[Federal Register Volume 65, Number 42 (Thursday, March 2, 2000)]
[Proposed Rules]
[Pages 11250-11253]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-4852]


 ========================================================================
 Proposed Rules
                                                 Federal Register
 ________________________________________________________________________
 
 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.
 
 ========================================================================
 

  Federal Register/Vol. 65, No. 42/Thursday, March 2, 2000/Proposed 
Rules  

[[Page 11250]]



NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 709


Involuntary Liquidation of Federal Credit Unions and Adjudication 
of Creditor Claims Involving Federally-insured Credit Unions in 
Liquidation

AGENCY: National Credit Union Administration.

ACTION: Notice of proposed rulemaking.

-----------------------------------------------------------------------

SUMMARY: The National Credit Union Administration (NCUA) is publishing 
for notice and comment a proposed rule regarding the treatment by the 
NCUA Board (Board), as conservator or liquidating agent, of financial 
assets transferred by a federally-insured credit union to another 
party: in connection with a securitization; or in the form of a 
participation. The proposal also addresses the treatment by the Board, 
as conservator or liquidating agent, of agreements entered into by a 
federally-insured credit union to collateralize public funds. The 
proposal generally provides that the Board will not, by exercise of its 
statutory power to repudiate contracts, recover, reclaim, or 
recharacterize as property of the credit union or the liquidation 
estate financial assets that were transferred by the credit union to 
another party in connection with a securitization or in the form of a 
participation. The proposal also establishes that the Board will not 
seek to avoid an otherwise legally enforceable and perfected security 
interest in collateral for public funds solely because the collateral 
was not acquired contemporaneously with the approval and execution of 
the security agreement. The Board will also not seek to avoid a 
security interest solely because the collateral was changed, increased 
or subject to substitution from time to time.

DATES: Written comments must be received by the NCUA on or before April 
3, 2000.

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. You may also fax comments 
to (703) 518-6319. Please send comments by one method only.

FOR FURTHER INFORMATION CONTACT: Chrisanthy J. Loizos or Mary F. Rupp, 
Staff Attorneys, Division of Operations, Office of General Counsel, at 
the above address or telephone: (703) 518-6540.

SUPPLEMENTARY INFORMATION:

Background

Section 709.10

    Under generally accepted accounting principles, a transfer of 
financial assets is accounted for as a sale if the transferor 
surrenders control over the assets. One of the conditions for 
determining whether the transferor has surrendered control is that the 
assets have been isolated from the transferor, i.e., put presumptively 
beyond the reach of the transferor, its creditors, a trustee in 
bankruptcy, or a receiver. This is known as the ``legal isolation'' 
condition.
    Where the transferor is a federally-insured credit union for which 
the Board may be appointed conservator or liquidating agent, the issue 
arises whether financial assets transferred in connection with a 
securitization or in the form of a participation would be put beyond 
the reach of the Board as conservator or liquidating agent. The issue 
arises because of the Board's statutory authority to repudiate credit 
union contracts and, also, sections 207(b)(9) and 208(a)(3) of the 
Federal Credit Union Act (the Act) regarding the enforceability of 
agreements against the NCUA. 12 U.S.C. 1787(b)(9), 1788(a)(3). The 
specific issues are: whether the Board might exercise its authority to 
repudiate contracts, and avoid a transfer of financial assets in 
connection with a securitization or a participation to recover assets; 
and whether the Board, with respect to an agreement executed in 
relation to a transfer of financial assets in connection with a 
securitization or a participation, might assert the requirements of 
sections 207(b)(9) and 208(a)(3) of the Act. Those sections provide, 
that, to be enforceable against the NCUA, any agreement that tends to 
diminish or defeat the NCUA's interest in an asset must be executed 
contemporaneously with the acquisition of the asset by the credit union 
(the ``contemporaneous'' requirement).
    The Federal Deposit Insurance Corporation (FDIC) published a Notice 
of Proposed Rulemaking, 64 FR 48968, Sept. 9, 1999, to resolve the 
issues raised above in the Statement of Financial Accounting Standards 
No. 125 (SFAS 125), issued by the Financial Accounting Standards Board. 
FDIC addressed whether its statutory authority to repudiate contracts 
under section 11(e) of the Federal Deposit Insurance Act (12 U.S.C. 
1821(e)) would prevent a transfer of financial assets by an insured 
depository institution in connection with a securitization or in the 
form of a participation from satisfying the ``legal isolation'' 
condition of SFAS 125. The Federal Credit Union Act contains provisions 
substantially similar to 12 U.S.C. 1821(e) that apply when the Board is 
appointed conservator or liquidating agent for a federally-insured 
credit union. See 12 U.S.C. 1787, 1788. As such, this preamble and 
proposed rule track the language of the FDIC's proposed rule, 12 CFR 
360.6.
    Under 12 U.S.C. 1787(c)(1), the Board, when acting as conservator 
or liquidating agent of any federally-insured credit union, has the 
power to disaffirm or repudiate any contract or lease (i) to which the 
credit union is a party; (ii) the performance of which the conservator 
or liquidating agent, in the conservator's or liquidating agent's 
discretion, determines to be burdensome; and (iii) the disaffirmance or 
repudiation of which the conservator or liquidating agent determines, 
in the conservator's or liquidating agent's discretion, will promote 
the orderly administration of the credit union's affairs. Repudiation 
of a contract relieves the Board from performing any unperformed 
obligations remaining under the contract. Repudiation also entitles the 
other party to the contract to a claim for damages, which are limited 
by statute to actual direct compensatory damages determined as of the 
date of the appointment of the liquidating agent or conservator. See 12 
U.S.C. 1787(c)(3).
    Under sections 207(b)(9) and 208(a)(3) of the Act, no agreement 
that tends to diminish or defeat the NCUA's interest in an asset 
acquired from a federally-insured credit union is enforceable against 
the NCUA unless such

