[Federal Register Volume 63, Number 209 (Thursday, October 29, 1998)]
[Proposed Rules]
[Pages 57943-57945]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-28877]
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NATIONAL CREDIT UNION ADMINISTRATION
12 CFR Part 701
Organization and Operations of Federal Credit Unions; Statutory
Lien
AGENCY: National Credit Union Administration (NCUA).
ACTION: Notice of Proposed Rulemaking.
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SUMMARY: The NCUA proposes to update, clarify and convert to a
regulation the provisions of its existing Interpretive Ruling and
Policy Statement (``IRPS''), which implements the Federal Credit Union
Act's authority to establish a statutory lien. Like the IRPS, the
proposed rule will permit a federal credit union to impress a statutory
lien upon the shares and dividends of a member, and to enforce that
lien to satisfy the member's outstanding indebtedness to the credit
union, even when such indebtedness is not secured by shares.
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. Please send comments by one method only.
FOR FURTHER INFORMATION CONTACT: Steven W. Widerman, Trial Attorney,
Division of Litigation & Liquidations, Office of General Counsel, at
the above address or telephone: (703) 518-6557.
SUPPLEMENTARY INFORMATION:
A. Background
Section 107(11) of the Federal Credit Union Act, 12 U.S.C. 1757(11)
(hereinafter ``Sec. 1757(11)''), provides that a federal credit union
``shall have [the] power . . . to impress and enforce a lien upon the
shares and dividends of any member to the extent of any loan made to
him and any dues or charges payable by him.'' Beginning in 1979, NCUA
took the position that a federal credit union could enforce the lien
granted by Sec. 1757(11) only after it had obtained a court judgment on
the debt, unless state law allowed enforcement of the lien without
first obtaining such a judgment. NCUA, Manual of Laws Affecting Federal
Credit Unions 1-17 (6/78 ed.); NCUA, Credit Manual for Federal Credit
Unions 29 (12/79 ed.). Once the prerequisite judgment was obtained, the
credit union could apply the member's shares to his or her outstanding
loan balance.
In 1982, NCUA reconsidered this interpretation of Sec. 1757(11)
because of experience indicating that it placed credit unions at a
disadvantage compared to other financial institutions, which usually
can offset a borrower's loan without first obtaining a court judgment.
47 FR 44340 (October 7, 1982). As a result, NCUA issued Interpretive
Ruling and Policy Statement No. 82-5 (``IRPS 82-5''), reinterpreting
Sec. 1757(11) to authorize a credit union to enforce the lien on the
shares and dividends of a member without first obtaining a court
judgment against the member, state law to the contrary notwithstanding.
47 FR 57483 (December 27, 1982). The NCUA Board concluded, and still
maintains, that the reinterpretation of Sec. 1757(11) is more
consistent with Congressional intent.
In 1987, NCUA issued Interpretive Ruling and Policy Statement No.
87-2 entitled ``Developing and Reviewing Government Regulations,'' 52
FR 35231 (Sept. 18, 1987) (``IRPS 87-2''). IRPS 87-2 established the
policy of reviewing all existing NCUA regulations every three years for
the purpose of updating, clarifying and simplifying them, and
eliminating redundant and unnecessary provisions. Id. at 35232.
Following a plain English question and answer format, the proposed rule
is intended to fulfill that purpose.
B. Principal Differences Between IRPS 82-5 and Proposed Rule
The principal difference between IRPS 82-5 and the proposed rule is
the requirement in Sec. 701.39(b)(1) and (3) that the credit union give
written notice to its member at the time it impresses a statutory lien
on that member's account(s). But for such written notice, the member
would not necessarily be aware when the credit union impresses a lien
either by notation on its records of the member's account(s) or through
a duly adopted by-law generally establishing a lien on members'
accounts.
The proposed rule also resolves two ambiguities in IRPS 82-5 and
recent editions of NCUA's ``Examiner's Guide.'' See, e.g., NCUA
Examiner's Guide 9-96 (6/97 ed.). First, the rule reiterates NCUA
policy permitting a statutory lien only to offset a member's
outstanding indebtedness to the credit union, not to offset other
outstanding financial obligations of the member to the credit union.
Proposed Sec. 701.39(a)(4). Second, the rule distinguishes a statutory
lien from a share secured loan by emphasizing that until a statutory
lien is enforced, following a member's default, the member is permitted
to make withdrawals from the impressed account(s) even to a level below
that of the outstanding indebtedness. Proposed Sec. 701.39(c)(2).
