[Federal Register Volume 64, Number 199 (Friday, October 15, 1999)]
[Proposed Rules]
[Pages 55866-55871]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-26717]


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 Proposed Rules
                                                 Federal Register
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 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
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  Federal Register / Vol. 64, No. 199 / Friday, October 15, 1999 / 
Proposed Rules  

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NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 714


Leasing

AGENCY: National Credit Union Administration (NCUA).

ACTION: Proposed regulation.

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SUMMARY: The proposed leasing regulation updates and redesignates 
NCUA's 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 leasing arrangements are the functional 
equivalent of secured loans. In addition, the proposed regulation 
formalizes NCUA's position, set forth in legal opinion letters, that 
FCUs do not have to own the leased property in an indirect leasing 
arrangement if certain requirements are satisfied.

DATES: Comments must be received on or before December 14, 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: Paul M. Peterson, Staff Attorney, 
Division of Operations, Office of the General Counsel, at the above 
address or by telephone: (703) 518-6555.

SUPPLEMENTARY INFORMATION:

A. Background

    In 1983, the NCUA Board issued Interpretive Ruling and Policy 
Statement (IRPS) 83-3, Federal Credit Union Leasing of Personal 
Property to Members, 48 FR 52560 (November 21, 1983), stating that 
federal credit unions (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 engaged 
in leasing 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 secured 
lending, a lease had to be a net, full payout lease with an estimated 
residual value not exceeding 25% unless guaranteed. In addition, an FCU 
engaged in leasing had to retain salvage powers over the leased 
property and maintain a contingent liability insurance policy with an 
endorsement for leasing.
    In the supplementary section of IRPS 83-3, the NCUA Board stated 
that FCUs could engage in either direct or indirect leasing. That is, 
an FCU could either purchase property from a third party for the 
purpose of leasing such property to a member or purchase the lease and 
the leased property after the lease had been executed between the third 
party and the member. Further, FCUs could engage in either open-end or 
closed-end leasing, that is, an FCU could either require a member to 
assume the risk and responsibility for any difference in the estimated 
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 inquiries 
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 leased property and granted an 
unconditional, irrevocable power of attorney to transfer title to the 
leased property to the FCU.
    Thereafter, the leasing industry argued that, irrespective of state 
limitations, an FCU should be able to take a lien on the leased 
property instead of having to own the property. The leasing industry 
stated that an FCU would be insulated from tort liability by not being 
the owner of the leased property and that an FCU's member would receive 
lower lease payments if a third-party lessor (the leasing company) was 
able to take advantage of certain tax benefits available only when the 
leasing company retained ownership of the property. NCUA concluded in 
legal opinion letters that although the direct and indirect leasing 
arrangements described in the supplementary section of IRPS 83-3 
resulted in an FCU owning the leased property, such ownership was not 
required. NCUA's position was that the purchase or assignment of a 
lease and the receipt of a lien on the leased property was a form of 
permissible indirect leasing if the following requirements were 
satisfied: (1) The FCU was named as the sole lienholder on the leased 
property; (2) the FCU was assigned all of the leasing company's rights 
under the lease; and (3) the FCU obtained an unconditional, irrevocable 
power of attorney to transfer title in the leased property to the FCU.
    NCUA undertook the proposed redesignation of IRPS 83-3 as an NCUA 
regulation as part of a regulatory review of all of its IRPS. Upon 
review of IRPS 83-3, the NCUA Board determined that it would be better 
suited as a regulation. 62 FR 11773 (March 13, 1997). The NCUA Board's 
goal in redesignating IRPS 83-3 as a regulation is to increase 
regulatory effectiveness by establishing a rule that states NCUA's 
current position on leasing, is easy to locate, and sets forth safety 
and soundness requirements to protect FCUs engaged in leasing.
    On October 29, 1998, the NCUA Board issued a notice of proposed 
rulemaking and request for comment on leasing. 63 FR 57950 (October 29, 
1998). The proposed leasing regulation adopted the policy on leasing 
set out in IRPS 83-3 and incorporated NCUA's position, set forth in 
legal opinion letters, that FCUs do not have to own the leased property 
in indirect leasing if certain requirements are satisfied. The comment 
period expired on January 27, 1999.

