Part 1. FINANCE COMMISSION OF TEXAS

Chapter 1. CONSUMER CREDIT COMMISSIONER

Subchapter A. REGULATED LOAN LICENSES

2. APPLICATION FOR LICENSE AND TRANSFER OF LICENSE

7 TAC §1.30, §1.31

The Finance Commission of Texas (the commission) proposes the adoption of the amendment to §§1.30 and 1.31 pertaining to the technical correction of legal citations as a result of the recodification by the 76th Legislature of the Texas Credit Code , Texas Civil Statutes, Article 5069, into the Texas Finance Code.

Leslie L. Pettijohn, Consumer Credit Commissioner, has determined that for the first five-year period of the amendment as proposed will be in effect, there will be no fiscal implications for state or local government as a result of administering or enforcing the amendment.

Ms. Pettijohn also has determined that for each year of the first five-year period the amendment as proposed will be in effect, the public benefit anticipated as result of the amendment is the removal and replacement of incorrect citation with correct and appropriate citations to the statute. These is no anticipated cost to persons who are required to comply with the amendment as proposed. There will be no adverse economic effect on small businesses.

Comments on the proposed amendment may be submitted in writing to Leslie L. Pettijohn, Consumer Credit Commissioner, 2601 North Lamar Boulevard, Austin, Texas 78705-4207.

The amendment is proposed under Texas Finance Code, §11.304, which authorizes the Finance Commission to adopt rules to enforce Title 4 of the Texas Finance Code. Additionally, Texas Finance Code, §342.551 authorizes the Finance Commission to adopt rules for the enforcement of the consumer loan chapter.

The statutory provisions (as currently in effect) affected Chapter 342, Texas Finance Code.

§1.30.Definitions.

Words and terms used in this chapter that are defined in Texas Finance Code, Chapter 342, [ Texas Civil Statutes, Article 5069, Chapter 3A, ] have the same meanings as defined in Chapter 342 [ Chapter 3A ]. The following words and terms, when used in this chapter, shall have the following meanings, unless the context clearly indicates otherwise.

(1)

(No change.)

(2)

Principal party--All proprietors and adult individuals with a substantial relationship to the proposed lending business of the applicant. Individuals with a substantial relationship to the proposed lending business of the applicant include but are not limited to:

(A) - (B)

(No change.)

(C)

corporate officers, to include the Chief Executive Officer or President, the Chief Financial Officer or Treasurer, and those with substantial responsibility for lending operations or compliance with [ Texas Civil Statutes, Article 5069, or ] the Finance Code;

(D) - (F)

(No change.)

§1.31.Filing of New Application.

An application for issuance of a new consumer loan license must be submitted on forms prescribed by the commissioner at the date of filing and in accordance with the commissioner's instructions. The application shall include, but not be limited to, the following:

(1)

(No change.)

(2)

Other Required Filings.

(A) - (D)

(No change.)

(E)

Bond. The commissioner may require a bond under §342.102,Texas Finance Code, [ Texas Civil Statutes, Article 5069-3A.202 ] when the commissioner finds that this would serve the public interest. When a bond is required, the commissioner shall give written notice to the applicant. Should a bond not be submitted within 40 calendar days of the date of the commissioner's notice, any pending application may be denied.

(3)

(No change.)

This agency hereby certifies that the proposal has been reviewed by legal counsel and found to be within the agency's legal authority to adopt.

Filed with the Office of the Secretary of State, on October 20, 2000.

TRD-200007411

Leslie L. Pettijohn

Commissioner

Finance Commission of Texas

Earliest possible date of adoption: December 3, 2000

For further information, please call: (512) 936-7640

7 TAC §§1.101, 1.102, 1.104 - 1.107

The Finance Commission of Texas (the commission) proposes the adoption of the amendment to §§1.101, 1.102, 1.104, 1.105, 1.106 and 1.107 pertaining to the technical correction of legal citations as a result of the recodification by the 76th Legislature of the Texas Credit Code , Texas Civil Statutes, Article 5069, into the Texas Finance Code.

Leslie L. Pettijohn, Consumer Credit Commissioner, has determined that for the first five-year period of the amendment as proposed will be in effect, there will be no fiscal implications for state or local government as a result of administering or enforcing the amendment.

Ms. Pettijohn also has determined that for each year of the first five-year period the amendment as proposed will be in effect, the public benefit anticipated as result of the amendment is the removal and replacement of incorrect citation with correct and appropriate citations to the statute. These is no anticipated cost to persons who are required to comply with the amendment as proposed. There will be no adverse economic effect on small businesses.

Comments on the proposed amendment may be submitted in writing to Leslie L. Pettijohn, Consumer Credit Commissioner, 2601 North Lamar Boulevard, Austin, Texas 78705-4207.

The amendment is proposed under Texas Finance Code, §11.304, which authorizes the Finance Commission to adopt rules to enforce Title 4 of the Texas Finance Code. Additionally, Texas Finance Code, §342.551 authorizes the Finance Commission to adopt rules for the enforcement of the consumer loan chapter.

The statutory provisions (as currently in effect) affected Chapter 342, Texas Finance Code.

§1.101.Purpose and Scope.

(a)

Purpose. The purpose of this chapter is to assist in the administration and enforcement of Chapter 342 of the Texas Finance Code. [ 3A of the Texas Civil Statutes, Article 5069 ("Article 5069"). ]

(b)

Scope.

(1)

This chapter applies to all persons engaged in the business of making, transacting, or negotiating loans subject to Chapter 342 of the Texas Finance Code. [ 3A of Article 5069. ] As such, this chapter only applies to lenders and brokers in the business of making, transacting or negotiating loans that:

(A) - (C)

(No change.)

(2)

This also includes a loan broker who arranges, negotiates, or brokers loans for a lender that funds the loan. This chapter does not apply to any loans made under Chapters 301-339 of the Texas Finance Code, [ Chapters 1B-1H of Article 5069, ] including, for example, commercial and agricultural loans.

§1.102.Definitions.

Words and terms used in this chapter that are defined in Chapter 342 of the Texas Finance Code [ Chapter 3A of Article 5069 ] have the same meanings as defined in Chapter 342. [ Chapter 3A. ] The following words and terms, when used in this chapter, shall have the following meanings, unless the context clearly indicates otherwise.

(1)

Acquisition Charge--An interest charge authorized for making the cash advance under authority of §342.252, Texas Finance Code. [ Article 3A.402 of Article 5069. ]

(2) - (10)

(No change.)

(11)

Installment Account Handling Charge (IAHC)--An interest charge authorized for making a loan under §342.252, Texas Finance Code. [ Article 5069-3A.402. ]

(12) - (13)

(No change.)

(14)

Interpretation Letter--A formal interpretation of Title 4 of [ Article 5069 and ]the Texas Finance Code made by the Commissioner and approved by the Finance Commission under Texas Finance Code §14.108. [ §14.408. ]

(15)

Licensee--Any person who has been issued a consumer loan license pursuant to Chapter 342 of the Texas Finance Code. [ Chapter 3A of Article 5069. ] Another name for a "consumer loan license" is "regulated loan license."

(16) - (23)

(No change.)

(24)

Regulated Loan--Loan made under the authority of Chapter 342, Texas Finance Code. [ Article 5069-3A.101. ]

(25) - (30)

(No change.)

§1.104.Knowledge of Laws and Regulations Required.

Each officer, director, employee, and agent of a licensee shall have a working knowledge of Chapter 342, Texas Finance Code [ Chapter 3A of Article 5069, ]its implementing regulations, and other pertinent state and federal statutes and regulations that apply to their business.

§1.105.Attempted Evasion of Applicability of Chapter.

A "device, subterfuge, or pretense to evade the application of this title," as used in §342.051(b), Texas Finance Code [ Article 5069-3A.101(b), ] refers to any transaction:

(1)

that in form may appear on its face to be something other than a loan, but in substance meets the definition of a loan as defined in §301.002(a)(10), Texas Finance Code; [ Article 5069- 1B.002(a)(10); ] and

(2)

(No change.)

§1.106.Multiple Licenses.

(a)

Definitions. The words "make," "negotiate," "arrange," and "collect" as used in §342.052(b), Texas Finance Code [ Texas Civil Statutes, Article 5069-3A.102(b) ] are to be construed as follows.

(1) - (3)

(No change.)

(b)

(No change.)

§1.107.Loans by Mail.

(a)

Definitions. The words "make," "negotiate," "arrange," and "collect" as used in §342.053(b), Texas Finance Code [ Texas Civil Statutes, Article 5069-3A.103(b) ] are to be construed as follows.

(1) - (3)

(No change.)

(b)

(No change.)

(c)

License not required. National banks and federally-chartered thrifts and credit unions, wherever located, and federally-insured state banks, state thrifts and state credit unions with offices located outside of Texas may make loans by mail to Texas without obtaining any license under §342.051 et seq., Texas Finance Code [ Texas Civil Statutes, Article 5069-3A.101 ] et seq. from the OCCC and are considered to be an authorized lender.

(d)

Internet Loans. For purposes of §342.053(b), Texas Finance Code [ Texas Civil Statutes, Article 5069-3A.103(b), ] a loan made, negotiated, arranged or collected by or through the Internet is considered a "loan by mail."

This agency hereby certifies that the proposal has been reviewed by legal counsel and found to be within the agency's legal authority to adopt.

Filed with the Office of the Secretary of State, on October 20, 2000.

TRD-200007412

Leslie L. Pettijohn

Commissioner

Finance Commission of Texas

Earliest possible date of adoption: December 3, 2000

For further information, please call: (512) 936-7640

7 TAC §§1.501, 1.502, 1.504, 1.505

The Finance Commission of Texas (the commission) proposes the adoption of the amendment to §§1.501, 1.502, 1.504 and 1.505 pertaining to the technical correction of legal citations as a result of the recodification by the 76th Legislature of the Texas Credit Code , Texas Civil Statutes, Article 5069, into the Texas Finance Code.

Leslie L. Pettijohn, Consumer Credit Commissioner, has determined that for the first five-year period of the amendment as proposed will be in effect, there will be no fiscal implications for state or local government as a result of administering or enforcing the amendment.

Ms. Pettijohn also has determined that for each year of the first five-year period the amendment as proposed will be in effect, the public benefit anticipated as result of the amendment is the removal and replacement of incorrect citation with correct and appropriate citations to the statute. These is no anticipated cost to persons who are required to comply with the amendment as proposed. There will be no adverse economic effect on small businesses.

