[Federal Register Volume 65, Number 179 (Thursday, September 14, 2000)]
[Rules and Regulations]
[Pages 55439-55443]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-23463]
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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: Final rule.
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SUMMARY: The National Credit Union Administration (NCUA) is issuing a
final 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 final rule
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 final rule also addresses the treatment by the
Board, as conservator or liquidating agent, of agreements entered into
by a federally-insured credit union (FICU) to collateralize public
funds. The rule establishes that the Board will not seek to avoid an
otherwise legally enforceable 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: This rule is effective October 16, 2000.
FOR FURTHER INFORMATION CONTACT: Chrisanthy J. Loizos, Staff Attorney,
Division of Operations, Office of General Counsel, National Credit
Union Administration, 1775 Duke Street, Alexandria, Virginia 22314-
3428, or telephone: (703) 518-6540.
SUPPLEMENTARY INFORMATION: The Board issued a proposed rule on February
24, 2000 addressing two issues concerning its authority as a
conservator or liquidating agent to repudiate or avoid certain
agreements. 65 FR 11250 (March 2, 2000). First, the Board examined
whether its statutory authority to repudiate contracts under sections
207 and 208 of the Federal Credit Union Act (the Act) would prevent a
transfer of financial assets by a FICU during a securitization or a
participation from satisfying the ``legal isolation'' condition. To
address this issue, the Board proposed a new Sec. 709.10. The Board
incorporates its analysis of Sec. 709.10 provided in the preamble of
the proposed rule. The Board notes that its final rule is substantially
identical to a final rule recently issued by the FDIC in which the FDIC
addressed this same issue as to federally-insured banks. 65 FR 49189
(Aug. 11, 2000). Second, the proposed rule also considered the Board's
authority to avoid a legally enforceable security interest in
collateral for public funds during a
[[Page 55440]]
conservatorship or liquidation. To address this issue, the Board
proposed a new Sec. 709.11. The following discussion separately
addresses the two new sections, providing background, a review of
comments, and a description of minor changes from the proposed rule.
Section 709.10
Background
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, in other words, 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. See Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 125 (SFAS 125).
When acting as a conservator or liquidating agent, the Board has
the statutory authority to repudiate credit union contracts under
section 207(c) of the Act. 12 U.S.C. 1787(c). In addition, no agreement
that tends to diminish or defeat NCUA's interest, as a liquidating
agent, in an asset acquired from a federally-insured credit union is
enforceable against NCUA unless the requirements of section 208(a)(3)
of the Act are met. 12 U.S.C. 1787(b)(9), 1788(a)(3). One particular
requirement is that the agreement must have been executed
contemporaneously with the FICU's acquisition of the asset. 12 U.S.C.
1788(a)(3)(B).
When a FICU is the transferor of financial assets in a
securitization or in the form of a participation, two issues arise that
may prevent these transferred assets from meeting the ``legal
isolation'' condition. The first is whether NCUA, when acting as a
conservator or a liquidating agent, might avoid the transfer of
financial assets by the credit union and recover such assets; and the
second is whether NCUA might challenge the enforceability of an
agreement that transfers financial assets but fails to meet the
contemporaneous requirement of section 208(a)(3) of the Act.
The final rule provides that the Board will not use its authority
to repudiate contracts under 12 U.S.C. 1787(c) to reclaim, recover, or
recharacterize financial assets transferred by a FICU in connection
with a securitization or in the form of a participation. Such assets
may be accounted for as a sale, provided the transaction meets all of
the requirements in SFAS 125. The Board's repudiation of a
securitization or participation will not affect transferred financial
assets but will excuse the Board from performing any continuing
obligations imposed by the securitization or participation.
The final rule further provides that NCUA will not attempt to avoid
an otherwise legally enforceable securitization agreement or
participation agreement solely because the agreement does not meet the
contemporaneous requirement of sections 207(b)(9) and 208(a)(3) of the
Act. The final rule applies only to 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.
The final rule defines ``participation'' as a transfer of an
interest in a loan or a lease without recourse by the buyer against the
lead. The Board wishes to clarify the term ``without recourse.'' The
issue is whether aspects of recourse within a transaction, such as
guaranties of quality or collectibility on the underlying obligation,
jeopardize the transaction's characterization as a true sale or true
participation agreement. Courts generally view a transaction as a
participation only if the participant does not have recourse against
the lead when a default occurs on the underlying obligation. See, e.g.,
In re Sackman Mortgage Corp., 158 B.R. 926, 931-34 (Bankr. S.D.N.Y.
