[Federal Register Volume 68, Number 190 (Wednesday, October 1, 2003)]
[Proposed Rules]
[Pages 56586-56589]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-24761]


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NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Parts 701 and 741


Suretyship and Guaranty; Maximum Borrowing Authority

AGENCY: National Credit Union Administration (NCUA).

ACTION: Proposed rule.

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SUMMARY: NCUA is proposing to revise its rules concerning maximum 
borrowing authority to permit federally insured, State-chartered credit 
unions (FISCUs) to apply for a waiver from the maximum borrowing 
limitation of 50 percent of paid-in and unimpaired capital and surplus 
(shares and undivided earnings, plus net income or minus net loss). 
This amendment will provide FISCUs with more flexibility by allowing 
them to apply for a waiver up to the amount permitted under State law.
    NCUA is also proposing adding a provision to its regulations that 
allows a Federal credit union (FCU) to act as surety or guarantor on 
behalf of its members. The proposal establishes certain requirements to 
ensure that FCUs, and FISCUs if permitted under state law to act as a 
surety or guarantor, are not exposed to undue risk.

DATES: The NCUA must receive comments on or before December 1, 2003.

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: Mary F. Rupp, Staff Attorney, Division 
of Operations, Office of General

[[Page 56587]]

Counsel, at the above address or telephone: (703) 518-6540.

SUPPLEMENTARY INFORMATION: 

A. New Sections 701.20 and 741.221--Suretyship and Guaranty

    The NCUA Board proposes adding a new Sec.  701.20 to recognize that 
an FCU, as part of its incidental powers, may act as a guarantor or 
surety on behalf of a member. 12 U.S.C. 1757(17). Acting as a guarantor 
or surety on behalf of an FCU member meets the definition of an 
incidental power because it: Is convenient or useful to an FCU in 
extending credit to its members; is a logical extension of an FCU's 
authority to make loans to its members and to provide letters of credit 
on behalf of members; and involves risks that are similar in nature to 
the risks involved in an FCU's lending activity. 12 CFR 721.2.
    The proposal notes that it does not apply to the guaranty of public 
deposits or the assumption of liability to pay member accounts. The FCU 
Act provides express authority for an FCU to guaranty public deposits. 
12 U.S.C. 1767(b). The requirements governing the assumption of 
liability to pay member accounts are in the FCU Act. 12 U.S.C. 
1757(b)(1)(B) and (3). Since an FCU may already engage in these 
activities under the authority and requirements in the FCU Act, it is 
not necessary to include these activities as part of this rulemaking.
    The proposal defines suretyship, guaranty agreements and principal. 
While both a surety and a guarantor agree to be bound for the 
principal, there are distinctions. A principal is the ``person 
primarily liable, for whose performance of his obligation the guaranty 
or surety has become bound.'' Blacks Law Dictionary 1193 (6th ed. 
1990). Under a suretyship agreement, a surety is bound with its 
principal to pay or perform an obligation to a third party. Id. at 
1441-42. Under a guaranty agreement, on the other hand, the guarantor 
agrees to satisfy the obligation of the principal to another only if 
the principal fails to perform. Id. at 705. In addition, while a surety 
is usually bound with the principal by the same instrument, which is 
executed simultaneously by both the surety and the principal, a 
guarantor usually enters into a separate agreement with the third 
party, which the principal does not join. Id. at 1441-42. A guaranty 
agreement is usually entered into before or after that of principal and 
is often founded on a separate consideration from that supporting the 
contract of the principal. Id.
    The proposal includes three requirements designed to ensure the 
safety and soundness of surety and guaranty agreements. The Board has 
the same safety and soundness concerns for FISCUs authorized under 
state law to enter into surety and guaranty agreements as it does for 
FCUs. Accordingly, the Board proposes to apply the requirements to 
FISCUs through new Sec.  741.220. The requirements are modeled after 
the requirements in the Office of the Comptroller of the Currency (OCC) 
and the Office of Thrift Supervision (OTS) rules on guaranty and 
suretyship. 12 CFR 7.1017 and 560.60.
    The first two requirements are substantially similar to the 
requirements in the OTS rule. The first requires that the obligation 
under the agreement be limited to a fixed amount and limited in 
duration. Without a requirement to limit the amount and duration of the 
agreement, an FCU may take on more risk than it anticipated in the 
agreement.
    The second provision requires that an FCU's performance under the 
agreement create a loan that is permissible under applicable law 
because the nature of a surety or guaranty agreement is a loan. The FCU 
is lending its credit and, in effect, is lending to its member. An FCU 
may not use a surety or guaranty agreement as a mechanism to avoid the 
applicable regulatory requirements for loans. These regulatory 
requirements are in place to ensure the safety and soundness of the 
transactions. For example, if an FCU will be a surety or guarantor for 
a member's obligation for a business loan, it must comply with the 
member business loan requirements. 12 CFR part 723.
    This provision also highlights that an FCU must treat its 
obligation under the agreement as a contractual commitment to advance 
funds to the principal under the loans-to-one-borrower limits and loans 
to insider restrictions. 12 CFR 560.60(b)(3), 701.21(c)(5), (d) and 
723.8. Again, these requirements are in place to ensure the safety and 
soundness of the transaction and should not be circumvented through the 
use of a surety or guaranty agreement.
    The third provision addresses collateral requirements and parallels 
requirements in the OCC and OTS rules. Depending on the nature of the 
collateral, an FCU must have collateral equal to 100 or 110 percent of 
the obligation. The 100 percent collateral category includes cash, 
obligations of the United States or its agencies, obligations fully 
guaranteed by the United States or its agencies as to principal and 
interest, and notes, drafts, bills of exchange, and bankers' 
acceptances that are eligible for rediscount or purchase by a Federal 
Reserve Bank. Because the value of some of these types of collateral 
can fluctuate, the proposal requires that the collateral have a market 
value at the close of each business day equal to 100 percent of the 
FCU's total potential liability.
    The 110 percent collateral category includes real estate and 
marketable securities. If the collateral is real estate, an FCU must 
establish the value of the collateral by an evaluation or appraisal of 
the real estate consistent with NCUA's appraisal regulation. 12 CFR 
722.3. If the collateral is marketable securities, an FCU must be 
authorized to invest in the securities and must ensure that the value 
of the securities is equal to 110 percent of the obligation at all 
times. To protect against risk of loss, an FCU must perfect its 
security interest in the collateral.

