basically sound.” Several commenters stated the specific concentration limits were reasonable and the waiver provisions appropriate. The SSA stated it shares NCUA's concern about indirect lending in general and specifically the risks related to third-party servicing arrangements for indirect vehicle lending. This SSA stated it had reviewed a number of these programs and found structural weaknesses and that reported returns failed to reflect credit losses and collection costs. Several commenters were generally opposed to the rulemaking. A few of these commenters contended NCUA's existing guidance was sufficient to deal with the risks of indirect automobile loans serviced by third-party servicers. One of these commenters stated that each credit union's board should have flexibility to set policy limits in indirect lending just as they do with other types of lending. One commenter stated the proposal manages credit unions to the lowest common denominator and unnecessarily encumbers a credit union's ability to use indirect lending to manage the asset liability management
(ALM)process. The Board appreciates these concerns and does not wish to unnecessarily limit the flexibility of credit union management or encumber a credit union's ability to manage its ALM process. As stated in the preamble to the proposed rule, indirect lending programs with third-party servicing carry risk for credit unions. When these programs involve a significant percentage of the credit union's net worth, these programs also create risks for the National Credit Union Share Insurance Fund (NCUSIF). Accordingly, the Board believes concentration limits are appropriate but credit unions demonstrating sufficient due diligence should be permitted to apply for and receive waivers to the concentration limits. 1 1 A credit union below the concentration limits must still perform due diligence at a level commensurate with the program risks. Comments About the Specific Concentration Limits As proposed, the rule permits a credit union to buy indirect vehicle loans serviced by a third-party servicer in an amount up to 50 percent of net worth for the first 30 months of the servicing relationship and, thereafter, up to 100 percent of net worth. Some commenters contended the rule should permit a credit union to invest up to 100 percent of its net worth after only 18 or 24 months in a program instead of having to wait 30 months. A few commenters also thought the initial concentration limit should be 75 percent of net worth instead of 50 percent. Some of these latter commenters thought that a 75 percent limit would be appropriate but only for credit unions with a composite CAMEL 1 rating. 2 A few commenters contended credit unions qualifying for the NCUA Regulatory Flexibility Program should be entirely exempt from the proposed limits. 12 CFR part 742. 2 For a discussion of CAMEL ratings, see NCUA Letter to Credit Unions No. 03-CU-04, Subject: CAMEL Rating System, dated March 2003, located on NCUA's Web site at *http://www.ncua.gov.* The Board believes a credit union should have sufficient experience with a third-party servicer before entrusting it with indirect vehicles loans in an amount equaling the credit union's entire net worth. Given the expected lives of various types of vehicle loans, the Board continues to believe 30 months is a reasonable time for a credit union to obtain the experience. Accordingly, the final rule retains the 30-month time period. The Board also believes half of a credit union's net worth is a reasonable exposure during its initial involvement with a third-party servicer, regardless of a credit union's CAMEL rating. As stated in the preamble to the proposed rule, risks associated with these programs are similar to risks associated with asset backed securities (ABS). While natural person credit unions generally may not invest in ABS, national banks may, and the Office of the Comptroller of the Currency
(OCC)limits a bank's aggregate investments in ABS issued by any one issuer to 25 percent of capital and surplus. 12 CFR 1.3(f). Since the capital and surplus of a national bank is roughly equivalent to the net worth of a natural person credit union, the 50 percent and 100 percent limits in the proposed rule are significantly less restrictive than the 25 percent that the OCC permits for national bank investment in ABS. In addition, the OCC's 25 percent concentration limit on ABS applies to all banks, regardless of the bank's asset size or net worth ratio or the general performance ratings that OCC examiners assign to a particular bank. NCUA's proposal is less restrictive than the OCC's ABS limits because NCUA wants to encourage lending, but some safety and soundness limits are necessary. Accordingly, the final rule retains 50 percent as the initial limit for credit unions and 100 percent as the general limit, subject to a credit union receiving a waiver. One commenter analogized the risks the proposal addressed to the risks of participation lending and suggested concentration limits should be related to loans to a single borrower, not to a particular servicer. The Board believes risks associated with third-party servicing of indirect vehicle loans apply equally to whole loans and participation interests in loans and these risks are best constrained by limits expressed in terms of exposure to particular servicers. Another commenter stated concentration limits should be set as a percentage of paid-in and unimpaired capital and surplus rather than as a percentage of net worth. This commenter believes using net worth in the calculation encourages credit unions to maintain unnecessarily high levels of net worth. The Board believes third-party servicer concentration limits, which protect the viability of the credit union and also limit risk to the NCUSIF, are best expressed in terms of a credit union's net worth and not in terms of paid-in and unimpaired capital and surplus. Paid-in and unimpaired capital and surplus includes both shares and undivided earnings. 12 CFR 700.2(f). Including shares in this definition means a credit union with relatively low levels of net worth could have significant paid-in and unimpaired capital. Accordingly, concentration limits calculated as a percentage of the paid-in and unimpaired capital and surplus may not adequately protect a credit union or the NCUSIF. The Board confirms, as some commenters requested, that the concentration limits are calculated based on the outstanding loan balance. Further, the Board clarifies, as requested by one commenter, that a credit union may calculate the initial 30-month servicing relationship period from a date preceding this rulemaking. The 30-month servicing relationship period starts from the date a credit union first acquires an interest in loans from a particular third-party servicer. Comments About Exemptions for Certain Types of Servicers The proposal exempted servicers that are federally-insured depository institutions or wholly-owned subsidiaries of federally-insured depository institutions from the concentration limits. The rationale for this exemption is federal regulators have access to and oversight of these entities. Many comment letters addressed this exemption. Several commenters contended the “wholly-owned subsidiary” exemption should be broadened to include servicers that are only partially owned by credit unions. These commenters suggested various alternatives to the “wholly-owned subsidiary” language, including: exempting any servicer that is also a CUSO; any CUSO that has a majority of voting interests owned by federally-insured depository institutions; or any CUSO that has a majority of voting interests owned by federally-insured depository institutions and to which SSAs have access. One commenter also stated additional language could be added to require access by a Federal regulatory authority. NCUA understands the concerns of these commenters. As suggested by some of the commenters, the final rule exempts any servicing entity that has a majority of its voting interests owned by federally-insured credit unions and that includes in its servicing agreements with credit unions a provision providing NCUA with access to the servicer's books and records and the ability to review its internal controls. This written access provision is similar to the CUSO rule requirement that federal credit unions and their CUSOs must agree in writing to permit NCUA access to the CUSO. 12 CFR 712.3(d)(3). Credit unions relying on this exemption must provide the regional director a copy of the servicing agreement. This will keep regional directors informed of the number of these arrangements, particularly regarding state-chartered credit unions that NCUA does not examine on a regular basis. A few commenters suggested NCUA should exempt any servicer that agrees to allow NCUA access, whether or not the servicer is affiliated with a federally-insured credit union. Absent at least majority ownership of the servicer by federally insured credit unions, the Board does not believe an agreement will assure unfettered and cooperative access. Similarly, while a few commenters stated access by an SSA should be sufficient to exempt a servicer from the rule, the Board concludes the circumstances this rule addresses present particular safety and soundness concerns requiring NCUA or another Federal insurer to have access to the servicing entity. One commenter suggested the rule should be changed to apply only to those servicers involved in the loan origination process. This commenter contended that, where a credit union controls the underwriting process, uses its own dealer relationships for originations, and contracts directly with an independent, financially sound servicer with appropriate asset class experience, the credit union's risks are not significantly different from risks in its internal programs and, therefore, should not have different concentration limits. As stated in the preamble to the proposed rule, NCUA is primarily concerned with indirect vehicle lending programs where both control over the loan origination process and servicing are outsourced to a third-party. While NCUA drafted the proposed concentration limits so as to apply to any indirect loan serviced by a third-party servicer, regardless of the servicer's involvement in the loan origination process, after considering the comments, the Board agrees separating servicing from other aspects of the loan, such as underwriting, originating, or insuring, mitigates the overall risk. Accordingly, the Board has determined to exclude loans in which the servicer and its affiliates have no involvement with the loan other than servicing from the concentration