Leasing

NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 714

Leasing

AGENCY: National Credit Union Administration (NCUA).

ACTION: Proposed regulation.

-----------------------------------------------------------------------

SUMMARY: The proposed leasing regulation updates and redesignates

NCUA's long-standing policy statement on leasing, Interpretive Ruling

and Policy Statement (IRPS) 83-3, as an NCUA regulation. IRPS 83-3

authorizes federal credit unions to engage in either direct or indirect

leasing and either open-end or closed-end leasing of personal property

to their members if such leasing arrangements are the functional

equivalent of secured loans. In addition, the proposed regulation

formalizes NCUA's position, set forth in legal opinion letters, that

FCUs do not have to own the leased property in an indirect leasing

arrangement if certain requirements are satisfied.

DATES: Comments must be received on or before December 14, 1999.

ADDRESSES: Direct comments to Becky Baker, Secretary of the Board. Mail

or hand-deliver comments to: National Credit Union Administration, 1775

Duke Street, Alexandria, Virginia 22314-3428. Fax comments to (703)

518-6319. E-mail comments to [email protected]. Please send comments

by one method only.

FOR FURTHER INFORMATION CONTACT: Paul M. Peterson, Staff Attorney,

Division of Operations, Office of the General Counsel, at the above

address or by telephone: (703) 518-6555.

SUPPLEMENTARY INFORMATION:

A. Background

In 1983, the NCUA Board issued Interpretive Ruling and Policy

Statement (IRPS) 83-3, Federal Credit Union Leasing of Personal

Property to Members, 48 FR 52560 (November 21, 1983), stating that

federal credit unions (FCUs) can lease personal property to their

members if the leasing of the personal property is the functional

equivalent of secured lending. The NCUA Board did not want FCUs engaged

in leasing to assume burdens or subject themselves to risks greater

than those ordinarily incident to secured lending. The NCUA Board

determined that for leasing to be the functional equivalent of secured

lending, a lease had to be a net, full payout lease with an estimated

residual value not exceeding 25% unless guaranteed. In addition, an FCU

engaged in leasing had to retain salvage powers over the leased

property and maintain a contingent liability insurance policy with an

endorsement for leasing.

In the supplementary section of IRPS 83-3, the NCUA Board stated

that FCUs could engage in either direct or indirect leasing. That is,

an FCU could either purchase property from a third party for the

purpose of leasing such property to a member or purchase the lease and

the leased property after the lease had been executed between the third

party and the member. Further, FCUs could engage in either open-end or

closed-end leasing, that is, an FCU could either require a member to

assume the risk and responsibility for any difference in the estimated

residual value and the actual value of the property at lease end or

assume such risk itself.

After IRPS 83-3 was issued, NCUA received a number of inquiries

regarding whether an FCU must own the leased property. NCUA responded

through legal opinion letters that, in states requiring an entity

engaged in leasing to be a licensed dealer, which involved posting a

bond and complying with other state regulatory requirements, an FCU did

not have to own the leased property. However, the FCU had to be named

as the sole lienholder on the leased property and granted an

unconditional, irrevocable power of attorney to transfer title to the

leased property to the FCU.

Thereafter, the leasing industry argued that, irrespective of state

limitations, an FCU should be able to take a lien on the leased

property instead of having to own the property. The leasing industry

stated that an FCU would be insulated from tort liability by not being

the owner of the leased property and that an FCU's member would receive

lower lease payments if a third-party lessor (the leasing company) was

able to take advantage of certain tax benefits available only when the

leasing company retained ownership of the property. NCUA concluded in

legal opinion letters that although the direct and indirect leasing

arrangements described in the supplementary section of IRPS 83-3

resulted in an FCU owning the leased property, such ownership was not

required. NCUA's position was that the purchase or assignment of a

lease and the receipt of a lien on the leased property was a form of

permissible indirect leasing if the following requirements were

satisfied: (1) The FCU was named as the sole lienholder on the leased

property; (2) the FCU was assigned all of the leasing company's rights

under the lease; and (3) the FCU obtained an unconditional, irrevocable

power of attorney to transfer title in the leased property to the FCU.