1993). However, the presence of recourse does not necessarily require
that a transaction be characterized as a security interest instead of
as a sale. See Major's Furniture Mart, Inc. v. Castle Credit
Corporation, Inc., 602 F.2d 538 (3rd Cir. 1979). Courts look to the
nature of the recourse, the allocation of risk, and the general nature
of the transaction. Id.
The rule is intended to cover participations that impose limited
recourse conditions on the lead without shifting all of the risks of
loss or obligations of ownership. Specifically, the rule will apply to
participations in which: (a) The lead retained a limited subordinated
interest in the obligation, against which losses are initially
allocated; (b) the lead participated in a loan in order to avoid a
statutory lending limit violation, with the option of reacquiring the
transferred interest when reacquisition would not result in a lending
limit violation; or (c) the participation agreement provided for
repurchase or compensation in connection with customary representations
and warranties regarding the underlying asset.
Comments
The comment period ended April 3, 2000. Nine comments were received
on proposed Sec. 709.10. Comments were submitted by five corporate
credit unions, two national credit union trade associations, and two
state credit union leagues. All nine commenters strongly supported the
adoption of the proposed section.
One commenter requested that the definition of ``without recourse''
permit corporate credit unions to establish reserve accounts for loan
participations, if 12 CFR part 704 is amended to allow corporate credit
unions to enter into these transactions with their members. On July 22,
1999, the Board issued an advance notice of proposed rulemaking
regarding amendments to part 704. 64 FR 40787 (July 28, 1999). Any
issues related to the scope of Sec. 709.10(a)(4) for corporate credit
union loan participations with natural person credit unions should be
addressed during that rulemaking.
The final rule is identical to the proposed rule except for the
following changes. The proposed rule's definition of the term
``participation'' included language that referred to ``the borrower's
default'' in describing the meaning of the term ``without recourse.''
Since a participation may involve a lease as well as a loan, the final
rule refers to ``a default on the underlying obligation'' instead of
``the borrower's default.'' In addition, the definition of ``special
purpose entity'' now conforms to the amended version of SFAS 125 by
using the phrase ``demonstrably distinct'' instead of ``distinct
standing at law'' within the definition.
Section 709.11
Background
The Act authorizes federal credit unions and FICUs to be
depositories of public money. 12 U.S.C. 1767, 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).
On April 30, 1993, the FDIC issued its ``Statement of Policy
Regarding Treatment of Security Interests After Appointment of the
Federal Deposit
[[Page 55441]]
Insurance Corporation as Conservator or Receiver'' (Statement of
Policy) addressing the enforceability of security interests that secure
public deposits in banks. It stated that the FDIC, when acting as
conservator or receiver, would not seek to avoid an otherwise legally
enforceable and perfected security interest solely because the security
agreement granting or creating the security interest did not meet the
``contemporaneous'' requirements of sections 11(d)(9), 11(n)(4)(I), and
13(e) of the Federal Deposit Insurance Act. 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).
Similarly, 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 FICUs
to offer governmental depositors the same protections the Federal
Deposit Insurance Act provides for deposits in banks. The final rule
establishes that the Board, acting as conservator or liquidating agent,
will not seek to avoid an otherwise legally enforceable security
interest in collateral for public funds solely because the collateral
was not acquired contemporaneously with the approval and execution of
the security agreement or was changed, increased or subject to
substitution from time to time.
Comments
The Board received two comments on proposed Sec. 709.11, one from a
state credit union regulator and the other from an association
representing state credit union regulators nationwide. Both commenters
supported the adoption of this section, but suggested a variety of
amendments to the proposal.
The commenters requested that the phrase ``lawful
collateralization'' be defined to mean that state and federal laws,
rules, regulations and interpretive statements determine whether a
security interest has been lawfully collateralized. The commenters also
noted that the creation of an enforceable and perfected security
interest in the collateral should not be required for a ``lawful
collateralization.'' The commenters suggested that not all state laws
require security interests provided in connection with public deposits
to be perfected. The Board believes that the phrase ``lawful
collateralization'' is self-explanatory and does not need to be defined
in the rule. Furthermore, this phrase is consistent with 12 U.S.C.
1823(e)(2). The Board recognizes that state laws vary regarding
security interests and, therefore, will look to applicable local and
federal laws and regulations to determine whether a security interest
has been lawfully collateralized for purposes of this rule.