B. Comments

    NCUA received fourteen comments on the proposed leasing regulation. 
Comments were received from five federal credit unions, one state-
chartered credit union, three state leagues, two national credit union 
trade associations, one leasing company, one bank trade association, 
and a joint comment from an auditing company

[[Page 55867]]

and a bank consulting company. All commenters, except one, supported 
the NCUA Board's effort to establish a regulation on the leasing of 
personal property. The dissenting commenter believed that a leasing 
regulation was unnecessary because NCUA examiners could monitor an 
FCU's leasing program during regular examinations.
    The NCUA Board has thoroughly evaluated the comments and has 
incorporated many of the suggested changes. Due to these changes to the 
original proposed leasing regulation, the Board has decided to issue a 
second proposed leasing regulation for additional comments.

C. Format

    In drafting the proposed leasing regulation, the NCUA Board chose 
to use a plain English, question and answer format. The Board supports 
plain English as a means to increase regulatory comprehension and 
improve compliance among those affected by the regulation. Plain 
English drafting emphasizes the use of informative headings (often 
written as a question), lists and charts where appropriate, non-
technical language, and sentences in the active voice. The NCUA wrote 
this proposed regulation as a series of questions and answers. The word 
``you'' in an answer refers to an FCU.
    Most commenters favored the NCUA Board's use of the question and 
answer (Q&A) style. One commenter, however, thought that Q&A style 
increased the potential for misunderstanding and confusion. The NCUA 
Board agrees that some regulations are more appropriate than others for 
Q&A. The NCUA Board believes that Q&A works well in the context of the 
leasing regulation.

D. Section-by-Section Analysis

Proposed Section 714.1--What Does This Part Cover?

    Section 714.1 of the proposed regulation stated that Part 714 
covers the standards and requirements that an FCU must follow when 
engaged in the lease financing of personal property. One commenter 
suggested that the term ``lease financing'' be replaced with 
``transactions involving leasing.'' The commenter believes that there 
is a distinction between the terms ``leasing'' and ``financing,'' thus, 
using the term ``lease financing'' may lead to confusion. The NCUA 
Board agrees with the commenter and has changed ``lease financing'' to 
``leasing.''

Proposed Section 714.2--What Are the Permissible Leasing Arrangements?

    Section 714.2 of the proposed regulation stated that FCUs may 
engage in either direct or indirect leasing. One commenter suggested 
certain changes in Sec. 714.2(b) to take into consideration the varying 
relations that may exist among parties in a leasing arrangement. 
Specifically, this commenter suggested that the NCUA Board should amend 
the sentence ``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 third party and your member'' by 
adding the phrase ``except as provided in Sec. 714.3,'' substituting 
the word ``having'' for the second ``leasing,'' and inserting the word 
``leased'' after the word ``property.'' The NCUA Board has added the 
phrase, ``except as provided in Sec. 714.3.'' The NCUA Board believes 
that adding this cross-reference points the reader to a permissible 
form of indirect leasing which allows for title in the leased property 
to remain with a third party. However, the NCUA Board has not 
incorporated the commenter's other suggested changes. The NCUA Board 
wants the regulation to state clearly that an FCU, not another party, 
is to lease the personal property to its member. The commenter's 
suggested changes would imply otherwise.
    In addition, the NCUA Board has added the text of prior Sec. 714.6 
to this section. Section 714.6 stated that an FCU can engage in either 
closed-end or open-end leasing, that is, either an FCU can assume the 
risk for the difference between the estimated residual value and the 
actual value of property at lease end or the lessee can assume the 
risk. Also, one commenter noted that the phrase ``relied upon residual 
value'' should be replaced with the phrase ``estimated residual 
value.'' The NCUA Board made this change for consistency and accuracy.

