CUNA Regulatory Comment Call
October 8, 1999
NCUAs Proposal on Leasing
NCUA is requesting comments on a proposed rule to update and redesignate NCUA's long-standing policy statement on leasing, Interpretive Ruling and Policy Statement (IRPS) 83-3, as an NCUA regulation. Comments are due within 60 days after the rule is published in the Federal Register, which should be in the next few days. Please submit your comments to CUNA by December 2. Please feel free to fax your responses to CUNA at 202-371-8240; e-mail them to Associate General Counsel Mary Dunn or to Assistant General Counsel Jeffrey Bloch; or mail them to Mary or Jeff in c/o CUNA's Regulatory Advocacy Department, 805 15th Street, NW, Suite 300, Washington, DC 20005. You may also contact us if you would like a copy of the proposed rule or you may access it on the Internet.
In 1983, NCUA issued IRPS 83-3 stating that federal credit unions (FCUs) can lease personal property to members if the leasing of the personal property is the functional equivalent of secured lending. To be the functional equivalent of secured lending, a lease has to be a net, full payout lease with an estimated residual value not exceeding 25%, unless guaranteed. An FCU engaged in leasing also has to retain salvage powers over the leased property and maintain a contingent liability insurance policy with an endorsement for leasing.
IRPS 83-3 permits FCUs to engage in either direct or indirect leasing where an FCU can either purchase the property from a third party for the purpose of leasing it to a member or purchase the lease and the lease property after the lease is executed between the member and the third party. FCUs can also engage in open-end or closed-end leasing. That is, an FCU can either require the member to assume the risk for the difference between the residual value and the actual value of the property at lease-end or the FCU can assume this risk.
In subsequent private opinion letters, NCUA concluded that FCUs do not have to own the leased property in an indirect leasing arrangement in states that require leasing entities to be licensed dealers. However, the FCU has to be named the sole lienholder on the leased property and has to be granted an unconditional, irrevocable power of attorney to transfer the property to the FCU.
On October 29, 1998, the NCUA Board issued a proposed leasing rule. After receiving comments, the NCUA Board has now decided to issue this second proposed rule, which provides for an additional opportunity for comment.
BRIEF DESCRIPTION OF THE PROPOSALRequirement to Own the Leased Property
The proposed rule will authorize 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 adopts 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.
In our comment letter in response to the rule proposed in October 1998, CUNA and others suggested deleting the requirement of obtaining full assignment, noting that such a decision should be made by the FCU. The current proposed rule does not incorporate this suggestion. In the Supplementary Information, the NCUA Board notes that language that assigns only one or more particular rights and remedies under the lease would not constitute a "full assignment." The Board also notes that the security agreement must set forth the terms and conditions upon which the leasing company or member may be in default. The current proposed rule removes the requirement for a power of attorney, although the FCU may use one if it seems appropriate for any particular arrangement. This removal was suggested by CUNA in our comment letter to the rule proposed in October 1998.
General Lease Requirements
The following are the lease requirements:
- the lease must be a net lease, which is when 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% of the original cost of the leased property, unless the amount above 25% is guaranteed, and the estimated value must be reasonable in light of all circumstances.
If the estimated residual value exceeds 25% of the original cost of the leased property, the amount above 25% must be guaranteed by a "financially capable party," which may include the manufacturer. The guarantor may also be an insurance company with an A.M. Best rating of at least a B+, or an equivalent rating from another major rating company. The FCU must have the financial documentation to show that the guarantor has the ability to fulfill the guarantee.
In comment letters sent in response to the rule proposed last October, CUNA and others suggested raising the 25% residual value ceiling and removing the requirement of a B+ rating for the guarantors. Unfortunately, NCUA decided not to incorporate these suggestions.
The FCU must retain salvage powers over the leased property, which will allow the FCU to take action if there is an unanticipated change in conditions that increases exposure to risk. The FCU must also maintain a contingent liability insurance policy with an endorsement for leasing or be named as the co-insured if the FCU does not own the leased property. This must be obtained from an insurance company with an industry rating of at least a B+.
The proposed rule clarifies that NCUA's regulations on early prepayment and interest rates are not applicable to leases. The Consumer Leasing Act (CLA) and Regulation M govern Early termination.
Indirect leasing arrangements will not be subject to NCUA's eligible obligation rules if the FCU: 1) reviews the lease and other documents to determine that the arrangement complies with leasing policy; and 2) receives a full assignment of the lease no more than five business days after it is signed by the member and a leasing company.
The FCU must also comply with the following laws and regulations:
- the CLA and Regulation M;
- state laws on consumer leasing if they are either consistent with, or provide better protection than, the CLA; and
- NCUA's lending rules, except as noted above.
- In the Supplementary Information, the NCUA Board notes that language that assigns only one or more particular rights and remedies under the lease would not constitute a "full assignment." Should the rule include a model form or standard language that would address NCUA's concern?
- The Supplementary Information also notes that the security agreement must set forth the terms and conditions upon which the leasing company or member may be in default. Should the rule include a model form or standard language that would address NCUA's concern?
- The Officer of the Comptroller of the Currency (OCC) imposes a 25% residual value limit on bank leases but does not impose rating requirements on insurance companies that guarantee amounts in excess of 25%. NCUA's proposed rule is more restrictive because it imposes both the 25% residual value limit and imposes a rating requirement on insurance companies. NCUA's rule could be more analogous to OCC's rule be either eliminating the rating requirement for insurance companies or raising the 25% residual value limit. Which would you prefer? What justification could we provide NCUA to eliminate both the rating requirement and raise the 25% residual value limit?
- Other comments?
Eric Richard General Counsel (202) 508-6742 firstname.lastname@example.org |
Mary Mitchell Dunn SVP & Associate General Counsel (202) 508-6736 email@example.com
Jeffrey Bloch Assistant General Counsel (202) 508-6732 firstname.lastname@example.org
Catherine Orr Senior Regulatory Counsel (202) 508-6743 email@example.com