Comments on the proposed amendment may be submitted in writing to Leslie L. Pettijohn, Consumer Credit Commissioner, 2601 North Lamar Boulevard, Austin, Texas 78705-4207.

The amendment is proposed under Texas Finance Code, §11.304, which authorizes the Finance Commission to adopt rules to enforce Title 4 of the Texas Finance Code. Additionally, Texas Finance Code, §342.551 authorizes the Finance Commission to adopt rules for the enforcement of the consumer loan chapter.

The statutory provisions (as currently in effect) affected Chapter 342, Texas Finance Code.

§1.501.Maximum Interest Charge.

(a)

Precomputed loans. An authorized lender may charge the add-on rates authorized by §342.201(a), Texas Finance Code [ Art. 5069-3A.301(a) ] or the alternative simple interest rate authorized by §342.201(d), Texas Finance Code [ Art. 5069- 3A.301(d), ] as calculated by the scheduled installment earnings method, for precomputed loans that are either unsecured or secured by personal property. Prepaid interest in the form of points is not permitted, unless expressly authorized by statute (e.g. an administrative loan fee).

(b)

Interest-bearing loans. An authorized lender may charge any rate of interest that does not exceed the maximum rate authorized by §342.201(d), Texas Finance Code [ Art. 5069-3A.301(d), ] as calculated by the true daily earnings method or the scheduled installment earnings method for an interest-bearing loan that is either unsecured or secured by personal property. Prepaid interest in the form of points is not permitted, unless expressly authorized by statute (e.g. an administrative loan fee).

(c)

Method of calculation. An authorized lender making loans under §342.201(d), Texas Finance Code [ Art. 5069-3A.301(d) ] may calculate the rate and amount of interest by any method of calculation as long as the amount of interest charged does not exceed the maximum rate or amount of interest set forth in §342.201(d), Texas Finance Code [ Art. 5069-3A.301(d) ] calculated using the specified earnings methods of §342.201, Texas Finance Code. [ Art. 5069-3A.301. ]

§1.502.Treatment of Periods Less Than a Full Month Before the First Installment Date.

(a)

(No change.)

(b)

An authorized lender may not charge more than the maximum authorized §342.201(a) or §342.201(d), Texas Finance Code [ Art. 5069-3A.301(a) or 5069-3A.301(d) ] effective rate in calculating the interest charge for the additional odd first period.

§1.504.Default Charges.

(a)

Precomputed loans. Additional interest for default may be charged on a precomputed loans, whether regular or irregular, or on a precomputed loan contracted for on a scheduled installment earnings method, to the extent it is authorized by §342.203 or §342.206, Texas Finance Code. [ Art. 5069-3A.303 or Art. 5069-3A.306. ]

(b)

Interest-bearing loans. No additional interest for default may be charged on an interest- bearing loan made pursuant to §342.201, Texas Finance Code [ Art. 3A.301, ] except for a loan contracted for on a scheduled installment earnings method.

(c) - (d)

(No change.)

(e)

Pyramiding prohibited. An authorized lender seeking to assess additional interest for default in a precomputed loan under §342.203 or §342.206, Texas Finance Code [ Art. 5069-3A.303 or Art. 5069-3A.306 ] must comply with the prohibition on the pyramiding of late charges set forth in the Federal Trade Commission Credit Practices Rule at 16 C.F.R. §§444.4.

§1.505.Deferment.

(a) - (d)

(No change.)

(e)

Computation of deferment charge for a regular transaction. Each deferment charge on a regular loan transaction shall be computed in accordance with the method prescribed by the loan contract. If the loan contract does not provide for a deferment charge, then no deferment charge may be assessed or collected. A lender may employ any of the prescribed computational methods described herein so long as the computational method employed is consistently utilized throughout the term of the loan.

(1)

(No change.)

(2)

If any installment subsequent to the first installment is deferred, the deferred installment period will be determined by dividing the remaining precomputed balance owed on the account by the regular scheduled installment amount. The dollar amount associated with the deferred installment period must be rounded down to the nearest whole integer. Additionally, no deferred installment period may have a default charge assessed against the deferred installment period. After the determination of the deferred installment period, the additional interest for the deferment may not exceed the difference between the refund that would be required for prepayment in full for the determined deferred installment and the refund that would be required for the prepayment in full of the next succeeding installment. The resulting difference shall be multiplied by the number of months in the deferment period. For example, the terms of a precomputed §342.201(a), Texas Finance Code [ Art. 5069- 3A.301(a) ] loan are as follows: Date of loan: 09/01/1997; First payment due date: 10/01/1997; Cash Advance: $2,576.61; Finance Charge: $1,023.39; Total of Payments: $3,600.00; Term: 36 months; Monthly Installment: $100; Refunding method: Sum of the periodic balances; Annual Percentage Rate: 23.1935%. Assume a deferment is agreed to roughly six months into the contract, and at that time the remaining precomputed balance owed on the account was $3,095.00 and the regular scheduled installment amount was $100.00. The nearest whole integer for the dollar amount associated with the deferred time period would be 30 ($3,095.00 divided by $100 = 30.95; rounded down to the nearest whole integer = 30). If a default charge had already been assessed on the 30th remaining installment, the nearest whole integer would be 29. Assuming no default charge had been assessed on the 30th remaining installment, the additional interest charge for the deferment would be the difference between the interest refund of the 30th and the 29th installments. This difference would be $46.10 (Interest refund as of the 30th installment = $714.53; interest refund as of the 29th installment = $668.43; $714.53 - $668.43 = $46.10). A scheduled installment earnings refund method would yield a slightly different result of $44.49.

(3)

(No change.)

(f) - (i)

(No change.)

This agency hereby certifies that the proposal has been reviewed by legal counsel and found to be within the agency's legal authority to adopt.

Filed with the Office of the Secretary of State, on October 20, 2000.

TRD-200007413

Leslie L. Pettijohn

Commissioner

Finance Commission of Texas

Earliest possible date of adoption: December 3, 2000

For further information, please call: (512) 936-7640

7 TAC §1.601

The Finance Commission of Texas (the commission) proposes an amendment to §1.601 pertaining to the technical correction of legal citations as a result of the recodification by the 76th Legislature of the Texas Credit Code , Texas Civil Statutes, Article 5069, into the Texas Finance Code.

Leslie L. Pettijohn, Consumer Credit Commissioner, has determined that for the first five-year period of the amendment as proposed will be in effect, there will be no fiscal implications for state or local government as a result of administering or enforcing the amendment.

Ms. Pettijohn also has determined that for each year of the first five-year period the amendment as proposed will be in effect, the public benefit anticipated as result of the amendment is the removal and replacement of incorrect citation with correct and appropriate citations to the statute. There is no anticipated cost to persons who are required to comply with the amendment as proposed. There will be no adverse economic effect on small businesses.

Comments on the proposed amendment may be submitted in writing to Leslie L. Pettijohn, Consumer Credit Commissioner, 2601 North Lamar Boulevard, Austin, Texas, 78705-4207.

The amendment is proposed under Texas Finance Code, §11.304, which authorizes the Finance Commission to adopt rules to enforce Title 4 of the Texas Finance Code. Additionally, Texas Finance Code, §342.551 authorizes the Finance Commission to adopt rules for the enforcement of the consumer loan chapter.

The statutory provisions (as currently in effect) affected Chapter 342, Texas Finance Code.

§1.601.Authorized Charges.

(a)

An authorized lender may contract for, charge, or collect on a loan made pursuant to Subchapter F:

(1)-(5)

(No change.)

(6)

interest after maturity that does not exceed the Subchapter A, Chapter 303 [ Chapter 1D ] rate.

(b)

(No change.)

This agency hereby certifies that the proposal has been reviewed by legal counsel and found to be within the agency's legal authority to adopt.

Filed with the Office of the Secretary of State, on October 20, 2000.

TRD-200007414

Leslie L. Pettijohn

Commissioner

Finance Commission of Texas

Earliest possible date of adoption: December 3, 2000

For further information, please call: (512) 936-7640

7 TAC §§1.701-1.706

The Finance Commission of Texas (the commission) proposes amendments to §§1.701-1.706 pertaining to the technical correction of legal citations as a result of the recodification by the 76th Legislature of the Texas Credit Code , Texas Civil Statutes, Article 5069, into the Texas Finance Code.

Leslie L. Pettijohn, Consumer Credit Commissioner, has determined that for the first five-year period of the amendments as proposed will be in effect, there will be no fiscal implications for state or local government as a result of administering or enforcing the amendments.

Ms. Pettijohn also has determined that for each year of the first five-year period the amendments as proposed will be in effect, the public benefit anticipated as result of the amendments are the removal and replacement of incorrect citation with correct and appropriate citations to the statute. There is no anticipated cost to persons who are required to comply with the amendments as proposed. There will be no adverse economic effect on small businesses.

Comments on the proposed amendments may be submitted in writing to Leslie L. Pettijohn, Consumer Credit Commissioner, 2601 North Lamar Boulevard, Austin, Texas, 78705-4207.

The amendments are proposed under Texas Finance Code, §11.304, which authorizes the Finance Commission to adopt rules to enforce Title 4 of the Texas Finance Code. Additionally, Texas Finance Code, §342.551 authorizes the Finance Commission to adopt rules for the enforcement of the consumer loan chapter.

The statutory provisions (as currently in effect) affected Chapter 342, Texas Finance Code.

§1.701.Maximum Interest Charge.

(a)

Precomputed secondary mortgage loan. In a precomputed secondary mortgage loan, an authorized lender may contract for, charge, or receive an amount of interest that does not exceed the applicable simple interest rate authorized by Texas Finance Code, Chapter 303 [ Tex. Rev. Civ. Stat., Article 5069-Chapter 1D ], Subchapter A. Prepaid interest is not permitted unless expressly authorized by statute (e.g., an administrative loan fee).

(b)

Interest-bearing loan. In an interest-bearing secondary mortgage loan, an authorized lender may contract for, charge, or receive any rate of interest that does not exceed the applicable amount authorized by Texas Finance Code, Chapter 303 [ Tex. Rev. Civ. Stat., Article 5069-Chapter 1D ], Subchapter A, as calculated under the true daily earnings method or the scheduled installment earnings method. Prepaid interest in the form of points, such as origination or discount points, may be contracted for, charged, or received by an originating lender, so long as the total amount of interest contracted for, charged, or received, when spread over the full term of the loan as permitted by §302.101, Texas Finance Code [ Tex. Rev. Civ. Stat., Art. 5069-1C.101, ] does not exceed the applicable interest limit in Texas Finance Code, Chapter 303 [ Tex. Rev. Civ. Stat., Art. 5069-1D ], Subchapter A.