[[Page 11251]]

agreement meets certain requirements. One of those requirements is that 
the agreement be executed by the credit union and any person claiming 
an adverse interest thereunder contemporaneously with the acquisition 
of the asset by the credit union.
    In order for a transfer of financial assets by a federally-insured 
credit union in connection with a securitization or in the form of a 
participation to be accounted for as a sale, the proposed rule provides 
that the Board, by exercise of its authority to disaffirm or repudiate 
contracts under 12 U.S.C. 1787(c), will not reclaim, recover, or 
recharacterize as property of the credit union or the liquidation 
estate any financial assets transferred by a federally-insured credit 
union to another party in connection with a securitization or in the 
form of a participation. Although the repudiation of a securitization 
or participation will not affect transferred financial assets, 
repudiation will excuse the Board from performing any continuing 
obligations imposed by the securitization or participation. If the 
Board, in order to terminate such continuing obligations or duties, 
seeks to disaffirm or repudiate an agreement or contract under which a 
federally-insured credit union has transferred financial assets to 
another party in connection with a securitization or a participation, 
the Board will not seek to reclaim, recover, or recharacterize as 
property of the credit union or the liquidation estate such financial 
assets.
    The proposed rule applies only to those securitizations or 
participations in which the transfer of financial assets meets all of 
the conditions for sale accounting treatment under generally accepted 
accounting principles, other than the ``legal isolation'' condition, 
which the proposed rule is intended to address. While the proposed rule 
enables a credit union to meet the ``legal isolation'' condition, it 
does not replace the credit union management's responsibility to 
establish evidence supporting the isolation criterion of SFAS 125.
    As part of the definition of ``participation,'' the proposed rule 
provides that a participation must be ``without recourse,'' that is, 
the participation must not be subject to any agreement that requires 
the lead institution to repurchase the participant's interest or to 
otherwise compensate the participant upon the borrower's default on the 
underlying obligation. The term ``without recourse'' does not, however, 
preclude the lead institution from retaining a subordinated interest in 
the participated obligation, against which losses are initially 
allocated.
    The proposed rule does not apply unless the federally-insured 
credit union received adequate consideration for the transfer of 
financial assets at the time of the transfer. Also, the documentation 
effecting the transfer of financial assets must reflect the intent of 
the parties to treat the transaction as a sale, and not as a secured 
borrowing, for accounting purposes.
    The proposed rule will not waive, limit or otherwise affect the 
rights or powers of the Board to take any action or to exercise any 
power not specifically limited by this section. This includes any 
rights, powers or remedies of the Board regarding transfers taken in 
contemplation of the credit union's insolvency or with the intent to 
hinder, delay, or defraud the institution or the creditors of the 
credit union, or that is a fraudulent transfer under applicable law.
    The proposed rule further provides that the Board will not seek to 
avoid an otherwise legally enforceable securitization agreement or 
participation agreement executed by a federally-insured credit union 
solely because such agreement does not meet the ``contemporaneous'' 
requirement of sections 207(b)(9) and 208(a)(3) of the Act. 12 U.S.C. 
1787(b)(9), 1788(a)(3).
    The Board intends the proposed rule to apply to securitizations and 
participations engaged in by federally-insured credit unions while the 
rule is in effect, even if the rule is later amended or repealed. 
Paragraph (g) of the proposed rule provides that the rule will be 
effective unless repealed by the NCUA upon 30 days notice and 
opportunity for comment provided in the Federal Register. This 
paragraph also provides that any repeal or amendment of the rule by the 
NCUA will not apply to any transfer of financial assets made in 
connection with a securitization or participation that was in effect 
before such repeal or amendment. As a result of paragraph (g), where a 
transfer of financial assets in connection with a securitization or in 
the form of a participation is made by a credit union and the 
securitization or participation was in effect before any repeal or 
amendment of the rule by the NCUA, such transfer will continue to 
satisfy the legal isolation requirement notwithstanding the repeal or 
amendment.

