[Federal Register Volume 63, Number 209 (Thursday, October 29, 1998)]
[Proposed Rules]
[Pages 57950-57952]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-28876]


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NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 714


Leasing

AGENCY: National Credit Union Administration (NCUA).

ACTION: Notice of proposed rulemaking and request for comment.

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SUMMARY: The NCUA Board is proposing to update and redesignate its 
long-standing policy statement on leasing, Interpretive Ruling and 
Policy Statement (IRPS) 83-3, as an NCUA regulation. IRPS 83-3 
authorizes federal credit unions to engage in either direct or indirect 
leasing and either open-end or closed-end leasing of personal property 
to their members if such lease financing arrangements are the 
functional equivalent of secured loans. In addition, the proposed 
regulation formalizes NCUA's position, stated in legal opinion letters, 
that a federal credit union does not have to own the lease property in 
indirect leasing if certain requirements are satisfied.

DATES: Comments must be received on or before January 27, 1999.

ADDRESSES: Direct comments to Becky Baker, Secretary of the Board. Mail 
or hand-deliver comments to: National Credit Union Administration, 1775 
Duke Street, Alexandria, Virginia 22314-3428. Fax comments to (703) 
518-6319. E-mail comments to [email protected]. Please send comments 
by one method only.

FOR FURTHER INFORMATION CONTACT: Nicole Sippial Williams, Staff 
Attorney, Division of Operations, Office of the General Counsel, at the 
above address or by telephone: (703) 518-6540.

SUPPLEMENTARY INFORMATION:

A. Background

    As part of its regulatory review program, NCUA reviewed its 
Interpretive Rulings and Policy Statements (IRPS) to determine their 
current effectiveness. As a result of this review, the NCUA Board 
determined that a number of the IRPS should be withdrawn because they 
were outdated or unnecessary, and that certain IRPS should be 
redesignated as NCUA regulations to clarify and more effectively 
communicate NCUA's position on issues affecting federal credit unions 
(FCUs). 62 FR 11773 (March 13, 1997). Thereafter, twenty-eight (28) 
IRPS were withdrawn. 62 FR 50245 (September 25, 1997). This was NCUA's 
first step in its ongoing project to update and streamline its IRPS.
    At this time, NCUA is in the second phase of the IRPS project, that 
is, the redesignation of certain IRPS as NCUA regulations. Among those 
IRPS that the NCUA Board determined would be better suited as a 
regulation is IRPS 83-3, Federal Credit Union Leasing of Personal 
Property to Members. 62 FR 11773 (March 13, 1997). The NCUA Board's 
goal in redesignating this IRPS is to increase regulatory effectiveness 
by establishing a rule that sets forth NCUA's current position on 
leasing and by making it easier for an FCU to locate the rule and its 
requirements.
    In 1983, the NCUA Board issued IRPS 83-3 (48 FR 52568, Nov. 21, 
1983) stating that FCUs can lease personal property to their members if 
the leasing of the personal property is the functional equivalent of 
secured lending. The NCUA Board did not want FCUs to assume burdens or 
subject themselves to risks greater than those ordinarily incident to 
secured lending. The NCUA Board determined that for leasing to be the 
functional equivalent of lending, a lease had to be a net, full payout 
lease with a residual value not exceeding 25% unless guaranteed. In 
addition, an FCU had to retain salvage powers over the leased property 
and maintain a contingent liability insurance policy with an 
endorsement for leasing.
    The NCUA Board further stated that FCUs could engage in either 
direct or indirect leasing and either open-end or closed-end leasing. 
That is, an FCU could either purchase property from a vendor for the 
purpose of leasing such property to a member or purchase the lease and 
the leased property after the lease has been executed between the 
vendor and the member. Further, an FCU could either require a member to 
assume the risk and responsibility for any difference in the relied 
upon residual value and the actual value of the property at lease end 
or assume such risk itself.
    After IRPS 83-3 was issued, NCUA received a number of inquires 
regarding whether an FCU must own the leased property. NCUA responded 
through legal opinion letters that, in states requiring an entity 
engaged in leasing to be a licensed dealer, which involved posting a 
bond and complying with other state regulatory requirements, an FCU did 
not have to own the leased property. However, the FCU had to be named 
as the sole lienholder on the lease property and granted an 
unconditional, irrevocable power of attorney.
    Thereafter, the leasing industry argued that irrespective of state 
limitations, an FCU should be able to