B. Section 741.2--Maximum Borrowing Authority

    The NCUA Board proposes to amend Sec.  741.2 to create a waiver 
process for FISCUs that want to exceed the general borrowing 
limitations in this section provided certain requirements have been 
met. The FCU Act limits an FCU's maximum borrowing authority to ``50 
per centum of its paid-in and unimpaired capital and surplus.'' 12 
U.S.C. 1757(9). In 1971, shortly after the passage of Title II of the 
FCU Act, which authorized the NCUA to provide share insurance, the 
Board issued regulations governing various aspects of the share 
insurance program. In particular, the Board, noting that some states 
had no limitations on borrowing, issued a regulation that made it a 
requirement for share insurance that all federally insured credit 
unions comply with the FCU Act's borrowing limitations. 36 FR 10844, 
June 4, 1971.
    While safety and soundness concerns could potentially exist with an 
FISCU borrowing over the statutory limit for an FCU absent necessary 
safeguards to ensure due diligence by the FISCU and State and Federal 
supervisory review, the Board recognizes that it may be appropriate in 
certain circumstances and on a case-by-case basis to allow an FISCU to 
exceed the statutory limitation currently imposed on FCUs. The Board 
proposes allowing an FISCU to apply for a waiver from Sec.  741.2 up to 
the amount permitted under State law or by the State regulator. 
Prerequisites for a waiver request include that appropriate safeguards 
must be in place and that either State law permits the higher limit 
than that specified in the FCU Act for which the FISCU seeks approval, 
which is verified by the State regulator, or the State regulator has 
duly approved a