Section 709.11

    The Act authorizes federally-insured credit unions to become 
depositories of public money. 12 U.S.C. 1767 and 12 U.S.C. 1789a. 
Federal credit unions may receive payments, representing equity, on 
shares, share certificates and share draft accounts from nonmember 
units of federal, state, local or tribal governments and political 
subdivisions as enumerated in section 207(k)(2)(A) of the Act. 12 
U.S.C. 1757(6). As a public depository, a federal credit union may 
pledge any of its assets to secure the payment of the public funds. 12 
U.S.C. 1767(b).
    NCUA received an inquiry as to the enforceability of security 
interests for public funds in federally-insured credit unions when the 
granting of security interests to protect public funds is authorized or 
required by state or federal law. On April 30, 1993, the FDIC addressed 
this precise issue in its ``Statement of Policy Regarding Treatment of 
Security Interests After Appointment of the Federal Deposit Insurance 
Corporation as Conservator or Receiver.'' The FDIC found that, provided 
the following five assumptions were met, when acting as conservator or 
receiver, it would not seek to avoid an otherwise legally enforceable 
and perfected security interest solely because the security agreement 
granting or creating such security interest did not meet the 
``contemporaneous'' requirements of sections 11(d)((), 11(n)(4)(I), and 
13(e) of the Federal Deposit Insurance Act.
    In its analysis, FDIC assumed the following: (1) the agreement was 
undertaken in the ordinary course of business, not in contemplation of 
insolvency, and with no intent to hinder, delay or defraud the 
depository institution or its creditors; (2) the secured obligation 
represented a bona fide and arm's length transaction; (3) the secured 
party or parties were not insiders or affiliates of the depository 
institution; (4) the grant or creation of the security interest was for 
adequate consideration; and (5) the security agreement evidencing the 
security interest was in writing, approved by the depository 
institution's board of directors or loan committee (which approval is 
reflected in the minutes of a meeting of the board of directors or 
committee) and has been, continuously from the time of its execution, 
an official record of the depository institution. 58 FR 16833, March 
31, 1993. Congress enacted the tenor of FDIC's policy statement in 
section 317 of the Riegle Community Development and Regulatory 
Improvement Act of 1994. 12 U.S.C. 1823(e)(2).
    The Board believes it should limit its extraordinary authority as a 
conservator or liquidating agent with special provisions for security 
interests related to public funds. This will allow

[[Page 11252]]

federally-insured credit unions to offer governmental depositors the 
same protections the Federal Deposit Insurance Act provides them for 
deposits in banks. As such, the proposed rule establishes that the 
Board, acting as conservator or liquidating agent for a federally-
insured credit union, will not seek to avoid an otherwise legally 
enforceable and perfected security interest in collateral for public 
funds solely because the security agreement granting or creating such 
security interest does not meet the contemporaneous requirement of 
sections 207(b)(9) and 208(a)(3) of the Federal Credit Union Act. The 
Board will not avoid a security interest because the collateral was not 
acquired contemporaneously with the approval and execution of the 
security agreement or because the collateral changed, increased or was 
subject to substitution from time to time.
    Under NCUA's Interpretive Ruling and Policy Statement 87-2, the 
Board's general policy is to provide a 60-day comment period for a 
proposed regulation. In this case, the Board believes that a 30-day 
comment period will be adequate and is appropriate given that the 
proposal has the effect of providing greater flexibility for federally-
insured credit unions.