Proposed Section 714.3--Must You Own the Leased Property?

    Section 714.3 of the proposed regulation states that an FCU does 
not have to own the leased property in an indirect leasing arrangement 
if three requirements are met: (1) The FCU receives a full assignment 
of the lease; (2) the FCU is named as the sole lienholder of the 
property; and (3) the FCU receives an unconditional, irrevocable power 
of attorney to transfer title in the leased property to itself.
    The commenters supported the NCUA Board's decision not to require 
that an FCU own the leased property in an indirect leasing arrangement. 
One commenter noted that owning the leased property is not necessary 
since, in a loan or credit sale, an FCU does not own the underlying 
asset, but only has a lien. Three commenters contended that owning the 
leased property could open an FCU up to potential liability issues, tax 
issues, and state regulation and licensing requirements.
    Six commenters, however, stated that they were against requiring a 
full assignment of the lease. Four of these commenters believed that 
the decision of whether to obtain a full assignment of a lease should 
be made by an FCU based on the circumstances of the leasing 
arrangement. Another commenter stated that the full assignment 
requirement was unnecessary because sales of or liens in leases are 
subject to Uniform Commercial Code (UCC) perfection rules. This 
commenter contended that a full assignment would not protect an FCU if 
a leasing company went bankrupt unless the full assignment had been 
perfected. In addition, one commenter expressed concern that, if a full 
assignment is required, leasing companies might refuse to do business 
with FCUs since they would not retain ownership of the leases. The 
commenter stated that leasing companies receive certain tax benefits 
from lease ownership and that, without those tax benefits, leasing 
companies may have no incentive to do business with FCUs.
    Three commenters were against requiring an FCU to obtain a power of 
attorney. Two of the commenters stated that such a decision should be 
made by an FCU's attorney based on the circumstances of the FCU's 
leasing arrangement. Further, one of these commenters stated that a 
power of attorney is unnecessary because Article 9 of the Uniform 
Commercial Code provides an FCU with the right to take possession and 
dispose of collateral upon a default without a power of attorney. In 
addition, one commenter stated that a power of attorney provides little 
protection to an FCU in the face of a leasing company bankruptcy. The 
commenter suggested that obtaining a security agreement that grants an 
FCU a sole lien position in the leased property with the right to 
foreclose in the event of a default would be more beneficial.
    The Board has reconsidered this form of indirect leasing in light 
of these comments and the recent bankruptcy of a leasing company 
(Security Excel Corporation, No. 96-32410 (Bankr. N.D. Ind.) 
(hereinafter Security Excel). In Security Excel, a bankruptcy that 
affected several credit unions, the trustee argued that the leasing 
company, not the FCU, owned both the leases and the leased property. 
The trustee further argued that the FCU had no security interest in 
either the leases or the leased property and, in the alternative, that 
whatever security interests might exist