C. Section 701.39(a)--What is a Statutory Lien?
1. Definition
The proposed rule defines a statutory lien under Sec. 1757(11) as a
security interest in a member's shares and dividends equal to the
amount of the member's indebtedness to the credit union. Proposed
Sec. 701.39(a)(1). The security interest established by the lien gives
the credit union a superior claim over all other creditors when claims
are asserted against the member's account(s). Id. at Sec. 701.39(a)(2).
See D. Bridewell, Bridewell on Credit Unions 710 (1942 ed.).
2. ``Floating'' Lien
The NCUA Board continues to believe that Congress intended for the
statutory lien to be a ``floating'' lien. When a federal credit union
impresses a lien on a member's accounts, it retains the lien on those
accounts from that date forward through the term of the loan, to the
extent of the unpaid loan balance together with interest, fees and
other charges attributable to the loan. The lien ``floats'' as the
outstanding balance of the indebtedness varies from time to time, and
as the member's account balance is reduced by withdrawals or increased
by deposits or dividend payments. When the statutory lien is enforced,
it applies to all funds in the account at that point, the amount of
which may well be less than the outstanding balance of the
indebtedness.
3. Preemption
The proposed rule expressly provides that Sec. 1757(11) preempts
state law. Proposed Sec. 701.39(a)(3). This means that the proposed
rule overrides the equitable right of set-off, as well as state
statutory and decisional law governing a creditor's right to impress
and enforce a lien. Many state laws require a
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creditor to obtain a court judgment on the debt before enforcing a
lien. The NCUA Board continues to maintain that federal credit unions
should be free of this restraint, as are other federally-insured
financial institutions. Accordingly, the proposed rule specifically
provides, apart from general preemption, that a court judgment on the
member's debt is not a prerequisite to enforcing a statutory lien.
Proposed Sec. 701.39(c)(3).
4. Member's Indebtedness
While Sec. 1757(11) can be read to apply to member financial
obligations beyond indebtedness to the credit union, the proposed rule
reiterates NCUA policy limiting its application to a member's
outstanding indebtedness and related charges. Proposed
Sec. 701.39(a)(4). For example, a statutory lien could be used to
offset unpaid loan principal and interest and charges related to the
loan, such as a late fee and collection expenses. But the statutory
lien cannot be used to offset financial obligations outside the context
of indebtedness to the credit union, such as a returned check charge,
safe deposit box rental fee or overdraft on a withdrawal from an
Automatic Teller Machine. It may be possible to offset such financial
obligations under a federal credit union's statutory authority to
receive payments on shares, 12 U.S.C. 1757(6), and to exercise
incidental powers, 12 U.S.C. 1757(17), provided that the credit union
has duly adopted a nonstandard by-law or board policy establishing its
right to do so. See also 12 C.F.R. 701.35.
A member is indebted to the credit union if he or she is the maker
or co-maker of a note or equivalent instrument establishing his, her or
their personal indebtedness to the credit union. Whereas IRPS 82-5 was
silent on guarantor liability, the proposed rule provides that a member
who co-signs as a guarantor of the indebtedness of another member also
is considered to be indebted to the credit union. Proposed
Sec. 701.39(a)(4). Thus, the credit union account(s) of the guarantor
also may be impressed with a statutory lien. If the maker of the note
or equivalent instrument then defaults, the credit union can enforce
the statutory lien on the guarantor's account, thereby effecting the
agreement to guarantee the maker's indebtedness to the credit union.
5. Exemptions
Certain forms of indebtedness to a credit union cannot be collected
by means of a statutory lien. In the case of outstanding indebtedness
due to extensions of credit under a credit card program, the Truth in
Lending Act, 15 U.S.C. 1666h, and Regulation Z, 12 C.F.R. 226.12(d),
both apply to generally prohibit a federal credit union from offsetting
against a member's account that member's indebtedness arising from a
consumer credit transaction under a credit card plan. In the case of a
member's Individual Retirement Account (``IRA''), the Internal Revenue
Code, 26 U.S.C. 408(a)(4), provides that the ``interest of an
individual in the balance of his account is nonforfeitable,'' thus
barring a credit union, as trustee of the IRA, from impressing a
statutory lien on an IRA. See In re McDaniel, 41 B.R. 132 (Bankr. W.D.