[[Page 57951]]

take a lien on the leased property instead of having to own the 
property. The industry stated that an FCU would be insulated from tort 
liability by not being the owner of the leased property and an FCU's 
member would have lower lease payments if the vendor was able to take 
advantage of certain tax benefits available only if the vendor retained 
ownership of the property. NCUA concluded in legal opinion letters, 
that although the direct and indirect lease financing arrangements 
described in the supplementary section of IRPS 83-3 would result in an 
FCU owning the leased property, the IRPS itself did not require such 
ownership. Thus, NCUA took the position that the purchase or assignment 
of a lease and the receipt of a lien on the leased property was a form 
of permissible indirect lease financing if an FCU was named as the sole 
lienholder on the lease property, was assigned all of the vendor's 
rights under the lease, and obtained an unconditional, irrevocable 
power of attorney.
    The recent bankruptcy of a leasing company has brought to NCUA's 
attention the potential problems regarding the ownership of the leased 
property and the lease in indirect lease financing. In the bankruptcy 
case, the trustee has argued that the leasing company, not the FCU, 
owned the leases and the leased property. NCUA still is of the position 
that an FCU does not have to own the leased property since leasing is 
to be the functional equivalent of secured lending, and in secured 
lending, the member owns the property which is the security for the 
loan, not the FCU.
    However, NCUA is concerned that an assignment of the rights under a 
lease is not the same as a full assignment of the lease, that is, 
ownership of the lease. Unless an FCU becomes owner of a lease, there 
is a legal question as to how the lease will be treated in the event of 
the bankruptcy of a vendor. Failure to receive a full assignment could 
result in a substantial loss to an FCU in the event of the bankruptcy 
of a vendor.

B. The Proposed Regulation

    In drafting the proposed regulation, NCUA has chosen to use a plain 
English, question and answer format. Plain English is being promoted 
within the federal government as a means to increase regulatory 
comprehension and improve compliance among users of regulations by 
decreasing confusion and misunderstanding created by unclear standard 
regulatory language.
    The proposed regulation adopts the leasing policy and requirements 
set forth in IRPS 83-3 although the language and the format of the 
proposed regulation are different. In addition, the proposed rule 
specifically provides that an FCU does not have to own the leased 
property if an FCU obtains a full assignment of a lease, in other words 
becomes the owner of the lease, is named as sole lienholder on the 
property, and obtains an unconditional, irrevocable power of attorney.

C. Request for Comments

    At this time, the NCUA Board invites the public to review the 
proposed regulation and requests comment on the use of the plain 
English format and the issues presented below. The questions below are 
intended to elicit comments on issues of concern; however, the list is 
not intended to be exclusive. The NCUA Board welcomes any and all 
relevant comments on leasing. Please remember that a comment that 
includes the reasoning or basis for a proposition likely will be more 
persuasive than a comment without supporting information.
Questions
    1. Should an FCU be required to own the leased property?
    2. If NCUA does not require an FCU to own the leased property, but 
permits it to be a first lienholder, should an FCU be required to 
obtain a power of attorney from the leasing company?
    3. Should an FCU be required to receive a full assignment of the 
lease in an indirect lease financing arrangement?
    4. Should NCUA raise the 25% residual value limit?
    5. Should NCUA establish a minimum rating for insurance companies 
used in leasing arrangements? If so, what rating should be used?

Regulatory Procedures

Regulatory Flexibility Act

    The NCUA Board certifies that the proposed regulation will not have 
a significant impact on a substantial number of small credit unions. 
Most small credit unions do not offer lease financing arrangements to 
its members. Accordingly, a regulatory flexibility analysis is not 
required.