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were not properly perfected. Ultimately, the Security Excel case was 
settled, at some significant expense to certain credit unions.
    As demonstrated in Security Excel, leasing arrangements that 
involve leaving title to the leased property in the name of the a 
third-party leasing company are complex and may involve significant 
risks to the FCU. In most of these leasing company arrangements, the 
NCUA Board understands that the FCU finances the full, or close to the 
full, value of the leased property and that the FCU will ultimately 
recover its full investment only if it collects all the lease payments 
and recoups all the proceeds from the leasing company's post-lease sale 
of the property. The FCU must be concerned about both the credit 
worthiness of the member and the solvency of the leasing company. In 
the event of insolvency of one or both parties, the FCU must be able to 
enforce its right to payment under the lease and, if necessary, its 
right to secure and dispose of the property as the collateral securing 
receipt of both lease payments and proceeds due from the post-lease 
property sale.
    The fact that the FCU has no authority to lend money to a nonmember 
leasing company that is not a credit union service organization further 
complicates these arrangements. For example, the FCU must ensure that, 
despite the lack of a creditor-debtor relationship with the leasing 
company, the FCU has a well-defined security interest in the leased 
property. In addition, the FCU must make sure that its rights in the 
leased property and its ownership of the lease are properly recorded so 
as to perfect those rights against bankruptcy trustees and other third-
party creditors. To take another example, a vehicle owned by a leasing 
company may be considered as ``inventory'' under the relevant 
commercial codes, and protection of a security interest in such 
inventory may well require steps beyond recording the lien on the 
certificate of title and filing the certificate with the department of 
motor vehicles.
    In light of these issues, the legal arguments advanced in Security 
Excel, and the comments received on our previously proposed Sec. 714.3, 
the NCUA Board is proposing that an FCU that does not own the leased 
property must take certain precautions.
    First, the FCU must receive a full assignment of the lease, meaning 
that the FCU must become the owner of the lease. The NCUA Board 
believes that, if an FCU receives a full assignment of a lease and the 
assignment is properly recorded, the lease should not be subject to the 
claims of a bankruptcy trustee acting on behalf of a leasing company 
that becomes bankrupt. The Board notes that an assignment of various 
rights under a lease, such as the right to receive payments, is not the 
same as a full assignment of the lease. There are varying ways that an 
acceptable assignment may be drafted. Some examples are: ``Leasing 
Company assigns this lease to ABC Federal Credit Union'' or ``Leasing 
Company makes a full assignment of this lease to ABC Federal Credit 
Union'' or ``Leasing Company conveys all of its right, title, and 
interest in this lease to ABC Federal Credit Union.'' Language that 
purports to assign only one or more particular rights or remedies under 
the lease would not constitute a full assignment of the lease and so is 
unacceptable.
    Second, the FCU must be the sole lienholder of the leased property. 
This language is consistent with IRPS 83-3, requiring that the lease 
must be the functional equivalent of a secured loan.
    Third, the FCU must enter into a security agreement with the 
leasing company to protect the FCU's lien on the property. The security 
agreement must describe the FCU's interest in the property. It must set 
forth the terms and conditions upon which the leasing company or the 
member may be in default and thus entitle the FCU to take immediate 
possession of the property and dispose of it. The security agreement 
must be signed by the leasing company. The FCU must also take any 
further steps necessary to ensure that its security is properly 
perfected to protect the FCU should the leasing company be forced into 
bankruptcy. Thus, for example, if the leased property constitutes the 
lessor's inventory under state law, perfection may require filing with 
the appropriate state agency, such as the Secretary of State. See the 
Uniform Commercial Code, 9-302 and 9-401.
    The NCUA Board believes that a power of attorney may be unnecessary 
for an FCU holding a well-defined and perfected security interest in 
the leased property. In the event of a default by leasing company or 
lessee, the FCU should be able to take possession and dispose of the 
collateral without the power of attorney. Thus, the new proposed rule 
no longer contains any requirement for a power of attorney. The Board 
notes, however, that the proposed rule does not prohibit an FCU from 
employing a power of attorney, in addition to a security agreement, as 
the FCU sees fit in any particular leasing arrangement.

Proposed Section 714.4--What Are the Lease Requirements?

