[Federal Register: February 25, 2004 (Volume 69, Number 37)]
[Rules and Regulations]
[Page 8545-8548]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr25fe04-1]
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Rules and Regulations
Federal Register
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[[Page 8545]]
NATIONAL CREDIT UNION ADMINISTRATION
12 CFR Parts 701 and 741
Suretyship and Guaranty; Maximum Borrowing Authority
AGENCY: National Credit Union Administration (NCUA).
ACTION: Final rule.
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SUMMARY: NCUA is revising its rules concerning maximum borrowing
authority to permit federally insured, state-chartered credit unions
(FISCUs) to apply for a waiver from the maximum borrowing limitation of
50 percent of paid-in and unimpaired capital and surplus (shares and
undivided earnings, plus net income or minus net loss). This amendment
will provide FISCUs with more flexibility by allowing them to apply for
a waiver up to the amount permitted under state law.
NCUA is also adding a provision to its regulations that allows a
federal credit union (FCU) to act as surety or guarantor on behalf of
its members. The final rule establishes certain requirements to ensure
that FCUs, and FISCUs if permitted under state law to act as a surety
or guarantor, are not exposed to undue risk.
DATES: This final rule is effective March 26, 2004.
FOR FURTHER INFORMATION CONTACT: Mary F. Rupp, Staff Attorney, Division
of Operations, Office of General Counsel, at the above address or
telephone: (703) 518-6540.
SUPPLEMENTARY INFORMATION:
A. Background
On September 24, 2003, the NCUA Board requested comment on proposed
changes to Sec. Sec. 701.20 and 741.2 of its regulations. 68 FR 56586
(October 1, 2003). Proposed Sec. 701.20 created a new provision to
recognize that an FCU, as part of its incidental powers, may act as a
guarantor or surety on behalf of a member. Section 741.2 sets forth a
maximum borrowing limitation of 50 percent of paid-in and unimpaired
capital and surplus for all federally insured credit unions. The
proposed amendment permitted federally insured, state-chartered credit
unions (FISCUs) to apply for a waiver up to the amount permitted by
state law.
B. Summary of Comments
The NCUA Board received 10 comments on the proposal: three from
credit unions; three from credit union trade groups; two from credit
union leagues; and two from bank trade groups. Below is a summary of
the comments.
Suretyship and Guaranty
Eight of the ten commenters support allowing a credit union to act
as a surety or guarantor. Two of the eight positive commenters
suggested allowing FISCUs to apply for a waiver from the safety and
soundness limitations placed on the transactions. One of the positive
commenters suggested slightly different collateral requirements. The
two negative commenters were the bank trade groups.
The positive commenters noted that allowing credit unions to enter
into suretyship and guaranty agreements with the safety and soundness
requirements in the proposal will give credit unions additional
flexibility to meet the needs of their members while ensuring the
safety and soundness of the transaction. The commenters noted that this
activity could become a valuable service for credit unions. A couple of
the commenters suggested, because this activity is so new for credit
unions, that NCUA review the rule after it has been in effect for a few
years to address any operational issues that may arise. The Board
intends to incorporate this suggestion into its regulatory review
process.
Two of the positive commenters suggested allowing FISCUs to apply
for a waiver that would allow the state regulator or legislature to
authorize more flexible guarantor or surety requirements. They suggest
that a waiver only be granted if there are no safety and soundness
implications. Because, as some of the commenters noted, this activity
is new for credit unions, NCUA believes it is premature to adopt a
waiver provision. The Board believes the requirements in the rule that
would be the subject of a waiver all relate directly to safety and
soundness, however, as NCUA and credit unions gain more experience in
this area, the Board may reconsider this issue.
One of the commenters suggested that corporate credit unions have a
role to play when a natural person credit union is acting as a
guarantor for its member. The commenter recommended including deposits
at corporate credit unions in the 100% collateral category. Because it
is the natural person member that is providing the collateral and
natural person members do not have deposits at corporate credit unions,
we do not believe it is appropriate to implement this suggestion.
The two bank trade groups believe allowing credit unions to engage
in these transactions conflicts with a credit union's mission of
serving people of modest means. They also assert that allowing this
activity is an expansion of a credit union's commercial lending powers
and should not be allowed as long as credit unions are tax exempt.
Congress has specifically authorized commercial lending for FCUs. 12
U.S.C. 1757a. Contrary to the bankers' claims, this rule is consistent
with Congress' intent for FCUs with respect to serving their members
and business lending.
Waiver of Maximum Borrowing Limitations for FISCUs
Eight of the ten commenters supported this proposal. The two
negative commenters were the bank trade groups.