(c)

Method of calculation. An authorized lender making loans under §342.301(c), Texas Finance Code [ Article 5069-3A.501(c) ] may calculate the rate and amount of interest by any method of calculation as long as the amount of interest charged does not exceed the maximum rate or amount of interest set forth in §342.301, Texas Finance Code [ Article 5069-3A.501 ] calculated using the specified earnings methods contained in §342.301, Texas Finance Code [ Article 5069-3A.501 ].

§1.702.Treatment of Periods Less Than a Full Month.

(a)-(b)

(No change.)

(c)

An authorized lender may not contract for or charge more than the maximum rate authorized by Texas Finance Code, Chapter 303 [ Art. 5069-Chapter 1D ], Subchapter A in calculating the interest charge for the additional odd days in the first installment period.

§1.703.Default Charges.

(a)

Precomputed loan. Additional interest for default may be charged in a precomputed secondary mortgage loan, whether regular or irregular, or on a secondary mortgage loan that employs the scheduled installment earnings method, to the extent it is authorized by §342.302 or §342.305, Texas Finance Code [ Tex. Rev. Civ. Stat., Art. 5069-3A.502 or Art. 5069-3A.505 ].

(b)-(e)

(No change.)

(f)

Pyramiding prohibited. An authorized lender seeking to assess additional interest for default in a precomputed secondary mortgage loan under §342.302 or §342.305, Texas Finance Code [ Tex. Rev. Civ. Stat., Article 5069-3A.502 or Article 5069-3A.505 ] must comply with the prohibition on the pyramiding of late charges set forth in the Federal Trade Commission Credit Practices Rule at 16 C.F.R. §444.4 or in Regulation AA, 12 C.F.R. Part 227, promulgated by the Board of Governors of the Federal Reserve Board, as applicable.

§1.704.Deferment.

(a)-(c)

(No change.)

(d)

Computation of deferment charge for a regular transaction. Each deferment charge on a regular loan transaction shall be computed in accordance with the method prescribed by the loan contract. If the loan contract does not provide for a deferment charge, then no deferment charge may be assessed or collected. A lender may employ any of the prescribed computational methods described in Chapter 342 [ Chapter 3A ] so long as the computational method employed is consistently utilized throughout the term of the loan.

(1)

(No change.)

(2)

If any installment subsequent to the first installment is deferred, the deferred installment period will be determined by dividing the remaining precomputed balance owed on the account by the regular scheduled installment amount. The dollar amount associated with the deferred installment period must be rounded down to the nearest whole integer. Additionally, no deferred installment period may have a default charge assessed against the deferred installment period. After the determination of the deferred installment period, the additional interest for the deferment may not exceed the difference between the refund that would be required for prepayment in full for the determined deferred installment and the refund that would be required for the prepayment in full of the next succeeding installment. The resulting difference shall be multiplied by the number of months in the deferment period. For example, the terms of a precomputed §342.301(a), Texas Finance Code [ Art. 5069-3A.501(a) ] loan are as follows: Date of loan: 09/01/1997; First payment due date: 10/01/1997; Cash Advance: $2,766.48; Finance Charge: $833.52; Total of Payments: $3,600.00; Term: 36 months; Monthly Installment: $100; Refunding method: Sum of the periodic balances; and Annual Percentage Rate: 18%. Assume a deferment is agreed to roughly six months into the contract and, at that time, the remaining precomputed balance owed on the account was $3,095.00 and the regularly scheduled installment amount was $100.00. The nearest whole integer for the dollar amount associated with the deferred time period would be 30 ($3,095.00 divided by $100 = 30.95, rounded down to the nearest whole integer, 30). If a default charge had already been assessed on the 30th remaining installment, the nearest whole integer would be 29. Assuming no default charge had been assessed on the 30th remaining installment, the additional interest charge for the deferment would be the difference between the interest refund of the 30th and the 29th installments. This difference would be $37.54 (interest refund as of the 30th installment = $581.96; interest refund as of the 29th installment = $544.42; $581.96 - $544.42 = $37.54). A scheduled installment earnings refund method would yield a slightly different result of $36.69.

(3)

(No change.)

(e)-(h)

(No change.)

§1.705.Amounts Authorized To Be Charged after Consummation.

(a)

Generally. A secondary mortgage loan contract may provide for any one or more of the four listed categories of charges set forth in §342.307, Texas Finance Code [ Tex. Rev. Civ. Stat., Art. 5069-3A.507 ]. These charges may then be assessed and collected by an authorized lender after consummation of the loan if appropriately included in the contract.

(b)

(No change.)

§1.706.Amounts Authorized To Be Collected on or before Closing.

(a)

Generally. On or before the closing of a secondary mortgage loan, an authorized lender may collect any one or more of the eight categories of charges set forth in §342.308(a), Texas Finance Code [ Tex. Rev. Civ. Stat., Art. 5069-3A.508(a) ].

(b)

Administrative loan fee. An authorized lender may collect an administrative loan fee pursuant to §342.308(a)(9), Texas Finance Code [ Acts 1997, 75th Legislature, Chapter 164 ] on interest bearing and pre-computed loans.

(1)-(2)

(No change.)

(3)

Interest may not be assessed, charged, or received on an administrative fee if the assessment causes the total amount of interest to exceed the maximum amount authorized under Chapter 342 [ 3A ].

(c)

(No change.)

(d)

Cost of credit report. An authorized lender may collect the cost paid to a credit reporting agency to obtain a credit report pursuant to §342.308(a)(5), Texas Finance Code [ Tex. Rev. Civ. Stat., Art. 5069-3A.508(a)(5) ] but may not charge an additional fee for reviewing or evaluating a credit report.

(e)-(f)

(No change.)

This agency hereby certifies that the proposal has been reviewed by legal counsel and found to be within the agency's legal authority to adopt.

Filed with the Office of the Secretary of State, on October 20, 2000.

TRD-200007415

Leslie L. Pettijohn

Commissioner

Finance Commission of Texas

Earliest possible date of adoption: December 3, 2000

For further information, please call: (512) 936-7640

7 TAC §§1.751, 1.756, 1.757

The Finance Commission of Texas (the commission) proposes amendments to §§1.751, 1.756 and 1.757 pertaining to the technical correction of legal citations as a result of the recodification by the 76th Legislature of the Texas Credit Code , Texas Civil Statutes, Article 5069, into the Texas Finance Code.

Leslie L. Pettijohn, Consumer Credit Commissioner, has determined that for the first five-year period of the amendments as proposed will be in effect, there will be no fiscal implications for state or local government as a result of administering or enforcing the amendments.

Ms. Pettijohn also has determined that for each year of the first five-year period the amendments as proposed will be in effect, the public benefit anticipated as result of the amendments are the removal and replacement of incorrect citation with correct and appropriate citations to the statute. There is no anticipated cost to persons who are required to comply with the amendments as proposed. There will be no adverse economic effect on small businesses.

Comments on the proposed amendments may be submitted in writing to Leslie L. Pettijohn, Consumer Credit Commissioner, 2601 North Lamar Boulevard, Austin, Texas 78705-4207.

The amendments are proposed under Texas Finance Code, §11.304, which authorizes the Finance Commission to adopt rules to enforce Title 4 of the Texas Finance Code. Additionally, Texas Finance Code, §342.551 authorizes the Finance Commission to adopt rules for the enforcement of the consumer loan chapter.

The statutory provisions (as currently in effect) affected Chapter 342, Texas Finance Code.

§1.751.Scope.

(a)

Scope. This subchapter applies to all precomputed loan transactions made pursuant to subchapters E, F, and G of Chapter 342, Texas Finance Code [ Article 5069, Chapter 3A ]. This subchapter is inapplicable to interest-bearing loans made under the same subchapters.

(b)

(No change.)

§1.756.Refund of Precomputed Interest in Regular Subchapter E and G Loans with the Term of the Loan More Than Sixty Months; Prepayment in Full after the First Installment Due Date and before the Final Installment Due Date.

An authorized lender may retain an interest charge after the first installment that does not exceed an amount calculated in accordance with §342.352, Texas Finance Code [ Article 5069-3A.602 ].

§1.757.Refund of Precomputed Interest in Irregular Subchapter E and G Loans.

If prepayment in full is made by cash, renewal, or otherwise in an irregular Subchapter E or G loan, the lender shall refund or credit to the borrower all unearned interest. The amount of interest which may be retained by the lender as earned shall be determined by use of the accrual method as authorized by §342.352, Texas Finance Code [ Article 5069-3A.602 ] and [ 7 TAC ] §1.755 and §1.756 of this title .

This agency hereby certifies that the proposal has been reviewed by legal counsel and found to be within the agency's legal authority to adopt.

Filed with the Office of the Secretary of State, on October 20, 2000.

TRD-200007416

Leslie L. Pettijohn

Commissioner

Finance Commission of Texas

Earliest possible date of adoption: December 3, 2000

For further information, please call: (512) 936-7640

7 TAC §§1.801, 1.802, 1.804 - 1.806, 1.808, 1.811

The Finance Commission of Texas (the commission) proposes the adoption of the amendment to §§1.801, 1.802, 1.804, 1.805, 1.806, 1.808 and 1.811 pertaining to the technical correction of legal citations as a result of the recodification by the 76th Legislature of the Texas Credit Code , Texas Civil Statutes, Article 5069, into the Texas Finance Code.

Leslie L. Pettijohn, Consumer Credit Commissioner, has determined that for the first five-year period of the amendment as proposed will be in effect, there will be no fiscal implications for state or local government as a result of administering or enforcing the amendment.

Ms. Pettijohn also has determined that for each year of the first five-year period the amendment as proposed will be in effect, the public benefit anticipated as result of the amendment is the removal and replacement of incorrect citation with correct and appropriate citations to the statute. These is no anticipated cost to persons who are required to comply with the amendment as proposed. There will be no adverse economic effect on small businesses.

Comments on the proposed amendment may be submitted in writing to Leslie L. Pettijohn, Consumer Credit Commissioner, 2601 North Lamar Boulevard, Austin, Texas 78705-4207.