Tex. 1984); In re Dunn, 5 B.R. 156 (Bankr. N.D. Tex. 1980). Finally, in
the case of a member who is in bankruptcy, if the bankruptcy court
issues an automatic ``stay'' of all creditor claims against the member,
11 U.S.C. 362(a)(7), the credit union is prohibited from enforcing its
statutory lien on the member's account(s) while the stay is in effect.
6. Limitations
Apart from outright exemptions, credit unions should be aware that
certain types of ownership interests in a credit union account will
limit the extent to which a credit union can enforce a statutory lien
under Sec. 1757(11). For example, in the case of an account held as a
tenancy in common between members, a statutory lien would be
enforceable only against the debtor's 50% interest in the contents of
the account (absent evidence of a disproportionate interest). No such
limitation on enforcement generally exists with accounts held
individually, or as a joint tenancy, or as a tenancy by the entirety
between married members.
D. Section 701.39(b)--How is a Statutory Lien Impressed?
1. Impressing a Lien
A credit union may impress a statutory lien in either of three
ways: (1) by noting the existence of the lien in the credit union's
records of the member's account(s) and giving notice thereof to the
member at the time the loan is granted, Sec. 701.39(b)(1); (2) by
reciting in a loan document signed by the member that shares and
dividends are subject to the lien, Sec. 701.39(b)(2); or (3) by duly
adopting a by-law establishing a statutory lien to satisfy its members'
delinquent indebtedness, and giving notice of the by-law to the member
at the time the loan is granted, Sec. 701.39(b)(3). See, e.g., Federal
Credit Union Bylaws, Art. III, Sec. 5(d) (12/87 ed.). See Credit Manual
for Federal Credit Unions 16-17 (May 1972 ed.).
2. Notice
To ensure that members are aware when their credit union impresses
a statutory lien on their accounts, proposed Sec. 701.39(b)(1) and (2)
require the credit union to give written notice to the member,
contemporaneously with granting the loan, that the credit union is
either noting the statutory lien on its records of the member's
account(s), or is impressing the lien on those accounts through a duly
adopted by-law authorizing the credit union to do so. The notice
requirement applies whether the member is the borrower or is the
guarantor of another member who is the borrower. Separate notice to the
member is not required when a statutory lien is recited in a loan
document signed by the member, Sec. 701.39(b)(2), because the member is
presumed to have read any document he or she signs, and thus to have
become aware of the statutory lien.
E. Section 701.39(d)--How is a Statutory Lien Enforced?
1. Enforcement
Generally, a credit union may enforce its lien on the shares and
dividends of the member by debiting the member's account and applying
the funds to satisfy the outstanding indebtedness. Section 1757(11)
preempts state law, meaning that a credit union is not required to
follow state laws governing liens, nor to exercise the equitable right
of set-off. In particular, this means that a credit union does not have
to obtain a court judgment on the member's indebtedness before
enforcing the lien, even if the state law requires a creditor to do so
as a prerequisite to enforcement.
2. Statutory Lien Versus Share Secured Loan
A statutory lien differs from a loan secured by the member's pledge
of his or her shares, commonly known as a ``share secured loan.'' In
the case of a share secured loan, the member is not allowed to withdraw
shares to a level below the outstanding balance of the indebtedness at
any time during the term of the loan, regardless whether the member is
current on the loan. See NCUA, Credit Manual for Federal Credit Unions
28 (12/79 ed.). See, e.g., Federal Credit Union Bylaws Art. III,
Sec. 5(c) (12/87 ed.). In contrast, when a statutory lien has been
impressed, a credit union may permit routine withdrawals from the
member's account without waiving the statutory lien, even if the
withdrawals would reduce the account balance to a level below that of
the outstanding balance of the indebtedness. Only when the credit
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union enforces the lien, following the member's default, can it then
bar the member from making withdrawals. When enforced, the statutory
lien applies to all funds then in the account(s); due to prior
withdrawals, those funds may amount to less than the outstanding
balance of the indebtedness.
F. Withdrawal of Current Interpretive Ruling and Policy Statement
Concurrent with adoption of the proposed rule regarding the
statutory lien, the NCUA Board will withdraw the current IRPS 82-5
regarding the statutory lien, 47 FR 57483 (December 27, 1982).
G. Regulatory Procedures
1. Regulatory Flexibility Act
The Regulatory Flexibility Act requires NCUA to prepare an analysis
to describe any significant economic impact any proposed regulation may
have on a substantial number of small entities (primarily those under
$1 million in assets). The proposed rule on the statutory lien would
reduce existing regulatory burdens. Therefore, the NCUA Board has
determined and certifies that the proposed rule, if adopted, will not
have a significant economic impact on a substantial number of small
credit unions. Accordingly, a Regulatory Flexibility Analysis is not
required.
