Hello, this is Samantha Shares.
This episode covers N C U A's proposed rule on Suretyship and Guaranty;
Segregated Deposit and Collateral.
The following is an audio version of that document.
This podcast is educational and is not legal advice.
We are sponsored by Credit Union Exam Solutions Incorporated, whose
team has over two hundred and forty years of National Credit
Union Administration experience.
We assist our clients with N C U A so they save time and money.
If you are worried about a recent, upcoming, or in process N C U A
examination, reach out to learn how they can assist at Mark Treichel dot com.
Also check out our other podcast called With Flying Colors where we provide tips
on how to achieve success with N C U A.
And now the proposal.
The N C U A Board, referred to as the Board, seeks comment on a proposed rule
to remove the segregated deposit and collateral requirements when a federally
insured credit union, referred to as a F I C U, acts as a surety and guarantor.
Removing this regulation will provide F I C U s with greater flexibility to
design products that meet member needs.
F I C U s would remain subject to the other requirements regarding
surety and guaranty agreements.
Federal credit unions may only engage in activities that are expressly authorized
either by statute or within the federal credit unionâs incidental powers.
The Federal Credit Union Act explicitly grants federal credit unions the
power to, among other activities, make loans to members and to provide
letters of credit on behalf of members.
The accompanying incidental powers provision states that each federal credit
union may exercise such incidental powers as shall be necessary or requisite to
enable it to carry on effectively the business for which it is incorporated.
The Federal Credit Union Act defines the business for which each federal
credit union is incorporated as promoting thrift among its members
and creating a source of credit for provident or productive purposes.
Section seven zero one point two zero, established in two thousand four,
recognizes the ability of federal credit unions to enter into suretyship and
guaranty agreements for their members as an incidental power, providing additional
flexibility to meet member needs.
For example, the regulation allows federal credit unions to become one party in a
three way lending relationship, where the federal credit union agrees to take
responsibility for repayment if the member is unable to meet the lending obligation.
Section seven zero one point two zero defines these arrangements and, to
promote safety and soundness, requires that the federal credit unionâs
obligation be for a fixed amount and duration, that the federal credit unionâs
performance of the agreement creates an authorized loan that complies with
the applicable lending regulations, and that it obtains a segregated
deposit from the member sufficient to cover the potential liability.
As provided in section seven four one point two two one of the N C U
A regulations, these requirements also apply to federally insured state
credit unions that are authorized under state law to enter into
suretyship and guaranty agreements.
The rule was amended in two thousand nineteen as part of a
regulatory reform initiative to reduce burden and improve clarity by
updating internal cross references.
The Board has the legal authority to issue this proposed rule pursuant to
its plenary rulemaking authority under the Federal Credit Union Act and its
specific rulemaking authority under the various acts the Board administers.
Under the Federal Credit Union Act, the N C U A is the chartering and supervisory
authority for federal credit unions and the federal supervisory authority
for federally insured credit unions.
The Federal Credit Union Act grants the N C U A a broad mandate to issue regulations
governing both federal credit unions and all federally insured credit unions.
Section one two zero of the Federal Credit Union Act is a general grant
of regulatory authority and authorizes the Board to prescribe rules and
regulations for the administration of the Federal Credit Union Act.
Section two zero seven of the Federal Credit Union Act is a specific grant of
authority over share insurance coverage, conservatorships, and liquidations.
Section two zero nine of the Federal Credit Union Act is a plenary grant
of regulatory authority to the Board to issue rules and regulations
necessary or appropriate to carry out its role as share insurer for
all federally insured credit unions.
Accordingly, the Federal Credit Union Act grants the Board broad
rulemaking authority to ensure that the credit union industry and
the National Credit Union Share Insurance Fund remain safe and sound.
As part of its deregulatory initiative, the Board proposes to remove paragraphs
c three and d of section seven zero one point two zero, which impose segregated
deposit and collateral requirements when federally insured credit unions
act as a surety and guarantor.
Under these provisions, depending on the nature of the collateral,
a federal credit union must have a perfected security interest in
collateral equal to one hundred or one hundred ten percent of the obligation.
The one hundred percent collateral category includes cash, obligations
of the United States or its agencies, obligations fully guaranteed by the United
States or its agencies as to principal and interest, and notes, drafts, bills
of exchange, and bankersâ acceptances that are eligible for rediscount or
purchase by a Federal Reserve Bank.
The one hundred ten percent collateral category includes real
estate and marketable securities.
