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CUNA Regulatory Comment Call

February 29, 2000

EXECUTIVE SUMMARY

• On February 24, 2000, the NCUA Board approved a proposed rule to ensure that property transferred by a federally- insured credit union as part of a securitization or participation will not be reclaimed by the NCUA Board, when acting as a conservator or liquidating agent.
• The proposed rule will also ensure that the NCUA Board, when acting as conservator or liquidating agent, will not avoid a security interest in collateral for public funds deposited in federally-insured credit unions solely because the collateral was not acquired contemporaneously with the execution of the security agreement or because the collateral was changed.
• Comments are due by April 3, 2000. Please submit your comments to CUNA by March 29, 2000.

Please feel free to fax your responses to CUNA at 202-371-8240; e-mail them to Associate General Counsel Mary Dunn at mdunn@cuna.com or to Assistant General Counsel Jeffrey Bloch at jbloch@cuna.com; or mail them to Mary or Jeff in c/o CUNA's Regulatory Advocacy Department, 805 15th Street, NW, Suite 300, Washington, DC 20005. Please contact us if you need more information.

BACKGROUND

Under generally accepted accounting principles (GAAP), 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 control has been surrendered is whether the asset is placed beyond the reach of the transferor, its creditors, or a receiver.

When appointed conservator or liquidating agent, the NCUA Board has authority under the Federal Credit Union Act (FCUA) to repudiate contracts. The FCUA also provides that agreements that diminish the NCUA Board's interest in an asset are generally not enforceable unless certain requirements are met. One of these requirements is that the agreement must be executed contemporaneously with the acquisition of the asset by the credit union, which is referred to as the "contemporaneous" requirement.

These provisions of the FCUA raise the issue as to whether a financial asset transferred in connection with a securitization or in the form of a participation would be put beyond the reach of the NCUA Board and would, therefore, be considered a sale under GAAP. These provisions also affect the enforceability of security interests in collateral for public funds deposited in federally-insured credit unions.

BRIEF DESCRIPTION OF THE PROPOSED RULE

Under the proposed rule, property transferred by a federally-insured credit union as part of a securitization or participation will generally not be reclaimed by the NCUA Board, when acting as a conservator or liquidating agent. This will ensure that the provisions of the FCUA described above do not conflict with the GAAP requirement that assets be placed beyond the reach of the transferor, its creditors, or a receiver.

Although the repudiation of a securitization or participation by the NCUA Board will not affect transferred financial assets, the repudiation will excuse the Board from performing any continuing obligations that may arise. However, the NCUA Board will not seek to avoid a securitization or participation agreement solely because the agreement does not meet the "contemporaneous" requirement under the FCUA.

The transfer must also meet all of the other conditions that GAAP requires in order for such transfers to be considered a sale. The following are additional requirements:

• The participation must be "without recourse," which means that the lead participant cannot be required to repurchase a participant's interest or otherwise compensate a participant upon a borrower's default.
• The federally-insured credit union must receive adequate "consideration" for the transfer of the financial asset at the time of the transfer. Also, the transfer document must reflect the intent to treat the transaction as a sale and not as a secured borrowing.
• The proposed rule will not affect NCUA's powers regarding transfers taken in contemplation of the credit union's insolvency or with the intent to hinder, delay, or defraud the credit union or its creditors.
• After the rule is final, any repeal or amendment of the rule will not apply to transfers of financial assets that were in effect before the repeal or amendment.

The proposed rule will also ensure that the NCUA Board, when acting as conservator or liquidating agent, will not avoid a security interest in collateral for public funds solely because the collateral was not acquired contemporaneously with the execution of the security agreement or because the collateral was changed. This will allow federally-insured credit unions to offer governmental depositors the same protections that they have under the Federal Deposit Insurance Act with regard to deposits in banks.

QUESTIONS TO CONSIDER REGARDING NCUA's PROPOSAL ON FINANCIAL ASSETS AND PUBLIC FUNDS

• Are there other ways the NCUA Board should relax its authority to repudiate contracts when acting as a conservator or liquidating agent?




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• Other comments?




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