limit. Specifically, the final rule excludes from the definition of covered vehicle loans any loan where neither the third-party servicer nor any of its affiliates are involved in underwriting, originating, or insuring the loan or the process by which the credit union acquires its interest in the loan. Aside from this modification, the final rule retains the basic definition of vehicle loan, that is, “any installment vehicle sales contract or its equivalent that is reported as an asset under generally accepted accounting principles [GAAP].” The Board notes that, under GAAP, an interest in a vehicle loan transferred with recourse may not be a true sale. *See* Financial Accounting Standards Board Standard No. 140. If the transfer does not warrant true sale accounting, the transferred loan interest would remain as an asset on the transferring credit union's books and, if serviced by a third-party servicer, count toward the concentration limits. Comments About Definitions The proposal defined net worth as: [T]he retained earnings balance of the credit union at quarter end as determined under generally accepted accounting principles. For low income-designated credit unions, net worth also includes secondary capital accounts that are uninsured and subordinate to all other claims, including claims of creditors, shareholders, and the National Credit Union Share Insurance Fund. Proposed § 701.21(h)(3)(iv). A few commenters believe this definition of “net worth” should be modified to permit calculation of the appropriate limits from the line items on NCUA's Call Report, NCUA Form 5300. NCUA's current Call Report has an automated “PCA Net Worth Calculation Worksheet.” If a credit union makes accurate Call Report entries, line 7 of this Worksheet, entitled “Total Net Worth,” will provide the credit union with its retained earnings balance as determined under generally accepted accounting principles. This information can help credit unions determine their net worth for purposes of these concentration limits. The final rule text, however, does not refer to the Call Report directly since NCUA modifies the Call Report and the specific line items change on occasion. The concentration limits will apply to all indirect vehicle loans serviced by a particular third-party servicer and its affiliates. The proposal defined affiliate as follows: The term “its affiliates,” as it relates to the third-party servicer, means any entities that:
(A)Control, are controlled by, or are under common control with, that third-party servicer; or
(B)are under contract with that third-party servicer or other entity described in paragraph (h)(3)(ii)(A) of this section. Proposed § 701.21(h)(3)(ii). One commenter asked why the proposed definition includes entities under contract as well as entities under common control. If a credit union is using two or more servicers to service indirect automobile loans, the Board believes the loans of both servicers should be aggregated for purposes of the concentration limits if there is any contractual connection between the two servicers. 3 If the contractual relationship does not increase the risk to a credit union in a particular case, it may seek a waiver from the regional director under the rule's waiver provisions and provide the regional director with details about the contractual relationship. 3 Although a credit union has a contract with its third-party servicer, the credit union is not an affiliate servicer for purposes of calculating compliance with its own concentration limits. In other words, a credit union does not have to aggregate any loans that it services in-house with loans serviced by third-party servicers. One commenter thought that, in the definition of “servicer,” the phrase “pursuant to the terms of a loan” should be clarified to ensure that lockbox relationships are not inadvertently covered by the regulation. 4 The Board understands lockbox accounts are typically established at banks, and the rule's definition of servicer specifically excludes banks and other federally-insured depository institutions and their wholly-owned subsidiaries. While a bank is excluded from the rule, any other entity falling within the definition of servicer is subject to the rule whether or not it employs a lockbox account arrangement as part of its servicing activities. 4 A “lock box” is a “[c]ash management system whereby a company's customers mail payments to a post office box near the company's bank. The bank collects checks from the lock box * * * deposits them directly to the account of the firm, and informs the company's cash manager by telephone of the deposit. This reduces the float and puts cash to work more quickly.” J. Downes and J. Goodman, Barron's Dictionary of Finance and Investment Terms, 333 (5th ed. 1998). Comments About the Waiver Provision The proposal provided that a regional director, upon request, could grant a credit union a waiver from the concentration limits. The proposal provided criteria a regional director will consider when evaluating a waiver request, including: a credit union's understanding of the third-party servicer's organization, business model, financial health, and the related program risks; the credit union's due diligence in monitoring and protecting against program risks; the contracts between the credit union and the third-party servicer; and other factors relevant to safety and soundness. Many commenters thought this waiver provision was a good idea and the provision for a waiver and proposed criteria are retained in the final rule. Several commenters suggested the waiver provision should set a time period for a regional director's decision. A few commenters thought the rule should permit appeal of a waiver decision to the NCUA Board. The Board agrees with these commenters. The final rule provides that a regional director will make a written determination on a waiver request within 45 calendar days after receipt of the request. The 45-day period will not begin until a credit union has submitted all necessary information to the regional director. A credit union may appeal any part of the determination to the NCUA Board. Appeals must be submitted through the regional director within 30 days of the date of the determination. The Board believes these time periods are reasonable and notes they are similar to other waiver processes the Board has adopted. *See, e.g.,* 12 CFR 701.36(a)(2)(iii). Two commenters thought the rule should permit state chartered credit unions to obtain waivers from their SSAs rather than from a regional director. The proposed rule required the SSA of a state chartered credit union to concur before the regional director grants a waiver, and the final rule retains this requirement. Because third-party servicing of indirect vehicle loans creates risk for the NCUSIF, however, NCUA should have a role in the decision to grant or deny all waivers. One commenter thought the waiver procedure was overly burdensome. The Board understands the commenter's concern, but believes it has balanced safety and soundness concerns appropriately with the burden associated with requesting a waiver. Another commenter questioned why an approved waiver should have an expiration date. Circumstances change with the passage of time, including the structure of the servicer, the content of its program, and the composition of the credit union's internal staff and due diligence. Given the significance of the risks, a credit union with an existing waiver should demonstrate periodically that it understands and controls the risks associated with a servicer's program. Two commenters sought clarification that credit unions could request a waiver from the initial concentration limit of 50 percent as well as the 100 percent concentration limit. The Board confirms that, as proposed and as provided in the final rule, credit unions may request waivers of either limit. One commenter noted one of the criteria a regional director will consider when reviewing a waiver is the ability of a credit union to replace an inadequate servicer. This commenter expressed concern that credit unions purchasing participation interests generally have little or no ability under standard servicing contracts to replace the servicer. The Board agrees an owner of a loan participation interest is unlikely to have much say in replacing a poor servicer but notes this criterion is only one factor among several a regional director considers in determining whether to grant a waiver request. Several commenters stated they would like additional information about the requirements for a waiver. Two commenters thought waiver criteria should include information about the rating of any associated insurance company. The Board believes the rule sufficiently describes the criteria a regional director will consider but provides the following additional discussion of the criteria and documentation for waiver requests. Much of this discussion is repeated from the preamble of the proposed rule. 70 FR 75753, 75756 (Dec. 21, 2005). Credit unions seeking higher concentration limits should have high levels of due diligence and tight controls. Due diligence, in turn, begins with a demonstrated understanding of the third-party servicer's organization, business model, financial health, and program risks. Accordingly, a waiver request should provide information about the following: • The vendor's organization, including identification of subsidiaries and affiliates involved in the program and the purpose of each; • The various sources of income to the vendor and the credit union in the program and any potential vendor conflicts with the interests of the credit union; • The experience, character, and fitness of the vendor's owners and key employees; • The vendor's ability to fulfill commitments, as evidenced by aggregate financial commitments, capital strength, liquidity, reputation, and operating results; 5 5 Nationally recognized statistical rating organization (NRSRO) ratings, multi-year audited and segmented financials, and explanations of related party transactions and changes to the net worth of the vendor, if any, are also relevant. • How loan-related cash flows, including borrower payments, borrower payoffs, and insurance payments, are tracked and identified in the program; • An analysis of whether, in the event of the servicer's insolvency, the various borrower, insurance, and resale payments in the possession of the servicer and the vehicle collateral are protected from the bankruptcy trustee; • The vendor's internal controls to protect against fraud and abuse, as documented by, for example, a current SAS 70 type II report prepared by an independent and well-qualified accounting firm; • Insurance offered by the vendor, including interrelated insurance products, premiums, conditions for coverage beyond the control of the credit union ( *e.g.* , a prohibition on extension of the insured loans past maturity), the rating of the insurer, and limitations such as aggregate loss limits; • The underwriting criteria provided by the vendor, including an analysis of the expected yield based on historical loan data, and a sensitivity analysis considering the potential effects of a deteriorating economic environment, failure of associated insurance, the possibility of fraud at the servicer, a decline in average portfolio credit quality, and, if applicable, movement in the program back toward industry-wide performance statistics; 6 6 If the program loans have historically outperformed industry averages, perhaps because of lower prepayment rates or lower default proportions, a credit union should calculate expected yield if the prepayment rates or default proportions move upwards toward the industry averages. • Vendor involvement in the underwriting and processing of loan applications, including use of proprietary scoring or screening models not included in the credit union approved underwriting criteria; and • The program risks, including