Those in support of the proposal contend that: It is inherent in
the concept of dual chartering to allow state-chartered credit unions
to exercise powers authorized under state law and regulation within the
bounds of safety and soundness; the proposal's approach is similar to
the approach used by the other banking agencies; and the waiver
provision will assist FISCUs in providing service to low income
families by allowing FISCUs to borrow from the Federal Home Loan Bank a
greater amount than the regulatory limitation currently permits.
Finally, a few of the positive commenters suggested NCUA seek similar
authority for FCUs through a legislative change.
The two negative bank commenters expressed concern that the waiver
provision could negatively impact on the safety and soundness of
FISCUs. As
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noted in the proposal and echoed by many of the commenters, NCUA has
incorporated the appropriate safeguards into the rule to ensure these
transactions are handled in a safe and sound manner. One of the
negative commenters incorrectly characterized the proposal as an
``attempt by the credit union industry to exceed its statutory, maximum
borrowing authority.'' As noted in the proposal, the statutory
limitation applies only to FCUs.
C. Final Amendments
New Sections 701.20 and 741.221--Suretyship and Guaranty
The final rule is identical to the proposal. Section 701.20
recognizes that an FCU, as part of its incidental powers, may act as a
guarantor or surety on behalf of a member. 12 U.S.C. 1757(17). Acting
as a guarantor or surety on behalf of an FCU member meets the
definition of an incidental power because it: Is convenient or useful
to an FCU in extending credit to its members; is a logical extension of
an FCU's authority to make loans to its members and to provide letters
of credit on behalf of members; and involves risks that are similar in
nature to the risks involved in an FCU's lending activity. 12 CFR
721.2.
The final rule defines suretyship, guaranty agreements, and
principal and includes three requirements designed to ensure the safety
and soundness of surety and guaranty agreements. The Board has the same
safety and soundness concerns for FISCUs authorized under state law to
enter into surety and guaranty agreements as it does for FCUs.
Accordingly, the requirements will apply to FISCUs as provided in Sec.
741.220. The requirements are modeled after the requirements in the
Office of the Comptroller of the Currency (OCC) and the Office of
Thrift Supervision (OTS) rules on guaranty and suretyship. 12 CFR
7.1017 and 560.60.
The first two requirements are substantially similar to the
requirements in the OTS rule. The first requires that the obligation
under the agreement be limited to a fixed amount and limited in
duration. Without a requirement to limit the amount and duration of the
agreement, an FCU may take on more risk than it anticipated in the
agreement.
The second provision requires that an FCU's performance under the
agreement create a loan that is permissible under applicable law
because the nature of a surety or guaranty agreement is a loan. The FCU
is lending its credit and, in effect, is lending to its member. An FCU
may not use a surety or guaranty agreement as a mechanism to avoid the
applicable regulatory requirements for loans. These regulatory
requirements are in place to ensure the safety and soundness of the
transactions. For example, if an FCU will be a surety or guarantor for
a member's obligation for a business loan, it must comply with the
member business loan requirements. 12 CFR part 723.
This provision also highlights that an FCU must treat its
obligation under the agreement as a contractual commitment to advance
funds to the principal under the loans-to-one-borrower limits and loans
to insider restrictions. 12 CFR 560.60(b)(3), 701.21(c)(5), (d) and
723.8. Again, these requirements are in place to ensure the safety and
soundness of the transaction and should not be circumvented through the
use of a surety or guaranty agreement.
The third provision addresses collateral requirements and parallels
requirements in the OCC and OTS rules. Depending on the nature of the
collateral, an FCU must have collateral equal to 100 or 110 percent of
the obligation. The 100 percent collateral category includes cash,
obligations of the United States or its agencies, obligations fully
guaranteed by the United States or its agencies as to principal and
interest, and notes, drafts, bills of exchange, and bankers'
acceptances that are eligible for rediscount or purchase by a Federal
Reserve Bank. Because the value of some of these types of collateral
can fluctuate, the proposal requires that the collateral have a market
value at the close of each business day equal to 100 percent of the
FCU's total potential liability.
The 110 percent collateral category includes real estate and
marketable securities. If the collateral is real estate, an FCU must
establish the value of the collateral by an evaluation or appraisal of
the real estate consistent with NCUA's appraisal regulation. 12 CFR
722.3. If the collateral is marketable securities, an FCU must be
authorized to invest in the securities and must ensure that the value
of the securities is equal to 110 percent of the obligation at all
times. To protect against risk of loss, an FCU must perfect its
security interest in the collateral.
