CUNA Comment Letter
Proposed Statutory Lien Regulation (701.39)
January 27, 1999
Ms. Becky Baker
Secretary of the Board
National Credit Union Administration
1775 Duke Street
Alexandria, Virginia 22314-6319
RE: Proposed Statutory Lien Regulation (701.39)
Dear Ms. Baker:
The Credit Union National Association (CUNA) appreciates the opportunity to comment on NCUA's proposal to convert to a regulation the agency's IRPS 82-5 on statutory liens, published in the Federal Register on October 29, 1998. CUNA represents approximately 90% of the nation's 11,300 credit unions.
When CUNA commented in May of 1997 on NCUA's general project to review Interpretive Rulings and Policy Statements, eliminate the obsolete ones, convert some to regulation after notice and comment, and leave about a dozen unchanged, CUNA commented that IRPS 82-5 "is an issue about which credit union attorneys have expressed opinions for some time, and all could benefit from the comment period and ultimate clarification in a regulation." After reviewing the regulatory proposal in depth, CUNA seriously questions whether a regulation should be adopted.
WHY AN IRPS ON STATUTORY LIENS IS PREFERABLE
We invited leagues to participate in a conference call earlier this month to discuss proposed 701.39, and over 50 league staff and retained counsel did so. These credit union legal experts are very concerned about numerous problems that would arise if NCUA's proposed regulation on statutory liens were adopted by the Board. We understand and generally support NCUA's interest in having many of its policies reduced to regulations, so that credit unions and others can find a definitive statement as to what the rules are governing a specific power. However, the statutory lien authority is one area where it is probably better to set forth NCUA's policy in an IRPS, rather than a regulation, because federal credit unions may be misled into believing that all the information they need can be found within the language of the regulation.
Unlike most regulations applicable to federal credit unions, aspects of the operation of the statutory lien are dependent on other law. Although NCUA has clearly preempted any state law that requires obtaining a court judgment on a debt before being able to enforce the statutory lien (changed in IRPS 82-5), many other aspects of the statutory lien are not necessarily insulated from other laws.
While this comment letter details many concerns with the proposed regulation, our two major objections are: (1) the limitation of the use of the statutory lien to loans in default (701.39(a)(4)); and (2) the new notice requirements (701.39(b)). In the first sentence of the announcement, the agency states that the regulation "implements the Federal Credit Union Act's authority to establish a statutory lien." On the contrary, the proposed regulation specifically curtails federal credit unions' usage of their statutory lien authority. Moreover, the proposed notice requirements add a new burden when no disclosure complaints that we are aware of have been raised about the statutory lien in the 16 years that IRPS 82-5 has been in place. Banks certainly do not have to give their borrowers notice of the common law right of setoff at the time a loan is granted.
We think the preferable approach is to update IRPS 82-5 to clarify that the statutory lien covers: (1) all debts owed to the federal credit union ( NCUA counsel's post-1982 interpretations that the statutory lien can only be used to collect on loans in default notwithstanding); and (2) all parties who are primarily or secondarily liable to the federal credit union.
Whether NCUA decides to proceed with converting its policy statement on statutory liens to a regulation or instead to make a few clarifications to the existing policy statement, NCUA needs to seek another round of comments on this issue. A misstated regulation on statutory liens could greatly undermine federal credit unions' authority to use the statutory lien and subject them to new legal challenges about their procedures on impressing and enforcing the statutory lien.
SECTION 701.39(a) WHAT IS A STATUTORY LIEN?
(1) Definition. We are concerned about NCUA's proposal to characterize the statutory lien as a "security interest." The statutory lien established in Section 107(11) of the Federal Credit Union Act is a unique lien, and to call it a "security interest" could possibly subject it to interpretations under Article 9 of the Uniform Commercial Code regarding the attachment and enforceability of security interests, regardless of the agency's position that NCUA preempts state law requirements.
We looked to Black's Law Dictionary for suggestions of what words to substitute for "security interest" as proposed in 701.39(a)(1). We suggest the sentence substitute the words "right or claim".
(2) Superior claim. While we like NCUA's statements that the statutory lien gives a federal credit union "a superior claim over all other creditors when claims are asserted against the member's account(s)," and "when a federal credit union impresses a lien on a member?s accounts, it retains the lien on those accounts from that date forward through the term of the loan, to the extent of the unpaid loan balance...", we are not confident that these are totally accurate statements.