[[Page 56588]]

higher limit than that allowed under State law. Instances in which it 
would seem appropriate to seek a waiver could include a situation 
where, for example, the borrowing has minimal risk associated with it 
but the FISCU is unable to enter into the transaction because of the 
regulatory prohibition. Circumstances presenting minimal risk could be, 
for example, a transaction where the FISCU is acting as a co-borrower 
with a member and the member has provided collateral sufficient to 
cover its obligation if the member defaults on the loan. The waiver 
process will permit regional directors to take into consideration the 
circumstances of the FISCU, its community, and members, and provide 
additional flexibility to address particular needs or benefits on a 
case-by-case basis. The proposed regulation contemplates that FISCUs 
wishing to engage in particular transactions, programs or projects, 
which would otherwise take their borrowings above the regulatory 
limitation, will have the opportunity to apply for a waiver, which will 
include a thorough explanation of the business purposes and strategies 
the FISCU has in place to mitigate risk, so that regional directors may 
make an informed determination regarding safety and soundness.
    To apply for a waiver, an FISCU must submit its request to the 
appropriate regional director. The request must include a detailed 
analysis of the safety and soundness implications of the waiver, a 
proposed aggregate dollar amount or percentage of paid-in and 
unimpaired capital and surplus limitation, a letter from the State 
regulator approving the request, and an explanation demonstrating the 
need for a higher limit. The regional director will approve the waiver 
request if he or she determines that the proposed borrowing limit will 
not adversely affect the safety and soundness of the FISCU.

C. Regulatory Procedures

Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) requires NCUA to prepare an 
analysis to describe any significant economic impact any proposed 
regulation may have on a substantial number of small entities. NCUA 
considers credit unions having less than ten million in assets to be 
small for purposes of RFA. Interpretive Ruling and Policy Statement 
(IRPS) 87-2 as amended by IRPS 03-2. The NCUA 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. The proposal authorizes FCUs to enter into surety and guaranty 
agreements and permits FISCUs to request a waiver from the maximum 
borrowing limitation. It is unlikely that small credit unions will 
participate in either of these activities. Accordingly, the NCUA has 
determined that a Regulatory Flexibility Analysis is not required.

Paperwork Reduction Act

    The NCUA Board has determined that the proposal that would allow 
FISCUs to file for a waiver from the borrowing limitations in Sec.  
741.2 is covered under the Paperwork Reduction Act. NCUA is submitting 
a copy of this proposed rule to the Office of Management and Budget 
(OMB) for its review.
    The NCUA Board estimates it will take an FISCU 8 hours on average 
to complete a waiver request. The NCUA Board also estimates, based on 
past interest in increased borrowing authority, that two FISCUs per 
year will request a waiver. Based on this, the NCUA Board estimates 
that the proposed rule will have an estimated net burden of 16 
additional hours.
    The Paperwork Reduction Act of 1995 and OMB regulations require 
that the public be provided an opportunity to comment on the paperwork 
requirements, including an agency's estimate of the burden of the 
paperwork requirements. The NCUA Board invites comment on: (1) Whether 
the paperwork requirements are necessary; (2) the accuracy of NCUA's 
estimate on the burden of the paperwork requirements; (3) ways to 
enhance the quality, utility, and clarity of the paperwork 
requirements; and (4) ways to minimize the burden of the paperwork 
requirements.
    Comments should be sent to: OMB Reports Management Branch, New 
Executive Office Building, Room 10202, Washington, DC 20503; Attention: 
Joseph Lackey, Desk Officer for NCUA. Please send NCUA a copy of any 
comments you submit to OMB.

Executive Order 13132

    Executive Order 13132 encourages independent regulatory agencies to 
consider the impact of their 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. The proposed rule will apply directly to 
federally insured state-chartered credit unions. NCUA has determined 
that the proposed amendments will not have a substantial direct effect 
on the States, on the connection 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 this 
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

    NCUA has determined that this proposed rule would not affect family 
well-being within the meaning of section 654 of the Treasury and 
General Government Appropriations Act, 1999, Public Law 105-277, 112 
Stat. 2681 (1998).

D. Agency Regulatory Goal

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

List of Subjects

12 CFR Part 701

    Credit unions.

12 CFR Part 741

    Credit unions, Requirements for insurance.

    By the National Credit Union Administration Board on September 
24, 2003.
Becky Baker,
Secretary of the Board.

    For the reasons set forth in the preamble, the National Credit 
Union Administration proposes to amend 12 CFR parts 701 and 741 as 
follows:

PART 701--ORGANIZATION AND OPERATIONS OF FEDERAL CREDIT UNIONS

    1. The authority citation for part 701 continues to read as 
follows:

    Authority: 12 U.S.C. 1752(5), 1755, 1756, 1757, 1759, 1761a, 
1761b, 1766, 1767, 1782, 1784, 1787, 1789.