The commenters requested that both sections within the Act
addressing the Board's authority to repudiate contracts during
conservatorships or liquidations be cited in the regulation, likewise
with the references used in Sec. 709.10(f). The Board agrees and has
included the statutory reference in the final rule. The commenters also
suggested that the rule establish that any repeal or amendment of the
rule will not apply to any collateral already provided in a
collateralization agreement. Section 709.11 does not contain a
provision for repeal upon 30-day notice by the Board like the provision
in Sec. 709.10(g). The Board believes that a provision of this sort is
unnecessary because any amendment of the rule would not apply
retroactively.
The commenters also requested clarification on two points. They
stated that the rule should clearly provide that NCUA either: (1) Will
not seek to avoid or repudiate a security agreement and the
collateralization or security interest created thereunder; or (2) will
not recover, reclaim or recharacterize any assets, securities or other
collateral subject to a security agreement tied to the deposit of
public funds. Like 12 U.S.C. 1823(e)(2), the final rule provides that
the Board will not invalidate a governmental depositor's security
interest in collateral used to secure public funds merely because the
security agreement fails to meet the contemporaneous requirements of
section 208(a)(3) of the Act. The Board maintains that this language is
satisfactory and consistent with the treatment of public deposits
within federally-insured banks.
The commenters also requested that the rule expressly establish
that it applies to increases or substitutions of collateral occurring
after the agreement has been entered into by the governmental depositor
and the credit union. The Board agrees and has made the clarification
in the final rule.
Finally, in the Statement of Policy discussed above, the FDIC
assumed that a bank's agreement met certain criteria before the FDIC
would determine not to avoid a security interest during a
conservatorship or receivership. The FDIC identified the following
conditions: (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 bank'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). For clarity, the Board has decided to
incorporate these five assumptions directly into the final rule.
Regulatory Procedures
Paperwork Reduction Act
NCUA has determined that the rule does not increase paperwork
requirements under the Paperwork Reduction Act of 1995 and regulations
of the Office of Management and Budget.
The Regulatory Flexibility Act
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 (those under $1 million
in assets). The final 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
final rule does not impose any reporting or recordkeeping burdens that
are not already a function of entering into such transactions.
Therefore, the Board certifies that this final rule will not have a
significant economic impact on a substantial number of small credit
unions.
Small Business Regulatory Enforcement Fairness Act
The Small Business Regulatory Enforcement Fairness Act of 1996
(Pub. L. 104-121) provides generally for congressional review of agency
rules. A reporting requirement is triggered in instances where NCUA
issues a final rule as defined by Section 551 of the Administrative
Procedures Act. 5 U.S.C. 551. The Office of Management and Budget has
determined that this is not a major rule.
[[Page 55442]]
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 final rule applies
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 final rule does not constitute a policy that has
federalism implications for purposes of the executive order.
The Treasury and General Government Appropriations Act, 1999--
Assessment of Federal Regulations and Policies on Families
The NCUA has determined that this 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 a minimal regulatory burden. We requested comments on
whether the proposed rules were understandable and minimally intrusive
if implemented as proposed. We received no specific comment on this
issue.
List of Subjects in 12 CFR Part 709
Credit unions, Liquidations.
By the National Credit Union Administration Board on September
7, 2000.
Becky Baker,
Secretary of the Board.
For the reasons set out in the preamble, the NCUA amends 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, 1766, 1767, 1786(h), 1787, 1788,
1789, 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 due
to a 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-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 230.91 through 230.905 (Regulation S) thereunder
(or any successor regulation).
(6) Special purpose entity means a trust, corporation, or other
entity demonstrably distinct 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
[[Page 55443]]
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 sections 207(b)(9) and 208(a)(3) of the Act
solely because such agreement was not executed contemporaneously with
the acquisition of collateral or with any changes, increases, or
substitutions in the collateral made in accordance with such agreement,
provided the following conditions are met:
(a) 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 credit union or its creditors;
(b) The secured obligation represents a bona fide and arm's length
transaction;
(c) The secured party or parties are not insiders or affiliates of
the credit union;
(d) The grant or creation of the security interest was for adequate
consideration; and,
(e) The security agreement evidencing the security interest is in
writing, was approved by the credit union's board of directors, and has
been continuously an official record of the credit union from the time
of its execution.
[FR Doc. 00-23463 Filed 9-13-00; 8:45 am]
BILLING CODE 7535-01-P