[Federal Register Volume 69, Number 37 (Wednesday, February 25, 2004)]
[Rules and Regulations]
[Pages 8545-8548]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-4076]



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  Federal Register / Vol. 69, No. 37 / Wednesday, February 25, 2004 / 
Rules and Regulations  

[[Page 8545]]



NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Parts 701 and 741


Suretyship and Guaranty; Maximum Borrowing Authority

AGENCY: National Credit Union Administration (NCUA).

ACTION: Final rule.

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

SUMMARY: NCUA is revising 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 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 final rule 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: This final rule is effective March 26, 2004.

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

SUPPLEMENTARY INFORMATION:

A. Background

    On September 24, 2003, the NCUA Board requested comment on proposed 
changes to Sec. Sec.  701.20 and 741.2 of its regulations. 68 FR 56586 
(October 1, 2003). Proposed Sec.  701.20 created a new provision to 
recognize that an FCU, as part of its incidental powers, may act as a 
guarantor or surety on behalf of a member. Section 741.2 sets forth a 
maximum borrowing limitation of 50 percent of paid-in and unimpaired 
capital and surplus for all federally insured credit unions. The 
proposed amendment permitted federally insured, state-chartered credit 
unions (FISCUs) to apply for a waiver up to the amount permitted by 
state law.

B. Summary of Comments

    The NCUA Board received 10 comments on the proposal: three from 
credit unions; three from credit union trade groups; two from credit 
union leagues; and two from bank trade groups. Below is a summary of 
the comments.

Suretyship and Guaranty

    Eight of the ten commenters support allowing a credit union to act 
as a surety or guarantor. Two of the eight positive commenters 
suggested allowing FISCUs to apply for a waiver from the safety and 
soundness limitations placed on the transactions. One of the positive 
commenters suggested slightly different collateral requirements. The 
two negative commenters were the bank trade groups.
    The positive commenters noted that allowing credit unions to enter 
into suretyship and guaranty agreements with the safety and soundness 
requirements in the proposal will give credit unions additional 
flexibility to meet the needs of their members while ensuring the 
safety and soundness of the transaction. The commenters noted that this 
activity could become a valuable service for credit unions. A couple of 
the commenters suggested, because this activity is so new for credit 
unions, that NCUA review the rule after it has been in effect for a few 
years to address any operational issues that may arise. The Board 
intends to incorporate this suggestion into its regulatory review 
process.
    Two of the positive commenters suggested allowing FISCUs to apply 
for a waiver that would allow the state regulator or legislature to 
authorize more flexible guarantor or surety requirements. They suggest 
that a waiver only be granted if there are no safety and soundness 
implications. Because, as some of the commenters noted, this activity 
is new for credit unions, NCUA believes it is premature to adopt a 
waiver provision. The Board believes the requirements in the rule that 
would be the subject of a waiver all relate directly to safety and 
soundness, however, as NCUA and credit unions gain more experience in 
this area, the Board may reconsider this issue.
    One of the commenters suggested that corporate credit unions have a 
role to play when a natural person credit union is acting as a 
guarantor for its member. The commenter recommended including deposits 
at corporate credit unions in the 100% collateral category. Because it 
is the natural person member that is providing the collateral and 
natural person members do not have deposits at corporate credit unions, 
we do not believe it is appropriate to implement this suggestion.
    The two bank trade groups believe allowing credit unions to engage 
in these transactions conflicts with a credit union's mission of 
serving people of modest means. They also assert that allowing this 
activity is an expansion of a credit union's commercial lending powers 
and should not be allowed as long as credit unions are tax exempt. 
Congress has specifically authorized commercial lending for FCUs. 12 
U.S.C. 1757a. Contrary to the bankers' claims, this rule is consistent 
with Congress' intent for FCUs with respect to serving their members 
and business lending.

Waiver of Maximum Borrowing Limitations for FISCUs

    Eight of the ten commenters supported this proposal. The two 
negative commenters were the bank trade groups.
    Those in support of the proposal contend that: It is inherent in 
the concept of dual chartering to allow state-chartered credit unions 
to exercise powers authorized under state law and regulation within the 
bounds of safety and soundness; the proposal's approach is similar to 
the approach used by the other banking agencies; and the waiver 
provision will assist FISCUs in providing service to low income 
families by allowing FISCUs to borrow from the Federal Home Loan Bank a 
greater amount than the regulatory limitation currently permits. 
Finally, a few of the positive commenters suggested NCUA seek similar 
authority for FCUs through a legislative change.
    The two negative bank commenters expressed concern that the waiver 
provision could negatively impact on the safety and soundness of 
FISCUs. As

[[Page 8546]]

noted in the proposal and echoed by many of the commenters, NCUA has 
incorporated the appropriate safeguards into the rule to ensure these 
transactions are handled in a safe and sound manner. One of the 
negative commenters incorrectly characterized the proposal as an 
``attempt by the credit union industry to exceed its statutory, maximum 
borrowing authority.'' As noted in the proposal, the statutory 
limitation applies only to FCUs.

C. Final Amendments

New Sections 701.20 and 741.221--Suretyship and Guaranty

    The final rule is identical to the proposal. Section 701.20 
recognizes 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 final rule defines suretyship, guaranty agreements, and 
principal and 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 requirements will apply to FISCUs as provided in 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.

Section 741.2--Maximum Borrowing Authority

    The final rule is identical to the proposal. It allows 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 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 final 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.

D. 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 credit unions, 
defined as those under ten million dollars in assets. The rule 
authorizes FCUs to enter into surety and guaranty agreements and 
permits FISCUs to request a waiver from the maximum borrowing 
limitation. It is

[[Page 8547]]

unlikely that small credit unions will participate in either of these 
activities. The final rule will not have a significant economic impact 
on a substantial number of small credit unions, and therefore, a 
Regulatory Flexibility Analysis is not required.

Paperwork Reduction Act

    The NCUA Board has determined that the final rule that allows 
FISCUs to file for a waiver from the borrowing limitations in Sec.  
741.2 is covered under the Paperwork Reduction Act. NCUA submitted a 
copy of the proposed rule to the Office of Management and Budget (OMB) 
for its review and is awaiting approval and issuance of a new OMB 
control number (3133-----).
    Under the Paperwork Reduction Act of 1995, no persons are required 
to respond to a collection of information unless it has a valid OMB 
number. The control number will be displayed in the table at 12 CFR 
part 795.

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 final rule will apply directly to 
federally insured state-chartered credit unions. NCUA has determined 
that the final rule 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 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

    NCUA has determined that this final rule would 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).

Small Business Regulatory Enforcement Fairness Act

    The Small Business Regulatory Enforcement Fairness Act of 1966 
(SBREFA) (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 rule is not a major rule for 
purposes of SBREFA.

E. Agency Regulatory Goal

    NCUA's goal is clear, understandable regulations that impose a 
minimal regulatory burden. The final rule is understandable and imposes 
minimum regulatory burden.

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 February 
19, 2004.
Becky Baker,
Secretary of the Board.

0
For the reasons set forth in the preamble, the National Credit Union 
Administration is amending 12 CFR parts 701 and 741 as follows:

PART 701--ORGANIZATION AND OPERATIONS OF FEDERAL CREDIT UNIONS

0
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.

0
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 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

0
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.

0
4. Amend Sec.  741.2 by designating the existing paragraph as (a) and 
adding new

[[Page 8548]]

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.

0
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. 04-4076 Filed 2-24-04; 8:45 am]
BILLING CODE 7535-01-P