NCUA undertook the proposed redesignation of IRPS 83-3 as an NCUA

regulation as part of a regulatory review of all of its IRPS. Upon

review of IRPS 83-3, the NCUA Board determined that it would be better

suited as a regulation. 62 FR 11773 (March 13, 1997). The NCUA Board's

goal in redesignating IRPS 83-3 as a regulation is to increase

regulatory effectiveness by establishing a rule that states NCUA's

current position on leasing, is easy to locate, and sets forth safety

and soundness requirements to protect FCUs engaged in leasing.

On October 29, 1998, the NCUA Board issued a notice of proposed

rulemaking and request for comment on leasing. 63 FR 57950 (October 29,

1998). The proposed leasing regulation adopted the policy on leasing

set out in IRPS 83-3 and incorporated NCUA's position, set forth in

legal opinion letters, that FCUs do not have to own the leased property

in indirect leasing if certain requirements are satisfied. The comment

period expired on January 27, 1999.

B. Comments

NCUA received fourteen comments on the proposed leasing regulation.

Comments were received from five federal credit unions, one state-

chartered credit union, three state leagues, two national credit union

trade associations, one leasing company, one bank trade association,

and a joint comment from an auditing company

[[Page 55867]]

and a bank consulting company. All commenters, except one, supported

the NCUA Board's effort to establish a regulation on the leasing of

personal property. The dissenting commenter believed that a leasing

regulation was unnecessary because NCUA examiners could monitor an

FCU's leasing program during regular examinations.

The NCUA Board has thoroughly evaluated the comments and has

incorporated many of the suggested changes. Due to these changes to the

original proposed leasing regulation, the Board has decided to issue a

second proposed leasing regulation for additional comments.

C. Format

In drafting the proposed leasing regulation, the NCUA Board chose

to use a plain English, question and answer format. The Board supports

plain English as a means to increase regulatory comprehension and

improve compliance among those affected by the regulation. Plain

English drafting emphasizes the use of informative headings (often

written as a question), lists and charts where appropriate, non-

technical language, and sentences in the active voice. The NCUA wrote

this proposed regulation as a series of questions and answers. The word

``you'' in an answer refers to an FCU.

Most commenters favored the NCUA Board's use of the question and

answer (Q&A) style. One commenter, however, thought that Q&A style

increased the potential for misunderstanding and confusion. The NCUA

Board agrees that some regulations are more appropriate than others for

Q&A. The NCUA Board believes that Q&A works well in the context of the

leasing regulation.

D. Section-by-Section Analysis

Proposed Section 714.1--What Does This Part Cover?

Section 714.1 of the proposed regulation stated that Part 714

covers the standards and requirements that an FCU must follow when

engaged in the lease financing of personal property. One commenter

suggested that the term ``lease financing'' be replaced with

``transactions involving leasing.'' The commenter believes that there

is a distinction between the terms ``leasing'' and ``financing,'' thus,

using the term ``lease financing'' may lead to confusion. The NCUA

Board agrees with the commenter and has changed ``lease financing'' to

``leasing.''

Proposed Section 714.2--What Are the Permissible Leasing Arrangements?

Section 714.2 of the proposed regulation stated that FCUs may

engage in either direct or indirect leasing. One commenter suggested

certain changes in Sec. 714.2(b) to take into consideration the varying

relations that may exist among parties in a leasing arrangement.

Specifically, this commenter suggested that the NCUA Board should amend

the sentence ``In indirect leasing, you purchase a lease and the leased

property for the purpose of leasing such property to your member after

the lease has been executed between a third party and your member'' by

adding the phrase ``except as provided in Sec. 714.3,'' substituting

the word ``having'' for the second ``leasing,'' and inserting the word

``leased'' after the word ``property.'' The NCUA Board has added the

phrase, ``except as provided in Sec. 714.3.'' The NCUA Board believes

that adding this cross-reference points the reader to a permissible

form of indirect leasing which allows for title in the leased property

to remain with a third party. However, the NCUA Board has not

incorporated the commenter's other suggested changes. The NCUA Board

wants the regulation to state clearly that an FCU, not another party,

is to lease the personal property to its member. The commenter's

suggested changes would imply otherwise.