The Internal Revenue Service has the power to levy on accounts held by financial institutions to satisfy a taxpayer's obligations. If the federal credit union enforces its statutory lien rights by debiting the member's account before the IRS levy arrives (based on the triggering of known default), the credit union clearly has the right to the funds. Controversies have arisen when the credit union does not suspect the member has financial problems until the levy arrives, even though technical default may have already occurred. We understand that credit unions have been unsuccessful in their challenges to the IRS in court; courts hold that where the member/taxpayer had unrestricted use of funds prior to the issuance of the levy, the IRS has the right to the funds.
These will also not be accurate statements when another creditor has taken a perfected security interest in a share certificate. The superiority of the statutory lien over other claims to a member's account cannot be determined solely by the Federal Credit Union Act or the NCUA regulation. This provides another example of the problems that arise when NCUA tries to get more specific by converting the statutory lien authority from an IRPS into a comprehensive regulation.
We are pleased that NCUA has reiterated the position taken in IRPS 82-5 that the statutory lien is a "floating" lien, and that "when the statutory lien is enforced, it applies to all funds in the account at that point, the amount of which may well be less than the outstanding balance of the indebtedness" at the time of enforcement. This is, of course, different from a specific pledge of shares.
(3) Preemption. The proposal states that the statutory lien "preempts state laws governing the right of a creditor to impress and enforce a lien, as well as the common law right of set-off." In 1982 CUNA urged NCUA to change its 1979 interpretation that federal credit unions first had to get a court judgment; NCUA issued IRPS 82-5 that year which emphasized that a federal credit union need not obtain a court judgment on the member's debt in order to enforce its statutory lien, a position reiterated in 701.39(c)(3) of the proposed regulation. While that much is clear regarding preemption, there are many of areas of state law that may impact the enforcement of the lien that may not be so clear. For instance, some state authorities may have taken the position that federal credit unions are subject to any state right-to-cure provision before enforcing the lien.
It is our view that federal credit unions have authority to use either the statutory lien or the common law right of setoff, and therefore they should be given all possible flexibility to efficiently and effectively reach the funds in the account of a member in default. We think it would be very useful if the agency itemizes what areas it preempts that state law limits regarding the impressing and enforcing of the statutory lien, similar to what NCUA has done in 701.21(b) on lending practices. If NCUA decides to convert IRPS 82-5 into a regulation, CUNA and some league attorneys would be pleased to work with the agency to come up with a proposed list of preemption items that could be put out for a second round of comments.
(4) Member's indebtedness. There seems to be universal agreement from the comments CUNA has received on the proposal that the statutory lien should be enforceable to cover all of the member's financial obligations in arrearage to the credit union. The Federal Credit Union Act specifically states in Section 107(11) that federal credit unions "shall have [the] power ... to impress and enforce a lien upon the shares and dividends of any member to the extent of any loan made to him and any dues or charges payable by him." NCUA concedes in the Supplementary Information section that Section 107(11) can be read to apply to member financial obligations beyond indebtedness to the credit union, but the "proposed rule reiterates NCUA policy limiting its application to a member's outstanding indebtedness and related charges" (such as late fees and collection expenses).
We question whether NCUA is accurately restricting the statutory lien as it intends to by the use of the word "indebtedness." According to Black's Law Dictionary "indebtedness" means "the owing of a sum of money upon a certain and express agreement." NCUA apparently feels that the term clearly applies only to loan agreements, but a reasonable reading of the term would include account agreements, thereby covering for instance charges for returned checks, safety deposit box agreements, including charges for overdue rental fees, and other agreements.
There is nothing in IRPS 82-5 that specifically forbids a federal credit union from enforcing the statutory lien for indebtedness to the credit union for matters other than loans in default. The second to the last sentence of IRPS 82-5 merely states that the federal credit union "may enforce the lien on the shares and dividends of the member by applying those funds directly to the outstanding indebtedness, which may include the unpaid loan balance together with interest, fees and other charges" (emphasis added). We know that over the years federal credit unions have quite understandably used their statutory lien authority to resolve other types of member indebtedness to the credit union, which is why commenters consider this proposed regulation a notable limitation on their use of the statutory lien.
Nowhere is it clear in IRPS 82-5 that federal credit unions are prohibited from using their statutory lien authority to address NSF problems, unpaid service fees, etc. Apparently, only inprivate opinion letters issued after 1982 did NCUA's Office of General Counsel take the view that it is impermissible to use the statutory lien authority for indebtedness other than due to loan defaults. ["Although Section 107(11) of the FCU Act authorizes an FCU "to impress and enforce a lien upon the shares and dividends of any member, to the extent of any loan made to him and any dues or charges payable by him", we do not necessarily agree that it proves the basis for the subject offsets." POL #91-0514, February 6, 1992; "[N]owhere in IRPS 82-5 does NCUA state that an FCU can use its statutory lien authority to impress and enforce a lien to recover any obligations of a member other than loans." POL #97-0423, June 19, 1997.]