(1)Credit risk,
(2)liquidity risk,
(3)transaction risk,
(4)compliance risk,
(5)strategic risk,
(6)interest rate risk, and
(7)reputation risk. To qualify for a waiver of concentration limits, the servicing agreement should also include more than minimal protections for the credit union. Servicer performance standards should be objective and clear, and a waiver request should clearly articulate how the performance standards protect the interests of the credit union. The exit clause, including any cure period, should be exercisable in a reasonable period of time. The more intensive the requisite servicing, such as for nonprime or subprime loans, the shorter that period of time should be. A credit union's right to exit the servicing agreement should be exercisable at a reasonable cost to the credit union. If a credit union must pay a punitive fee to replace a poor servicer, give up valuable insurance protection, or forfeit legal rights without adequate compensation, the servicing agreement will not satisfy this waiver criterion. Some indirect, outsourced programs have complex business models that include vendor management of the dealer relationship and also insurance provided by the vendor. These business models can produce situations where the vendor's financial interests are not aligned with the credit union's interests. The credit union needs to be aware of these situations and, if appropriate, take protective action. For example, a dealer's interest in an indirect lending situation is to obtain financing so the dealer can sell a vehicle. A credit union's interest is to ensure loan applications are properly underwritten and only members meeting the underwriting standards receive loans. With an indirect, outsourced program, a third-party vendor controls information on the quality of a particular dealer's originations. A vendor could present loans to a credit union from a changing list of dealers, making it difficult for a credit union to identify and screen substandard dealers. This creates a potential for the vendor to permit dealers with substandard underwriting performance to remain active in the program. Unlike typical indirect lending where a dealer receives an origination fee, in some vendor programs, a vendor processes loan applications for the credit union and also receives significant income from dealer fees. A credit union needs to fully understand the relationship between the vendor and the dealers. Credit unions seeking a concentration limit waiver should review agreements between the vendor and associated dealers. Some vendors provide third-party default insurance or reinsurance and this presents a potential conflict between the vendor as servicer and the vendor as insurer. Accordingly, a credit union needs to understand the relationship between the vendor and the insurance company and the associated risks to the credit union. To understand this relationship fully, a credit union desiring a concentration limit waiver should review all agreements between the vendor, affiliates of the vendor, and the associated insurance companies. Another potential conflict exists where the vendor controls the dealer relationship and can route a potential loan to multiple funding sources. For example, some vendors track statistics on loan performance by dealership. A credit union should be aware if a vendor then routes loan applications from the preferred dealerships to the preferred funding sources. A credit union desiring a waiver should understand the various funding sources available to the vendor and document how the vendor tracks vendor performance and makes funding decisions. With each identified risk, a credit union should explain to the regional director how it plans to eliminate or mitigate the risk. Some, but not all, risks may be dealt with through contractual arrangements. For example, the credit union must ensure that its contracts with the servicer grant the credit union sufficient control over the servicer's actions and provide for replacing an inadequate servicer. As NCUA stated in Letter to Credit Unions No. 04-CU-13, and, again, in NCUA Risk Alert No. 05-01, safety and soundness requires a credit union to limit the power of a third-party servicer to alter loan terms. Also, the servicing contract must contain a mechanism, or exit clause, to replace an unsatisfactory servicer. A regional director may also consider any legal reviews obtained by the credit union on these contracts and should consider the scope and depth of the review and the reviewer's qualifications. Regional directors may consider other relevant factors when determining whether to grant a waiver of concentration limits as well as the size of any substitute limit. Other factors include the demonstrated strength of the credit union's management and the credit union's previous history in exercising due diligence over similar programs. In addition, higher concentration levels entail more risk to the net worth of a credit union, and so the requisite due diligence also depends on the substitute concentration limit the credit union requests. C. Effective Date The effective date of this final rule is 30 days from the date of publication in the **Federal Register** . As discussed in the preamble to the proposed rule, 70 FR 75753, 75757 (Dec. 21, 2005), several credit unions that currently participate in indirect, outsourced programs have concentration levels that exceed the proposed concentration limits. For those credit unions that exceed the concentration limits on the effective date, the rule will not require any divestiture. The rule will prohibit these credit unions from purchasing any additional loans, or interests in loans, from the affected vendor program until such time as the credit union either reduces its holdings below the appropriate concentration limit or the credit union obtains a waiver to permit a greater concentration limit. The Board is concerned that some credit unions may consider making large purchases of loans that would be subject to the rule before the effective date of the final rule. NCUA will review any large purchases closely and credit unions should be advised that NCUA may consider appropriate supervisory action, including divestiture, to ensure that the credit union's actions were safe and sound. D. Regulatory Procedures Regulatory Flexibility Act The Regulatory Flexibility Act requires NCUA to prepare an analysis to describe any significant economic impact a proposed rule may have on a substantial number of small credit unions (those under $10 million in assets). This final rule establishes for federally-insured credit unions a concentration limit on indirect vehicle loans serviced by certain third parties. In the preamble of the proposed rule NCUA published its estimate that no more than five small credit unions were involved in purchasing vehicle loans, or interests in loans, from an indirect, outsourced vendor program. NCUA received no comments on this estimate. Accordingly, NCUA has determined that the rule will not have a significant economic impact on a substantial number of small credit unions and that a regulatory flexibility analysis is not required. Paperwork Reduction Act The waiver provision in § 701.21(h)(2) contains information collection requirements. As required by the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)), NCUA submitted a copy of the proposed rule as part of an information collection package to the Office of Management and Budget
(OMB)for its review and approval of a new Collection of Information, Third-Party Servicing of Indirect Vehicle Loans. On March 1, 2006, OMB approved this new Collection of Information. The OBM Collection Number is 3133-0171. 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 rule will not have substantial direct effects on the states, on the connection 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 would 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 Act of 1996 (Pub. L. 104-121) provides generally for 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 that this rule is not a major rule for purposes of the Small Business Regulatory Enforcement Fairness Act of 1996. List of Subjects 12 CFR Part 701 Credit unions, Loans. 12 CFR Part 741 Credit unions, Requirements for insurance. By the National Credit Union Administration Board on June 22, 2006. Mary Rupp, Secretary of the Board. For the reasons stated in the preamble, the National Credit Union Administration amends 12 CFR parts 701 and 741 as set forth below: PART 701—ORGANIZATION AND OPERATION OF FEDERAL CREDIT UNIONS 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. 1981 and 3601-3619. Section 701.35 is also authorized by 42 U.S.C. 4311-4312. 2. Add a new paragraph
(h)to § 701.21 to read as follows: § 701.21 Loans to members and lines of credit to members.
(h)*Third-party servicing of indirect vehicle loans* .
(1)A federally-insured credit union must not acquire any vehicle loan, or any interest in a vehicle loan, serviced by a third-party servicer if the aggregate amount of vehicle loans and interests in vehicle loans serviced by that third-party servicer and its affiliates would exceed:
(i)50 percent of the credit union's net worth during the initial thirty months of that third-party servicing relationship; or
(ii)100 percent of the credit union's net worth after the initial thirty months of that third-party servicing relationship.