In addition, the NCUA Board has added the text of prior Sec. 714.6

to this section. Section 714.6 stated that an FCU can engage in either

closed-end or open-end leasing, that is, either an FCU can assume the

risk for the difference between the estimated residual value and the

actual value of property at lease end or the lessee can assume the

risk. Also, one commenter noted that the phrase ``relied upon residual

value'' should be replaced with the phrase ``estimated residual

value.'' The NCUA Board made this change for consistency and accuracy.

Proposed Section 714.3--Must You Own the Leased Property?

Section 714.3 of the proposed regulation states that an FCU does

not have to own the leased property in an indirect leasing arrangement

if three requirements are met: (1) The FCU receives a full assignment

of the lease; (2) the FCU is named as the sole lienholder of the

property; and (3) the FCU receives an unconditional, irrevocable power

of attorney to transfer title in the leased property to itself.

The commenters supported the NCUA Board's decision not to require

that an FCU own the leased property in an indirect leasing arrangement.

One commenter noted that owning the leased property is not necessary

since, in a loan or credit sale, an FCU does not own the underlying

asset, but only has a lien. Three commenters contended that owning the

leased property could open an FCU up to potential liability issues, tax

issues, and state regulation and licensing requirements.

Six commenters, however, stated that they were against requiring a

full assignment of the lease. Four of these commenters believed that

the decision of whether to obtain a full assignment of a lease should

be made by an FCU based on the circumstances of the leasing

arrangement. Another commenter stated that the full assignment

requirement was unnecessary because sales of or liens in leases are

subject to Uniform Commercial Code (UCC) perfection rules. This

commenter contended that a full assignment would not protect an FCU if

a leasing company went bankrupt unless the full assignment had been

perfected. In addition, one commenter expressed concern that, if a full

assignment is required, leasing companies might refuse to do business

with FCUs since they would not retain ownership of the leases. The

commenter stated that leasing companies receive certain tax benefits

from lease ownership and that, without those tax benefits, leasing

companies may have no incentive to do business with FCUs.

Three commenters were against requiring an FCU to obtain a power of

attorney. Two of the commenters stated that such a decision should be

made by an FCU's attorney based on the circumstances of the FCU's

leasing arrangement. Further, one of these commenters stated that a

power of attorney is unnecessary because Article 9 of the Uniform

Commercial Code provides an FCU with the right to take possession and

dispose of collateral upon a default without a power of attorney. In

addition, one commenter stated that a power of attorney provides little

protection to an FCU in the face of a leasing company bankruptcy. The

commenter suggested that obtaining a security agreement that grants an

FCU a sole lien position in the leased property with the right to

foreclose in the event of a default would be more beneficial.

The Board has reconsidered this form of indirect leasing in light

of these comments and the recent bankruptcy of a leasing company

(Security Excel Corporation, No. 96-32410 (Bankr. N.D. Ind.)

(hereinafter Security Excel). In Security Excel, a bankruptcy that

affected several credit unions, the trustee argued that the leasing

company, not the FCU, owned both the leases and the leased property.

The trustee further argued that the FCU had no security interest in

either the leases or the leased property and, in the alternative, that

whatever security interests might exist

[[Page 55868]]

were not properly perfected. Ultimately, the Security Excel case was

settled, at some significant expense to certain credit unions.

As demonstrated in Security Excel, leasing arrangements that

involve leaving title to the leased property in the name of the a

third-party leasing company are complex and may involve significant

risks to the FCU. In most of these leasing company arrangements, the

NCUA Board understands that the FCU finances the full, or close to the

full, value of the leased property and that the FCU will ultimately

recover its full investment only if it collects all the lease payments

and recoups all the proceeds from the leasing company's post-lease sale

of the property. The FCU must be concerned about both the credit

worthiness of the member and the solvency of the leasing company. In

the event of insolvency of one or both parties, the FCU must be able to

enforce its right to payment under the lease and, if necessary, its

right to secure and dispose of the property as the collateral securing

receipt of both lease payments and proceeds due from the post-lease

property sale.

The fact that the FCU has no authority to lend money to a nonmember

leasing company that is not a credit union service organization further

complicates these arrangements. For example, the FCU must ensure that,

despite the lack of a creditor-debtor relationship with the leasing

company, the FCU has a well-defined security interest in the leased

property. In addition, the FCU must make sure that its rights in the

leased property and its ownership of the lease are properly recorded so

as to perfect those rights against bankruptcy trustees and other third-

party creditors. To take another example, a vehicle owned by a leasing

company may be considered as ``inventory'' under the relevant

commercial codes, and protection of a security interest in such

inventory may well require steps beyond recording the lien on the

certificate of title and filing the certificate with the department of

motor vehicles.

