CUNA Comment Letter
Proposed Leasing Regulation (New 714)
January 27, 1999
Ms. Becky Baker
Secretary to the Board
National Credit Union Administration
1775 Duke Street
Alexandria, VA 22314-3428
New Leasing Regulation (New 714)
Dear Ms. Baker:
The Credit Union National Association (CUNA) appreciates this opportunity to comment on NCUA's proposed regulation to convert its long-standing policy (IRPS 83-3) into a regulation governing personal property leasing by federal credit unions. This proposal was published in the Federal Register on October 29, 1998. CUNA represents approximately 90% of the nation's 11,300 credit unions.
CUNA sent the notice and a summary of the proposal to our leagues and posted the agency's solicitation for comments on our website. In addition, we directly asked the 50 federal credit unions most heavily involved in automobile leasing, as identified by call report information, to provide us with their reactions to the proposal. We received a limited number of responses to the questions posed by the agency in the Register notice, and there was little unanimity. No one responding, however, objected to converting the leasing interpretive ruling and policy statement into a regulation.
We think the diversity of responses resulted in part from the fact that some credit unions evaluated the agency proposal from the standpoint of what they felt made good business sense while other respondents reviewed the proposal from the standpoint of safety and soundness needs. CUNA balanced these responses to arrive at the positions reflected in this letter. Moreover, we reviewed what the Comptroller of the Currency requires of national banks engaged in personal property leasing, as set forth in 12 C.F.R. 23, "Leasing."
Under current policy and the proposed regulation, federal credit unions can engage in both direct and indirect leasing. The federal credit union does not have to own the leased property if it obtains a full assignment of the lease (i.e. becomes the owner by having all rights, interests, obligations and title to the lease), and the credit union is named as the sole lienholder of the leased property, and the credit union receives an unconditional, irrevocable power of attorney to transfer title to the property to its own name.
NCUA specifically requested answers to three questions involving ownership issues:
1. Should a federal credit union be required to own the leased property? No, a federal credit union should be able to make a business decision of whether it will own the property. The decision of how to structure a leasing program will understandably vary from one credit union to another. NCUA reports that there are currently about 750 federal credit unions engaged in leasing, and we are sure there is much variety in how those leasing programs operate. No safety and soundness reason exists to mandate one approach.
2. If NCUA does not require a federal credit union to own the leased property, but permits it to be a first lienholder, should a federal credit union be required to obtain a power of attorney from the leasing company? We would consider obtaining a power of attorney to be a good business practice in all situations we can think of; this is a practice we assume the credit union?s legal counsel would recommend. We question whether such details are necessary in a leasing regulation, however.
3. Should a federal credit union be required to receive a full assignment of the lease in an indirect lease financing arrangement? Similar to our answer to question two, we would consider obtaining a full assignment of the lease to be a good business practice in most instances, but again we question whether such details are necessary in a leasing regulation. The Comptroller's leasing regulation certainly does not dictate the specific requirements posed by these questions for bank leasing programs.
The proposal, as does IRPS 83-3, states that the lease must be a full payout lease, which means that the FCU must recoup its entire investment in the leased property, with a reasonable "residual value estimate" not exceeding 25% of the original cost of the leased property unless guaranteed. The residual value (i.e. the projected future value of the leased property at the end of the lease contracting period) may be greater than 25% only if a financially capable party guarantees the full value of the property. The proposal states that the guarantor may be the manufacturer or an insurance company with a rating of at least B+, and that the FCU must maintain statistics documenting the financial resources of the guarantor. While IRPS 83-3 also requires a "financially capable party," it does not contain the B+ rating standard or any other specific rating level.
NCUA specifically requests answers to the following two questions:
4. Should NCUA raise the 25% residual value limit? Comments we received in answer to this question were notably split. We understand that many residual values on automobile leases are greater than 25% and therefore guarantees (insurance) are almost universal. We are also told that the present method of calculating residual values on vehicles by insurance companies results in almost all insurance claims being denied, making credit unions understandably frustrated about being required to purchase such insurance. Moreover, this type of insurance is very expensive.
Some commenters felt that the level of permissible residual value without a guarantee should be treated as a business decision left to the credit union. These commenters point out that they make automobile loans every day and have no regulatory requirement to insure the transaction in case there is a repossession. Others urge NCUA to raise the 25% residual value threshold at which point insurance must be purchased, in essence to allow federal credit unions to self-insure up to a certain percentage, such as 50%. One commenter urged NCUA at least to correct the problem raised by the language of the proposed regulation which seems to forbid an insurance policy that contains deductibles.
CUNA is aware that the Comptroller's leasing rule requires insurance above the 25% residual value level, although that regulation provides greater flexibility as to what companies can be used as the guarantor (see the next question and answer). We are also aware of recent problems due to "miscalculations" of residual value estimates. Nevertheless, hearing about the realities of how questionable the value of the insurance actually is leads us to ask NCUA to consider raising the permissible level of the residual value estimate before insurance must be purchased. The actual percentage probably should vary depending on the length of the lease and perhaps the type of property involved, which NCUA would need to determine after some specific discussions with leasing experts. An accompanying safeguard, however, could be issuance by the agency of guidelines on what steps NCUA expects the credit union to take to "self-insure" that increased risk. We think that this approach would balance credit unions' interest in being competitive in the leasing marketplace with NCUA's concerns about managing the risks associated with leasing.
5. Should NCUA establish a minimum rating for insurance companies used in leasing arrangements? If so, what rating should be used? We do not think such detail is needed in this regulation. The Comptroller's regulation merely states that the insurance company is acceptable if the bank "determines, and demonstrates by appropriate documentation, that the guarantor has the resources to meet the guarantee and the guarantor is not an affiliate...." We think 714 should contain similar language, rather than incorporating a minimum acceptable rating into the regulation.
Regarding one other point not addressed by the questions, CUNA strongly supports NCUA's determination that the loan interest rate ceiling applicable to federal credit union loan products is inapplicable to leases.
CUNA appreciates the opportunity to provide comments on this proposal and we will be happy to answer any questions raised by our comments.
Kathleen O. Thompson
Senior Vice President, Regulatory Affairs