NCUA's Proposed Rule: Suretyship and Guaranty; Segregated Deposit and Collateral.
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.
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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.
