CUNA Regulatory Comment Call
September 30, 2003
MAXIMUM BORROWING LIMIT/SURETYSHIP & GUARANTY PROPOSAL
(Not a Major Rule)
EXECUTIVE SUMMARY
- NCUA issued a proposed rule that will permit state-chartered credit unions to apply for a waiver from the maximum borrowing limitation of 50% of paid-in and unimpaired capital and surplus, up to the amount permitted under state law. The maximum borrowing authority for federal credit unions (FCUs) is set by statute, which cannot be changed by NCUA.
- The proposal will also allow FCUs to act as a surety or guarantor on behalf of its members but will include requirements to ensure that FCUs are not exposed to undue risk. These will also apply to state-chartered credit unions if they are permitted under state law to act as a surety or guarantor.
- Comments are due to NCUA by December 1, 2003. Please submit your comments to CUNA by November 17, 2003.
Please feel free to fax your responses to CUNA at 202-638-7052; e-mail them to Associate General Counsel Mary Dunn at mdunn@cuna.coop and to Assistant General Counsel Jeff Bloch at jbloch@cuna.coop; or mail them to Mary and Jeff in c/o CUNA’s Regulatory Advocacy Department, 601 Pennsylvania Avenue, NW, South Building, Suite 600, Washington, DC 20004-2601. You may also contact us at 800-356-9655, ext. 6732, if you would like a copy of the rule, or you may access it here.
DESCRIPTION OF THE PROPOSED RULE
Maximum Borrowing Authority
The proposed rule will create a waiver process for state-chartered credit unions that want to exceed the general borrowing limitations, provided certain requirements are met. State-chartered credit unions may apply for a waiver up to the amount permitted under state law or by the state regulator. The maximum borrowing authority for FCUs is set by statute, which cannot be changed by NCUA.
The waiver request must be submitted to the appropriate regional director and must include the following:
- Detailed analysis of the safety and soundness implications.
- 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.
- An explanation of the need for a higher limit.
The request will be approved if the regional director determines that the proposed borrowing limit will not adversely affect the safety and soundness of the state-chartered credit union.
The waiver process will permit regional directors to consider the circumstances of the state-chartered credit union, its community, and members, and will provide additional flexibility to address specific needs and benefits on a case-by-case basis. State-chartered credit unions will need to include a thorough explanation of the business purposes and strategies that will be in place to mitigate risk so that the regional directors may make an informed determination with regard to safety and soundness considerations.
Such a waiver may be appropriate when the borrowing has minimal risk. An example could be a transaction in which the state-chartered credit union is acting as co-borrower and the member has provided sufficient collateral to cover the obligation if that member defaults.
Suretyship and Guaranty
The proposal will permit FCUs to act as a guarantor or surety on behalf of a member, which will be considered an incidental power. This proposal will not apply to the guaranty of public deposits or the assumption of liability to pay member deposits, since those activities are already permitted under the Federal Credit Union Act. The proposal will also apply to state-chartered credit unions if permitted under state law.
While both a surety and guarantor agree to be bound for the one primarily liable for the obligation to the third party, there are differences. The significant difference is that the surety is bound to the obligation while the guarantor is bound only if the party primarily obligated fails to perform.
Here are the requirements of the surety and guaranty agreements, designed to ensure safety and soundness, which are modeled after similar requirements that have been issued by the Office of the Comptroller of the Currency and the Office of Thrift Supervision:
- The obligation under the agreement must be limited to a fixed amount and limited in duration.
- The credit union’s performance must create a loan that is permissible under applicable law to ensure that the credit union does not use the agreement to avoid the applicable regulatory requirements for loans.
- The credit union must have collateral equal to 100 or 110% of the obligation. The 100% will apply to cash, certain federal government obligations, and notes, drafts, bills of exchange, and bankers’ acceptances that are eligible for rediscount or purchase by a Federal Reserve Bank. The proposal will require that the collateral have a market value at the close of each business day equal to 100% of the credit union’s potential liability. The 110% collateral requirement will apply to real estate and marketable securities. For real estate, the credit union must establish the value of collateral consistent with NCUA’s appraisal rule. For marketable securities, the credit union must be authorized to make the investment and must meet the 110% requirement at all times. The credit union must perfect the security interest.
QUESTIONS TO CONSIDER REGARDING NCUA’s PROPOSED RULE ON MAXIMUM BORROWING LIMIT/GUARANTY AND SURETYSHIP AGREEMENTS
- Do you agree with the process for state-chartered credit unions to obtain a waiver from the maximum borrowing
limit? Are there requirements with regard to this process that are unnecessary? In what situations would a waiver
be appropriate?
- Do you agree with the proposal to permit credit unions to act as a guarantor or surety on behalf of a member?
Are the requirements that credit unions must follow in order to act as a guarantor or surety reasonable?
- Other comments?
|
Eric Richard • General Counsel • (202) 508-6742 • erichard@cuna.com Mary Mitchell Dunn • SVP & Associate General Counsel • (202) 508-6736 • mdunn@cuna.com Jeffrey Bloch • Assistant General Counsel • (202) 508-6732 • jbloch@cuna.com Catherine Orr • Senior Regulatory Counsel • (202) 508-6743 • corr@cuna.com |