    Section 714.4 states that leases must be net, full payout leases, 
with a maximum estimated residual value of 25% of the original cost of 
the leased property unless guaranteed. One commenter suggested that the 
NCUA Board revise the description of net lease to allow FCUs to finance 
certain dealer included services, including mechanical breakdown 
protection, credit life and disability premiums, and license and 
registration fees. The Board does not believe that these dealer 
services, which are generally additional services purchased by a lessee 
to satisfy his or her obligations under the ``net'' lease concept, 
should be financed. The Board notes that these costs, if financed by 
the credit union, may raise safety and soundness issues, particularly 
if the lessee has made little or no down payment and so there is no 
value in the collateral to secure the financing of these particular 
services.
    One commenter stated that the wording used to describe the full 
payout requirement was confusing and failed to specify an FCU's source 
of recovery to meet the requirement. The NCUA Board agrees with the 
commenter and has added a sentence stating that an FCU's source of 
recovery will come from the lessee's payments and the residual value of 
the leased property at the expiration of the lease term.
    Five commenters wanted the NCUA Board to raise the estimated 
residual value limit. These commenters believed that the 25% estimated 
residual value limit was restrictive and placed FCUs at a disadvantage 
against other lenders that were not required to obtain a guarantee when 
an estimated residual value greater than 25% was used. Further, the 
five commenters suggested that the NCUA Board allow FCUs to self-insure 
against the increased risk associated with a higher estimated residual 
value. One commenter suggested that the NCUA Board allow FCUs to set 
their own estimated residual values as long as the combination of 
residual value insurance, manufacturer guarantees, and residual value 
reserves for loss maintained over the life of the leases is sufficient 
to cover the residual value risks assumed.
    The NCUA Board believes that the risks associated with leasing are 
substantially reduced due to the 25% limit placed on estimated residual 
values and has not raised the limit. The NCUA Board notes that the 
Office of the Comptroller of the Currency (OCC) has very similar rules 
on estimated residual values. The OCC places a 25%

[[Page 55869]]

estimated residual value limit on bank leases, and requires banks to 
guarantee estimated residual values in excess of the 25% limit. 12 CFR 
23.21(a)(2).
    The Board also notes that the purpose of the leasing regulation is 
to facilitate a consumer financing transaction with a member that is 
roughly the equivalent of a secured loan. In the closed-end lease 
arrangement, which is the most common arrangement, the member lessee is 
not liable to the FCU for the payment of the residual value at the end 
of the lease. As the estimated residual value increases, the member's 
financial responsibility to the FCU, as a percent of the FCU's total 
investment, decreases correspondingly. If the NCUA Board were to permit 
significantly higher estimated residual value amounts, a lease 
transaction would lose its character of being substantially equivalent 
to secured lending to its member. Instead, the credit union would be 
dependent on the sale of the vehicle to recoup a significant part of 
its investment, and so would be in a business very similar to used car 
sales. Credit unions may not engage in the business of selling cars. 
See M&M Leasing Corporation v. Seattle First National Bank, 563 F.2d 
1377 (9th Cir. 1977), cert. denied, 436 U.S. 958 (1978).

Proposed Section 714.5--What Is Required if an Estimated Residual Value 
Greater Than 25% Is Used?

    Section 714.5 of the proposed regulation incorrectly stated the 
guarantee requirement when the estimated residual value exceeds 25% of 
the original cost of the leased property. In issuing the proposed 
regulation, the Board's intention was to adopt the leasing policy and 
requirements as contained in IRPS 83-3. Proposed Sec. 714.5 incorrectly 
stated that, if a residual value greater than 25% was used, the full 
estimated residual value of the leased property must be guaranteed. 
Five commenters noted that a guarantee of the full value should not be 
required. IRPS 83-3 requires that only the estimated residual value 
above 25% of the original cost be guaranteed and, in this second 
proposed regulation, this section now reflects the requirement as 
stated in IRPS 83-3.
    One commenter suggested revising Sec. 714.5 to permit others 
parties, in addition to a manufacturer or insurance company, to 
guarantee the estimated residual value. IRPS 83-3 allowed the 
manufacturer, the lessee, or third party not affiliated with the FCU to 
guarantee the estimated residual value. The proposed regulation 
eliminated the lessee as a guarantor on the basis that it would be 
difficult to collect from a lessee or monitor the lessee's 
creditworthiness and capacity to meet the guarantee. However, the NCUA 
Board has revised Sec. 714.5 to allow any financially capable party to 
guarantee the estimated residual value. Thus, a lessee, if properly 
qualified, could guarantee the estimated residual value. This approach 
is consistent with IRPS 83-3.
    In addition, four commenters were against requiring insurance 
companies guaranteeing estimated residual values to have at least a B+ 
rating. These commenters believed that such a requirement was 
unnecessary and noted that the OCC's leasing regulation did not 
establish such a requirement. The NCUA Board believes that establishing 
a minimum rating standard ensures that the institutional guarantor has 
the resources to meet the guarantee.
    The NCUA Board has amended the rating requirement to read ``The 
guarantor may also be an insurance company with an A.M. Best rating of 
at least a B+, or with the equivalent of at least an A.M. Best B+ 
rating from another major rating company.'' This amendment clarifies 
the source of the B+ rating and specifies that ratings from other 
rating companies may be used to establish financial capability.