Moreover, nowhere can we find an explanation of why NCUA has restricted the use of the statutory lien to loan indebtedness, in plain contradiction to the language of the Section 107(11). We cannot think of why NCUA wants to impose this restriction by regulation. Most credit union account agreements undoubtedly disclose the lien in words similar to those used in the CUNA/CSG "Membership and Account Agreement": "If you owe us money as a borrower, guarantor, endorser or otherwise, we have a lien on the account funds in any account in which you have an ownership interest, regardless of their source, unless prohibited by law." The member who opens the account is on notice that if he owes the credit union money for any purpose, not just for an overdue loan, he can expect to have his account funds used to satisfy that indebtedness.
The statutory lien is a unique credit union feature that we think is particularly appropriate for a cooperative financial institution, because if one member is allowed to shirk his financial debts to the credit union, all the other members have to pay. NCUA says there may be other ways to offset these non-loan obligations to the credit union, such as under the federal credit union's authority to receive payments on shares or under the incidental powers provision, provided the credit union has adopted a nonstandard by-law or board policy establishing its right to do so. But there is no apparent reason why a federal credit union should be constrained from using its statutory lien authority. At a minimum, NCUA on the next round of comments on its proposed regulation needs to provide an explanation of why it is not granting the full authority stated in Section 107(11) of the Act.
The last sentence of this subsection says that "a member is considered to be indebted to the credit union if he or she is the maker, co-maker or guarantor of a note or equivalent instrument establishing indebtedness to the credit union." We agree that the agency should make clear that the statutory lien can be enforced against all parties who are obligated on a loan. The terminology should be broadened to include other terms such as "co-signer," "endorser," "surety" or "accommodation party." Perhaps the best way to handle this is to provide in the revised IRPS or new regulation that anyone who is "primarily or secondarilyliable for the loan" is subject to the lien. Examples of common terms could be included in the Supplementary Information section.
(5) Exemptions. NCUA's proposal states that to the extend provided by federal law, a statutory lien cannot be (i) impressed on an IRA account; (ii) enforced to offset an indebtedness arising from a credit card debt under Truth-in-Lending Act constraints; and (iii) enforced against a member who has declared bankruptcy when there is a stay. Commenters are concerned that the language in this subsection is incomplete and therefore misleading, and that the word "exemptions" is a misnomer. The Supplementary Information section is somewhat better with its citations, but some corrections and additions, at a minimum, are needed.
As an example of the problems, the proposed regulation refers to a "stay order", but there is no such thing; it is an automatic stay. Moreover, if the automatic stay is referenced, probably credit unions should be reminded of the prohibition against trying to collect debts after discharge has occurred. Also, NCUA may want to explain to credit unions that they still can "freeze" the funds in the accounts to take steps to preserve their lien, even though the stay prohibits actually applying the funds to satisfy the debt owed.
The Supplementary Information section, but not the proposed regulation itself, contains a paragraph (6) on other limitations, explaining that ownership interests as established by state law can affect the amount of funds that can actually be withdrawn by the federal credit union to enforce the lien. If the NCUA is trying to be a comprehensive in its directions on the use and pitfalls of the statutory lien, the agency may also want to add that state law may only allow one form of action to recover a loan in default secured by real property, so that using the statutory lien could preclude the credit union's right to foreclose on the property.
We think the additional cautionary information that we have suggested above demonstrates why NCUA needs to reconsider whether the statutory lien should be made a topic of a regulation. Any explanatory text in the Supplementary Information section is never codified, and therefore trying to list the "exemptions" in a few lines of a regulation could cause more problems than are solved.
SECTION 701.39(b) HOW IS A STATUTORY LIEN IMPRESSED?
This section says that the federal credit union can impress (establish) its statutory lien in one of three ways: In the account agreement with notice to the member when the loan is made; in the loan document signed by the member; or in the bylaws (Article III, Section 5(d)) with notice of the bylaw at the time the loan is made. FCU Standard Bylaws Article III, Section 5(d) states that "no member may withdraw any shareholdings below the amount of his/her primary or contingent liability to the credit union if he/she is delinquent as a borrower ... without [the] written approval [of the credit committee if the credit union continues to have a credit committee, otherwise by someone in authority at the credit union to give such written approval]...."