The amendment is proposed under Texas Finance Code, §11.304, which authorizes the Finance Commission to adopt rules to enforce Title 4 of the Texas Finance Code. Additionally, Texas Finance Code, §342.551 authorizes the Finance Commission to adopt rules for the enforcement of the consumer loan chapter.

The statutory provisions (as currently in effect) affected Chapter 342, Texas Finance Code.

§1.801.Definitions.

Words and terms used in this subchapter that are defined in Texas Finance Code, Chapter 342, [ Texas Revised Civil Statutes, Article 5069, Chapter 3A, ] have the meanings as defined in Chapter 342 [ Chapter 3A ]. The following words and terms, shall have the following meanings unless the context clearly indicates otherwise.

(1)

Personal property insurance--coverage to insure tangible personal property offered as security for a loan made under Chapter 342 [ Chapter 3A ] .

(2)

Property insurance--coverage to insure either an interest in real estate or tangible personal property offered as security for a loan made under Chapter 342 [ Chapter 3A ].

(3) - (6)

(No change.)

§1.802.Authorized Property Insurance.

(a)

Property insurance written in connection with a loan made under Chapter 342 [ Chapter 3A ] must be written at rates not in excess of the rates fixed or approved by the Texas Department of Insurance if a rate structure has been fixed or approved for that particular type of coverage.

(b) - (d)

(No change.)

(e)

Property insurance written in connection with a Chapter 342 [ Chapter 3A ] loan must be provided by a company authorized to do business in this state.

§1.804.Claim Provisions for Property Insurance Other Than Insurance Covering Automobiles.

(a)

Personal property insurance other than insurance property covering automobiles written on a loan subject to Chapter 342, [ Chapter 3A ] should provide a procedure for determining and adjusting the value of insured items in the event of loss. If a licensee does not utilize a formula submitted to and approved by the commissioner for adjusting the value of the items insured and if a loss occurs, the value initially stated is presumed to be the actual replacement cost of each insured item throughout the life of the policy.

(b)

(No change.)

§1.805.Authorized Credit Insurance.

(a)

Credit insurance written in connection with a Chapter 342 [ Chapter 3A ] loan shall be decreasing term insurance.

(b) - (c)

(No change.)

§1.806.Provision of Policy or Certificate.

If a Chapter 342 [ Chapter 3A ] loan provides for the purchase of insurance by the borrower from the lender, the lender shall furnish to the borrower, within 30 days of the date of the loan, a properly executed policy or certificate of insurance. The policy or certificate of insurance shall clearly set forth:

(1) - (4)

(No change.)

§1.808.Termination and Refund.

(a)

Upon discharge of an indebtedness by prepayment, renewal, or refinancing, any insurance, other than nonfiling insurance, written under the authority of Subchapter I of Chapter 342, Texas Finance Code, §342.401 through §342.416, [ Chapter 3A of the Credit Code, Texas Revised Civil Statutes, Articles 5069-3A.701 through 5069- 3A.716, ] shall be automatically terminated. At the option of the borrower, dual-interest automobile insurance may be retained without cancellation. If a policy of insurance is terminated prior to scheduled maturity, a credit of the unearned premium shall be applied to the borrower's account or a refund of the unearned premium shall be paid by the lender to the borrower.

(b) - (e)

(No change.)

§1.811.Nonfiling Insurance.

If a Chapter 342 [ Chapter 3A ] loan is renewed and a charge was assessed for nonfiling insurance in the original loan, a new charge for nonfiling insurance may not be assessed or contracted for in the renewed loan unless the term of the renewed loan extends more than five years after the date of the original loan. If different collateral is substituted or added to a loan, then a new charge for nonfiling insurance may be assessed.

This agency hereby certifies that the proposal has been reviewed by legal counsel and found to be within the agency's legal authority to adopt.

Filed with the Office of the Secretary of State, on October 20, 2000.

TRD-200007417

Leslie L. Pettijohn

Commissioner

Finance Commission of Texas

Earliest possible date of adoption: December 3, 2000

For further information, please call: (512) 936-7640

7 TAC §1.827, §1.828

The Finance Commission of Texas (the commission) proposes the adoption of the amendment to §1.827 and §1.828 pertaining to the technical correction of legal citations as a result of the recodification by the 76th Legislature of the Texas Credit Code, Texas Civil Statutes, Article 5069, into the Texas Finance Code.

Leslie L. Pettijohn, Consumer Credit Commissioner, has determined that for the first five-year period of the amendment as proposed will be in effect, there will be no fiscal implications for state or local government as a result of administering or enforcing the amendment.

Ms. Pettijohn also has determined that for each year of the first five-year period the amendment as proposed will be in effect, the public benefit anticipated as result of the amendment is the removal and replacement of incorrect citation with correct and appropriate citations to the statute. There is no anticipated cost to persons who are required to comply with the amendment as proposed. There will be no adverse economic effect on small businesses.

Comments on the proposed amendment may be submitted in writing to Leslie L. Pettijohn, Consumer Credit Commissioner, 2601 North Lamar Boulevard, Austin, Texas 78705-4207.

The amendment is proposed under Texas Finance Code, §11.304, which authorizes the Finance Commission to adopt rules to enforce Title 4 of the Texas Finance Code. Additionally, Texas Finance Code, §342.551 authorizes the Finance Commission to adopt rules for the enforcement of the consumer loan chapter.

The statutory provisions (as currently in effect) affected Chapter 342, Texas Finance Code.

§1.827.Bilingual Disclosure.

(a)

Each licensee shall fully disclose the terms of a loan contract subject to Chapter 342 [ Chapter 3A ] to the borrower. If all or a majority of the negotiations between the licensee and the borrower are conducted in the Spanish language, disclosure of the terms of the contract shall be in writing in the Spanish language as well as in English. The disclosure shall be deemed to have been made properly if the borrower is furnished a completed form prescribed by the commissioner for this purpose and the borrower acknowledges receipt thereof or if the lender provides the borrower with a written disclosure of equivalent information.

(b)

(No change.)

§1.828.Return of Instruments to Borrower.

Upon discharge of an indebtedness by payment, renewal, or refinancing, a lender shall return an original or true and correct copy of the instrument creating the indebtedness marked "PAID" or, in lieu of a marked original or copy, provide a discharge and release of all obligations under the loan to satisfy the requirements of §342.454, Texas Finance Code. [ Texas Revised Civil Statute Article 5069-3A.804. ] In addition, if a loan has been paid off, a lender shall give the borrower, in a recordable form, a release of the lien, including a lien on an automobile title or real estate, or shall provide documentation for the release to the borrower, at the option of the lender whose loan has been paid a copy of an endorsement, with or without recourse, representation or warranty, and assignment of the lien to a lender that is refinancing the loan. A lender shall comply with the requirements of this section within a reasonable time not to exceed 30 days after receipt of collected funds by the lender.

This agency hereby certifies that the proposal has been reviewed by legal counsel and found to be within the agency's legal authority to adopt.

Filed with the Office of the Secretary of State, on October 20, 2000.

TRD-200007418

Leslie L. Pettijohn

Commissioner

Finance Commission of Texas

Earliest possible date of adoption: December 3, 2000

For further information, please call: (512) 936-7640

7 TAC §1.851, §1.857

The Finance Commission of Texas (the commission) proposes the adoption of the amendment to §§1.851 and 1.857 pertaining to the technical correction of legal citations as a result of the recodification by the 76th Legislature of the Texas Credit Code , Texas Civil Statutes, Article 5069, into the Texas Finance Code.

Leslie L. Pettijohn, Consumer Credit Commissioner, has determined that for the first five-year period of the amendment as proposed will be in effect, there will be no fiscal implications for state or local government as a result of administering or enforcing the amendment.

Ms. Pettijohn also has determined that for each year of the first five-year period the amendment as proposed will be in effect, the public benefit anticipated as result of the amendment is the removal and replacement of incorrect citation with correct and appropriate citations to the statute. These is no anticipated cost to persons who are required to comply with the amendment as proposed. There will be no adverse economic effect on small businesses.

Comments on the proposed amendment may be submitted in writing to Leslie L. Pettijohn, Consumer Credit Commissioner, 2601 North Lamar Boulevard, Austin, Texas 78705-4207.

The amendment is proposed under Texas Finance Code, §11.304, which authorizes the Finance Commission to adopt rules to enforce Title 4 of the Texas Finance Code. Additionally, Texas Finance Code, §342.551 authorizes the Finance Commission to adopt rules for the enforcement of the consumer loan chapter.

The statutory provisions (as currently in effect) affected Chapter 342, Texas Finance Code.

§1.851.Duplication of Loans.

(a)

A licensee may have more than one loan contract under Chapter 342 [ Chapter 3A ] with the same borrower at the same time; however, in such an event the total interest charges assessed on the several cash advances shall not exceed the total interest charges that could be legally imposed on one cash advance of an amount equal to the total of the several separate cash advances. The commissioner may require refunds of interest charges in excess of that which could be legally charged under the chapter. The commissioner shall prescribe the method of determining any excess charges.

(b) - (c)

(No change.)

§1.857.Full Disclosure Requirements Other Than Open End or Revolving Loan Plans.

(a) - (c)

(No change.)

(d)

For purposes of this section, compliance by an authorized lender with the Federal Truth- In-Lending Act and regulations promulgated thereunder relating to closed-end transactions shall constitute compliance with §342.505, Texas Finance Code [ the Texas Credit Title, Article 3A.855 ] and these administrative rules.

This agency hereby certifies that the proposal has been reviewed by legal counsel and found to be within the agency's legal authority to adopt.

Filed with the Office of the Secretary of State, on October 20, 2000.

TRD-200007419

Leslie L. Pettijohn

Commissioner

Finance Commission of Texas

Earliest possible date of adoption: December 3, 2000

For further information, please call: (512) 936-7640

Chapter 91. CHARTERING, OPERATIONS, MERGERS, LIQUIDATIONS

Subchapter B. ORGANIZATION PROCEDURES

7 TAC §91.210

The Texas Credit Union Commission proposes amendments to §91.210 relating to certificate of authority to do business in the State of Texas.

Two new subsections are proposed. The first deals with field of membership expansion requests from foreign credit unions. If adopted, a foreign credit union could add new occupational or associational groups to their fields of membership provided that reciprocity exists between Texas and the credit unions' home state or country and the proposed group can be conveniently served from the foreign credit union's office. The second subsection adds an enforcement and penalty provision that can be invoked by the Commissioner should a foreign credit union fail to comply with any applicable statute or administrative rule.