Proposed Section 714.6--Are You Required To Retain Salvage Powers Over 
the Leased Property?

    Section 714.6 states that an FCU must retain salvage powers over 
the leased property. One commenter suggested that the NCUA Board add 
the language ``pursuant to your contractual rights'' contained in 
subsection (b) to subsection (a) which sets forth a credit union's 
salvage powers. The NCUA Board does not believe that this additional 
language is needed and has left this section unchanged. However, the 
NCUA Board has deleted the reference to the assignment of ``a vendor's 
interest in a lease'' in Sec. 714.6(b). The FCU must receive an 
assignment of the entire lease as required by Sec. 714.3(a).

Proposed Section 714.7--What Are the Insurance Requirements Applicable 
to Leasing?

    Section 714.7(a) requires an FCU to maintain a contingent liability 
insurance policy if it owns the leased property or, if it does not, it 
must be named as the co-insured. One commenter suggested that the NCUA 
Board also require an FCU to obtain excess liability insurance as well 
as the contingent liability insurance. The NCUA Board believes that 
such additional insurance is not needed to protect FCUs. Section 
714.7(b) states that the lessee is to carry liability or collateral 
protection insurance on the leased property. The NCUA Board intended 
that both liability and collateral protection insurance were to be 
purchased, and has changed the word ``or'' to ``and.'' In addition, one 
commenter stated that, for the most part, FCUs are named as the loss 
payee on a physical damage coverage policy and as the additional 
insured on a liability insurance policy and this should be reflected in 
the proposed leasing regulation. The NCUA Board has adopted the 
commenter's changes.

Proposed Section 714.8--What Rate of Interest May Be Charged Under a 
Lease?

    Section 714.8 stated that an FCU engaged in leasing may charge an 
interest rate higher than the usury limit set for FCUs engaged in 
lending. One commenter stated that Sec. 714.8 reflects a 
misunderstanding of leases since leases do not have interest rates, 
only an implicit rate which may or may not be received depending on the 
ultimate residual recovery. The NCUA Board has reworded this section to 
eliminate the confusion. The Board also added language to clarify that 
12 CFR 701.21(c)(6), prohibiting penalties for early payment, does not 
apply to leasing arrangements. Early termination is governed by the 
Consumer Leasing Act, 15 U.S.C. 1667-67f, and Regulation M, 12 CFR part 
213.

Proposed Section 714.9--When Engaged in Indirect Leasing, Must You 
Comply With the Purchase of Eligible Obligation Rules Set Forth in 
Sec. 701.23 of This Chapter?

    Section 714.9 states that an FCU may participate in indirect 
leasing arrangements under its authority to make loans. The NCUA Board 
intended Sec. 714.9 to inform FCUs that their participation in an 
indirect leasing arrangement does not subject them to the purchase of 
eligible obligation rules. However, two commenters stated that 
Sec. 714.9 was unclear. Thus, the NCUA Board has added language to 
clarify this section and has changed the section title.