(2)Regional directors may grant a waiver of the limits in paragraph (h)(1) of this section to permit greater limits upon written application by a credit union. In determining whether to grant or deny a waiver, a regional director will consider:
(i)The credit union's understanding of the third-party servicer's organization, business model, financial health, and the related program risks;
(ii)The credit union's due diligence in monitoring and protecting against program risks;
(iii)If contracts between the credit union and the third-party servicer grant the credit union sufficient control over the servicer's actions and provide for replacing an inadequate servicer; and
(iv)Other factors relevant to safety and soundness.
(3)A regional director will provide a written determination on a waiver request within 45 calendar days after receipt of the request; however, the 45-day period will not begin until the requesting credit union has submitted all necessary information to the regional director. If the regional director does not provide a written determination within the 45-day period the request is deemed denied. A credit union may appeal any part of the determination to the NCUA Board. Appeals must be submitted through the regional director within 30 days of the date of the determination.
(4)For purposes of paragraph
(h)of this section:
(i)The term “third-party servicer” means any entity, other than a federally-insured depository institution or a wholly-owned subsidiary of a federally-insured depository institution, that receives any scheduled, periodic payments from a borrower pursuant to the terms of a loan and distributes payments of principal and interest and any other payments with respect to the amounts received from the borrower as may be required pursuant to the terms of the loan. The term also excludes any servicing entity that meets the following three requirements:
(A)Has a majority of its voting interests owned by federally-insured credit unions;
(B)Includes in its servicing agreements with credit unions a provision that the servicer will provide NCUA with complete access to its books and records and the ability to review its internal controls as deemed necessary by NCUA in carrying out NCUA's responsibilities under the Act; and
(C)Has its credit union clients provide a copy of the servicing agreement to their regional directors.
(ii)The term “its affiliates,” as it relates to the third-party servicer, means any entities that:
(A)Control, are controlled by, or are under common control with, that third-party servicer; or
(B)Are under contract with that third-party servicer or other entity described in paragraph (h)(4)(ii)(A) of this section.
(iii)The term “vehicle loan” means any installment vehicle sales contract or its equivalent that is reported as an asset under generally accepted accounting principles. The term does not include:
(A)Loans made directly by a credit union to a member, or
(B)Loans in which neither the third-party servicer nor any of its affiliates are involved in the origination, underwriting, or insuring of the loan or the process by which the credit union acquires its interest in the loan.
(iv)The term “net worth” means the retained earnings balance of the credit union at quarter end as determined under generally accepted accounting principles. For low income-designated credit unions, net worth also includes secondary capital accounts that are uninsured and subordinate to all other claims, including claims of creditors, shareholders, and the National Credit Union Share Insurance Fund. PART 741—REQUIREMENTS FOR INSURANCE 3. The authority citation for part 741 continues to read as follows: Authority: 12 U.S.C. 1757, 1766, 1781-1790, and 1790d. Section 741.4 is also authorized by 31 U.S.C. 3717. 4. Add a new paragraph
(c)to § 741.203 to read as follows: § 741.203 Minimum loan policy requirements.
(c)Adhere to the requirements stated in § 701.21(h) of this chapter concerning third-party servicing of indirect vehicle loans. Before a state-chartered credit union applies to a regional director for a waiver under § 701.21(h)(2), it must first notify its state supervisory authority. The regional director will not grant a waiver unless the appropriate state official concurs in the waiver. The 45-day period for the regional director to act on a waiver request, as described § 701.21(h)(3), will not begin until the regional director has received the state official's concurrence and any other necessary information. [FR Doc. E6-10137 Filed 6-27-06; 8:45 am] BILLING CODE 7535-01-P NATIONAL CREDIT UNION ADMINISTRATION 12 CFR Part 701 Organization and Operations of Federal Credit Unions AGENCY: National Credit Union Administration (NCUA). ACTION: Final rule. SUMMARY: NCUA is amending its field of membership rules regarding service to underserved areas to limit underserved area additions to multiple common-bond credit unions and revise facility requirements for underserved areas. These amendments are being made after a comprehensive review of chartering policy based upon NCUA's experience addressing field of membership issues and the uncertainty resulting from recent litigation challenging service to underserved areas in Utah and the current ambiguity in the Federal Credit Union Act on this issue. This final rule will ensure continued reliable and efficient service to federal credit union members located in approved underserved areas and continue to allow multiple common-bond credit unions to add underserved areas to their charters. The final rule generally adopts the amendments as proposed. In addition, the final rule retains the definition of service facility as a credit union owned facility where shares are accepted for members' accounts, loan applications are accepted, and loans are disbursed. DATES: Effective July 28, 2006 FOR FURTHER INFORMATION CONTACT: Michael J. McKenna, Deputy General Counsel, John K. Ianno, Senior Trial Attorney, or Regina Metz, Staff Attorney, Office of General Counsel, 1775 Duke Street, Alexandria, Virginia 22314 or telephone
(703)518-6540. SUPPLEMENTARY INFORMATION: A. Background NCUA's chartering and field of membership policy is set out in NCUA's Chartering and Field of Membership Manual (Chartering Manual), Interpretive Ruling and Policy Statement 03-1. 68 FR 18333, Apr. 15, 2003. The policy is incorporated by reference in NCUA's regulations at 12 CFR 701.1. On December 29, 2005, the NCUA Board issued a moratorium suspending that portion of its chartering policy allowing non-multiple-common-bond credit unions to add new underserved areas. After establishing a moratorium, the NCUA conducted a comprehensive review of its underserved area policy. On January 19, 2006, the NCUA Board approved a proposed rule regarding service to underserved areas. 71 FR 4530, Jan. 27, 2006. The NCUA proposed two amendments that would apply only prospectively. The first proposed change was to limit the addition of new underserved areas to only multiple common-bond credit unions. The second proposed change was to the definition and location of the service facility. When adding underserved areas, NCUA proposed requiring a physical presence in the underserved areas to assure better service to members in these locations and deleting the choice of a credit union owned electronic facility with certain functions as a service facility. B. Comments NCUA welcomed general comments on the proposed rule and also on all aspects of NCUA's rules on credit unions serving underserved areas. In addition to seeking general comments on the proposed rule, the Board specifically sought comments on a series of questions related to the impact of the proposed changes on consumers and credit unions. The comments were intended to assist the Board in understanding what, if any, impact the proposed changes would have on credit unions that have expended resources investing in underserved areas. The Board is concerned that there is both financial and reputation risk if credit unions, previously authorized to operate in underserved areas, are prohibited from continuing to do so. The Board is also concerned that the proposed changes could limit the ability of credit unions to grow and expand services into underserved areas and provide needed financial assistance to consumers of modest means who do not currently have access to low cost financial services and undermine the viability of the federal credit union charter. NCUA received 49 comment letters in response to the proposed rule: 31 from federal credit unions, one from a state-chartered credit union, 12 from credit union trade organizations, three from bank trade organizations, one from an individual, and one from an institute. Most credit union commenters opposed the proposal and support the status quo. One commenter believes the proposal contradicts congressional intent by only allowing multiple common-bond credit unions to add underserved areas. In contrast, some credit union commenters appreciated NCUA's concerns and supported the proposal. Whether opposed to or in favor of the proposal, most credit union commenters support a legislative solution amending the Federal Credit Union Act to expressly state that all federal credit unions may add underserved areas. Bank trade group commenters generally supported the proposal and, in some cases, recommended further requirements for credit unions serving underserved areas. The NCUA Board asked for specific comments on the following five questions.