Lynette Pool, Deputy Commissioner, has determined that there will be no fiscal implications for state or local government as a result of enforcing or administering the proposed rule amendment.

She has also determined that for each year of the first five years the proposed amendment is in effect, the public benefits anticipated as a result of enforcing the rule will be that foreign credit unions operating in Texas will have clearly defined requirements for adding groups to their fields of membership, and parity between them and Texas state-chartered credit unions will be ensured. The enforcement provisions will allow the Department to more readily address problems with foreign credit unions to the benefit of the latter's Texas members. There is no anticipated effect on small businesses as a result of adopting the new amendment. There is no economic cost anticipated to entities that are required to comply with the new amendment as a result of its future adoption.

Written comments on the proposal must be submitted within 30 days after its publication in the Texas Register to Lynette Pool, Deputy Commissioner, Credit Union Department, 914 East Anderson Lane, Austin, Texas 78752-1699.

The amendment is proposed under the provisions of §122.013 of the Texas Finance Code that is interpreted as authorizing the Credit Union Commission to adopt rules that govern foreign credit union operations in this state.

The specific section affected by this proposed rule is Texas Finance Code §122.013.

§91.210. Certificate of Authority to Do Business in the State of Texas.

(a) - (h)

(No change.)

(i)

Field of membership. A certificate of authority to do business in this state is specifically issued to allow a foreign credit union to provide services to its existing field of membership. However, the commissioner may approve a foreign credit union's request to expand its field of membership to include distinct, definable single occupational and/or associational communities of interest within the state of Texas that can be conveniently served from its office(s) if it is organized in a state or country that allows a credit union organized under the act to expand its field of membership to at least the same extent. The commissioner shall use, in making a determination on the expansion request, the same criteria and the same procedures as used when a Texas credit union seeks to expand its field of membership. The commissioner shall make a reasonable effort to coordinate this determination with the foreign credit union's primary regulator to assure that each agency's material interests, authorities and responsibilities are fulfilled.

(j)

Enforcement; penalty. The commissioner has grounds to issue a cease and desist order to an officer, employee, director, and/or the foreign credit union itself, if the commissioner determines from examination or other credible evidence that the credit union has violated or is violating any applicable Texas law or rules of the commission. If the foreign credit union does not comply with an order, the commissioner may assess an administrative penalty as authorized by §122.260, Finance Code, as well as suspend or revoke the certificate of authority.

This agency hereby certifies that the proposal has been reviewed by legal counsel and found to be within the agency's legal authority to adopt.

Filed with the Office of the Secretary of State, on October 23, 2000.

TRD-200007442

Harold E. Feeney

Commissioner

Credit Union Department

Earliest possible date of adoption: December 3, 2000

For further information, please call: (512) 837-9236

7 TAC §91.301

The Texas Credit Union Commission proposes amendments to rule §91.301 relating to field of membership. The first amendment conforms the terminology used in the rule to that contained in the enabling statute, specifically the term "common bond" has been changed to "community of interests. Another change describes what constitutes a recognizable community with regards to a geographic community of interest. The third amendment inserts language addressing the treatment of overlaps resulting from a proposed field of membership change. Lastly, there is an amendment that would allow credit unions the ability to add underserved communities regardless of location to their fields of membership provided certain criteria are met.

The Government Code and the General Appropriations Act require each state agency to review and consider for readoption each rule adopted by that agency pursuant to the Government Code, Chapter 2001 (Administrative Procedures Act). Such reviews shall include, at a minimum, an assessment by the agency as to whether the reason for adopting or readopting the rule continues to exist. After conducting a preliminary review of §91.301, the Commission determined that several modifications and additions are necessary to bring the field of membership rule more in line with today's competitive marketplace.

The Department received letters from Texas Dow Employees Credit Union, Mid-County Teachers Credit Union, GTX Credit Union, Pollock Employees Credit Union, and Forth Worth City Employees Credit Union in response to the Commission's notice of intention to assess the need for the rule. All of the commenters addressed the need for enforcement of field of membership (FOM) provisions, including exclusionary language to protect against overlaps, through assessment of a penalty. One commenter addressed the continued need for a multiple group FOM. Another commenter stated the belief that bigger is not necessarily better with respect to total assets, and FOM expansions should be based on the resulting benefits to the credit unions' members/owners. Another comment was made recommending that use of exclusionary language designed to provide overlap protection should be limited or done away with completely on the basis of giving potential members the greatest flexibility as possible. Two commenters disagreed with that position, however, and stated that overlap protection still has a place in protecting the smaller credit unions.

Lynette Pool, Deputy Commissioner, has determined that there will be no fiscal implications for state or local government as a result of enforcing or administering the proposed new rule.

Lynette Pool has determined that for each year of the first five years the rule is in effect, the public benefit anticipated will be that a greater number of Texas citizens will have access to credit union membership. Furthermore, credit unions will have a clearer understanding of the requirements for expanding their fields of membership, as well as the Commission's procedures for addressing potential overlaps. There is no anticipated economic cost to entities that will be required to comply with this section as a result of its adoption.

Written comments on the proposal must be submitted within 35 days after its publication in the Texas Register to Lynette Pool, Deputy Commissioner, Credit Union Department, 914 East Anderson Lane, Austin, Texas 78752-1699.

The amendment is proposed under the provisions of §15.402 of the Texas Finance Code, which is interpreted as authorizing the Credit Union Commission to reasonable rules necessary for administering Chapter 15 and Subtitle D, Title 3, of the Texas Finance Code.

The specific sections affected by these proposed amendments to this rule are §122.001 and §122.051 of the Texas Finance Code.

§91.301.Field of Membership.

State credit unions will be allowed to have, as a minimum, at least as much flexibility as federal credit unions in the regulation of fields of membership. The following guidelines and standards shall be considered by the commissioner in evaluating field of membership requests.

(1)

Occupational community of interest [ Common Bond ].

(A)

This community of interest [ common bond ] is based on an employment relationship with a specified employer. Persons sharing this community of interest [ common bond ] may be geographically dispersed. Employees of a parent corporation and its subsidiaries and persons under contract to work regularly for an enterprise may be considered under a single occupational community of interest. Each category to be served (e.g., subsidiaries, contractors) should be separately listed in section 3.01 of the credit union's bylaws, if practical. Persons employed by different entities, even if closely related geographically, persons working at a single shopping center, industrial park, or office building, for example, are not treated as having an occupational community of interest [ common bond ].

(B)

All occupational communities of interest [ common bonds ] should include a geographic definition: e.g., "employees, officials, and persons who work under contract regularly for ABC Corporation or any of its subsidiaries, who work in Houston, Texas." Other acceptable geographic definitions are "employees ... who are paid from .... "or "employees ... who are supervised from ...."

(C)

The employer may also be included in this community of interest [ common bond ] -- e.g., "ABC Corporation and its subsidiaries."

(D)

Some examples of occupational group definitions are:

(i)

"employees of the Scott Manufacturing Company who work in El Paso, Texas ...;"

(ii)

"employees and elected and appointed officials of municipal government in Tyler, Texas ...;"

(iii)

"employees of Sharp Drillbit Company and its subsidiary, Drillbit Salvage Company, who work in Midland or Houston, Texas ...;"

(iv)

"personnel of fleet units of the United States Navy home port at Ingleside, Texas ...;"

(v)

"civilian and military personnel of the United States Government who work or are stationed at, or are attached or assigned to Fort Hood, Texas, or those who are retired from, or their dependents or dependent survivors who are eligible by law or regulations to receive and are receiving benefits or services from that military installation ...;"

(vi)

"employees of these contractors who work regularly at United States Naval Shipyard in Ingleside, Texas ...;"

(vii)

"employees, doctor, medical staff, technicians, medical and nursing students who work at Galveston Medical Center at the locations stated: ...;"

(viii)

"employees, and teachers who work for the Fort Worth Independent School District in Fort Worth, Texas...."

(E)

Some examples of insufficiently defined occupational groups are:

(i)

"employees of engineering firms in Houston, Texas;" (No common employer; names of firms must be stated; however, may be the basis for a multiple group.)

(ii)

"persons employed or working in Dallas, Texas;" (No common employer; names of firms must be stated.)

(iii)

"persons working in the entertainment industry in Texas." (No common employer; names of firms should be stated.)

(2)

Associational community of interest [ Common Bond ].

(A)

This community of interest [ common bond ] is generally based on groups consisting primarily of natural persons who participate in activities developing common loyalties, mutual benefits, and mutual interest. Qualifying associational groups must hold meetings open to all natural person members at least once a year, must sponsor other activities providing for contact among natural persons members, and must have an authoritative definition of who is eligible for membership -- usually, this will be in the associations's constitution and bylaws. The clarity of the associational group's definition and compactness of its membership will be important criteria in reviewing the application. The department policy is to organize associational charters at the lowest organizational level which is economically feasible.

(B)

Students constitute an associational community of interest [ common bond ] and may qualify for a credit union charter.

(C)

Associations formed primarily to obtain a credit union charter do not have a sufficient associational community of interest [ common bond ]; nor do associations based on a client or customer relationship[ ; ] (e.g., an insurance company's customers or a buyer's club ) [ , for example ].

(D)

The department normally charters associational credit unions consisting of natural person members. The department will allow nonnatural persons (e.g., corporate sponsor or organizations of members) to be eligible for membership.

(E)

Moreover, the community of interest [ common bond ] usually would extend to the association's members and their employees. However, situations may exist where the employees of a member of an association do not have a sufficiently close tie to the association to be included.

(F)

Homeowner associations, tenant groups, electric co-ops, consumer groups, and other groups of persons having an interest in a particular cause and certain consumer cooperatives may be eligible to receive a charter, however, they must make a strong showing of common activities and economic viability. Newly-organized associations must make similar showing; experience has shown that a new group's efforts are best focused on solidifying member interest before attempting to offer credit union service.

(G)

All associational communities of interest [ common bonds ] will include a definition of the group and a geographic or operational area limitation, unless the constitution or bylaws of the associational group limit the geographical area -- e.g., "Members of the Small Businessmen Association living or working in Dallas, Texas who qualify for membership in accordance with its constitution and bylaws in effect on January 21, 1989."

(H)

The association itself may also be included in the field of membership; e.g., "ABC Association."

