CUNA Comment Letter
NCUA's Proposed Rule on Leasing (Part 714)
VIA FACSIMILE (703) 518-6319
December 14, 1999
Ms. Becky Baker
Secretary of the Board
National Credit Union Administration
1775 Duke Street
Alexandria, Virginia 22314-3428
RE: NCUA's Proposed Rule on Leasing (Part 714)
Dear Ms. Baker:
The Credit Union National Association (CUNA) appreciates the opportunity to comment on NCUA's proposed rule on leasing. CUNA represents more than 90 percent of our nation's 11,000 state and federal credit unions.
The proposed rule is intended to update and redesignate NCUA's long-standing policy statement on leasing, Interpretive Ruling and Policy Statement (IRPS) 83-3, as an NCUA regulation. The rule will authorize federal credit unions (FCUs) to engage in either direct or indirect leasing and either open-end or closed-end leasing of personal property if such leasing is the equivalent of a secured loan. The rule will also adopt the position expressed in NCUA's private opinion letters that FCUs do not have to own the leased property in an indirect leasing arrangement. However, in such arrangements, the FCU must take the following actions:
- receive full assignment of the lease;
- be named the sole lienholder of the property;
- receive a security agreement, signed by the leasing company, granting the FCU the sole lien in the leased property, with the right to take possession and dispose of the property in the event of either a default by the lessee or leasing company or a material change in the leasing company's financial condition; and
- take the necessary steps to record and perfect the security interest in the leased property, including any requirement for filing with a state's Secretary of State.
The general lease requirements under the proposed rule will be as follows:
- the lease must be a net lease where the member assumes all burden of ownership, such as maintenance, repair, licensing, registration, taxes, and insurance;
- the lease must be a full-payout lease where the FCU must reasonably expect to recoup the entire investment in the leased property, including the estimated financing costs, from the lease payments and the estimated residual value of the leased property; and
- the estimated residual value may not exceed 25 percent of the original cost of the leased property, unless the amount above 25 percent is guaranteed by a "financially capable party" with a rating that is at least equivalent to an A.M. Best rating of B+.
Our comments focus primary on the requirement of a full assignment of the lease in an indirect leasing arrangement and the requirement that the unguaranteed estimated residual value not exceed 25 percent of the original cost of the leased property
Requirement of a Full Assignment of the Lease
We believe that credit unions should determine for themselves whether obtaining a full assignment is necessary to protect their interests. The Office of the Comptroller's (OCC) leasing rules do not require full assignment. The OCC rules require a perfected lien and treat the end user lessee as the obligor. Likewise, it should not make a difference whether credit unions perfect a lien in or is the owner of the lease, as long as the credit union's rights are perfected by possession.
The decision to obtain a full assignment should be based on the credit unions' business practices. Some credit unions may very well decide that a full assignment is the best method to maintain full control of any situation that may arise, especially in the case of default and vehicle disposition.
The 25 Percent Unguaranteed Residual Value Limit
The unguaranteed residual value limitation is far too restrictive and would place credit unions at a competitive disadvantage with other financial institutions. We believe that NCUA should adopt a flexible approach. An example is the OCC's approach, which allows banks to invest in operating leases up to an amount of ten percent of its assets, without the restriction regarding residual value limits.
By way of background, when banks were first given authority to invest in leases, they were limited to unguaranteed estimated residual values of no greater than 25 percent. However, banks were given an additional authority to engage in personal property leasing under the Competitive Equality Banking Act of 1987 (CEBA). Under this additional authority, banks are permitted to invest ten percent of their net assets in leases that do not meet the full-payout test. These "CEBA leases" are not subject to the 25 percent unguaranteed residual value limit. We also want to note that in a final rule regarding personal property leasing issued in 1996, the OCC noted that banks did not believe that a modification of the 25 percent residual value limit that was already in place was necessary because banks have the ability to use their CEBA leasing authority instead.
We believe that NCUA should follow a similar approach and provide more flexibility regarding the residual value limits. Leasing transactions differ based on such factors as the length of the lease term and the property that is involved. The length of the term and the varying rates at which different vehicles depreciate may both affect the decision regarding the appropriate residual value. Credit unions should have discretion to review these factors to make their own determinations with the assistance of accepted residual leasing guides.
Under the proposed rule, credit unions will be required to absorb the costs necessary to guarantee residual values that exceed 25 percent. This will increase the credit unions' costs of providing leasing services to members, which will ultimately be passed on to the members. This would not be equitable considering that banks and their customers are not required to bear these costs.
We note that the Supplementary Information requires that a security agreement must set forth the terms and conditions upon which the leasing company or member may be in default. We do not believe that this requirement is necessary. These types of agreements generally have provisions that merely state that a party's failure to perform its obligations is an event of default. Therefore, the proposed rule should only state that the credit union should be able to foreclose on its lien in the event of default.
We also noticed that the proposed rule uses the phrase "estimated residual value" instead of the phrase "relied upon residual value," which was used in IRPS 83-3. We believe the term "relied upon residual value" is the appropriate term that should be used in the proposed rule. This preferred term stresses the reliance concept, which focuses on the amount of the residual recovery on which a credit union relies upon in order to satisfy the full-payout test. For example, if a lease has an estimated residual value of 35 percent but the credit union relies only on a 25 percent residual value in order to satisfy the full-payout test, then the lease should not require a guarantee for the amount that exceeds 25 percent. However, the proposed rule would require such a guarantee under these circumstances. We also note that the OCC uses this reliance concept in its rules regarding bank leasing activity.
The Supplementary Information also states that credit unions will be prohibited from including financed added services in a lease contract, such as insurance and service contracts. Although the intent is to ensure that the value of the underlying collateral at the end of the lease is at least equal to the actual residual value, this approach does not recognize that credit unions engaged in direct leasing can often purchase the leased property, especially automobiles, at a price significantly below the manufacturers suggested retail price (MSRP). The discounted price often creates sufficient equity to allow credit unions to offer such financed added services without compromising the intent of the proposed rule.
For example, a credit union could purchase a car for $2000 less than the MSRP and offer $1000 worth of financed added services, which would provide the credit union with greater security than if it paid the MSRP and did not offer any financed added services. However, the proposed rule would prohibit the lease with the financed added services but would permit a lease where the credit union pays the MSRP. This is not logical if the intent of the rule is to ensure that credit unions do not advance funds beyond the value of the underlying collateral. Therefore, we believe the proposed rule should permit inclusion of financed added services in a lease contract, as long as the underlying value of the collateral adequately secures the cost of the lease.
Thank you for the opportunity to comment on NCUA's proposed rule on leasing. If Board members or agency staff have questions about our comments, please give me a call at 202-218-7795.
Assistant General Counsel