Paperwork Reduction Act

    The NCUA Board has determined that the requirement in Sec. 714.5 
that an FCU must obtain or have on file statistics documenting that a 
guarantor has the resources to meet a residual value guarantee 
constitutes a collection of information under the Paperwork Reduction 
Act. NCUA is submitting a copy of this proposed regulation to the 
Office of Management and Budget (OMB) for its review.
    The proposed regulation requires an FCU to obtain a guarantee if it 
uses a residual value estimate that is greater than 25% of the value of 
the leased property. Residual value is the projected future value of 
leased property at lease end. A significant disparity in a residual 
value estimate and the actual value of a leased property at lease end 
can result in a loss to an FCU. The greater the residual value estimate 
used, the greater the potential for loss is for an FCU. For this 
reason, it is important that a residual value estimate greater than 25% 
is guaranteed and that the guarantor is financially able to meet the 
guarantee. The NCUA Board believes that the best way for an FCU to 
evaluate the creditworthiness and ability of a guarantor to meet the 
guarantee is to obtain and maintain documentation evidencing such 
financial ability.
    The NCUA Board estimates that it will take an average of one to two 
hours to acquire, maintain, and evaluate such documentation. The NCUA 
Board estimates that approximately 750 FCUs are engaged in leasing, so 
that the total annual collection burden is estimated to be no more than 
1500 hours.
    The Paperwork Reduction Act of 1995 and OMB regulations require 
that the public be provided an opportunity to comment on information 
collection requirements, including an agency's estimate of the burden 
of the collection of information. The NCUA Board invites comment on: 
(1) whether the collection of information is necessary; (2) the 
accuracy of NCUA's estimate of the burden of collecting the 
information; (3) ways to enhance the quality, utility, and clarity of 
the information to be collected; and (4) ways to minimize the burden of 
collection of information. Comments should be sent to: OMB Reports 
Management Branch, New Executive Office Building, Room 10202, 
Washington, D.C. 20503; Attention: Alex T. Hunt, Desk Officer for NCUA. 
Please send NCUA a copy of any comments you submit to OMB.

Executive Order 12612

    Executive Order 12612 requires NCUA to consider the effect of its 
actions on state interests. The Proposed regulation only applies to 
federal credit unions. The NCUA Board has determined that the proposed 
regulation does not constitute a significant regulatory action for the 
purposes of the Executive Order.

List of Subjects in 12 CFR Part 714

    Credit unions, Leasing.


[[Page 57952]]


    By the National Credit Union Administration Board on October 22, 
1998.
Becky Baker,
Secretary to the Board.

    Accordingly, NCUA proposes to add Part 714 to read as follows:

PART 714---LEASING

Sec.
714.1  What does this part cover?
714.2  What are the permissible lease financing arrangements?
714.3  Must you own the leased property arrangement?
714.4  What are the lease requirements?
714.5  What is required if a residual value greater than 25% is 
used?
714.6  Who is responsible for the difference between the residual 
value estimate and the actual value of the leased property at lease 
end?
714.7  Are you required to retain salvage powers over the leased 
property?
714.8  What are the insurance requirements applicable to leasing?
714.9  What rate of interest may be charged under a lease?
714.10  When engaged in indirect leasing, must you comply with the 
purchase of eligible obligation rules set forth in Sec. 701.23 of 
this chapter?
714.11  What other laws must you comply with when engaged in 
leasing?

    Authority: 12 U.S.C. 1756, 1757, 1766, 1785, 1789.

Sec. 714.1  What does this part cover?

    This part covers the standards and requirements that a federal 
credit union (``you'') must follow when engaged in the lease financing 
of personal property.


Sec. 714.2  What are the permissible lease financing arrangements?

    (a) Direct leasing. In direct leasing, you purchase personal 
property from a vendor, becoming the owner of the property at the 
request of your member, and then lease the property to that member.
    (b) Indirect leasing. In indirect leasing, you purchase a lease and 
the leased property for the purpose of leasing such property to your 
member after the lease has been executed between a vendor and your 
member.


Sec. 714.3  Must you own the leased property?