Section 741.2--Maximum Borrowing Authority
The final rule is identical to the proposal. It allows an FISCU to
apply for a waiver from Sec. 741.2 up to the amount permitted under
state law or by the state regulator. Prerequisites for a waiver request
include that appropriate safeguards must be in place and that either
state law permits the higher limit than that specified in the FCU Act
for which the FISCU seeks approval, which is verified by the state
regulator, or the state regulator has duly approved a higher limit than
that allowed under state law. Instances in which it would seem
appropriate to seek a waiver could include a situation where, for
example, the borrowing has minimal risk associated with it but the
FISCU is unable to enter into the transaction because of the regulatory
prohibition. Circumstances presenting minimal risk could be, for
example, a transaction where the FISCU is acting as a co-borrower with
a member and the member has provided collateral sufficient to cover its
obligation if the member defaults on the loan. The waiver process will
permit regional directors to take into consideration the circumstances
of the FISCU, its community, and members, and provide additional
flexibility to address particular needs or benefits on a case-by-case
basis. The final regulation contemplates that FISCUs wishing to engage
in particular transactions, programs or projects, which would otherwise
take their borrowings above the regulatory limitation, will have the
opportunity to apply for a waiver, which will include a thorough
explanation of the business purposes and strategies the FISCU has in
place to mitigate risk, so that regional directors may make an informed
determination regarding safety and soundness.
To apply for a waiver, an FISCU must submit its request to the
appropriate regional director. The request must include a detailed
analysis of the safety and soundness implications of the waiver, a
proposed aggregate dollar amount or percentage of paid-in and
unimpaired capital and surplus limitation, a letter from the state
regulator approving the request, and an explanation demonstrating the
need for a higher limit. The regional director will approve the waiver
request if he or she determines that the proposed borrowing limit will
not adversely affect the safety and soundness of the FISCU.
D. Regulatory Procedures
Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) requires NCUA to prepare an
analysis to describe any significant economic impact any proposed
regulation may have on a substantial number of small credit unions,
defined as those under ten million dollars in assets. The rule
authorizes FCUs to enter into surety and guaranty agreements and
permits FISCUs to request a waiver from the maximum borrowing
limitation. It is
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unlikely that small credit unions will participate in either of these
activities. The final rule will not have a significant economic impact
on a substantial number of small credit unions, and therefore, a
Regulatory Flexibility Analysis is not required.
Paperwork Reduction Act
The NCUA Board has determined that the final rule that allows
FISCUs to file for a waiver from the borrowing limitations in Sec.
741.2 is covered under the Paperwork Reduction Act. NCUA submitted a
copy of the proposed rule to the Office of Management and Budget (OMB)
for its review and is awaiting approval and issuance of a new OMB
control number (3133-----).
Under the Paperwork Reduction Act of 1995, no persons are required
to respond to a collection of information unless it has a valid OMB
number. The control number will be displayed in the table at 12 CFR
part 795.
Executive Order 13132
Executive Order 13132 encourages independent regulatory agencies to
consider the impact of their actions on state and local interests. In
adherence to fundamental federalism principles, NCUA, an independent
regulatory agency as defined in 44 U.S.C. 3502(5), voluntarily complies
with the executive order. The final rule will apply directly to
federally insured state-chartered credit unions. NCUA has determined
that the final rule will not have a substantial direct effect on the
states, on the connection between the national government and the
states, or on the distribution of power and responsibilities among the
various levels of government. NCUA has determined that the final rule
does not constitute a policy that has federalism implications for
purposes of the executive order.
The Treasury and General Government Appropriations Act, 1999--
Assessment of Federal Regulations and Policies on Families
NCUA has determined that this final rule would not affect family
well-being within the meaning of section 654 of the Treasury and
General Government Appropriations Act, 1999, Pub. L. 105-277, 112 Stat.
2681 (1998).
Small Business Regulatory Enforcement Fairness Act
The Small Business Regulatory Enforcement Fairness Act of 1966
(SBREFA) (Pub. L. 104-121) provides generally for congressional review
of agency rules. A reporting requirement is triggered in instances
where NCUA issues a final rule as defined by Section 551 of the
Administrative Procedures Act. 5 U.S.C. 551. The Office of Management
and Budget has determined that this rule is not a major rule for
purposes of SBREFA.
E. Agency Regulatory Goal
NCUA's goal is clear, understandable regulations that impose a
minimal regulatory burden. The final rule is understandable and imposes
minimum regulatory burden.
List of Subjects
12 CFR Part 701
Credit unions.
12 CFR Part 741
Credit unions, Requirements for insurance.
By the National Credit Union Administration Board on February
19, 2004.