(I)

Some examples of associational group definitions are:

(i)

"regular members of Locals 10 and 13, IBEW Union, Houston, Texas, who qualify for membership in accordance with their constitution and bylaws in effect on May 20, 1989;"

(ii)

"members of the Texas Farm Bureau who live or work in Williamson or adjacent counties, who qualify for membership in accordance with its constitution and bylaws in effect on March 7, 1990;"

(iii)

"members of the Catholic Church who live or work in Del Rio, Texas;"

(iv)

"members of the First Baptist Church in Georgetown, Texas;"

(v)

"regular members of the Corporate Executives Association, located in Dallas, Texas, who live or work in Dallas, Texas, who qualify for membership in accordance with its constitution and bylaws in effect on December 1, 1985;"

(vi)

"members of the Lower Colorado River Authority located in Austin, Texas."

(J)

Some examples of insufficiently defined association group definitions are:

(i)

"members of military service clubs in the State of Texas." (No single associational tie; specific clubs and locations must be named; may be considered as multiple group.)

(ii)

"veterans of United States military service."

(K)

Some examples of unacceptable associational communities of interest [ common bonds ] are:

(i)

"ABC Buyers Club." (An interest in purchasing only does not meet associational standards.)

(ii)

"customers of ABC Insurance Company." (Policyholders or customer/client relationships do not meet associational standards.)

(3)

Geographic community of interest Community common bonds.

(A)

This community of interest [ common bond ] is based upon employment, or residence within a clearly defined and specified geographic area(s). Business entities within the specified geographic area(s) may also qualify for membership. Given the diversity of community characteristics throughout the state and the department's goal of making credit union service available to all eligible groups who wish to have it, the department has established the following [ community common bond ] guidelines:

(i)

The geographic area(s) must be clearly specified.

(ii)

The [ charter ] application must establish that the area(s) is recognized as a distinct neighborhood, community, or geographic area(s). For the purposes of this section a recognizable community is a geographical area which possesses such characteristics that the residents of the area share a definable community of interest or sense of identification with each other which may be based upon mutual interests, goals, community pride or other similar elements.

(B)

A typical definition of a geographic community of interest [ community-based common bond ] is: "Persons who live, work or are located in ABC, the area of XYZ City bounded by Fern Street on the north, Long Street on the east, Fourth Street on the south, and Elm Avenue on the west."

(C)

Additional criteria may be considered for an application to convert to or expand an existing community [ common bond ] and may include, but not be limited to, providing for a protective exclusion for honoring existing credit unions in the proposed area(s).

(D)

Some examples of geographic community of interest [ common bond ] definitions are:

(i)

"persons who live, work or are located in Brown County, Texas;

(ii)

"persons who live or work in and business entities located in Spring Branch Independent School District, Houston, Texas;"

(iii)

"persons who live or work are located within a ten-mile radius of El Campo, Texas".

(E)

Some examples of insufficiently defined geographic community of interest [ common bond ] definitions are:

(i)

"persons who live or work in East Texas;"

(ii)

"persons who live or work in the ship channel section of Houston, Texas."

(4)

Multiple-group charters.

(A)

The department may charter a credit union to serve a combination of definable occupational, associational and/or geographical [ community ] groups.

(B)

In addition to general chartering requirements, special requirements pertaining to multiple-group applications may be required before the department will grant such a charter.

(i)

Each group to be included in the proposed field of membership of the credit union must have its own community of interest [ common bond ].

(ii)

Each group must individually request inclusion in the proposed credit union's charter.

(5)

Overlap protection.

(A)

The commissioner will consider the [ extent and ] financial effect of an overlap proposed by an application to expand a credit union's field of membership or when a charter application proposes an overlap. Generally, the department will not charter or otherwise authorize two or more credit unions to serve the same single occupational or associational group. An overlap is permitted when the expansion's beneficial effect in meeting the convenience and needs of the members of the group proposed to be included in the field of membership outweighs any adverse effect on the overlapped credit union(s) .

(B)

The commissioner will weigh the information in support of the application and any information provided by a protesting or affected credit union. If the applicant has the financial capacity to serve the financial needs of the proposed members, demonstrates economic feasibility, complies with the requirements of this rule, and no protestant reasonably establishes a basis for denying the request, it shall be approved.

(C)

If a finding is made that overlap protection is warranted, the commissioner shall reject the application or require the applicant to limit or eliminate the overlap by adding exclusionary language to the text of the amendment, e.g., "excluding persons eligible for primary membership in any occupation or association based credit union that has an office within a specified proximity of the applicant credit union at the time membership is sought." Generally, overlap protection will not be considered warranted unless the financial effect on the overlapped credit union will present a safety and soundness concern. Exclusionary clauses are rarely appropriate for inclusion in a geographic community of interest credit union.

(D)

Generally, if the overlapped credit union does not submit a notice of protest form, and the department determines that there is no safety and soundness problem, an overlap will be permitted. If, however, a notice of protest is filed, the commissioner will consider the following in performing an overlap analysis:

(i)

whether the overlap is incidental in nature, ie., the group(s) in question is so small as to have no material effect on the overlapped credit union;

(ii)

whether there is limited participation by members of the group(s) in the overlapped credit union after the expiration of a reasonable period of time;

(iii)

whether the overlapped credit union provides requested service;

(iv)

the financial effect on the overlapped credit union;

(v)

the desires of the group(s); and

(vi)

the best interests of the affected group(s) and the credit union members involved.

(E)

Where a sponsor organization expands its operations internally, by acquisition or otherwise, the credit union may serve these new entrants to its field of membership if they are part of the community of interest described in the credit union's bylaws. Where acquisitions are made which add a new subsidiary or affiliate, the group cannot be served until the entity is included in the field of membership through the application process.

(F)

Credit unions affected by the organizational restructuring or merger of a group within its field of membership must apply for a modification of their fields of membership to reflect the group to be served.

(6)

Underserved communities.

(A)

All credit unions may include in their fields of membership, without regard to location, communities satisfying the definition for underserved areas. More than one credit union can serve the same underserved area.

(B)

Once an underserved area has been added to a credit union's field of membership, the credit union must establish and maintain an office or facility in the community. For the purposes of this subsection service facility is defined as a place where shares are accepted for members' accounts, loan applications are accepted and loan proceeds are disbursed. This definition includes a credit union owned branch, a shared branch, a mobile branch, and an office operated on a regularly scheduled weekly basis, or a credit union owned electronic facility that meets, at a minimum, these requirements. This definition does not include an atm.

(C)

A credit union desiring to add an underserved area must document that the community meets the definition. In addition, the credit union must 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 regularly review the business plan to determine if the community is being adequately served. The commissioner may require periodic service status reports from a credit union pertaining to the underserved area to ensure that the needs of the area are being met, as well as requiring such reports before allowing a credit union to add an additional unserved area.

This agency hereby certifies that the proposal has been reviewed by legal counsel and found to be within the agency's legal authority to adopt.

Filed with the Office of the Secretary of State, on October 23, 2000.

TRD-200007437

Harold E. Feeney

Commissioner

Credit Union Department

Earliest possible date of adoption: December 3, 2000

For further information, please call: (512) 837-9236

7 TAC §91.802

The Texas Credit Union Commission proposes republication of the proposed amendments to rule §91.802 relating to other investments for credit unions. The first request for comments was published in the May 5, 2000, issue of the Texas Register (25 TexReg 3889).

One of the amendments requires a credit union's board of directors to establish and annually review a written investment policy; however, that policy may be part of a broader asset-liability management policy. Another amendment adds a restriction for investments in mutual funds, municipal bonds, and asset-backed securities, as well as limits investment in commercial paper to those issued by corporations domiciled within the United States. A third amendment mandates that credit unions document their due diligence in selecting a particular investment. A fourth amendment requires credit unions to classify any security in accordance with generally accepted accounting principles. In addition, the reporting requirements of the existing rule are removed from this rule and are placed into a new rule addressing only reporting requirements. Finally, certain language that is outdated or no longer used in the financial industry has been updated.

The amendments to the rule are proposed as a result of the general rule review mandated by the Government Code and General Appropriations Act. (Both contain provisions requiring state agencies to review and consider for readoption each of their rules every four years). Notice of Intention to Review Chapter 91 rules was published in the Texas Register on February 4, 2000, (25 TexReg 823) for the purpose of accepting public comment. No comments were received in response to the Notice of Intention. However, the Commission has determined from its review of Chapter 91 that a need continues to exist for this rule as amended.

No comments were received in response to the first publication of the proposed amendments. However, based upon further review and recommendation by Department staff, the Commission has determined that additional changes are needed to update the rule to reflect today's current investment market.

Lynette Pool, Deputy Commissioner, has determined that there will be no fiscal implications for state or local government as a result of enforcing or administering the proposed amended rule.

She has also determined that for each year of the first five years the proposed amended rule is in effect, the public benefits anticipated as a result of enforcing the rule will be greater clarification as to credit unions' ability to invest excess funds not used for loans, as well as improved safety and soundness given the additional restrictions relating to investment quality. There is no anticipated effect on small businesses as a result of adopting the proposal. There is no economic cost anticipated to entities that are required to comply with the amendment as a result of its future adoption.

Written comments on the proposal must be submitted within 35 days after its publication in the Texas Registerexas Register to Lynette Pool, Deputy Commissioner, Credit Union Department, 914 East Anderson Lane, Austin, Texas 78752-1699.

The amendments are proposed under the provisions of §124.351of the Texas Finance Code that are interpreted to authorize the Credit Union Commission to adopt rules authorizing other investments permissible for credit unions that are responsive to changes in economic conditions or competitive practices and to the need for safety and soundness of credit union investments.

The specific section affected by this proposed amendments is Texas Finance Code §124.351.

§91.802.Other Investments.

(a)

Definitions. The following words and terms, when used in this section, shall have the following meanings, unless the context clearly indicates otherwise.

(1)

Bailment for hire contract -- A contract whereby a third party, bank, or other financial institution, for a fee, agrees to exercise ordinary care in protecting the securities held in safekeeping for its customers.

(2)

Bankers' acceptance -- A time draft that is drawn on and accepted by a bank, and that represents an irrevocable obligation of the bank.

(3)

Cash forward agreement -- An agreement to purchase or sell a security with delivery and acceptance being mandatory and at a future date in excess of 30 days from the trade date.

(4)

Eurodollar deposit -- A deposit denominated in U. S. dollars in a foreign branch of a United States financial institution.

(5)

Federal funds transaction -- A short-term or open-ended transfer of funds to a financial institution.