Proposed Section 714.10--What Other Laws Must You Comply With When 
Engaged in Leasing?

    Section 714.10 sets forth the additional laws that an FCU must 
comply with when engaged in leasing. One commenter requested that the 
NCUA Board clarify whether FCUs are subject to state leasing disclosure 
laws. The NCUA Board amended Sec. 714.10 to point out that credit 
unions must

[[Page 55870]]

comply with the Consumer Leasing Act (the Leasing Act). 15 U.S.C. 1667-
67f. Section 1667e of the Leasing Act generally requires that lessors 
comply with state leasing laws if the state law is not in conflict with 
the Leasing Act or provides greater consumer protection than the 
Leasing Act. The Board also notes that, with regard to federal and 
state lending laws, the proposed language of Sec. 714.10 requires 
compliance with Sec. 701.21 of this chapter. Subsection 701.21(b) 
discusses the applicability of other federal and state lending laws in 
some detail.
    Another commenter stated that the disclosure requirements of 
Regulation M are cumbersome and not easily understood, thus, NCUA 
should simplify the leasing disclosure requirements and employ 
something similar to the ``fed box'' used for truth-in-lending 
disclosures. The Board notes that there are already model disclosure 
forms in the appendix to Regulation M, and these forms set out leasing 
disclosures in a manner similar to the truth-in-lending ``fed box.''

E. Additional Comments

    Two commenters suggested that the NCUA Board address balloon note 
programs or guaranteed buy-back programs in the proposed leasing 
regulation. The commenters did not provide any details explaining the 
balloon note or guaranteed buy-back programs.
    The primary distinction between a loan and a lease is who owns the 
underlying property. In a loan, the borrower owns the property and the 
lender is a lienholder. In a lease, the borrower-lessee has no 
ownership or lienhold interest in the property. Accordingly, it is the 
NCUA Board's position that programs which involve loans and not leases 
are significantly different from leasing arrangements, and should not 
be addressed in a leasing regulation.
    However, the NCUA Board would like to note, as stated in legal 
opinion letters, that balloon note or guarantee buy-back programs 
giving any borrower on a loan the option of returning property directly 
to the FCU at the end of the financing period are impermissible. 
Programs that authorize the borrower to turn the property into a third 
party for liquidation and cash recoupment may be acceptable.

F. 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 
their 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 an estimated residual value 
guarantee constitutes a collection of information under the Paperwork 
Reduction Act. 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 NCUA Board submitted a copy of this rule 
to the Office of Management and Budget (OMB) for its review. OMB 
assigned control number 3133-0151 to this information collection. The 
control number will be displayed in the table at 12 CFR Part 795.

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.

G. Agency Regulatory Goal

    NCUA's goal is to promulgate clear and understandable regulations 
that impose minimal regulatory burden. We request your comments on 
whether the proposed amendment is understandable and minimally 
intrusive if implemented as proposed.

List of Subjects in 12 CFR Part 714

    Credit unions, Leasing.

    By the National Credit Union Administration Board on October 6, 
1999.
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 leasing arrangements?
714.3 Must you own the leased property in an indirect leasing 
arrangement?
714.4 What are the lease requirements?
714.5 What is required if an estimated residual value greater than 
25% is used?
714.6 Are you required to retain salvage powers over the leased 
property?
714.7 What are the insurance requirements applicable to leasing?
714.8 Are the early payment provisions, or interest rate provisions, 
applicable in leasing arrangements?
714.9 Are indirect leasing arrangements subject to the purchase of 
eligible obligation limit set forth in Sec. 701.23 of this chapter?
714.10 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 you, a federal 
credit union, must follow when engaged in the leasing of personal 
property.


Sec. 714.2  What are the permissible leasing arrangements?