(1)NCUA's authority to permit expansions into underserved areas for all three federal charter types. With the exception of the bank trade groups, almost all commenters expressed the opinion that NCUA has the authority to allow all three charter types to add underserved areas. Six commenters support the continuation of the moratorium and understand the basis for NCUA's proposal in this area given the current litigation. Almost all credit union commenters suggest that NCUA seek a statutory change to the Federal Credit Union Act in order to insert express language authorizing this activity. Credit unions are leaders among financial institutions in providing affordable financial services to persons within their specific field of membership, including people of modest means. The Board is committed to assuring that credit unions have the regulatory tools necessary to perform this important role. One of the primary purposes of the Credit Union Membership Access Act (CUMAA) was to codify the legality of multiple common-bond credit unions. CUMAA also reflects Congress' intent to clarify that this new charter type was authorized to add underserved areas. Unfortunately, the statutory language does not expressly provide that authority to the other two charter types although there is legislative history that indicates Congress intended that all types of federal credit unions should be able to add underserved areas. This absence of specific statutory language, when considered together with the specific authorization for multiple common-bond credit unions, creates uncertainty about the continued authority of non-multiple common-bond credit unions to serve underserved areas. Though most commenters argued that the Board has the authority to authorize the other charter types to serve underserved areas, they provided no persuasive argument to address the issue created by the absence of any specific statutory language. In addition, recently the American Bankers Association and others have filed litigation challenging the authority of a non-multiple common-bond credit union to serve underserved areas in Utah. In light of this uncertainty, the Board is amending its chartering policies to allow only multiple common-bond credit unions to serve underserved areas pending clarification of the language contained in the Federal Credit Union Act that authorizes the addition of underserved areas. The amendments to the chartering policy will apply only prospectively. The NCUA Board agrees a statutory change is necessary.
(2)The impact of limiting expansions into underserved areas to only multiple common-bond credit unions. Several credit union commenters described the negative impact on both credit unions and consumers of limiting underserved expansions to multiple common bond credit unions. Commenters wrote that low-income individuals and those who most need credit union service will receive less service. A couple of commenters wrote that there will be less competition. One commenter said there will be a negative impact on the dual chartering system and that some federal credit unions will convert to state charters. The Board agrees that restricting further expansions has the potential to limit the availability of credit union services to some consumers. Nevertheless, the Board has concluded that there are many opportunities for continued growth and expanded service to consumers within existing fields of membership, even with a change to chartering policies limiting prospective addition of underserved areas to multiple common-bond credit unions. The Board concludes that the ambiguity arising from the statute as well as the current litigation outweighs the potential harm to credit unions and potential members.
(3)Whether, if only multiple common bond credit unions are permitted to add underserved areas, they should be permitted to retain these areas in the event they change charter type. Almost all credit union commenters who commented on this issue support permitting multiple common-bond credit unions to retain their underserved areas if they change charter types. The banking trade group commenters oppose credit unions retaining the areas. Given that the final rule will not permit non-multiple common-bond credit unions to serve underserved areas, the Board concludes that, upon conversion to another charter type, the restrictions applicable to the new charter type must apply. Therefore, a multiple common-bond credit union converting to either a single common-bond or community charter would be required to give up its underserved areas. The credit union could continue to serve its existing members. This approach is faithful to the requirements of this final rule which prospectively permits only multiple common-bond credit unions to serve underserved areas. It is also consistent with the approach taken when a multiple common-bond credit union converts to a community credit union. In those circumstances, a credit union must comply with the requirements of the new charter type and relinquish its select employee groups. The Board is aware that certain unpredictable factors, such as economic downturns and plant closings, could cause a multiple common-bond credit union to convert its charter type. While the loss of underserved areas in these circumstances may seem harsh, the Board concludes that the credit union must balance the potential impact of the loss with other factors relevant to a decision on its charter type. Part of the consideration regarding whether a charter change makes good business sense should necessarily include the fact that, once a multiple common-bond credit union changes its charter, it will lose its underserved areas.
(4)The type and extent of existing investment by non-multiple common bond credit unions in underserved areas including for example, capital investment, loans, share deposits, and other programs targeting low income people. The Credit Union National Association, a credit union trade group, provided a comprehensive list of investments by non-multiple common-bond credit unions in underserved areas. Credit unions described investments in branch offices and ATMs, their involvement through loans, deposit products, services, and community involvement and charitable services in underserved areas. This information is discussed further in connection with question 5 below.
(5)The impact to members of underserved areas, and non-multiple common-bond credit unions, of restrictions on the addition of new members in underserved areas they are currently serving. Almost all credit union commenters on this question believe the restrictions would have a negative impact. A few credit unions wrote they might have to close branches and would suffer economic loss. Several credit unions requested they be “grandfathered” so that they can continue to add new members from the underserved areas they currently serve. The information provided establishes that many credit unions have invested significant funds, totaling in excess of 400 million dollars, and other resources into serving more than 800 underserved areas. This investment includes the establishment of hundreds of branches in and near underserved areas. Activity by credit unions in these areas indicates the significance of their services to their financial well being and the needs of their membership. It includes billions of dollars in loans and share deposits. Generally, regulations are prospective in nature. *Bowen* v. *Georgetown Hospital,* 488 U.S. 204, 216
(1988)(Scalia, J., concurring). In considering the equities of applying a rule retroactively courts will consider such factors as the degree of hardship parties would experience, whether reliance on past regulation was justifiable and any statutory interest in retroactive application of the new rule. See, e.g., *Consolidated Freightways* v. *N.L.R.B.,* 892 F.2d 1052, 1058 (D.C. Cir. 1989) citing *Tennesee Gas Pipeline Co.* v. *FERC,* 606 F.2d 1094, 1115, 1116 n.77 (D.C. Cir. 1979), cert. denied, 445 U.S. 920 (1980). Application of these principles to this rule demonstrate that the equities favor prospective application. The comments received demonstrate that there has been significant financial investment by credit unions in reliance on NCUA's existing rule. These investments were made with the expectation that service would be available to all potential members in the underserved areas. Prohibiting the addition of new members would limit growth in these areas, expose the institutions to significant hardship through increased financial and reputation risk, and could cause safety and soundness concerns. Existing members would also suffer as a result of the diminished services that would result if further membership growth was prohibited. It is also clear that reliance by credit unions on NCUA's regulation permitting these expansions was justified. NCUA has authorized all federal credit unions, regardless of charter type, to add underserved areas since 1994. Prior to the passage of the CUMAA in 1998 these areas were referred to as underserved communities. With the passage of CUMAA, NCUA made significant changes to its chartering policies but again reiterated that all charter types were permitted to add underserved areas. In the preamble to the regulatory changes implementing CUMAA, the Board noted that the new legislation specifically authorized flexible policies regarding multiple common-bond credit unions providing service to underserved areas. At that time we also encouraged all credit unions to continue service to poor and disadvantaged areas and indicated that previous policy permitting all charter types to serve underserved areas would continue. IRPS 99-1, 63 FR 71998, 72016 (Dec. 30, 1998). Credit unions reasonably relied on these policy statements by this Board. In short, investment by credit unions in underserved areas has occurred in reliance on long-standing NCUA policies that authorized and indeed encouraged