(6)

Financial institution - An insured depository institution as defined under the Federal Deposit Insurance Act (12 USC Section 1813(c)(2)), [ bank, or similar entity savings and loan association, savings association, or mutual savings bank insured by an agency of the federal government, or ] a federal or state-chartered credit union or the National Credit Union Central Liquidity Facility.

(7)

Repurchase transaction -- A transaction in which a credit union agrees to purchase a security from a counterparty [ vendor ] and to resell the same or any identical security to that counterparty [ vendor ] at a later date and at a specified price . [ A repurchase transaction may be one of the three following types. ]

[ (A)

An investment-type repurchase transaction is a repurchase transaction where the credit union purchasing the security takes physical possession of the security, or receives written confirmation of the purchase and a custodial or safekeeping receipt from a third party under a written bailment for hire contract, or is recorded as the owner of the security through the Federal Reserve book-entry system.]

[ (B)

A financial institution-type repurchase transaction is a repurchase transaction with a financial institution.]

[ (C)

A loan-type repurchase transaction is any repurchase transaction that does not qualify as an investment-type or financial institution-type repurchase transaction.]

(8)

Reverse repurchase transaction -- A transaction whereby a credit union agrees to sell a security to a counterparty [ purchaser ] and to repurchase the same or any identical security from that counterparty [ purchaser ] at a future date and at a specified price.

(9)

Investment [ Security ] -- Any security, obligation, account, deposit, or other item authorized for investment by the Act or this section other than an investment authorized by §124.351(a)(1) of the Act [ the Act, §8.01(1) ].

(10)

Settlement date -- The date originally agreed to by a credit union and a vendor for settlement of the purchase or sale of a security.

(11)

Trade date -- The date a credit union originally agrees, whether orally or in writing, to enter into the purchase or sale of a security.

(12)

Yankee Dollar deposit -- A deposit in a United States branch of a foreign bank licensed to do business in the state in which it is located, or a deposit in a state chartered, foreign controlled bank.

(13)

Mortgage related security -- A security which meets the definition of mortgage related security in United States Code Annotated, Title 15, §78c(a)(41).

(14)

Nationally recognized statistical rating organization (NRSRO) -- A rating organization recognized by the Securities and Exchange Commission.

(15)

[ 14 ] Asset-backed security -- A bond, note, or other obligation issued by a financial institution, trust, insurance company, or other corporation secured by either a pool of loans, extensions of credit which are unsecured or secured by personal property, or a pool of personal property leases.

(b)

Policy. A credit union may invest funds not used in loans to members, subject to the conditions and limitations of the written investment policy of the board of directors. The investment policy may be part of a broader, asset-liability management policy. The board of directors must review the investment policy at least annually to ensure that the policies adequately address the following issues:

(1)

The types of investments that are authorized by the board of directors.

(2)

A specific limit on the amount that may be invested in any single investment or investment type.

(3)

The delegation of investment authority to the credit union's officials or employees, including the person or persons authorized to purchase or sell investments, and a limit of the investment authority for each individual or committee.

(4)

A list of authorized broker-dealers or other third-parties that may be used to purchase or sell investments, and an internal process for assessing the credentials and previous record of the individual or firm.

(5)

An assessment of the interest-rate risk, credit risk, and liquidity risk for any investment or concentration of similar investments that exceeds 25% of the credit union's reserves and undivided earnings.

(6)

A list of authorized third-party safekeeping agents.

(7)

If the credit union operates a trading account, the policy should specify the persons authorized to engage in trading account activities, trading account size limits, stop loss and sale provisions, time limits on inventoried trading account investments, and internal controls that specify the segregation of risk-taking and monitoring activities that related to trading account activities.

(c)

[ (b) ] Authorized activities.

(1)

General authority. A credit union may contract for the purchase or sale of an investment [ a security ] provided that delivery of the investment is by regular-way settlement [ security is to be made within 30 days from the trade date ]. Regular-way settlement means delivery of an investment from a seller to a buyer within the time frame that the securities industry has established for that type of investment. All purchases and sales of investments must be delivery versus payment (i.e., payment for an investment must occur simultaneously with its delivery).

(2)

Cash forward agreements. A credit union may enter into a cash forward agreement to purchase or sell a security, provided that:

(A)

the period from the trade date to the settlement date does not exceed 90 [ 180 ] days;

(B)

if the credit union is the purchaser, it has written cash flow projections evidencing its ability to purchase the security;

(C)

if the credit union is the seller, it owns the security on the trade date; and

(D)

the cash forward agreement is settled on a cash basis at the settlement date.

(3)

Repurchase transactions. A credit union may enter into a [ an investment-type ] repurchase transaction [ or a financial institution-type repurchase transaction ] provided:

(A)

the purchase price of the security obtained in the transaction is at or below the market price;[ . ]

(B)

the repurchase securities are authorized investments under Texas Finance Code §124.351 or this section;

(C)

the credit union has entered into signed contracts with all approved counterparties;

(D)

the counterparty is rated no lower than BBB by Standard & Poor's or an equivalent rating by another NRSRO; and

(E)

the credit union receives a daily assessment of the market value of the repurchase securities, including accrued interest, and maintains adequate margin that reflects a risk assessment of the repurchase securities and the term of the transaction. [ A repurchase transaction not qualifying as either an investment-type or financial institution-type repurchase transaction will be considered a loan-type repurchase transaction subject to the Act. ]

(4)

Reverse repurchase transactions. A credit union may enter into a reverse repurchase transaction , which [ . A reverse repurchase transaction ] is a borrowing transaction subject to the Act , provided:

(A)

any securities received are authorized investments under Texas Finance Code §124.351 and this section;

(B)

the credit union has entered into signed contracts with all approved counterparties; and

(C)

the credit union receives a daily assessment of the market value of the securities received, including accrued interest, and maintains adequate margin that reflects a risk assessment of the securities and the term of the transaction.

(5)

Federal funds. A credit union may enter into a federal funds transaction with a financial institution, provided that the interest or other consideration received from the financial institution is at the market rate for federal funds transactions and that the transaction has a maturity of one or more business days or the credit union is able to require repayment at any time.

(6)

Yankee Dollars. A credit union may invest in Yankee Dollar deposits.

(7)

Eurodollars. A credit union may invest in Eurodollar deposits.

(8)

Bankers' acceptance. A credit union may invest in bankers' acceptances.

(9)

Open-end Investment Companies (Mutual Funds). A credit union may invest funds[ , not used in loans to members, ] in an open-end investment company established for investing directly or collectively in any authorized investment , including money market mutual funds meeting the requirements set forth in 17 CFR 270.2a-7. [ A credit union shall record each investment in an open-end investment company at the lower of its cost or market value, determined at the end of each month, and net of all purchase and load fees. ]

(10)

Government-sponsored enterprises. A credit union may invest in government-sponsored enterprise obligations such as Federal Home Loan Banks, the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association and the Student Loan Marketing Association.

(11)

Commercial paper. A credit union may invest in commercial paper issued by corporations domiciled within the United States and having a rating of no less than A1 or P1 by Standard & Poor's or Moody's , respectively, or an equivalent rating by a NRSRO [ rating service ].

(12)

Corporate bonds. A credit union may invest in corporate bonds which are rated in one of the three highest rating categories by a NRSRO (e.g. Standard & Poor's ratings AAA, AA, and A) [ that have a rating "A" or better by Standard & Poor's or Moody's rating service ] and remaining maturities of five years or less.

(13)

Municipal bonds. A credit union may invest in municipal bonds which are rated in one of the three highest rating categories by a NRSRO and remaining maturities of five years or less.

(14)

[ (13) ] Mortgage related securities. A credit union may invest in mortgage related securities, except not in the "accrual bond" (or Z-bonds) or the residual interest of the mortgage related security which are rated in one of the three highest rating categories by a NRSRO.

(15)

[ (14) ] Asset-backed securities. A credit union may invest in asset-backed securities rated in one of the two highest rating categories by a NRSRO provided the underlying collateral is domestic- and consumer-based. [ AA or better by Standard & Poor's or having an equivalent rating from another nationally recognized rating agency ].

(d)

Documentation: A credit union shall maintain files containing credit and other information adequate to demonstrate evidence of prudent business judgement in exercising the investment powers under the Act and this rule. Except for investments that are insured or fully guaranteed as to principal and interest by the U.S. Government or its agencies, enterprises, or corporations or fully insured (including accumulated interest) by the National Credit Union Administration or the Federal Deposit Insurance Corporation, a credit union must conduct and document a credit analysis of the issuing entity and/or investment before purchasing the investment. The credit union must update the credit analysis at least annually as long as the investment is held. Credit and other due diligence documentation for each investment shall be maintained as long as the credit union holds the investment and until it has been both audited and examined.

[ (c)

Reporting investment activities to the board of directors. The president shall provide the board of directors a monthly comprehensive report of investment activities, including:]

[ (1)

investments purchased and sold during the month;]

[ (2)

unrealized market gains or losses compared to book value at month's end;]

[ (3)

calculated yield to maturity (current yield on mutual funds) on each outstanding investment as of month's end;]

[ (4)

net asset value (NAV) or market value of each marketable investment;]

[ (5)

total book value of investments outstanding at month's end;]

[ (6)

the total amount of investments having maturities exceeding three years and the ratio of the investments to total reserves and undivided earnings;]

[ (7)

unrecorded and unreported obligations to buy or sell investments; and]

[ (8)

amounts of investments, other than designated depositories, in other institutions which are not fully insured by the Federal Deposit Insurance Corporation, National Credit Union Share Insurance Fund, or federal or state governments or their agencies.]

(e)

Classification. A credit union must classify a security as hold-to-maturity, available-for-sale, or trading, in accordance with generally accepted accounting principles and consistent with the credit union's documented intent and ability regarding the security.

This agency hereby certifies that the proposal has been reviewed by legal counsel and found to be within the agency's legal authority to adopt.

Filed with the Office of the Secretary of State, on October 23, 2000.

TRD-200007432

Harold E. Feeney

Commissioner

Credit Union Department

Earliest possible date of adoption: December 3, 2000

For further information, please call: (512) 837-9236

7 TAC §91.803

The Texas Credit Union Commission proposes republication of the proposed amendments to §91.803 relating to investment limits and prohibitions. The proposal was first published in the May 5, 2000 issue of the Texas Register (25 TexReg 3892).