    (a) You may engage in 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) You may engage in indirect leasing. In indirect leasing, you 
purchase a lease and, except as provided in Sec. 714.3, the leased 
property for the purpose of leasing such property to your member after 
the lease has been executed between a third party and your member.
    (c) You may engage in open-end leasing. In an open-end lease, your 
member assumes the risk and responsibility for any difference in the 
estimated residual value and the actual value of the property at lease 
end.
    (d) You may engage in closed-end leasing. In a closed-end lease, 
you assume the risk and responsibility for any difference in the 
estimated residual value and the actual value of the property at lease 
end.


Sec. 714.3  Must you own the leased property in an indirect leasing 
arrangement?

    You do not have to own the leased property in an indirect leasing 
arrangement if:
    (a) You obtain a full assignment of the lease. A full assignment is 
the assignment of all 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;
    (c) You receive a security agreement, signed by the leasing 
company, granting you a sole lien in the leased property and the right 
to take possession and dispose of the leased property in the

[[Page 55871]]

event of a default by the lessee, a default in the leasing company's 
obligations to you, or a material adverse change in the leasing 
company's financial condition; and
    (d) You take all necessary steps to record and perfect your 
security interest in the leased property. Your state's Commercial Code 
may treat the automobiles as inventory, and require a filing with the 
Secretary of State.


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, taxes, and insurance;
    (b) Your lease must be a full payout lease. In a full payout lease, 
you must reasonably expect to recoup your entire investment in the 
leased property, plus the estimated cost of financing, from the 
lessee's payments and the estimated residual value of the leased 
property at the expiration of the lease term; and
    (c) Your estimated residual value may not exceed 25% of the 
original cost of the leased property unless the amount above 25% is 
guaranteed. Estimated residual value is the projected value of the 
leased property at lease end. Estimated residual value 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 an estimated residual value greater 
than 25% is used?

    You may use an estimated residual value greater than 25% of the 
original cost of the leased property if a financially capable party 
guarantees the amount above 25% of the original cost of the property. 
The guarantor may be the manufacturer. The guarantor may also be an 
insurance company with an A.M. Best rating of at least a B+, or with at 
least the equivalent of an A.M. Best B+ rating from another major 
rating company. You must obtain or have on file financial documentation 
demonstrating that the guarantor has the resources to meet the 
guarantee.


Sec. 714.6  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 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. 714.7  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 and collateral 
protection insurance on the leased property. You must be named as an 
additional insured on the liability insurance policy and as the loss 
payee on the collateral protection insurance policy.


Sec. 714.8  Are the early payment provisions, or interest rate 
provisions, applicable in leasing arrangements?

    You are not subject to the early payment provisions set forth in 
Sec. 701.21(c)(6) of this chapter. You are also not subject to the 
interest rate provisions in Sec. 701.21(c)(7).


Sec. 714.9  Are indirect leasing arrangements subject to the purchase 
of eligible obligation limit set forth in Sec. 701.23 of this chapter?

    Your indirect leasing arrangements are not subject to the purchase 
of eligible obligation rules set forth in Sec. 701.23 of this chapter 
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 no more than five 
business days after it is signed by your member and a leasing company.


Sec. 714.10  What other laws must you comply with when engaged in 
leasing?

    You must comply with the Consumer Leasing Act, 15 U.S.C. 1667-67f, 
and its implementing regulation, Regulation M, 12 CFR part 213. You 
must comply with state laws on consumer leasing, but only to the extent 
that the state leasing laws are consistent with the Consumer Leasing 
Act, 15 U.S.C. 1667e, or provide the member with greater protections or 
benefits than the Consumer Leasing Act. You are also subject to the 
lending rules set forth in Sec. 701.21 of this chapter, except as 
provided in Sec. 714.8 and Sec. 714.9 of this part. The lending rules 
in Sec. 701.21 address the preemption of other state and federal laws 
that impact on credit transactions.
[FR Doc. 99-26717 Filed 10-14-99; 8:45 am]
BILLING CODE 7535-01-P