Section seven four one point two two one of the N C U A regulations applies these
requirements to federally insured state credit unions that are authorized under
state law to act as a surety or guarantor.
The Board is now of the view that removing these segregated deposit and collateral
requirements will provide federally insured credit unions the flexibility to
design products that meet member needs.
These proposed changes are intended to simplify the regulatory framework and
reduce unnecessary compliance burdens.
It is not always necessary to have a segregated deposit that
fully covers the liability.
For example, current regulations require a federally insured credit union acting
as a surety or guarantor to create an authorized loan that complies with the
applicable N C U A lending regulations.
The N C U Aâs commercial lending regulations adopted in two thousand
sixteen include collateral requirements that reflect a broad principles based
regulatory approach for federally insured credit unions engaged in
member business lending activities.
These principles are predicated on the Boardâs expectation that credit unions
will maintain prudent risk management practices and sufficient capital to
mitigate the risks associated with their commercial lending activities.
Maintaining this additional requirement for a segregated deposit associated
with suretyship or guaranty agreements adds complexity to these transactions.
Federally insured credit unions are best positioned to determine the
amount and types of collateral they are willing to accept to cover the risk.
The Board invites comment on all aspects of this proposed rule.
The Providing Accountability Through Transparency Act of two thousand twenty
three requires that a notice of proposed rulemaking include the internet address
of a summary of not more than one hundred words in length of a proposed
rule, in plain language, that shall be posted on the internet website
commonly known as regulations dot gov.
The Act applies to notices of proposed rulemaking.
In summary, the Board seeks comment on a proposed rule to remove the segregated
deposit and collateral requirements when a federally insured credit
union acts as a surety and guarantor.
Removing this regulation will give federally insured credit
unions the flexibility to design products that meet member needs.
Federally insured credit unions would remain subject to the other requirements
regarding surety and guaranty agreements.
Pursuant to Executive Order twelve eight six six, as amended, a
determination must be made whether a regulatory action is significant
and therefore subject to review by the Office of Management and Budget.
This proposed rule was drafted and reviewed in accordance with
applicable executive orders.
The Office of Management and Budget has determined that this proposed rule is
not a significant regulatory action.
This proposed rule will reduce a burden by removing the segregated
deposit and collateral requirements for federally insured credit union
suretyship and guaranty arrangements.
The Regulatory Flexibility Act generally requires an agency to conduct a regulatory
flexibility analysis unless the agency certifies that the rule will not have
a significant economic impact on a substantial number of small entities.
For purposes of this analysis, the N C U A considers small credit
unions to be those having under one hundred million dollars in assets.
The Board fully considered the potential economic impacts of the regulatory
amendments on small credit unions.
To the extent that the proposed rule would have any economic impacts,
they will be deregulatory in nature.
Accordingly, the N C U A certifies the proposed rule would not have
a significant economic impact on a substantial number of small credit unions.
The Paperwork Reduction Act of nineteen ninety five generally provides that
an agency may not conduct or sponsor a collection of information unless it
displays a currently valid Office of Management and Budget control number.
The N C U A has determined that the changes addressed in this notice do not
create a new information collection or revise an existing information collection.
The N C U A has determined that this proposed rule would
not affect family well being.
The proposed rule relates to the collateral requirements for federally
insured credit unions to enter into surety and guaranty agreements,
and any effect on family well being is expected to be indirect.
For the reasons stated in the preamble, the N C U A Board proposes to amend Title
twelve of the Code of Federal Regulations, part seven zero one, as follows.
Part seven zero one, Organization and Operation of Federal Credit Unions.
The authority citation for part seven zero one continues to read as follows.
Authority, twelve United States Code sections one seven five two, one
seven five five, one seven five six, one seven five seven, one seven five
eight, one seven five nine, one seven six one a, one seven six one b, one
seven six six, one seven six seven, one seven eight two, one seven eight four,
one seven eight five, one seven eight six, one seven eight seven, one seven
eight eight, and one seven eight nine.
Section seven zero one point two zero, Suretyship and guaranty.
The federal credit union limits its obligations under the agreement to a
fixed dollar amount and a specified duration, and the federal credit unionâs
performance under the agreement creates an authorized loan that complies with the
applicable lending regulations, including the limitations on loans to one member
or associated members or officials.
This concludes the proposal.
If your credit union could use assistance with your exam, reach out to Mark Treichel
on LinkedIn or at Mark Treichel dot com.
This is Samantha Shares, and we thank you for listening.