such activity. Members in underserved areas have benefited from low cost financial services made available as a result of these efforts. They have become members in reliance upon NCUA policy that authorized credit union expansion into these areas. Credit unions that have invested in these areas have done so based on economic assumptions that included continued growth in membership. If continued growth is no longer possible, credit unions will be unable to sustain the current level of services provided in these areas. This could result in diminished or lost services to existing members. On balance therefore, the Board concludes that the equities support only prospective application of this rule. Credit unions, regardless of charter type, that were serving underserved areas at the time the proposed rule was issued should be permitted to continue to serve those areas to include adding new members. To require them to do otherwise, given their reasonable reliance on NCUA's policy as well as their substantial investments, would cause substantial harm to the credit unions, their members, and potential members in the underserved area. Regarding the service facility location, many commenters opposed NCUA's proposal to require a physical presence in the underserved area and recommend keeping the status quo. Some opposing commenters believe NCUA has the authority to require a credit union to locate a service facility in or near an underserved area. Some commenters believe the location of a branch is a business decision for the credit union to decide. Some commenters believe NCUA should focus on the level of service to the underserved area, not whether the branch is within the area, and one commenter noted that the Community Reinvestment Act does not require branches in an area and allows banks to provide service via ATMs and computers. Another commenter supported a specified distance from the underserved area to the service facility's location rather than requiring it to be in the underserved area. A commenter wrote that the service facility should not have to be in an underserved area within two years if there is public transportation to the service facility or is an acceptable distance from the underserved area. The same commenter suggested the proposed definition of local community should be revised to be 50 miles for heavily populated urban areas and 200 miles for lightly populated rural areas. The commenter believes common interests and interaction should be removed as they are no longer valid or necessary due to credit reports. Several commenters supported the service facility requirement as proposed, requiring a service facility be within the underserved area. A couple of commenters specifically mentioned that a physical presence ensures a credit union is serving the area. A banking trade group commenter wrote that NCUA should require credit unions serving underserved areas to establish a service facility in that area within one year. Another banking trade group wrote that NCUA should require a credit union to establish the service facility in the area upon approval of the expansion. The NCUA Board finds that a service facility physically located in the underserved area assures better service to members in these locations. A credit union can build a better relationship and understanding of the needs of the community by having a physical presence in the area. By doing so the credit union will be better able to assess the needs of the underserved area and provide needed services to its members. NCUA believes requiring establishment of a service facility within two years of the credit union's addition of the area is reasonable and is retaining it. In addition, the Board has decided to retain as an option for an acceptable type of service facility within the underserved area, a credit union owned facility where shares are accepted for member accounts, loan applications are accepted, and loans are disbursed. Regulatory Flexibility Act The Regulatory Flexibility Act requires NCUA to prepare an analysis to describe any significant economic impact a regulation may have on a substantial number of small credit unions (primarily those under $10 million in assets). The final amendments will not have a significant economic impact on a substantial number of small credit unions and therefore, a regulatory flexibility analysis is not required. Paperwork Reduction Act The Office of Management and Budget control numbers assigned to Section 701.1 are 3133-0015 and 3133-0116. NCUA has determined that the amendments will not increase paperwork requirements and a paperwork reduction analysis is not required. 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. The final rule would not have substantial direct effects on the states, on the connection 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 The NCUA has determined that this rule would not affect family well-being within the meaning of section 654 of the Treasury and General Government Appropriations Act of 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) provides generally for 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. NCUA is recommending the Office of Management and Budget determined that this rule is not a major rule for purposes of the Small Business Regulatory Enforcement Fairness Act of 1996. List of Subjects in 12 CFR Part 701 Credit, Credit unions, Reporting and recordkeeping requirements By the National Credit Union Administration Board on June 22, 2006. Mary Rupp, Secretary of the Board. For the reasons stated in the preamble, the National Credit Union Administration amends 12 CFR part 701 as follows: PART 701—ORGANIZATION AND OPERATION OF FEDERAL CREDIT UNIONS 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, 1789. Section 701.6 is also authorized by 15 U.S.C. 3717. Section 701.31 is also authorized by 15 U.S.C. 1601, *et seq.* , 42 U.S.C. 1981 and 3601-3610. Section 701.35 is also authorized by 12 U.S.C. 4311-4312. 2. Section 701.1 is revised to read as follows: § 701.1 Federal credit union chartering, field of membership modifications, and conversions. National Credit Union Administration policies concerning chartering, field of membership modifications, and conversions are set forth in Interpretive Ruling and Policy Statement 03-1, Chartering and Field of Membership Manual, as amended by IRPS 06-1, Copies may be obtained on NCUA's Web site, *http://www.ncua.gov* , or by contacting NCUA at the address found in Section 790.2(c) of this chapter. (Approved by the Office of Management and Budget under control number 3133-0015 and 3133-0116.) 3. IRPS 03-1, Chapter 3, Section III.A is revised to read as follows: Note: The text of the IRPS 06-1 does not appear in the Code of Federal Regulations. A multiple common-bond federal credit union may include in its field of membership, without regard to location, communities satisfying the definition of underserved areas in the Federal Credit Union Act. Adding an underserved area will not change the charter type of the multiple common-bond federal credit union. More than one multiple common-bond federal credit union can serve the same underserved area. The Federal Credit Union Act defines an underserved area as a local community, neighborhood, or rural district that is an “investment area” as defined in Section 103(16) of the Community Development Banking and Financial Institutions Act of 1994. For an underserved area, the well-defined local community, neighborhood, or rural district requirement is met if: • The area to be served is in a recognized single political jurisdiction, i.e., a city, county, or their political equivalent, or any contiguous portion thereof; • The area to be served is in multiple contiguous political jurisdictions, i.e. a city, county, or their political equivalent, or any contiguous portion thereof and if the population of the requested well-defined area does not exceed 500,000; or • The area to be served is a Metropolitan Statistical Area
(MSA)or its equivalent, or a portion thereof, where the population of the MSA or its equivalent does not exceed 1,000,000. If the area to be served does not meet the MSA or multiple political jurisdiction requirements outlined above, the application must include documentation to support that it is a well-defined local community, neighborhood, or rural district. For an underserved area, an investment area includes any of the following, as reported in the most recently completed decennial census or equivalent government data: • An area that wholly consists of or is wholly located within an Empowerment Zone or Enterprise Community designated under section 1391 of the Internal Revenue Code (26 U.S.C. 1391); • An area where the percentage of the population living in poverty is at least 20 percent; • An area in a Metropolitan Area where the median family income is at or below 80 percent of the Metropolitan Area median family income or the national Metropolitan Area median family income, whichever is greater; • An area outside of a Metropolitan Area, where the median family income is at or below 80 percent of the statewide non-Metropolitan Area median family income or the national non-Metropolitan Area median family income, whichever is greater; • An area where the unemployment rate is at least 1.5 times the national average; • An area meeting the criteria for economic distress that may be established by the Community Development Financial Institutions Fund