2. Paperwork Reduction Act
The proposed rule has no information collection requirements.
Therefore, no Paperwork Reduction Act analysis is required.
3. Executive Order 12612
Executive Order 12612 requires NCUA to consider the effect of its
actions on state interests. The proposed rule does not apply to State-
chartered credit unions and, thus, would not effect State interests.
Therefore, no analysis is required.
List of Subjects in 12 CFR Part 701
Credit, Credit unions, Insurance, Liens, Mortgages, Reporting and
recordkeeping requirements, Surety bonds, Statutory liens.
By the National Credit Union Administration Board on October 22,
1998.
Becky Baker,
Secretary of the Board.
For the reasons set forth in the preamble, it is proposed that 12
CFR chapter VII be amended as follows:
PART 701--ORGANIZATION AND OPERATION OF FEDERAL CREDIT UNIONS
1. The authority citation for part 701 continues to read as
follows:
Authority: 12 U.S.C. 1752(5), 1755, 1756, 1757, 1759, 1761a,
1761b, 1766, 1767, 1782, 1784, 1787, and 1789. Section 701.6 is also
authorized by 31 U.S.C. 3717. Section 701.31 is also authorized by
15 U.S.C. 1601 et seq., 42 U.S.C. 1861 and 42 U.S.C. 3601-3610.
Section 701.35 is also authorized by 42 U.S.C. 4311-4312.
2. Part 701 is amended to add Sec. 701.39 to read as follows:
Sec. 701.39 Statutory lien.
(a) What is a statutory lien? (1) Definition. A statutory lien is
the power granted by section 107(11) of the Federal Credit Union Act
(the Act), 12 U.S.C. 1757(11), to a federal credit union to impress
(i.e., to establish) a security interest in a member's shares and
dividends equal to the amount of that member's indebtedness to the
credit union, as that amount varies from time to time.
(2) Superior claim. A statutory lien gives the federal credit union
priority over all other creditors when claims are asserted against the
member's account(s).
(3) Preemption. A statutory lien pursuant to section 107(11) of the
Act, 12 U.S.C. 1757(11), preempts state laws governing the right of a
creditor to impress and enforce a lien, as well as the common law right
of set-off.
(4) Member's indebtedness. A statutory lien may be applied to a
member's account(s) only to satisfy a member's outstanding indebtedness
to the credit union, such as loan principal and interest and other
charges attributable to the indebtedness. For purposes of this section,
a member is considered to be indebted to the credit union if he or she
is the maker, co-maker or guarantor of a note or equivalent instrument
establishing indebtedness to the credit union.
(5) Exemptions. To the extent provided by federal law--(i) A
statutory lien may not be impressed on a member's Individual Retirement
Account;
(ii) A statutory lien cannot be enforced to offset a member's
indebtedness arising from a consumer credit transaction under a credit
card plan;
(iii) A statutory lien cannot be enforced against the account of a
member who is the subject of bankruptcy proceeding when a ``stay''
order of the bankruptcy court, issued pursuant to 11 U.S.C. 362, is in
effect.
(b) How is a statutory lien impressed? A credit union can impress a
statutory lien on a member's account(s)--
(1) Account records. By noting the existence of the lien on the
credit union's records of the member's account(s) and providing written
notice thereof to the member at the time the loan is granted; or
(2) Loan documents. In the case of a loan, by reciting in a loan
document signed by the borrower that a statutory lien is impressed on
his or her shares; or
(3) By-Law. Through a duly adopted credit union by-law or board
policy establishing a statutory lien on member accounts, provided that
written notice of such by-law or board policy is given to the borrower
at the time the loan is granted.
(c) How is a statutory lien enforced? (1) Application of funds. A
federal credit union may enforce its statutory lien on a member's
account by debiting the balance of funds in the account and applying it
to offset the member's outstanding indebtedness, including unpaid loan
principal and interest, and fees and charges attributable to the
indebtedness.
(2) Default required. A federal credit union may enforce its
statutory lien on a member's accounts only when the member is in
default on his indebtedness to the credit union.
(3) Judgment not required. A federal credit union need not obtain a
court judgment on the member's debt prior to enforcing its statutory
lien on the member's account.
[FR Doc. 98-28877 Filed 10-28-98; 8:45 am]
BILLING CODE 7535-01-U