In light of these issues, the legal arguments advanced in Security

Excel, and the comments received on our previously proposed Sec. 714.3,

the NCUA Board is proposing that an FCU that does not own the leased

property must take certain precautions.

First, the FCU must receive a full assignment of the lease, meaning

that the FCU must become the owner of the lease. The NCUA Board

believes that, if an FCU receives a full assignment of a lease and the

assignment is properly recorded, the lease should not be subject to the

claims of a bankruptcy trustee acting on behalf of a leasing company

that becomes bankrupt. The Board notes that an assignment of various

rights under a lease, such as the right to receive payments, is not the

same as a full assignment of the lease. There are varying ways that an

acceptable assignment may be drafted. Some examples are: ``Leasing

Company assigns this lease to ABC Federal Credit Union'' or ``Leasing

Company makes a full assignment of this lease to ABC Federal Credit

Union'' or ``Leasing Company conveys all of its right, title, and

interest in this lease to ABC Federal Credit Union.'' Language that

purports to assign only one or more particular rights or remedies under

the lease would not constitute a full assignment of the lease and so is

unacceptable.

Second, the FCU must be the sole lienholder of the leased property.

This language is consistent with IRPS 83-3, requiring that the lease

must be the functional equivalent of a secured loan.

Third, the FCU must enter into a security agreement with the

leasing company to protect the FCU's lien on the property. The security

agreement must describe the FCU's interest in the property. It must set

forth the terms and conditions upon which the leasing company or the

member may be in default and thus entitle the FCU to take immediate

possession of the property and dispose of it. The security agreement

must be signed by the leasing company. The FCU must also take any

further steps necessary to ensure that its security is properly

perfected to protect the FCU should the leasing company be forced into

bankruptcy. Thus, for example, if the leased property constitutes the

lessor's inventory under state law, perfection may require filing with

the appropriate state agency, such as the Secretary of State. See the

Uniform Commercial Code, 9-302 and 9-401.

The NCUA Board believes that a power of attorney may be unnecessary

for an FCU holding a well-defined and perfected security interest in

the leased property. In the event of a default by leasing company or

lessee, the FCU should be able to take possession and dispose of the

collateral without the power of attorney. Thus, the new proposed rule

no longer contains any requirement for a power of attorney. The Board

notes, however, that the proposed rule does not prohibit an FCU from

employing a power of attorney, in addition to a security agreement, as

the FCU sees fit in any particular leasing arrangement.

Proposed Section 714.4--What Are the Lease Requirements?

Section 714.4 states that leases must be net, full payout leases,

with a maximum estimated residual value of 25% of the original cost of

the leased property unless guaranteed. One commenter suggested that the

NCUA Board revise the description of net lease to allow FCUs to finance

certain dealer included services, including mechanical breakdown

protection, credit life and disability premiums, and license and

registration fees. The Board does not believe that these dealer

services, which are generally additional services purchased by a lessee

to satisfy his or her obligations under the ``net'' lease concept,

should be financed. The Board notes that these costs, if financed by

the credit union, may raise safety and soundness issues, particularly

if the lessee has made little or no down payment and so there is no

value in the collateral to secure the financing of these particular

services.

One commenter stated that the wording used to describe the full

payout requirement was confusing and failed to specify an FCU's source

of recovery to meet the requirement. The NCUA Board agrees with the

commenter and has added a sentence stating that an FCU's source of

recovery will come from the lessee's payments and the residual value of

the leased property at the expiration of the lease term.

Five commenters wanted the NCUA Board to raise the estimated

residual value limit. These commenters believed that the 25% estimated

residual value limit was restrictive and placed FCUs at a disadvantage

against other lenders that were not required to obtain a guarantee when

an estimated residual value greater than 25% was used. Further, the

five commenters suggested that the NCUA Board allow FCUs to self-insure

against the increased risk associated with a higher estimated residual

value. One commenter suggested that the NCUA Board allow FCUs to set

their own estimated residual values as long as the combination of

residual value insurance, manufacturer guarantees, and residual value

reserves for loss maintained over the life of the leases is sufficient

to cover the residual value risks assumed.