Regulatory Procedures

Paperwork Reduction Act

    NCUA has determined that the proposed amendments do not increase 
paperwork requirements under the Paperwork Reduction Act of 1995 and 
regulations of the Office of Management and Budget. The Regulatory 
Flexibility Act requires NCUA to prepare an analysis to describe any 
significant economic impact any final regulation may have on a 
substantial number of small entities (primarily those under $1 million 
in assets). For purposes of this analysis, credit unions under $1 
million in assets will be considered small entities. As of June 30, 
1999, there were 1,690 such entities with a total of $807.3 million in 
assets, with an average asset size of $0.5 million. These small 
entities make up 15.6 percent of all credit unions, but only 0.2 
percent of all credit union assets.
    The proposed rule addresses the manner in which the Board will 
enforce its rights as a conservator or liquidating agent when 
evaluating financial assets transferred during a securitization or 
participation, or reviewing the collateralization of public funds. The 
proposed rule does not impose additional reporting or recordkeeping 
burdens that are not already a function of entering into such 
transactions. Therefore, the Board has determined and certifies that 
this proposed rule, if adopted, will not have a significant economic 
impact on a substantial number of small credit unions.

Executive Order 13132

    Executive Order 13132 encourages independent regulatory agencies to 
consider the impact of their regulatory 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. This proposed rule, if 
adopted, will apply to all federally-insured credit unions, but it will 
not have substantial direct effects on the states, on the relationship 
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 proposed 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

    The NCUA has determined that this proposed rule will 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).

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 709

    Credit unions, Liquidations.

    By the National Credit Union Administration Board on February 
24, 2000.
Becky Baker,
Secretary of the Board.
    For the reasons set out in the preamble, the NCUA proposes to amend 
12 CFR part 709 as follows:

PART 709--INVOLUNTARY LIQUIDATION OF FEDERAL CREDIT UNIONS AND 
ADJUDICATION OF CREDITOR CLAIMS INVOLVING FEDERALLY-INSURED CREDIT 
UNIONS IN LIQUIDATION

    1. The authority citation for part 709 is revised to read as 
follows:

    Authority: 12 U.S.C. 1757; 12 U.S.C. 1766; 12 U.S.C. 1767; 12 
U.S.C. 1786(h); 12 U.S.C. 1787; 12 U.S.C. 1788; 12 U.S.C. 1789; 12 
U.S.C. 1789a.

    2. Amend Sec. 709.0 by revising the first sentence to read as 
follows:


Sec. 709.0  Scope.

    The rules and procedures set forth in this part apply to charter 
revocations of federal credit unions under 12 U.S.C. 1787(a)(1)(A), 
(B), the involuntary liquidation and adjudication of creditor claims in 
all cases involving federally-insured credit unions, the treatment by 
the Board as conservator or liquidating agent of financial assets 
transferred in connection with a securitization or participation, and 
the treatment by the Board as conservator or liquidating agent of 
public funds held by a federally-insured credit union. * * *
    3. Add Sec. 709.10 to part 709 to read as follows:


Sec. 709.10  Treatment by conservator or liquidating agent of financial 
assets transferred in connection with a securitization or 
participation.

    (a) Definitions. (1) Beneficial interest means debt or equity (or 
mixed) interests or obligations of any type issued by a special purpose 
entity that entitle their holders to receive payments that depend 
primarily on the cash flow from financial assets owned by the special 
purpose entity.
    (2) Financial asset means cash or a contract or instrument that 
conveys to one entity a contractual right to receive cash or another 
financial instrument from another entity.
    (3) Legal isolation means that transferred financial assets have 
been put presumptively beyond the reach of the transferor, its 
creditors, a trustee in bankruptcy, or a receiver, either by a single 
transaction or a series of transactions taken as a whole.
    (4) Participation means the transfer or assignment of an undivided 
interest in all or part of a loan or a lease from a seller, known as 
the ``lead,'' to a buyer, known as the ``participant,'' without 
recourse to the lead, under an agreement between the lead and the 
participant. Without recourse means that the participation is not 
subject to any agreement that requires the lead to repurchase the 
participant's interest or to otherwise compensate the participant upon 
the borrower's default on the underlying obligation.
    (5) Securitization means the issuance by a special purpose entity 
of beneficial interests:
    (i) The most senior class of which at time of issuance is rated in 
one of the four highest categories assigned to long-