    You do not have to own the leased property if:
    (a) You obtain a full assignment of the lease. A full assignment is 
the assignment of the rights, interests, obligations, and title in a 
lease to you, that is, you become the owner of the lease;
    (b) You are named as the sole lienholder of the leased property; 
and
    (c) You receive an unconditional, irrevocable power of attorney to 
transfer title in the property to yourself.


Sec. 714.4  What are the lease requirements?

    (a) Your lease must be a net lease. In a net lease, your member 
assumes all the burdens of ownership including maintenance and repair, 
licensing and registration, and insurance;
    (b) Your lease must be a full payout lease. In a full payout lease, 
you must recoup your entire investment in the leased property, amount 
financed, plus the cost of financing over the term of the lease; and 
(c) Your residual value estimate may not exceed 25% of the original 
cost of the leased property unless guaranteed. Residual value is the 
projected future value of the leased property at lease end. The 
residual value estimate must be reasonable in light of the nature of 
the leased property and all circumstances relevant to the leasing 
arrangement.


Sec. 714.5  What is required if a residual value greater than 25% is 
used?

    You may use a residual greater than 25% of the original cost of the 
leased property if a financially capable party guarantees the full 
value of the property. The guarantor may be the manufacturer or an 
insurance company that has a nationally recognized industry rating of 
at least a B+. You must obtain or have on file statistics documenting 
that the guarantor has the resources to meet the guarantee.


Sec. 714.6  Who is responsible for the difference between the residual 
value estimate and the actual value of the leased property at lease 
end?

    Either you or your member may be responsible for the difference in 
the residual value and the actual value. Thus, your lease may be either 
open-end or closed-end. In an open-end lease, your member assumes the 
risk and responsibility for any difference in the relied upon residual 
value and the actual value of the property at lease end. In a closed-
end lease, you assume such risk.


Sec. 714.7  Are you required to retain salvage powers over the leased 
property?

    You must retain salvage powers over the leased property. Salvage 
powers protect you from a loss and provide you with the power to take 
action if there is an unanticipated change in conditions that threatens 
your financial position by significantly increasing your exposure to 
risk. Salvage powers allow you:
    (a) As the owner and lessor, to take reasonable and appropriate 
action to salvage or protect the value of the property or your 
interests arising under the lease; or
    (b) As the assignee of a vendor's interest in a lease, to become 
the owner and lessor of the leased property pursuant to your 
contractual rights, or take any reasonable and appropriate action to 
salvage or protect the value of the property or your interests arising 
under the lease.


Sec. 714.8  What are the insurance requirements applicable to leasing?

    (a) You must maintain a contingent liability insurance policy with 
an endorsement for leasing or be named as the co-insured if you do not 
own the leased property. Contingent liability insurance protects you 
should you be sued as the owner of the leased property. You must use an 
insurance company with a nationally recognized industry rating of at 
least a B+.
    (b) Your member must carry the normal liability or collateral 
protection insurance on the leased property. The insurance policy must 
acknowledge the property as leased and list you as the financier of the 
leased property.


Sec. 714.9  What rate of interest may be charged under a lease?

    You may charge a rate of interest that is higher than the usury 
ceiling limit for credit unions set forth in Sec. 701.21(c)(7)(ii)(B) 
of this chapter when engaged in leasing activities.


Sec. 714.10  When engaged in indirect leasing, must you comply with the 
purchase of eligible obligation rules set forth in Sec. 701.23 of this 
chapter?

    You may participate in an indirect leasing arrangement under your 
authority to make loans to members if:
    (a) You review the lease and other documents to determine that the 
arrangement complies with your leasing polices; and (b) You receive a 
full assignment of the lease very soon after it is signed by your 
member and a vendor.


Sec. 714.11  What other laws must you comply with when engaged in 
leasing?

    You are subject to the lending rules set forth in Sec. 701.21 of 
this chapter, except as provided in Sec. 714.9 of this part, and the 
Consumer Leasing Act, 15 U.S.C. Sec. 1601, et seq., and Regulation M, 
12 CFR Part 213 implementing such Act.

[FR Doc. 98-28876 Filed 10-28-98; 8:45 am]
BILLING CODE 7535-01-U