The NCUA Board believes that the risks associated with leasing are

substantially reduced due to the 25% limit placed on estimated residual

values and has not raised the limit. The NCUA Board notes that the

Office of the Comptroller of the Currency (OCC) has very similar rules

on estimated residual values. The OCC places a 25%

[[Page 55869]]

estimated residual value limit on bank leases, and requires banks to

guarantee estimated residual values in excess of the 25% limit. 12 CFR

23.21(a)(2).

The Board also notes that the purpose of the leasing regulation is

to facilitate a consumer financing transaction with a member that is

roughly the equivalent of a secured loan. In the closed-end lease

arrangement, which is the most common arrangement, the member lessee is

not liable to the FCU for the payment of the residual value at the end

of the lease. As the estimated residual value increases, the member's

financial responsibility to the FCU, as a percent of the FCU's total

investment, decreases correspondingly. If the NCUA Board were to permit

significantly higher estimated residual value amounts, a lease

transaction would lose its character of being substantially equivalent

to secured lending to its member. Instead, the credit union would be

dependent on the sale of the vehicle to recoup a significant part of

its investment, and so would be in a business very similar to used car

sales. Credit unions may not engage in the business of selling cars.

See M&M Leasing Corporation v. Seattle First National Bank, 563 F.2d

1377 (9th Cir. 1977), cert. denied, 436 U.S. 958 (1978).

Proposed Section 714.5--What Is Required if an Estimated Residual Value

Greater Than 25% Is Used?

Section 714.5 of the proposed regulation incorrectly stated the

guarantee requirement when the estimated residual value exceeds 25% of

the original cost of the leased property. In issuing the proposed

regulation, the Board's intention was to adopt the leasing policy and

requirements as contained in IRPS 83-3. Proposed Sec. 714.5 incorrectly

stated that, if a residual value greater than 25% was used, the full

estimated residual value of the leased property must be guaranteed.

Five commenters noted that a guarantee of the full value should not be

required. IRPS 83-3 requires that only the estimated residual value

above 25% of the original cost be guaranteed and, in this second

proposed regulation, this section now reflects the requirement as

stated in IRPS 83-3.

One commenter suggested revising Sec. 714.5 to permit others

parties, in addition to a manufacturer or insurance company, to

guarantee the estimated residual value. IRPS 83-3 allowed the

manufacturer, the lessee, or third party not affiliated with the FCU to

guarantee the estimated residual value. The proposed regulation

eliminated the lessee as a guarantor on the basis that it would be

difficult to collect from a lessee or monitor the lessee's

creditworthiness and capacity to meet the guarantee. However, the NCUA

Board has revised Sec. 714.5 to allow any financially capable party to

guarantee the estimated residual value. Thus, a lessee, if properly

qualified, could guarantee the estimated residual value. This approach

is consistent with IRPS 83-3.

In addition, four commenters were against requiring insurance

companies guaranteeing estimated residual values to have at least a B+

rating. These commenters believed that such a requirement was

unnecessary and noted that the OCC's leasing regulation did not

establish such a requirement. The NCUA Board believes that establishing

a minimum rating standard ensures that the institutional guarantor has

the resources to meet the guarantee.

The NCUA Board has amended the rating requirement to read ``The

guarantor may also be an insurance company with an A.M. Best rating of

at least a B+, or with the equivalent of at least an A.M. Best B+

rating from another major rating company.'' This amendment clarifies

the source of the B+ rating and specifies that ratings from other

rating companies may be used to establish financial capability.

Proposed Section 714.6--Are You Required To Retain Salvage Powers Over

the Leased Property?

Section 714.6 states that an FCU must retain salvage powers over

the leased property. One commenter suggested that the NCUA Board add

the language ``pursuant to your contractual rights'' contained in

subsection (b) to subsection (a) which sets forth a credit union's

salvage powers. The NCUA Board does not believe that this additional

language is needed and has left this section unchanged. However, the

NCUA Board has deleted the reference to the assignment of ``a vendor's

interest in a lease'' in Sec. 714.6(b). The FCU must receive an

assignment of the entire lease as required by Sec. 714.3(a).