[[Page 11253]]

term debt or in an equivalent short-term category (within either of 
which there may be sub-categories or gradations indicating relative 
standing) by one or more nationally recognized statistical rating 
organizations; or

    (ii) Which are sold in transactions by an issuer not involving any 
public offering for purposes of section 4 of the Securities Act of 
1933, as amended, or in transactions exempt from registration under 
such Act under 17 CFR 230.901 through 230.905 (Regulation S) thereunder 
(or any successor regulation).

    (6) Special purpose entity means a trust, corporation, or other 
entity with a distinct standing at law separate from the federally-
insured credit union that is primarily engaged in acquiring and holding 
(or transferring to another special purpose entity) financial assets, 
and in activities related or incidental thereto, in connection with the 
issuance by such special purpose entity (or by another special purpose 
entity that acquires financial assets directly or indirectly from such 
special purpose entity) of beneficial interests.
    (b) The Board, by exercise of its authority to disaffirm or 
repudiate contracts under 12 U.S.C. 1787(c), will not reclaim, recover, 
or recharacterize as property of the credit union or the liquidation 
estate any financial assets transferred to another party by a 
federally-insured credit union in connection with a securitization or 
participation, provided that a transfer meets all conditions for sale 
accounting treatment under generally accepted accounting principles, 
other than the ``legal isolation'' condition addressed by this section.
    (c) Paragraph (b) of this section will not apply unless the 
federally-insured credit union received adequate consideration for the 
transfer of financial assets at the time of the transfer, and the 
documentation effecting the transfer of financial assets reflects the 
intent of the parties to treat the transaction as a sale, and not as a 
secured borrowing, for accounting purposes.

    (d) Paragraph (b) of this section will not be construed as waiving, 
limiting, or otherwise affecting the power of the Board, as conservator 
or liquidating agent, to disaffirm or repudiate any agreement imposing 
continuing obligations or duties upon the federally-insured credit 
union in conservatorship or the liquidation estate.
    (e) Paragraph (b) of this section will not be construed as waiving, 
limiting or otherwise affecting the rights or powers of the Board to 
take any action or to exercise any power not specifically limited by 
this section, including, but not limited to, any rights, powers or 
remedies of the Board regarding transfers taken in contemplation of the 
credit union's insolvency or with the intent to hinder, delay, or 
defraud the credit union or the creditors of such credit union, or that 
is a fraudulent transfer under applicable law.
    (f) The Board will not seek to avoid an otherwise legally 
enforceable securitization agreement or participation agreement 
executed by a federally-insured credit union solely because such 
agreement does not meet the ``contemporaneous'' requirement of sections 
207(b)(9) and 208(a)(3) of the Federal Credit Union Act.
    (g) This section may be repealed by the NCUA upon 30 days notice 
and opportunity for comment provided in the Federal Register, but any 
such repeal or amendment will not apply to any transfers of financial 
assets made in connection with a securitization or participation that 
was in effect before such repeal or modification. For purposes of this 
paragraph, a securitization would be in effect on the earliest date 
that the most senior level of beneficial interests is issued, and a 
participation would be in effect on the date that the parties executed 
the participation agreement.
    4. Add Sec. 709.11 to part 709 to read as follows:


Sec. 709.11  Treatment by conservator or liquidating agent of 
collateralized public funds.

    An agreement to provide for the lawful collateralization of funds 
of a federal, state, or local governmental entity or of any depositor 
or member referred to in section 207(k)(2)(A) of the Act will not be 
deemed to be invalid under section 208(a)(3) of the Act solely because 
such agreement was not executed contemporaneously with the acquisition 
of collateral or with any changes in the collateral made in accordance 
with such agreement.

[FR Doc. 00-4852 Filed 3-1-00; 8:45 am]
BILLING CODE 7535-01-U