Becky Baker,
Secretary of the Board.
0
For the reasons set forth in the preamble, the National Credit Union
Administration is amending 12 CFR parts 701 and 741 as follows:
PART 701--ORGANIZATION AND OPERATIONS OF FEDERAL CREDIT UNIONS
0
1. The authority citation for part 701 continues to read as follows:
Authority: 12 U.S.C. 1752(5), 1755, 1756, 1757, 1759, 1761a,
1761b, 1766, 1767, 1782, 1784, 1787, 1789.
0
2. Add new Sec. 701.20 to read as follows:
Sec. 701.20 Suretyship and guaranty.
(a) Scope. This section authorizes a federal credit union to enter
into a suretyship or guaranty agreement as an incidental powers
activity. This section does not apply to the guaranty of public
deposits or the assumption of liability for member accounts.
(b) Definitions. A suretyship binds a federal credit union with its
principal to pay or perform an obligation to a third person. Under a
guaranty agreement, a federal credit union agrees to satisfy the
obligation of the principal only if the principal fails to pay or
perform. The principal is the person primarily liable, for whose
performance of his obligation the surety or guarantor has become bound.
(c) Requirements. The suretyship or guaranty agreement must be for
the benefit of a principal that is a member and is subject to the
following conditions:
(1) The federal credit union limits its obligations under the
agreement to a fixed dollar amount and a specified duration;
(2) The federal credit union's performance under the agreement
creates an authorized loan that complies with the applicable lending
regulations, including the limitations on loans to one member or
associated members or officials for purposes of Sec. Sec.
701.21(c)(5), (d); 723.2 and 723.8; and
(3) The federal credit union obtains a segregated deposit from the
member that is sufficient in amount to cover the federal credit union's
total potential liability.
(d) Collateral. A segregated deposit under this section includes
collateral:
(1) In which the federal credit union has perfected its security
interest (for example, if the collateral is a printed security, the
federal credit union must have obtained physical control of the
security, and, if the collateral is a book entry security, the federal
credit union must have properly recorded its security interest); and
(2) That has a market value, at the close of each business day,
equal to 100 percent of the federal credit union's total potential
liability and is composed of:
(i) Cash;
(ii) Obligations of the United States or its agencies;
(iii) Obligations fully guaranteed by the United States or its
agencies as to principal and interest; or
(iv) Notes, drafts, or bills of exchange or banker's acceptances
that are eligible for rediscount or purchase by a Federal Reserve Bank;
or
(3) That has a market value equal to 110 percent of the federal
credit union's total potential liability and is composed of:
(i) Real estate, the value of which is established by a signed
appraisal or evaluation in accordance with part 722 of this chapter. In
determining the value of the collateral, the federal credit union must
factor in the value of any existing senior mortgages, liens or other
encumbrances on the property except those held by the principal to the
suretyship or guaranty agreement; or
(ii) Marketable securities that the federal credit union is
authorized to invest in. The federal credit union must ensure that the
value of the security is 110 percent of the obligation at all times
during the term of the agreement.
PART 741--REQUIREMENTS FOR INSURANCE
0
3. The authority citation for part 741 continues to read as follows:
Authority: 12 U.S.C. 1757, 1766(a), and 1781-1790; Pub.L. 101-
73.
0
4. Amend Sec. 741.2 by designating the existing paragraph as (a) and
adding new
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paragraphs (b), (c) and (d) to read as follows:
Sec. 741.2 Maximum borrowing authority.
(a) * * *
(b) A federally insured state-chartered credit union may apply to
the regional director for a waiver of paragraph (a) of this section up
to the amount permitted under the applicable state law or by the state
regulator. The waiver request must include:
(1) Written approval from the state regulator;
(2) A detailed analysis of the safety and soundness implications of
the proposed waiver;
(3) A proposed aggregate dollar amount or percentage of paid-in and
unimpaired capital and surplus limitation; and
(4) An explanation demonstrating the need to raise the limit.
(c) The regional director will approve the waiver request if the
proposed borrowing limit will not adversely affect the safety and
soundness of the federally insured state-chartered credit union.
0
5. Add new Sec. 741.221 to read as follows:
Sec. 741.221 Suretyship and guaranty requirements.
Any credit union, which is insured pursuant to Title II of the Act,
must adhere to the requirements in Sec. 701.20 of this chapter. State-
chartered, NCUSIF-insured credit unions may only enter into suretyship
and guaranty agreements to the extent authorized under state law.
[FR Doc. 04-4076 Filed 2-24-04; 8:45 am]
BILLING CODE 7535-01-P