The amendments, if adopted, will impose new, more stringent limitations on the maximum investments in any one security and specifically prohibits credit unions from engaging in certain types of investment activities. The amendments also provide a specific exception for investments in domestically-issued federal funds, banker acceptances, certificates of deposit, and operating accounts at financial institutions meeting certain safety and soundness standards, as well as for loan participations purchased from other credit unions. Lastly, the rule, while listing prohibited investments, gives the commissioner the ability to authorize a pilot investment program which could result in a credit union engaging in otherwise prohibited investments if a need and expertise to do so is demonstrated.

The amendments to the rule are being proposed as a result of the general rule review mandated by the Government Code and General Appropriations Act (Both contain provisions requiring state agencies to review and consider for readoption each of their rules every four years). Notice of Intention to Review Chapter 91 rules was published in the Texas Register on February 4, 2000 (25 TexReg 823) for the purpose of accepting public comment. No comments have been received. However, the Commission has determined from its review of Chapter 91 that a need continues to exist for this rule as amended.

No comments were received in response to the first publication of the proposed amendments. However, based upon further review and recommendation by Department staff, the Commission has determined that additional changes are needed to update the rule to reflect today's current marketplace.

Lynette Pool, Deputy Commissioner, has determined that there will be no fiscal implications for state or local government as a result of enforcing or administering the proposed amended rule.

Ms. Pool has also determined that for each year of the first five years the proposed amended rule is in effect, the public benefits anticipated as a result of enforcing the rule will be increased flexibility for credit unions in dealing with their primary repository institution without compromising the safety and soundness of those investments. Credit union management will also have a comprehensive list of prohibited investments for easier reference. There is no anticipated effect on small businesses as a result of adopting the proposal. There is no economic cost anticipated to entities that are required to comply with the amendment as a result of its future adoption.

Written comments on the proposal must be submitted within 35 days after its publication in the Texas Register to Lynette Pool, Deputy Commissioner, Credit Union Department, 914 East Anderson Lane, Austin, Texas, 78752-1699.

The amendments are proposed under the provisions of §124.351 of the Texas Finance Code that are interpreted to authorize the Credit Union Commission to adopt rules authorizing other investments permissible for credit unions that are responsive to changes in economic conditions or competitive practices and to the need for safety and soundness of credit union investments.

The specific section affected by this proposed amendments is Texas Finance Code §124.351.

§91.803.Investment Limits and Prohibitions [ in Other Financial Institutions ].

(a)

Limitations. A credit union may not invest an amount that is greater than 50% of its reserves and undivided earnings in any obligor or related obligors except for investments issued by or fully guaranteed as to principal and interest by the United States or an agency or instrumentality of the United States, or in any trust or trusts established for investing directly or collectively in such securities, obligations, or instruments. For the purposes of this section, obligor is defined as an issuer, trust, or originator of an investment, including the seller of a loan participation. [ A credit union may invest in certificates of deposit and passbook type accounts issued by an insured state or national bank or other similar institution, provided that the total investments in any one institution shall not exceed 10% of the capital and surplus of that institution, unless such investments are 100% secured by securities issued or guaranteed by the United States or any agency or instrumentality thereof. ]

(b)

Notwithstanding subsection (a) of this section, a credit union may invest in:

(1)

Domestically-issued federal funds, banker acceptances, certificates of deposit, and operating accounts at financial institutions, approved by the board, subject to the following limits:

(A)

Amounts may exceed the maximum limits of deposit insurance by up to 10% of the credit union's reserves and undivided earnings at any single financial institution having total assets less than $10 billion and by up to 50% of the credit union's reserves and undivided earnings at an institution having total assets greater than $10 billion provided that any such financial institution's ratio of nonperforming assets to primary or core capital does not exceed 25%.

(B)

As a single exception to this subsection, a credit union's board of directors will be allowed to establish the aggregate credit-risk exposure to a single financial institution approved by the board as the credit union's designated depository based on the credit union's liquidity trends and funding needs as documented by the credit union's asset/liability management policy, provided that the institution's ratio of nonperforming assets to primary or core capital does not exceed 20% and that the credit union has appropriately documented its due diligence to ensure that the investments in this financial institution does not pose a safety and soundness concern.

(2)

Loan participations purchased from other credit unions provided the loan complies with the purchasing credit union's loan policy and credit risk standards.

(c)

Prohibited Activities.

(1)

Definitions.

(A)

Adjusted trading--Selling an investment to a counterparty at a price above its current fair value and simultaneously purchasing or committing to purchase from the counterparty another investment at a price above its current fair value.

(B)

Collateralized mortgage obligation (CMO)--A multi-class bond issue collateralized by mortgages or mortgage-backed securities.

(C)

Fair value--The price at which a security can be bought or sold in a current, arms length transaction between willing parties, other than in a forced or liquidation sale.

(D)

Real estate mortgage investment conduit (REMIC)--A nontaxable entity formed for the sole purpose of holding a fixed pool of mortgages secured by an interest in real property and issuing multiple classes of interests in the underlying mortgages.

(E)

Residual interest--The remainder cash flows from a CMO/REMIC, or other mortgage-backed security transaction, after payments due bondholders and trust administrative expenses have been satisfied.

(F)

Short sale--The sale of a security not owned by the seller.

(G)

Stripped mortgage-backed security (SMBS)--A security that represents either the principal-only or the interest-only portion of the cash flows of an underlying pool of mortgages or mortgage-backed securities. Some mortgage-backed securities represent essentially principal-only cash flows with nominal interest cash flows or essentially interest-only cash flows with nominal principal cash flows. These securities are considered SMBSs for the purposes of this rule.

(H)

Zero coupon investment--An investment that makes no periodic interest payments but instead is sold at a discount from its face value. The holder of a zero coupon investment realizes the rate of return through the gradual appreciation of the investment, which is redeemed at face value on a specified maturity date.

(2)

A credit union may not:

(A)

Purchase or sell financial derivatives, such as futures, options, interest rate swaps, or forward rate agreements;

(B)

Engage in adjusted trading or short sales;

(C)

Purchase stripped mortgage backed securities, residual interests in CMOs/REMICs, mortgage servicing rights, commercial mortgage related securities, or small business related securities;

(D)

Purchase a zero coupon investment with a maturity date that is more than 10 years from the settlement date;

(E)

Purchase investments whereby the underlying collateral consists of foreign receivables or foreign deposits; or

(F)

Purchase securities used as collateral by a safekeeping concern.

(d)

Investment pilot program. The commissioner may authorize a credit union to engage in other types of investment activities under an investment pilot program. In approving a credit union's request to participate in a pilot program, the commissioner, in the exercise of discretion, may condition or limit the investment activity to be conducted. A credit union wishing to participate in an investment pilot program shall submit a request that addresses the following items:

(1)

Board policies approving the activities and establishing limits on them;

(2)

A complete description of the activities, with specific examples of how the credit union will conduct them and how they will benefit the credit union;

(3)

A demonstration of how the activities will affect the credit union's financial performance, risk profile, and asset-liability management strategies;

(4)

Examples of reports the credit union will generate to monitor the activities;

(5)

A projection of the associated costs of the activities, including personnel, computer, audit, etc.;

(6)

A description of the internal systems to measure, monitor, and report the activities, and the qualifications of the staff and/or official(s) responsible for implementing and overseeing the activities; and

(7)

The internal control procedures that will be implemented, including audit requirements.

This agency hereby certifies that the proposal has been reviewed by legal counsel and found to be within the agency's legal authority to adopt.

Filed with the Office of the Secretary of State, on October 23, 2000.

TRD-200007439

Harold E. Feeney

Commissioner

Credit Union Department

Earliest possible date of adoption: December 3, 2000

For further information, please call: (512) 837-9236

7 TAC §91.808

The Texas Credit Union Commission proposes new §91.808 relating to reporting investment activities to the board of directors. This rule will incorporate the reporting requirement provisions of existing §91.802(c) which the Commission has proposed to be deleted from that rule.

The new rule is proposed as a result of the general rule review mandated by the Government Code and General Appropriations Act. (Both contain provisions requiring state agencies to review and consider for readoption each of their rules every four years). Notice of Intention to Review Chapter 91 rules was published in the Texas Register on February 4, 2000, (25 TexReg 823) for the purpose of accepting public comment. No comments have been received. However, the Commission has determined from its review of Chapter 91 that a need exists for this proposed rule.

Lynette Pool, Deputy Commissioner, has determined that there will be no fiscal implications for state or local government as a result of enforcing or administering the proposed rule.

She has also determined that for each year of the first five years the proposed new rule is in effect, the public benefits anticipated as a result of enforcing the rule will be that credit union management and the boards of directors will be able to more readily identify the information that must be monitored for proper management of investments and associated risks. There is no anticipated effect on small businesses as a result of adopting the new rule. There is no economic cost anticipated to credit unions for complying with the new rule if adopted.

Written comments on the proposal must be submitted within 45 days after its publication in the Texas Register to Lynette Pool, Deputy Commissioner, Credit Union Department, 914 East Anderson Lane, Austin, Texas 78752-1699.

The new rule is proposed under the provisions of §15.402 of the Texas Finance Code that is interpreted to authorize the Credit Union Commission to adopt reasonable rules necessary for administering Subtitle D, Title 3, Texas Finance Code (Texas Credit Union Act).

The specific section affected by this proposed rule is Texas Finance Code §124.351.

§91.808.Reporting Investment Activities To The Board Of Directors.

A credit union shall provide its board of directors a monthly comprehensive report of investment activities, including:

(1)

Investments purchased and sold during the month;

(2)

Unrealized market gains or losses compared to book value at month's end;

(3)

Calculated yield to maturity (current yield on mutual funds) on each outstanding investment as of month's end;

(4)

Net asset value (NAV) or market value of each marketable investment;

(5)

Total book value of investments outstanding at month's end;

(6)

The total amount of investments having maturities exceeding three years and the ratio of the investments to total reserves and undivided earnings;

(7)

Unrecorded and unreported obligations to buy or sell investments; and

(8)

Amounts of investments, other than designated depositories, in other institutions that are not fully insured by the federal deposit insurance corporation, national credit union share insurance fund, or federal or state governments or their agencies.

This agency hereby certifies that the proposal has been reviewed by legal counsel and found to be within the agency's legal authority to adopt.

Filed with the Office of the Secretary of State, on October 23, 2000.

TRD-200007441

Harold E. Feeney

Commissioner

Credit Union Department

Earliest possible date of adoption: December 3, 2000

For further information, please call: (512) 837-9236