    2. Add new Sec.  701.20 to read as follows:


Sec.  701.20  Suretyship and guaranty.

    (a) Scope. This section authorizes a Federal credit union to enter 
into a suretyship or guaranty agreement as an incidental powers 
activity. This section does not apply to the guaranty of public 
deposits or the assumption of liability for member accounts.
    (b) Definitions. A suretyship binds a Federal credit union with its 
principal

[[Page 56589]]

to pay or perform an obligation to a third person. Under a guaranty 
agreement, a Federal credit union agrees to satisfy the obligation of 
the principal only if the principal fails to pay or perform. The 
principal is the person primarily liable, for whose performance of his 
obligation the surety or guarantor has become bound.
    (c) Requirements. The suretyship or guaranty agreement must be for 
the benefit of a principal that is a member and is subject to the 
following conditions:
    (1) The Federal credit union limits its obligations under the 
agreement to a fixed dollar amount and a specified duration;
    (2) The Federal credit union's performance under the agreement 
creates an authorized loan that complies with the applicable lending 
regulations, including the limitations on loans to one member or 
associated members or officials for purposes of Sec. Sec.  
701.21(c)(5), (d); 723.2 and 723.8; and
    (3) The Federal credit union obtains a segregated deposit from the 
member that is sufficient in amount to cover the Federal credit union's 
total potential liability.
    (d) Collateral. A segregated deposit under this section includes 
collateral:
    (1) In which the Federal credit union has perfected its security 
interest (for example, if the collateral is a printed security, the 
Federal credit union must have obtained physical control of the 
security, and, if the collateral is a book entry security, the Federal 
credit union must have properly recorded its security interest); and
    (2) That has a market value, at the close of each business day, 
equal to 100 percent of the Federal credit union's total potential 
liability and is composed of:
    (i) Cash;
    (ii) Obligations of the United States or its agencies;
    (iii) Obligations fully guaranteed by the United States or its 
agencies as to principal and interest; or
    (iv) Notes, drafts, or bills of exchange or banker's acceptances 
that are eligible for rediscount or purchase by a Federal Reserve Bank; 
or
    (3) That has a market value equal to 110 percent of the Federal 
credit union's total potential liability and is composed of:
    (i) Real estate, the value of which is established by a signed 
appraisal or evaluation in accordance with part 722 of this chapter. In 
determining the value of the collateral, the Federal credit union must 
factor in the value of any existing senior mortgages, liens or other 
encumbrances on the property except those held by the principal to the 
suretyship or guaranty agreement; or
    (ii) Marketable securities that the Federal credit union is 
authorized to invest in. The Federal credit union must ensure that the 
value of the security is 110 percent of the obligation at all times 
during the term of the agreement.

PART 741--REQUIREMENTS FOR INSURANCE

    3. The authority citation for part 741 continues to read as 
follows:

    Authority: 12 U.S.C. 1757, 1766(a), and 1781-1790; Pub. L. 101-
73.

    4. Amend Sec.  741.2 by designating the existing paragraph as (a) 
and adding new paragraphs (b), (c) and (d) to read as follows:


Sec.  741.2  Maximum borrowing authority.

    (a) * * *
    (b) A federally insured State-chartered credit union may apply to 
the regional director for a waiver of paragraph (a) of this section up 
to the amount permitted under the applicable State law or by the State 
regulator. The waiver request must include:
    (1) Written approval from the State regulator;
    (2) A detailed analysis of the safety and soundness implications of 
the proposed waiver;
    (3) A proposed aggregate dollar amount or percentage of paid-in and 
unimpaired capital and surplus limitation; and
    (4) An explanation demonstrating the need to raise the limit.
    (c) The regional director will approve the waiver request if the 
proposed borrowing limit will not adversely affect the safety and 
soundness of the federally insured State-chartered credit union.
    5. Add new Sec.  741.221 to read as follows:


Sec.  741.221  Suretyship and guaranty requirements.

    Any credit union, which is insured pursuant to Title II of the Act, 
must adhere to the requirements in Sec.  701.20 of this chapter. State-
chartered, NCUSIF-insured credit unions may only enter into suretyship 
and guaranty agreements to the extent authorized under State law.

[FR Doc. 03-24761 Filed 9-30-03; 8:45 am]
BILLING CODE 7535-01-P