Proposed Section 714.7--What Are the Insurance Requirements Applicable

to Leasing?

Section 714.7(a) requires an FCU to maintain a contingent liability

insurance policy if it owns the leased property or, if it does not, it

must be named as the co-insured. One commenter suggested that the NCUA

Board also require an FCU to obtain excess liability insurance as well

as the contingent liability insurance. The NCUA Board believes that

such additional insurance is not needed to protect FCUs. Section

714.7(b) states that the lessee is to carry liability or collateral

protection insurance on the leased property. The NCUA Board intended

that both liability and collateral protection insurance were to be

purchased, and has changed the word ``or'' to ``and.'' In addition, one

commenter stated that, for the most part, FCUs are named as the loss

payee on a physical damage coverage policy and as the additional

insured on a liability insurance policy and this should be reflected in

the proposed leasing regulation. The NCUA Board has adopted the

commenter's changes.

Proposed Section 714.8--What Rate of Interest May Be Charged Under a

Lease?

Section 714.8 stated that an FCU engaged in leasing may charge an

interest rate higher than the usury limit set for FCUs engaged in

lending. One commenter stated that Sec. 714.8 reflects a

misunderstanding of leases since leases do not have interest rates,

only an implicit rate which may or may not be received depending on the

ultimate residual recovery. The NCUA Board has reworded this section to

eliminate the confusion. The Board also added language to clarify that

12 CFR 701.21(c)(6), prohibiting penalties for early payment, does not

apply to leasing arrangements. Early termination is governed by the

Consumer Leasing Act, 15 U.S.C. 1667-67f, and Regulation M, 12 CFR part

213.

Proposed Section 714.9--When Engaged in Indirect Leasing, Must You

Comply With the Purchase of Eligible Obligation Rules Set Forth in

Sec. 701.23 of This Chapter?

Section 714.9 states that an FCU may participate in indirect

leasing arrangements under its authority to make loans. The NCUA Board

intended Sec. 714.9 to inform FCUs that their participation in an

indirect leasing arrangement does not subject them to the purchase of

eligible obligation rules. However, two commenters stated that

Sec. 714.9 was unclear. Thus, the NCUA Board has added language to

clarify this section and has changed the section title.

Proposed Section 714.10--What Other Laws Must You Comply With When

Engaged in Leasing?

Section 714.10 sets forth the additional laws that an FCU must

comply with when engaged in leasing. One commenter requested that the

NCUA Board clarify whether FCUs are subject to state leasing disclosure

laws. The NCUA Board amended Sec. 714.10 to point out that credit

unions must

[[Page 55870]]

comply with the Consumer Leasing Act (the Leasing Act). 15 U.S.C. 1667-

67f. Section 1667e of the Leasing Act generally requires that lessors

comply with state leasing laws if the state law is not in conflict with

the Leasing Act or provides greater consumer protection than the

Leasing Act. The Board also notes that, with regard to federal and

state lending laws, the proposed language of Sec. 714.10 requires

compliance with Sec. 701.21 of this chapter. Subsection 701.21(b)

discusses the applicability of other federal and state lending laws in

some detail.

Another commenter stated that the disclosure requirements of

Regulation M are cumbersome and not easily understood, thus, NCUA

should simplify the leasing disclosure requirements and employ

something similar to the ``fed box'' used for truth-in-lending

disclosures. The Board notes that there are already model disclosure

forms in the appendix to Regulation M, and these forms set out leasing

disclosures in a manner similar to the truth-in-lending ``fed box.''

E. Additional Comments

Two commenters suggested that the NCUA Board address balloon note

programs or guaranteed buy-back programs in the proposed leasing

regulation. The commenters did not provide any details explaining the

balloon note or guaranteed buy-back programs.

The primary distinction between a loan and a lease is who owns the

underlying property. In a loan, the borrower owns the property and the

lender is a lienholder. In a lease, the borrower-lessee has no

ownership or lienhold interest in the property. Accordingly, it is the

NCUA Board's position that programs which involve loans and not leases

are significantly different from leasing arrangements, and should not

be addressed in a leasing regulation.