A major change proposed in this regulation is requiring separate notice at the time a loan is made that a statutory lien has been impressed on the borrower's, co-signer's, co-maker's, guarantor's, or endorsers' account(s), unless this notice is specifically incorporated into the loan agreement. This new notice requirement is a new regulatory burden, and we question the need to force federal credit unions to do this.
Enforcement of the statutory lien against members' accounts has not been a problem that has been of any note whatsoever in the 16 years that IRPS 82-5 has been in place. The notice requirement raises problems of getting the notice to co-makers, guarantors, etc. and will create legal disputes of whether the notice was actually given at the time the loan was granted. The notice may result in federal credit unions considering foregoing their statutory rights to rely on this lien and may lead to more reliance on consensual liens in membership agreements or on the right of setoff. The banking industry has no requirement to give similar notice about the common law right of setoff when a loan is made, and the use of the statutory lien should not be subjected to an added disclosure burden.
Notice as provided in (b)(2) is also a potential problem because there is an increasing use of loan documents that do not actually have the member sign the document, notably credit card agreements. If this provision remains, it should read, "In the case of a loan, by reciting in a loan agreement that a statutory lien is impressed on his or her shares."
There are many unanswered questions about what NCUA envisions this new notice requirement to encompass. Do all borrowers have to get their own copy of the notice" (It is not unusual for only one borrower to get a copy of the loan agreement, so this would present additional paperwork even if the notice is incorporated into the agreement.) The proposed notice requirement is silent on the question of what kind, if any, notice has to be given to joint account owners who are not involved in the borrowing transaction in any way. Overdraft protection agreements are loans, and the statutory lien would allow the federal credit union to access other accounts of that member to cover the overdraft, if necessary. What kind of notice must be given in that instance, i.e., when is the loan "granted"? Does the written notice have to be in a form that the member can keep? What if a co-signer/co-maker is not a member of the credit union and has no accounts at the credit union? Does the credit union have to supply the person with the notice? What about new joint accounts opened after the loan is granted? Are additional notices required? There are numerous other questions that the agency has to answer if this notice provision is part of the final regulation.
We urge NCUA to drop this proposed new notice requirement and allow federal credit unions to continue to choose whether notice is provided in account agreements, through the bylaws, or in loan agreements. This recommendation is not "anti-consumer" since members should expect that if they incur an indebtedness to the credit union, they will have to pay the funds owed. If NCUA decides to proceed with a regulation on statutory liens, this notice requirement needs to be spelled out in greater detail, and perhaps the agency needs to develop some sample disclosure language that federal credit unions can use or adapt to their needs.
SECTION 701.39(c) HOW IS A STATUTORY LIEN ENFORCED?
(1) Enforcement. As discussed above, questions have been raised as to exactly what state laws can NCUA preempt to facilitate the use of the statutory lien. Since this subsection reiterates the (a)(4) limitation on the federal credit union's use of the statutory lien, we reiterate that we object to limiting the use of the statutory lien to enforce only loan defaults -- any funds owed to the federal credit union should be subject to the enforcement of the statutory lien.
(2) Default required. Since we advocate a broader use of the statutory lien authority as permitted by the Federal Credit Union Act, we request that this subsection be rewritten to read: "(2) Violation of an agreement required. A federal credit union may enforce its statutory lien on a member's account only when the member is in default on a loan to the credit union or is otherwise in violation of an agreement with the credit union that causes the member to owe any sum of money to the credit union."
(3) Judgment not required. This subsection reiterates the key point of why IRPS 82-5 was issued in 1982. We support this restatement that a federal credit union does not have to obtain a court order before enforcing the statutory lien.
The agency did not discuss or suggest how long federal credit unions would be given to comply with this new regulation if the NCUA Board decides to proceed with its promulgation. Since a new 701.39 would impose significant operational burdens on federal credit unions, we suggest a one-year period before the new regulation becomes effective. Loan agreements may have to be changed, new disclosures developed, and lending procedures altered. If a regulation is implemented, NCUA also needs to decide how, or whether, the new rules will apply to loans already granted. Will notice requirements, for instance, apply to future advances under existing open-end loan agreements?
CUNA's strong preference is that NCUA not go forth with this regulatory approach and instead clarify its existing interpretive ruling and policy statement on statutory liens. We look forward to discussing with the agency further our concerns about proposed 701.39 and how to make sure that federal credit unions can exercise the full authority of the statutory lien provision found in Section 107(11) of the Federal Credit Union Act.
Kathleen O. Thompson
Senior Vice President, Regulatory Affairs