(CDFI)of the United States Department of the Treasury. In addition, the local community, neighborhood, or rural district must be underserved, based on data considered by the NCUA Board and the Federal banking agencies. Once an underserved area is added to a Federal credit union's field of membership, the credit union must establish and maintain an office or service facility in the community within two years. A service facility is defined as a place where shares are accepted for members' accounts, loan applications are accepted and loans are disbursed. This definition includes a credit union owned branch, a shared branch, a mobile branch, an office operated on a regularly scheduled weekly basis, or a credit union owned facility that meets, at a minimum, these requirements. This definition does not include an ATM or the credit union's Internet Web site. The Federal credit union adding the underserved community must document that the community meets the definition for serving underserved areas in the Federal Credit Union Act. Adding an underserved community does not change the charter type of a multiple common-bond federal credit union. In order to receive the benefits afforded to low-income designated credit unions, such as expanded use of nonmember deposits and access to the Community Development Revolving Loan Program for Credit Unions, a credit union must receive low-income designation pursuant to 12 CFR 701.34. A Federal credit union that desires to include an underserved community in its field of membership must first develop a business plan specifying how it will serve the community. The business plan, at a minimum, must identify the credit and depository needs of the community and detail how the credit union plans to serve those needs. The credit union will be expected to review the business plan regularly to determine if the community is being adequately served. The regional director may require periodic service status reports from a credit union about the underserved area to ensure that the needs of the community are being met as well as requiring such reports before NCUA allows a multiple common-bond Federal credit union to add an additional underserved area. [FR Doc. E6-10134 Filed 6-27-06; 8:45 am] BILLING CODE 7535-01-P DEPARTMENT OF TRANSPORTATION Federal Aviation Administration 14 CFR Part 39 [Docket No. FAA-2006-25175; Directorate Identifier 2006-NM-099-AD; Amendment 39-14670; AD 2006-13-17] RIN 2120-AA64 Airworthiness Directives; Boeing Model 757-200 Series Airplanes Modified by Supplemental Type Certificate
(STC)SA979NE AGENCY: Federal Aviation Administration (FAA), Department of Transportation (DOT). ACTION: Final rule; request for comments. SUMMARY: The FAA is adopting a new airworthiness directive
(AD)for certain Boeing Model 757-200 series airplanes. This AD requires a one-time deactivation of the auxiliary fuel system, repetitive venting and draining of the auxiliary fuel tank sumps, and revising the Limitations section of the airplane flight manual to limit the maximum cargo weight. This AD results from a re-evaluation of the floor structure and cargo barriers conducted by the STC holder. We are issuing this AD to prevent structural overload of the auxiliary fuel tank support structure, which could cause the floor beams to fail, damaging the primary flight controls and the auxiliary power unit fuel lines that pass through the floor beams, resulting in loss of control of the airplane. We are also issuing this AD to prevent structural overload of the cargo barriers, which could cause the barriers to fail, allowing the cargo to shift, resulting in damage to the auxiliary fuel tanks, residual fuel leakage, and consequent increased risk of a fire. DATES: This AD becomes effective July 13, 2006. The Director of the Federal Register approved the incorporation by reference of certain publications listed in the AD as of July 13, 2006. We must receive comments on this AD by August 28, 2006. ADDRESSES: Use one of the following addresses to submit comments on this AD. • DOT Docket Web site: Go to *http://dms.dot.gov* and follow the instructions for sending your comments electronically. • Government-wide rulemaking Web site: Go to *http://www.regulations.gov* and follow the instructions for sending your comments electronically. • Mail: Docket Management Facility; U.S. Department of Transportation, 400 Seventh Street, SW., Nassif Building, Room PL-401, Washington, DC 20590. • Fax:
(202)493-2251. • Hand Delivery: Room PL-401 on the plaza level of the Nassif Building, 400 Seventh Street, SW., Washington, DC, between 9 a.m. and 5 p.m., Monday through Friday, except Federal holidays. Contact PATS Aircraft, LLC, Product Support, 21652 Nanticoke Avenue, Georgetown, DE 19947, for service information identified in this AD. FOR FURTHER INFORMATION CONTACT: Jon Hjelm, Aerospace Engineer, Airframe and Propulsion Branch, ANE-171, FAA, New York Aircraft Certification Office, 1600 Stewart Avenue, Suite 410, Westbury, New York 11590; telephone
(516)228-7323; fax
(516)794-5531. SUPPLEMENTARY INFORMATION: Discussion PATS Aircraft (holder of Supplemental Type Certificate
(STC)SA979NE) notified us that it has determined that Model 757-200 series airplanes equipped with auxiliary fuel tank systems installed by STC SA979NE have insufficient structural strength in the auxiliary fuel tank support structure. The STC holder has also determined that the cargo barriers have insufficient structural strength if subjected to emergency landing loads with more than 2,000 pounds of cargo in the cargo compartment. These determinations were based on a new structural analysis resulting from a re-evaluation of the floor structure and cargo barriers conducted by the STC holder. Structural overload of the auxiliary fuel tank support structure could cause the floor beams to fail, damaging the primary flight controls and the auxiliary power unit fuel lines that pass through the floor beams; this condition, if not corrected, could result in loss of control of the airplane. Structural overload of the cargo barriers could cause the barriers to fail, allowing the cargo to shift; this condition, if not corrected, could result in damage to the auxiliary fuel tanks, residual fuel leakage, and consequent increased risk of a fire. Relevant Service Information We have reviewed PATS Aircraft Service Bulletin SA979NE-28-SB-28_IR, dated April 3, 2006. The service bulletin describes procedures for deactivating the auxiliary fuel system, and installing new cargo loading weight limits and “INOP” placards, depending on the airplane configuration. The service bulletin also describes procedures for venting any residual air pressure from the auxiliary fuel tanks following each flight and draining the auxiliary fuel tank sumps to regularly remove any residual fuel that may accumulate over time due to leakage around the auxiliary fuel tank valves. Paragraph I.D. (“Description”) of the service bulletin describes limiting the maximum cargo weight to 2,000 pounds (as specified on the new cargo weight placards) in the forward and aft cargo compartments, as applicable, depending on the STC configuration of the airplane. We have also reviewed the PATS Aircraft supplements to the Limitations section of the Boeing 757-200 Airplane Flight Manual (AFM), which are identified in the following table. These AFM supplements provide revised maximum cargo weight limits. Table.—Applicable AFM Supplements for Revised Cargo Weight Limits For airplanes having S/Ns— Use PATS Aircraft AFM supplement— 29025, 29026, 29027, and 29028 (STC Configuration F, which has been upgraded to Configuration H) 142, dated May 31, 2006. 24923 (STC Configuration A) 143, dated May 31, 2006. 25155 and 25220 (STC Configuration C & D) 144, dated May 31, 2006. 28463 (STC Configuration E) 145, dated May 31, 2006. 22690 and 25487 (STC Configuration B & G) 146, dated May 31, 2006. FAA's Determination and Requirements of This AD The unsafe conditions described previously are likely to exist or develop on other airplanes of the same type design. We are issuing this AD to prevent structural overload of the auxiliary fuel tank support structure, which could cause the floor beams to fail, damaging the primary flight controls and the auxiliary power unit fuel lines that pass through the floor beams, resulting in loss of control of the airplane. We are also issuing this AD to prevent structural overload of the cargo barriers, which could cause the barriers to fail, allowing the cargo to shift, resulting in damage to the auxiliary fuel tanks, residual fuel leakage, and consequent increased risk of a fire. This AD requires accomplishing the actions specified in the service information described previously, except as discussed under “Differences Between the AD and the Service Bulletin.” Differences Between the AD and the Service Bulletin PATS Aircraft Service Bulletin SA979NE-28-SB-28_IR, dated April 3, 2006, does not specify a compliance time for deactivating the auxiliary fuel system or implementing the new cargo weight limits. In developing an appropriate compliance time for those actions in this AD, we considered the degree of urgency associated with the subject unsafe condition, the average utilization of the affected fleet, and the time necessary to perform the deactivation (3 hours) and AFM revision. In light of all of these factors, we find that a 30-day compliance time represents an appropriate interval of time for affected airplanes to continue to operate without compromising safety. Interim Action We consider this AD interim action. The STC holder is currently developing a modification that will address the unsafe conditions identified in this AD. Once this modification is developed, approved, and available, we may consider additional rulemaking. FAA's Determination of the Effective Date Since unsafe conditions exists that require the immediate adoption of this AD, we have found that notice and opportunity for public comment before issuing this AD are impracticable, and that good cause exists to make this AD effective in less than 30 days. Comments Invited This AD is a final rule that involves requirements that affect flight safety and was not preceded by notice and an opportunity for public comment; however, we invite you to submit any relevant written data, views, or arguments regarding this AD. Send your comments to an address listed in the ADDRESSES section. Include “Docket No. FAA-2006-25175; Directorate Identifier 2006-NM-099-AD” at the beginning of your comments. We specifically invite comments on the overall regulatory, economic, environmental, and energy aspects of the AD that might suggest a need to modify it. We will post all comments we receive, without change, to *http://dms.dot.gov* , including any personal information you provide. We will also post a report summarizing each substantive verbal contact with FAA personnel concerning this AD. Using the search function of that Web site, anyone can find and read the comments in any of our dockets, including the name of the individual who sent the comment (or signed the comment on behalf of an association, business, labor union, etc.). You may review the DOT's complete Privacy Act Statement in the **Federal Register** published on April 11, 2000 (65 FR 19477-78), or you may visit *http://dms.dot.gov* . Examining the Docket You may examine the AD docket on the Internet at *http://dms.dot.gov* , or in person at the Docket Management Facility office between 9 a.m. and 5 p.m., Monday through Friday, except Federal holidays. The Docket Management Facility office (telephone