However, the NCUA Board would like to note, as stated in legal

opinion letters, that balloon note or guarantee buy-back programs

giving any borrower on a loan the option of returning property directly

to the FCU at the end of the financing period are impermissible.

Programs that authorize the borrower to turn the property into a third

party for liquidation and cash recoupment may be acceptable.

F. Regulatory Procedures

Regulatory Flexibility Act

The NCUA Board certifies that the proposed regulation will not have

a significant impact on a substantial number of small credit unions.

Most small credit unions do not offer lease financing arrangements to

their members. Accordingly, a regulatory flexibility analysis is not

required.

Paperwork Reduction Act

The NCUA Board has determined that the requirement in Sec. 714.5

that an FCU must obtain or have on file statistics documenting that a

guarantor has the resources to meet an estimated residual value

guarantee constitutes a collection of information under the Paperwork

Reduction Act. The NCUA Board estimates that it will take an average of

one to two hours to acquire, maintain, and evaluate such documentation.

The NCUA Board estimates that approximately 750 FCUs are engaged in

leasing, so that the total annual collection burden is estimated to be

no more than 1500 hours. The NCUA Board submitted a copy of this rule

to the Office of Management and Budget (OMB) for its review. OMB

assigned control number 3133-0151 to this information collection. The

control number will be displayed in the table at 12 CFR Part 795.

Executive Order 12612

Executive Order 12612 requires NCUA to consider the effect of its

actions on state interests. The proposed regulation only applies to

federal credit unions. The NCUA Board has determined that the proposed

regulation does not constitute a significant regulatory action for the

purposes of the Executive Order.

G. Agency Regulatory Goal

NCUA's goal is to promulgate clear and understandable regulations

that impose minimal regulatory burden. We request your comments on

whether the proposed amendment is understandable and minimally

intrusive if implemented as proposed.

List of Subjects in 12 CFR Part 714

Credit unions, Leasing.

By the National Credit Union Administration Board on October 6,

1999.

Becky Baker,

Secretary to the Board.

Accordingly, NCUA proposes to add Part 714 to read as follows:

PART 714--LEASING

Sec.

714.1 What does this part cover?

714.2 What are the permissible leasing arrangements?

714.3 Must you own the leased property in an indirect leasing

arrangement?

714.4 What are the lease requirements?

714.5 What is required if an estimated residual value greater than

25% is used?

714.6 Are you required to retain salvage powers over the leased

property?

714.7 What are the insurance requirements applicable to leasing?

714.8 Are the early payment provisions, or interest rate provisions,

applicable in leasing arrangements?

714.9 Are indirect leasing arrangements subject to the purchase of

eligible obligation limit set forth in Sec. 701.23 of this chapter?

714.10 What other laws must you comply with when engaged in leasing?

Authority: 12 U.S.C. 1756, 1757, 1766, 1785, 1789.

Sec. 714.1 What does this part cover?

This part covers the standards and requirements that you, a federal

credit union, must follow when engaged in the leasing of personal

property.

Sec. 714.2 What are the permissible leasing arrangements?

(a) You may engage in direct leasing. In direct leasing, you

purchase personal property from a vendor, becoming the owner of the

property at the request of your member, and then lease the property to

that member.

(b) You may engage in indirect leasing. In indirect leasing, you

purchase a lease and, except as provided in Sec. 714.3, the leased

property for the purpose of leasing such property to your member after

the lease has been executed between a third party and your member.

(c) You may engage in open-end leasing. In an open-end lease, your

member assumes the risk and responsibility for any difference in the

estimated residual value and the actual value of the property at lease

end.

(d) You may engage in closed-end leasing. In a closed-end lease,

you assume the risk and responsibility for any difference in the

estimated residual value and the actual value of the property at lease

end.

Sec. 714.3 Must you own the leased property in an indirect leasing

arrangement?

You do not have to own the leased property in an indirect leasing

arrangement if:

(a) You obtain a full assignment of the lease. A full assignment is

the assignment of all the rights, interests, obligations, and title in

a lease to you, that is, you become the owner of the lease;

(b) You are named as the sole lienholder of the leased property;

(c) You receive a security agreement, signed by the leasing

company, granting you a sole lien in the leased property and the right

to take possession and dispose of the leased property in the

[[Page 55871]]

event of a default by the lessee, a default in the leasing company's

obligations to you, or a material adverse change in the leasing

company's financial condition; and

(d) You take all necessary steps to record and perfect your

security interest in the leased property. Your state's Commercial Code

may treat the automobiles as inventory, and require a filing with the

Secretary of State.

Sec. 714.4 What are the lease requirements?

(a) Your lease must be a net lease. In a net lease, your member

assumes all the burdens of ownership including maintenance and repair,

licensing and registration, taxes, and insurance;

(b) Your lease must be a full payout lease. In a full payout lease,

you must reasonably expect to recoup your entire investment in the

leased property, plus the estimated cost of financing, from the

lessee's payments and the estimated residual value of the leased

property at the expiration of the lease term; and

(c) Your estimated residual value may not exceed 25% of the

original cost of the leased property unless the amount above 25% is

guaranteed. Estimated residual value is the projected value of the

leased property at lease end. Estimated residual value must be

reasonable in light of the nature of the leased property and all

circumstances relevant to the leasing arrangement.

Sec. 714.5 What is required if an estimated residual value greater

than 25% is used?

You may use an estimated residual value greater than 25% of the

original cost of the leased property if a financially capable party

guarantees the amount above 25% of the original cost of the property.

The guarantor may be the manufacturer. The guarantor may also be an

insurance company with an A.M. Best rating of at least a B+, or with at

least the equivalent of an A.M. Best B+ rating from another major

rating company. You must obtain or have on file financial documentation

demonstrating that the guarantor has the resources to meet the

guarantee.

Sec. 714.6 Are you required to retain salvage powers over the leased

property?

You must retain salvage powers over the leased property. Salvage

powers protect you from a loss and provide you with the power to take

action if there is an unanticipated change in conditions that threatens

your financial position by significantly increasing your exposure to

risk. Salvage powers allow you:

(a) As the owner and lessor, to take reasonable and appropriate

action to salvage or protect the value of the property or your

interests arising under the lease; or

(b) As the assignee of a lease, to become the owner and lessor of

the leased property pursuant to your contractual rights, or take any

reasonable and appropriate action to salvage or protect the value of

the property or your interests arising under the lease.

Sec. 714.7 What are the insurance requirements applicable to leasing?

(a) You must maintain a contingent liability insurance policy with

an endorsement for leasing or be named as the co-insured if you do not

own the leased property. Contingent liability insurance protects you

should you be sued as the owner of the leased property. You must use an

insurance company with a nationally recognized industry rating of at

least a B+.

(b) Your member must carry the normal liability and collateral

protection insurance on the leased property. You must be named as an

additional insured on the liability insurance policy and as the loss

payee on the collateral protection insurance policy.

Sec. 714.8 Are the early payment provisions, or interest rate

provisions, applicable in leasing arrangements?

You are not subject to the early payment provisions set forth in

Sec. 701.21(c)(6) of this chapter. You are also not subject to the

interest rate provisions in Sec. 701.21(c)(7).

Sec. 714.9 Are indirect leasing arrangements subject to the purchase

of eligible obligation limit set forth in Sec. 701.23 of this chapter?

Your indirect leasing arrangements are not subject to the purchase

of eligible obligation rules set forth in Sec. 701.23 of this chapter

if:

(a) You review the lease and other documents to determine that the

arrangement complies with your leasing polices; and

(b) You receive a full assignment of the lease no more than five

business days after it is signed by your member and a leasing company.

Sec. 714.10 What other laws must you comply with when engaged in

leasing?

You must comply with the Consumer Leasing Act, 15 U.S.C. 1667-67f,

and its implementing regulation, Regulation M, 12 CFR part 213. You

must comply with state laws on consumer leasing, but only to the extent

that the state leasing laws are consistent with the Consumer Leasing

Act, 15 U.S.C. 1667e, or provide the member with greater protections or

benefits than the Consumer Leasing Act. You are also subject to the

lending rules set forth in Sec. 701.21 of this chapter, except as

provided in Sec. 714.8 and Sec. 714.9 of this part. The lending rules

in Sec. 701.21 address the preemption of other state and federal laws

that impact on credit transactions.

[FR Doc. 99-26717 Filed 10-14-99; 8:45 am]

BILLING CODE 7535-01-P