(800)647-5227) is located on the plaza level of the Nassif Building at the DOT street address stated in the ADDRESSES section. Comments will be available in the AD docket shortly after the Docket Management System receives them. Authority for This Rulemaking Title 49 of the United States Code specifies the FAA's authority to issue rules on aviation safety. Subtitle I, section 106, describes the authority of the FAA Administrator. Subtitle VII, Aviation Programs, describes in more detail the scope of the Agency's authority. We are issuing this rulemaking under the authority described in subtitle VII, part A, subpart III, section 44701, “General requirements.” Under that section, Congress charges the FAA with promoting safe flight of civil aircraft in air commerce by prescribing regulations for practices, methods, and procedures the Administrator finds necessary for safety in air commerce. This regulation is within the scope of that authority because it addresses unsafe conditions that are likely to exist or develop on products identified in this rulemaking action. Regulatory Findings We have determined that this AD will not have federalism implications under Executive Order 13132. This AD 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. For the reasons discussed above, I certify that the regulation: 1. Is not a “significant regulatory action” under Executive Order 12866; 2. Is not a “significant rule” under the DOT Regulatory Policies and Procedures (44 FR 11034, February 26, 1979); and 3. Will not have a significant economic impact, positive or negative, on a substantial number of small entities under the criteria of the Regulatory Flexibility Act. We prepared a regulatory evaluation of the estimated costs to comply with this AD and placed it in the AD docket. See the ADDRESSES section for a location to examine the regulatory evaluation. List of Subjects in 14 CFR Part 39 Air transportation, Aircraft, Aviation safety, Incorporation by reference, Safety. Adoption of the Amendment Accordingly, under the authority delegated to me by the Administrator, the FAA amends 14 CFR part 39 as follows: PART 39—AIRWORTHINESS DIRECTIVES 1. The authority citation for part 39 continues to read as follows: Authority: 49 U.S.C. 106(g), 40113, 44701. § 39.13 [Amended] 2. The Federal Aviation Administration
(FAA)amends § 39.13 by adding the following new airworthiness directive (AD): **2006-13-17 PATS Inc.:** Amendment 39-14670. Docket No. FAA-2006-25175; Directorate Identifier 2006-NM-099-AD. Effective Date
(a)This AD becomes effective July 13, 2006. Affected ADs
(b)None. Applicability
(c)This AD applies to Boeing Model 757-200 series airplanes, certificated in any category; modified by Supplemental Type Certificate
(STC)SA979NE, having serial numbers identified in PATS Aircraft Service Bulletin SA979NE-28-SB-28_IR, dated April 3, 2006. Unsafe Condition
(d)This AD results from a re-evaluation of the floor structure and cargo barriers conducted by the STC holder. We are issuing this AD to prevent structural overload of the auxiliary fuel tank support structure, which could cause the floor beams to fail, damaging the primary flight controls and the auxiliary power unit fuel lines that pass through the floor beams, resulting in loss of control of the airplane. We are also issuing this AD to prevent structural overload of the cargo barriers, which could cause the barriers to fail, allowing the cargo to shift, resulting in damage to the auxiliary fuel tanks, residual fuel leakage, and consequent increased risk of a fire. Compliance
(e)You are responsible for having the actions required by this AD performed within the compliance times specified, unless the actions have already been done. Service Bulletin References
(f)The term “service bulletin,” as used in this AD, means the Accomplishment Instructions and Maintenance Requirements of PATS Aircraft Service Bulletin SA979NE-28-SB-28-IR, dated April 3, 2006. Deactivation of the Auxiliary Fuel System and Revised Cargo Weight Limits
(g)Within 30 days after the effective date of this AD: Do the actions in paragraphs (g)(1) and (g)(2) of this AD. Thereafter, do the actions in paragraphs
(h)and
(i)of this AD at the times specified in those paragraphs.
(1)Deactivate the auxiliary fuel system by doing all of the actions specified in Part III and all of the actions for the applicable airplane configuration specified in Part IV of the service bulletin.
(2)Revise the Limitations section of the Boeing 757-200 Airplane Flight Manual
(AFM)to include revised maximum cargo weight limits specified in the applicable AFM supplement identified in Table 1 of this AD. Operate the airplane according to the limitations in the AFM supplements. Table 1.—Applicable AFM Supplements for Revised Cargo Weight Limits For airplanes having S/Ns— Use PATS Aircraft AFM supplement— 29025, 29026, 29027, and 29028 (STC Configuration F, which has been upgraded to Configuration H) 142, dated May 31, 2006. 24923 (STC Configuration A) 143, dated May 31, 2006. 25155 and 25220 (STC Configuration C & D) 144, dated May 31, 2006. 28463 (STC Configuration E) 145, dated May 31, 2006. 22690 and 25487 (STC Configuration B & G) 146, dated May 31, 2006. Repetitive Venting of the Built-Up Pressure in the Auxiliary Fuel Tanks
(h)After deactivating the auxiliary fuel system as specified in paragraph
(g)of this AD: Following each flight, vent the auxiliary fuel tanks by doing all of the actions specified in paragraph A. of Part V of the service bulletin. Repetitive Draining of the Fuel Tank Sumps for Residual Fuel
(i)At intervals not to exceed 100 flight cycles following deactivation of the auxiliary fuel system, as specified in paragraph
(g)of this AD: Drain the auxiliary fuel tank sumps to remove any built-up residual fuel by doing all of the actions specified in paragraph B. of Part V of the service bulletin. Special Flight Permits
(j)Special flight permits may be issued in accordance with sections 21.197 and 21.199 of the Federal Aviation Regulations (14 CFR 21.197 and 21.199) to operate the airplane to a location where the airplane can be modified, provided the airplane is operated with the auxiliary fuel tanks empty. Alternative Methods of Compliance (AMOCs) (k)(1) The Manager, New York Aircraft Certification Office (ACO), FAA, has the authority to approve AMOCs for this AD, if requested in accordance with the procedures found in 14 CFR 39.19.
(2)Before using any AMOC approved in accordance with § 39.19 on any airplane to which the AMOC applies, notify the appropriate principal inspector in the FAA Flight Standards Certificate Holding District Office. Material Incorporated by Reference
(l)You must use PATS Aircraft Service Bulletin SA979NE-28-SB-28_IR, dated April 3, 2006, and the applicable PATS Aircraft supplement to the Boeing 757-200 Airplane Flight Manual identified in Table 2 of this AD, as applicable, to perform the actions that are required by this AD, unless the AD specifies otherwise. Table 2.—Airplane Flight Manual Supplements for Incorporation by Reference PATS Aircraft airplane flight manual supplement— Dated— 142 May 31, 2006. 143 May 31, 2006. 144 May 31, 2006. 145 May 31, 2006. 146 May 31, 2006. The Director of the Federal Register approved the incorporation by reference of these documents in accordance with 5 U.S.C. 552(a) and 1 CFR part 51. Contact PATS Aircraft, LLC, Product Support, 21652 Nanticoke Avenue, Georgetown, DE 19947, for a copy of this service information. You may review copies at the Docket Management Facility, U.S. Department of Transportation, 400 Seventh Street, SW., Room PL-401, Nassif Building, Washington, DC; on the Internet at *http://dms.dot.gov;* or at the National Archives and Records Administration (NARA). For information on the availability of this material at the NARA, call
(202)741-6030, or go to *http://www.archives.gov/federal_register/code_of_federal_regulations/ibr_locations.html.* Issued in Renton, Washington, on June 15, 2006. Ali Bahrami, Manager, Transport Airplane Directorate, Aircraft Certification Service. [FR Doc. 06-5702 Filed 6-27-06; 8:45 am]
Connectionstraces to 23
Traces to 23 documents
13 references not yet in our index
  • 12 CFR 742
  • Pub. L. 105-277
  • Pub. L. 104-121
  • 12 CFR 701
  • 12 CFR 741
  • 42 USC 4311-4312
  • 488 U.S. 204
  • 892 F.2d 1052
  • 606 F.2d 1094
  • 445 U.S. 920
  • 12 USC 4311-4312
  • 14 CFR 39
  • 1 CFR 51
Citation graph
cites case law
Rules and Regulations
Final rule
C.F.R.§ 1.3
C.F.R.§ 700.2
C.F.R.§ 712.3
C.F.R.§ 701.36
U.S.C.§ 3507
Fed. Reg.Proposed Rules
U.S.C.§ 3502
Pub. L.Public Law 118-137
U.S.C.§ 551
SCOTUS488 U.S. 204
F. App'x892 F.2d 1052
F. App'x606 F.2d 1094
Cites 36 · showing 12Cited by 0 across 0 sources
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